UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended July 31, 2017

OR

Commission File Number: 001-35584

 

EXA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

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 August 25, 2017, 15,016,217 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

 

 

 

 

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EXA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED July 31, 2017

TABLE OF CONTENTS

 

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PART I. FINANCIAL INFORMATION

EXA CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

 

 

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

 

 

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EXA CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share data)

 

 

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

 

 

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EXA CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

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

 

 

 

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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 and aerospace markets, but has recently expanded its technology into the field of oil and gas production, as well. The Company continues to explore the application of its capabilities in other markets, such as biomedical, chemical processing, architecture, engineering and construction, power generation, 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 other countries, such as Sweden, India, Mexico, 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 July 31, 2017 and for the three and six months ended July 31, 2017 and 2016 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, 2017 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, 2017 filed with the Securities and Exchange Commission on March 22, 2017.

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.

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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 standard is effective for annual periods beginning after December 15, 2017, 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 modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).

Though the Company continues to evaluate the impact of its pending adoption of this standard, the Company plans to adopt the standard using the modified retrospective approach with the cumulative effect of initially adopting recognized at the date of adoption. The standard is expected to have a significant impact on the way the Company accounts and contracts for its on-premise software license contracts, as well as how it reports revenue derived from those contracts. Due to the complexity of certain of the Company’s license contracts, the actual revenue recognition treatment required under the standard is expected to be dependent on contract-specific terms at the time of sale and adoption of the new standard. As such, the Company has begun to review individual customer contracts whose license terms span the transition date to the new revenue recognition standards to ensure consistent revenue recognition through the transition period. Accounting for revenue related to services and ExaCLOUD  offerings is expected to remain substantially unchanged due to the over-time nature of such performance obligations. The Company is also assessing the impact of capitalizing costs associated with ongoing customer contracts, specifically commission payments. As of July 31, 2017, the Company has not yet completed its assessment.

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 the impact on its consolidated financial results.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230)-Restricted Cash. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, and for interim periods therein. Early adoption is permitted. The Company is currently evaluating the requirements of this ASU, but does not expect it to have a material impact on the Company’s consolidated financial results.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This standard provides clarity and reduces both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a share-based payment award. ASU 2017-09 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, and for interim periods therein. Early adoption is permitted. The Company is currently evaluating the requirements of this ASU, but does not expect it to have a material impact on the Company’s consolidated financial results.

 

 

3. Computation of Net 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.

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

 

 

The table below represents outstanding options and restricted stock unit awards that were excluded from the computation of diluted net 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 and unvested restricted stock unit awards were anti-dilutive as of July 31, 2017 and 2016, respectively, due to the net loss incurred by the Company.

 

 

 

4. Property and Equipment, net

Property and equipment, net consists of the following:

 

 

For the three and six months ended July 31, 2017, depreciation expense was $1,125 and $2,254, respectively. For the three and six months ended July 31, 2016, depreciation expense was $892 and $1,816, respectively. Included in computer software and equipment and office equipment and furniture is equipment held pursuant to capital leases with costs of $14,907 and $14,820 and accumulated depreciation of $10,541 and $9,266 as of July 31, 2017 and January 31, 2017, respectively.

 

 

5. Accrued Expenses

Accrued expenses consist of the following:

 

 

 

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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:

 

 

 

7. Fair Value Measurements

The provisions of fair value accounting establish 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.

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 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.

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2017:

 

 

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2017:

 

 

 

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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 July 31, 2017: 

 

 

The following table reflects the carrying value of intangible assets as of January 31, 2017:

 

 

For each of the three and six months ended July 31, 2017 and 2016, amortization expense of intangible assets was $88 and $175, respectively.

 

 

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.

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 July 31, 2017 and January 31, 2017, the Company has not recorded any liabilities for these indemnities.

Operating Leases

During the second quarter of fiscal year 2018, the Company entered into an agreement to lease space and high performance computing capacity at a data center located in Japan. The three-year agreement will provide access to up to 20 kilovolt-amps (kVA) of computing capacity, which the Company believes will be suitable and adequate to meet the growing demands of its customers in Asia.

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As of July 31, 2017, after taking into consideration the above agreement, total future minimum lease payments under non-cancelable lease arrangements are as follows:

 

 

10. Stockholders’ Equity and Stock-Based Compensation

 

Adoption of Accounting Pronouncement

 

During the first quarter of fiscal year 2018, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. The provision simplifies several aspects of the accounting for employee share-based payment transactions, including the way companies account for share-based award forfeitures. Under the new provision, an entity can elect to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.

 

As part of the adoption of this standard, the Company elected to prospectively account for forfeitures when they occur. As a result, the Company adjusted its opening retained earnings balance as of February 1, 2017 to reflect the additional expense that would have been recognized if the Company had not been applying an estimated forfeiture rate in prior periods. The resulting adjustment was an increase to accumulated deficit of $34, with the offset recorded to additional paid-in capital.

 

Stock-Based Compensation Expense

 

During the three months ended July 31, 2017, the Company’s stockholders approved the Company’s 2017 Stock Incentive Plan, which provides for, among other things, the issuance of up to 1,400,000 additional shares of the Company’s common stock over the number previously authorized for issuance under the Company’s Amended and Restated 2011 Stock Incentive Plan. Following the approval of the 2017 Stock Incentive Plan, the Company ceased making new awards under its 2011 Amended and Restated Stock Incentive Plan.

 

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

 

 

The weighted-average grant date fair value per share for stock options granted in the three and six months ended July 31, 2017 was $5.20 and $5.14, respectively. The weighted-average grant date fair value per share for stock options granted in the three and six months ended July 31, 2016 was $4.66 and $4.29, respectively.

 

The weighted-average grant date fair value per share for time-based restricted stock units granted in the three and six months ended July 31, 2017 was $13.79 and $13.16, respectively. The weighted-average grant date fair value per share for time-based restricted stock units granted in both the three and six months ended July 31, 2016 was $12.30.

For stock options and restricted stock units, the Company records stock-based compensation expense over the service/vesting period. The amount of stock-based compensation expense recognized during a period is based on the value of the awards that will ultimately vest, adjusted for any forfeitures that occurred in the current period.

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

 

 

The total unrecognized compensation cost related to all outstanding stock options and restricted stock units is $7,327 at July 31, 2017. This amount is expected to be recognized over a weighted-average period of 2.15 years.

 

 

11. Income Taxes

For the three and six months ended July 31, 2017, the Company’s income tax benefit was $251 and $384, respectively. For the three and six months ended July 31, 2016, the income tax provision was $239 and $359, respectively. The benefits and provisions for each of the reporting periods consist primarily 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, 2012. However, carryforward attributes that were generated in tax years ending prior to January 31, 2013 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 July 31, 2017, 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.

 

 

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12. Geographic Information

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

 

 

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:

 

 

 

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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 22, 2017. 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.

Simulation-driven design has enabled product and process improvements in many industries, and as a result, the process in which products are conceptualized and developed is undergoing a radical transformation. Digital simulation not only provides feedback earlier and in a more useful form than traditional approaches, but in many areas simulation has reached a level of accuracy and robustness that is sufficient to enable a manufacturer to rely solely on its results for design decisions, without prototype testing.

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 the top 15 global 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 also have offerings addressed to the aerospace market and have recently expanded our technology offerings into the field of oil and gas production. We are continuing to explore other markets in which we believe the capabilities of PowerFLOW have broad application, such as the biomedical, chemical processing, architecture, engineering and construction, power generation, and electronics industries.

Global vehicle manufacturers face increasing pressure, from government mandates as well as from consumers, to improve the efficiency of their products and to reduce particulate and greenhouse gas emissions. This requires different powertrain choices (diesel, electric, hybrid), changes in the shape of the vehicle, and reductions in vehicle weight. Consumers also demand improved quality and durability, and equally important, innovative and emotionally expressive designs. In addition, manufacturers are offering a broader array of vehicles for different niche customer segments and geographies on a faster design refresh schedule than in the past. We believe these industry forces favor the adoption of simulation-driven design.

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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 ExaCLOUD offerings. 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 exposing our customers to 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.

As disclosed in our Annual Report on Form 10-K for the year ended January 31, 2017, during the last two months of fiscal year 2017, we experienced reduced and delayed renewal commitments from some of our customers. The impact of these reductions and delays is reflected in our revenue recognized during the six months ended July 31, 2017 and in our rate of license revenue growth during that period. In addition, the U.S. dollar strengthened on average against the Euro and Japanese yen on a year-to-date basis, which resulted in a negative impact on revenue performance as compared to the same period last year. The geographic mix of revenue outside the Americas reflects both the impact of these weaker currencies and, consistent with recent trends, a stronger presence in the Americas. During the six months ended July 31, 2017 and 2016, 69% and 75% of our revenue, respectively, came from outside of the Americas. Revenue for the six months ended July 31, 2017 remained relatively flat at $34.0 million compared with the same period a year ago and increased approximately 1.3% 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 six months ended July 31, 2017 increased approximately 10.1 percentage points when compared to the same period last year. As we do not expect the lower revenue growth experienced in the six months ended July 31, 2017 to continue on a sustained basis, we continued to invest prudently during this period. Additionally, 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 strengthening dollar compared with the same period last year had the effect of slightly offsetting the full impact of the decreased margins. For the six months ended July 31, 2017, total operating expenses were $38.8 million, with growth of 10.0% over the same period a year ago and 10.6% 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 six months ended July 31, 2017 was 10.1 percentage points greater than the same period last year, primarily as a result of the impacts described above. Adjusted EBITDA for the six months ended July 31, 2017, as described in “Non-GAAP Measures” below, was also negatively impacted at $(0.7) million when compared to $1.5 million in the same period last year.

We ended the quarter with cash and cash equivalents of $18.4 million compared to $24.6 million as of January 31, 2017. Capital expenditures increased during the six months ended July 31, 2017 over the same period last year, primarily due to investments related to equipment purchases across our high-performance computing data centers.

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Results of operations for the three months ended July 31, 2017 and 2016

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

 

 

 

 

 

 

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

 

 

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

Comparison of three months ended July 31, 2017 and 2016

Revenue

 

 

License revenue increased 2.6% from $14.8 million for the three months ended July 31, 2016 to $15.2 million for the three months ended July 31, 2017. The $0.4 million increase was driven by a combination of 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, which more than offset the revenue impact of reduced and delayed renewal commitments by some of our customers at the end of the previous fiscal year and during the three months ended July 31, 2017. Deployment otherwise continued to expand in our core customer base across our portfolio of applications, though as described above, at a slower pace than in prior periods.

 

Project revenue for the three months ended July 31, 2017 remained relatively flat at $2.3 million when compared to the three months ended July 31, 2016, reflecting caution in the passenger automotive market as expected. 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 and it continues to play an increasingly important role in our new customer acquisition go-to-market model.

Foreign exchange fluctuations, particularly the weakening of the Euro and the Japanese yen against the U.S. dollar, negatively impacted total revenue in the three months ended July 31, 2017 by $0.2 million as compared to the three months ended July 31, 2016. On a constant currency basis, our total revenues in the three months ended July 31, 2017 increased approximately 2.7% compared with the three months ended July 31, 2016.

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Cost of revenues

 

 

Cost of revenues for the three months ended July 31, 2017 was $5.3 million, an increase of approximately $0.7 million, or 15.0%, compared with $4.6 million during the three months ended July 31, 2016. As a percentage of revenues, cost of revenues increased to 30.5% for the three months ended July 31, 2017 compared to 27.1% for the three months ended July 31, 2016. The period-over-period increase is primarily attributable to a $0.4 million increase in employee-related expenses due to newly hired full-time employees and annual merit increases, along with a $0.2 million increase in hosting costs and a $0.1 million increase in depreciation expense related to the allocation of expenses for our high-performance computing data center.

Sales and marketing

 

 

Sales and marketing expenses for the three months ended July 31, 2017 were $3.5 million, an increase of approximately $0.1 million, or 3.0%, compared with $3.4 million during the three months ended July 31, 2016. As a percentage of revenues, sales and marketing expenses increased to 20.0% for the three months ended July 31, 2017 compared to 19.8% for the three months ended July 31, 2016. The period-over-period increase is primarily attributable to a $0.1 million increase in employee-related compensation driven primarily by an increase in share-based compensation expense associated with awards issued to certain executives in fiscal year 2018.

Research and development

 

 

Research and development expenses for the three months ended July 31, 2017 were $6.8 million, an increase of $0.8 million, or 12.9%, compared with $6.0 million during the three months ended July 31, 2016. As a percentage of revenues, research and development expense increased to 39.0% for the three months ended July 31, 2017 compared to 35.2% for the three months ended July 31, 2016. The period-over-period increase is primarily attributable to a $0.3 million increase in employee-related compensation driven primarily by an increase in share-based compensation expense associated with awards issued to certain executives in fiscal year 2018. Hosting costs and depreciation expense also increased by $0.2 million related to the allocation of expenses for our high-performance computing data center, along with increased consulting fees of $0.2 million associated with new product development.

General and administrative

 

 

General and administrative expenses for the three months ended July 31, 2017 were $4.2 million, an increase of $0.7 million, or 21.5%, compared to $3.5 million for the three months ended July 31, 2016. As a percentage of revenues, general and administrative expenses increased to 24.1% for the three months ended July 31, 2017 compared to 20.2% for the three months ended July 31, 2016. The period-over-period increase was driven primarily by a $0.5 million increase in employee-related expenses due to newly hired full-time employees and increased share-based compensation expense associated with awards issued to certain executives in fiscal year 2018, along with a $0.2 million increase in accounting and other professional costs, and a $0.1 million increase in consulting costs associated with support for our new enterprise resource planning, or ERP, system. These increases were partially offset by a $0.1 million decrease in hosting costs related to the allocation of expenses for our high-performance computing data center.

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Total other expense, net

 

 

Total other expense, net for the three months ended July 31, 2017 was $0.5 million compared to total other expense, net of less than $0.1 million for the three months ended July 31, 2016. 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.

Benefit (provision) for income taxes

 

 

For the three months ended July 31, 2017 our income tax benefit was $0.3 million. For the three months ended July 31, 2016, our income tax provision was $0.2 million, respectively. The benefit and provision in each respective period primarily consist 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, 2012. However, carryforward attributes that were generated in tax years ending prior to January 31, 2013 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 July 31, 2017, 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.

 

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Results of operations for the six months ended July 31, 2017 and 2016

 

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

 

(1)Amounts include stock-based compensation expense as follows:

 

 

 

 

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

 

 

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

Comparison of six months ended July 31, 2017 and 2016

 

Revenue

 

 

License revenue increased 2.6% from $28.9 million for the six months ended July 31, 2016 to $29.6 million for the six months ended July 31, 2017. The $0.8 million increase was driven by a combination of 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, which more than offset the impact of reduced and delayed renewal commitments by some of our customers at the end of the previous fiscal year and during the six months ended July 31, 2017. Deployment otherwise continued to expand in our core customer base across our portfolio of applications, though as described above, at a slower pace than in prior periods.

 

Project revenue for the six months ended July 31, 2017 decreased by approximately $0.6 million compared with the prior year period, reflecting caution in the passenger automotive market as expected. 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 and it continues to play an increasingly important role in our new customer acquisition go-to-market model.

 

Foreign exchange fluctuations, particularly the weakening of the Euro and the Japanese yen against the U.S. dollar, negatively impacted total revenue in the six months ended July 31, 2017 by $0.2 million as compared to the six months ended July 31, 2016. On a constant currency basis, our total revenues in the six months ended July 31, 2017 increased approximately 1.3% compared with the six months ended July 31, 2016.

 

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Cost of Revenues

 

Cost of revenues for the six months ended July 31, 2017 was $10.5 million, an increase of approximately $1.1 million, or 11.4%, compared with $9.4 million during the three months ended July 31, 2016. As a percentage of revenues, cost of revenues increased to 30.9% for the six months ended July 31, 2017 compared to 27.8% for the three months ended July 31, 2016. The period-over-period increase is primarily attributable to a $0.6 million increase in employee-related expenses due to newly hired full-time employees and annual merit increases, along with a $0.3 million increase in depreciation expense and a $0.2 million increase in hosting costs related to the allocation of expenses for our high-performance computing data center.

Sales and marketing

 

 

Sales and marketing expenses for the six months ended July 31, 2017 were $6.9 million, an increase of approximately $0.2 million, or 2.8%, compared with $6.7 million during the three months ended July 31, 2016. As a percentage of revenues, sales and marketing expenses increased to 20.3% for the six months ended July 31, 2017 compared to 19.8% for the six months ended July 31, 2016. The period-over-period increase is primarily attributable to a $0.2 million increase in employee-related expenses driven primarily by newly hired full-time employees and increased share-based compensation expense associated with awards issued to certain executives in fiscal year 2018.

 

Research and development

 

 

Research and development expenses for the six months ended July 31, 2017 were $13.2 million, an increase of $1.0 million, or 7.9%, compared with $12.2 million during the six months ended July 31, 2016. As a percentage of revenues, research and development expense increased to 38.8% for the three months ended July 31, 2017 compared to 36.1% for the six months ended July 31, 2016. The period-over-period increase is primarily attributable to a $0.4 million increase in employee-related expenses driven primarily by an increase in share-based compensation expense associated with awards issued to certain executives in fiscal year 2018. Hosting costs and depreciation expense also increased by $0.4 million related to the allocation of expenses for our high-performance computing data center, along with increased consulting fees of $0.2 million associated with new product development.

 

General and administrative

 

General and administrative expenses for the six months ended July 31, 2017 were $8.2 million, an increase of $1.3 million, or 18.9%, compared to $6.9 million for the six months ended July 31, 2016. As a percentage of revenues, general and administrative expenses increased to 24.2% for the six months ended July 31, 2017 compared to 20.4% for the six months ended July 31, 2016. The period-over-period increase is primarily attributable to a $0.8 million increase in employee-related expenses driven primarily by newly hired full-time employees and increased share-based compensation expense associated with awards issued to certain executives in fiscal year 2018, along with a $0.3 million increase in consulting costs associated with support for our new ERP system, and a $0.3 million increase in accounting and other professional costs. These increases were partially offset by a $0.1 million decrease in hosting costs related to the allocation of expenses for our high-performance computing data center.

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Total other (expense) income, net

 

Total other (expense) income, net for the six months ended July 31, 2017 was $(0.7) million compared to total other (expense) income, net of $0.1 million for the six months ended July 31, 2016. Total other (expense) income, 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.

Benefit (provision) for income taxes

 

 

For the six months ended July 31, 2017, our income tax benefit was $0.4 million. For the six months ended July 31, 2016, our income tax provision was $0.4 million, respectively. The benefit and provision in each respective period primarily consist 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, 2012. However, carryforward attributes that were generated in tax years ending prior to January 31, 2013 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 July 31, 2017, 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.

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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 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 six months ended July 31, 2017 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 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 loss.

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

Non-GAAP net loss. We define non-GAAP net loss as GAAP net 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 loss is net loss.

Non-GAAP net loss per diluted share. We define non-GAAP net loss per diluted share as GAAP net 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 loss per diluted share is net loss per diluted share.

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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 (loss) income, non-GAAP net loss and non-GAAP net loss per diluted share, investors should take into account the following reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures:

 

 

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Liquidity

Overview

Our primary sources of liquidity during the six months ended July 31, 2017 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 six months ended July 31, 2017 were capital expenditures and payments of capital lease obligations. As of July 31, 2017, we had $18.4 million in cash and cash equivalents.

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.

For the six months ended July 31, 2017, net cash used in operating activities totaled $2.1 million and was primarily the result of our net loss and fluctuations in working capital, including decreases in accounts receivable and deferred revenue, along with an increase in prepaid expenses. Accounts receivable and deferred revenue typically fluctuate depending on the timing of when customer orders are received by us and invoiced to customers and the timing of cash payments from the customers. During the first half of fiscal year 2018, we received fewer customer cash payments than during the prior-year quarter as a result of a lower accounts receivable balance at January 31,2017, resulting in a decrease in cash provided by operating activities compared with the same period last year.

Net cash provided by operating activities for the six months ended July 31, 2016 was $6.7 million and was primarily the result of decreases in accounts payable, deferred revenue, and prepaid expenses.

Net Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended July 31, 2017 and 2016 was $3.8 million and $0.8 million, respectively. Capitalized expenditures for equipment purchases for an expansion of our high-performance computing capacity 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 six months ended July 31, 2017 was $0.8 million, which consisted of payments on our capital lease obligations of $1.0 million and the acquisition of common stock for withholding tax obligations of $0.2 million, which were partially offset by proceeds from stock option exercises of $0.4 million. Net cash used in financing activities for the six months ended July 31, 2016 was $1.1 million, which consisted of $1.5 million of payments on our capital lease obligations, partially offset by proceeds from stock options exercises of $0.4 million.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of either July 31, 2017 or January 31, 2017.

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Recently Issued Accounting Pronouncements

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 standard is effective for annual periods beginning after December 15, 2017, 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).

Though we continue to evaluate the impact of our pending adoption of this standard, we plan to adopt the standard using the modified retrospective approach with the cumulative effect of initially adopting recognized at the date of adoption. The standard is expected to have a significant impact on the way we account and contract for our on-premise software license contracts, as well as the way we report the revenues derived from those contracts. Due to the complexity of certain of our license contracts, the actual revenue recognition treatment required under the standard is expected to be dependent on contract-specific terms at the time of sale and adoption of the new standard. As such, we have begun to review individual customer contracts whose license terms span the transition date to the new revenue recognition standards to ensure consistent revenue recognition through the transition period. Accounting for revenue related to services and ExaCLOUD  offerings is expected to remain substantially unchanged due to the over-time nature of such performance obligations. We are also assessing the impact of capitalizing costs associated with ongoing customer contracts, specifically commission payments. As of July 31, 2017, we have not yet completed our assessment.

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 the impact on our consolidated financial results.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230)-Restricted Cash. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, and for interim periods therein. Early adoption is permitted. We are currently evaluating the requirements of this ASU, but do not expect it to have a material impact on our consolidated financial results.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This standard provides clarity and reduces both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a share-based payment award. ASU 2017-09 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, and for interim periods therein. Early adoption is permitted. We are currently evaluating the requirements of this ASU, but do not expect it to have a material impact on our consolidated financial results.

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 July 31, 2017 and January 31, 2017, $13.2 million and $10.1 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.

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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.

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 1.8% weaker against the United States dollar, on average, for the six months ended July 31, 2017, when compared with the six months ended July 31, 2016. The resulting net overall impact to both revenue and operating expense was a decrease of $0.1 million during the six months ended July 31, 2017.

The exchange rate impact of other currencies for the six months ended July 31, 2017, primarily driven by a weaker Japanese yen, was a decrease to revenue of $0.2 million and a decrease to operating expense of approximately $0.1 million.

For the six months ended July 31, 2017, a 10% change in the exchange rates for the United States dollar versus the Chinese yuan, Euro, Japanese yen, British Pound, and Korean won would have resulted in a $1.7 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.

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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 July 31, 2017 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 July 31, 2017.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended July 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II. OTHER INFORMATION

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.

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, 2017, filed with the SEC on March 22, 2017 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.

(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 July 31, 2017.

 

 

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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.

 

 

 

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