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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended October 31, 2015

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  x    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  x    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   x
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  x

As of November 30, 2015, 14,625,975 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

 

 

 


Table of Contents

EXA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED October 31, 2015

TABLE OF CONTENTS

 

     Pages  
PART I. FINANCIAL INFORMATION   

ITEM 1. FINANCIAL STATEMENTS

     3   

Condensed Consolidated Balance Sheets (Unaudited) as of October 31, 2015 and January 31, 2015

     3   

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited) for the three and nine months ended October 31, 2015 and 2014

     4   

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended October  31, 2015 and 2014

     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

     28   

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   

 

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Table of Contents

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,
2015
    January 31,
2015
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 23,186      $ 21,785   

Accounts receivable

     11,602        27,462   

Prepaid expenses and other current assets

     2,867        3,098   
  

 

 

   

 

 

 

Total current assets

     37,655        52,345   

Property and equipment, net

     11,194        6,961   

Intangible assets, net

     2,132        2,395   

Deferred tax assets

     261        260   

Restricted cash

     352        525   

Other assets

     729        567   
  

 

 

   

 

 

 

Total assets

   $ 52,323      $ 63,053   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 2,310      $ 1,620   

Accrued expenses

     7,067        10,585   

Current portion of deferred revenue

     15,710        26,863   

Current portion of capital lease obligations

     2,987        2,390   
  

 

 

   

 

 

 

Total current liabilities

     28,074        41,458   

Deferred revenue

     122        38   

Capital lease obligations

     3,220        1,602   

Deferred rent

     2,049        472   

Other long-term liabilities

     523        592   
  

 

 

   

 

 

 

Total liabilities

     33,988        44,162   
  

 

 

   

 

 

 

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; 14,653,862 and 13,874,744 shares issued, respectively; 14,621,360 and 13,842,242 shares outstanding, respectively

     15        14   

Additional paid-in capital

     91,106        88,181   

Accumulated deficit

     (72,394     (68,878

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

     0        0   

Accumulated other comprehensive loss

     (392     (426
  

 

 

   

 

 

 

Total stockholders’ equity

     18,335        18,891   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 52,323      $ 63,053   
  

 

 

   

 

 

 

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

 

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Table of Contents

EXA CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited)

(in thousands, except share and per share data)

 

     Three Months Ended October 31,     Nine Months Ended October 31,  
     2015     2014     2015     2014  

Revenue:

        

License revenue

   $ 13,966      $ 12,866      $ 39,185      $ 36,842   

Project revenue

     2,998        3,092        8,002        7,729   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     16,964        15,958        47,187        44,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Cost of revenues

     5,118        4,562        14,516        13,790   

Sales and marketing

     2,336        2,442        7,264        7,518   

Research and development

     6,143        5,462        18,265        15,968   

General and administrative

     3,456        3,171        9,849        9,510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,053        15,637        49,894        46,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (89     321        (2,707     (2,215
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

        

Foreign exchange gain (loss)

     51        194        (172     325   

Interest expense

     (60     (88     (179     (265

Interest income

     3        3        8        9   

Other income, net

     6        4        6        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     0        113        (337     76   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (89     434        (3,044     (2,139

Provision for income taxes

     (344     (214     (472     (15,870
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (433   $ 220      $ (3,516   $ (18,009
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share:

        

Basic

   $ (0.03   $ 0.02      $ (0.24   $ (1.31

Diluted

   $ (0.03   $ 0.02      $ (0.24   $ (1.31

Weighted average shares outstanding used in computing net (loss) income per share:

        

Basic

     14,610,479        13,822,400        14,484,563        13,701,380   

Diluted

     14,610,479        14,749,825        14,484,563        13,701,380   

Comprehensive (loss) income:

        

Net (loss) income

   $ (433   $ 220      $ (3,516   $ (18,009

Foreign currency translation adjustments

     6        (126     34        (160
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (427   $ 94      $ (3,482   $ (18,169
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

EXA CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

     Nine Months Ended October 31,  
     2015     2014  

Cash flows provided by operating activities:

    

Net loss

   $ (3,516   $ (18,009

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     2,487        2,157   

Stock-based compensation expense

     1,766        1,403   

Deferred rent expense

     472        (267

Deferred income taxes

     4        15,209   

Net change in operating assets and liabilities:

    

Accounts receivable

     15,948        20,432   

Prepaid expenses and other current assets

     54        258   

Other assets

     11        (2

Accounts payable

     694        (874

Accrued expenses

     (2,946     (3,415

Other liabilities

     (69     (23

Deferred revenue

     (11,007     (18,942
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     3,898        (2,073
  

 

 

   

 

 

 

Cash flows used in investing activities:

    

Purchases of property and equipment

     (1,571     (684

Change in restricted cash

     173        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,398     (684
  

 

 

   

 

 

 

Cash flows used in financing activities:

    

Proceeds from stock option and warrant exercises

     1,168        749   

Payments of capital lease obligations

     (2,131     (2,303
  

 

 

   

 

 

 

Net cash used in financing activities

     (963     (1,554
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (136     (498
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,401        (4,809

Cash and cash equivalents, beginning of period

     21,785        28,753   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 23,186      $ 23,944   
  

 

 

   

 

 

 

Supplemental cash flow disclosures:

    

Cash paid for interest

   $ 179      $ 265   

Cash paid for income taxes

   $ 1,214      $ 1,282   

Supplemental disclosure of non-cash investing activities:

    

Acquisition of equipment through capital leases

   $ 4,351      $ 1,700   

Construction costs funded by landlord tenant improvement allowance

   $ 554      $ —     

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 result 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, 2015 and for the three and nine months ended October 31, 2015 and 2014 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, 2015 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, 2015 filed with the Securities and Exchange Commission on March 24, 2015.

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 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, 2016, and interim periods therein. However, in July 2015, the FASB approved a one-year

 

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deferral that does not require adoption until calendar year 2018 (fiscal 2019 for the Company). 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 June 2014, the FASB issued ASU 2014-12, Stock Compensation, which is a standards update on accounting for share-based payments when the terms of the award provide that a performance target could be achieved after a requisite service period. The standard is effective for annual periods beginning after December 31, 2015, and interim periods therein, with early adoption permitted. This ASU is not expected to have an impact on the Company’s financial statements or disclosures.

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 an 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.

3. Computation of Net (Loss) Income Per Share

Net (loss) income per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted amounts per share include the impact of the Company’s outstanding potential common shares, such as shares issuable upon exercise of in-the-money stock options or warrants, when dilutive. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net (loss) income per common share.

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

 

     Three Months Ended October 31,      Nine Months Ended October 31,  
     2015      2014      2015      2014  

Numerator:

           

Net (loss) income

   $ (433    $ 220       $ (3,516    $ (18,009
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average common shares, basic

     14,610,479         13,822,400         14,484,563         13,701,380   

Dilutive effect of:

           

Options to purchase common and preferred stock

     —           898,619         —           —     

Warrants to purchase common stock

     —           9,285         —           —     

Restricted stock units

     —           19,521         —           —     
  

 

 

    

 

 

       

Weighted average common shares, diluted

     14,610,479         14,749,825         14,484,563         13,701,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net (loss) income per share

   $ (0.03    $ 0.02       $ (0.24    $ (1.31
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net (loss) income per share

   $ (0.03    $ 0.02       $ (0.24    $ (1.31
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below represents outstanding options, restricted stock unit awards and warrants that were excluded from the computation of diluted net (loss) income 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, 2015 and 2014 due to the net loss incurred by the Company.

 

     Three Months Ended October 31,      Nine Months Ended October 31,  
     2015      2014      2015      2014  

Options, restricted stock unit awards and warrants to purchase common stock

     2,514,955         1,633,635         2,514,955         2,785,477   

 

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4. Property and Equipment, net

Property and equipment, net consists of the following:

 

     October 31,
2015
     January 31,
2015
 

Computer software and equipment

   $ 25,668       $ 20,637   

Office equipment and furniture

     463         422   

Leasehold improvements

     2,652         2,593   

Construction-in-process

     1,009         —     
  

 

 

    

 

 

 

Total property and equipment

     29,792         23,652   

Less: accumulated depreciation

     (18,598      (16,691
  

 

 

    

 

 

 

Property and equipment, net

   $ 11,194       $ 6,961   
  

 

 

    

 

 

 

For the three and nine months ended October 31, 2015, depreciation expense was $871 and $2,224, respectively. For the three and nine months ended October 31, 2014, depreciation expense was $675 and $1,894, respectively. Included in computer software and equipment and office equipment and furniture is equipment held pursuant to capital leases with costs of $22,708 and $18,303 and accumulated depreciation of $14,023 and $12,736 as of October 31, 2015 and January 31, 2015, respectively.

In September 2015, the Company capitalized $4,656 of computer processor equipment for its high performance computing data center in New Jersey. The equipment is included in computer software and equipment and the purchase price (exclusive of sales tax of $305 that was paid in cash), is being financed over three years under an arrangement that qualifies for capital lease accounting treatment.

The construction-in-process balance as of October 31, 2015 primarily relates to furniture and equipment purchases and leasehold improvement construction for the Company’s corporate headquarter renovation in Burlington, Massachusetts. The renovation project is expected to be substantially complete by January 2016. See Notes 6 and 9.

5. Accrued Expenses

Accrued expenses consist of the following:

 

     October 31,
2015
     January 31,
2015
 

Accrued payroll

   $ 1,729       $ 1,695   

Accrued commissions and bonuses

     2,152         3,150   

Sales and withholding taxes

     793         2,427   

Accrued income taxes payable

     598         597   

Legal and professional

     657         275   

Deferred rent, current portion

     38         597   

Other accrued expenses

     1,100         1,844   
  

 

 

    

 

 

 

Total accrued expenses

   $ 7,067       $ 10,585   
  

 

 

    

 

 

 

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. 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 as operating expense over the applicable lease terms.

 

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Deferred rent consists of the following:

 

     October 31,
2015
     January 31,
2015
 

Leasehold improvement incentive

   $ 1,234       $ 308   

Cumulative non-cash rent expense

     853         761   
  

 

 

    

 

 

 

Total deferred rent

     2,087         1,069   

Less: current portion included in accrued expenses

     (38      (597
  

 

 

    

 

 

 

Deferred rent, net of current portion

   $ 2,049       $ 472   
  

 

 

    

 

 

 

As discussed in Note 9, the Company entered into an amendment to its corporate headquarter lease in Burlington, Massachusetts effective July 1, 2015. The amendment provided for a tenant improvement allowance of up to $1,681 to cover renovations being made to the Company’s leased space over the remainder of fiscal year 2016. As of October 31, 2015, the Company recorded $1,047 of the tenant improvement allowance as an increase to deferred rent for renovation costs incurred to date. Of these costs, the Company paid for approximately $493, and accordingly, recorded a receivable from the landlord for this amount which is included in other current assets in the accompanying consolidated balance sheet. The $554 balance of these costs was funded by the landlord and is recorded as construction-in-process within property and equipment, net in the accompanying consolidated balance sheet.

7. Fair Value Measurements

Financial instruments consist primarily of cash and cash equivalents, accounts receivable and capital lease obligations. As of October 31, 2015 and January 31, 2015, 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.

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, 2015:

 

     Total      Level 1      Level 2      Level 3  

Assets:

           

Money market funds

   $ 12,517       $ 12,517       $ —         $ —     

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of January 31, 2015:

 

     Total      Level 1      Level 2      Level 3  

Assets:

           

Money market funds

   $ 12,514       $ 12,514       $ —         $ —     

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.

 

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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 October 31, 2015:

 

     October 31, 2015  
     Cost      Accumulated
Amortization
     Net Book
Value
 

Intellectual property

   $ 3,505       $ (1,373    $ 2,132   

Access to facilities contract

     38         (38      —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,543       $ (1,411    $ 2,132   
  

 

 

    

 

 

    

 

 

 

The following table reflects the carrying value of intangible assets as of January 31, 2015:

 

     January 31, 2015  
     Cost      Accumulated
Amortization
     Net Book
Value
 

Intellectual property

   $ 3,505       $ (1,110    $ 2,395   

Access to facilities contract

     38         (38      —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,543       $ (1,148    $ 2,395   
  

 

 

    

 

 

    

 

 

 

Amortization expense of intangible assets was $88 for each of the three months ended October 31, 2015 and 2014 and $263 for each of the nine months ended October 31, 2015 and 2014.

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.

Guarantees and 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, 2015 and January 31, 2015, the Company has not recorded any liabilities for these guarantees and indemnities.

Operating Leases

Effective July 1, 2015, the Company entered into an amendment to the lease for its corporate headquarters space in Burlington, Massachusetts. The amendment extends the lease term, originally set to expire in March 2016, through March 2023 and reduces the leased space from 65,941 square feet to 44,241 square feet. The 21,700 square foot reduction primarily relates to first floor space that had been subleased by the Company to a subtenant, and under the terms of the amendment, the landlord assumed the sublease effective July 1, 2015. The amendment also provides for a tenant improvement allowance of up to $1,681 to cover renovations that are being made to the retained second floor space over the remainder of fiscal year 2016. Management believes that the renovated space will be suitable and adequate to meet the Company’s planned growth needs at its headquarters over the next several years.

In conjunction with the relinquishment of the first floor space, the amendment reduced the Company’s required security deposit letter of credit from $525 to $352. The reduction of the letter of credit is reflected as a change in restricted cash in the investing activity section of the accompanying consolidated statement of cash flows.

 

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Effective August 1, 2015, the Company entered into an amendment to the lease for its office space located in Japan. The amendment extends the lease term, originally set to expire in November 2015, through November 2017 and increases the leased space from approximately 4,047 square feet to 7,512 square feet.

In conjunction with the purchase of additional computer processor equipment for its high performance computing data center in New Jersey described in Note 4, effective as of September 1, 2015, the Company’s hosting and support arrangement for that facility was expanded to account for the new equipment.

As of October 31, 2015, after taking into consideration the above amendments, total future minimum lease payments under non-cancelable lease arrangements are as follows:

 

Fiscal year ended January 31,       

2016 (remainder as of October 31, 2015)

   $ 1,211   

2017

     4,711   

2018

     4,688   

2019

     4,209   

2020

     2,980   

2021

     2,086   

Thereafter

     3,942   
  

 

 

 
   $ 23,827   
  

 

 

 

10. Stockholders’ Equity and Stock-Based Compensation

Warrants Exercised

In July 2015, Massachusetts Capital Resource Company exercised warrants to purchase 21,538 shares of common stock at a cash exercise price of $6.11 per share. The Company has no remaining outstanding warrants as of October 31, 2015.

Stock-Based Compensation Expense

The fair value of common stock service-based options for employees and directors 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,
 
     2015     2014  

Estimated dividend yield

     0     0

Expected stock price volatility

     36.8     47.4

Weighted-average risk-free interest rate

     2.0     2.2

Expected life of options (in years)

     6.23        6.25   

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. The weighted average grant date fair value per share for service-based stock options granted in the three and nine months ended October 31, 2014 was $5.04 and $5.48, respectively.

For standard service-based stock options, 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 are 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 2016 based on achieved performance metrics for fiscal year 2015. As of October 31, 2015, the Company concluded that it was probable that required metrics for certain performance-based grants would be achieved for fiscal year 2016. As a result, the Company recognized $228 in share-based compensation expense associated with these options.

 

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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,
 
     2015      2014      2015      2014  

Cost of revenues

   $ 64       $ 52       $ 186       $ 134   

Sales and marketing

     117         88         317         249   

Research and development

     265         200         691         547   

General and administrative

     215         193         572         473   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 661       $ 533       $ 1,766       $ 1,403   
  

 

 

    

 

 

    

 

 

    

 

 

 

The total unrecognized compensation cost related to outstanding stock options is $4,224 at October 31, 2015. This amount is expected to be recognized over a weighted-average period of 2.45 years.

11. Income Taxes

For the three and nine months ended October 31, 2015, the Company’s income tax provision was $344 and $472, respectively. The provision for both periods primarily consists of the tax effects of foreign operating results and foreign withholding taxes. For the three and nine months ended October 31, 2014, the income tax provision was $214 and $15,870, respectively. The provision for the nine months ended October 31, 2014 includes a $14,506 non-cash charge to record a valuation allowance against the Company’s United States net deferred tax assets and a $700 non-cash write-off of state deferred tax assets.

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 does not expect that its unrecognized tax benefit will change significantly within the next twelve months. 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, 2015, 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 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. 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,
 
     2015      2014      2015      2014  

United States

   $ 5,320       $ 4,332       $ 13,462       $ 10,616   

Japan

     2,917         2,339         7,396         6,857   

Germany

     2,431         3,026         7,081         8,555   

United Kingdom

     1,700         1,220         5,403         3,609   

France

     1,768         2,361         5,387         6,597   

Korea

     1,464         1,319         4,170         3,974   

Sweden

     420         501         1,377         1,846   

Other

     944         860         2,911         2,517   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,964       $ 15,958       $ 47,187       $ 44,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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,
2015
     January 31,
2015
 

United States

   $ 10,449       $ 6,080   

France

     421         590   

Germany

     122         132   

Japan

     139         91   

Other

     63         68   
  

 

 

    

 

 

 

Total property and equipment, net

   $ 11,194       $ 6,961   
  

 

 

    

 

 

 

 

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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 24, 2015. 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 125 manufacturers currently utilize our products and services, including 14 of the global top 15 passenger vehicle manufacturer groups. We are also beginning to explore other markets in which we believe the capabilities of our solutions 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 licenses, with a minority utilizing multi-year arrangements. 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 or PowerFLOW OnDemand offerings. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulation services accessed via our hosted facilities, along with engineering and consulting services. Customers typically license our products for one application, such as aerodynamics, and over time expand to other applications such as thermal management or aeroacoustics. In our customer engagement model, our applications management teams engage with our customers in long-term relationships focused on identifying problems that we can help them solve, demonstrating the value of our solutions and ensuring that the customer achieves maximum benefit from them. In this process we interact continuously with our customers to improve our software and services and add new solutions, and at the same time deepen our knowledge of their industry.

 

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During the nine months ended October 31, 2015, 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 over the past two fiscal years are yielding growth in both project and license revenue. The strengthening U.S. dollar, particularly against the Euro and yen, had a material negative 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 but does reflect the impact of the weaker Euro and yen. During the nine months ended October 31, 2015, 73% of our revenue came from outside of the Americas as compared to 76% for the same period last year. Revenue for the nine months ended October 31, 2015 was $47.2 million, with growth of 5.9% over the same period a year ago and 15.8% 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, 2015 increased approximately 0.7% when compared to the same period last year. This reflects our investment 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 strengthening dollar had a positive impact on total operating expenses when compared to the same period last year. For the nine months ended October 31, 2015, total operating expenses were $49.9 million, with growth of 6.6% over the same period a year ago and 12.5% 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, 2015 was 0.7% higher than the same period last year, primarily as a result of the foreign currency impacts described above. Adjusted EBITDA for the nine months ended October 31, 2015, as described in the Non-GAAP Measures section below, was slightly improved at $1.5 million when compared to $1.3 million in the same period last year.

We ended the quarter with cash and cash equivalents of $23.2 million compared to $21.8 million as of January 31, 2015. This reflects strong accounts receivable collections activity and normal seasonal cash flows. Capital expenditures increased during the nine months ended October 31, 2015 over the same period last year, primarily due to $4.7 million of investments in computer processor equipment for our high performance computing data center in New Jersey and due to renovations to our headquarter office in Burlington, Massachusetts.

 

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Results of Operations for the Three Months Ended October 31, 2015 and 2014

The following tables set forth, for the periods presented, data from our consolidated statements of operation, as well as that data as a percentage of revenues.

 

     Three Months Ended October 31,  
(in thousands)    2015      2014  

Revenue:

     

License revenue

   $ 13,966       $ 12,866   

Project revenue

     2,998         3,092   
  

 

 

    

 

 

 

Total revenues

     16,964         15,958   
  

 

 

    

 

 

 

Operating expenses: (1)

     

Cost of revenues

     5,118         4,562   

Sales and marketing

     2,336         2,442   

Research and development

     6,143         5,462   

General and administrative (2)

     3,456         3,171   
  

 

 

    

 

 

 

Total operating expenses

     17,053         15,637   
  

 

 

    

 

 

 

(Loss) income from operations

     (89      321   
  

 

 

    

 

 

 

Other income (expense), net:

     

Foreign exchange gain

     51         194   

Interest expense

     (60      (88

Interest income

     3         3   

Other income, net

     6         4   
  

 

 

    

 

 

 

Total other income (expense), net

     0         113   
  

 

 

    

 

 

 

(Loss) income before income taxes

     (89      434   

Provision for income taxes

     (344      (214
  

 

 

    

 

 

 

Net (loss) income

   $ (433    $ 220   
  

 

 

    

 

 

 

 

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

 

     Three Months Ended October 31,  
(in thousands)    2015      2014  

Cost of revenues

   $ 64       $ 52   

Sales and marketing

     117         88   

Research and development

     265         200   

General and administrative

     215         193   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 661       $ 533   
  

 

 

    

 

 

 

 

(2) Includes amortization expense related to intangible assets as follows:

 

     Three Months Ended October 31,  
(in thousands)    2015      2014  

General and administrative

   $ 88       $ 88   

 

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     Three Months Ended October 31,  
(as a percent of total revenue)    2015     2014  

Revenue:

    

License revenue

     82.3     80.6

Project revenue

     17.7     19.4
  

 

 

   

 

 

 

Total revenues

     100.0     100.0
  

 

 

   

 

 

 

Operating expenses:

    

Cost of revenues

     30.2     28.6

Sales and marketing

     13.8     15.3

Research and development

     36.2     34.2

General and administrative

     20.4     19.9
  

 

 

   

 

 

 

Total operating expenses

     100.5     98.0
  

 

 

   

 

 

 

(Loss) income from operations

     (0.5 )%      2.0
  

 

 

   

 

 

 

Other income (expense), net:

    

Foreign exchange gain

     0.3     1.2

Interest expense

     (0.4 )%      (0.6 )% 

Interest income

     0.0     0.0

Other income, net

     0.0     0.0
  

 

 

   

 

 

 

Total other income (expense), net

     0.0     0.7
  

 

 

   

 

 

 

(Loss) income before income taxes

     (0.5 )%      2.7

Provision for income taxes

     (2.0 )%      (1.3 )% 
  

 

 

   

 

 

 

Net (loss) income

     (2.6 )%      1.4
  

 

 

   

 

 

 

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

Comparison of Three Months Ended October 31, 2015 and 2014

Revenue

 

     Three Months Ended
October 31,
              
(in thousands, except percentages)    2015      2014      Change     % Change  

License revenue

   $ 13,966       $ 12,866       $ 1,100        8.5

Project revenue

     2,998         3,092         (94     (3.0 )% 
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 16,964       $ 15,958       $ 1,006        6.3
  

 

 

    

 

 

    

 

 

   

License revenue increased 8.5% from $12.9 million for the three months ended October 31, 2014 to $14.0 million for the three months ended October 31, 2015. The increase was driven by new license customers and by increased utilization of simulation capacity by existing customers. Two significant customers accelerated their consumption of simulation hours, resulting in the use of all of their respective contracted simulation capacity earlier than previously expected. Each of these customers entered into a contract renewal during the quarter ended October 31, 2015, pursuant to which we recognized an aggregate of $0.6 million of incremental license revenue during the period. Project revenue for the three months ended October 31, 2015 decreased by approximately $0.1 million, and was primarily attributable to negative fluctuations in foreign exchange rates compared with the same period a year ago.

Foreign exchange fluctuations, particularly the weakening of the Euro and the Japanese yen, negatively impacted total revenue in the three months ended October 31, 2015 by $1.2 million as compared to the three months ended October 31, 2014. On a constant currency basis, our total revenues in the three months ended October 31, 2015 increased 13.9% compared with the three months ended October 31, 2014.

 

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Cost of revenues

 

     Three Months Ended
October 31,
               
(in thousands, except percentages)    2015      2014      Change      % Change  

Cost of revenues

   $ 5,118       $ 4,562       $ 556         12.2

Cost of revenues for the three months ended October 31, 2015 was $5.1 million, an increase of $0.6 million, or 12.2%, compared with $4.6 million during the three months ended October 31, 2014. As a percentage of revenues, cost of revenues increased to 30.2% for the three months ended October 31, 2015 compared to 28.6% for the three months ended October 31, 2014. The increase is attributable to $0.3 million of increased royalty costs associated with higher customer license levels and expanded use of an embedded sublicensed product, $0.2 million of increased personnel-related costs associated with the net addition of 8 new application engineers and merit-based compensation increases for existing personnel and $0.1 million of increased depreciation expense associated with expansions at our high performance computing data center in New Jersey.

Sales and marketing

 

     Three Months Ended
October 31,
              
(in thousands, except percentages)    2015      2014      Change     % Change  

Sales and marketing

   $ 2,336       $ 2,442       $ (106     (4.3 )% 

Sales and marketing expenses for the three months ended October 31, 2015 were $2.3 million, a decrease of $0.1 million, or 4.3%, compared with $2.4 million during the three months ended October 31, 2014. As a percentage of revenues, sales and marketing expenses decreased to 13.8% for the three months ended October 31, 2015 compared to 15.3% for the three months ended October 31, 2014. Decreases of $0.3 million in personnel-related and travel costs were partially offset by an increase of $0.2 million in expenses associated with marketing programs and initiatives.

Research and development

 

     Three Months Ended
October 31,
               
(in thousands, except percentages)    2015      2014      Change      % Change  

Research and development

   $ 6,143       $ 5,462       $ 681         12.5

Research and development expenses for the three months ended October 31, 2015 were $6.1 million, an increase of $0.7 million, or 12.5%, compared to $5.5 million for the three months ended October 31, 2014. As a percentage of revenues, research and development expense increased to 36.2% for the three months ended October 31, 2015 compared to 34.2% for the three months ended October 31, 2014. Increased payroll and employee-related costs accounted for approximately $0.6 million of the increase, primarily as a result of the net addition of 14 new scientists and software engineers since the prior year period and merit-based compensation increases for existing personnel. The balance of the increase is primarily attributable to additional depreciation expense associated with expansions at our high performance computing data center in New Jersey.

General and administrative

 

     Three Months Ended
October 31,
               
(in thousands, except percentages)    2015      2014      Change      % Change  

General and administrative

   $ 3,456       $ 3,171       $ 285         9.0

General and administrative expenses for the three months ended October 31, 2015 were $3.5 million, an increase of $0.3 million, or 9.0%, compared to $3.2 million for the three months ended October 31, 2014. As a percentage of revenues, general and administrative expenses increased to 20.4% for the three months ended October 31, 2015 compared to 19.9% for the three months ended October 31, 2014. The increase is attributable to $0.1 million of moving, short term furniture rental and project management costs associated with our Burlington, Massachusetts headquarter renovation, $0.1 million of increased employee-related expenses and $0.1 million of other increased costs, including professional fees and depreciation expense.

 

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Total other income (expense), net

 

     Three Months Ended
October 31,
              
(in thousands, except percentages)    2015      2014      Change     % Change  

Total other income (expense), net

   $ 0       $ 113       $ (113     100

Total other income (expense), net for the three months ended October 31, 2015 was $0 compared to total other income (expense), net of $0.1 million for the three months ended October 31, 2014. 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

 

     Three Months Ended
October 31,
               
(in thousands, except percentages)    2015      2014      Change      % Change  

Provision for income taxes

   $ 344       $ 214       $ 130         60.7

For the three months ended October 31, 2015 and 2014, our income tax provision was $0.3 million and $0.2 million, respectively. 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 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 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 do not expect that our unrecognized tax benefit will change significantly within the next twelve months. 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, 2015, 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.

 

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Results of Operations for the Nine Months Ended October 31, 2015 and 2014

 

     Nine Months Ended October 31,  
(in thousands)    2015      2014  

Revenue:

     

License revenue

   $ 39,185       $ 36,842   

Project revenue

     8,002         7,729   
  

 

 

    

 

 

 

Total revenues

     47,187         44,571   
  

 

 

    

 

 

 

Operating expenses: (1)

     

Cost of revenues

     14,516         13,790   

Sales and marketing

     7,264         7,518   

Research and development

     18,265         15,968   

General and administrative (2)

     9,849         9,510   
  

 

 

    

 

 

 

Total operating expenses

     49,894         46,786   
  

 

 

    

 

 

 

Loss from operations

     (2,707      (2,215
  

 

 

    

 

 

 

Other (expense) income, net:

     

Foreign exchange (loss) gain

     (172      325   

Interest expense

     (179      (265

Interest income

     8         9   

Other income, net

     6         7   
  

 

 

    

 

 

 

Total other (expense) income, net

     (337      76   
  

 

 

    

 

 

 

Loss before income taxes

     (3,044      (2,139

Provision for income taxes

     (472      (15,870
  

 

 

    

 

 

 

Net loss

   $ (3,516    $ (18,009
  

 

 

    

 

 

 

 

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

 

     Nine Months Ended October 31,  
(in thousands)    2015      2014  

Cost of revenues

   $ 186       $ 134   

Sales and marketing

     317         249   

Research and development

     691         547   

General and administrative

     572         473   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,766       $ 1,403   
  

 

 

    

 

 

 

 

(2) Includes amortization expense related to intangible assets as follows:

 

     Nine Months Ended October 31,  
(in thousands)    2015      2014  

General and administrative

   $ 263       $ 263   

 

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     Nine Months Ended October 31,  
(as a percent of total revenue)    2015     2014  

Revenue:

    

License revenue

     83.0     82.7

Project revenue

     17.0     17.3
  

 

 

   

 

 

 

Total revenues

     100.0     100.0
  

 

 

   

 

 

 

Operating expenses:

    

Cost of revenues

     30.8     30.9

Sales and marketing

     15.4     16.9

Research and development

     38.7     35.8

General and administrative

     20.9     21.3
  

 

 

   

 

 

 

Total operating expenses

     105.7     105.0
  

 

 

   

 

 

 

Loss from operations

     (5.7 )%      (5.0 )% 
  

 

 

   

 

 

 

Other (expense) income, net:

    

Foreign exchange (loss) gain

     (0.4 )%      0.7

Interest expense

     (0.4 )%      (0.6 )% 

Interest income

     0.0     0.0

Other income, net

     0.0     0.0
  

 

 

   

 

 

 

Total other (expense) income, net

     (0.7 )%      0.2
  

 

 

   

 

 

 

Loss before income taxes

     (6.5 )%      (4.8 )% 

Provision for income taxes

     (1.0 )%      (35.6 )% 
  

 

 

   

 

 

 

Net loss

     (7.5 )%      (40.4 )% 
  

 

 

   

 

 

 

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

Comparison of Nine Months Ended October 31, 2015 and 2014

Revenue

 

     Nine Months Ended
October 31,
               
(in thousands, except percentages)    2015      2014      Change      % Change  

License revenue

   $ 39,185       $ 36,842       $ 2,343         6.4

Project revenue

     8,002         7,729         273         3.5
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 47,187       $ 44,571       $ 2,616         5.9
  

 

 

    

 

 

    

 

 

    

License revenue increased 6.4% from $36.8 million for the nine months ended October 31, 2014 to $39.2 million for the nine months ended October 31, 2015. The increase was driven by new license customers and by increased utilization of simulation capacity by existing customers. Two significant customers accelerated their consumption of simulation hours, resulting in the use of all of their respective contracted simulation capacity earlier than previously expected. Each of these customers entered into a contract renewal during the quarter ended October 31, 2015, pursuant to which we recognized an aggregate of $0.6 million of incremental license revenue during the period. Project revenue increased by $0.3 million during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014 due to expanded sales and engineering efforts with new and existing customers.

Foreign exchange fluctuations, particularly the weakening of the Euro and the Japanese yen, negatively impacted total revenue in the nine months ended October 31, 2015 by $4.4 million as compared to the nine months ended October 31, 2014. On a constant currency basis, our total revenues in the nine months ended October 31, 2015 increased 15.8% compared with the nine months ended October 31, 2014.

 

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Cost of revenues

 

     Nine Months Ended
October 31,
               
(in thousands, except percentages)    2015      2014      Change      % Change  

Cost of revenues

   $ 14,516       $ 13,790       $ 726         5.3

Cost of revenues for the nine months ended October 31, 2015 was $14.5 million, an increase of $0.7 million, or 5.3%, compared with $13.8 million during the nine months ended October 31, 2014. As a percentage of revenues, cost of revenues decreased slightly to 30.8% for the nine months ended October 31, 2015 compared to 30.9% for the nine months ended October 31, 2014. The period-over-period increase was almost entirely attributable to increased royalty costs of approximately $0.7 million associated with higher customer license levels and expanded use of an embedded sublicensed product.

Sales and marketing

 

     Nine Months Ended
October 31,
              
(in thousands, except percentages)    2015      2014      Change     % Change  

Sales and marketing

   $ 7,264       $ 7,518       $ (254     (3.4 )% 

Sales and marketing expenses for the nine months ended October 31, 2015 were $7.3 million, a decrease of $0.3 million, or 3.4%, compared to $7.5 million for the nine months ended October 31, 2014. As a percentage of revenues, sales and marketing expenses decreased to 15.4% for the nine months ended October 31, 2015 compared to 16.9% for the nine months ended October 31, 2014. The decrease in sales and marketing expenses is primarily attributable to a $0.7 million decrease in payroll and employee-related costs, including reduced commission expense related to the timing of customer orders and lower travel expenses, and a $0.2 million decrease in consulting fees, offset by an increase of $0.6 million in costs related to marketing programs and initiatives.

Research and development

 

     Nine Months Ended
October 31,
               
(in thousands, except percentages)    2015      2014      Change      % Change  

Research and development

   $ 18,265       $ 15,968       $ 2,297         14.4

Research and development expenses for the nine months ended October 31, 2015 were $18.3 million, an increase of $2.3 million, or 14.4%, compared to $16.0 million for the nine months ended October 31, 2014. As a percentage of revenues, research and development expense increased to 38.7% for the nine months ended October 31, 2015 compared to 35.8% for the nine months ended October 31, 2014. Increased payroll and employee-related costs accounted for essentially all of the $2.3 million increase, primarily as a result of the net addition of 9 new scientists and software engineers since the prior year period and merit-based compensation increases for existing personnel.

General and administrative

 

     Nine Months Ended
October 31,
               
(in thousands, except percentages)    2015      2014      Change      % Change  

General and administrative

   $ 9,849       $ 9,510       $ 339         3.6

General and administrative expenses for the nine months ended October 31, 2015 were $9.8 million, an increase of $0.3 million, or 3.6%, compared to $9.5 million for the nine months ended October 31, 2014. As a percentage of revenues, general and administrative expense decreased to 20.9% for the nine months ended October 31, 2015 compared to 21.3% for the nine months ended October 31, 2014. Increased payroll and employee-related costs accounted for approximately $0.4 million of the increase, which was partially offset by a decrease of $0.1 million related to internet service charges.

 

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Total other (expense) income, net

 

     Nine Months Ended
October 31,
              
(in thousands, except percentages)    2015      2014      Change     % Change  

Total other (expense) income, net

   $ (337    $ 76       $ (413     543.4

Total other (expense) income, net for the nine months ended October 31, 2015 was $(0.3) million, compared to total other (expense) income, net of $0.1 million for the nine months ended October 31, 2014. 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 to total other expense (income), 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)    2015      2014      Change     % Change  

Provision for income taxes

   $ 472       $ 15,870       $ (15,398     (97.0 )% 

For the nine months ended October 31, 2015 and 2014, our income tax provision was $0.5 million and $15.9 million, respectively. The provision for the nine months ended October 31, 2015 primarily consists of the tax effects of foreign operating results and foreign withholding taxes. The provision for the nine months ended October 31, 2014 includes a $14.5 million non-cash charge to record a valuation allowance against the Company’s United States net deferred tax assets and a $0.7 million non-cash write-off of state deferred tax assets.

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 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 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 do not expect that our unrecognized tax benefit will change significantly within the next twelve months. 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 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, 2015, 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

From time to time 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.

 

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Table of Contents

Revenue and total operating expenses on a constant currency basis. Our international operations generate 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 nine months ended October 31, 2015 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 year, rather than the exchange rates actually in effect during the current fiscal year.

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

Non-GAAP operating (loss) income. We define non-GAAP operating (loss) income as GAAP operating (loss) income 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) income.

Non-GAAP net (loss) income. We define non-GAAP net (loss) income as GAAP net (loss) income 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) income is net (loss) income.

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

Our management uses these non-GAAP financial measures to evaluate our operating performance and for internal planning and forecasting purposes. We believe that these measures help identify 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) income and non-GAAP net (loss) income 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,
 
(in thousands)    2015      2014      2015      2014  

Net (loss) income

   $ (433    $ 220       $ (3,516    $ (18,009

Add back:

           

Depreciation and amortization

     959         763         2,487         2,157   

Interest expense, net

     57         85         171         256   

Other income, net

     (6      (4      (6      (7

Foreign exchange (gain) loss

     (51      (194      172         (325

Provision for income taxes

     344         214         472         15,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     870         1,084         (220      (58

Stock-based compensation expense

     661         533         1,766         1,403   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 1,531       $ 1,617       $ 1,546       $ 1,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Non-GAAP operating income (loss):

 

     Three Months Ended
October 31,
     Nine Months Ended
October 31,
 
(in thousands)    2015      2014      2015      2014  

Operating (loss) income

   $ (89    $ 321       $ (2,707    $ (2,215

Add back:

           

Stock-based compensation expense

     661         533         1,766         1,403   

Amortization of acquired intangible assets

     88         88         263         263   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP operating income (loss)

   $ 660       $ 942       $ (678    $ (549
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP net income (loss):

 

     Three Months Ended
October 31,
     Nine Months Ended
October 31,
 
(in thousands)    2015      2014      2015      2014  

Net (loss) income

   $ (433    $ 220       $ (3,516    $ (18,009

Add back:

           

Stock-based compensation expense

     661         533         1,766         1,403   

Amortization of acquired intangible assets

     88         88         263         263   

Income tax effect (1)

     (265      (220      (710      (583
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP net income (loss)

   $ 51       $ 621       $ (2,197    $ (16,926
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended
October 31,
     Nine Months Ended
October 31,
 
     2015      2014      2015      2014  

Net (loss) income per diluted share (2)

   $ (0.03    $ 0.02       $ (0.24    $ (1.31

Add back:

           

Stock-based compensation expense

     0.05         0.04         0.12         0.10   

Amortization of acquired intangible assets

     0.01         0.01         0.02         0.02   

Income tax effect (1)

     (0.02      (0.02      (0.05      (0.04
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 0.00       $ 0.04       $ (0.15    $ (1.24
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 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 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 14.6 million and 14.7 million for the three months ended October 31, 2015 and 2014, respectively, and 14.5 million and 13.7 million for the nine months ended October 31, 2015 and 2014, respectively.
(3) Due to rounding, totals may not equal the sum of line items in the table above.

 

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Liquidity

Overview

Our primary sources of liquidity during the nine months ended October 31, 2015 were cash and cash equivalents on hand, cash flows provided by operating activities and cash proceeds from stock option and warrant exercises. Our primary uses of cash during the nine months ended October 31, 2015 were capital expenditures and payments of capital lease obligations. As of October 31, 2015, we had $23.2 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 Act, in amounts, at prices and on terms to be determined at the time of the offering.

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, 2015 was $3.9 million. Net cash used in operating activities for the nine months ended October 31, 2014 was $2.1 million. The increase during the current year period is primarily the result of fluctuations in accounts receivable and deferred revenue, which typically vary depending on the timing of our receipt and invoicing of customer orders and the timing of cash payments to us from customers.

Net Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended October 31, 2015 and 2014 was $1.4 million and $0.7 million, respectively. Capitalized renovations to our Burlington, Massachusetts headquarter office accounted for the majority of the increase in purchases of property and equipment during the current year period. In addition, restricted cash decreased by $0.2 million during the third quarter of fiscal 2016 as a result of the release of a portion of our required security deposit letter of credit in connection with the amendment of our corporate headquarters lease

Net Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended October 31, 2015 was $1.0 million, and consists of payments on our capital lease obligations of $2.1 million, partially offset by proceeds from stock option and warrant exercises of $1.2 million. Net cash used in financing activities for the nine months ended October 31, 2014 was $1.6 million, and consisted primarily of payments on our capital lease obligations of $2.3 million, partially offset by proceeds from stock option exercises of $0.7 million.

In September 2015, we financed $4.4 million of computer processor equipment, which we obtained under a capital lease arrangement as part of our investment to significantly expand the computing capacity at our high performance computing data center in New Jersey. The repayment of the associated capital lease obligation will occur over three years.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of either October 31, 2015 or January 31, 2015.

Contractual Commitments

Operating Leases

Effective July 1, 2015, we entered into an amendment to the lease for our corporate headquarters space in Burlington, Massachusetts. The amendment extends to the lease term, originally set to expire in March 2016, through March 2023 and reduces the leased space from 65,941 square feet to 44,241 square feet. The 21,700 square foot reduction primarily relates to first floor space that we had

 

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previously subleased to a subtenant, and under the terms of the amendment, the landlord assumed the sublease effective July 1, 2015. The amendment also provides for a tenant improvement allowance of up to $1.7 million to cover renovations that will be made to the retained second floor space over the remainder of fiscal year 2016. We believe that the renovated space will be suitable and adequate to meet our planned growth needs at our headquarters over the next several years.

In conjunction with the relinquishment of the first floor space, the amendment reduces our required security deposit letter of credit from $0.5 million to $0.4 million. The reduction of the letter of credit is reflected as a change in restricted cash in the investing activity section of the accompanying consolidated statement of cash flows.

Effective August 1, 2015, we entered into an amendment to the lease for our office located in Japan. The amendment extends the lease term, originally set to expire in November 2015, through November 2017 and increases the leased space from approximately 4,047 square feet to 7,512 square feet.

In conjunction with the purchase of additional computer processor equipment for our high performance computing data center in New Jersey, effective as of September 1, 2015, our hosting and support arrangement for that facility was expanded to account for the new equipment.

As of October 31, 2015, after taking into consideration the above amendments, total future minimum lease payments under non-cancelable lease arrangements are as follows (in millions):

 

Fiscal year ended January 31,       

2016 (remainder as of October 31, 2015)

   $ 1.2   

2017

     4.7   

2018

     4.7   

2019

     4.2   

2020

     3.0   

2021

     2.1   

Thereafter

     3.9   
  

 

 

 
   $ 23.8   
  

 

 

 

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, 2015 and January 31, 2015, $6.8 million and $5.8 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.

 

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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 15.4% weaker against the United States dollar, on average, for the nine months ended October 31, 2015, when compared with the nine months ended October 31, 2014. The resulting net overall impact to revenue and operating expense was a decrease of approximately $3.2 million and $2.1 million, respectively, during the nine months ended October 31, 2015.

The exchange rate impact of other currencies for the nine months ended October 31, 2015, primarily driven by a weaker Japanese yen, was a decrease to revenue and operating expense of approximately $1.2 million and $0.6 million, respectively.

For the nine months ended October 31, 2015, 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 $2.4 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.

 

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, 2015 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, 2015.

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, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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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

You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, filed with the SEC on March 24, 2015 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.

 

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, 2015.

 

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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).
  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.

 

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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.

 

EXA CORPORATION

(Registrant)

By:  

/s/ Richard F. Gilbody

  Richard F. Gilbody
  Chief Financial Officer
  Date: December 3, 2015

 

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