S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 3, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

EXA CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   7372   23-3011410

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

55 Network Drive

Burlington, Massachusetts 01803

(781) 564-0200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Stephen A. Remondi

Chief Executive Officer

Exa Corporation

55 Network Drive

Burlington, Massachusetts 01803

Telephone: (781) 564-0200

Telecopy: (781) 564-0299

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Robert W. Sweet, Jr., Esq.

John D. Patterson, Jr., Esq.

Foley Hoag LLP

Seaport West

155 Seaport Boulevard

Boston, Massachusetts 02210

Telephone: (617) 832-1000

Telecopy: (617) 832-7000

 

Kenneth J. Gordon, Esq.

Martin C. Glass, Esq.

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, Massachusetts 02109

Telephone: (617) 570-1000

Telecopy: (617) 523-1231

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Larger accelerated filer  ¨

   

Accelerated filer  ¨

Non-accelerated filer  x

 

(Do not check if a smaller reporting company)

 

Smaller reporting company  ¨

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered  

Proposed Maximum

Aggregate Offering Price(1)

 

Amount of

Registration Fee(2)

Common Stock, $0.001 par value

  $86,250,000   $10,014

 

 

(1) Estimated solely for the purpose of determining the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes the offering price attributable to shares that the underwriters have the option to purchase from the registrant and the selling stockholders solely to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED AUGUST 3, 2011

LOGO

                     Shares

Common Stock

 

 

We are offering             shares of our common stock and the selling stockholders are offering             shares of our common stock. This is our initial public offering and no public market currently exists for our shares. We intend to apply to list our shares of common stock on the NASDAQ Global Market under the symbol “EXA.” We anticipate that the initial public offering price will be between $             and $             per share.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.

 

 

 

     Per Share      Total  

Public Offering Price

   $                    $                

Underwriting Discounts and Commissions

   $         $     

Proceeds to Us, Before Expenses

   $         $     

Proceeds to Selling Stockholders, Before Expenses

   $         $     

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

We and the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional              shares of common stock to cover over-allotments. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

The underwriters expect to deliver shares of common stock to purchasers on or about                     , 2011.

Stifel Nicolaus Weisel

 

Baird

      Canaccord Genuity
Needham & Company, LLC

The date of this Prospectus is                     , 2011.


Table of Contents

LOGO

PowerFLOW® is our innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management and aeroacoustics.

The images above, showing aerodynamic streamlines around a moving passenger vehicle and highway truck, represent output of aerodynamics simulations using PowerFLOW and our PowerVIZ® visualization tools.


Table of Contents

You should rely only on information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. The information in this prospectus may only be accurate as of the date on the front of this prospectus regardless of the time of delivery of this prospectus or any sale of our common stock.

Our business, prospects, financial condition and results of operations may have changed since that date. We obtained industry and market data used throughout this prospectus through our research, surveys and studies conducted by third parties, and industry and general publications. We have not independently verified market and industry data from third-party sources.

In this prospectus, except as otherwise indicated or as the context may otherwise require, all references to “Exa Corporation,” “Exa,” “we,” “us” and “our” refer to Exa Corporation, a Delaware corporation, and its subsidiaries.

 

 

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-Looking Statements

     25   

Use of Proceeds

     26   

Dividend Policy

     27   

Capitalization

     28   

Dilution

     29   

Selected Consolidated Financial Data

     31   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   

Business

     52   

Management

     69   

Principal and Selling Stockholders

     89   

Certain Relationships and Related Party Transactions

     91   

Description of Capital Stock

     93   

Shares Eligible for Future Sale

     95   

Underwriting

     97   

Legal Matters

     101   

Experts

     101   

Where You Can Find Additional Information

     102   

Index To Consolidated Financial Statements

     F-1   

 

 

The following is a list of our United States registered trademarks and applications for trademark registrations: Digital Physics, Exa, PowerACOUSTICS, PowerCLAY, PowerCOOL, PowerDELTA, PowerFLOW, PowerINSIGHT, PowerSPECTRUM, PowerTHERM, PowerVIZ and PowerWRAP. We also own the following unregistered trademarks: DWT, Digital Wind Tunnel, PowerCASE, PowerPREP and PowerEXPORT. We have also registered, and applied for registrations for, various of our marks in various foreign countries. This prospectus also refers to the products or services of other companies by the trademarks and trade names used and owned by those companies.


Table of Contents

 

PROSPECTUS SUMMARY

This summary highlights information about Exa Corporation and the offering that is contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus before making an investment decision, including the information presented under the heading “Risk Factors” and in the financial statements and notes thereto included elsewhere in this prospectus.

Our fiscal year begins on February 1 and ends on the following January 31. For example, references to fiscal year 2011 mean the fiscal year ended January 31, 2011.

Overview

We develop, sell and support simulation software and services that vehicle 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 our customers to augment or replace inefficient and expensive methods of evaluating alternative designs, such as wind tunnel testing using physical prototypes, with accurate digital simulations that are more useful and timely. We enable significant cost savings and fundamental improvements in our customers’ vehicle development process by allowing their engineers and designers to gain crucial insights about design performance early in the design cycle.

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 our proprietary technology that we refer to as Digital Physics®, which is based on algorithms known as the lattice Boltzmann method. Our proprietary technology enables PowerFLOW to predict complex fluid flows with a level of reliability comparable to or better than physical testing, with results that are more accurate and useful than those of alternative computational fluid dynamics, or CFD, methods.

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 80 manufacturers currently utilize our products and services, including 13 of the global top 15 passenger vehicle manufacturers. Global vehicle manufacturers face increasing pressure, from government mandates as well as from consumers, to improve the efficiency of their products. This requires different powertrain choices, changes in the shape of the vehicle, and reductions in vehicle weight, all of which we believe favor the adoption of simulation-driven design.

We are also beginning to explore other markets in which we believe the capabilities of PowerFLOW have broad application, such as the aerospace, oil and gas production, chemical processing, architecture engineering and construction, power generation, biomedical and electronics industries. We offer our solutions through annual capacity-based licenses, either as software-only, to be run on the customer’s own computer hardware, or in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering.

We sell our products and services primarily through our direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, Europe, Japan and Korea, through distributors in China and India and through a sales agent in Brazil.

We are profitable, with a predictable business model based on recurring revenue from a growing customer base. For our fiscal year ended January 2011, we recorded revenues and Adjusted EBITDA of $37.7 million and $4.5 million, respectively. Our revenues and Adjusted EBITDA were $10.3 million and $1.8 million, respectively in the first three months of fiscal year 2012. Since generating our first commercial revenue in 1994, our annual revenue has increased for 17 consecutive years. (For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure and a reconciliation of our Adjusted EBITDA to our net income, see note 2 to “Summary Consolidated Financial Information—Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key metrics that we use to evaluate our performance.”)

 

 

1


Table of Contents

 

Our Industry

In a wide range of industries, such as ground transportation, aerospace, power generation, chemical and industrial processing, architecture, electronics and biomedicine, companies face increasing and often conflicting demands to provide innovative product designs and improved safety, quality and efficiency as well as to reduce product development costs and accelerate time-to-market. All these activities are significantly influenced by government regulatory activity, as well.

In the ground transportation industry, experimentation using physical systems such as prototypes and wind tunnels has been the primary predictive method used to aid in the design and development process and as the method of verification enabling designers and engineers to achieve sign off at the completion of each step in the design process. We estimate that our customers spend as much as 10% to 15% of their research and development budgets, or approximately $6 billion per year, on physical prototypes, test facilities and related travel and staff costs.

In recent years, computer-aided technology has played an increasingly important role in the product development process. Digital modeling and simulation, in particular, have emerged as enabling technologies to aid in the design, analysis, and manufacture of products. The emergence of simulation-driven design has been facilitated by increasing adoption of computer-aided design, or CAD, and product lifecycle management, or PLM, software by manufacturers and their suppliers, by the continually decreasing cost of computing power and by increasingly powerful tools for visualization and computer generated imaging. According to CIMdata, an independent global consulting firm, the global comprehensive PLM market was $26.0 billion in 2010, and is expected to grow to $41.3 billion by 2015, representing a compound annual growth rate of 9.7%. Of that $26.0 billion, $21.2 billion comes from independent software vendors, or ISVs. The ISV portion of the comprehensive PLM market is expected to grow to $33.3 billion in 2015, at a compound annual growth rate of 9.5%. The simulation segment of this market, in which we participate, was $2.4 billion in 2010, and is expected to grow to $3.9 billion in 2015, at a compound annual growth rate of 10.0%.

Our Solution

We provide a powerful, innovative simulation software solution that has catalyzed a disruptive change in how our customers design, engineer and optimize their products. Customers use our PowerFLOW simulation solutions to enhance the performance of their products, reduce product development costs and improve the efficiency of their product development processes. Simulation-driven design enabled by PowerFLOW makes predictive information available earlier in the design process, with iterative simulations providing insight into how new concepts can improve the design. Our proprietary Digital Physics approach enables complex fluid dynamics modeling to be performed within dramatically shorter time frames, at a level of accuracy comparable to or better than that available through physical experimentation, and typically at much lower cost.

We leverage the key attributes of our proprietary technology and 20 years of industry experience to provide answers that previously have been practically unattainable through traditional physical testing or existing CFD methods. Our integrated suite of aerodynamic, thermal management and aeroacoustics simulation capabilities provides a single solution for critical fluid dynamics problems, and our interactive visualization capabilities enable real time iteration of design modifications and simulation of results. By adding functionalities that address phenomena such as thermal radiation or acoustic transmission, we provided our customers with broader solutions that extend beyond our initial fluid dynamics focus. As we continue to add new applications solutions to broaden the range of simulation problems that PowerFLOW can address, adoption of our technology has spread from the automotive market that was our initial focus to other segments of the ground transportation industry.

As our customers have recognized the predictive accuracy of our simulation solutions, they have begun to adopt verification of design behavior by means of PowerFLOW simulation as an alternative to physical experimentation as a basis for critical design signoffs. Similar approaches are now being considered by regulatory agencies. For example, new greenhouse gas regulations proposed by the U.S. Environmental Protection Agency for medium and heavy-duty vehicles will permit aerodynamic drag (a key value used to determine compliance with CO2 emission standards) to be certified by means of fluid dynamics simulation.

 

 

2


Table of Contents

 

We believe that our proprietary solution has the potential to transform the product development process not only in our current target market but in other markets that face similar problems, including the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

Our Business Strengths

We believe that, in addition to our differentiated customer solution, the following key business strengths will assist us in taking advantage of the opportunities we are pursuing:

 

   

Customer engagement model. Our dedicated field and applications management teams interact continuously with our customers to foster long-term relationships and identify problems we can help them solve.

   

Solutions focus and deep domain expertise. Our customers value our core intellectual property and technology but they equally value our focus on surrounding that technology with know-how and best practices that enable them to solve their most challenging engineering and design problems.

   

Expertise in our targeted vertical market. Concentrating initially on the large and underpenetrated ground transportation market has enabled us to deliver solutions that are based on a deep understanding of our customers’ most difficult fluid flow problems and provide highly differentiated solutions that are difficult or impossible for our competitors to replicate.

   

Predictable business model. The recurring nature of our revenues, as customers annually renew or increase their simulation capacity, provides high visibility into future performance.

   

Proprietary and protected intellectual property. Our senior scientific and engineering leadership, some of whom have been with Exa since its founding, pioneered the use of the lattice Boltzmann method for fluid dynamics simulation and have developed extensive know-how relating both to the fundamental underlying physics as well as its application to the specific problems our customers face.

Our Growth Strategy

Our goal is to become the global leader in digital simulation solutions in the target markets we serve. Our strategies to achieve this objective include:

 

   

deepening deployment in our existing customer base;

   

adding new customers in the ground transportation market;

   

enabling additional applications and solutions;

   

penetrating new geographies;

   

exploring new vertical markets; and

   

selectively pursuing strategic acquisitions.

Risks Associated with Our Business

Our business is subject to numerous risks which may prevent us from successfully implementing our business strategy. These risks are more fully described under “Risk Factors” beginning on page 9 and include, but are not limited to, the following:

 

   

we depend on our PowerFLOW suite of simulation solutions for substantially all of our revenue, and our business will suffer if demand for, or usage of, PowerFLOW declines;

   

we are dependent on a small number of significant customers for a substantial portion of our revenues;

   

our success depends on continued adoption of digital simulation in our target markets, and, if potential customers are unwilling to adopt our digital simulation technologies to augment or replace their traditional physical methods of design validation and testing, our opportunities for future revenue growth may be limited;

   

economic downturns that affect the ground transportation industry may adversely affect our revenues and operating results;

   

our sales cycle is lengthy and complicated;

   

competition from software offered by current competitors and new market entrants, as well from internally developed solutions by our customers, could adversely affect our ability to sell our software

 

 

3


Table of Contents

 

 

products and related services and could result in pressure to price our products in a manner that reduces our profitability;

   

the significant cost of deep deployment of our solutions could deter their wider adoption; and

   

our success depends in part on our ability to develop and introduce new and enhanced products and we may not be able to timely develop new and enhanced products to satisfy changes in demand.

Our Corporate Information

Exa Corporation, a Delaware corporation, was originally incorporated in Massachusetts on November 21, 1991 and reincorporated in Delaware on March 18, 1998. Our corporate headquarters are located at 55 Network Drive, Burlington, MA 01803 and our telephone number is (781) 564-0200. We maintain a website at www.exa.com. Information contained on or linked to our website is not a part of this prospectus.

 

 

4


Table of Contents

 

THE OFFERING

 

Common stock offered by us

             Shares

 

Common stock offered by selling stockholders

             Shares

 

Common stock to be outstanding after this offering

             Shares

 

Over-allotment option

             Shares

 

Use of proceeds

General corporate purposes, including working capital, potential repayment of debt and potential acquisitions.

 

  A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by $             , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

Proposed NASDAQ Global Market symbol

EXA

The number of shares of common stock to be outstanding after the offering is based on 58,432,856 shares outstanding as of April 30, 2011 and includes 55,232,073 shares that we will issue upon conversion to common stock of our outstanding preferred stock effective immediately prior to completion of the offering. The number of shares of common stock to be outstanding after the offering excludes, as of April 30, 2011:

 

   

11,213,256 shares issuable upon exercise of stock options, which have a weighted average exercise price of $0.29 per share and 7,497,459 additional shares reserved for future issuance under our stock-based compensation plans;

 

   

700,000 shares issuable upon exercise of warrants, which have a weighted average exercise price of $0.94 per share; and

 

   

assumes no exercise of the underwriters’ option to purchase             additional shares of common stock.

Unless otherwise stated, all information contained in this prospectus assumes the conversion to common stock of all our outstanding redeemable convertible preferred stock, the effectiveness of a 1-for-             reverse stock split with respect to our common stock, no exercise of our outstanding stock options and warrants to purchase an aggregate of 11,913,256 shares of our common stock and no exercise of the underwriters’ over-allotment option, gives effect to amendments to our certificate of incorporation and by-laws that will become effective upon completion of this offering and assumes an initial public offering price of $             per share, the midpoint of the offering range set forth on the cover of this prospectus.

 

 

5


Table of Contents

 

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following tables summarize the financial data of our business. You should read this summary information along with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes that are included elsewhere in this prospectus.

Our summary consolidated statement of operations data for the fiscal years ended January 31, 2009, 2010 and 2011 and our summary consolidated balance sheet data as of January 31, 2010 and 2011 are derived from our consolidated financial statements included elsewhere in this prospectus. Our summary consolidated financial data presented below as of April 30, 2011 and for the three months ended April 30, 2010 and 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. In the opinion of management, our unaudited consolidated financial statements included in this prospectus include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation thereof. Our historical results are not necessarily indicative of results to be expected for any future period, and our interim results are not necessarily indicative of our results for the entire year or any future period.

The pro forma balance sheet data as of April 30, 2011 gives effect to the conversion of all of our preferred stock into our common stock immediately prior to the consummation of this offering. The pro forma as adjusted balance sheet data as of April 30, 2011 gives effect to (1) the pro forma adjustment above and (2) our receipt of estimated net proceeds of $             million from this offering, based on an assumed initial public offering price of $             per share, which is the mid-point of our filing range, after deducting estimated underwriting discounts and estimated offering expenses payable by us, as if each had occurred as of April 30, 2011. The pro forma as adjusted summary financial data are not necessarily indicative of what our financial position would have been if this offering had been completed as of the date indicated, nor are these data necessarily indicative of our financial position for any future date or period.

 

 

6


Table of Contents

 

    Year Ended January 31,     Three Months Ended
April 30,
 
        2009             2010             2011             2010             2011      
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

         

License revenue

  $ 28,226      $ 26,853      $ 30,592      $ 6,463      $ 9,305   

Project revenue

    5,897        8,743        7,140        1,294        1,039   
                                       

Total revenue

    34,123        35,596        37,732        7,757        10,344   

Operating expenses: (1)

         

Cost of revenues

    11,453        9,956        9,896        2,329        2,811   

Sales and marketing

    6,952        5,304        6,110        1,270        1,274   

Research and development

    15,025        12,595        12,777        2,937        3,202   

General and administrative

    9,358        5,902        6,330        1,402        1,631   
                                       

Total operating expenses

    42,788        33,757        35,113        7,938        8,918   

(Loss) income from operations

    (8,665     1,839        2,619        (181     1,426   

Other income (expense), net

         

Foreign exchange gain (loss)

    549        (766     (198     180        (464

Interest expense

    (1,218     (586     (1,262     (567     (242

Other (expense) income

    (71     12        10        0        131   
                                       

Total other expense, net

    (740     (1,340     (1,450     (387     (575

(Loss) income before provision for income taxes

    (9,405     499        1,169        (568     851   

Provision for income taxes

    441        595        587        9        50   
                                       

Net (loss) income

  $ (9,846   $ (96   $ 582      $ (577   $ 801   
                                       

Net (loss) income per common share:

         

Basic

  $ (3.36   $ (0.03   $ 0.18      $ (0.18   $ 0.25   

Diluted

  $ (3.36   $ (0.03   $ 0.01      $ (0.18   $ 0.01   

Weighted average number of common shares outstanding:

         

Basic

    2,928,481        3,191,721        3,195,780        3,192,957        3,200,190   

Diluted

    2,928,481        3,191,721        66,349,360        3,192,957        66,390,958   

 

(1) Includes non-cash, share-based compensation expense as follows:

 

     Year Ended January 31,      Three Months
Ended April 30,
 
         2009              2010              2011          2010      2011  
     (in thousands)  

Cost of revenues

   $ 33       $ 39       $ 45       $ 10       $ 9   

Sales and marketing

     87         62         63         15         2   

Research and development

     111         105         133         27         13   

General and administrative

     60         224         40         10         9   

 

     Year Ended January 31,      Three Months
Ended April 30,
 
     2009     2010      2011      2010      2011  
     (in thousands)  

Operating Data:

             

Adjusted EBITDA (2)

   $ (5,521   $ 4,968       $ 4,460       $ 309       $ 1,781   

 

(2)

Adjusted EBITDA. To supplement our consolidated financial statements, which are presented on the basis of generally accepted accounting principles in the United States, or GAAP, we disclose Adjusted EBITDA, a non-GAAP measure that excludes certain amounts. This non-GAAP measure is not in accordance with,

 

 

7


Table of Contents

 

  or an alternative for, generally accepted accounting principles in the United States. The GAAP measure most comparable to Adjusted EBITDA is GAAP net income (loss). A reconciliation of this non-GAAP financial measure to the corresponding GAAP measure is included below.

 

     We define EBITDA as net income (loss), excluding depreciation and amortization, interest expense, other income (expense), foreign exchange gain (loss) and provision for income taxes. We define Adjusted EBITDA as EBITDA, excluding non-cash share-based compensation expense. Our management uses this non-GAAP measure when evaluating our operating performance and for internal planning and forecasting purposes. We believe that this measure helps indicate underlying trends in our business, is important in comparing current results with prior period results, and is useful to investors and financial analysts in assessing our operating performance. For example, 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, Adjusted EBITDA may have limitations as an analytical tool.

 

     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, used by other companies and therefore should not be used to compare our performance to that of other companies.

 

     In considering our Adjusted EBITDA, investors should take into account the following reconciliation of this non-GAAP financial measure to the comparable GAAP financial measure of net income (loss) that is presented in this “Summary Consolidated Financial Information.”

 

     Year Ended January 31,     Three Months Ended
April 30,
 
     2009     2010     2011         2010             2011      
     (in thousands)  

Net (loss) income

   $ (9,846   $ (96   $ 582      $ (577   $ 801   

Depreciation and amortization

     2,853        2,699        1,560        428        322   

Interest expense, net

     1,218        586        1,262        567        242   

Other expense (income)

     71        (12     (10     (0     (131

Foreign exchange (gain) loss

     (549     766        198        (180     464   

Provision for income taxes

     441        595        587        9        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (5,812     4,538        4,179        247        1,748   

Non-cash, share-based compensation expense

     291        430        281        62        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (5,521   $ 4,968      $ 4,460      $ 309      $ 1,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of April 30, 2011  
     Actual     Pro Forma     Pro Forma as
Adjusted
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash

   $ 12,613      $ 12,613      $                

Total current assets

     19,394        19,394     

Total assets

     23,750        23,750     

Long-term debt, net of current portion

     4,481        4,481     

Convertible preferred stock

     32,663        —       

Stockholders’ (deficit) equity

     (48,955     (16,292  

 

 

8


Table of Contents

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should consider carefully the risks described below, as well as all of the other information contained in this prospectus, before making any investment decision with respect to our common stock. Please note that it is not possible to predict or identify all factors that could cause our actual results to differ. Consequently, you should not consider any list of factors to be a complete set of all potential risks or uncertainties. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock.

Risks Related to Our Business and Industry

We depend on our PowerFLOW suite of simulation solutions for substantially all of our revenue, and our business will suffer if demand for, or usage of, PowerFLOW declines.

We derive substantially all of our revenue from subscription licenses to use our PowerFLOW software suite and related services. We expect revenue from PowerFLOW to continue to account for substantially all of our revenue for the foreseeable future. If demand for, or usage of, PowerFLOW declines for any reason, our revenue would decline and our operating results would suffer.

We are dependent on a small number of significant customers for a substantial portion of our revenues.

A significant portion of our revenues is derived from renewals by our existing customers of annual licenses to use PowerFLOW, and in any fiscal period, a large portion of our revenue is typically attributable to a small number of significant customers. In each of the fiscal years ended January 31, 2009, 2010 and 2011, approximately 30%, 25% and 24% of our revenue, respectively, was attributable to Renault and Toyota in the aggregate, each of which accounted for more than 10% of our revenue in each of those years. Due to the concentration of revenue in a small number of customers, a significant reduction in usage of PowerFLOW by any of these customers, or the non-renewal of their annual licenses, due to the cancellation or postponement of vehicle development programs or for any other reason, could have a materially adverse affect on our results of operations.

Our success depends on continued adoption of digital simulation in our target markets, and if potential customers are unwilling to adopt our digital simulation technologies to augment or replace their traditional physical methods of design validation and testing, our opportunities for future revenue growth may be limited.

Most of our customers and potential customers have historically tested their product designs using experimental methods such as wind tunnels and road tests. Manufacturers often have made substantial investments in physical test facilities and associated staff and infrastructure and have accumulated many years of experience in using these methods. For organizational, cultural, financial or other reasons, potential customers may be reluctant to reduce their reliance on physical experimental methods as the primary means to validate and test their designs. If we are not successful in overcoming these obstacles by demonstrating to potential customers that the results of digital simulation using PowerFLOW can be delivered in a timely and cost effective manner and are sufficiently reliable to be used as the basis of design decisions, they may not adopt, or may delay broader adoption of, our digital simulation technology, which could limit our opportunities for revenue growth and adversely affect our business.

Economic downturns that affect the ground transportation industry may adversely affect our revenues and operating results.

We derive a substantial majority of our total revenue from companies in the ground transportation industry. Accordingly, our future success depends upon the continued demand for digital simulation software and services by companies in this industry. The ground transportation industry and the other manufacturing industries that we serve, or may expand into, periodically experience economic downturns that can adversely affect our business. For example, our license revenue declined in fiscal year 2010 for the first time in our history, due to the suspension or postponement of vehicle development programs by our customers in response to the 2008 financial crisis and resulting recession, which significantly affected the automotive industry. Furthermore, terrorist attacks, other increased global hostilities and natural disasters have, at times, contributed to widespread uncertainty and

 

9


Table of Contents

speculation in the world financial markets. The impact of events of this kind may be exacerbated by other economic factors, such as increased operating and manufacturing costs due to rising global energy prices or the tightening of the financial and credit markets, and by changes in commercial and consumer preferences and spending habits. In the future, such cyclical trends and economic factors may adversely affect our business by reducing customer capital expenditures, extending design cycles and reducing our revenue and, ultimately, our results of operations. In addition, manufacturers in the ground transportation market tend to adhere to a technology choice for long periods, possibly an entire product development cycle. As a result, a lost opportunity with a given customer may not again become a new opportunity for several years or projects may be delayed if development of a new product is put on hold or terminated.

Adverse changes in the economy and global economic and political uncertainty may also cause delays and reductions in information technology spending by our customers and a deterioration of the markets for our products and services. If adverse economic conditions occur, we would likely experience reductions, delays and postponements of customer purchases that will negatively impact our revenue and operating results.

In the past, worldwide economic downturns and pricing pressures have led to reorganizations of companies in the automotive industry. Such reorganizations have in the past caused delays and reductions in capital and operating expenditures including for products and services like ours. In addition, a consolidation or reorganization affecting a significant customer could result in discontinuation of use by the acquired company of our simulation solutions, if the acquiring company has not adopted our technology or prefers other methods of design verification. Domestic and foreign economic conditions or any other factors that result in reduced spending on new product development by companies in the automotive industry could harm our operating results in the future.

Our sales cycle is lengthy and complicated.

The development of our business relationship with a potential customer can be a lengthy process, typically spanning three to six months or longer. Our strategy is to engage initially with new customers, or with new engineering groups within existing customers, by performing fixed-price projects. Once new customers are familiar with the capabilities of our products, they generally, but not always, transition to a license-based model for access to PowerFLOW. Because the license fees for our products can be substantial and the internal process changes necessary for a customer to implement our solution can be significant, the software license sales cycle may involve multiple divisions within a potential customer’s organization and multiple layers of management. Due to the length and complicated nature of our sales cycle, predicting the fiscal period in which a new license agreement will be entered into, if at all, is difficult. Delay in booking a new license agreement could cause our quarterly revenues to fall substantially below our expectations and those of public market analysts and investors. Delays in sales could cause significant shortfalls in our revenue and operating results for any particular period.

Competition from software offered by current competitors and new market entrants, as well from internally developed solutions by our customers, could adversely affect our ability to sell our software products and related services and could result in pressure to price our products in a manner that reduces our profitability.

The market for digital simulation software is characterized by vigorous competition. We consider the primary competition to adoption of our solutions to be our customers’ continued use of physical prototypes and test facilities. We also encounter competition from companies that provide multi-function digital simulation software that is used for various purposes in the ground transportation industry and elsewhere, primarily CD-adapco, with its products STAR-CD and STAR-CCM+, and ANSYS, with its products Fluent and CFX. CD-adapco has a strong presence in the automotive market, and offers capabilities in certain areas where we do not currently focus, such as combustion. ANSYS offers a suite of digital simulation software that includes many applications that we do not address, such as structural mechanics and electromagnetism, which it markets to a broad spectrum of industries. We also compete against open source software such as OpenFOAM that includes computational fluid dynamics capabilities.

In most of our existing and potential new accounts, products such as these are already in use for a variety of purposes, and likely will remain so. Our ability to further penetrate the ground transportation market will therefore depend on our ability to demonstrate that our solutions deliver economic value in the form of significant process and cost improvements that competing products are unable to provide. As we expand our offerings into other markets,

 

10


Table of Contents

we may face competition from the same competitors as well as from companies that we have not typically competed against in the past. Many of our current and potential competitors have greater financial, technical, marketing, service and other resources than we have and may expand into our markets by acquiring other companies or otherwise. As a result, these companies may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. Existing and potential customers may perceive the cost of our solution as being higher than that of our competitors’ products. This perception could become an obstacle to wider adoption of our simulation solutions, or result in pressure to reduce our prices or change our capacity-based pricing model. We may not be able to compete successfully against current or future competitors and competitive pressures may materially adversely affect our business, financial condition and operating results.

The significant cost of deep deployment of our solutions could deter their wider adoption.

Under our capacity-based license model, license fees are based on simulation capacity, purchased on an annual basis. Increased utilization, or continued usage after the expiration of the license term, requires the purchase of additional simulation capacity. As customers increase their reliance on our digital simulation solutions and deploy them more widely within their organizations, their consumption of our simulation capacity increases. For example, one customer has expanded the annual simulation capacity it purchases from us by a factor of over 35 times over a period of five years. At some point, the significant cost of implementing our solutions pervasively throughout their organizations under a capacity-based licensing model may deter our customers from more widely adopting our solutions, which could limit our prospects for growth.

Our success depends in part on our ability to develop and introduce new and enhanced products and we may not be able to timely develop new and enhanced products to satisfy changes in demand.

Our success depends in part on our ability to develop and market new and enhanced solutions on a timely basis. Successful product development and marketing depends on numerous factors, including our ability to anticipate customer requirements, changes in technology, our ability to differentiate our products and solutions from those of our competitors, and market acceptance. Enterprises are requiring their application software vendors to provide greater levels of functionality and broader product offerings. Moreover, our industry is characterized by rapidly changing technologies and evolving industry standards and operating platforms. We may not be able to develop and market new or enhanced solutions in a timely or cost-effective manner or to develop and introduce products that satisfy customer requirements. Our products also may not achieve market acceptance or correctly anticipate technological changes. In particular, a critical component of our growth strategy is to increase the penetration and expansion of PowerFLOW and our related products with our existing customers in the ground transportation market. We may not be successful in developing and marketing, on a timely basis, new products or product enhancements, or adequately addressing the changing needs of our customers and potential customers or successfully increasing the penetration of PowerFLOW and our related products in our existing, or any other, markets.

Our success in penetrating new vertical markets will depend, in part, on our ability to develop a deep understanding of the challenges facing potential customers in those markets.

We have historically concentrated our development efforts primarily on the ground transportation market. While we anticipate that the substantial majority of our revenues will continue to be derived from the ground transportation market for the foreseeable future, in order to achieve our long-term growth goals, we will need to penetrate additional vertical markets, such as the aerospace, oil and gas production, chemical processing, architecture and construction, power generation, biomedical and electronics industries. Our success in the ground transportation market depends on our deep understanding of the design processes utilized by our customers in that market. In order to penetrate new vertical markets, we will need to develop a similar understanding of the design processes, and associated technical difficulties, utilized by participants in those markets. Developing this level of understanding will be a time consuming and potentially expensive process, and we may not be successful. We will also need to demonstrate to potential customers that PowerFLOW and our other products and services can provide digital simulation solutions that compare favorably to physical testing methods as well as the offerings by our competitors with respect to cost, accuracy, set-up time and ease of use. If we fail to penetrate these new vertical markets, our revenue may grow at a slower rate than we anticipate and our financial condition could suffer.

 

11


Table of Contents

We may not be able to obtain or maintain necessary licenses of third-party technology on commercially reasonable terms, or at all, which could delay product sales and development and adversely impact product quality.

We have incorporated third-party licensed technology into certain of our products. We anticipate that we are also likely to need to license additional technology from third parties in connection with the development of new products or product enhancements in the future. Third-party licenses may not be available to us on commercially reasonable terms, or at all. The inability to retain any third-party licenses required in our current products or to obtain any new third-party licenses to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from making these products or enhancements, any of which could seriously harm the competitive position of our products.

Defects or errors in our products could harm our reputation, impair our ability to sell our products and result in significant costs to us.

PowerFLOW and the other products that we offer are complex and, despite extensive testing and quality control, may contain undetected errors or failures when first introduced or as new versions are released. We have not suffered significant harm from any defects or errors to date, but we have from time to time found defects in our products and we may discover additional defects in the future. We may not find errors in new or enhanced products before the products are released and such errors may not be discovered by us or our customers until after the products have been implemented. We have in the past issued and may in the future need to issue corrective releases of our products to remedy defects and errors. Any of these problems may result in the loss of or delay in customer acceptance and sales of our products, which could have a material, adverse effect on our business, financial position, results of operations and cash flows.

We could be subject to significant expenses and damages because of liability claims related to our products and services.

Our customers’ reliance on our digital simulation solutions or project-based services in their vehicle design processes may entail the risk of product liability claims and associated damages, and our software products and services could give rise to warranty and other claims. As we expand into new market segments outside the ground transportation industry, the risk of product liability exposure may increase. Any errors, defects, performance problems or other failure of our software could result in significant liability to us for damages or for violations of environmental, safety and other laws and regulations. Our agreements with our customers generally contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions in our agreements may not be effective as a result of federal, foreign, state or local laws or ordinances or unfavorable judicial decisions. A substantial product liability judgment against us could materially and adversely harm our operating results and financial condition. Even if our software is not at fault, a product liability claim brought against us could be time consuming, costly to defend and harmful to our operations. In addition, although we carry general liability insurance, our current insurance coverage may be insufficient to protect us from all liability that may be imposed under these types of claims.

If there are interruptions or delays in our PowerFLOW OnDemand services due to third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions and the use of our service could become impaired, which could harm our relationships with customers and subject us to liability.

We provide PowerFLOW OnDemand services primarily through a data center operated by IBM in Piscataway, New Jersey under an agreement with IBM. IBM provides the system infrastructure and owns or leases the computer hardware used for the PowerFLOW OnDemand services that it hosts. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems, or those in the IBM data center, to fail, resulting in interruptions in our service. Interruptions or delays in our PowerFLOW OnDemand service could result from the termination of our arrangement with IBM, third-party error, our own error, natural disasters or security breaches. Such interruptions or delays, whether accidental or willful, could harm our relationships with customers, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability, cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could adversely affect our business, financial condition and results of operations.

 

12


Table of Contents

If the security measures of the third-party providers for our PowerFLOW OnDemand service are breached and unauthorized access is obtained to client data, clients may curtail or stop their use of our on-demand solutions, which could harm our business, financial condition and results of operations.

Our PowerFLOW OnDemand service involves the storage and transmission of confidential information of customers, including their design data. If our, or our third-party service providers’, security measures were ever breached as a result of employee error, malfeasance or otherwise, and, as a result, an unauthorized party obtained access to this confidential data, our reputation could be damaged, our business could suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not discovered until launched against a target. As a result, we and our third-party providers may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our or our third-party suppliers’ security occurs, the market perception of our on-demand services could be harmed and we could lose sales and clients.

Seasonal variations in the purchasing patterns of our customers may lead to fluctuations in the timing of our cash flows.

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 fiscal year budgets, which often coincide with the calendar year, except for our customers in Japan. These seasonal trends materially affect the timing of our cash flows, as license fees become due at the time the license term commences. As a result, new and renewal licenses have been concentrated in the fourth quarter of our fiscal year, and our cash flows from operations have been highest in the first quarter of the succeeding fiscal year.

Declines in new software license sales or in the rate of renewal of our software may not be fully reflected in our current period operating results and could lead to future revenue shortfalls that could affect our results of operations.

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 new or renewal licenses may not be fully reflected in our current period operating results. We do not intend to report or disclose our bookings or invoices on a current basis. If our new and renewal license purchases in any period decline or fail to grow at a rate consistent with our historical trends, particularly in the fourth quarter of our fiscal year, when a disproportionate percentage of our new license and renewal sales typically occur, our revenue in future periods could fall short of analysts’ expectations which, in turn, could adversely affect the price of our common stock.

Our cost structure is relatively fixed in the short term, which makes it difficult to reduce our expenses quickly in response to declines in revenue or revenue growth.

Most of our expenses, such as those associated with headcount and facilities, are relatively fixed and can be difficult to reduce in the short term. Our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, our expenses for that quarter may constitute a larger percentage of our operating budget than we planned, causing a disproportionate effect on our expected results of operations and profitability for that quarter.

If we are unable to manage our expected growth, our performance may suffer.

Our business has grown rapidly, and if we are successful in executing our business strategy, this growth will continue as we expand our offerings in the ground transportation market and seek to penetrate new vertical markets. We will need to continue to expand our managerial, operational, financial and other systems and resources to manage our operations, continue our research and development activities, increase our sales force and expand project-based services by increasing our field application engineers and worldwide support staff. It is possible that our management, finance, development personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and products requires that we continue to develop more robust business processes and improve our systems and procedures in each of these areas and to attract and retain sufficient numbers of talented employees. We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our research, development and growth goals.

 

13


Table of Contents

Our business could be adversely affected if we are unable to attract, integrate and retain key personnel.

Our success in the highly competitive digital simulation market depends largely on our ability to attract, integrate and retain highly skilled technical, managerial, consulting, sales and marketing personnel. Competition for these personnel in our industry is intense. We may not be able to continue to attract and retain the appropriately qualified, highly skilled employees necessary for the development of our products and services and the growth of our business, or to replace such personnel who leave our employ in the future. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel, particularly scientific, product development and applications management personnel, could make it difficult to meet key objectives, such as timely and effective product introductions, penetration and expansion into existing accounts and growth in our share of the domestic and international digital simulation market.

We may expand by acquiring or investing in other companies, which may divert our management’s attention, result in additional dilution to our stockholders and consume resources that are necessary to sustain our business.

Although we have no agreements or commitments for any material acquisitions, our business strategy may in the future include acquiring complementary services, technologies or businesses. We also may enter into relationships with other businesses to expand our service offerings or our ability to provide service in foreign jurisdictions, which could involve preferred or exclusive licenses, developing channels of distribution or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close.

An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the company’s technology is not easily adapted to work with ours or we have difficulty retaining the customers of any acquired business due to changes in management or otherwise. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown liabilities. Our acquisitions may not be successfully integrated or any such acquisitions may not otherwise be successful. If our acquisitions are unsuccessful for any reason, our business may be harmed and the value of your investment may decline.

We sell our products and services internationally and are subject to various risks relating to these international activities; if we fail to manage our international operations effectively, our business, financial condition and results of operations could be adversely affected.

International sales of PowerFLOW and our related products and services are important to our growth and profitability. In the fiscal year ended January 31, 2011, 84.6% of our revenue was attributable to sales in international markets, and at April 30, 2011, we had 10 offices in 6 countries. By doing business in international markets, we are exposed to risks separate and distinct from those we face in our domestic operations, and if we are unable to manage the various risks associated with supporting our international sales and service efforts effectively, the growth and profitability of our business may be adversely affected.

Engaging in international business inherently involves a number of other difficulties and risks, including:

 

   

changes in foreign currency exchange rates;

   

changes in a specific country’s or region’s political or economic conditions, particularly in emerging markets;

   

burdens on complying with a wide variety of foreign laws and regulations;

   

natural disasters or outbreaks of infectious diseases affecting the regions in which our customers operate;

   

unexpected changes in tariffs or trade protection measures;

   

import or export licensing requirements and other restrictions on technology imports and exports;

   

potentially negative consequences from changes in foreign government regulations, tax laws and regulatory requirements;

   

laws and business practices favoring local companies;

 

14


Table of Contents
   

difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and customs;

   

difficulties and costs of staffing and managing foreign operations;

   

disproportionate management attention or company resources;

   

changes in diplomatic and trade relationships;

   

international terrorism and anti-American sentiment;

   

possible future limitations on the ownership of foreign businesses;

   

difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;

   

longer accounts receivable payment cycles;

   

less effective protection of intellectual property; and

   

the challenges of handling legal disputes in foreign jurisdictions.

Because most of our international sales are denominated in the currency of the country where the purchaser is located, as we continue to expand our direct sales presence in international regions, the portion of our accounts receivable and payment obligations denominated in foreign currencies continues to increase. As a result, increases or decreases in the value of the U.S. dollar relative to foreign currencies may affect our financial position, results of operations and cash flow. Currently, our largest exposures to foreign exchange rates exist with respect to the euro and the Japanese yen. Any hedging policies we may implement in the future may not be successful, and the cost of those hedging techniques may have a significant negative impact on our operating results.

Our exposure to each of these risks may increase our costs, impair our ability to market and sell our products and require significant management attention. Our business, financial position, results of operations and cash flows may be materially adversely affected by any of these risks.

We rely on independent distributors to distribute our products and services in certain geographies, and any adverse change in our relationship with our distributors could adversely affect our performance.

We currently sell our products and services in China and India through independent distributors, and are dependent upon the efforts of these distributors in those areas. Currently, we do not have long-term agreements with our distributors. Difficulties in ongoing relationships with these distributors, such as delays in collecting accounts receivable, failure to meet performance criteria or to promote our products as aggressively as we expect or differences in the handling of customer relationships, could adversely affect our performance. Additionally, the loss of a distributor for any reason, including a distributor’s decision to sell competing products rather than our products, could have an adverse effect on our results. Moreover, our future success will depend on the ability and willingness of our distributors to continue to dedicate the resources necessary to promote our products and to support a larger installed base of our products. If our distributors are unable or unwilling to do so, we may be unable to sustain revenue growth.

Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of amounts that have been accrued.

We are subject to income taxes in both the United States and various foreign jurisdictions, and we may take certain income tax positions on our tax returns that tax authorities may disagree with. When necessary, we provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions. However, the calculation of our tax liabilities involves the application of complex tax regulations to our global operations in many jurisdictions. Therefore, any dispute with any tax authority may result in a payment that is materially different from our current estimate of the tax liabilities associated with our returns.

Changes in tax laws or tax rulings could materially impact our effective tax rate. There are several proposals to reform U.S. tax rules being considered by U.S. law makers, including proposals that may reduce or eliminate the deferral of U.S. income tax on our unrepatriated earnings, potentially requiring those earnings to be taxed at the U.S. federal income tax rate, reduce or eliminate our ability to claim foreign tax credits, and eliminate various tax deductions until foreign earnings are repatriated to the U.S. Our future reported financial results may be adversely affected by tax rule changes which restrict or eliminate our ability to utilize net operating loss carry-forwards, claim foreign tax credits or deduct expenses attributable to foreign earnings, or otherwise affect the treatment of our unrepatriated earnings.

 

15


Table of Contents

Our loan agreements contain operating and financial covenants that may restrict our business and financing activities.

We are party to loan and security agreements relating to our working capital line of credit facility with Silicon Valley Bank and our term loan facility with Gold Hill Capital 2008, L.P. and Massachusetts Capital Resource Company. Borrowings under these loan and security agreements are secured by substantially all of our assets, including our intellectual property. Our loan and security agreements restrict our ability to:

 

   

incur additional indebtedness;

   

redeem subordinated indebtedness;

   

create liens on our assets;

   

enter into transactions with affiliates;

   

make investments;

   

sell assets;

   

make material changes in our business or management;

   

pay dividends, other than dividends paid solely in shares of our common stock, or make distributions on and, in certain cases, repurchase our stock; or

   

consolidate or merge with other entities.

In addition, our working capital line of credit requires us to maintain specified adjusted quick ratio tests. The operating and financial restrictions and covenants in the loan and security agreements governing our working capital line of credit facility and our term loan facility, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants could result in a default under the loan and security agreements, which could cause all of the outstanding indebtedness under both facilities to become immediately due and payable and terminate all commitments to extend further credit.

If we are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either when they mature or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to continue as a going concern.

We may need substantial additional funding and we may be unable to raise capital when needed, which could force us to delay, reduce or eliminate our product development programs or commercialization efforts.

We believe that the net proceeds from this initial public offering, together with our future sales, existing cash and cash equivalent balances and interest we earn on these balances, will be sufficient to meet our anticipated cash requirements for at least the next twelve months. However, our actual capital requirements will depend on many factors, many of which are outside our control, including:

 

   

future revenue generation;

   

future operating expenses, including planned increases in our research and development, sales and marketing and general and administrative expenses;

   

the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;

   

the cost of defending, in litigation or otherwise, any claims that we infringe third party intellectual property rights;

   

the effect of competing technological and market developments; and

   

the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

Historically, we have financed our operations and internal growth primarily through private placements of our equity securities and debt. We cannot be certain that additional public or private financing will be available in amounts acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience dilution. Furthermore, any new securities we issue may have rights, preferences and privileges superior to our common stock. Debt financing, if available, may involve restrictive covenants. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

 

16


Table of Contents

Risks Related to Our Intellectual Property

We may not be able to adequately protect our intellectual property rights in internally developed software and other materials and efforts to protect them may be costly.

Our ability to compete effectively is dependent in part upon our ability to protect our intellectual property rights in our software and other materials that we have developed internally. While we hold issued patents and pending patent applications covering certain elements of our technology, these patents, and, more generally, existing patent laws, may not provide adequate protection for portions of the technology that are important to our business. In addition, our pending patent applications may not result in issued patents. We have largely relied on copyright, trade secret and, to a lesser extent, trademark laws, as well as generally relying on confidentiality procedures and agreements with our employees, consultants, customers and vendors, to control access to, and distribution of, technology, software, documentation and other confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain, use or distribute our technology without authorization. If this were to occur, we could lose revenue as a result of competition from products infringing or misappropriating our technology and intellectual property and we may be required to initiate litigation to protect our proprietary rights and market position.

U.S. patent, copyright and trade secret laws offer us only limited protection and the laws of some foreign countries do not protect proprietary rights to the same extent. Accordingly, defense of our proprietary technology may become an increasingly important issue as we continue to expand our operations and product development into countries that provide a lower level of intellectual property protection than the United States. Policing unauthorized use of our technology is difficult and the steps we take may not prevent misappropriation of the technology we rely on. If competitors are able to use our technology without recourse, our ability to compete would be harmed and our business would be materially and adversely affected.

We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to determine the validity and scope of the rights of others. That litigation may not be ultimately successful and could result in substantial costs to us, the reduction or loss in intellectual property protection for our technology, the diversion of our management attention and harm to our reputation, any of which could materially and adversely affect our business and results of operations.

Claims recently asserted by the Massachusetts Institute of Technology could subject us to litigation or require the payment by us of royalties.

In 1991, we entered into a license agreement with the Massachusetts Institute of Technology, or MIT, which was subsequently amended in 1993, 1994, 1995 and 1997, relating to two patents related to methods and systems for simulating fluid dynamics that had been developed by an MIT scientist, Dr. Kim Molvig. Dr. Molvig was one of our co-founders, but has not been employed by us since 1998. MIT and Dr. Molvig hold, in the aggregate, 1.5% of our common stock. Under the MIT license agreement, as amended, we were required to pay royalties at rates ranging from 1% to 3%, up to a maximum aggregate amount of $2.8 million, on any sales by us of products that incorporated the licensed technology. We paid minimum annual royalties in the amount of $20,000 per year from 1996 to 2007 under this agreement. In 1998, after we developed the extended lattice Boltzmann method that forms the core of our current product offering, we discontinued the use in our products of the technology licensed from MIT. We ceased paying minimum royalties to MIT in 2007.

We have recently been notified by MIT that it believes that we are practicing the patents covered by the license agreement, and therefore are in arrears in the payment of royalties under the agreement. We have advised MIT that we do not believe that we have practiced the subject patents at any time since at least 1998, or that we owe any royalties under the agreement.

MIT has not commenced suit against us with respect to its claims, and if any such suit is commenced by MIT, we intend to defend it vigorously. Litigation instituted by MIT alleging infringement by us of its patent rights, whether meritorious or not, could be time-consuming to defend and could damage our reputation, result in substantial and unanticipated costs associated with litigation, or result in the payment by us of damages. We believe that if MIT were to prevail in any such litigation, the royalties due under the terms of the license agreement, after giving effect to the approximately $200,000 in royalties that we have already paid, would not exceed approximately $2.6 million (excluding any interest or costs of litigation).

 

17


Table of Contents

Assertions by any other third party that we infringe its intellectual property, whether successful or not, could subject us to costly and time-consuming litigation and expensive licenses.

The software and technology industries are characterized by frequent litigation based on allegations of infringement or other violations of patents, copyrights, trademarks, trade secrets or other intellectual property rights. We cannot be certain that our products and services do not infringe the intellectual property rights of third parties. Additionally, because our software is integrated with our customers’ business processes and other software applications, third parties may bring claims of infringement against us, as well as our customers and other software suppliers, if the cause of the alleged infringement cannot be easily determined. Although we believe that our intellectual property rights are sufficient to allow us to market our products and services without incurring liability to third parties, third parties may bring claims of infringement or misappropriation against us. Except as set forth above with regard to MIT, no claims of this type have been asserted against us to date. However, such claims of alleged infringement of intellectual property rights of third parties could be asserted against us in the future. We cannot be sure that we would prevail against any such asserted claim. In addition to possible claims with respect to our proprietary information, some of our products contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement or misappropriation claims with respect to these third party technologies.

Claims of alleged infringement of third party intellectual property rights may have a material adverse effect on our business. Any intellectual property rights claim made against us or our customers, with or without merit, could be time-consuming, expensive to litigate or settle, and could divert management attention and financial resources. An adverse determination could prevent us from offering our products or services to our customers and may require that we procure or develop substitute products or services that do not infringe. Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements. We may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Furthermore, many of our license agreements require us to indemnify our customers for certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages if there were an adverse ruling related to any such claims. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our intellectual property in any subsequent litigation in which we are a named party. Moreover, such infringement claims may harm our relationships with our existing customers and may deter future customers from subscribing to our services on acceptable terms, if at all.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of employees’ former employers.

We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of our employees’ former employers. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our products if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. In addition, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to develop, market and support potential products or product enhancements, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management.

Our use of open source software could impose limitations on our ability to provide our services, which could adversely affect our financial condition and operating results.

We utilize open source software in our products. The use and distribution of open source software can lead to greater risks than the use of third-party commercial software, as open source software does not come with warranties or other contractual protections regarding infringement claims or the quality of the code. From time to time parties have asserted claims against companies that distribute or use open source software in their products and services, asserting that open source software infringes their intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights with respect to what we believe to be open source software. In such event, we could be required to seek licenses from third parties in order to continue using such software or offering certain of our services or to discontinue the use of such software or the sale of our affected

 

18


Table of Contents

services in the event we could not obtain such licenses, any of which could adversely affect our business, operating results and financial condition. In addition, if we combine our proprietary software with open source software in a certain manner, we could, under some of the open source licenses, be required to release the source code of our proprietary software.

Risks Related to this Offering and Ownership of Our Common Stock

There has been no public market for our common stock prior to this offering, and you may not be able to resell our shares at or above the price you paid, or at all.

Prior to this offering, there has been no public market for our common stock. We intend to apply to list our common stock on the NASDAQ Global Market. If an active trading market for our common stock does not develop after this offering, the market price and liquidity of our common stock will be materially and adversely affected. The offering price for our common stock will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our common stock after this offering. An active trading market for our common stock may not develop and the market price of our common stock may decline below the offering price.

The market price for our common stock may be volatile.

Fluctuations in the price of our common stock could contribute to the loss of all or part of your investment. Prior to this offering, there has not been a public market for our common stock. Accordingly, the initial public offering price for the shares of our common stock may not be indicative of the price that will prevail in the trading market, if any, that develops following this offering. If an active market for our common stock develops and continues, the trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our common stock and our common stock may trade at prices significantly below the initial public offering price. In such circumstances the trading price of our common stock may not recover and may experience a further decline.

Factors affecting the trading price of our common stock may include:

 

   

actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

   

changes in the market’s expectations about our operating results;

   

the effects of seasonality on our business cycle;

   

success of competitive products and services;

   

our operating results failing to meet the expectation of securities analysts or investors in a particular period or failure of securities analysts to publish reports about us or our business;

   

changes in financial estimates and recommendations by securities analysts concerning our company, the digital simulation market, or the software industry in general;

   

operating and stock price performance of other companies that investors deem comparable to us;

   

news reports relating to trends in the markets we serve, such as the ground transportation market, including changes in estimates of the future size and growth rate of our markets;

   

announcements by us or our competitors of acquisitions, new offerings or improvements, significant contracts, commercial relationships or capital commitments;

   

our ability to market new and enhanced product and services offerings on a timely basis;

   

changes in laws and regulations affecting our business;

   

commencement of, or involvement in, litigation involving our company, our general industry, or both;

   

changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;

   

the volume of shares of our common stock available for public sale;

   

any major change in our board or management;

   

sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and

   

general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.

 

19


Table of Contents

Broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. The stock market in general, and the NASDAQ Global Market and the market for technology companies and software companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of ours, may not be predictable. A loss of investor confidence in the market for technology or software stocks or the stocks of other companies which investors perceive to be similar to us, the opportunities in the digital simulation market or the stock market in general, could depress our stock price regardless of our business, prospects, financial conditions or results of operations.

In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against the affected company. This type of litigation, even if unsuccessful, could be costly to defend and distract our management.

Our revenue, operating results and gross margin have historically fluctuated significantly from quarter to quarter, and we expect they will continue to do so, which could cause the trading price of our stock to decline.

Our quarterly revenue and results of operations have fluctuated in the past and may do so in the future as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section in this prospectus:

 

   

our recognition of project revenues during the quarter in which services are completed, rather than ratably over the period of performance of services;

   

our ability to retain and increase sales to existing customers and attract new customers;

   

changes in the volume and mix of products sold in a particular quarter;

   

seasonality of our business cycle, given that our cash flows from operating activities are typically significantly higher in our first fiscal quarter;

   

our policy of expensing sales commissions on license sales at the time license contracts are entered into and the license term commences;

   

the timing and success of new product introductions or upgrades by us or our competitors;

   

changes in our pricing policies or those of our competitors;

   

failure to achieve anticipated levels of customer acceptance of our existing or new applications or platform changes;

   

failure to expand the utilization of PowerFLOW in our customer base or to penetrate new customers and market segments;

   

unexpected outcomes of matters relating to litigation;

   

unanticipated changes in tax rates and tax laws;

   

failure to effectively protect our intellectual property, especially in developing countries;

   

failure to successfully integrate acquired businesses and technologies;

   

renegotiation or termination of royalty or intellectual property arrangements;

   

unanticipated impact of accounting for technology acquisitions, if any;

   

general economic conditions, particularly in countries where we derive a significant portion of our revenue;

   

greater than anticipated expenses or a failure to maintain cost controls;

   

competition, including entry into the market by new competitors and new product offerings by existing competitors;

   

the amount and timing of expenditures related to expanding our operations, research and development, or introducing new products;

   

fluctuations in foreign currency exchange rates;

   

changes in the licensing or payment terms for our products and services; and

   

the purchasing and budgeting cycles of our customers.

Customers may choose not to renew annual licenses, resulting in reduced revenue to us. In addition, customers may wish to negotiate renewals of licenses on terms and conditions that require us to change the way we recognize revenue under our existing revenue recognition practices at the time of such renewal with such customers. Any such changes could result in a material adverse effect on our results.

 

20


Table of Contents

We expect that the factors listed above and other risks discussed in this prospectus will continue to affect our operating results for the foreseeable future. Because of the factors listed above and other risks discussed in this prospectus, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

We will become subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to satisfy. Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.

We have historically operated our business as a private company. In connection with this offering, we will become obligated to file with the Securities and Exchange Commission annual and quarterly information and other reports that are specified in Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and we will also become subject to other new financial and other reporting and corporate governance requirements, including the requirements of the Nasdaq Stock Market and certain provisions of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder, which will impose significant compliance obligations upon us. These obligations will require a commitment of additional resources and result in the diversion of our senior management’s time and attention from our day-to-day operations. In particular, we may be required to:

 

   

create or expand the roles and duties of our board of directors, our board committees and management;

   

institute a more comprehensive financial reporting and disclosure compliance function;

   

hire additional financial and accounting personnel and other experienced accounting and finance staff with the expertise to address the complex accounting matters applicable to public companies;

   

establish an internal audit function;

   

prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

   

establish an investor relations function; and

   

establish new internal policies, such as those relating to disclosure controls and procedures and insider trading.

We may not be successful in complying with these obligations, and compliance with these obligations could be time-consuming and expensive.

Failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.

As a private company, our internal control over financial reporting is not required to, and does not, currently meet all the standards contemplated by Section 404 of the Sarbanes-Oxley Act of 2002 that we will eventually be required to meet. We will be required to evaluate, test and implement internal controls over financial reporting to enable management to report on, and our independent registered public accounting firm to attest to, such internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. While we anticipate being compliant with the requirements of Section 404 for our fiscal year ending January 31, 2012, we cannot be certain as to the timing of the completion of our evaluation and testing actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the adequacy of our internal control over financial reporting. This result may cause us to be unable to report on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by regulatory authorities, such as the Securities and Exchange Commission. Our failure to comply with Section 404 on a timely basis could result in the diversion of management time and attention from operating our business and the expenditure of substantial financial resources on remediation activities. In addition, such failure may make it more difficult and costly to attract and retain independent board and audit committee members. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. We could also suffer a loss of confidence in the reliability of our financial statements if our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. We will incur incremental costs in order to improve our internal control over financial reporting and comply with Section 404, including increased auditing and legal fees and costs associated with hiring additional accounting and administrative staff. Any such actions could increase our operating expenses and negatively affect our results of operations.

 

21


Table of Contents

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our common stock could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us, our business, our markets and our competitors. We do not control these analysts. If securities analysts do not cover our common stock after the closing of this offering, the lack of research coverage may adversely affect the market price of our common stock. Furthermore, if one or more of the analysts who do cover us downgrade our stock or if those analysts issue other unfavorable commentary about us or our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fails to regularly publish reports on us, we could lose visibility in the market and interest in our stock could decrease, which in turn could cause our stock price or trading volume to decline and may also impair our ability to expand our business with existing customers and attract new customers.

The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters.

We anticipate that our executive officers, employees, directors, current 5% or greater stockholders, and their respective affiliates will together beneficially own or control, in aggregate, approximately     % of the shares of our common stock outstanding, after giving effect to the conversion of all outstanding preferred stock and assuming no exercise of outstanding options or warrants following the closing of this offering. As a result, these executive officers, directors and principal stockholders, acting together, will have substantial influence over most matters that require approval by our stockholders, including the election of directors, any merger, consolidation or sale of all or substantially all or of our assets or any other significant corporate transaction. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose such action. These stockholders may delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of our company, even if such change of control would benefit our other stockholders. This concentration of stock ownership may adversely affect investors’ perception of our corporate governance or delay, prevent or cause a change in control of our company, any of which could adversely affect the market price of our common stock.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on the appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to fund our future growth and do not expect to declare or pay any dividend on shares of our common stock in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock appreciates and you sell your shares at a price above your cost. The price of our common stock may not appreciate in value or ever exceed the price that you paid for shares of our common stock in this offering.

Our board of directors and management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our board of directors and management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our board of directors and management regarding the application of these proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds, and we may not apply the net proceeds of this offering in ways that increase the value of your investment. While we have not allocated these estimated net proceeds for any specific purposes, we expect to use the net proceeds from this offering for general corporate purposes, including working capital. We may also use a portion of the proceeds to repay outstanding indebtedness or in acquisitions of businesses, products and technologies that are complementary to our business. Although we have from time to time evaluated possible acquisitions, we currently have no commitments or agreements to make any material acquisition, and we may not make any acquisitions in the future. We might not be able to yield a significant return, if any, on any investment of the net proceeds of this offering.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution, as the initial public offering price of our common stock will be substantially greater than the net tangible book value per share of our common stock. Based on an initial offering price of $             per share, which is the

 

22


Table of Contents

midpoint of the range on the cover of this prospectus, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $             per share. If the underwriters exercise their over-allotment option, or if outstanding options and warrants to purchase our common stock are exercised, you will experience additional dilution. For a further description of the dilution that you will experience immediately after this offering, see the section entitled “Dilution.”

Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions in Delaware law, might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

 

   

providing for three classes of directors with the term of office of one class expiring each year, commonly referred to as a staggered board;

   

authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

   

limiting the liability of, and providing indemnification to, our directors and officers;

   

limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

   

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

   

controlling the procedures for the conduct and scheduling of board and stockholder meetings;

   

limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board of directors then in office; and

   

providing that directors may be removed by stockholders only for cause.

These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

Future sales, or the availability for sale, of our common stock may cause our stock price to decline.

Sales of our common stock in the public market after this offering, or the perception that these sales may occur, could cause the market price of our common stock to decline. Upon completion of this offering, we will have              shares of common stock outstanding. All shares of our common stock sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933. The remaining shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, if applicable, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act of 1933. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriter for this offering. To the extent these shares are sold into the market, the market price of our common stock could decline. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions applicable to the sale of shares of our common stock after this offering.

 

23


Table of Contents

Our ability to use our net operating loss carryforwards may be subject to limitation.

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 our taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of our net operating loss carryforwards before they expire. The closing of this offering, alone or together with transactions that may occur in the future, may trigger an ownership change pursuant to 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 this offering, sales of common stock by our existing stockholders or additional sales of common stock by us after this offering, could have a material adverse effect on our results of operations in future years. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study.

 

24


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These statements identify substantial risks and uncertainties and relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” and similar expressions, whether in the negative or affirmative. These statements are only predictions and may be inaccurate. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under “Risk Factors” and in other parts of this prospectus. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our future results, levels of activity, performance or achievements may differ from our expectations. Other than as required by law, we do not undertake to update any of the forward-looking statements after the date of this prospectus, even though our situation may change in the future.

 

25


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares by us in the offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $             million. We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of              shares at the initial public offering price less estimated underwriting discounts and commissions and estimated offering expenses. This option may be exercised if the underwriters sell more than              shares in connection with this offering. To the extent that this option is exercised in full, the estimated net proceeds from the shares we sell will be approximately $             million.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by $            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use our net proceeds for general corporate purposes, including working capital. We may also use a portion of the proceeds to repay outstanding indebtedness or in acquisitions of businesses, products and technologies that are complementary to our business. Although we have from time to time evaluated possible acquisitions, we currently have no commitments or agreements to make any material acquisition, and we may not make any acquisitions in the future. Until we use our net proceeds of the offering, we intend to invest the funds in United States government securities and other short-term, investment-grade, interest-bearing instruments or high-grade corporate notes. Management will have significant flexibility in applying our net proceeds of the offering.

We will not receive any proceeds from the sale of shares by the selling stockholders.

 

26


Table of Contents

DIVIDEND POLICY

We have never paid or declared any cash dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Covenants in the agreements governing our term loan and line of credit also restrict our ability to pay cash dividends. We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, outstanding indebtedness and plans for expansion and restrictions imposed by lenders, if any.

 

27


Table of Contents

CAPITALIZATION

The following table sets forth our cash, short-term and long-term debt and capitalization as of April 30, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion into common stock of all of our outstanding shares of preferred stock into 55,232,073 shares of common stock upon completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect the conversion described above as well as to give effect to the completion of this offering and our receipt of the estimated net proceeds from the sale of the shares of common stock we are offering, as described under “Use of Proceeds.”

You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of April 30, 2011  
     Actual     Pro
Forma
    Pro Forma as
Adjusted
 
     (in thousands, except share and per
share data)
 

Cash

   $ 12,613      $ 12,613      $                
  

 

 

   

 

 

   

 

 

 

Short-term debt, including current portion of long-term debt and capital lease obligations

     772        772     
  

 

 

   

 

 

   

 

 

 

Long-term debt and capital lease obligations, net of current portion

     5,660        5,660     
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.001 par value; series A to I, 77,835,000 shares authorized; shares issued and outstanding: 55,232,073 actual; none pro forma or pro forma as adjusted

     32,663        —          —     
  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity:

      

Common stock, $0.001 par value: 92,165,000 shares authorized; shares issued and outstanding: 3,412,023 actual; 58,644,096 pro forma;                  pro forma as adjusted

     3        59     

Additional paid-in capital

     13,016        45,623     

Accumulated deficit

     (62,137     (62,137  

Treasury stock (211,240 common shares, at cost)

     0        0     

Accumulated other comprehensive income

     163        163     
  

 

 

   

 

 

   

Total stockholders’ (deficit) equity

     (48,955     (16,292  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (9,860   $ (9,860   $     
  

 

 

   

 

 

   

 

 

 

The numbers of shares of common stock shown above as issued and outstanding on a pro forma and pro forma as adjusted basis are based upon the number of shares of our common stock and preferred stock outstanding at April 30, 2011, giving effect to the 1-for-             reverse stock split with respect to our common stock effected on             , 2011 and exclude, as of             , 2011:

 

   

11,213,256 shares issuable upon exercise of outstanding stock options, which have a weighted average exercise price of $0.29 per share;

 

   

7,497,459 additional shares reserved for future issuance under our stock-based compensation plans; and

 

   

700,000 shares issuable upon exercise of outstanding warrants, which have a weighted average exercise price of $0.94 per share.

 

28


Table of Contents

DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the adjusted net tangible book value per share of our common stock immediately after completion of this offering. Our pro forma net tangible book value on April 30, 2011 was approximately $             million, or $0.             per share. “Net tangible book value” is equal to the sum of our total assets at April 30, 2011, minus the sum of our liabilities and intangible assets at April 30, 2011. “Pro forma net tangible book value per share” is pro forma net tangible book value divided by the total number of shares of our common stock outstanding on a pro forma basis giving effect to the conversion to common stock of our outstanding preferred stock.

After giving effect to adjustments relating to the offering, our pro forma as adjusted net tangible book value on April 30, 2011 would have been $             million, or $             per share. The adjustments made to determine pro forma as adjusted net tangible book value per share consist of:

 

   

an increase in total assets to reflect the estimated net proceeds to us of the offering as described under “Use of Proceeds;” and

   

the addition of the number of shares offered by us in this prospectus to the number of shares outstanding.

The following table illustrates the increase in pro forma net tangible book value of $             per share and the dilution (the difference between the offering price per share and pro forma net tangible book value per share) to new investors:

 

Assumed public offering price per share

      $                

Pro forma net tangible book value per share as of April 30, 2011

   $                   

Increase in pro forma net tangible book value per share attributable to the offering

   $        
  

 

 

    

Pro forma as adjusted net tangible book value per share as of April 30, 2011, after giving effect to the offering

   $         $     
     

 

 

 

Dilution per share to new investors in the offering

      $     
     

 

 

 

The following table shows the difference between existing stockholders and new investors with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share. The table assumes the initial public offering price will be $             per share.

 

     Shares Purchased    Total Consideration    Weighted
Average Price
Per Share
     Amount    Percent    Amount    Percent   

Existing stockholders

              

New investors

              
  

 

  

 

  

 

  

 

  

 

Total

              
  

 

  

 

  

 

  

 

  

 

The preceding tables are based on our shares outstanding at April 30, 2011 and assume no exercise of any outstanding stock options or warrants after that date. At April 30, 2011 there were outstanding options and warrants to purchase an aggregate of 11,913,256 shares of our common stock at a weighted average exercise price of $0.33 per share. To the extent any of these options or warrants are exercised, there will be further dilution to new investors.

If all options and warrants outstanding at April 30, 2011 had been exercised as of that date:

 

   

our pro forma net tangible book value, giving effect to those transactions, would have been $             per share, and the dilution per share to new investors in the offering would have been $             per share;

 

   

the average price per share paid by all existing stockholders for their shares, giving effect to those transactions, would have been $            , and existing stockholders would have owned     % of our outstanding shares and would have paid     % of the total consideration paid for all our outstanding shares.

 

29


Table of Contents

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to              shares or     % of the total number of shares of our common stock outstanding after this offering. If the underwriters’ overallotment option is exercised in full, the number of shares held by the existing stockholders after this offering would be reduced to     % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to     % of the total number of shares of our common stock outstanding after this offering.

 

30


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

Our selected consolidated statement of operations data for the fiscal years ended January 31, 2009, 2010 and 2011 and our selected consolidated balance sheet data as of January 31, 2010 and 2011 are derived from our consolidated financial statements included elsewhere in this prospectus. Our selected consolidated statement of operations data for the fiscal years ended January 31, 2007 and 2008 and our selected consolidated balance sheet data as of January 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements which have not been included in this prospectus. Our selected consolidated financial data presented below as of April 30, 2011 and for the three months ended April 30, 2010 and 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. In the opinion of management, our unaudited consolidated financial statements included in this prospectus include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation thereof. Our historical results are not necessarily indicative of results to be expected for any future period, and our interim results are not necessarily indicative of our results for the entire year or any future period.

The pro forma balance sheet data as of April 30, 2011 gives effect to the conversion of all of our preferred stock into our common stock immediately prior to the consummation of this offering. The pro forma as adjusted balance sheet data as of April 30, 2011 gives effect to (1) the pro forma adjustment above and (2) our receipt of estimated net proceeds of $             million from this offering, based on an assumed initial public offering price of $             per share, which is the mid-point of our filing range, after deducting estimated underwriting discounts and estimated offering expenses payable by us, as if each had occurred as of April 30, 2011. The pro forma as adjusted summary financial data are not necessarily indicative of what our financial position would have been if this offering had been completed as of the date indicated, nor are these data necessarily indicative of our financial position for any future date or period.

 

    Year Ended January 31,     Three Months Ended
April 30,
 
    2007     2008     2009     2010     2011     2010     2011  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

             

License revenue

  $ 17,085      $ 24,056      $ 28,226      $ 26,853      $ 30,592      $ 6,463      $ 9,305   

Project revenue

    3,218        3,950        5,897        8,743        7,140        1,294        1,039   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    20,303        28,006        34,123        35,596        37,732        7,757        10,344   

Operating expenses: (1)

             

Cost of revenues

    6,189        8,408        11,453        9,956        9,896        2,329        2,811   

Sales and marketing

    4,986        7,194        6,952        5,304        6,110        1,270        1,274   

Research and development

    7,609        11,711        15,025        12,595        12,777        2,937        3,202   

General and administrative

    3,953        5,813        9,358        5,902        6,330        1,402        1,631   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    22,737        33,126        42,788        33,757        35,113        7,938        8,918   

(Loss) income from operations

    (2,434     (5,120     (8,665     1,839        2,619        (181     1,426   

Other income (expense), net

             

Foreign exchange (loss) gain

    (261     (560     549        (766     (198     180        (464

Interest expense

    (999     (1,430     (1,218     (586     (1,262     (567     (242

Other income (expense)

    7        15        (71     12        10        0        131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (1,253     (1,975     (740     (1,340     (1,450     (387     (575

(Loss) income before provision for income taxes

    (3,687     (7,095     (9,405     499        1,169        (568     851   

Provision for income taxes

    111        419        441        595        587        9        50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (3,798   $ (7,514   $ (9,846   $ (96   $ 582      $ (577   $ 801   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per common share:

             

Basic

  $ (1.81   $ (3.57   $ (3.36   $ (0.03   $ 0.18      $ (0.18   $ 0.25   

Diluted

  $ (1.81   $ (3.57   $ (3.36   $ (0.03   $ 0.01      $ (0.18   $ 0.01   

Weighted average number of common shares outstanding:

             

Basic

    2,096,001        2,101,903        2,928,481        3,191,721        3,195,780        3,192,957        3,200,190   

Diluted

    2,096,001        2,101,903        2,928,481        3,191,721        66,349,360        3,192,957        66,390,958   

 

31


Table of Contents

 

(1) Includes non-cash, share-based compensation expense as follows:

 

     Year Ended January 31,      Three Months Ended
April 30,
 
     2007     2008     2009     2010      2011      2010      2011  
     (in thousands)  

Cost of revenues

   $ 1      $ 6      $ 33      $ 39       $ 45       $ 10       $ 9   

Sales and marketing

     8        45        87        62         63         15         2   

Research and development

     29        55        111        105         133         27         13   

General and administrative

     0        7        60        224         40         10         9   
     Ended January 31,      Three Months Ended
April 30,
 
     2007     2008     2009     2010      2011      2010      2011  
     (in thousands)  

Operating Data:

                 

Adjusted EBITDA (2)

   $ (1,488   $ (2,964   $ (5,521   $ 4,968       $ 4,460       $ 309       $ 1,781   

 

(2) To supplement our consolidated financial statements, which are presented on a GAAP basis, we disclose Adjusted EBITDA, a non-GAAP measure that excludes certain amounts. This non-GAAP measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The GAAP measure most comparable to Adjusted EBITDA is GAAP net income (loss). A reconciliation of this non-GAAP financial measure to the corresponding GAAP measure is included below.

We define EBITDA as net income (loss), excluding depreciation and amortization, interest expense, and other income (expense), foreign exchange gain (loss) and provision for income taxes. We define Adjusted EBITDA as EBITDA, excluding non-cash share-based compensation expense. Our management uses this non-GAAP measure when evaluating our operating performance and for internal planning and forecasting purposes. We believe that this measure helps indicate underlying trends in our business, is important in comparing current results with prior period results, and is useful to investors and financial analysts in assessing our operating performance. For example, 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, Adjusted EBITDA may have limitations as an analytical tool.

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, used by other companies and therefore should not be used to compare our performance to that of other companies.

In considering our Adjusted EBITDA, investors should take into account the following reconciliation of this non-GAAP financial measure to the comparable GAAP financial measure of net income (loss) that is presented in this “Summary Consolidated Financial Information.”

 

     Year Ended January 31,     Three Months Ended
April 30,
 
     2007     2008     2009     2010     2011     2010     2011  
     (in thousands)  

Net (loss) income

   $ (3,798   $ (7,514   $ (9,846   $ (96   $ 582      $ (577   $ 801   

Depreciation and amortization

     908        2,043        2,853        2,699        1,560        428        322   

Interest expense, net

     999        1,430        1,218        586        1,262        567        242   

Other (income) expense

     (7     (15     71        (12     (10     (0     (131

Foreign exchange loss (gain)

     261        560        (549     766        198        (180     464   

Provision for income tax

     111        419        441        595        587        9        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (1,526     (3,077     (5,812     4,538        4,179        247        1,748   

Non-cash, share-based compensation expense

     38        113        291        430        281        62        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (1,488   $ (2,964   $ (5,521   $ 4,968      $ 4,460      $ 309      $ 1,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents
    As of January 31,     As of April 30, 2011  
    2007     2008     2009     2010     2011     Actual     Pro Forma     Pro Forma
as Adjusted
 
    (in thousands)        

Consolidated Balance Sheet Data:

               

Cash

  $ 7,147      $ 6,265      $ 6,025      $ 2,402      $ 2,780      $ 12,613      $ 12,613      $              

Total current assets

    17,962        31,845        23,417        20,951        26,817        19,394        19,394     

Total assets

    22,668        37,148        30,246        25,132        29,732        23,750        23,750     

Long-term debt, net of current portion

    8,596        9,455        —          —          4,587        4,481        4,481     

Convertible preferred stock

    19,321        18,994        33,024        32,703        32,663        32,663        —       

Stockholders’ (deficit) equity

    (35,648     (43,045     (51,567     (51,233     (49,859     (48,955     (16,292  

 

33


Table of Contents

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 the section titled “Selected Consolidated Financial Data” and our financial statements and related notes that appear elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates 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 prospectus, including but not limited to those set forth in “Risk Factors” and “Special Note Regarding Forward-looking Statements.”

Overview

We develop, sell and support simulation software and services that vehicle 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 our customers to augment or replace inefficient and expensive methods of evaluating designs, such as wind tunnel testing using physical prototypes, with accurate digital simulations that are more useful and timely. We enable significant cost savings and fundamental improvements in our customers’ vehicle development process by allowing their engineers and designers to gain crucial insights about design performance early in the product development cycle. 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.

We derive our revenue primarily from the sale of our simulation software, using an annual capacity-based model. Customers usually purchase PowerFLOW simulation capacity under one-year licenses. Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering. We separately license front-end and back-end applications software that interfaces with our core simulation server software for a fixed annual fee, based on the number of concurrent users. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulations accessed via our OnDemand 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.

We sell our products and services primarily through our direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, United Kingdom, France, Germany, Italy, Japan and Korea, through distributors in China and India and through a sales agent in Brazil.

We were founded in 1991 and began operations in April 1992. We subsequently developed the extended lattice Boltzmann method that forms the core of our current product offering. Since generating our first customer revenue in 1994, our annual revenue has increased for 17 consecutive years.

 

   

From 1992 until 2001, we were heavily engaged in the development of our core physics and technology and development of our early commercial products.

 

   

In 1994, we introduced our first commercial product for use by passenger vehicle manufacturers. Even at this stage in our development, we were able to generate both project and license revenue as customers were able to derive value from our simulation results. We received initial funding for our first product from venture capital investors and the United States Defense Advanced Research Agency.

 

   

Beginning in 2001, our core technology reached a level of accuracy and maturity sufficient to enable customers to use digital simulation instead of physical experiment-based test procedures. Initially, this predictive capability was limited to vehicle aerodynamics.

 

   

From 2001 to 2006, we continued the development of our technology in order to improve its accuracy and to broaden the application capabilities available to our customers. This culminated in 2006 with our introduction of a new, fourth generation of our core product, PowerFLOW, which enabled customers to address a significantly broader range of application areas, including thermal management and aeroacoustics.

 

   

From 2006 to present, we continued to build on the core physics and technology embodied in our fourth generation of PowerFLOW to improve its accuracy and further broaden its application capabilities. We also

 

34


Table of Contents
 

engaged in extensive validation efforts, independently and with our customers, to substantiate the accuracy of our simulations in comparison to physical test results. In addition, we have invested in software and methodology development to enable our customers to rapidly set up and analyze simulations and developed best practices for implementation.

 

   

The 2008 financial crisis and resulting recession significantly affected the global ground transportation market and our business. We responded in fiscal year 2009 by significantly reducing operating expenses, including reducing headcount by 20%, instituting a twelve-month, 10% reduction in the salaries of our remaining staff and eliminating all incentive bonuses in fiscal years 2009 and 2010. These actions allowed us to generate income from operations in fiscal years 2010 and 2011.

 

   

In fiscal year 2011, strengthening conditions in the global economy led to the resumption of many vehicle design programs that had been suspended or delayed by our customers in fiscal 2010. Since fiscal year 2010, we have experienced renewed license revenue growth and improved profitability. In the first quarter of fiscal year 2012, our license revenue increased by 44% and our Adjusted EBITDA increased by 477% compared with the corresponding period in fiscal year 2011.

Our goal is to become the global leader in digital simulation solutions in the target markets we serve. Our strategies to achieve this objective include:

 

   

deepening our deployment in our existing customer base;

   

adding new customers in the ground transportation market;

   

enabling additional applications and solutions;

   

penetrating new geographies;

   

exploring new vertical markets; and

   

selectively pursuing strategic acquisitions.

Key financial terms and metrics

Sources of revenue

License Revenue. Our revenues primarily consist of subscription fees for access to our simulation solutions under annual, usage–based licenses. The primary driver of our license revenue is our core product, PowerFLOW, which is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics. Customers typically purchase PowerFLOW simulation capacity under one-year licenses that provide the customer either with dedicated access to a specified number of processor cores throughout the contract period or with a block of “simulation-hours” that may be used at any time but expire if not used by the end of the contract period. Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering. Purchasing simulation-hours allows customers the flexibility to respond to peak needs and critical time constraints that may vary significantly as they manage multiple concurrent product development programs. We separately license the front-end and back-end applications software that interfaces with our simulation server software for a fixed annual fee, based on the number of concurrent users. We invoice customers at the commencement of the license term for the cost of access to our offerings over the term of the license. Our licenses generally have twelve-month terms, with no carryover provisions for unused simulation capacity. Revenues are generally recognized ratably over the term of the license agreement.

Project Revenue. We also derive revenue from fees for project-based services, which we perform on a fixed-price basis, generally to introduce customers to our solutions. Such projects have standalone value to our customers and do not include a separate software licensing arrangement or commitment. Pricing of these projects is based primarily on the simulation capacity used in performance of the project, rather than on engineering time or materials. To date, we have generally recognized revenue from project arrangements upon completion of the contracted services.

Cost of revenues and operating expenses

Cost of revenues. Cost of revenues primarily consists of personnel costs such as wages and benefits related to customer support personnel and application engineering personnel. Cost of revenues also includes the costs associated with the computer hardware necessary to provide the simulation capacity used by our license and

 

35


Table of Contents

OnDemand customers, as well as in our performance of project-based services. We provide PowerFLOW OnDemand services primarily through a data center operated by IBM. We track data center usage by activity. Data center costs attributable to simulation usage by license or OnDemand customers, or by us on billable projects, are charged to cost of revenues. Cost of revenues also includes the amortization of licenses purchased in support of and used in our products and royalties paid to vendors whose technology is incorporated into our products. To the extent that we incorporate more licensed technology into our solutions, this portion of cost of revenues may increase over time.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of personnel costs for our sales and marketing teams, commissions earned by our sales personnel, marketing costs and occupancy costs. Data center costs that are attributable to simulation usage by our field applications engineers in support of our sales and marketing efforts are also charged to sales and marketing expense. In order to grow our business, we will continue to add resources to our sales and marketing efforts over time. We expect that sales and marketing expenses will increase in absolute dollars, but stay consistent as a percentage of total revenues in the near term.

Research and Development Expenses. Research and development expenses consist primarily of personnel costs for development and maintenance of our simulation software solutions, occupancy costs, personnel costs for product engineering and applications management, as well as basic research to advance the science that forms the core of our solution. Our research and development organization is responsible for enhancing our existing software and solutions, and includes our applications management teams, who work closely with customers to ascertain their needs and develop new solutions. To date, all of the costs related to our research and development efforts have been expensed as incurred. Data center costs that are attributable to simulation usage by our research and development organization and our applications management teams are also charged to research and development expense. We expect research and development expenses will increase in absolute dollars as we continue to enhance and expand our solutions and applications, but decrease as a percentage of total revenues.

General and Administrative Expenses. General and administrative expenses consist primarily of personnel costs for finance, human resources and internal information technology support and occupancy costs, as well as legal, accounting and other fees. We expect general and administrative expenses will increase in absolute dollars and as a percentage of total revenues in the near term as we absorb the increased cost of operating as a public company. In the longer term, we expect general administrative expenses will continue to increase in absolute dollars, but will decrease as a percentage of total revenues.

Other income (expense), net. Other income (expense), net, primarily consists of net gains and losses from foreign currency transactions, interest income and interest expense. Foreign currency transaction gains and losses can fluctuate based on the amount of revenue that is generated in certain international currencies and the exchange gain or loss that results from foreign currency disbursements and receipts. Interest income represents interest received on our cash and cash equivalents. Interest expense includes both interest paid as well as the amortization of debt discounts and deferred financing costs associated with a bridge loan and our term debt and revolving credit line. We recognized the initial value of equity participation rights that we granted in connection with our bridge financing as interest expense in fiscal year 2011. Subsequent changes in the fair value of these equity participation rights are reflected as a component of other income (expense).

Key metrics that we use to evaluate our performance

Adjusted EBITDA. To supplement our consolidated financial statements, which are presented on a GAAP basis, we disclose Adjusted EBITDA, a non-GAAP measure that excludes certain amounts. This non-GAAP measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The GAAP measure most comparable to Adjusted EBITDA is GAAP net income (loss). A reconciliation of this non-GAAP financial measure to the corresponding GAAP measure is included below.

We define EBITDA as net income (loss), excluding depreciation and amortization, interest expense, other income (expense), foreign exchange gain (loss) and provision for income taxes. We define Adjusted EBITDA as EBITDA, excluding non-cash share-based compensation expense. Our management uses this non-GAAP measure when evaluating our operating performance and for internal planning and forecasting purposes. We believe that this measure helps indicate underlying trends in our business, is important in comparing current results with prior period results, and is useful to investors and financial analysts in assessing our operating performance. For example,

 

36


Table of Contents

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, Adjusted EBITDA may have limitations as an analytical tool.

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, used by other companies and therefore should not be used to compare our performance to that of other companies.

In considering our Adjusted EBITDA, investors should take into account the following reconciliation of this non-GAAP financial measure to the comparable GAAP financial measure of net income (loss) that is presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year Ended January 31,     Three Months Ended
April 30,
 
     2009     2010     2011     2010     2011  
     (in thousands)  

Net (loss) income

   $ (9,846   $ (96   $ 582      $ (577   $ 801   

Depreciation and amortization

     2,853        2,699        1,560        428        322   

Interest expense, net

     1,218        586        1,262        567        242   

Other expense (income)

     71        (12     (10     (0     (131

Foreign exchange (gain) loss

     (549     766        198        (180     464   

Provision for income tax

     441        595        587        9        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (5,812     4,538        4,179        247        1,748   

Non-cash, share-based compensation expense

     291        430        281        62        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (5,521   $ 4,968      $ 4,460      $ 309      $ 1,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon our financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in the notes to our financial statements, the following accounting policies involve a greater degree of judgment and complexity. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, the policies below are those that we believe are the most critical to fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

We generate revenues from the licensing of our software products, typically in the form of one-year term “subscription” licenses, and from project fees for training and technical consulting services. We recognize revenues based on ASC 985-605 Software Revenue Recognition and ASC 605, Revenue Recognition. We typically sell our products in a bundled sale of term and usage-based software licenses. Term licenses are typically sold for one year. Usage-based licenses allow the customer to buy simulation capacity either as a service hosted by us or as a limited amount of customer installed software usage and are sold based upon simulation capacity expected to be used within a certain time period – typically one year. We recognize revenue from these arrangements ratably on a daily basis over the license period. Payments received from customers in advance of revenue recognition are treated as deferred revenue.

 

37


Table of Contents

If training or technical consulting services projects are bundled with a software license sale or, through specific facts and circumstances, determined to be linked with a software license sale, we treat this as one arrangement and recognize revenue ratably on a daily basis over the license period once the consulting service project is complete and provided that all elements of the arrangement have commenced.

We recognize subscription license revenue when persuasive evidence of an arrangement exists; delivery of the software or license keys has occurred and service elements, if bundled or linked, have commenced; payment is fixed and determinable; and collection of the resulting receivable is considered probable by management.

We also derive revenue from fees for separate, project-based services. Pricing of these projects is based primarily on the simulation capacity used in performance of the project, rather than on engineering time or materials. To the extent that adequate project reporting of time incurred and time to complete records exist, we recognize consulting services revenue as the services are performed under the proportionate performance method. If adequate documentation does not exist, revenue recognition is deferred until the contract is completed. To date, we have recognized all revenue from project arrangements upon completion of the contracted services.

Revenue is presented net of any taxes collected from customers.

Income Taxes

We are subject to income taxes in both the U.S. and international jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes in accordance with ASC 740, Income Taxes, which requires that deferred tax assets and liabilities be recorded based on temporary differences between the financial statement amounts and the tax basis of assets and liabilities, measured using enacted tax rates in effect for the year in which the differences are expected to reverse. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of all of the deferred tax asset will not be realized. We periodically evaluate the realizability of our net deferred tax assets and record a valuation allowance against net deferred tax assets when uncertainties exist as to their realization prior to expiration. The realizability of the deferred tax assets is evaluated quarterly. We review all available evidence to evaluate the recoverability of our deferred tax assets associated with net operating losses and research and development tax credits, including our recent earnings history in all tax jurisdictions over the last three years, as well as our ability to generate income in future periods. As of January 31, 2010 and 2011, due to the uncertainty related to the ultimate use of our deferred income tax asset, we have provided a full valuation allowance against our deferred tax asset. Net operating loss carry forwards and other tax attributes may be limited in the event that we experience a change in ownership as defined under Internal Revenue Code Section 382.

We may recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

Stock-Based Compensation

We have issued options to purchase our common stock as well as options to purchase shares of our Series G preferred stock. Upon the closing of the offering contemplated by this prospectus, all outstanding options to purchase Series G preferred stock will entitle the holder to purchase an equivalent number of shares of our common stock, on the same terms.

We account for stock based compensation in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the fair value recognition provisions of ASC 718, share based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service / vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility.

We estimate the grant date fair value of stock options and the related compensation expense, using the Black-Scholes option valuation model. This option valuation model requires the input of subjective assumptions including: (1) expected life (estimated period of time outstanding) of the options granted, (2) volatility, (3) risk-free rate and (4) dividends. Because share-based compensation expense is based on awards ultimately expected to vest, it is

 

38


Table of Contents

reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeiture rates differ from those estimates. We have estimated expected forfeitures of stock options based on our historical forfeiture rate and used these rates in developing a future forfeiture rate. If our actual forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be required in future periods. In general, the assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Information pertaining to the Black-Scholes valuation of common stock options granted during fiscal years 2009, 2010 and 2011 and the three months ended April 30, 2011 is as follows:

 

    Year Ended January 31,     Three Months Ended
April 30,
 
    2009     2010     2011     2011  

Options granted

    1,410,500        390,000        322,000        40,000   

Weighted-average exercise price

  $ 1.00      $ 1.00      $ 1.00      $ 1.00   

Weighted-average grant date fair value of common stock

  $ 0.51      $ 0.54      $ 0.53      $ 0.53   

Assumptions:

       

Expected volatility

    49.6     53.0     57.5     57.0

Expected term (in years)

    6.17        6.22        6.25        6.25   

Risk-free interest rate

    3.20     2.81     2.84     2.72

Expected dividend yield

    0.0     0.0     0.0     0.0

Exercise price and fair value of common stock

The fair value of the shares of common stock that underlie the stock options we have granted under the various plans outstanding has historically been determined by our board of directors based upon information available to it at the time of grant. Because, prior to this offering, there has been no public market for our common stock, our board of directors determined the fair value of our common stock by utilizing, among other things, recent or contemporaneous valuation information available to it. All options have been granted at exercise prices not less than the fair value of the underlying shares on the date of grant.

Expected volatility

We compute volatility under the “calculated value method” of ASC 718 by utilizing the average of a peer group comprised of publicly-traded companies and expect to continue to do so until we have adequate historical data regarding the volatility of our traded stock price. The peer group was determined based upon companies considered to be direct competition or having been presented by independent parties as a “comparable” company based upon market sector. In determining a comparable, we have excluded “large-cap” entities.

Expected term

Since adopting ASC 718, we have been unable to use historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. We have therefore utilized the “simplified” method, as prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate on a formula basis the expected term of our stock options considered to have “plain vanilla” characteristics.

Risk-free interest rate

We utilize the Federal Reserve Board’s published Treasury Constant Maturity rate which most closely matches the option term.

Expected dividend yield

Our Board of Directors historically has not declared cash dividends and does not expect to issue cash dividends in the future. We therefore use an expected dividend yield equal to zero.

 

39


Table of Contents

Significant Factors Used in Determining the Fair Value of Our Common Stock

Prior to this offering, there has been no public market for our common stock, and our board of directors has determined the fair value of our common stock in light of the facts and circumstances prevailing at the time of each award. At all relevant times, the board consisted of directors who, other than Mr. Stephen A. Remondi, who is also our chief executive officer, were independent, most of whom were stockholders in their own right or represented significant stockholders. The board of directors and management considered numerous objective and subjective factors in the assessment of fair value, including reviews of our business and financial condition, the conditions of the industry in which we operate and the markets that we serve and general economic, market and U.S. and global capital market conditions, information concerning recent transactions involving our common stock and preferred stock, independent valuations of our common stock, the lack of marketability of our common stock, the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of our company, the preferences and privileges of the preferred stock and common stock and the status of strategic initiatives being undertaken by management and the board of directors.

In considering the fair value of our common stock, the board of directors and management have considered the impact of the accumulated liquidation preferences of our preferred stock. The board recognized that any sale or other exit scenario other than an initial public offering at a valuation less than the accumulated liquidation preference would result in the receipt by common stockholders of no consideration. However, when estimating the fair value of our common stock for purposes of equity-based compensation, our board also took into account the alternative that all outstanding shares of preferred stock would convert to common stock prior to the exit transaction, such that the accumulated liquidation preferences would not factor into the fair value of the common stock.

The options awarded by our board of directors during fiscal year 2011 and the first quarter of fiscal year 2012 were routine grants in the ordinary course of business made to non-executive employees in connection with new hires or promotions, as follows:

Equity-based compensation awards since February 1, 2010

 

Date of grant        

Aggregate Number of

Shares subject to award

        Award recipients        Exercise price

March 11, 2010

       197,000 shares of common stock       

9 non-executive

employees

      $1.00

June 3, 2010

       35,000 shares of common stock       

7 non-executive

employees

      $1.00

September 20, 2010

       75,000 shares of common stock       

19 non-executive

employees

      $1.00

December 3, 2010

       15,000 shares of common stock       

4 non-executive

employees

      $1.00

February 24, 2011

       27,500 shares of common stock       

5 non-executive

employees

      $1.00

March 21, 2011

       12,500 shares of common stock       

3 non-executive

employees

      $1.00

Awards during the three months ended April 30, 2010

At the beginning of fiscal year 2011, we faced significant uncertainty. The global credit crisis and recession had significantly affected us and our customers, many of which had reduced or postponed their purchases of new licenses and usage of our simulation services. This had resulted in declines in bookings and license revenue in fiscal year 2010, to which we had responded by initiating reductions in headcount, salary cuts and other expense control measures. Additionally, we were in need of capital, and under pressure to repay a bridge loan that had been extended to us by one of our principal stockholders, FMR LLC.

Prior to our option awards in March 2010, the most recent arms’ length transactions involving our securities had occurred in April 2008, at which time we sold 3.4 million shares of Series I preferred stock in a private placement

 

40


Table of Contents

for $1.48 per share. At the same time, we retired indebtedness to certain of our venture capital investors that was to mature in December 2008 by issuing an additional 677,000 shares of Series I preferred stock at $1.48 per share and 1.0 million shares of common stock at $1.00 per share.

At the time of the March 2010 option awards, our board considered that the business, prospects and financial condition of the company had, if anything, deteriorated since the April 2008 transactions, and that there was no reason to believe that the fair value of our common stock had increased over the $1.00 per share reflected in the April 2008 Series I and debt conversion transactions and associated valuation analysis.

Further corroboration that the fair value of the common stock was no greater than $1.00 was provided by the fact that in March 2010 one of our executive officers agreed to sell to us 40,000 shares of Series G preferred stock, a security senior in liquidation to the common stock but convertible into common stock on a 1:1 basis, at a price of $1.00 per share.

Awards during the three months ended July 31, 2010

At the meeting in June 2010 at which our board awarded options for 35,000 shares of common stock at an exercise price of $1.00 per share, our management also reported that revenue for the second quarter was expected to fall short of the forecast amount, that the company was at risk of losing key technical personnel, and that an additional reduction in headcount had been implemented, with the goal of reallocating salaries in order to retain the services of these key employees.

The board considered it likely that the fair value of the common stock was actually less than $1.00 per share, in light of the company’s need for capital and weakened financial condition, but decided not to reduce the exercise price of the options granted at that time, but rather to revisit the issue following further business results and any progress management made addressing the working capital challenges of the business.

Awards during the three months ended October 31, 2010

In third quarter of fiscal year 2011, growth was resuming at Exa’s customer base; this was evidenced by recent customer simulation capacity upgrades and increased project activity. Management also was forecasting a strong return to growth later in the year based on preliminary budget discussions with customers. However, management continued to struggle with a solution to our working capital shortage.

In light of these circumstances, the board considered that the fair value of our common stock on September 20, 2010 remained no higher than $1.00.

Awards during the three months ended January 31, 2011

Prospects for our business had improved along with the broader economy, and bookings growth had resumed. In addition, in December 2010, we had reached agreement on the principal terms for an $8.5 million mezzanine financing in the form of a term loan from one of our stockholders and another, unaffiliated, lender accompanied by warrants to purchase 1.2 million shares of our Series G preferred stock at an exercise price of $0.94 per share. This transaction was ultimately completed in January 2011. This transaction provided corroboration that the fair value of the common stock was no greater than $1.00 as the Series G preferred stock is senior in liquidation to the common stock but convertible into common stock on a 1:1 basis and given that the lead lender in this transaction, who is unaffiliated with Exa, negotiated with a view to ensuring that these Series G preferred stock warrants were priced at what it considered to be fair value.

Under these circumstances, the board decided that there was no justification for increasing its estimate of the fair value of the common stock in connection with its option awards on December 3, 2010.

Awards during the three months ended April 30, 2011

During the first quarter of fiscal year 2012, our management and board held discussions with investment banking firms and certain private equity investors concerning recapitalization or other transactions. In addition, given the improvement in our performance and financial condition and the recent improvement in the market for initial public offerings, our management also discussed the possibility of an initial public offering with several investment banking firms.

On February 24 and March 21, 2011, an investment banking firm (the lead underwriter of this offering) presented to the board regarding these alternatives, including the possibility of our pursuing an initial public offering. The

 

41


Table of Contents

prospective underwriter provided an estimate of value assuming a private equity investment prior to an initial public offering which was consistent with the board’s previous determination of fair value.

Prior to January 31, 2011, the board did not conduct any formal valuation procedure or commission any third party valuation or appraisal in connection with its determinations of the fair value of our common stock. In connection with our preparation of the unaudited financial statements for the three months ended April 30, 2011 that are included in this prospectus, the board of directors commissioned a valuation study by an unrelated valuation firm. This firm provided an opinion dated May 13, 2011 that the fair value of our common stock as of January 31, 2011 was $0.48 per share. In performing its analysis, the valuation firm used valuation methodologies consistent with the requirements of AICPA Technical Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation, which we refer to as the Practice Aid, including the guidance in the March 2011 working draft for revisions to the Practice Aid.

In determining the fair value of our common stock in connection with its equity awards in February and March 2011, the board chose not to rely entirely on this valuation, since the valuation approach placed a significant probability on scenarios which resulted in the preferred shareholders’ liquidation preference receiving the entire value. Taking into account its view of the probability of the various exit scenarios, including the recent indications of value and preliminary discussions about a possible initial public offering, the board decided that on balance there was no justification for increasing or decreasing its estimate of the fair value of the common stock in connection with its option awards on February 24 and March 21, 2011.

On April 4, 2011, the board authorized management to proceed with preparations for an initial public offering.

In anticipation of our award of stock options prior to our initial public offering, the board of directors commissioned a second valuation study by the unrelated valuation firm. In July 2011, the firm provided a draft opinion, which has not yet been finalized, concluding on a preliminary basis that the fair value of our common stock as of June 15, 2011 was $1.18 per share.

On July 19, 2011, we granted to our non-employee directors, executive officers and other employees options to purchase an aggregate of 2,905,000 shares of our common stock, at an exercise price of $1.75 per share. In determining that $1.75 per share represented the fair value of our common stock on that date, the board considered the progress that had been made in preparing for our initial public offering, as a result of which it weighted the probability of successful completion of an initial public offering more heavily than the valuation firm had done in its draft opinion.

Research and Development Expenses

Research and development expense includes costs incurred to develop intellectual property. The costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. We have determined that technological feasibility is established at the time a working model of software is completed. Because we believe that under our current process for developing software completion of the software occurs essentially concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

Foreign Currency Translation

We have subsidiaries in England, France, Germany, Italy, Japan and Korea. Foreign subsidiary records are maintained in the local currency. Through fiscal 2010, our foreign subsidiaries used the United States dollar as their functional currency in accordance with ASC 830, Foreign Currency Matters. Accordingly, we re-measured all assets and liabilities of the subsidiaries into United States dollars, with any resulting unrealized gains or losses being recorded as a component of other income (expense), net in the accompanying consolidated statements of operations. We review the functional currency of our subsidiaries on an annual basis in accordance with the “Foreign/Parent Currency” indicators outlined in Appendix A to ASC 830 to determine if the functional currency should be changed to the local currency. In fiscal 2011, we concluded that the nature of the operations of our foreign subsidiaries, other than our subsidiaries in England and Italy, indicated that the functional currency should be changed to the respective local currency. As a result, beginning in fiscal 2011, our French, German, Japanese and Korean subsidiaries translate their assets and liabilities denominated in their functional currency at current rates of exchange in effect at the balance sheet date. Beginning in fiscal year 2012, our Italian subsidiary will also translate

 

42


Table of Contents

its assets and liabilities denominated in their functional currency at current rates of exchange in effect at the balance sheet date. The resulting gains and losses from translation are included as a component of other comprehensive income. Transaction gains and losses and re-measurement of assets and liabilities denominated in currencies other than an entity’s functional currency are included in other income (expense), net.

Valuation of Equity Participation Right

In connection with a bridge financing provided by a stockholder, FMR LLC, we granted to FMR LLC the right, which we refer to in this prospectus as the “equity participation right,” to invest up to $10 million at a 15% discount in our next equity investment round (if any), either by converting the existing debt or by participating with a cash investment. The equity participation right does not apply to, and will terminate upon the closing of, the offering described in this prospectus. We estimated the fair value of the equity participation right based on a number of objective and subjective factors, including the likely occurrence and timing of a qualified potential financing and discount rates. We determined that the value was not material at the date of its issuance and as of January 31, 2010, due to its short expiration date (originally less than one year). However, by virtue of an April 2010 amendment, the expiration date was extended until the sooner of a qualified financing or an initial public offering and we concluded that the fair value of the right was $552,000. This amount was recognized as non-cash interest expense in fiscal year 2011. The equity participation right is recorded in other liabilities on the balance sheet at January 31, 2011 and April 30, 2011. We record changes in the fair value of the equity participation right as a component of other income (expense), net.

 

43


Table of Contents

Results of Operations

The following tables set forth, for the periods presented, data from our consolidated statement of operations as well as that data as a percentage of revenues. The information contained in the tables below should be read in conjunction with the financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended January 31,     Three Months Ended
April 30,
 
     2009     2010     2011     2010     2011  
     (in thousands)  

License revenue

   $ 28,226      $ 26,853      $ 30,592      $ 6,463      $ 9,305   

Project revenue

     5,897        8,743        7,140        1,294        1,039   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     34,123        35,596        37,732        7,757        10,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Cost of revenues

     11,453        9,956        9,896        2,329        2,811   

Sales and marketing

     6,952        5,304        6,110        1,270        1,274   

Research and development

     15,025        12,595        12,777        2,937        3,202   

General and administrative

     9,358        5,902        6,330        1,402        1,631   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     42,788        33,757        35,113        7,938        8,918   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (8,665     1,839        2,619        (181     1,426   

Other income (expense), net;

          

Foreign exchange gain (loss)

     549        (766     (198     180        (464

Interest expense

     (1,218     (586     (1,262     (567     (242

Other (expense) income

     (71     12        10        0        131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (740     (1,340     (1,450     (387     (575

Provision for income taxes

     441        595        587        9        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (9,846   $ (96   $ 582      $ (577   $ 801   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth, for the periods indicated, our results of operations expressed as a percentage of revenues.

   

     Year Ended January 31,     Three Months Ended
April 30,
 
     2009     2010     2011         2010             2011      

License revenue

     82.7     75.4     81.1     83.3     90.0

Project revenue

     17.3     24.6     18.9     16.7     10.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Cost of revenues

     33.6     28.0     26.2     30.0     27.2

Sales and marketing

     20.4     14.9     16.2     16.4     12.3

Research and development

     44.0     35.4     33.9     37.9     30.9

General and administrative

     27.4     16.6     16.8     18.1     15.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     125.4     94.8     93.1     102.3     86.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (25.4 )%      5.2     6.9     (2.3 )%      13.8

Other income (expense), net

          

Foreign exchange gain (loss)

     1.6  %      (2.2 )%      (0.5 )%      2.3  %      (4.5 )% 

Interest expense

     (3.6 )%      (1.6 )%      (3.3 )%      (7.3 )%      (2.3 )% 

Other (expense) income

     (0.2 )%      0.0  %      0.0  %      0.0  %      1.3  % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (2.2 )%      (3.8 )%      (3.8 )%      (5.0 )%      (5.6 )% 

Provision for income taxes

     1.3  %      1.7  %      1.6  %      0.1  %      0.5  % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (28.9 )%      (0.3 )%      1.5  %      (7.4 )%      7.7  % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

44


Table of Contents

Three months ended April 30, 2011 compared to three months ended April 30, 2010

License revenue increased 44.0% from $6.5 million for the quarter ended April 30, 2010 to $9.3 million for the quarter ended April 30, 2011. The increase was due to an increase in purchasing of new licenses and increased consumption of simulation capacity by existing customers, primarily as a result of the commencement or resumption of vehicle design programs that had been suspended or delayed by our customers in response to the global recession. Project revenue decreased 19.7%, from $1.3 million for the quarter ended April 30, 2010 to $1.0 million for the quarter ended April 30, 2011. The decrease was due primarily to the timing of project completions.

Cost of revenues increased 20.7%, from $2.3 million for the quarter ended April 30, 2010 to $2.8 million for the quarter ended April 30, 2011, but decreased as a percentage of total revenue from 30.0% to 27.2% because revenue grew at a higher rate than the cost of revenue over the respective periods. An increase of $164,000 in our data center costs due to increased utilization of our simulation services and increased project activity, an increase of $285,000 in employee-related costs due to increases in headcount in our customer support and application engineering organizations and an increase of $73,000 in the amount of occupancy costs allocated to cost of revenue were partially offset by a decrease of $63,000 in depreciation expense. The decrease in depreciation expense was the result of reduced purchases of capital equipment in fiscal years 2009 and 2010 in comparison to prior periods, and the fact that certain assets had become fully depreciated in the fiscal 2012 quarter.

Sales and marketing expenses increased 0.3%, from $1.3 million or 16.4% of total revenue for the quarter ended April 30, 2010 to $1.3 million, or 12.3% of total revenues for the quarter ended April 30, 2011. An increase of $72,000 in sales commissions due to higher bookings and an increase of $47,000 in marketing related costs were partially offset by decreases of $103,000 in consultant and contractor costs and $16,000 in the amount of occupancy costs allocated to sales and marketing expenses.

Research and development expenses increased 9.0%, from $2.9 million, or 37.9% of total revenue, for the quarter ended April 30, 2010 to $3.2 million, or 30.9% of total revenue, for the quarter ended April 30, 2011. Increases of $268,000 in employee-related costs, $89,000 in the amount of occupancy costs allocated to research and development expenses and $45,000 in consultant and contractor costs, were partially offset by a decrease of $134,000 in the portion of our data center costs that was allocated to research and development, due to higher utilization of our data center on billable services, and a decrease of $74,000 in depreciation expense.

General and administrative expenses increased 16.4%, from $1.4 million, or 18.1% of total revenue, for the quarter ended April 30, 2010 to $1.6 million, or 15.8% of total revenues, for the quarter ended April 30, 2011. Contributing to the increase were increases of $46,000 in professional fees and consultant and contractor costs, $57,000 in the amount of occupancy costs allocated to general and administrative expenses, $33,000 in depreciation expense, $25,000 in employee-related costs and $27,000 in bank related fees.

Other income (expense), net increased from net expense of $387,000 for the quarter April 30, 2010 to net expense of $575,000 for the quarter ended April 30, 2011. The increase in the net expense was due largely to an increase of $644,000 in our foreign exchange losses which were partially offset by a decrease of $324,000 in interest expense and an increase of $131,000 in other income. The year-over-year decrease in interest expense was due primarily to the fact that during the first quarter of fiscal year 2011 we recorded a non-cash interest charge of $400,000 representing the amortization of the value ascribed to the equity participation right related to a bridge loan from FMR LLC. The year-over-year increase in other income was due to our recording as other income in the first quarter of fiscal year 2012 a change in our valuation of this equity participation right.

Our provision for income taxes was $50,000 in the three months ended April 30, 2011, compared with $9,000 in the corresponding three month period ended April 30, 2010. The income tax provision in each period relates primarily to current tax on earnings of our foreign subsidiaries.

Fiscal year ended January 31, 2011 compared to fiscal year ended January 31, 2010

License revenue increased 13.9%, from $26.9 million in fiscal year 2010 to $30.6 million in fiscal year 2011. The increase was due to an increase in purchasing of new licenses and increased consumption of simulation capacity by existing customers, primarily as a result of the commencement or resumption of vehicle design programs that had been suspended or delayed by our customers in fiscal 2010. Despite an overall increase in project activity, project revenue decreased 18.3% from $8.7 million in fiscal year 2010 to $7.1 million in fiscal year 2011. The

 

45


Table of Contents

year-over-year decrease was due primarily to the fact that project revenue in fiscal year 2010 was unusually high due to the completion in fiscal year 2010 of a number of projects that had been deferred or delayed in fiscal 2009.

Cost of revenues decreased 0.6%, from $10.0 million in fiscal year 2010 to $9.9 million in fiscal year 2011, and decreased as a percentage of total revenues from 28.0% to 26.2%. A decrease of $494,000 in depreciation expense, due to full depreciation of certain assets during fiscal 2011 and reduced capital expenditures in prior periods, and a decrease in the amount of occupancy costs allocated to cost of revenues of $32,000 were substantially offset by increases of $328,000 in employee-related costs and $115,000 in travel expenses due to the relaxation of recession-related expense reduction measures and an increase of $17,000 in data center costs.

Sales and marketing expenses increased 15.2%, from $5.3 million, or 14.9% of total revenues, in fiscal year 2010, to $6.1 million, or 16.2% of total revenues, in fiscal year 2011. The higher expenses were due primarily to a $814,000 increase in sales commissions due to invoice growth.

Research and development expenses increased 1.4% from $12.6 million, or 35.4% of total revenues, in fiscal year 2010, to $12.8 million, or 33.9% of total revenues, in fiscal year 2011. An increase of $1.2 million in employee-related costs, due to increases in headcount and salary adjustments made to eliminate temporary reductions instituted in fiscal 2010, was offset by decreases of $272,000 in data center costs, $706,000 in depreciation expense, $165,000 in the amount of occupancy costs allocated to research and development expenses and $106,000 in consultant and contractor costs. Also contributing to the increase in research and development expense was the fact that receipts from government-funded research and development projects that we record as offsets to research and development expense were lower by $287,000 in fiscal year 2011 than in fiscal year 2010, due to completion of a government project.

General and administrative expenses increased 7.2%, from $5.9 million, or 16.6% of total revenues, in fiscal year 2010 to $6.3 million, or 16.8% of total revenues, in fiscal year 2011. Increases of $347,000 in consultant and contractor costs and $173,000 in professional fees, due primarily to professional services related to our exploration of our financing and strategic alternatives during fiscal year 2011, were partially offset by decreases of $122,000 in the amount of occupancy costs allocated to general and administrative expenses and $104,000 in bank related fees.

Other income (expense), net increased from net expense of $1.3 million in fiscal year 2010 to net expense of $1.5 million in fiscal year 2011. A $671,000 increase in interest expense due to increased borrowing under our line of credit, including a non-cash interest charge of $552,000 attributable to the equity participation right granted in connection with a bridge loan from a related party, was partially offset by a $568,000 decrease in our foreign exchange losses.

Our provision for income taxes was $595,000 and $587,000 for fiscal years 2010 and 2011, respectively, and our effective tax rate decreased from 119% to 50%. The tax provision relates primarily to foreign taxes on earnings of our foreign subsidiaries and withholding taxes related to sales to foreign customers for which we cannot take a corresponding benefit in the United States due to our United States net operating loss position. At the end of fiscal 2011, we had operating loss carry forwards of approximately $31.2 million which are available to offset future taxable income, if any, through 2029. At the end of fiscal 2011 we also had research and development credits of approximately $1.5 million which expire in varying amounts through 2029. Net operating loss carry forwards and other tax attributes may be limited in the event that we experience a change in ownership as defined under Internal Revenue Code Section 382.

Fiscal year ended January 31, 2010 compared to fiscal year ended January 31, 2009

License revenue decreased 4.9%, from $28.2 million in fiscal year 2009 to $26.9 million in fiscal year 2010. The decrease was due to reduced purchasing of new licenses and reduced usage of our simulation services by existing customers, primarily as a result of the suspension or postponement of vehicle development programs by our customers in response to the global recession, which significantly affected the automotive industry. Project revenue increased 48.3%, from $5.9 million in fiscal year 2009 to $8.7 million in fiscal year 2010. The increase was due to increased new project activity, as well as the completion in fiscal year 2010 of projects that had been deferred or delayed in fiscal 2009.

Cost of revenues decreased 13.1%, from $11.5 million in fiscal year 2009 to $10.0 million in fiscal year 2010 and as a result decreased as a percentage of total revenues from 33.6% to 28.0%. A decrease of $1.1 million in employee-related costs due to expense reduction initiatives that we undertook in response to the global recession

 

46


Table of Contents

and a decrease of $559,000 in non-capital equipment related costs and depreciation expense were partially offset by increases of $31,000 in data center costs and $184,000 in the amount of occupancy costs allocated to cost of revenues.

Sales and marketing expenses decreased 23.7%, from $7.0 million, or 20.4% of total revenues, in fiscal year 2009, to $5.3 million, or 14.9% of total revenues, in fiscal year 2010. A decrease of $1.3 million in employee-related costs, a decrease of $630,000 in travel expenses, and a decrease of $272,000 in marketing costs, each as a result of our expense reduction initiatives, were partially offset by an increase of $337,000 in sales commission expense and an increase of $186,000 in professional, consulting and contractor costs. The year-over-year increase in commission expense was due to the elimination in fiscal year 2010 of temporary reductions in the commission rates payable to our sales personnel that had been implemented on a voluntary basis in fiscal year 2009.

Research and development expenses decreased 16.2%, from $15.0 million, or 44.0% of total revenues, in fiscal year 2009 to $12.6 million, or 35.4% of total revenues, in fiscal year 2010. Decreases of $2.4 million in employee-related costs and $672,000 in professional, consultant and contractor costs, each as a result of our expense reduction initiatives, and $115,000 in depreciation expense and equipment-related costs, were partially offset by increases of $514,000 in the amount of occupancy costs allocated to research and development expenses and $467,000 in data center costs due to lower billable utilization of our data center.

General and administrative expenses decreased 36.9%, from $9.4 million, or 27.4% of total revenues, in fiscal year 2009 to $5.9 million, or 16.6% of total revenues, in fiscal year 2010. Decreases of $1.1 million in employee-related costs and $1.0 million in professional, consultant and contractor costs, each as a result of our expense reduction initiatives, a decrease of $555,000 in depreciation expense and equipment related costs, and decreases of $245,000 in the amount of occupancy costs allocated to general and administrative expenses, $160,000 in bank fees and $301,000 in other expenses all contributed to the lower general and administrative expenses in fiscal year 2010.

Other income (expense), net increased from net expense of $740,000 in fiscal year 2009 to net expense of $1.3 million in fiscal year 2010. The increase in net expense was primarily attributable to a net increase of $1.3 million in our foreign exchange losses due to currency exchange market fluctuations, which was partially offset by a decrease of $670,000 in interest expense as a result of the conversion of certain debt to equity during fiscal year 2010.

Our provision for income taxes increased from $441,000 in fiscal year 2009 to $595,000 in fiscal year 2010, and our effective tax rate increased from (5)% to 119%. The tax provision in each year relates primarily to foreign taxes on earnings of our foreign subsidiaries and withholding taxes related to sales to foreign customers for which we cannot take a corresponding benefit in the United States due to our United States net operating loss position.

Liquidity and Capital Resources

We have financed our operations primarily from our operating cash flow, the sale of preferred stock and borrowings under our lines of credit, a term loan and capital leases. At January 31, 2011, borrowings of $3.0 million under our line of credit from Silicon Valley Bank, and $5.0 million under our term loan, of which $1.0 million was from Massachusetts Capital Resource Company, a related party, were outstanding. At April 30, 2011, the line of credit from Silicon Valley Bank had been repaid in full. On May 23, 2011, we entered into a First Loan Modification Agreement with Silicon Valley Bank which extended for an additional two years our $10.0 million revolving line of credit from the bank.

At April 30, 2011, our principal sources of liquidity were cash totaling $12.6 million and accounts receivable of $5.7 million, compared to cash of $2.8 million and accounts receivable of $23.4 million at January 31, 2011. Our working capital deficit as of April 30, 2011 was $12.3 million compared to a working capital deficit of $12.6 million as of January 31, 2011.

Net Cash Flows from Operating Activities

Our operating activities provided net cash of $12.6 million in the three months ended April 30, 2011 and $10.2 million in the three months ended April 30, 2010. Our operating activities provided net cash of $2.5 million in fiscal year 2011 and used net cash of $2.4 million in fiscal year 2010 and $2.0 million in fiscal year 2009. 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 depreciation and amortization, the timing of cash payments from our customers and of our cash expenditures, principally employee salaries and accounts payable, payments of value added taxes and consumption taxes on the receivables of our foreign subsidiaries and changes in our deferred revenue.

 

47


Table of Contents

Cash payments from our customers fluctuate due to the 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 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. Cash payments to employees are typically ratable throughout the fiscal year, with the exception of annual incentive payments, which occur in the first quarter, and sales commissions on license sales.

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. Increases in deferred revenue are attributable to growth in new business, offset by the related license revenues that are recognized ratably over time.

For the three months ended April 30, 2011, our operating activities provided net cash of $12.6 million, consisting primarily of $801,000 in net income plus depreciation and amortization of $322,000 and a decrease in accounts receivable of $18.1 million, due to customers’ payment of the annual license fees for licenses booked in the previous quarter, which were offset by a $130,000 non-cash increase in the value of the equity participation right granted to FMR LLC, a decrease of $4.2 million in accrued expenses due to payment of sales commissions and bonuses, payroll and related taxes, value added taxes and consumption taxes on the receivables of our foreign subsidiaries, and a decrease of $2.4 million in deferred revenue, due the timing of revenue recognition.

For the three months ended April 30, 2010, our operating activities provided net cash of $10.2 million, primarily due to the fact that our net loss of $577,000, decrease of $1.5 million in accrued expenses due to the timing of accrual payments and a decrease of $1.5 million in deferred revenue due to timing of revenue recognition were more than offset by depreciation and amortization of $428,000, $400,000 of non-cash interest expense and a decrease in accounts receivable of $13.5 million due to customers’ payment of the annual license fees for licenses booked in the previous quarter.

For fiscal year 2011, our operating activities provided net cash of $2.5 million, consisting primarily of $582,000 of net income, $1.6 million of depreciation and amortization, $552,000 of non-cash interest expense, an increase of $2.3 million in accrued expenses due to the accrual of sales commissions on license sales and related payroll and related taxes and value added taxes and consumption taxes on orders which did not become payable until the subsequent fiscal year, and an increase of $3.3 million in deferred revenue due to the timing of revenue recognition on completed projects and license sales. These amounts were offset by an increase in accounts receivable of $5.4 million due to new and renewal licenses booked during the fiscal year for which the fees were not due until the first quarter of the following fiscal year.

For fiscal year 2010, our operating activities used net cash of $2.4 million, consisting primarily of our net loss of $96,000 and an increase in accounts receivable from customers of $1.6 million due to new and renewal licenses booked during the fiscal year for which the fees were not due until the first quarter of the following fiscal year, a decrease in accounts payable of $2.1 million due to overall lower expenses, such as a decrease in royalties in relation to lower sales, minimal use of consultants and the absence of expenses related to equity financing compared to the prior fiscal year, and a decrease in deferred revenue of $4.9 million due to a decrease in license revenues from the prior fiscal year, offset by depreciation and amortization of $2.7 million and an increase of $1.2 million in accrued expense due to the accrual of sales commissions and related payroll and related taxes and value added taxes and consumption taxes on orders which did not become payable until the subsequent fiscal year. The higher depreciation and amortization in fiscal year 2010 compared to fiscal year 2011 was the result of reduced purchases of capital equipment in fiscal years 2009 and 2010 in comparison to prior periods, and the fact that certain assets had become fully depreciated in fiscal year 2011.

For fiscal year 2009, our operating activities used net cash of $2.0 million, consisting primarily of our net loss of $9.8 million, a decrease in deferred revenue of $1.0 million, due to a significant decrease in revenue bookings during the fourth quarter of the prior fiscal year associated with the global recession, a decrease in accrued expenses of $2.7 million, offset by a decrease in accounts receivable of $7.5 million, an increase in accounts payable of $575,000, a decrease in prepaid expenses and other current assets of $501,000 and depreciation and amortization of $2.9 million.

 

48


Table of Contents

Net Cash Flows from Investing Activities

For the three months ended April 30, 2010 and 2011 and for fiscal years 2009, 2010 and 2011 our investing activities used net cash of $9,000, $36,000, $448,000, $53,000 and $320,000, respectively, primarily for purchases of property and equipment to support growth in our business operations.

Net Cash Flows from Financing Activities

For the three months ended April 30, 2011 our financing activities used net cash of $3.0 million, primarily attributable to payments on our line of credit of $3.0 million.

For the three months ended April 30, 2010 our financing activities used net cash of $7.8 million, primarily attributable to payments on our line of credit of $7.5 million as well as payments of $311,000 on our capital lease obligations.

For fiscal year 2011 our financing activities used net cash of $1.8 million, primarily attributable to payments on our line of credit of $6.0 million as well as payments of $793,000 on our capital lease obligations and payments of $40,000 in respect of the repurchase and retirement of preferred stock, offset by proceeds from new long-term debt of $5.0 million.

For fiscal year 2010 our financing activities used net cash of $1.2 million, primarily attributable to payments of $2.2 million on our capital lease obligations and payments of $459,000 in respect of the repurchase and retirement of preferred stock, offset by proceeds received from our line of credit of $1.3 million and proceeds received from option exercises of $137,000.

For fiscal year 2009 our financing activities provided net cash of $2.2 million, primarily attributable to proceeds from a preferred stock financing of $4.9 million and proceeds from stock option exercises of $77,000, offset by payments on our line of credit of $390,000 and payments of $2.4 million on our capital lease obligations.

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.

We believe our cash, cash flows from our operations and availability under our lines of credit will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

During the last three years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as of January 31, 2011 or as of April 30, 2011.

Contractual Commitments

Our contractual obligations as of January 31, 2011 are summarized below:

 

     Amounts Due by Period  

Contractual Obligations

   Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (In thousands)  

Line of credit

   $ 2,995       $ 2,995       $ —         $ —         $ —     

Long-term debt obligations

     5,000         —           2,507         2,493         —     

Capital lease obligations

     295         221         74         —           —     

Operating lease obligations

     14,456         3,126         6,042         4,895         393   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,746       $ 6,342       $ 8,624       $ 7,387       $ 393   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

49


Table of Contents

Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Rate Risk. As we conduct business in multiple international currencies through our worldwide operations but report our financial results in U.S. dollars, we are affected by fluctuations in exchange rates of such currencies versus the U.S. dollar as follows:

 

   

Transactions in non-U.S. dollar revenues and expenses: Revenue and related expenses generated in currencies other than the U.S. dollar could result in higher or lower net income when, upon consolidation, those transactions are translated into U.S. dollars. When the value or timing of revenue and expenses in a given currency are materially different than the transaction date, we may be exposed to significant impacts on our net income.

   

Remeasurement of monetary assets and liabilities: Transaction gains and losses generated from remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of a subsidiary are included in other (expense) income, net on the consolidated statements of operation. Our subsidiaries have intercompany accounts that are eliminated in consolidation, and cash and cash equivalents denominated in various currencies that expose us to fluctuations in currency exchange rates. We have considered the potential impact on us of historical trends in currency exchange rates. A hypothetical 10% change in currency exchange rates was applied to total net monetary assets denominated in currencies other than the local currencies at the balance sheet dates to compute the impact these would have had on our income before taxes in the near term. A hypothetical decrease in exchange rates of 10% against the functional currency of our subsidiaries would have resulted in an increase of $168,000 and $434,000 on our income before income taxes for the fiscal years 2010 and 2011, respectively.

   

Translation of our non-U.S. dollar assets and liabilities: Each of our subsidiaries, with the exception of our U.K. subsidiary, translates its assets and liabilities to U.S. dollars at current rates of exchange in effect at the balance sheet date. The resulting gains and losses from translation are included as a component of accumulated other comprehensive (loss) income on the balance sheet. Fluctuations in exchange rates can materially impact the carrying value of our assets and liabilities.

Foreign currency gains (losses) included in other (expense) income, net for the years ended January 31, 2009, 2010 and 2011 were $549,000, $(766,000) and $(198,000), respectively.

Interest Rate Risk. Our outstanding long-term debt carries interest at a fixed rate. Our revolving bank line of credit bears interest at a floating rate; however, we currently have no borrowing outstanding under this facility. As a result, we do not believe that we are exposed to material interest rate risk. Our cash is maintained in interest bearing bank accounts. Interest income is sensitive to changes in the general level of U.S. 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 short-term investments 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.

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. 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.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2009-13, Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: vendor-specific objective

 

50


Table of Contents

evidence; third-party evidence; or estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. We adopted the new guidance on a prospective basis as of February 1, 2011 for revenue arrangements entered into or materially modified after January 31, 2011. The adoption of the new guidance did not have a material impact on our financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05 Comprehensive Income (Topic 220) — Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for us in our first quarter of fiscal year 2011 and should be applied retrospectively. There will be no impact to our consolidated financial results as the amendments relate only to changes in financial statement presentation.

 

51


Table of Contents

BUSINESS

Overview

We develop, sell and support simulation software and services that vehicle 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, with accurate digital simulations that are more useful and timely. Our simulation solutions enable our customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes. As a result, our customers realize significant cost savings and fundamental improvements in their vehicle development process.

Simulation-driven design has enabled product and process improvements in many industries, and as a result, the process in which products are conceptualized and developed is undergoing a radical transformation. Digital simulation not only provides feedback earlier and in a more useful form than traditional approaches, but in many areas simulation has reached a level of accuracy and robustness that is sufficient to enable a manufacturer to rely solely on its results for design decisions, without prototype testing. Due to accelerating adoption of these techniques, the broad market for simulation software in which we participate was a $2.4 billion market in 2010 and is expected to grow to $3.9 billion by 2015, according to CIMdata, an independent global consulting firm.

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

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 a proprietary technology that we refer to as Digital Physics, based on algorithms known as the lattice Boltzmann method. Our proprietary technology enables PowerFLOW 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 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 80 manufacturers currently utilize our products and services, including 13 of the global top 15 passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen/Porsche; truck and off-highway vehicle manufacturers such as AGCO, Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo; and suppliers to these manufacturers, such as Cummins, Denso and Magna Steyr. We are also beginning to explore other markets in which we believe the capabilities of PowerFLOW have broad application, such as the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

We derive our revenue primarily from the sale of our simulation software, using an annual capacity-based model. Customers usually purchase PowerFLOW simulation capacity under one-year licenses. Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulation services accessed via our OnDemand 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.

 

52


Table of Contents

We sell our products and project services primarily through our direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, United Kingdom, France, Germany, Italy, Japan and Korea, and through distributors in China and India and through a sales agent in Brazil. 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.

We were founded in 1991 and had 156 employees worldwide at April 30, 2011. Our corporate headquarters, including our principal administrative, marketing, technical support, research and product development facilities, are located in Burlington, Massachusetts.

We are profitable, with a predictable business model based on recurring revenue from a growing customer base. We recorded:

 

   

revenues of $37.7 million in fiscal year 2011, and $10.3 million in the first three months of fiscal year 2012;

   

net income of $582,000 in fiscal year 2011 and $801,000 in the first three months of fiscal year 2012; and

   

Adjusted EBITDA of $4.5 million in fiscal year 2011 and $1.8 million in the first three months of fiscal year 2012.

(For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure and a reconciliation of our Adjusted EBITDA to our net income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key financial terms and metrics.”)

Our Industry

Manufacturers’ requirements

A wide range of industries such as ground transportation, aerospace, power generation, chemical and industrial processing, architecture, electronics and biomedicine face increasing and often conflicting demands to:

 

   

meet customer and regulatory requirements for improved fuel economy and reduced environmental impact;

   

meet customer desires for innovative product designs;

   

optimize products for quality, performance and safety;

   

accelerate product development cycles and time-to-market; and

   

reduce product development, material and warranty costs.

All of these activities are significantly influenced by rising consumer expectations for more efficient and environmentally sensitive products, and by government regulatory activity that is pervasive in many industries. For example, the product strategies of automobile manufacturers have for years been shaped by their need to comply with an array of regulatory requirements, including mandatory corporate average fuel economy, or CAFE, standards. The U.S. passenger car and light truck CAFE standard continues to rise, from 27.3 miles per gallon, or MPG, in 2011 to 35.5 MPG in 2016 and to a proposed 56.2 MPG by 2025, requiring a doubling of fuel economy performance over the next 14 years. Similar mandates relating to particulate and CO2 emissions apply in other segments of the transportation industry. For manufacturers of transportation systems, achieving these goals requires major improvements in aerodynamics, weight, and propulsion systems of their products. Our customers need to attain these goals while continuing to meet customer demands for aesthetically pleasing and innovative product designs.

These goals often conflict, requiring manufacturers to make careful trade-offs of competing values. Thus, the automotive designer’s task is not to create the most attractive, or fastest, or quietest, or most fuel-efficient car, but rather a car that satisfies sufficiently the design preferences and functional and quality expectations of its target customer, offers fuel efficiency within a desired target range, and can be brought to market on time at an acceptable profit. This need to optimize the balance of industrial design, performance factors, cost and process efficiencies is a continual challenge for the ground transportation industry and many other industries, as they seek to develop new and innovative products.

 

53


Table of Contents

The Vehicle Development Process

Vehicle development is a complex, multi-disciplinary process. The trend toward shorter model lives and increased model proliferation has led to increasing numbers of new vehicle design programs being launched simultaneously. This trend has been compounded by the global demand for more efficient and lower emission modes of transportation. These combined global trends are forcing radical changes in the vehicle development process.

The new vehicle development process consists of three primary phases: design, engineering and manufacturing. In each of these phases, the ability to predict or verify how a new design will behave under real world conditions is a critical factor in the manufacturer’s efforts to improve the design, performance and profitability of the new vehicle.

Design. In this stage, designers in the studio develop the design of a new vehicle. They begin the process of bringing an innovative new vehicle to life within a set of packaging, powertrain, fuel efficiency and other attributes that must be met. However, in the past a large part of this up front design work has been completed without knowing how the design will actually perform on target attributes such as aerodynamic drag, weight, handling, noise and ability to manage heat, as it is cost and time prohibitive to build and test physical prototypes for every new concept that is conceived. As a consequence, required performance attributes are either ignored or are attempted to be met via conservatism (for example, ensuring airflow is sufficient for engine cooling by making the front grille larger than necessary). For decades, physical systems such as clay models and wind tunnels have been the primary predictive tool used in the design and development process. As a result, our customers spend a significant portion of their research and development budgets, which we estimate to be as much as 10% to 15%, or over $6 billion per year, on physical prototypes, test facilities and related travel and staff costs. These physical experimental methods are not only expensive and inefficient, but also limited in their ability to provide accurate predictive information early in the design process, when such information is most valuable. Physical prototypes often lack features necessary to predict key attributes of vehicle performance: for example, thermal management and acoustic characteristics cannot be tested on a clay model that has no engine or interior. As changes to the design occur, time consuming construction of new prototypes may be necessary to test each variation, adding cost and slowing the process.

Engineering. This is the longest phase of the development process, where all of the details and functionality of the vehicle are developed, achieved and verified in order to ensure that the product design can be realized within the specified constraints. Each new vehicle design needs to be evaluated across numerous performance attributes involving many engineering disciplines, including aerodynamics, powertrain, thermal management, climate control and aeroacoustics. In this stage, experimental testing of full scale functional prototypes in wind tunnels, climate chambers and test tracks is used extensively to verify that the vehicle will meet required parameters for performance and quality. Physical testing of this type is expensive and cumbersome and also occurs late in the development process, when design changes are more difficult and expensive to implement. For example, track testing can only be performed near the end of the development process when working pre-production prototypes become available, and even then its accuracy can be affected by prototype quality, variable environmental conditions and the difficulty of measuring multiple performance attributes on a moving vehicle.

As a result of these intrinsic limitations of physical experimentation as a method of verification, performance deficiencies such as a component that overheats, or a side mirror that produces excessive wind noise, may not be discovered until late in the vehicle development process. At this point, a problem that could have been detected earlier may require corrective changes that add cost and weight to the vehicle, compromising program performance goals and profitability.

Manufacturing. At multiple points throughout each phase of the vehicle development process, key attributes of the new vehicle design must be certified as meeting the manufacturer’s program requirements, in a process known as signoff, before the design can be released to the next stage in the process. Achieving each of these signoffs is a key milestone in the vehicle development process. For example, one of the largest costs associated with designing and engineering a new car, truck or machine is that of the tooling for the manufacturing process. The large stamping presses used to create many of the body components and sheet metal can each cost tens to hundreds of millions of dollars and the lead times in this process are long, requiring the design of a new vehicle to be “released to tooling” more than a year before production can commence.

 

54


Table of Contents

Design verification using physical experimentation has been the principal method of obtaining these signoffs. However, testing of a limited number of functional prototypes may not identify all potential performance problems. Manufacturing variability can cause significant performance differences. Gaps of even a few millimeters due to variations in the manufacturing process or surface changes due to oxidization of high temperature components can materially alter the vehicle’s acoustic or thermal performance. The inability to predict and account for such effects earlier in the development process, before the final design is released to tooling, can lead to quality and reliability issues and higher warranty costs.

Emergence of simulation-driven design technologies

In recent years, computer-aided technology has played an increasingly important role in the product development process. Digital modeling and simulation in particular have emerged as enabling technologies to aid in the design, analysis, and manufacture of products. Digital simulation-driven design is not only cheaper and faster in providing feedback than experimental approaches such as the construction of prototypes or wind tunnel testing, but in many industries it is now approaching a level of accuracy and robustness that is sufficient to utilize its predictions for design decisions.

A number of technology factors are facilitating the emergence of simulation-driven design:

 

   

increasing adoption of computer-aided design, or CAD, and product lifecycle management, or PLM, software by manufacturers and their suppliers: according to CIMdata, an independent global consulting firm, the ground transportation industry spent over $3 billion per year on PLM software (including CAD) in 2010;

   

continually decreasing cost of computing power, transforming computing power from a scarce resource that is conserved to one that is inexpensive and readily available; and

   

increasingly powerful tools for visualization and computer generated imaging: the ability to see eases the ability to understand and communicate—key attributes in a very complex design process with many interdependent silos.

According to CIMdata, the global comprehensive PLM market was $26.0 billion in 2010, and is expected to grow to $41.3 billion by 2015, representing a compound annual growth rate of 9.7%. Of that $26.0 billion, $21.2 billion comes from independent software vendors, or ISVs. The ISV portion of the comprehensive PLM market is expected to grow to $33.3 billion in 2015, at a compound annual growth rate of 9.5%. The simulation segment of this market, in which we participate, was $2.4 billion in 2010, and is expected to grow to $3.9 billion in 2015, at a compound annual growth rate of 10.0%.

Challenges of fluid dynamics simulation

In the ground transportation industry, as in many other industries, a critical element in optimizing product design is predicting how a vehicle feature or a mechanical subsystem will interact with air, water or other fluids. Fluid dynamics modeling is extremely challenging due to the complexity of the physics necessary to accurately predict the behavior of fluid flows, particularly when complex, non-linear phenomena such as turbulence are involved. As a result, for many years the only available means of addressing fluids engineering challenges have been addressed by physical experimentation or design conservatism, based on what was known to work in the past. Both of these approaches limit innovation in the product or process development activities, because they provide limited information and knowledge of how systems perform and, more importantly, little or no insight into how to improve them.

Software-based simulation tools using CFD methods have been commercially available for over 40 years. In this approach, numerical methods are utilized to provide approximate solutions to the Navier-Stokes equations, which statistically describe the behavior of a fluid in motion. The limitations of this approach are not with the Navier-Stokes equations but with the numerical techniques utilized to find approximate solutions to them for industrial problems. Most existing fluid dynamics solutions are limited in their ability to analyze highly complex geometries and predict the flow at a high level of accuracy within practical time frames.

Our Solution

We provide a powerful, innovative software solution for simulating complex fluid flow problems. Customers use our PowerFLOW simulation solutions to enhance the performance of their products, reduce product development costs and improve the efficiency of their product development processes. Our technology and products are

 

55


Table of Contents

catalyzing a disruptive change in how our customers design, engineer and optimize their products. Simulation-driven design enabled by PowerFLOW makes predictive information available earlier in the design process, permitting deeper exploration of the design space, with iterative simulations providing insight into how new concepts can improve the design.

Our products enable engineers and designers to replace conventional methods of verifying design behavior that rely on expensive physical prototypes and test facilities with accurate digital simulation-driven design and engineering processes that are more useful, more timely and less expensive. This enables our customers to gain crucial insights about the performance of alternative design approaches early in the product development cycle, improving the efficiency of the design and engineering process and reducing the likelihood of expensive redesigns or engineering fixes to remedy problems that might otherwise only be discovered late in the product development program.

In each phase of the vehicle development process, PowerFLOW simulations can be utilized to improve the product in its performance attributes, development costs, product costs, manufacturing costs, and warranty and other product lifecycle costs.

For example:

 

   

Aerodynamics: Reducing aerodynamic drag is a core focus for every transportation system. Aerodynamic drag can be responsible for over half of the fuel consumption of a vehicle at high speeds. Our solutions allow our customers to rapidly explore the design space, visualizing the impact of design modifications in real time, to find opportunities to reduce drag while maintaining their styling themes.

 

   

Heat Transfer: Braking systems have stringent heat dissipation requirements, as temperature affects braking effectiveness. Manufacturers have historically used physical mock-ups of the wheel and braking system to evaluate braking performance and cool down time. Because these test rigs do not include the full car they cannot reproduce the effect of air flow from the vehicle body and chassis that surround the braking system. Thus, actual performance is discovered only when functional prototypes become available. With PowerFLOW, full thermal braking simulations can be performed early in the design cycle, based on the proposed geometry of the entire vehicle.

 

   

Acoustics: PowerFLOW can accurately predict the air-driven turbulent fluctuations that agitate the glass panel on a vehicle’s front passenger door and produce wind noise, an indicator of quality and comfort that vehicle manufacturers work extremely hard to reduce. Our PowerACOUSTICS module enables engineers to model the transmission of these noise sources through the door and glass structures to predict the noise in the interior of the vehicle. Historically, our customers could evaluate interior wind noise only by wind tunnel testing, which was possible only when functional prototypes became available late in the development process. PowerFLOW’s ability to predict interior noise early in the product development workflow enables acoustic engineers to analyze and address wind noise issues early in the development process, when small but critical design changes can more easily be made.

Our simulation solutions can also enhance the efficiency and reduce the cost of our customers’ design and engineering processes as reliance on physical test procedures is reduced or eliminated. Our proprietary Digital Physics approach enables accurate complex fluid dynamics modeling to be performed within dramatically shorter time frames than are available through physical experimentation, and typically at much lower cost. As a result, our applications can augment or even replace expensive and time consuming model making and wind tunnel testing.

Our integrated suite of aerodynamic, thermal management and aeroacoustics simulation capabilities provides a single solution for critical fluid dynamics problems, and our interactive visualization capabilities enable rapid iteration of design modifications and simulations. Our case preparation tools and user interface shorten set-up time, and reduce the need for personnel with extensive CAD expertise. Our product architecture and user interface facilitate sharing of data and collaboration across departments, design teams and engineers. Our OnDemand delivery model and suite of professional project services simplify deployment and reduce cost of ownership, and our capacity-based pricing model allows customers to purchase our simulation services in a cost-effective manner, to be used when they need them.

By adding functionality that addresses phenomena such as thermal radiation or acoustic transmission, we have been able to provide our customers with solutions that extend beyond our initial fluid dynamics focus. As we

 

56


Table of Contents

continue to add new applications solutions to broaden the range of simulation problems that PowerFLOW can address, adoption of our technology has spread from the automotive market that was our initial focus to other segments of the ground transportation industry. For example, the addition of thermal management capability to our product in fiscal year 2008 enabled us to offer simulation solutions to the truck and off-highway equipment markets, in which thermal management is a significant challenge. By fiscal year 2011, these market segments accounted for approximately 20% of our total revenue.

We provide solutions to the most difficult simulation problems that are faced by our customers. Relying upon deep knowledge of our vertical market, our applications management teams work with design and engineering groups in various disciplines within our customers’ organizations to identify their needs, to develop solutions using our technology to meet their specific requirements, and to assist the customer in validating and implementing these solutions. We leverage the key attributes of our proprietary technology and 20 years of industry experience to provide answers that previously have been unattainable through traditional physical testing or existing CFD methods.

As our customers have recognized the predictive accuracy of our simulation solutions, they are beginning to adopt verification of design behavior by means of PowerFLOW simulation as an alternative to physical experimentation as a basis for critical design signoffs. Similar approaches are now being considered by regulatory agencies. For example, new greenhouse gas regulations proposed by the U.S. Environmental Protection Agency and National Highway Traffic Safety Administration for medium and heavy-duty vehicles will permit aerodynamic drag (a key value used to determine compliance with CO2 emission standards) to be certified by means of fluid dynamics simulation.

The result is a significant increase in the usefulness and cost-effectiveness of simulation. The use of PowerFLOW can accelerate design cycles, enhance innovation and provide flexibility to experiment with designs that might otherwise be thought too costly, reducing research and development and manufacturing costs and improving product reliability and quality. We believe that our proprietary solution has the potential to transform the product development process not only in our current target market but in other markets that face similar problems, including the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

Our Business Strengths

We believe that, in addition to our differentiated customer solution, the following key business strengths will assist us in taking advantage of the opportunities we are pursuing:

 

   

Customer engagement model. Delivering value to our customers and ensuring their success is at the core of our business philosophy. Our dedicated field and applications management teams engage with our customers in long-term relationships focused on identifying problems 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 the industry. Our customer-centric focus, significant domain expertise and integrated accurate solutions have led to the establishment of stable and growing customer relationships.

 

   

Solutions focus and deep domain expertise. Our customers value our core intellectual property and technology, but they equally value our focus on surrounding that technology with know-how and best practices that enable them to solve their engineering and design problems. In order to deliver upon our solutions-oriented approach, we have built a strong applications management team that understands our customers’ problems and translates this understanding into product development roadmaps and deployment best practices.

 

   

Expertise in our targeted vertical market. A natural outcome of our solutions focus is our vertical industry focus. We have concentrated initially on the ground transportation market, where management of aerodynamic drag and related fuel efficiency, heat transfer and aerodynamic noise are critical problems in product design. This focus has enabled us to deliver solutions that are based on a deep understanding of our customers’ fluid flow simulation problems and provide highly differentiated solutions that are difficult or impossible for our competitors to replicate. It has also enabled us to focus our sales and marketing efforts on a large market that we believe remains significantly underpenetrated.

 

57


Table of Contents
   

Predictable business model. Our revenue is derived primarily from the sale of access to our simulation software, under annual capacity-based licenses for which we invoice at the beginning of the license term. The principal driver of our revenue growth is customers’ increased consumption of simulation capacity, as our solutions penetrate more deeply and widely across their organizations. The recurring nature of our revenues, as customers annually renew or increase their simulation capacity, provides high visibility into future performance. On average over the last three fiscal years, more than 70% of our annual revenue was attributable to contractual commitments that were in place at the beginning of the fiscal year.

 

   

Proprietary and protected intellectual property. Our core and layered technologies, including our Digital Physics approach, are protected by patent coverage and non-disclosed trade secrets which provide a strong competitive advantage over alternative solutions. Our senior scientific and engineering leadership, some of whom have been with Exa since its founding, pioneered the use of the lattice Boltzmann method for fluid dynamics simulation and have developed extensive know-how relating both to the fundamental underlying physics as well as its application to the specific problems our customers face.

Our Growth Strategy

Our goal is to become the global leader in digital simulation solutions in the target markets we serve. Our strategies to achieve this objective include:

 

   

Deepen deployment in our existing customer base. We remain underpenetrated at our existing customers and see significant growth potential as they migrate their product development processes based on physical test and prototypes to digital-based approaches. Once our PowerFLOW technology has been adopted in one area of a customer’s organization, we seek opportunities to expand to other disciplines and departments. Our core technology and product architecture, which use the same geometric model for aerodynamic, thermal management and aeroacoustic analysis, along with our intuitive user interface and case preparation tools, ease deployment and facilitate sharing of data and collaboration across departments.

 

   

Add new customers in the ground transportation market. We believe that the addressable market in ground transportation is significantly underpenetrated and there continue to be favorable regulatory and market dynamics pushing the industry to improve fuel efficiency and emissions and enhance the performance and quality of its products. Hundreds of passenger car, highway truck and off-highway vehicle manufacturers and their suppliers worldwide represent potential new customers for us. We intend to continue to add sales personnel to capture this opportunity.

 

   

Enable additional applications and solutions. We will continue to expand the applications we offer so that our customers can meet an expanded set of needs through simulation-driven design. Our applications management teams will identify new applications for which our customers need solutions, and develop product requirements, validation data, best practices and deployment assistance for our customers, with the outcome of broadening the use of our simulation services and increased consumption of simulation capacity. Expanded applications will lead to increased demand as different applications require unique simulations due to evaluating the vehicle under different operating conditions or configurations.

 

   

Penetrate new geographies. We have a strong presence in North America, Europe and Japan and Korea. Ground transportation customers in Brazil, India and China are rapidly maturing their design and engineering capabilities as they work to become global competitors. We have been working to expand our presence and business in these geographies, and will continue to do so.

 

   

Explore new vertical markets. We believe that our solution has the potential to transform the design process not only in our current target market but in other markets that face similar problems, including the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries. Our core technology is extendable to applications beyond those required in the ground transportation market. For example, we have developed a prototype simulation capability for multi-phase fluid flows, such as air-water mixtures, that we believe would be of value to the oil and gas, chemical and power generation markets.

 

   

Selectively pursue strategic acquisitions. There are many fragmented and complementary software products and technologies that would enable us to expand our product and solutions offering, increase the value

 

58


Table of Contents
 

delivered to our customers, and expand our customer base. We will selectively pursue opportunities to acquire complementary business, products or technologies.

Our Products and Applications

We provide our solutions through our core product, PowerFLOW and a suite of related software products. We surround that technology with 20 years of technical know-how and vertical industry expertise, which we employ to deliver applications tailored specifically to the requirements of the ground transportation market. We also generate validation data to substantiate the accuracy of the resulting simulations in comparison to physical test results and best practices for implementation that enable customers to solve with confidence their engineering and design problems.

Our solution focus starts with our powerful and patented fluids simulation technology. Combining our inherently transient simulation engine with a single detailed geometric model allows the software to connect with other physics algorithms to address the requirements of many engineering disciplines. The same geometric model can be used for aerodynamic, aeroacoustic and thermal simulations, saving engineering time and expense and allowing for cross-disciplinary studies.

The simulation process occurs in three stages: simulation preparation, the simulation itself and analysis of the simulation results. In the simulation preparation stage, our software tools are used prepare a digital geometric model, often based on CAD design data, for use in our PowerFLOW simulation engine. The user then selects the environmental and operating conditions, such as highway speed with a cross wind or slow towing hill climb, under which to evaluate the digital model. The simulation stage involves the use of our PowerFLOW simulation engine to model complex fluid flows and other phenomena as they relate to the digital model and test conditions prepared in the simulation preparation. Lastly, simulation analysis involves the use of visualization and other tools to gain insights into the data generated by the simulation step. These results can be used to further refine the digital model for use in later iterations of the simulation step. In the analysis phase, we offer sophisticated optimization algorithms that assist in searching within specified constraints for improved designs, something that is not possible in physical test environments.

The complete PowerFLOW software suite includes the simulation engine and grid generation engine (also called the discretizer), along with complementary pre- and post-processing software products. The software is delivered in a client/server architecture in which the computationally intensive discretization and simulation processes generally run on a centralized multi-processor simulation server, while the front-end applications for simulation preparation and back-end applications for post-processing analysis run on desktop clients that interact with the central server.

The main driver of our revenue is customers’ usage of simulation hours on the simulation server, to which we provide access under capacity-based term licenses. Customers usually purchase PowerFLOW simulation capacity under one-year licenses that provide the customer either with dedicated access to a specified number of processor cores throughout the contract year or with a block of “simulation hours” that may be used at any time but expire if not used by the end of the contract year. We separately license the client software that interfaces with our PowerFLOW simulation server for a fixed annual fee, based on the number of concurrent users.

 

59


Table of Contents

Our Product Suite

The following diagram illustrates how data flows through the products that comprise our PowerFLOW suite:

LOGO

 

Simulation preparation 

 

Key Features

 

    The desktop-based simulation preparation products described below enable users to quickly and easily import complex geometric models and incorporate them into a PowerFLOW simulation case and to manipulate and modify these digital models, and evaluate potential design improvements.

PowerDELTA

  Streamlines and automates the simulation model preparation process by applying proven concepts of parametric feature modeling and history tree model management to the process of simulation model creation and update. Design data in most major CAD and mesh formats are supported—even at varying levels of quality.

PowerCASE

  Efficiently creates, edits, and compiles a complete PowerFLOW simulation case. The compiled case file controls the construction of the simulation grid produced by the discretizer (PowerFLOW’s grid generator), which in turn drives the actual simulation.

PowerCLAY

  Quickly and easily performs direct modification or morphing of digital model surfaces, shortening the design iteration loop to hours rather than weeks and providing the capability to easily design completely new features and electronically catalogue them for future simulation.

 

60


Table of Contents

Simulation Server

 

Key Features

 

    The server-based simulation products described below form the core of our PowerFLOW suite. These products utilize our proprietary Digital Physics technology to accurately model complex fluid flows and other phenomena.

PowerFLOW

  Our core product, which incorporates all of our proprietary Digital Physics technology, efficiently and accurately simulates fluid dynamics, even on models with extreme geometric complexity.

PowerTHERM

  Couples with PowerFLOW to accurately predict surface temperatures and heat fluxes generated by thermal radiation and conduction.

PowerCOOL

  Couples with PowerFLOW to accurately calculate the heat transfer between a heat exchanger and the cooling airflow while seamlessly integrating into the PowerFLOW work flow.

Simulation Analysis

 

Key Features

 

    The desktop-based simulation analysis products described below allow users to efficiently visualize and evaluate the simulation data generated by PowerFLOW. Using this information and our simulation preparation tools, users can quickly and easily refine their design and prepare a new simulation case for additional testing.

PowerINSIGHT

  A graphical user interface that offers a library of user configurable templates and generates comparative results, allowing users to interactively browse these results to gain insight into their simulation and automatically generate reports in a variety of formats, including PowerPoint.

PowerVIZ

  High-performance visualization and analysis application used for processing simulation results from PowerFLOW and spectral analysis results from PowerACOUSTICS. Provides a wide variety of tools to perform detailed analyses, a fast, intuitive, and interactive user interface, and the ability to quickly process large data sets. Different visualization techniques can be combined within the same image to explore simulation data.

PowerACOUSTICS

  Enables accurate pressure fluctuation prediction, noise source identification, wind noise transmission to interior, and sound package parameter study capabilities.

Our Applications

Our goal is to promote simulation-based design techniques throughout each of the core disciplines and departments within our customers’ organizations, which include aerodynamics, thermal management, aeroacoustics, climate control and powertrain. Each of these departments is responsible for a particular aspect of the design of a vehicle and tradeoffs often must be made between the priorities of these departments. For example, a design change made to improve the aerodynamic properties of a vehicle may negatively affect the thermal management or aeroacoustic properties of the vehicle. By providing timely and accurate insights about the performance of alternative design approaches early in the product development cycle, our products allow engineers to better understand these tradeoffs and thereby reduce the likelihood of expensive redesigns or engineering fixes to remedy problems that might otherwise only be discovered late in the product development program. Toward that end, our applications management teams dedicated to each of these disciplines seek opportunities to apply our core fluids and related physics simulation engines to address new target problems. In this process, we develop new solutions, which can then be marketed to other customers, all of which drives simulation consumption.

For example, one of the earliest applications of our technology in the automotive market was the modeling of aerodynamic drag, a key concern of engineers in our customers’ aerodynamics departments. However, the same core transient simulation engine that enables the prediction of drag can also be extended to address the problems of a different group of engineers in the same company who are responsible for the vehicle’s soiling and water management attributes. This group works to understand and mitigate the amount of soil (road dirt, brake dust and salt) that accumulates on critical components such as doors, side glass and mirrors, for safety and quality reasons.

 

61


Table of Contents

Similarly, for off highway equipment, accumulation of particles in the air intake and cooling systems can significantly affect performance. All of this can now be studied and optimized digitally using PowerFLOW early in the design process where changes are less costly to include.

A major strength of our proprietary Digital Physics technology is its extensibility when compared to traditional CFD solutions, which require extensive and specialized tuning for each new application. By layering on top of our core fluids solver additional functionalities that address phenomena such as thermal radiation or acoustic transmission, we are able to provide broader solutions that extend beyond our initial fluid dynamics focus. These include the interior noise simulation capability that we offer to our customers’ aeroacoustics department, or the brake cooling simulation capability that we provide to engineers in their thermal management department.

The graphic below illustrates how we have extended our simulation engine and physics technology to address the needs of the various core disciplines and departments within our ground transportation customers’ design and engineering organizations. Each outer “tile” below represents a functional solution for which our applications management teams either have developed or intend to develop product requirements, validation data, best practices and deployment assistance for our customers.

LOGO

Deployment of each new functional solution results in increased utilization of simulation capacity, which leads to new license purchases and revenue. We believe the customer base for most of these applications remains only

 

62


Table of Contents

partially deployed. As our customers gradually alter their development processes to take more advantage of the digital development methods we are enabling, we seek opportunities to cross-sell our products to new engineering groups within our existing customers.

Our Technology

PowerFLOW is built on our proprietary Digital Physics technology, which is based on an extended implementation of the lattice Boltzmann method that we have developed over two decades. PowerFLOW differs from competing CFD technology in fundamental ways that make our simulations more useful to our customers. PowerFLOW simulations are:

 

   

transient: can simulate time-dependent phenomena such as turbulent flows;

   

stable: reliable even when used to analyze complex geometries; and

   

accurate.

The traditional approach in CFD has been to start with the Navier-Stokes equations, which are a set of partial differential equations that describe the behavior of a fluid. These equations are theoretically sound for many types of flows but are very complex and highly non-linear. Because these equations by their nature cannot be directly solved for any but the simplest scenarios, their application in practice requires the use of numerical techniques to approximate a solution. The main drawbacks of the traditional CFD approach therefore lie not with the Navier-Stokes equations themselves but in the numerical techniques that must be employed to provide solutions to them.

In the traditional CFD approach, the continuous Navier-Stokes equations are discretized, meaning that the flow field is broken up into discrete cells located in three-dimensional space (analogous to the two-dimensional pixels on a computer screen), where the flow properties such as velocity and pressure are solved. Because solving for the fluid properties at all locations in time and space is not mathematically possible, values are computed at these discrete locations, which make up what is referred to as the computational grid.

There are also significant difficulties with these numerical techniques when simulating flow conditions at the interface where the fluid grid meets a surface. The necessary calculations are computationally intensive and they often become unstable, meaning that no meaningful solution can be provided. In order to address these difficulties and to reduce the computational costs, many traditional CFD approaches use a steady-state solver that simplifies the problem by calculating an average value for each discrete cell, rather than predicting the changing values in time. To improve robustness and stability, traditional approaches also introduce excess numerical dissipation that, while improving stability, works to destroy subtle flow structures that are critical for accuracy.

In contrast, our Digital Physics technology, based on the lattice Boltzmann method, describes the fluid flow at the mesoscopic level, between the molecular and the continuum level of Navier-Stokes. As with traditional solvers, the lattice Boltzmann method also discretizes the flow domain. In spite of this discretization, it was proved in the early 1990’s that the lattice Boltzmann method accurately provides solutions equivalent to the highly non-linear Navier-Stokes equations without actually having to solve them. This theoretical proof was the genesis for the founding of Exa.

PowerFLOW provides a further advantage in that it can handle fully complex surface geometry, the details of which are also equally important to generate accurate predictions. Another unique component of our core technology is the “discretizer,” which automatically determines the fluid/surface intersection without compromising the geometric fidelity. Other tools offer automatic mesh generation but the limitations of their solvers require that the geometry be simplified, often to such an extent that the accuracy of the results is compromised.

Unlike traditional approaches, PowerFLOW’s extremely low dissipation allows for accurate simulation of time dependent flows enabling sensitive applications such as aeroacoustics. Furthermore, PowerFLOW has been proven to be highly scalable on massively parallel computers to enable shorter turn-around times, a very challenging task in traditional CFD solvers.

For higher speed, turbulent flows it is not computationally practical to perform direct simulations by resolving all of the scales of motion—from the microscopic to large scale flow structures that are the size of the vehicle. Thus, it becomes necessary to incorporate models to account for these unresolved turbulent flow structures. The small turbulent scales are universal in nature and thus can be predicted with theoretical models. The large scales of turbulence are not universal and no theoretical model exists that can be relied upon to accurately predict their behavior.

 

63


Table of Contents

The most common approach in CFD to this problem is to rely on turbulence modeling across the entire scales of turbulence. These models extend far beyond their theoretical basis and are often applied to steady-state solutions where the time dependent nature of the flow is completely ignored. Due to the non-universal nature in the large turbulent scales, this approach has led to a range of user-selected turbulence models with empirical tuning of the parameters in an attempt to be suitable for a specific class of flows. These compromises have enabled traditional CFD approaches to be tailored to specific applications and be deployed in a way that provides some level of insight and understanding of flow behaviors but limit their accuracy and thus their ability to replace the complex experimental testing required that ensure designs meet their targets.

PowerFLOW leverages the fact that it is a transient solver with high three-dimensional resolution and low dissipation. This allows PowerFLOW to directly simulate the large unpredictable turbulent scales. PowerFLOW uses turbulence theory to model only where it is valid and directly simulates the rest.

These combined attributes of PowerFLOW’s underlying technology enable us to bring simulation solutions to new levels of accuracy and robustness that have not been possible before. This in turn allows our customers to improve their development processes from requiring physical prototype testing at every stage by substituting robust, detailed and accurate digital simulations. This allows the final prototype stage to be primarily one of confirmation rather than discovery.

Customers and Markets

Our initial focus has been on the ground transportation market, and primarily on makers of passenger vehicles, due to the immediate benefits and strong value proposition of our solutions for vehicle manufacturers. With global annual revenue for 2010 for the top 50 global passenger vehicle manufacturers exceeding $1.6 trillion and research and development expenses for that group of approximately $60 billion, ground transportation is one of the most important and dynamic industries. The passenger vehicle segment sells on average 60 million vehicles per year and we estimate that there are typically over 200 distinct models in active development per year worldwide. Over 95% of our fiscal year 2011 revenues were generated from the ground transportation market.

The segments of the ground transportation market that we serve include the following:

 

   

Passenger vehicle manufacturers;

   

Highway truck manufacturers;

   

Off-highway vehicle manufacturers (including agricultural, construction and military vehicles and machines);

   

Train manufacturers; and

   

Suppliers to the above manufacturers.

Over 80 manufacturers currently utilize our products and services, including 13 of the global top 15 passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen/Porsche; truck and off-highway vehicle manufacturers such as AGCO, Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo; and suppliers to these manufacturers, such as Cummins, Denso and Magna Steyr.

We have also begun to explore new markets in which we believe the capabilities of PowerFLOW have broad application, including the aerospace, oil and gas production, chemical processing, architecture and construction, power generation, biomedical and electronics industries. For example, we have a prototype for multi-phase fluids that we believe would be of value to the oil and gas, chemical and power generation markets.

Examples of Customer Deployments

The following are examples of applications in which our customers have deployed our products, the problems they were seeking to solve, and some of the benefits that they have reported from their use of PowerFLOW:

AGCO Corporation. AGCO is a global manufacturer of agricultural equipment sold under several well known brands such as Challenger, Massey Ferguson, Fendt and Valtra. AGCO’s vision is to provide high-tech solutions to professional farmers feeding the world by manufacturing products to help improve farmers’ efficiency and productivity.

AGCO was aware that the EPA is phasing in mandatory 90% reductions of nitrous oxides by heavy equipment. In order to meet the required level of emissions, manufacturers such as AGCO must incorporate a number of extremely

 

64


Table of Contents

high temperature after treatment devices into engine compartments that are getting smaller, while maintaining engine operating temperatures within acceptable limits. AGCO began working with Exa via project-based services and now purchases annual client licenses and simulation-hours of PowerFLOW via the OnDemand software-as-a-service capability.

By using Exa’s PowerFLOW suite, AGCO states that it has been able to:

 

   

Save product costs by not having to “over design” engines—predictive simulations enable AGCO to incorporate the minimum design changes needed, where they are required;

   

Reduce the number of physical test stages from twenty per vehicle design to three;

   

Save millions of dollars in prototype testing costs across their product line; and

   

Migrate from physical test processes requiring more than 60 days to a digital test process requiring 6 days per iteration, as illustrated in the AGCO graphic below:

LOGO

Peterbilt Motors Company, a PACCAR Company. Peterbilt manufactures premium quality trucks for a wide range of markets, including over-the-road, construction and medium-duty. For its on-highway trucks, fuel economy is one of the top purchasing criteria of fleet customers.

In 2009, Peterbilt introduced an aerodynamic package for its on-highway Model 386 and 384 trucks that improved fuel economy by 12%. This was achieved by leveraging Exa’s PowerFLOW simulation products to reduce the aerodynamic drag by 24% while also maintaining the distinctive aesthetic style required to appeal to fleet customers.

 

   

In developing the aerodynamic package, Peterbilt evaluated and optimized the following new features using PowerFLOW:

   

Proprietary roof fairing—to help push air up and over the cab and trailer

   

Enhanced chassis fairings—to redirect the air around the rear wheels

   

Aero battery box—optimized to provide better airflow under the cab

   

Composite sun visor—reduced drag with improved glare protection

   

Sleeper extender—a 3-inch rubber extender flare to redirect air around the trailer

   

Aerodynamic mirrors—improved shape to reduce drag

   

Peterbilt states that the new aerodynamic package results in a 24% reduction in aerodynamic drag, which translates to a 12% improvement in highway fuel economy and an estimated $5,600 of annual fuel savings per year per vehicle.

By using our products, AGCO and Peterbilt have achieved significant savings in their vehicle development process. We intend to continue to leverage the success we have had with these and other customers to further penetrate our existing customer base and attract new customers.

 

65


Table of Contents

Sales and Marketing

We sell our products and services primarily through our direct sales force of 77 persons in the United States, United Kingdom, France, Germany, Italy, Japan and Korea at April 30, 2011, including 14 sales executives, 20 technical account managers assigned to our most deployed customers and a worldwide staff of 37 field applications engineers. We also sell our products and services through distributors in China and India and through a sales agent in Brazil.

Our sales executives and applications engineering teams are based near our customers to enable quick, efficient, local time zone and language support. Our sales team is responsible for building a long-term, value-driven relationship with our customers. They also have access to our global technical resources to carry out and deliver project-based engagements. They utilize these project resources strategically to enable customers over time to deploy our solutions independently.

To introduce new customers to our simulation solutions, we typically perform fixed price projects that include simulations accessed via our OnDemand facilities, along with engineering and consulting services. Initial projects typically focus on a specific real problem in an active development program and are executed over the course of a few weeks or months. We may perform one or a series of projects, in which our applications management teams work with the design and engineering groups in various disciplines within our customers’ organizations to identify their needs and to assist the customer in validating and implementing our solution. As we work with the customer in project-based mode, we work towards building a value proposition that supports a license sale.

Once our PowerFLOW technology has been adopted in one area of a customer’s organization, we seek opportunities to expand to other disciplines and departments. We believe that we are currently marginally deployed at many of our current customers and see significant growth potential from existing customers. For example, a manufacturer of luxury automobiles initially implemented our aerodynamic simulation solutions for use in styling evaluation and optimization. Over the course of our multi-year relationship with this customer, the range of our solutions deployed by the customer has expanded to include thermal management (including convective drive train cooling, brake cooling, underhood temperatures and climate control solutions) as well as aeroacoustics, resulting in an increase in simulation capacity purchased by this customer by a factor of over 35 times over a period of five years.

Customers usually purchase PowerFLOW simulation capacity under one-year licenses that provide the customer either with dedicated access to a specified number of processor cores throughout the contract year or with a block of “simulation hours” that may be used at any time but expire if not used by the end of the contract year. As an illustration, a highway truck customer, based on a new truck design program, may estimate that it will run a minimum of 200 aerodynamic simulations in their next fiscal year. A typical highway truck aerodynamics simulation requires 2,500 simulation-hours each. Thus, this customer will require a minimum of 500,000 simulation-hours.

Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering. We separately license the front-end and back-end applications software that interfaces with our simulation server software for a fixed annual fee, based on the number of concurrent users at the customer. As customers continue to use our solutions and deploy them more widely within their organizations, their consumption of our simulation services typically increases. We offer volume discounts based on the annual volume of simulation capacity ordered.

Research and Development

Our product development activities are carried out by our research and development organization, which at April 30, 2011 encompassed 68 persons, including 15 scientists engaged in basic research in fluid dynamics, 25 software engineers, 20 applications management personnel and 8 product management personnel. Our senior research and development scientists include leaders in the field of fluid dynamics who have pioneered the use of the lattice Boltzmann method. Our applications management teams, which are organized around the core engineering disciplines and departments within our customers’ organizations, perform a critical role in establishing and executing our product development roadmap, by identifying customer needs, developing product requirements and working with customers to implement and improve our solutions. Examples of our current research and development activities include basic research to improve the capabilities and performance of our core fluids simulation engine, which is currently in its fifth generation, as well as the expansion of our solutions to address new simulation applications, for example, modeling of moving geometries such as rotating machinery.

 

66


Table of Contents

Our total expenditures on research and development were $15.0 million, or 44.0% of total revenues, in fiscal year 2009, $12.6 million, or 35.4% of total revenues in fiscal year 2010, and $12.8 million, or 33.9% of total revenues, in fiscal year 2011. In order to maintain and extend our technology leadership and competitive position, we intend to continue to devote significant effort to our research and development activities.

Competition

The market for digital simulation software is characterized by vigorous competition. We consider the primary competition to adoption of our solutions to be our customers’ continued use of physical prototypes and test facilities. We also encounter competition from companies that provide multi-function digital simulation software that is used for various purposes in the ground transportation industry and elsewhere, primarily CD-adapco, with its products STAR-CD and STAR-CCM+, and ANSYS, with its products Fluent and CFX. CD-adapco has a strong presence in the automotive market, and offers capabilities in certain areas in which we currently do not focus, such as combustion. ANSYS offers a suite of digital simulation software that includes many applications that we do not address, such as structural mechanics and electromagnetism, and that it markets to a broad spectrum of industries. We also compete against open source software such as OpenFOAM that includes computational fluid dynamics capabilities.

In most of our existing and potential new accounts, products such as these are already in use for a variety of purposes, and likely will remain so. Our competitors’ products are often offered at what customers may perceive as a lower cost than ours. Our ability to further penetrate the ground transportation market will therefore depend on our ability to demonstrate that our solutions deliver economic value in the form of significant process and cost improvements that competing products are unable, due to their technical limitations, to provide. As we expand our offerings into other markets, we may face competition from the same competitors as well as from companies that we have not typically competed against in the past. Many of our current and potential competitors have greater financial, technical, marketing, service and other resources than we have and may expand into our market by acquiring other companies or otherwise. As a result, these companies may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. We may not be able to compete successfully against current or future competitors and competitive pressures could materially adversely affect our business, financial condition and operating results.

Intellectual Property

We regard our software as proprietary. Our strategy is to rely on a combination of copyright, patent, trademark and trade secret laws in the United States and other jurisdictions, and to rely on license and confidentiality agreements, and software security measures to further protect our proprietary technology and brand. The laws of some countries in which our products are licensed may not protect our intellectual property rights to the same extent as the laws of the United States.

We have obtained or applied for patent protection with respect to some of our core intellectual property, but generally do not rely on patents as a principal means of protecting intellectual property. As of April 30, 2011 we owned eight patents issued in the United States and two pending patent applications in the United States.

We conduct business under our trademarks and use trademarks on some of our products. We believe that having distinctive marks may be an important factor in marketing our products. We have registered eleven of our significant trademarks in the United States and in limited subset in selected other countries. Although we have a foreign trademark registration program for selected marks, the laws of many countries protect trademarks solely on the basis of registration and we may not be able to register or use such marks in each foreign country in which we seek registration. We monitor use of our trademarks and intend to enforce our rights to our trademarks.

We rely on trade secrets to protect substantial portions of our technology. We generally seek to protect these trade secrets by entering into non-disclosure agreements with our employees and customers, and historically have restricted access to our software source code and licenses, which we regard as proprietary information. In these cases, we rely on non-disclosure and other contractual provisions to protect our proprietary rights. Trade secrets may be difficult to protect, and it is possible that parties may breach their confidentiality agreements with us.

In addition to the protections described above our software is protected by U.S. and international copyright laws. We license our software products utilizing a combination of web-based and hard copy license terms and forms. We rely primarily on “click-wrap” licenses. The enforceability of these types of agreements under the laws of some jurisdictions is uncertain.

 

67


Table of Contents

We also incorporate a number of third-party software programs into our products pursuant to license agreements. With the exceptions of PowerTHERM and PowerVIZ, which incorporate technology licensed from ThermoAnalytics, Inc. and Science + Computing AG, respectively, our products are not substantially dependent on any third-party software. Certain portions of our products utilize open source code. Notwithstanding the use of this open source code, we do not believe that our usage requires public disclosure of our own source code nor do we believe that the use of open source code is material to our business.

The steps we have taken to protect our proprietary rights may not be adequate to deter misappropriation of our technology or independent development by others of technologies that are substantially equivalent or superior to our technology. Any misappropriation of our technology or development of competitive technologies could harm our business. We could incur substantial costs in protecting and enforcing our intellectual property rights.

We believe that the success of our business depends more on the quality of our proprietary software products, technology, processes and know-how than on trademarks, copyrights or patents. While we consider our intellectual property rights to be valuable, we do not believe that our competitive position in the industry is dependent simply on obtaining legal protection for our software products and technology. Instead, we believe that the success of our business depends primarily on our ability to maintain a leadership position by developing proprietary software products, technology, information, processes and know-how. Nevertheless, we attempt to protect our intellectual property rights with respect to our products and development processes through trademark, copyright and patent registrations, both foreign and domestic, whenever appropriate as part of our ongoing research and development activities.

Employees

As of April 30, 2011, we had 156 employees, of which 92 are located in the United States. None of our employees is represented by a labor union or party to a collective bargaining agreement, and we believe our employee relations are good.

Facilities

Our principal offices occupy approximately 60,000 square feet of leased office space in Burlington, Massachusetts pursuant to a lease agreement that expires in March 2016. We also maintain sales, support and applications management offices in Livonia, Michigan; Brisbane, California; Paris, France; Stuttgart, Germany; Munich, Germany; Ciriè, Italy; Yokohama, Japan; and Seoul, Korea. We believe that our current facilities are suitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.

Legal Proceedings

We are not a party to any pending 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.

 

68


Table of Contents

MANAGEMENT

Executive Officers and Directors

The following table sets forth information with respect to our executive officers and members of our board of directors as of August 3, 2011:

 

Name

   Age     

Position

Stephen A. Remondi

     46       Chief Executive Officer, President, Director

Edmond L. Furlong

     47       Chief Operating Officer and Chief Financial Officer

Jean-Paul Roux

     47       Vice President of European Operations

Hudong Chen, Ph.D.

     54       Chief Scientist, Vice President of Physics

James Hoch

     47       Vice President of Software Development

John J. Shields, III (1)

     72       Chairman of the Board of Directors

John William Poduska, Ph.D. (1)(3)

     73       Director

Wayne Mackie (2)(3)

     62       Director

John F. Smith, Jr. (2)(3)

     72       Director

Robert Schechter (2)

     62       Director

 

(1) Member of compensation committee
(2) Member of audit committee
(3) Member of nominating and corporate governance committee

Stephen A. Remondi co-founded Exa Corporation in 1991 and has held the positions of Chief Executive Officer and President since 1999. Prior to 1999, Mr. Remondi held numerous positions within Exa, including Vice President of Applications Development and Business Development. In that role, Mr. Remondi was responsible for the development of the PowerFLOW product and management of Exa’s strategic customer partnerships. Prior to founding Exa, Mr. Remondi held various engineering and engineering management positions at Alliant Computer Systems Corporation and Data General Corporation. Mr. Remondi has a B.S. in Electrical & Computer Engineering from Tufts University and an M.B.A. from Bentley College. We believe that Mr. Remondi’s educational background in engineering and management, his professional experience as an engineer and executive, and his extensive knowledge of our company’s history and culture, its products, technology and personnel, and its markets and customers, qualify him to serve as a member of our board of directors.

Edmond L. Furlong served as a director of Exa Corporation from 2001 to January 2005 when he became our Chief Operating Officer and Chief Financial Officer. Immediately prior to joining Exa, Mr. Furlong held the position of Senior Vice President of Fidelity Strategic Investments, the venture capital arm of Fidelity Investments. Prior to his tenure at Fidelity Strategic Investments, Mr. Furlong held several investment and operations roles including Chief Operating Officer of UAM Investment Services, Inc., Vice President and National Sales Manager of Fidelity Investments Tax-Exempt Services Company and Chief Financial Officer of Fidelity Investments Tax-Exempt Services Company and also served as a management consultant at The Boston Consulting Group, Inc., and an associate in the investment banking group of Dillon, Read & Company, Inc.. Mr. Furlong holds a B.S. in Economics from The Wharton School of The University of Pennsylvania and an M.B.A. from The Harvard Business School.

Jean-Paul Roux joined Exa in 2001 as our managing director for Southern and Western Europe. In April 2003 Mr. Roux assumed the position of Vice President of European Operations. Prior joining to Exa, Mr. Roux was Managing Director of Tecnomatix UK, a provider of product lifecycle management software, and its Scandinavian subsidiary. Mr. Roux has extensive experience selling software solutions to engineers in the manufacturing, electronics, automotive, aerospace and off-highway equipment industries. Mr. Roux holds a language degree from Catholic University and a business degree from Ecole Superieure de Commerce in Grenoble, France.

Dr. Hudong Chen joined Exa in 1993 and has been our Chief Scientist since 1997 and Vice President of Physics since 2000. Prior to his tenure at Exa, Dr. Chen was a visiting assistant physics professor at Dartmouth College and a postdoctoral fellow at Los Alamos National Laboratory. Dr. Chen has a Ph.D. in Physics from Dartmouth College, a M.S. in Physics from the College of William and Mary, and a B.S. in Physics from Fudan University in China.

 

69


Table of Contents

Dr. Chen is known for his pioneering work in lattice Boltzmann methods as well as contributions in turbulence and kinetic theory. Dr. Chen has been a Fellow of the American Physical Society since 2000.

James Hoch joined Exa in 1993 and has been our Vice President of Software Development since rejoining the company in 1999. Prior to joining Exa, Mr. Hoch was the lead architect on several research parallel computer systems and related compiler projects at Sandia National Laboratories. Mr. Hoch was also chief architect at Maker Communications, a developer of network communications processors, from October 1998 to July 1999. Mr. Hoch has extensive experience in compiler technology and parallel computing and holds both M.S. and B.S. degrees from Purdue University in Computer and Electrical Engineering.

John J. Shields, III has served as a member of our Board of Directors since 1996 and our Chairman since 1999. Mr. Shields has served as a general partner of Boston Capital Ventures since 1997. Prior to assuming that position, Mr. Shields was the President and Chief Executive Officer of Computervision Corporation, formerly Prime Computer, Inc., a provider of computer aided design and manufacturing software that was acquired by PTC in 2001. Mr. Shields joined Computervision in January 1990 after 28 years at Digital Equipment Corporation where his last position was Senior Vice President responsible for sales, services, marketing and international organizations. Mr. Shields was a member of Digital Equipment Corporation’s Executive Committee and Chairman of its Marketing and Sales Strategy Committee. We believe that Mr. Shields’ many years of service as a chief executive officer and senior executive in a variety of roles in the computer software and hardware industries and his experience as an investor qualify him to serve as a member of our Board of Directors.

Dr. John William Poduska has served as a member of our Board of Directors since 1994. Dr. Poduska was the Chairman of Advanced Visual Systems Inc., a provider of visualization software, from January 1992 to December 2001. From December 1989 until December 1991, Dr. Poduska was President and Chief Executive Officer of Stardent Computer Inc., a computer manufacturer. From December 1985 until December 1989, Dr. Poduska served as Chairman and Chief Executive Officer of Stellar Computer Inc., a computer manufacturer he founded which is the predecessor of Stardent Computer Inc. Prior to founding Stellar Computer, Inc, Dr. Poduska founded Apollo Computer Inc. and Prime Computer, Inc. Dr. Poduska also served as a director of Novell, Inc. until 2011 and Anadarko Petroleum Corporation and Safeguard Scientifics, Inc. until 2009. Dr. Poduska holds a Sc.D. from MIT and an Honorary Doctorate of Humane Letters from Lowell University. We believe that Dr. Poduska’s scientific background, his many years of service as a founder and senior executive in the computer hardware industry and his experience as a director of other public companies qualify him to serve as a member of our Board of Directors.

Wayne Mackie has served as a member of our Board of Directors since February 2008. Mr. Mackie is currently the Executive Vice President, Treasurer and Chief Financial Officer of CRA International, Inc., a publicly traded worldwide economic, financial, and management consulting services firm, a position he has held since2005. Mr. Mackie was a member of the Board of Directors and Audit Committee of Novell, Inc. from 2003 until 2005. From 1972 through December 2002, Mr. Mackie was a partner with Arthur Andersen LLP, where he specialized in software and high technology industry clients. After leaving Arthur Andersen, Mr. Mackie served as a consultant to a number of organizations. Mr. Mackie received a Masters degree from the Wharton School of the University of Pennsylvania and a Bachelors degree from Babson College, and is a certified public accountant. Mr. Mackie is currently a Trustee and former member of the Board of Directors, Compensation Committee and Chairman of the Audit Committee for the Massachusetts Eye and Ear Infirmary. We believe that Mr. Mackie’s training as a certified public accountant, his background as a partner of a registered independent public accounting firm and as a senior financial executive and his experience as a director of another public company qualify him to serve as a member of our Board of Directors.

John F. Smith, Jr., has served as a member of our Board of Directors since November 2007. Mr. Smith is a retired Chairman of the Board of Directors of General Motors Company, a position he held from 1996 to 2003. Mr. Smith also held variety of other positions at General Motors, including Chief Executive Officer from 1992 to 2000 and President from 1992 to 1998. In addition to his service on our Board of Directors, Mr. Smith is the senior partner of Charles River Wine Company and is currently a retired, non-executive Chairman of the Board of Directors of Delta Air Lines, Inc. Mr. Smith also served as a member of the President’s Export Council. Mr. Smith received his bachelor of business degree from the University of Massachusetts and a M.B.A. from Boston University. We believe that Mr. Smith’s educational background in management, his many years of service as a chief executive officer and senior executive in the automotive industry and his experience as a director of other public companies qualify him to serve as a member of our Board of Directors.

 

70


Table of Contents

Robert Schechter has served as a member of our Board of Directors since June 2008. Mr. Schechter served as Chief Executive Officer and Chairman of the Board of NMS Communications Corporation from 1995 until his retirement in 2008. From 1987 to 1994, Mr. Schechter held various senior executive positions with Lotus Development Corporation and from 1980 to 1987 was a partner of Coopers & Lybrand LLP. Mr. Schechter is currently a director of Parametric Technology Corporation, a provider of product development software solutions. Previously, he had served as a director of Unica Corporation, Soapstone Networks, Inc., Moldflow Corporation and MapInfo Corporation. Mr. Schechter is a graduate of Rensselaer Polytechnic Institute and the Wharton School of the University of Pennsylvania. We believe that Mr. Schechter’s educational background in technology, finance and accounting and his experience as a partner of a registered independent public accounting firm, as a senior executive in the software industry and as a director of other public companies qualify him to serve as a member of our Board of Directors.

Board of Directors

Our board of directors currently consists of six members. Following this offering, the board of directors will be divided into three classes. Except as described below, each of the directors will serve for three-year terms. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. Immediately after the completion of this offering:

 

   

Messrs. Poduska and Remondi will be the Class I directors whose terms end in 2012, and will stand for election at the 2012 annual meeting for three-year terms ending in 2015;

   

Messrs. Schechter and Shields will be the Class II directors whose terms end in 2013, and will stand for election at the 2013 annual meeting for three-year terms ending in 2016; and

   

Messrs. Mackie and Smith will be the Class III directors whose terms end in 2014, and will stand for election at the 2014 annual meeting for three-year terms ending in 2017.

Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

Our board of directors has determined that each of our directors other than Mr. Remondi is an independent director within the meaning of the NASDAQ Marketplace Rules.

Each executive officer serves at the discretion of the board of directors and holds office until his or her successor is elected and qualified or until his or her earlier resignation or removal. There are no family relationships among any of our directors and executive officers.

Committees of the Board of Directors

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, which are the only standing committees of the board of directors.

Audit committee. The current members of our audit committee are Wayne Mackie, who serves as Chairman, Robert Schechter and, effective upon the closing of this offering, John F. Smith, Jr., each of whom satisfies the Nasdaq Stock Market independence standards and the independence standards of Rule 10A-3(b)(1) of the Securities Exchange Act. Each of the members of our audit committee meets the requirements for financial literacy under applicable rules and regulations of the SEC and the Nasdaq Stock Market. The board of directors has determined that Mr. Mackie qualifies as an “audit committee financial expert,” as defined by applicable rules of the NASDAQ Stock Market and the SEC. The audit committee assists our board of directors in its oversight of:

 

   

the integrity of our financial statements;

   

our compliance with legal and regulatory requirements;

   

the qualifications and independence of our independent registered public accounting firm; and

   

the performance of our independent registered public accounting firm.

The audit committee has direct responsibility for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm, Ernst & Young LLP. The audit committee establishes and implements policies and procedures for the pre-approval of all audit services and all permissible non-audit services provided by our independent registered public accounting firm and reviews and approves any related party transactions entered into by us.

 

71


Table of Contents

Compensation committee. The current members of our compensation committee are John William Poduska, who serves as Chairman and Mr. Shields, each of whom is an independent director. The compensation committee:

 

   

approves the compensation and benefits of our executive officers;

   

reviews and makes recommendations to the board of directors regarding benefit plans and programs for employee compensation; and

   

administers our equity compensation plans.

Nominating and corporate governance committee. The current members of our nominating and corporate governance committee are Mr. Smith, who serves as Chairman, Mr. Mackie and Mr. Poduska, each of whom is an independent director. The nominating and corporate governance committee:

 

   

identifies individuals qualified to become board members;

   

recommends to the board of directors nominations of persons to be elected to the board; and

   

advises the board regarding appropriate corporate governance policies and assists the board in achieving them.

Compensation Committee Interlocks and Insider Participation

No member of our Compensation Committee has ever been an officer or employee of ours or any of our subsidiaries. None of our executive officers serves as a director or member of the compensation committee of another entity in a case where an executive officer of such other entity serves as a director of ours or a member of our Compensation Committee.

Director Compensation

Mr. Remondi, who is employed by us as our chief executive officer and president, receives no separate compensation for his services as a director. In addition, both Mr. Shields, the chairman of our board of directors, and Paul L. Mucci, who resigned from our board of directors on August 3, 2011, elected not to receive any separate compensation for their services as directors, due to their respective relationships with Boston Capital Ventures and FMR LLC.

Other than Mr. Shields, our non-employee directors receive cash fees as follows:

 

   

each non-employee director receives an annual cash fee in the amount of $20,000;

   

the chairperson of each of our board committees receives an additional annual cash fee as follows: audit committee chair, $10,000; compensation committee chair, $3,000; and nominating and corporate governance committee chair, $2,000;

   

each other member of the audit committee receives an additional annual cash fee of $2,500; and

   

each director receives an additional cash fee of $500 for each board or committee meeting he attends.

The cash fees described above are paid annually in arrears. Non-employee directors are also reimbursed upon request for travel and other out-of-pocket expenses incurred in connection with their attendance at meetings of the board and of committees on which they serve.

In addition to the cash fees described above, upon appointment to our board of directors each director is issued an option to purchase 100,000 shares of our common stock. These options vest in equal quarterly installments over a period of four years and have an exercise price equal to the fair market value of our common stock on the date they are granted. In light of their prior holdings of our stock, or their affiliation with a substantial stockholder, each of Messrs. Mucci, Shields and Poduska elected not to receive such an option upon his appointment as a director.

The following table provides information concerning the compensation earned by each person, other than Mr. Remondi, who served as a member of our board of directors during fiscal year 2011. See “Executive Compensation” for a discussion of the compensation of Mr. Remondi.

 

     Fees earned or paid in cash      Total  

John J. Shields, III (1)

   $ —         $ —     

John William Poduska

   $ 28,000       $ 28,000   

Wayne Mackie

   $ 37,500       $ 37,500   

John F. Smith, Jr.

   $ 26,500       $ 26,500   

Robert Schechter

   $ 28,500       $ 28,500   

Paul L. Mucci (1)(2)

   $ —         $ —     

 

72


Table of Contents

 

(1) Mr. Shields and Mr. Mucci, each of whom is affiliated with one of our major stockholders, have not historically been compensated by us for their service as directors.
(2) Mr. Mucci resigned as a director effective August 3, 2011.

On July 19, 2011, our board of directors approved the issuance of options to purchase 250,000 shares of our common stock to each of Messrs. Mackie, Poduska, Schechter and Smith. These options were issued under our 2007 Stock Incentive Plan, vest in equal quarterly installments over a period of four years and have an exercise price of $1.75 per share.

Code of Ethics

Our board of directors has adopted a code of ethics which establishes the standards of ethical conduct applicable to all of our directors, officers, employees, consultants and contractors. The code of ethics addresses, among other things, competition and fair dealing, conflicts of interest, financial matters and external reporting, company funds and assets, confidentiality and corporate opportunity requirements and the process for reporting violations of the code of ethics, employee misconduct, conflicts of interest or other violations. Our code of ethics is publicly available on our website at www.exa.com. Any waiver of our code of ethics with respect to our chief executive officer, chief financial officer, controller or persons performing similar functions may only be authorized by our audit committee and will be disclosed as required by applicable law.

 

73


Table of Contents

EXECUTIVE COMPENSATION

The following tables summarize the compensation earned during fiscal year 2011 by our chief executive officer, our chief financial officer, and each of our three other most highly compensated executive officers who were in office at January 31, 2011, whom we refer to collectively in this prospectus as our “named executive officers.”

Summary Compensation Table for Fiscal Year 2011

The following table provides information regarding the compensation earned during the fiscal year ended January 31, 2011 by our named executive officers. Under the Securities and Exchange Commission’s rules for preparation of the following tables, cash bonuses are reported in the performance year in which they were earned, while equity-based awards are reported in the year in which they are granted by our compensation committee.

 

Name and Principal Position

   Fiscal Year      Salary ($)      Bonus ($)      Non-Equity
Incentive Plan
Compensation
($)
     All Other
Compensation
($)
    Total ($)  

Stephen A. Remondi

     2011         297,692         50,000         250,000         —          597,692   

Chief Executive Officer and

                

President

                

Edmond L. Furlong

     2011         223,269         —           200,000         —          423,269   

Chief Operating Officer and

                

Chief Financial Officer

                

Hudong Chen

     2011         221,230         —           124,000         —          345,230   

Chief Scientist and Vice

                

President of Physics

                

James Hoch

     2011         221,230         —           124,000         —          345,230   

Vice President of Software

                

Development

                

Jean-Paul Roux

     2011         292,368         —           327,015         50,269  (2)      669,652   

Vice President of European

                

Operations (1)

                

 

(1) Salary and other cash compensation paid to Mr. Roux in fiscal year 2011 were paid in euros. For purposes of this table, euros were converted to U.S. dollars at an assumed exchange rate of €1:$1.3194, which is the average of the daily noon buying rates of exchange for the year ended January 31, 2011, as reported by the Board of Governors of the United States Federal Reserve System.
(2) Consists of an “expatriation bonus” payable to Mr. Roux pursuant to an employment agreement dated August 25, 2005.

 

74


Table of Contents

Grants of Plan-Based Awards for Fiscal Year 2011

The following table provides information about non-equity incentive awards granted to our named executive officers during fiscal year ended January 31, 2011.

 

     Estimated Possible Payouts under Non-Equity
Incentive Plan Awards
 

Name and Principal Position

   Threshold ($)     Maximum ($)  

Stephen A. Remondi

     100,000  (1)      350,000  (1) 

Chief Executive Officer and

    

President

    

Edmond L. Furlong

     100,000  (1)      300,000  (1) 

Chief Operating Officer and

    

Chief Financial Officer

    

Hudong Chen

     75,000  (2)                    (2) 

Chief Scientist and Vice

    

President of Physics

    

James Hoch

     75,000  (2)                    (2) 

Vice President of Software

    

Development

    

Jean-Paul Roux

                   (3)                    (3) 

Vice President of European

    

Operations

    

 

(1) The annual variable compensation of our chief executive officer, Mr. Remondi, and our chief financial officer, Mr. Furlong, for fiscal year 2011 were determined by reference to a formula based on our level of invoice growth rate for fiscal year 2011. For more information on the methodology used to calculate the annual variable compensation for Mr. Remondi and Mr. Furlong, see “Executive Compensation—Compensation Discussion and Analysis—Executive compensation for fiscal year 2011.” We paid Mr. Remondi and Mr. Furlong $250,000 and $200,000, respectively, of non-equity incentive plan compensation for fiscal year 2011.
(2) The annual variable compensation of our chief scientist and vice president of physics, Dr. Chen, and our vice president of software development, Mr. Hoch, for fiscal year 2011 were determined by reference to a formula based on our level of invoice growth rate for fiscal year 2011. For more information on the methodology used to calculate the annual variable compensation for Dr. Chen and Mr. Hoch, see “Executive Compensation—Compensation Discussion and Analysis—Executive compensation for fiscal year 2011.” We paid Dr. Chen and Mr. Hoch $124,000 and $124,000, respectively, of non-equity incentive plan compensation for fiscal year 2011.
(3) The variable compensation for our vice president of European operations, Mr. Roux, was structured as a commission on the aggregate amount of the fiscal year 2011 invoices from the territories for which he was responsible, with the commission rate being determined by reference to a matrix based on our fiscal year 2011 European invoice growth rate. For more information on the methodology used to calculate the annual variable compensation for Mr. Roux, see “Executive Compensation—Compensation Discussion and Analysis—Executive compensation for fiscal year 2011.” We paid Mr. Roux $327,015 of non-equity incentive plan compensation for fiscal year 2011.

 

75


Table of Contents

Outstanding Equity Awards at Fiscal Year-End for Fiscal Year 2011

The following table provides information regarding outstanding equity awards held by each of our named executive officers as of January 31, 2011.

 

    Option Awards  

Name and Principal Position

  Number of Securities
Underlying
Unexercised Options
(#) Exercisable
    Number of Securities
underlying Unexercised
Options (#)
Unexercisable
    Option Exercise Price
($)
    Option Expiration Date (1)  

Stephen A. Remondi

    3,800,000  (2)      —          0.12        July 1, 2015   

Chief Executive Officer and President

       

Edmond L. Furlong Chief

    1,500,000  (2)      —          0.12        July 1, 2015   

Operating Officer and Chief Financial Officer

       

Hudong Chen

    550,000  (2)      —          0.12        July 1, 2015   

Chief Scientist and Vice President of Physics

    450,000  (3)      —          0.24        June 4, 2016  (4) 

James Hoch

    500,000  (2)      —          0.12        July 1, 2015   

Vice President of Software Development

    450,000  (3)      —          0.24        June 5, 2016   

Jean-Paul Roux

    168,750  (5)      —          0.12        July 1, 2015   

Vice President of European Operations

    125,000  (6)      —          0.55        June 29, 2017   

 

(1) Except as noted, the expiration date of each option occurs on the tenth anniversary of the date of grant of such option.
(2) Option became fully exercisable on September 30, 2009.
(3) Option became fully exercisable on June 30, 2009.
(4) Option was granted on June 5, 2006.
(5) Option became fully exercisable on December 31, 2009.
(6) Option became fully exercisable on March 31, 2009.

Option Exercises and Stock Vested for Fiscal Year 2011

None of our named executive officers exercised any stock options during fiscal year 2011, and no named executive officer held any stock awards that vested during fiscal year 2011.

Non-qualified Deferred Compensation Plans

During fiscal year 2011, our named executive officers did not participate in any non-qualified defined contribution or other non-qualified deferred compensation plans.

Pension Benefits

During fiscal year 2011, our named executive officers did not participate in any plan that provides for specified retirement benefits, or payments and benefits that will be provided primarily following retirement, other than defined contribution plans, such as our 401(k) savings plan.

Potential Payments Upon Termination or Change-in-Control

On August 25, 2005, we entered into a Work Agreement with Mr. Roux in connection with his appointment as our Vice President of European Operations. Pursuant to the terms of the Work Agreement, in the event that Mr. Roux’s employment with us is terminated for any reason, either by us or by Mr. Roux, we will pay to Mr. Roux an amount equal to five months of his base salary and sales commissions, calculated on the basis of the 12 month period ending on the effective date of such termination.

 

76


Table of Contents

Additionally, on June 3, 2010, in connection with a review of our compensation practices with respect to our senior management team, we agreed that in the event of the termination of the employment of either Dr. Chen or Mr. Hoch, other than a voluntary resignation or termination for cause, we will continue to pay the affected officer his base salary as in effect of the date of such termination for a period of 12 months.

The table below sets forth the estimated payments that would be provided to Messrs. Chen, Hoch and Roux in the event that their employment with us had been terminated, other than a termination for cause or by voluntary resignation in the case of Messrs. Chen and Hoch, on January 31, 2011, the last day of our last fiscal year. The amounts shown as payable do not include amounts earned by the individual and accrued before the assumed termination date but payable following such date, such as accrued and unpaid salary or the value of accrued but unused vacation days.

 

Name and Principal Position

   Potential Severance Payments ($)  

Hudong Chen

     240,000  (1) 

Chief Scientist and Vice President of Physics

  

James Hoch

     240,000  (1) 

Vice President of Software Development

  

Jean-Paul Roux

     258,076  (2) 

Vice President of European Operations

  

 

(1) Consists of the named executive officer’s annual base salary as of January 31, 2011.
(2) Consists of an amount equal to five months of Mr. Roux’s base salary and cash-based variable compensation, excluding any expatriation bonuses, calculated on the basis of the 12-month period ending on January 31, 2011. Salary and other cash compensation are paid to Mr. Roux in euros. For purposes of this table, euros were converted to U.S. dollars at an assumed exchange rate of €1:$1.3194, which is the average of the daily noon buying rates of exchange for the year ended January 31, 2011, as reported by the Board of Governors of the United States Federal Reserve System.

Our named executive officers are employees-at-will and, except as set forth above, do not otherwise have employment or severance contracts with us. There are no other contracts, agreements, plans or arrangements that provide for payments to our named executive officers at, following, or in connection with any termination of employment, change in control of our company or a change in a named executive officer’s responsibilities.

Compensation Discussion and Analysis

The following compensation discussion and analysis summarizes our executive officer compensation policies for fiscal year 2011.

Elements and objectives of our executive compensation program.

The objectives of our executive compensation program are to align compensation with our success in achieving our business goals, the individual performance of our executives and the interests of our stockholders; to motivate and reward high levels of performance; to recognize and reward the achievement of company-wide or departmental goals; and to enable us to attract, retain and reward members of senior management who contribute to the long-term success of our company.

To achieve those objectives, we seek to make decisions concerning executive compensation that establish incentives that will link executive officer compensation to our company’s financial performance and provide a total compensation package that is competitive among comparable companies in the software industry.

Our compensation package for our executive officers consists of three principal elements:

 

   

salary;

   

short-term incentive compensation in the form of annual variable compensation and discretionary cash bonuses; and

   

long-term equity-based incentive compensation in the form of stock options.

We have not adopted a formula to allocate total compensation among these various components. Each of the three principal elements of our executive compensation program is essential to meeting the program’s overall objectives,

 

77


Table of Contents

and most of the compensation components simultaneously fulfill one or more of these objectives. Base salaries, which are the only fixed component of compensation, are used primarily to attract and retain executives responsible for our long-term success. Annual variable compensation and discretionary cash bonuses are “at-risk” compensation designed both to reward executives for the achievement of short-term corporate and individual goals and to attract and retain executives. Long-term equity-based incentive compensation is intended to align executive and stockholder interests, to motivate and reward executives for our long-term business success and to attract and retain executives responsible for this long-term success. Equity awards in the form of stock options reward value creation, as their benefit to the executive increases as our stock price increases. They also serve as retention tools due to their time-based vesting, thus increasing our ability to retain our executive officers.

Our executive officers are also eligible to participate in other standard employee benefit plans, including health, life insurance and medical reimbursement plans and a 401(k) retirement plan, on substantially the same terms as other employees who meet applicable eligibility criteria, subject to any legal limitations on the amounts that may be contributed or the benefits that may be payable under these plans.

Executive compensation process.

The compensation of our executive officers is determined by the compensation committee of our board of directors, and discussed by the committee throughout the year. Our formal annual compensation review process generally takes place during the first quarter of each fiscal year, after the results of the previous fiscal year are known. Cash bonuses for the completed fiscal year, if any, and long-term equity-based incentive compensation are awarded by the committee on a discretionary basis, after a review of the full year’s results.

Our compensation committee is comprised entirely of non-employee directors, each of whom our board of directors has determined is independent within the meaning of the rules of The NASDAQ Stock Market. The members of the compensation committee have substantial managerial experience and wide contacts in the computer software and hardware industries and in the broader technology industry, upon which they rely in making their determinations. The committee also takes into account publicly available information concerning the compensation practices of other companies in the software industry. This information is used by the committee informally and primarily for purposes of comparison to ascertain whether our compensation practices for our executive officers are broadly competitive.

The committee does not have a formal benchmarking policy or a practice of establishing the amount of any element of our executive officers’ compensation by reference to a fixed range of percentages or percentiles of the compensation of any peer or comparison group. As a result, the determinations made by the members of our compensation committee are guided to a significant degree by their collective judgment and experience. The committee has not employed the services of a compensation consultant.

Role of executive officers in establishing compensation.

Our chief executive officer makes recommendations with regard to the compensation of our executive officers other than himself, which are reviewed by the compensation committee. Executive officers do not participate in the process of establishing their own annual compensation.

Executive compensation for fiscal year 2011.

Salaries. In setting salaries for our executive officers for fiscal year 2011, we considered the salaries we paid our executive officers in prior years, information available to us regarding the salaries and overall compensation paid to persons having comparable responsibilities at other software companies, as well as information concerning the responsibilities and compensation of other members of our senior management team. The committee evaluated the experience, talents, capabilities and expected contributions of our executive officers and established salaries that it believed were commensurate with these attributes and that our executive officers would find attractive. In determining base salaries for fiscal year 2011, the committee noted that our executive officers’ base salaries had been reduced substantially in March 2009 as part of our expense control initiatives in response to the global recession, and determined to reverse these salary cuts in fiscal 2011, such that, in general, our executive officers’ base salaries in fiscal year 2011 were restored to the levels originally set in early 2008. Effective in May 2010, the base salaries of our chief scientist and our vice president of software development for fiscal year 2011 were increased above their 2008 levels, from $190,000 to $240,000, in recognition of the critical role these officers are expected to play in maintaining our technical leadership position.

 

78


Table of Contents

Bonuses. Our cash bonuses are intended to provide short-term incentives by rewarding executive officers for their contribution to our performance for the past year. Historically our executive officers’ cash bonuses have consisted primarily of annual variable compensation that is determined by reference to a formula, and in certain cases, a discretionary component that has been awarded by the compensation committee in its judgment. The compensation committee’s judgments with regard to discretionary bonuses take into account the recommendations of our chief executive officer and are based in part on a review, during the first quarter following the completion of the performance year, of each executive’s performance during the performance period. While some of the individual performance factors that the committee considers are quantifiable, in our view many less quantifiable forms of contribution are equally important and deserve considerable weight.

The annual variable compensation component of our executive officers’ cash bonuses for any fiscal year is determined by reference to the year-over-year rate of growth in our invoices for the fiscal year, which we refer to as our invoice growth rate. For this purpose, the term “invoices” means the total amount billed by us to customers for our products and services during the fiscal year, without regard to the timing of recognition of the related revenue. In determining invoice growth rate, we translate invoices rendered in other currencies into United States dollars at a constant exchange rate, to correct for fluctuations due to foreign currency exchange rates.

We consider invoice growth rate to be an important measure of the success of our management team in promoting broader adoption of our solutions and increased consumption of our simulation services, which are the principal drivers of our business growth, and therefore an appropriate metric for measurement of our executive officers’ short-term incentive compensation.

The annual variable compensation of our chief executive officer, Mr. Remondi, and our chief financial officer, Mr. Furlong, for fiscal year 2011 were determined by reference to the matrix below, which was established by our compensation committee before the commencement of the fiscal year. The matrix specified a target amount that could be earned at various levels of invoice growth rate, based on the highest invoice growth rate attained, without interpolation. If the invoice growth rate for fiscal 2011 was less than the minimum specified in the matrix for that officer, no variable compensation would be earned; if the invoice growth rate was greater than 45%, a bonus higher than that specified in the matrix could be awarded by the compensation committee in its discretion:

 

Fiscal year 2011 invoice growth rate

   Chief executive officer’s
variable compensation ($)
     Chief financial officer’s
variable compensation ($)<