S-1/A 1 d214313ds1a.htm AMENDMENT NO 5 TO FORM S-1 Amendment No 5 to Form S-1
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As filed with the Securities and Exchange Commission on June 18, 2012

Registration No. 333-176019

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 5

to

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)(3)

Common Stock, $0.001 par value

  $93,437,500   $10,838

 

 

(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.
(3) Of this amount, $10,014 was previously paid.

 

 

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.

 

 

 


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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 JUNE 18, 2012

 

LOGO

6,250,000 Shares

Common Stock

 

 

We are offering 4,166,667 shares of our common stock and the selling stockholders are offering 2,083,333 shares of our common stock. This is our initial public offering and no public market currently exists for our shares. We have applied 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 $11.00 and $13.00 per share.

We are an “emerging growth company” within the meaning of the recently enacted Jumpstart Our Business Startups Act, or the JOBS Act, and will be subject to reduced public company reporting requirements.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10.

 

 

 

     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.

 

 

The selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 937,500 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                     , 2012.

Stifel Nicolaus Weisel

 

Baird

      Canaccord Genuity
Needham & Company

The date of this Prospectus is                     , 2012.


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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.


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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.

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

     10   

Special Note Regarding Forward-Looking Statements

     27   

Use of Proceeds

     28   

Dividend Policy

     29   

Capitalization

     30   

Dilution

     31   

Selected Consolidated Financial Data

     33   

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

     36   

Business

     63   

Management

     81   

Principal and Selling Stockholders

     102   

Certain Relationships and Related Party Transactions

     104   

Description of Capital Stock

     106   

Shares Eligible for Future Sale

     108   

Underwriting

     110   

Legal Matters

     114   

Experts

     114   

Where You Can Find Additional Information

     115   

Market and Industry Data

     115   

Index To Consolidated Financial Statements

     F-1   

 

 

 


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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 2012 mean the fiscal year ended January 31, 2012.

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 believe, based on feedback from our customers and data published by them, that use of our software solutions enables significant cost savings and fundamental improvements in their 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 (for a description of the lattice Boltzmann method, see Business—Our Technology). 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 90 manufacturers currently utilize our products and services, including 13 of the global top 15 passenger vehicle manufacturers, based on motor vehicle production volume for 2010, as reported by the Organisation Internationale des Constructeurs d’Automobiles, or the International Organization of 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, Korea and China, through a distributor in India and through a sales agent in Brazil.

We have a predictable business model based on recurring revenue from a growing customer base. For fiscal year 2012, we recorded total revenues, net income and Adjusted EBITDA of $45.9 million, $14.5 million and $7.1 million. Since generating our first commercial revenue in 1994, our annual revenue has increased for 18 consecutive years. We were profitable in fiscal years 2011 and 2012, after recording net losses in the three preceding fiscal years. Our total revenues and Adjusted EBITDA in fiscal year 2012 increased 21% and 51%, respectively, compared with fiscal year 2011.

 

 

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Our net income in fiscal year 2012 was favorably affected by a benefit from income taxes of $11.0 million, primarily due to the release, as of January 31, 2012, of the valuation allowance recorded against our deferred tax assets in the United States. Our income before income taxes in fiscal year 2012 was $3.4 million. For a fuller discussion of our accounting for income taxes and the release of our valuation allowance, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Income Taxes” and Note 12 to our consolidated financial statements appearing elsewhere in this prospectus.

For the first three months of fiscal year 2013, our total revenues, net income and Adjusted EBITDA were $11.3 million, $11 thousand and $974 thousand, respectively.

Adjusted EBITDA is a non-GAAP financial measure. 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 financial terms and metrics—Key metrics that we use to evaluate our performance.”

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 a May 2012 estimate by CIMdata, an independent global consulting firm, the global comprehensive PLM market was $29.9 billion in 2011, and is expected to grow to $49.6 billion by 2016, representing a compound annual growth rate of 10.7%. The simulation segment of the PLM market, in which we participate, was $2.9 billion in 2011, and is expected to grow to $5.7 billion by 2016, at a compound annual growth rate of 14.0%.

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

 

 

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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 United States 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.

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.

 

 

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Risks Associated with Our Business and Ownership of Our Stock

Our business is subject to numerous risks which may prevent us from successfully implementing our business strategy. These risks, as well as other risks relating to ownership of our stock, are more fully described under “Risk Factors” beginning on page 10 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 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;

   

following the completion of this offering, assuming no exercise of the underwriters’ over-allotment option, our officers, directors, current 5% or greater stockholders and their respective affiliates will together beneficially own or control, in the aggregate, approximately 54.1% of the outstanding shares of our common stock, and as a result, if they act together, they will be able to determine substantially all matters requiring stockholder approval; 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.

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.

 

 

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THE OFFERING

 

Common stock offered by us

4,166,667 Shares

 

Common stock offered by selling stockholders

2,083,333 Shares

 

Common stock to be outstanding after this offering

13,193,161 Shares

 

Over-allotment option

937,500 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 $12.00 per share would increase (decrease) the net proceeds to us from this offering by $3.9 million, 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 9,026,494 shares outstanding as of April 30, 2012 and includes 8,529,366 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, 2012:

 

   

2,249,078 shares issuable upon exercise of stock options, which have a weighted average exercise price of $4.29 per share and 592,375 additional shares reserved for future issuance under our stock-based compensation plans;

 

   

183,076 shares issuable upon exercise of warrants, which have a weighted average exercise price of $6.11 per share; and

 

   

assumes no exercise of the underwriters’ option to purchase 937,500 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; gives effect to the 1-for-6.5 reverse stock split effected with respect to our common stock on June 8, 2012; assumes no exercise of our outstanding stock options and warrants to purchase an aggregate of 2,432,154 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 $12.00 per share, the midpoint of the offering range set forth on the cover of this prospectus.

 

 

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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, 2010, 2011 and 2012 and our summary consolidated balance sheet data as of January 31, 2011 and 2012 are derived from our consolidated financial statements included elsewhere in this prospectus. Our summary consolidated financial data as of April 30, 2012 and for the three months ended April 30, 2011 and 2012 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 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, 2012 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, 2012 gives effect to (1) the pro forma adjustment above and (2) our receipt of estimated net proceeds of $43.0 million from this offering, based on an assumed initial public offering price of $12.00 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, 2012. 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.

 

 

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    Year Ended January 31,     Three Months
Ended
April 30,
 
    2010
     Restated (1)    
    2011
     Restated (1)    
        2012         2011
Restated (1)
    2012  
    (in thousands, except share and per share data)              

Consolidated Statement of Operations Data:

         

License revenue

  $ 26,837      $ 30,584      $ 38,724      $ 9,176      $ 9,985   

Project revenue

    8,781        7,323        7,176        1,044        1,281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    35,618        37,907        45,900        10,220        11,266   

Operating expenses: (2)

         

Cost of revenues

    9,956        9,896        12,075        2,810        3,223   

Sales and marketing

    5,304        6,110        6,233        1,274        1,600   

Research and development

    12,595        12,777        14,449        3,202        4,140   

General and administrative

    6,829        6,291        8,124        1,638        2,030   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    34,684        35,074        40,881        8,924        10,993   

Income from operations

    934        2,833        5,019        1,296        273   

Other expense, net:

         

Foreign exchange gain (loss)

    (766     (198     (106     (464     (0

Interest expense, net

    (672     (1,411     (1,284     (270     (412

Other income (expense), net

    12        10        (213     66        66   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (1,426     (1,599     (1,603     (668     (346

(Loss) income before income taxes

    (492     1,234        3,416        628        (73

Provision (benefit) for income taxes

    521        839        (11,040     390        (84
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (1,013   $ 395      $ 14,456      $ 238      $ 11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per common share:

         

Basic

  $ (2.06   $ 0.80      $ 29.28      $ 0.48      $ 0.02   

Diluted

  $ (2.06   $ 0.04      $ 1.40      $ 0.02      $ 0.00   

Weighted average number of common shares outstanding:

         

Basic

    490,999        491,623        493,763        492,301        497,124   

Diluted

    490,999        10,154,136        10,324,811        10,188,417        10,455,405   

Pro forma net income per share (unaudited):

         

Basic

      $ 1.61        $ 0.00   

Diluted

      $ 1.40        $ 0.00   

Pro forma weighted-average number of common shares used in computing net income per common share (unaudited):

         

Basic

        8,996,836          9,019,041   

Diluted

        10,324,811          10,455,405   

 

(1) Our consolidated financial statements for fiscal years 2010 and 2011 and for the first three months of fiscal year 2012 have been restated. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.
(2) Includes non-cash, share-based compensation expense as follows:

 

     Year Ended January 31,      Three Months
Ended
April 30,
 
         2010    
Restated
         2011    
Restated
         2012          2011
Restated
     2012  
     (in thousands)                

Cost of revenues

   $ 39       $ 45       $ 79       $ 9       $ 27   

Sales and marketing

     61         63         119         2         46   

Research and development

     105         133         227         13         81   

General and administrative

     1,200         40         211         9         87   

 

 

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     Year Ended January 31,     Three Months
Ended
April 30,
 
           2010                 2011                 2012           2011      2012  
     (in thousands, except percentage data)               

Non-GAAP Operating Data:

           

Adjusted EBITDA (1)

   $ 5,042      $ 4,676      $ 7,060      $ 1,652       $ 974   

License Revenue Renewal Rate (2)

     80     91     97     —           —     

License Revenue Renewal Rate with Capacity
Expansion (3)

     95     113     123     —           —     

 

(1) Adjusted EBITDA. To supplement our consolidated financial statements, which are presented in accordance with accounting principles generally accepted 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, or an alternative for, other measures that are in accordance with GAAP. 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,
 
     2010
Restated 
    2011
Restated 
    2012     2011
Restated 
    2012  
     (in thousands)              

Net (loss) income

   $ (1,013   $ 395      $ 14,456      $ 238      $ 11   

Depreciation and amortization

     2,702        1,562        1,405        323        460   

Interest expense, net

     672        1,411        1,284        270        412   

Other (expense) income, net

     (12     (10     213        (66     (66

Foreign exchange loss

     766        198        106        464        (0

Provision (benefit) for income taxes

     521        839        (11,040     390        (84
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     3,636        4,395        6,424        1,619        733   

Non-cash, share-based compensation expense

     1,406        281        636        33        241   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 5,042      $ 4,676      $ 7,060      $ 1,652      $ 974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2)

License Revenue Renewal Rate. License revenue renewal rate is an annual operational metric that we use to measure continuity in the usage of simulation capacity by our existing customer base. This measure of customer retention is important because our business model is based on recurring revenue. We compute our

 

 

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  license revenue renewal rate for any fiscal year by identifying the customers from whom we derived license revenue in the prior fiscal year and dividing the dollar amount of license revenue that we receive in the current fiscal year from those customers by the dollar amount of license revenue we received from them in the prior fiscal year. We treat as a single customer entities that are under common ownership, and include as customers in both periods being compared any entities that purchased simulation licenses in both years but that appear as distinct customers in our records because they have undergone an ownership change, name change or change in their form of organization. In computing our license revenue renewal rate, we exclude current year license revenue attributable to new customers or to upgrades or expansions of capacity purchased by prior year customers in the current year. For a fuller explanation of our management’s use and computation of our license revenue renewal rate, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key financial terms and metrics—Key metrics that we use to evaluate our performance.”

 

(3) License Revenue Renewal Rate with Capacity Expansion. License revenue renewal rate with capacity expansion is an annual operational metric that measures growth in the usage of simulation capacity by our existing license customer base. We calculate this metric in the same manner that we calculate our license revenue renewal rate, except that we include in the current year license revenue included in the calculation revenue attributable to upgrades or expansions of capacity purchased by prior year customers. See Note 2 above and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key financial terms and metrics—Key metrics that we use to evaluate our performance.”

 

     As of April 30, 2012  
     Actual     Pro Forma     Pro Forma as
Adjusted
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash

   $ 15,955      $ 15,955      $ 58,995   

Total current assets

     21,823        21,823        64,823  

Total assets

     44,444        44,444        87,444  

Long-term debt and long-term capital leases, net of current portion

     7,540        7,540        7,540  

Convertible preferred stock

     32,685          —            —    

Stockholders’ (deficit) equity

     (35,154     (2,469     40,531   

 

 

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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 fiscal years 2010, 2011 and 2012 and in the three months ended April 30, 2012, approximately 13%, 13%, 13%, and 15% of our revenue, respectively, was attributable to Renault and approximately 10%, 11%, 9% and 9% of our revenue, respectively, was attributable to Toyota. Our relationship with each of these customers is an arm’s length commercial relationship. Our contract with Renault expires in December 2013. We do not have a long-term contract with Toyota. In each of those years and in the three months ended April 30, 2012, approximately 61%, 69%, 64% and 69% of our revenue, respectively, was attributable to our ten largest customers in the aggregate, including Renault and Toyota. 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, due to the suspension or postponement of vehicle

 

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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 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 lengthy and complicated sales cycle makes it difficult for us to predict the timing of our entry into new license agreements.

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

 

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cost improvements that competing products are unable 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 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 50 times over a period of six 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.

 

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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.

 

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If our security measures, or those of 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 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. We may also in the course of our service engagements have access to such confidential customer information. 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 OnDemand 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.

 

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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, 2012, 77% of our revenue was attributable to sales in international markets, and at April 30, 2012, we had 14 offices in 8 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 of complying with a wide variety of foreign customs, laws and regulations;

   

burdens of complying with United States laws regulating international business activities, including the United States Foreign Corrupt Practices Act and economic and trade sanctions regimes;

   

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;

 

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laws and business practices favoring local companies;

   

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. We do not currently hedge our exposure to fluctuations in foreign exchange rates. 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.

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 United States tax rules being considered by United States law makers, including proposals that may reduce or eliminate the deferral of United States 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 United States. 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.

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;

 

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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.

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,

 

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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.

United States 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 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 is one of our co-founders, but has not been employed by us since 1998. MIT and Dr. Molvig hold, in the aggregate, approximately 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.

In 2011, we were 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).

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

 

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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 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

The concentration of our capital stock ownership with insiders upon the completion of this offering will 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 54.1% of the shares of

 

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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, were they to act together, would be able to control 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.

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 have applied 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, which could contribute to the loss of your investment.

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;

 

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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.

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

 

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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.

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.

The recently enacted JOBS Act will allow us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in our company and adversely affect the market price of our common stock.

The recently enacted JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualify as an emerging growth company until the earliest of:

 

   

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

   

the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more;

   

the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

   

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (a) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (b) has been required to file annual and quarterly reports under the Securities Exchange Act of 1934 for a period of at least 12 months, and (c) has filed at least one annual report pursuant to the Securities Act of 1934.

Under this definition, we will be an emerging growth company upon completion of this offering and could remain an emerging growth company until as late as January 31, 2018.

The JOBS Act provides that, so long as a company qualifies as an emerging growth company, it will, among other things:

 

   

be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

   

be exempt from the “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Act and certain disclosure requirements of the Dodd-Frank Act relating to compensation of its chief executive officer;

   

be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934 and instead provide a reduced level of disclosure concerning executive compensation; and

   

be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.

Although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an

 

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attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be adversely affected.

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, particularly after we are no longer an emerging growth company. 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.

We have identified material weaknesses in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting, investors could lose confidence in our financial statements and our company, which could have a material adverse effect on our business and stock price.

In order to provide reliable financial reports, mitigate the risk of fraud and operate successfully as a publicly traded company, we must maintain effective control over our financial reporting. In the course of the preparation and audit of our financial statements for fiscal year 2012, we identified material weaknesses in our internal control over financial reporting and, as a result, have concluded that our internal control over financial reporting is not effective in certain respects.

We restated our consolidated financial statements for all periods in the fiscal years ended January 31, 2010 and 2011 and the quarterly periods ended April 30, 2011 and July 31, 2011 after certain material errors were identified. In connection with this restatement, management identified the following material weaknesses in our internal controls: (1) we do not have the appropriate resources and controls to properly account for taxes and (2) we do not have adequate oversight and controls related to the accounting for complex equity arrangements, which resulted in accounting errors. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.”

 

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When we file our Annual Report on Form 10-K for the fiscal year ending January 31, 2014, we will be required to assess the effectiveness of our internal control over financial reporting as of the end of that fiscal year. This assessment must include disclosure of any material weakness in our internal control over financial reporting that is identified by management. Once we are no longer an emerging growth company, our independent registered public accounting firm will also be required to consider our internal controls over financial reporting and express an opinion as to their effectiveness. If our management or our independent registered public accounting firm identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to conclude that such internal control is effective. If we are unable to conclude that our internal control over financial reporting is effective because the material weaknesses identified above have not been remediated or for any other reason, or, when we are no longer an emerging growth company, if our independent registered public accounting firm is unable to express an opinion that our internal control over financial reporting is effective, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

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.

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 $12.00 per share, which is the 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 $9.18 per share. If the underwriters exercise their

 

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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 13,193,161 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.

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

 

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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. We have determined that as of April 30, 2012, we had not experienced an ownership change for purposes of Section 382. However, the closing of this offering, alone or together with transactions that may occur in the future, could 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.

 

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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.

 

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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 $43.0 million. The selling stockholders 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 937,750 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 6,250,000 shares in connection with this offering. Because all of the shares subject to this option will be sold by the selling stockholders, we will not receive any additional proceeds from the sale of those shares.

A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) the net proceeds to us from this offering by $3.9 million, 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 our outstanding term loans or in acquisitions of businesses, products and technologies that are complementary to our business. As of April 30, 2012, we had outstanding term loans in an aggregate principal amount of $8.5 million under a Loan and Security Agreement dated January 28, 2011, which were used to finance our working capital requirements. The term loans bear interest at a rate of 10.5% per annum. The term loans will mature on August 1, 2015 with respect to $5.0 million of the outstanding principal, and on October 1, 2016, with respect to the remaining $3.5 million of the outstanding principal. Under the terms of the Loan and Security Agreement, we are required to pay a prepayment penalty in the form of additional interest payments in the event that we prepay any of the outstanding term loans prior to the third anniversary of the funding of the term loans. Given this requirement, our management has not yet determined whether it is in our best interest to repay this indebtedness out of the proceeds of this offering. If we had repaid the entire amount of the term loans outstanding on April 30, 2012, the aggregate amount of this prepayment penalty would have been $340,000. 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. This offering is also intended to facilitate our future access to public markets and to provide a source of liquidity for our current investors by establishing a public market for our common stock, as well as by enabling the sale of our securities by our selling stockholders in this offering. For more information regarding our indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 8 to our consolidated financial statements included elsewhere in this prospectus. See also “Principal and Selling Stockholders.”

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

 

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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.

 

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CAPITALIZATION

The following table sets forth our cash, short-term and long-term debt and capitalization as of April 30, 2012:

 

   

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 8,529,366 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, 2012  
     Actual     Pro
Forma
    Pro Forma as
Adjusted
 
     (in thousands, except share and per
share data)
 

Cash

   $ 15,955      $ 15,955      $ 58,955   
  

 

 

   

 

 

   

 

 

 

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

     1,830        1,830        1,830   
  

 

 

   

 

 

   

 

 

 

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

     7,540        7,540        7,540   
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.001 par value; series A to I, 77,835,000 shares authorized; shares issued and outstanding: 55,441,239 actual; none pro forma or pro forma as adjusted

     32,685        —          —     
  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity:

      

Common stock, $0.001 par value: 92,165,000 shares authorized; shares issued: 529,630 actual; 9,058,996 pro forma; 13,225,659
pro forma as adjusted

     1        9        13   

Additional paid-in capital

     14,445        47,122        90,118   

Accumulated deficit

     (49,576     (49,576     (49,576

Treasury stock (32,498 common shares, at cost)

     0        0        0   

Accumulated other comprehensive income

     (24     (24     (24
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (35,154     (2,469     40,531   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 6,901      $ 6,901      $ 49,901   
  

 

 

   

 

 

   

 

 

 

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

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, 2012, giving effect to the 1-for-6.5 reverse stock split with respect to our common stock effected on June 8, 2012 and exclude, as of April 30, 2012:

 

   

2,249,078 shares issuable upon exercise of outstanding stock options, which have a weighted average exercise price of $4.29 per share;

 

   

592,375 additional shares reserved for future issuance under our stock-based compensation plans; and

 

   

183,076 shares issuable upon exercise of outstanding warrants, which have a weighted average exercise price of $6.11 per share.

 

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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 pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering. Our net tangible book value on April 30, 2012 was a deficit of approximately $(5.9) million, or $(0.65) per share. “Net tangible book value” is equal to the sum of our total assets at April 30, 2012, minus the sum of our liabilities and intangible assets at April 30, 2012. “Pro forma net tangible book value per share” is 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 net tangible book value on April 30, 2012 would have been $37.1 million, or $2.82 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 per share of $3.47 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

     $ 12.00   

Pro forma net tangible book value per share as of April 30, 2012

   $ (0.65  

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

   $ 3.47     
  

 

 

   

Pro forma as adjusted net tangible book value per share as of April 30, 2012, after giving effect to the offering

     $ 2.82   
    

 

 

 

Dilution per share to new investors in the offering

     $ 9.18   
    

 

 

 

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 $12.00 per share.

 

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

Existing stockholders

     9,026,494         68.4   $ 35,069,753         41.2   $ 3.89   

New investors

     4,166,667         31.6   $ 50,000,000         58.8   $ 12.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     13,193,161         100.0   $ 85,069,753         100.0   $ 6.45   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The preceding tables are based on our shares outstanding at April 30, 2012 and assume no exercise of any outstanding stock options or warrants after that date. At April 30, 2012 there were outstanding options and warrants to purchase an aggregate of 2,432,154 shares of our common stock at a weighted average exercise price of $4.43 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, 2012 had been exercised as of that date:

 

   

our pro forma net tangible book value per share, giving effect to those transactions, would have been $0.43, and the dilution per share to new investors in the offering would have been $8.93 per share;

 

   

the average price per share paid by all existing stockholders for their shares, giving effect to those transactions, would have been $4.00, and existing stockholders would have owned 73.3% of our outstanding shares and would have paid 47.8% of the total consideration paid for all our outstanding shares.

 

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Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 6,943,161 shares or 52.6% 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 6,005,661, or 45.5% 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 54.5% of the total number of shares of our common stock outstanding after this offering.

 

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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, 2010, 2011 and 2012 and our selected consolidated balance sheet data as of January 31, 2011 and 2012 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, 2008 and 2009 and our selected consolidated balance sheet data as of January 31, 2008, 2009 and 2010 are derived from our audited consolidated financial statements which have not been included in this prospectus. Our selected consolidated financial data as of April 30, 2012 and for the three months ended April 30, 2011 and 2012 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 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, 2012 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, 2012 gives effect to (1) the pro forma adjustment above and (2) our receipt of estimated net proceeds of $43.0 million from this offering, based on an assumed initial public offering price of $12.00 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, 2012. 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,
 
    2008     2009     2010
Restated (1)
    2011
Restated (1)
    2012      2011
Restated (1)
    2012  
    (in thousands, except share and per share data)        

Consolidated Statement of Operations Data:

             

License revenue

  $ 24,056      $ 28,226      $ 26,837      $ 30,584      $ 38,724      $ 9,176      $ 9,985   

Project revenue

    3,950        5,897        8,781        7,323        7,176        1,044        1,281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    28,006        34,123        35,618        37,907        45,900        10,220        11,266   

Operating expenses: (2)

             

Cost of revenues

    8,408        11,453        9,956        9,896        12,075        2,810        3,223   

Sales and marketing

    7,194        6,952        5,304        6,110        6,233        1,274        1,600   

Research and development

    11,711        15,025        12,595        12,777        14,449        3,202        4,140   

General and administrative

    5,813        9,358        6,829        6,291        8,124        1,638        2,030   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    33,126        42,788        34,684        35,074        40,881        8,924        10,993   

(Loss) income from operations

    (5,120     (8,665     934        2,833        5,019        1,296        273   

Other expense, net:

             

Foreign exchange (loss) gain

    (560     549        (766     (198     (106     (464     0   

Interest expense, net

    (1,430     (1,218     (672     (1,411     (1,284     (270     (412

Other income (expense), net

    15        (71     12        10        (213     66        66   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (1,975     (740     (1,426     (1,599     (1,603     (668     (346

(Loss) income before provision for income taxes

    (7,095     (9,405     (492     1,234        3,416        628        (73

Provision (benefit) for income taxes

    419        441        521        839        (11,040     390        (84
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (7,514   $ (9,846   $ (1,013   $ 395      $ 14,456      $ 238      $ 11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per common share:

             

Basic

  $ (23.24   $ (21.85   $ (2.06   $ 0.80      $ 29.28      $ 0.48      $ 0.02   

Diluted

  $ (23.24   $ (21.85   $ (2.06   $ 0.04      $ 1.40      $ 0.02      $ 0.00   

Weighted average number of common shares outstanding:

             

Basic

    323,353        450,522        490,999        491,623        493,763        492,301        497,124   

Diluted

    323,353        450,522        490,999        10,154,136        10,324,811        10,188,417        10,455,405   

Pro forma net income per share:

             

Basic

          $ 1.61        $ 0.00   

Diluted

          $ 1.40        $ 0.00   

Pro forma weighted-average number of common shares used in computing pro forma net income per share:

             

Basic

            8,996,836          9,019,041   

Diluted

            10,324,811          10,455,405   

 

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(1) Our consolidated financial statements for fiscal years 2010 and 2011 and for the first three months of fiscal year 2012 have been restated. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.
(2) Includes non-cash, share-based compensation expense as follows:

 

     Year Ended January 31,      Three Months Ended
April 30,
 
      2008      2009      2010
Restated
     2011
Restated
     2012      2011
Restated
     2012  
     (in thousands)         

Cost of revenues

   $ 6       $ 33       $ 39       $ 45       $ 79       $ 9       $ 27   

Sales and marketing

     45         87         61         63         119         2         46   

Research and development

     55         111         105         133         227         13         81   

General and administrative

     7         60         1,200         40         211         9         87   
      Year Ended January 31,     Three Months Ended
April 30,
 
      2008     2009     2010     2011     2012     2011      2012  
     (In thousands, except percentages)         

Operating Data:

               

Adjusted EBITDA (1)

   $ (2,964   $ (5,521   $ 5,042      $ 4,676      $ 7,060      $ 1,652       $ 974   

License Revenue Renewal Rate (2)

     97     87     80     91     97     —           —     

License Revenue Renewal Rate with Capacity Expansion (3)

     140     116     95     113     123     —           —     

 

(1) To supplement our consolidated financial statements, which are presented in accordance with accounting principles generally accepted 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, or an alternative for, other measures that are in accordance with GAAP. 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.”

 

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     Year Ended January 31,     Three Months Ended
April 30,
 
     2008     2009     2010
Restated
    2011
Restated
    2012     2011
     Restated    
        2012      
    (in thousands)              

Net (loss) income

  $ (7,514   $ (9,846   $ (1,013   $ 395      $ 14,456      $ 238      $ 11   

Depreciation and amortization

    2,043        2,853        2,702        1,562        1,405        323        460   

Interest expense, net

    1,430        1,218        672        1,411        1,284        270        412   

Other (income) expense

    (15     71        (12     (10     213        (66     (66

Foreign exchange loss (gain)

    560        (549     766        198        106        464        0   

Provision for income tax

    419        441        521        839        (11,040     390        (84
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    (3,077     (5,812     3,636        4,395        6,424        1,619        733   

Non-cash, share-based compensation expense

    113        291        1,406        281        636        33        241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (2,964   $ (5,521   $ 5,042      $ 4,676      $  7,060      $ 1,652      $ 974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) License Revenue Renewal Rate. License revenue renewal rate is an annual operational metric that we use to measure continuity in the usage of simulation capacity by our existing customer base. This measure of customer retention is important because our business model is based on recurring revenue. We compute our license revenue renewal rate for any fiscal year by identifying the customers from whom we derived license revenue in the prior fiscal year and dividing the dollar amount of license revenue that we receive in the current fiscal year from those customers by the dollar amount of license revenue we received from them in the prior fiscal year. We treat as a single customer entities that are under common ownership, and include as customers in both periods being compared any entities that purchased simulation licenses in both years but that appear as distinct customers in our records because they have undergone an ownership change, name change or change in their form of organization. In computing our license revenue renewal rate, we exclude current year license revenue attributable to new customers or to upgrades or expansions of capacity purchased by prior year customers in the current year. For a fuller explanation of our management’s use and computation of our license revenue renewal rate, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key financial terms and metrics—Key metrics that we use to evaluate our performance.”

 

(3) License Revenue Renewal Rate with Capacity Expansion. License revenue renewal rate with capacity expansion is an annual operational metric that measures growth in the usage of simulation capacity by our existing license customer base. We calculate this metric in the same manner that we calculate our license revenue renewal rate, except that we include in the current year license revenue included in the calculation revenue attributable to upgrades or expansions of capacity purchased by prior year customers. See Note 2 above and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key financial terms and metrics—Key metrics that we use to evaluate our performance.”

 

     As of January 31,     As of April 30, 2012  
     2008     2009     2010
Restated (1)
    2011
Restated (1)
    2012     Actual     Pro Forma     Pro Forma
As Adjusted
 
    (in thousands)              

Consolidated Balance Sheet Data:

               

Cash

  $ 6,265      $ 6,025      $ 2,402      $ 2,780      $ 11,468      $ 15,955      $ 15,955        58,995   

Total current assets

    31,845        23,417        20,983        26,914        32,212        21,823        21,823        64,823   

Total assets

    37,148        30,246        25,164        29,935        54,740        44,444        44,444        87,444   

Long-term debt and capital leases, net of current portion

    11,542        971        169        4,650        4,505        7,540        7,540        7,540   

Convertible preferred
stock

    18,994        33,024        32,703        32,663        32,678        32,685        —          —     

Stockholders’ (deficit)
equity

    (43,045     (51,567     (51,174     (50,438     (35,434     (35,154     (2,469     40,531   

 

  (1) Our consolidated financial statements for fiscal years 2010 and 2011 and for the first three months of fiscal year 2012 have been restated. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.

 

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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, Korea and China, through a distributor in 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 18 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

 

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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 years 2011 and 2012, 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 fiscal year 2012, our license revenue increased by 27% and our Adjusted EBITDA increased by 51% compared with fiscal year 2011.

 

   

For the first three months of fiscal year 2013, our total revenues, net income and Adjusted EBITDA were $11.3 million, $11 thousand and $974 thousand, respectively. Our revenues for the quarter increased by 10.2% compared with the corresponding period in fiscal year 2012. Our total operating expenses increased in the first quarter of fiscal year 2013 compared with the corresponding period in the preceding fiscal year, as we continued to invest in expansion of our operations to support our expected future growth, which adversely affected our net income and Adjusted EBITDA for the quarter.

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.

Factors Affecting Our Performance

The following is a discussion of factors that we believe could have a significant impact on our financial condition and results of operations. This discussion is not intended to be a complete list of trends and uncertainties that could affect our business in the long or short term. This discussion should be considered along with the entirety of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and with the factors identified in “Risk Factors” elsewhere in this prospectus.

Customer Process Change. Manufacturers in the ground transportation industry have well-established design and engineering processes based on test methods using physical prototypes. These incumbent methods are a significant barrier to overcome as we seek to deepen deployment of our solutions in our customers. Our customers’ vehicle development processes are complex, often spanning years and involving the participation of up to thousands of people. Despite significant limitations and costs of the current physical prototype-based processes, changing these processes takes time. The process change also involves reallocation of financial budgets from physical prototypes and test facilities to computer hardware and simulation software; these are typically contained in separate departmental budgets within our customers. The process change timescale is unique to each customer and is difficult to predict. However, it is not an all-or-nothing step change for our customers; all of our customers utilize a hybrid approach to using simulation and physical test methods and change their processes over time. We rely upon our technology, core competencies and operating strategy, including our deep, focused customer engagement and domain expertise to help overcome this barrier to change. Specifically, we believe the accuracy, cost effectiveness, and application breadth of our solutions are all critical in motivating our customers to change their existing processes. Additionally, we engage in projects with our customers in order to demonstrate the value of our solutions and the financial return customers can achieve by investing in process change. However, we cannot change our customers’ engineering processes, only our customers can do this. This is our single largest challenge to achieving our growth and profitability plans.

 

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Green Movement and Government Regulation. Over the last 20 years, our customers have experienced growing pressure from consumers and government regulators for increased fuel efficiency, cleaner emissions, and lower noise. We have benefited from these increased consumer and regulatory pressures on our customers, as increased government regulations often spur our customers to seek new engineering alternatives. Our customers’ motivation to invest in process change is greater when we can demonstrate that simulation technology will help them to meet these consumer demands and government regulations. We expect this significant trend to continue and believe that it will continue to aid our growth and increase profitability. Any government regulatory relief or rollback, for example in reaction to the current slow economic environment, would likely reduce our customers’ process change and adoption rate, slow our growth, and decrease our profitability, as we would need to continue to invest in our technology and sales efforts but at lower revenue levels.

Competitive and Cost Pressures in Our Customer Base. The ground transportation market in which our customers compete is intensely competitive, and we believe this trend will only increase given new entrants based in China and India. This competition amongst our customers creates challenges for us as it spurs relentless pressure on suppliers for better price and performance. However, we also benefit from this competitive pressure as we believe that our solutions enable our customers to deliver to market better and more innovative products at lower cost. Our ability to continue to demonstrate this value proposition to our customers is critical to our continued growth.

Customer Concentration and Cost of Developing and Penetrating Customers. As a result of the concentrated nature of the ground transportation industry, we currently have a highly concentrated customer base. We believe that our current customers remain under-penetrated and therefore still offer significant potential for revenue growth, and as a result this customer concentration will persist even though we are also focused on adding new customers. As we deepen our customer penetration, our profitability from existing customers should improve and our operating margins should increase. However, we are adding sales and field engineering resources in order to develop new customers in the ground transportation industry. Since penetrating new customers can be a gradual and expensive process, we do not expect any significant improvements in our overall sales and marketing expense as a percentage of revenue over the medium-term. This investment, while contributing to top line growth, may limit the increase in our profitability.

Customer Retention. Historically, we have lost very few customers once they have deployed our technology and solutions, particularly after they have changed their engineering processes to rely on our simulation capability to make design decisions. Our license revenue renewal rate, which we consider an important indicator of customer retention, was 80% in fiscal year 2010, 91% in fiscal year 2011 and 97% in fiscal year 2012. Our high customer retention has been driven by the high cost of our customer’s process change and the strength of our technology and value proposition. A reduction in our customer retention rate could significantly harm our growth and profitability. We seek to mitigate this risk through continued investment in our technology and solutions, our deep customer engagement model and pricing and value efficiencies our customers can achieve through deep deployment of our technology.

Challenges Associated with Penetrating New Geographic Markets. We have established sales and field engineering teams in all our major markets, which comprise the developed countries (US, EU, Japan, and Korea). However, we only have an initial presence in the rapidly developing markets of China, India, and Brazil. Since the ground transportation market is truly global, we need to make further investments in these markets in order to generate and sustain the deep customer relationships our business model requires. Our plan is to approach these markets incrementally so that after small initial investments they will generate self-funded growth. This approach has worked successfully for us in other international markets, but we have limited experience in these newly developing markets and they may present unforeseen and more costly challenges which could increase our sales and marketing expense in these regions.

Competition from Other Simulation Companies. We face significant competition from larger, longer established simulation competitors. These competitors have broader application capabilities and more significant sales resources than we do. We believe the strength of our technology and solutions combined with our deep domain expertise, as exemplified by our application management teams, will enable us to counter these competitive threats, and we will continue to invest in these capabilities. However, this competition will affect how we price our products and will present ongoing sales and account management challenges. These pressures may reduce our growth rate and increase our sales expenses.

 

 

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Challenges Associated with Penetrating New Vertical Markets. We intend to expand into other vertical markets in industries beyond ground transportation. Over the past five years, we have been investing in the research, product and applications development work to develop new capabilities that will enable us to provide solutions to new vertical markets. However, the level of new investment required, whether in new physics or software capabilities or increased sales and marketing resources, to penetrate these new markets is unknown. Our experience in the ground transportation industry leads us to believe that expansion into other vertical markets will be a lengthy, gradual process. Therefore, we do not expect significant revenue from these new vertical markets in the near term. Our ability to properly balance the funding of this growth strategy with our other initiatives will be an important determinant of our near term profitability and longer term growth.

Key financial terms and metrics

Sources of revenue

License Revenue. 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. In addition, we also license, for a fixed term and a fixed annual fee based on the number of concurrent users, software that interfaces with our simulation server software to facilitate the preparation and analysis of simulations performed with PowerFLOW. In general, the term of these licenses coincides with the term of the PowerFLOW simulation license. 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 carry over 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. These projects may be entered into with new customers, to introduce them for the first time to our solutions, or with existing customers, to introduce them to new applications they have not previously utilized, or to enable a new department or engineering group within an existing customer to utilize our solutions for the first time. Generally, but not always, new customers who begin utilizing our solutions through project-based services eventually purchase licenses. However, some customers may remain in project-based mode for an extended period. Our project-based services have standalone value to our customers and do not include a separate software licensing arrangement or commitment. The performance of a project may extend over multiple quarters or even fiscal years. Pricing of these projects is based primarily on the simulation capacity expected to be 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. The largest component of these costs is the personnel cost associated with our field engineering teams. Because our customer engagement model is designed to develop expanding, long-term relationships with our customers, we do not maintain separate organizations to support customers who purchase our simulations services on a licensed basis and those who purchase project-based services, but rather maintain customer-focused teams that are responsible for the long-term account plan of the customer. We do not have administrative or time keeping systems to separately track these activities by revenue category, and therefore do not currently account separately for our cost of revenues attributable to our license revenue and project revenue. Cost of revenues also includes the costs associated with the computer hardware necessary to provide the simulation capacity used by our license and 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

 

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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, 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.

 

 

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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,
 
      2010
     Restated (1)    
    2011
    Restated (1)    
    2012     2011
     Restated (1)    
        2012      
     (in thousands)              

Net (loss) income

   $ (1,013   $ 395      $ 14,456      $ 238      $ 11   

Depreciation and amortization

     2,702        1,562        1,405        323        460   

Interest expense, net

     672        1,411        1,284        270        412   

Other expense (income)

     (12     (10     213        (66     (66

Foreign exchange (gain) loss

     766        198        106        464        (0

Provision for income tax

     521        839        (11,040     390        (84
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     3,636        4,395        6,424        1,619        733   

Non-cash, share-based compensation expense

     1,406        281        636        33        241   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 5,042      $  4,676      $  7,060      $ 1,652      $ 974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Our consolidated financial statements for fiscal years 2010 and 2011 and for the first three months of fiscal year 2012 have been restated. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.

License Revenue Renewal Rate. License revenue renewal rate is an annual operational metric that we use to measure continuity in the usage of simulation capacity by our existing customer base. We consider this to be a measure of customer retention that is important because our business model is based on recurring revenue from existing customers.

We compute our license revenue renewal rate for any fiscal year by identifying the customers from whom we derived license revenue in the prior fiscal year, which we refer to for purposes of this computation as prior year customers, and dividing the dollar amount of license revenue that we receive in the current fiscal year from those prior year customers by the dollar amount of license revenue we received from them in the prior fiscal year. The amount of our license revenue is determined in a manner consistent with that used in our consolidated financial statements.

In this calculation, we treat as a single customer entities that are under common ownership, such as the Peterbilt and Kenworth divisions of PACCAR Inc. For consistency, we also include as customers in both periods being compared any entities that purchased simulation licenses in both years but that appear as distinct customers in our records because they have undergone an ownership change, name change or change in their form of organization, such as the Jaguar-Land Rover division of Ford Motor Company, which used simulation capacity in fiscal year 2009 under licenses purchased when it was part of Ford, and continued to do so in fiscal year 2010, after being spun off by Ford and acquired by Tata Motors Limited.

Our license revenue renewal rate was 80% in fiscal year 2010, 91% in fiscal year 2011 and 97% in fiscal year 2012, and has averaged 90% over the five years ended January 31, 2012. We expect to maintain a license revenue renewal rate in the range of 85% to 100%. However, our license revenue renewal rates can fluctuate for a variety of reasons. For example, a significant customer may experience a surge of development activity that requires a peak need for simulation capacity that neither we nor the customer expects to be repeated in the succeeding year.

 

 

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In computing our license revenue renewal rate, we exclude current year license revenue that is attributable to new customers or to upgrades or expansions of capacity purchased by prior year customers in the current year. Because upgrades, expansions and new customers are excluded, the maximum theoretical license revenue renewal percentage for an existing license customer (assuming no change in currency exchange rates) is 100%, which would indicate that the customer purchased new licenses at the same or a higher capacity level in the current year. If upgrades and expanded capacity purchased by prior year customers are included, our renewal rate is typically in excess of 100%.

License Revenue Renewal Rate with Capacity Expansion. License revenue renewal rate with capacity expansion is an annual operational metric that measures growth in the usage of simulation capacity by our existing license customer base. Our management considers this to be an important indicator of deepening deployment of our solutions in our existing license customer base.

We calculate our license revenue renewal rate with capacity expansion in the same manner that we calculate our license revenue renewal rate, as described above, except that we include in the current year license revenue included in the calculation revenue attributable to upgrades or expansions of capacity purchased by prior year customers.

Our license revenue renewal rate with capacity expansion was 95% in fiscal year 2010, 113% in fiscal year 2011 and 123% in fiscal year 2012, and has averaged 117% over the five years ended January 31, 2012. Although it may fluctuate for a variety of reasons, we expect our annual license revenue renewal rate with capacity expansion to remain over 100%.

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” or capacity-based licenses that have a defined term, and from project fees for technical consulting services and training. Licenses for our software products may be 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 recognize revenues from licensing our software products in accordance with ASC 985-605, Software Revenue Recognition and, in the case of licenses provided in the form of software-as-a-service, ASC 605, Revenue Recognition. Term licenses typically have a term of one year. Capacity-based licenses allow the customer to buy simulation capacity either as a service hosted by us or in the form of a limited amount of simulation capacity on customer installed software and are sold based upon simulation capacity expected to be used within a certain time period—typically not exceeding one year. Licenses have finite terms that are not extendible at their expiration, and capacity usage is limited by contract to the amount specified. Our practice is not to modify existing capacity-based licenses to allow simulation capacity to be added to an existing arrangement. A customer desiring to purchase additional simulation capacity or to license additional users of our preparation and analysis software during the term of the original simulation license must do so by entering into a separate arrangement. Revenue from these new arrangements is recognized over the term of the new agreements, which include bundled maintenance and support, and are for a term of less than twelve months, coterminous with the remaining term of the original simulation license.

 

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We typically sell term and capacity-based software licenses combined in a bundled sale. For instance, when customers purchase simulation capacity, they typically also purchase a number of term-based licenses for preparation and analysis software. All of our software licenses include multiple elements such as support and maintenance. Pursuant to the guidance within ASC 985-605, we have determined that since we do not have vendor-specific objective evidence of the fair value of the individual elements contained in a bundled sale of term and capacity-based software licenses, the arrangement is treated as a single unit of accounting and revenue is recognized ratably on a daily basis over the term of the license agreement, which coincides with the duration of the maintenance and support services. Our arrangements typically do not include rights to carryover any unused capacity beyond the contractual license term or any customer right of return.

We have occasionally licensed our PowerTHERM application, which has functionality that can be utilized independently from PowerFLOW, on a standalone basis, under a term license in a bundled arrangement including support and maintenance. Revenue from these arrangements is recognized over the term of the license agreement.

We commence recognition of subscription license revenue when persuasive evidence of an arrangement exists; delivery of the software or license keys has occurred and all service elements, if bundled or linked, have commenced; payment is fixed or determinable; and collection of the resulting receivable is considered probable by management. Payments received from customers in advance of revenue recognition are treated as deferred revenue.

When we host the licensed software as part of our PowerFLOW OnDemand software-as-a-service offering, which includes support and maintenance and hosting services, we recognize revenue from the arrangement ratably over the combined service period.

If training or technical consulting services projects are bundled with a software license sale or, as a result of specific facts and circumstances, are 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 provided that delivery of all elements of the arrangement have commenced.

We also derive revenue from fees for separate, project-based services. Pricing of these projects is generally either fixed fee or time and material based. We recognize revenue from these service arrangements in accordance with ASC 605. 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 not implemented time reporting and project accounting administration systems adequate to enable us to reliably measure proportionate performance. Accordingly, we have recognized the majority of revenue from project arrangements upon completion of the contracted services. Our plan is to evaluate the costs and benefits of a project time tracking and accounting system that would support the recognition of revenue from project-based services under the proportionate performance method.

Revenue is presented net of any value-added or sales taxes collected from customers.

Income Taxes

We are subject to income taxes in both the United States 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. The realizability of the deferred tax assets is evaluated quarterly. We review all available evidence to evaluate the recoverability of our United States federal and state and foreign deferred tax assets, including net operating losses and research and development tax credits. Our analysis includes 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, due to the uncertainty related to the ultimate use of our deferred income tax assets, we maintained a full valuation allowance against our United States federal and state and

 

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foreign deferred tax assets. As of January 31, 2011, due to the uncertainty related to the ultimate use of our deferred income tax assets as a result of our history of losses in the current year and our cumulative loss before tax for the three years ended January 31, 2011, we maintained a full valuation allowance against our United States deferred tax assets. As of January 31, 2011, we determined that it was more likely than not that we would be able to realize our foreign deferred tax assets, primarily as a result of our profitability in the foreign jurisdictions in which we operated in the current year and cumulatively for the three years in the period ended January 31, 2011, and our expectation of future earnings in those jurisdictions for the next fiscal year. Accordingly, we reversed $1.2 million of our valuation allowance. At January 31, 2012 we determined that it was more likely than not that we would be able to realize our United States deferred tax assets, primarily as a result of our achievement during the fourth quarter of fiscal year 2012 of cumulative profitability for the three years ended January 31, 2012 and our forecasted profit before tax in fiscal year 2013. Accordingly, we reversed $12.8 million of our valuation allowance. As of January 31, 2012, we no longer maintain any valuation allowance.

Our current intention is to reinvest the total amount of our unremitted foreign earnings in the local international jurisdiction or to repatriate the earnings only when tax-effective. As a result, we have not provided for United States taxes on the unremitted earnings of our international subsidiaries of $2.0 million.

As of February 1, 2011, we had gross unrecognized tax benefits of $1.9 million. Of this amount, $1.9 million (net of the federal benefit on state tax issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect our effective income tax rate in future periods. Also as of February 1, 2011, we had accrued $8 thousand of interest expense related to these unrecognized tax benefits. When appropriate, we will recognize interest accrued and penalties, if incurred, related to unrecognized tax benefits as a component of income tax expense. Unrecognized tax benefits increased during the twelve months ended January 31, 2012 by $656 thousand. We do not expect that the unrecognized tax benefit will change significantly within the next twelve months. We or one or more of our subsidiaries file income tax returns in the United States federal jurisdiction and various states and international jurisdictions. With limited exceptions, we are no longer subject to United States federal, state or foreign examinations for years prior to January 31, 2007, however, carryforward attributes that were generated prior to January 31, 2007 may still be adjusted upon examination by United States federal, state or foreign tax authorities if they either have been or will be used in a future period.

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, after giving effect to the 1-for-6.5 reverse stock split effected on June 8, 2012, each outstanding option to purchase a share of Series G preferred stock will entitle the holder to purchase two-thirteenths of a share 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 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 turnover rate and used these rates in developing a future forfeiture rate. If our actual forfeiture rate varies from our 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.

 

 

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Information pertaining to the Black-Scholes valuation of common stock options granted during fiscal years 2011 and 2012 is as follows:

 

     Year Ended January 31,   
           2011                 2012        

Options granted

     49,518        576,152   

Weighted-average exercise price

   $ 6.50      $ 11.31   

Weighted-average grant date fair value of common stock options

   $ 3.71      $ 6.37   

Assumptions:

    

Expected volatility

     57.5     56.7

Expected term (in years)

     6.25        6.48   

Risk-free interest rate

     2.84     2.11

Expected dividend yield

     0.0     0.0

On March 6, 2012, our board granted to certain non-executive employees options to purchase an aggregate of 3,303 shares of common stock at an exercise price of $11.38 per share. These awards were not communicated to employees until May 2012 and therefore will be treated for accounting purposes as having been granted in the second quarter of fiscal year 2013.

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.

Significant Factors Used in Determining the Fair Value of Our 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. Prior to January 31, 2011, the board did not conduct any formal valuation procedure or

 

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commission any third party valuation or appraisal in connection with its determinations of the fair value of our common stock. The board considered the most persuasive evidence of fair value to be the prices at which our securities were sold in actual arms’ length transactions. The board of directors also considered numerous other 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 United States and global capital market conditions, an analysis of publicly traded peer companies, 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 over the rights of the common stock, the status of strategic initiatives being undertaken by management and the board of directors and, after January 31, 2011, independent third party valuations of our common stock. All options have been granted at exercise prices not less than the fair value of the underlying shares on the date of grant.

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.

During fiscal years 2011 and 2012 and the three months ended April 30, 2012, we granted options to purchase shares of our common stock as follows:

Equity-based compensation awards since February 1, 2010

 

Date of grant        

Aggregate number of

shares subject to award

        Award recipients        Exercise price        Fair value of
common stock

March 11, 2010

       30,302 shares of common stock       

9 non-executive

employees

      $6.50       $6.50

June 3, 2010

       5,380 shares of common stock       

7 non-executive

employees

      $6.50       $6.50

September 20, 2010

       11,530 shares of common stock       

19 non-executive

employees

      $6.50       $6.50

December 3, 2010

       2,306 shares of common stock       

4 non-executive

employees

      $6.50       $6.50

February 24, 2011

       4,228 shares of common stock       

5 non-executive

employees

      $6.50       $6.50

March 21, 2011

       1,922 shares of common stock       

3 non-executive

employees

      $6.50       $6.50

July 19, 2011

       493,044 shares of common stock       

4 non-employee directors,

5 executive officers and

47 non-executive

employees

      $11.38       $11.38

August 1, 2011

       30,596 shares of common stock       

43 non-executive

employees

      $11.38       $11.38

September 8, 2011

       15,605 shares of common stock       

24 non-executive

employees

      $11.38       $11.38

December 7, 2011

       30,757 shares of common stock       

21 non-executive

employees

      $11.38       $11.38

March 6, 2012

       3,303 shares of common stock       

8 non-executive

employees

      $11.38       $11.38

 

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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 for $1.48 per share. Giving effect to the 1-for-6.5 reverse stock split and assuming the conversion to common stock of our Series I preferred stock, this was the equivalent of 523 thousand shares of common stock at $9.62 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 approximately 677 thousand additional shares of Series I preferred stock at a price of $1.48 per share (equivalent to 104 thousand shares of common stock at $9.62 per share) and approximately 150 thousand shares of common stock at $6.50 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. Accordingly, the board discussed and considered that the valuation might be lower than $6.50 per share due to the global credit and economic crisis, its impact on Exa and its customers, and the uncertainty the crisis had caused in global financial and stock markets. However, the board decided that it was not desirable to adjust the valuation based on short-term market dynamics that made assessments of the valuation of our common stock more uncertain and instead chose to give more weight to the most recent actual transactions in our stock. Further corroboration that the fair value of the common stock was no greater than $6.50 per share was provided by the fact that in March 2010 one of our executive officers agreed to sell to us 40 thousand shares of Series G preferred stock, a security senior in liquidation to the common stock but convertible into common stock, at a price of $1.00 per share (equivalent to six thousand shares of common stock at $6.50 per share). The board decided that there was no compelling basis on which to determine that the fair value of our common stock had increased or decreased from the $6.50 per share reflected in the April 2008 Series I and debt conversion transactions and the March 2010 share repurchase, and that $6.50 per share represented the best estimate of fair value.

Awards during the three months ended July 31, 2010

At the meeting in June 2010 at which our board awarded options for 5,380 shares of common stock at an exercise price of $6.50 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 again discussed and considered that the valuation might be lower than $6.50 per share due to these developments, as well as the global credit and economic crisis, its impact on Exa and its customers, and the uncertainty the crisis had caused in global financial and stock markets. Consistent with its analysis in the March meeting, the board decided that it was not desirable to adjust the valuation based on short-term market dynamics that made assessments of the valuation of our common stock more uncertain and instead chose to give more weight to the most recent actual transactions in our stock. Therefore, the board decided not to reduce the exercise price of the options granted at that time and determined that $6.50 per share represented the best estimate of the fair value of our common stock.

Awards during the three months ended October 31, 2010

In third quarter of fiscal year 2011, growth was resuming in our 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 $6.50 per share.

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

 

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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 (equivalent to 185 thousand shares of common stock at $6.11 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 $6.50 per share as the Series G preferred stock is senior in liquidation to the common stock but convertible into common stock and given that the lead lender in this transaction, which 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 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. The board considered the most persuasive evidence of fair value to be the prices at which our securities were sold in actual arms’ length transactions. 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 $3.12 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.

Awards during the three months ended July 31, 2011

In anticipation of our award of stock options prior to our initial public offering, the board commissioned a second valuation study by the unrelated valuation firm. On July 4, 2011, the firm provided an opinion concluding that the fair value of our common stock as of June 15, 2011 was $7.67 per share.

On July 19, 2011, our board granted to our non-employee directors, executive officers and other employees options to purchase an aggregate of 493,044 shares of our common stock, at an exercise price of $11.38 per share. In determining that $11.38 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 opinion.

In addition, in concluding that the fair value of our common stock exceeded the $7.67 per share third party valuation, the board considered other factors that had contributed to an increase in fair value of our common stock from January 31, 2011 to the June 15, 2011 valuation and then to the July 19, 2011 valuation, including:

 

   

significantly higher revenue and revenue growth rate in the first quarter of fiscal year 2012 and forecasted for fiscal year 2012;

 

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significantly improved profitability in the first quarter of fiscal year 2012 and forecasted for fiscal year 2012;

 

   

increased weighting in the valuation process of the possibility of a public offering as opposed to a liquidation or sale of our company in which the preponderance of value realized would be allocated to satisfy the accumulated liquidation preferences of the preferred stock; and

 

   

improved stock market valuations in general and for our publicly traded peer companies.

On July 19, 2011, our board also authorized the grant of options to purchase up to 30,769 shares of our common stock to certain non-executive employees to be designated by our chief executive officer. The board concluded that these options should also be granted at $11.38 per share, provided that the chief executive officer finalized the list of recipients and issued the options promptly following the resolution.

Awards during the three months ended October 31, 2011

On August 1, 2011, pursuant to our board’s July 19, 2011 authorization, our chief executive officer finalized the grant of options to purchase an aggregate of 30,596 shares of our common stock, at an exercise price of $11.38 per share, to 43 non-executive employees.

On September 8, 2011, our board granted to certain non-executive employees options to purchase an aggregate of 15,605 shares of our common stock, at an exercise price of $11.38 per share. On that date, the board reviewed the June 15, 2011 valuation by the unrelated valuation firm and the status of our preparations for our initial public offering, and re-assessed its July 19, 2011 valuation discussion. Based on this discussion, the board determined that there had been no change in the fair value of our common stock, which remained $11.38 per share.

Awards during the three months ended January 31, 2012

On December 7, 2011, our board granted to certain non-executive employees options to purchase an aggregate of 30,757 shares of our common stock at an exercise price of $11.38 per share. On that date, the board reviewed the June 15, 2011 valuation by the unrelated valuation firm and re-assessed its July 19, 2011 and September 8, 2011 valuation discussions. The board also took into consideration the status of our preparations for our initial public offering, which had effectively been placed on hold in November 2011. Based on this discussion the board determined that there had been no change in the fair value of our common stock, which remained at $11.38 per share.

Awards during the three months ended April 30, 2012

On March 6, 2012, our board granted to certain non-executive employees options to purchase an aggregate of 3,303 shares of our common stock at an exercise price of $11.38 per share. On that date, the board reviewed the June 15, 2011 valuation by the unrelated valuation firm and the status of our preparations for our initial public offering, and re-assessed its July 19, 2011, September 8, 2011 and December 7, 2011 valuation discussions. Based on this discussion the board determined that there had been no change in the fair value of our common stock, which remained at $11.38 per share. These awards were not communicated to employees until May 2012 and therefore will be treated for accounting purposes as having been granted in the second quarter of fiscal year 2013.

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, Korea and China. 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

 

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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 review of the operations of our Italian subsidiary indicated that our Italian subsidiary should change its functional currency to the local currency. As a result, beginning in fiscal 2012, our Italian subsidiary translates its assets and liabilities denominated in its functional currency at current rates of exchange in effect at the balance sheet date. During the first quarter of fiscal year 2013, we established our Chinese subsidiary. Our review of the operations of this subsidiary indicated that it should use the local currency as its functional currency. As a result, our Chinese subsidiary translates its assets and liabilities denominated in its 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. Because there are no observable inputs into the valuation of the equity participation right, at each reporting period, the equity participation right was valued based on our best estimate of inputs that market participants would use for pricing the liability at each measurement date, including assumptions about risk. We calculated the fair value of the equity participation right by applying the estimated probability of the right becoming exercisable to the instrument’s maximum intrinsic value of $1.8 million and discounting that value using a credit-adjusted interest rate of 5% to arrive at its present value.

At the inception of the equity participation right, we considered the probability of exercise to be remote and ascribed no value to the right. Based on our potential financing activities at the time, our assessment was that there was no expectation that the right would become exercisable prior to its original expiration date. In April 2010, the expiration of the equity participation right was extended until such time as an appropriate financing occurs or an initial public offering of our common stock, at which time the right expires. Due to this extension of the expiration date of the equity participation right, we determined that there was an approximately 33% chance that the equity participation right would become exercisable. Based upon that probability, we ascribed a fair value of $552,000 to the instrument, and recorded the full amount to other long-term liabilities and interest expense. As the equity instrument is deemed to be a derivative, it is marked to market at each reporting period.

As of January 31, 2012, we assessed the probability of the equity participation right becoming exercisable prior to an initial public offering of our common stock and after considering the status of our pending registration statement on Form S-1, determined that the probability of exercise had declined to approximately 16.5%, resulting in a $276,000 reduction in the fair value of the equity participation right. As of April 30, 2012, we re-assessed the probability of the equity right becoming exercisable prior to an initial public offering of our common stock, and concluded it was unchanged. Upon completion of the offering described in this prospectus, the equity participation right will expire and its fair value will decline to zero.

Valuation of Acquired Intangible Assets

Our intangible assets, which were acquired as part of a business combination, are valued based on estimates of future cash flows and amortized over their estimated useful lives. We evaluate intangible assets when events occur or circumstances change that may reduce the value of the asset below its carrying amount using forecasts of discounted future cash flows. Intangible assets totaled $0 and $3.5 million, respectively, at January 31, 2011 and January 31, 2012. Estimates of future cash flows require assumptions related to revenue and operating income growth, asset-related expenditures, working capital levels and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of impairment. Should the fair value of our finite-lived intangible assets decline because of reduced operating performance, market declines, or other indicators of impairment, or as a result of changes in the discount rate, charges for impairment may be necessary.

 

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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,
 
     2010
Restated (1)
    2011
Restated (1)
    2012     2011
Restated (1)
    2012  
     (in thousands)              

License revenue

   $ 26,837      $ 30,584      $ 38,724      $ 9,176      $ 9,985   

Project revenue

     8,781        7,323        7,176        1,044        1,281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     35,618        37,907        45,900        10,220        11,266   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Cost of revenues

     9,956        9,896        12,075        2,810        3,223   

Sales and marketing

     5,304        6,110        6,233        1,274        1,600   

Research and development

     12,595        12,777        14,449        3,202        4,140   

General and administrative

     6,829        6,291        8,124        1,638        2,030   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     34,684        35,074        40,881        8,924        10,993   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     934        2,833        5,019        1,296        273   

Other expense, net:

          

Foreign exchange loss

     (766     (198     (106     (464     (0

Interest expense, net

     (672     (1,411     (1,284     (270     (412

Other income (expense), net

     12        10        (213     66        66   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (1,426     (1,599     (1,603     (668     (346

(Loss) income before income taxes

     (492     1,234        3,416        628        (73

Provision (benefit) for income taxes

     521        839        (11,040     390        (84
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (1,013   $ 395      $ 14,456      $ 238      $ 11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      Year Ended January 31,     Three Months Ended
April 30,
 
     2010
Restated (1)
    2011
Restated (1)
        2012         2011
Restated (1)
    2012  

License revenue

     75.3     80.7     84.4     89.8     88.6

Project revenue

     24.7     19.3     15.6     10.2     11.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Cost of revenues

     28.0     26.1     26.3     27.5     28.6

Sales and marketing

     14.9     16.1     13.6     12.5     14.2

Research and development

     35.4     33.7     31.5     31.3     36.7

General and administrative

     19.2     16.6     17.7     16.0     18.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     97.5     92.5     89.1     87.3     97.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2.5     7.5     10.9     12.7     2.5

Other expense, net:

          

Foreign exchange loss

     (2.2 )%      (0.5 )%      (0.2 )%      (4.5 )%      (0.0 )% 

Interest expense, net

     (1.9 )%      (3.7 )%      (2.8 )%      (2.6 )%      (3.7 )% 

Other income (expense), net

     0.0     0.0     (0.5 )%      0.6     0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (4.1 )%      (4.2 )%      (3.5 )%      (6.5 )%      (3.1 )% 

(Loss) income before income taxes

     (1.4 )%      3.3     7.4     6.2     (0.6 )% 

Provision (benefit) for income taxes

     (1.5 )%      2.2     (24.1 )%      3.8     (0.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (2.9 )%      1.1     31.5     2.4     0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Our consolidated financial statements for fiscal years 2010 and 2011 and for the first three months of fiscal year 2012 have been restated. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.

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

 

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Three months ended April 30, 2012 compared to three months ended April 30, 2011

License revenue increased 8.8%, from $9.2 million for the three months ended April 30, 2011 to $10.0 million for the three months ended April 30, 2012. The increase was due to an increase in consumption of licensed simulation capacity by new and existing customers. Of this increase, $567 thousand was due to an increase in consumption of simulation capacity by our existing customers, and $242 thousand was attributable to new customers. Project revenue increased 22.7%, from $1.0 million for the three months ended April 30, 2011 to $1.3 million for the three months ended April 30, 2012, due to increased project activity.

Cost of revenues increased 14.7%, from $2.8 million for the three months ended April 30, 2011 to $3.2 million for the three months ended April 30, 2012, and cost of revenues also increased as a percentage of total revenue from 27.5% to 28.6%. Increases of $482 thousand in employee related costs due to increases in headcount in our application engineering organizations and $70 thousand in our data center costs due to increased utilization of our simulation services and increased project activity were partially offset by a decrease of $152 thousand in royalty costs. The decrease in royalty costs was the result of our acquisition from science + computing AG in November 2011 of certain intellectual property assets related to our PowerVIZ product on which we had previously paid royalities.

Sales and marketing expenses increased 25.5%, from $1.3 million, or 12.5% of total revenue, for the three months ended April 30, 2011 to $1.6 million, or 14.2% of total revenue, for the three months ended April 30, 2012. The increase in sales and marketing expenses was primarily due to increases of $168 thousand in employee-related costs, $74 thousand in travel expenses, $45 thousand in stock compensation, and $34 thousand in recruiting fees due to our efforts to increase the size of our sales force.

Research and development expenses increased 29.3%, from $3.2 million, or 31.3% of total revenue, for the three months ended April 30, 2011 to $4.1 million, or 36.7% of total revenue, for the three months ended April 30, 2012. The increase in research and development expenses was primarily due to increases of $455 thousand in salaries and wages, $102 thousand in bonuses, and $63 thousand in employee benefits due to increases in headcount, along with increases of $120 thousand in 401(k) matching contributions, $68 thousand in stock compensation expenses and $93 thousand in professional services expenses.

General and administrative expenses increased 23.9%, from $1.6 million, or 16.0% of total revenue, for the three months ended April 30, 2011 to $2.0 million, or 18.0% of total revenue, for the three months ended April 30, 2012. Contributing to the increase were increases of $241 thousand in employee related costs, $69 thousand in recruiting fees, $77 thousand in stock compensation expense, $93 thousand in legal fees, and $117 thousand in depreciation expense allocated to general and administrative expenses, which were partially offset by a decrease of $169 thousand in accounting and audit fees.

Total other expense, net decreased 48.2%, from $668 thousand for the three months ended April 30, 2011 to $346 thousand for the three months ended April 30, 2012. This decrease was primarily attributable to a $464 thousand decrease in our foreign exchange loss, which was partially offset by an increase of $142 thousand in net interest expense.

Our effective income tax rate, including discrete items, was 115.0% and 62.2% for the three months ended April 30, 2012 and 2011, respectively. Our effective income tax rate is based upon estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods and the resolution or identification of tax position uncertainties. For the three months ended April 30, 2012, our effective income tax rate was higher than the federal statutory tax rate mainly due to the impact of non-deductible expenses and state taxes offset by state credits. Additionally, the rate was increased discretely for a mark-to-market adjustment on our outstanding preferred stock warrants for which there is no tax provision. For the three months ended April 30, 2011, our effective income tax rate was higher than the federal statutory tax rate mainly due to the impact of non-deductible expenses and state taxes offset by a change in our valuation allowance related to tax credits and net operating losses for which no tax benefit is recognized. Additionally, the rate was increased discretely for the impact of foreign withholding taxes.

 

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Fiscal year ended January 31, 2012 compared to fiscal year ended January 31, 2011

License revenue increased 26.6%, from $30.6 million in fiscal year 2011 to $38.7 million in fiscal year 2012. Of this increase, $7.0 million was due to an increase in consumption of simulation capacity by our existing customers, and $1.0 million was attributable to new customers. Project revenue decreased 2.0% from $7.3 million in fiscal year 2011 to $7.2 million in fiscal year 2012.

Cost of revenues increased 22.0%, from $9.9 million in fiscal year 2011 to $12.1 million in fiscal year 2012, but slightly increased as a percentage of total revenue from 26.1% to 26.3% because revenue grew at a nearly comparable rate to the cost of revenues over the respective periods. Increases of $739 thousand in royalty costs due to increased sales of licenses for products on which we are required to pay royalties, $1.2 million in employee-related costs due to increases in headcount in our customer support and application engineering organizations and $155 thousand in the amount of occupancy costs allocated to cost of revenue were partially offset by a decrease of $125 thousand 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 fiscal year 2012.

Sales and marketing expenses increased 2.0%, from $6.1 million, or 16.1% of total revenue in fiscal year 2011 to $6.2 million, or 13.6% of total revenues in fiscal year 2012. Increases of $217 thousand in recruiting fees incurred in connection with our efforts to increase our sales force, $124 thousand in employee travel costs and $47 thousand in marketing related costs were partially offset by decreases of $145 thousand in consultant and contractor costs and $116 thousand in employee-related costs allocated to sales and marketing expenses.

Research and development expenses increased 13.1% from $12.8 million, or 33.7% of total revenue, in fiscal year 2011 to $14.4 million, or 31.5% of total revenue in fiscal year 2012. Increases of $1.0 million in salary and wage expense, $312 thousand in bonus expense, $96 thousand in employee travel costs, $63 thousand in research sponsorship programs, and $91 thousand in consultant and contractor costs were partially offset by a decrease of $165 thousand in data center costs and a decrease of $189 thousand in depreciation expense.

General and administrative expenses increased 29.1%, from $6.3 million, or 16.6% of total revenue, in fiscal year 2011 to $8.1 million, or 17.7% of total revenues, in fiscal year 2012. Contributing to the increase were increases of $386 thousand in employee related costs, $172 thousand in stock compensation, $784 thousand in accounting and audit fees allocated to general and administrative expenses, $157 thousand in depreciation expense and $130 thousand in internet service costs allocated to general and administrative expenses. These expenses were partially offset by decreases of $92 thousand in other general and administrative expenses and $194 thousand in consultant and contractor costs.

Total other (expense), net remained unchanged at $1.6 million for both fiscal years 2011 and 2012. An increase of $223 thousand in other income, was offset by a decrease of $92 thousand in our foreign exchange gains and an increase of $126 thousand in interest expense. The year-over-year increase in other income was due to $276 thousand of gain recorded in fiscal year 2012 due to the marking to market of the FMR LLC equity participation right.

Our provision for income taxes decreased $11.8 million from a provision of $839 thousand in fiscal year 2011 to a benefit of $11.0 million in fiscal year 2012, and our effective tax rate decreased from 67.98% to (323.23)%. The decrease in the tax provision relates primarily to the release of the valuation allowance on our United States deferred tax assets in the amount of $12.8 million, The release of the valuation allowance was based upon our cumulative history of earnings before taxes for financial reporting purposes over the three-year period ending on January 31, 2012 and our expectation that we will achieve profit before taxes in future periods. The impact of the release was offset by an increase in foreign income taxes of $452 thousand and United States deductions with no tax benefit of $217 thousand on a tax effected basis. The increase in foreign taxes was primarily due to a $147 thousand increase in Korean withholding taxes, a $116 thousand change in the foreign rate differential and a $177 thousand decrease in foreign tax deductions on a tax effected basis, offset by a $45 thousand decrease in the provision for uncertain tax positions. Because Korean withholding taxes constitute a substantial portion of our foreign taxes, changes to the amount of sales to our Korean customers in future periods will have a disproportionate impact on our foreign tax provision for those periods.

The benefit from income taxes of $11.0 million recorded in fiscal year 2012 had a significant favorable impact on our net income in fiscal year 2012 that we do not expect to recur in future periods. For purposes of comparison, our income before income taxes in fiscal year 2012 increased 276%, from $1.2 million in fiscal year 2011 to $3.4 million in fiscal year 2012.

 

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

License revenue increased 14%, from $26.8 million in fiscal year 2010 to $30.6 million in fiscal year 2011. Of this increase, $3.5 million was due to an increase in consumption of simulation capacity by our existing customers, and $0.3 million was attributable to new customers. Despite an overall increase in project activity, project revenue decreased 16.6% from $8.8 million in fiscal year 2010 to $7.3 million in fiscal year 2011. The 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 26.1%. A decrease of $495 thousand in depreciation expense, due to full depreciation of certain assets during fiscal 2011 and reduced capital expenditures in prior periods, and a decrease in data center costs of $191 thousand were substantially offset by increases of $319 thousand in employee-related costs and $101 thousand in travel expenses due to the relaxation of recession-related expense reduction measures and an increase of $208 thousand in royalty 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 16.1% of total revenues, in fiscal year 2011. The higher expenses were due primarily to an $814 thousand 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 33.7% of total revenues, in fiscal year 2011. An increase of $1.1 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 thousand in data center costs, $706 thousand in depreciation expense, $114 thousand in marketing costs allocated to research and development expenses and $106 thousand 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 thousand in fiscal year 2011 than in fiscal year 2010, due to completion of a government project.

General and administrative expenses decreased 7.9%, from $6.8 million, or 19.2% of total revenues, in fiscal year 2010 to $6.3 million, or 16.6% of total revenues, in fiscal year 2011. Increases of $347 thousand in consultant and contractor costs, $169 thousand in employee-related costs, and $591 thousand in professional fees, due primarily to professional services related to our exploration of our financing and strategic alternatives during fiscal year 2011, were offset by decreases of $1.2 million in stock compensation costs, and $126 thousand in occupancy costs and $118 thousand in bank related fees.

Other income (expense), net increased from net expense of $1.4 million in fiscal year 2010 to net expense of $1.6 million in fiscal year 2011. A $733 thousand increase in interest expense due to increased borrowing under our line of credit, including a non-cash interest charge of $552 thousand attributable to the equity participation right granted in connection with a bridge loan from a related party, was partially offset by a $568 thousand decrease in our foreign exchange losses.

Our provision for income taxes increased $318 thousand from $521 thousand in fiscal year 2010 to $839 thousand in fiscal year 2011, and our effective tax rate increased from (105.76)% to 67.98%. The increase in our effective tax rate was primarily due to a $192 thousand increase in foreign income taxes and the tax effect of United States operating losses with no tax benefits as compared to worldwide profits before tax. The increase in our foreign income and withholding taxes was primarily due to a $411 thousand increase in the provision for uncertain tax positions, a $55 thousand increase in Korean withholding taxes offset by a $36 thousand change in the foreign rate differential, a $19 thousand increase in foreign tax deductions and a $457 thousand decrease in our non-United States valuation allowance.

 

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Quarterly Results of Operations

The following tables set forth our unaudited operating results and Adjusted EBITDA for each of the nine quarters from the period beginning February 1, 2010 through the period ended April 30, 2012 and the percentage of revenues for each line item shown. The information is derived from our unaudited financial statements. In the opinion of management, our unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The financial information presented for the interim periods has been prepared in a manner consistent with our accounting policies described elsewhere in this prospectus and should be read in conjunction therewith. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full-year period or any future period.

 

     April 30,
2010

Restated  (1)
    July 31,
2010

Restated  (1)
    October31,
2010

Restated  (1)
    January 31,
2011

Restated  (1)
    April 30,
2011

Restated  (1)
    July 31,
2011

Restated  (1)
    October 31,
2011
    January 31,
2012
    April 30,
2012
 
    (Unaudited, in thousands)  

Consolidated Statement of Operations Data:

                 

License revenue

  $ 6,514      $ 6,974      $ 7,858      $ 9,238      $ 9,176      $ 9,552      $ 9,942      $ 10,054      $ 9,985   

Project revenue

    1,294        1,724        2,287        2,018        1,044        1,265        1,742        3,125        1,281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    7,808        8,698        10,145        11,256        10,220        10,817        11,684        13,179        11,266   

Operating expenses:

                 

Cost of revenues

    2,329        2,399        2,408        2,760        2,810        2,765        2,910        3,590        3,223   

Sales and marketing

    1,271        1,237        1,193        2,409        1,274        1,310        1,341        2,308        1,600   

Research and development

    2,937        2,989        3,037        3,814        3,202        3,563        3,655        4,029        4,140   

General and administrative

    1,427        1,594        1,351        1,919        1,638        1,879        1,732        2,875        2,030   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,964        8,219        7,989        10,902        8,924        9,517        9,638        12,802        10,993   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (156     479        2,156        354        1,296        1,300        2,046        377        273   

Other expense, net:

                 

Foreign exchange gain (loss)

    180        (32     (518     172        (464     91        50        217        (0

Interest expense, net

    (627     (285     (216     (283     (270     (260     (267     (487     (412

Other income (expense), net

    —          —          —         10        66        (304     14        11        66   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (447     (317     (734     (101     (668     (473     (203     (259     (346
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

    (603     162        1,422        253        628        827        1,843        118        (73

Provision (benefit) for income taxes

    403        173        281        (18     390        345        488        (12,263     (84
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (1,006   $ (11   $ 1,141      $ 271      $ 238      $ 482      $ 1,355      $ 12,381      $ 11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Our unaudited consolidated financial statements for the three-month periods ended April 30, 2010, July 31, 2010, October 31, 2010, January 31, 2011, April 30, 2011 and July 31, 2011, have been restated. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.

 

Non-GAAP Operating Data:

                 

Adjusted EBITDA (1)

  $ 335      $ 975      $ 2,591      $ 773      $ 1,652      $ 1,786      $ 2,603      $ 1,018      $ 974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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The following table provides, for the periods indicated, a reconciliation of our net (loss) income to Adjusted EBITDA:

 

    April  30,
2010

Restated
    July  31,
2010

Restated
    October  31,
2010

Restated
    January  31,
2011

Restated
    April  30,
2011

Restated
    July  31,
2011

Restated
    October 31,
2011
    January 31,
2012
    April 30,
2012
 
    (Unaudited, in thousands)        

Net (loss) income

    (1,006     (11     1,141        271        238        482        1,355        12,381        11   

Depreciation and amortization

    429        414        368        349        323        377        313        391        460   

Interest expense, net

    627        285        216        283        270        260        267        487        412   

Other (expense) income, net

    —          —          —         (10     (66     304        (14     (11     (66

Foreign exchange (gain) loss

    (180     32        518        (172     464        (91     (50     (217     (0

Provision (benefit) for income taxes

    403        173        281        (18     390        345        488        (12,263     (84
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    273        893        2,524        703        1,619        1,677        2,359        768        733   

Non-cash, share-based compensation expense

    62        82        67        70        33        109        244        250        241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    335        975        2,591        773        1,652        1,786        2,603        1,018        974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     April 30,
2010

Restated  (1)
    July 31,
2010

Restated  (1)
    October 31,
2010

Restated  (1)
    January 31,
2011

Restated  (1)
    April 30,
2011
Restated (1)
    July 31,
2011
Restated (1)
    October 31,
2011
    January 31,
2012
    April 30,
2012
 

Consolidated Statement of Operations Data:

                 

License revenue

    83.4     80.2     77.5     82.1     89.8     88.3     85.1     76.3     88.6

Project revenue

    16.6     19.8     22.5     17.9     10.2     11.7     14.9     23.7     11.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Operating expenses:

                 

Cost of revenues

    29.8     27.6     23.7     24.5     27.5     25.6     24.9     27.2     28.6

Sales and marketing

    16.3     14.2     11.8     21.4     12.5     12.1     11.5     17.5     14.2

Research and development

    37.6     34.4     29.9     33.9     31.3     32.9     31.3     30.6     36.7

General and administrative

    18.3     18.3     13.3     17.1     16.0     17.4     14.8     21.8     18.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    102.0     94.5     78.7     96.9     87.3     88.0     82.5     97.1     97.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (2.0 )%      5.5     21.3     3.1     12.7     12.0     17.5     2.9     2.5

Other expense, net:

                 

Foreign exchange gain (loss)

    2.3     (0.4 )%      (5.1 )%      1.5     (4.5 )%      0.8     0.4     1.6     (0.0 )% 

Interest expense, net

    (8.0 )%      (3.3 )%      (2.1 )%      (2.5 )%      (2.6 )%      (2.4 )%      (2.3 )%      (3.7 )%      (3.7 )% 

Other income (expense), net

    —          —          —          0.1     0.6     (2.8 )%      0.1     0.1     0.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (5.7 )%      (3.7 )%      (7.2 )%      (0.9 )%      (6.5