2. Summary of Significant Accounting Policies

Applicable Accounting Guidance

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative nongovernmental GAAP as found in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. On an on-going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition and allowance for doubtful accounts, stock- based compensation expense, intangible assets and other long-lived assets, certain accrued expenses and income taxes. Changes in estimates are recorded in the period in which they become known.

The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from management’s estimates if future events differ substantially from past experience, or other assumptions, while reasonable when made, do not turn out to be substantially accurate.

Revenue Recognition

The Company generates revenues from the licensing of its 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 consulting services and training. Licenses for the Company’s software products may be software to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service via the Company’s hosted ExaCLOUD.

Software

The Company recognizes revenues from licensing the software products in accordance with ASC 985-605, Software Revenue Recognition. Term licenses typically have a term of one year and allow the customer to buy simulation 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.

The Company typically sells 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 the Company’s software licenses include multiple elements such as maintenance and support. Pursuant to the guidance within ASC 985-605, the Company determined that since it does 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 longest delivered element, maintenance and support services. The Company’s arrangements typically do not include rights to carryover any unused capacity beyond the contractual license term or any customer right of return.

Licenses have finite terms that are not extendible at their expiration, and capacity usage is limited by contract to the amount specified. The Company’s 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 the Company’s preparation and analysis software during the term of the original simulation license does 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.

The Company commences recognition of term 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; contract price 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.

If training or consulting service 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, the Company treats this as one arrangement and recognizes revenue ratably on a daily basis over the license period provided that delivery of all elements of the arrangement have commenced.

Software as a service (ExaCLOUD)

The Company recognizes revenue from software-as-a-service arrangements in accordance with ASC 605. ExaCLOUD capacity-based licenses allow the customer to buy simulation capacity as a service hosted by the Company and are sold based upon simulation capacity expected to be used within a certain time period—typically not exceeding one year. The contracts have finite terms that are not extendible at their expiration, and capacity usage is limited by contract to the amount specified. The Company’s 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 the Company’s preparation and analysis software during the term of the original simulation license must do so by entering into a separate arrangement. In the event that any capacity remains unused at the end of the term of the arrangement, it is recognized as revenue at that time. With the ExaCLOUD solution, customers have access to hosted simulation capacity as well as hosted preparation and analysis software through a web browser. The ExaCLOUD solution includes a “pay-as-you-use” model and an option to purchase a block of simulation capacity upfront to be used over a defined period – typically not exceeding one year. Revenue from these arrangements is recognized as the cloud hosting service is provided.

Projects

The Company also derives revenue from fees for separate, project-based services. The Company’s projects are typically short-term in nature and usually complete in less than 90 days. Project pricing is generally either fixed fee or time and material based. The Company recognizes revenue from these service arrangements in accordance with ASC 605. Projects are either sold as one deliverable, or as multiple deliverables with stand-alone value. For single deliverable projects, to the extent that adequate project reporting of time incurred and time to complete records exist, the Company recognizes consulting services revenue as the services are performed under the proportionate performance method. In other situations, for example, providing a customer with an on-site engineer for a defined period of time to provide services at the customer’s direction, the Company recognizes revenue ratably over the service period. In situations where the Company is unable to utilize the proportional performance method, for example due to either the lack of adequate documentation of time incurred or to be incurred or a lack of a defined service period, revenue is deferred until the contract is completed.

For projects which have multiple deliverables, each with stand-alone value, the Company recognizes revenue based on ASC 605 and allocates the arrangement consideration based on the relative selling price of the deliverables. For project deliverables, the Company uses its best estimated selling price (“BESP”) as its selling price if vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price (“TPE”) do not exist. If each deliverable does not have stand-alone value, the project is then deemed to be a single unit of accounting.

Multiple element arrangements

Multiple element arrangements may include customer rights to any combination of software, project deliverables, software as a service, maintenance and training.

When more than one element is contained in a single arrangement, the Company first allocates total arrangement revenue based upon relative selling prices into two categories: (1) non-software components, such as services under projects not related to software licenses or software-as-a-service and (2) software components, such as software licenses, maintenance and support, and other software-related services.

Revenue allocated to non-software services is recognized based on ASC 605 and the arrangement consideration is allocated based on the relative selling price of the deliverables. For non-software deliverables, the Company uses its best estimate of selling price (“BESP”) if vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price (“TPE”) do not exist.

Revenue allocated to products sold which meet the definition of software components is recognized based on software accounting guidance provided for in ASC 985-605. Under this guidance, the residual method is used to recognize revenue when a multiple element arrangement includes one or more software related elements to be delivered at a future date and VSOE of fair value of all undelivered elements exists (typically maintenance and other services), but does not exist for the delivered elements (typically the software). However, since the Company cannot establish VSOE for its undelivered elements, the entire software arrangement is deferred and recognized ratably over the contract (maintenance) period. This particularly includes the Company’s term-based licenses since the software license term and the maintenance term are co-terminus.

Foreign Currency Translation

The Company has foreign subsidiaries in the United Kingdom, France, Germany, Italy, Japan, Korea and China. Foreign subsidiary records are maintained in the local currency. Foreign currency effects are accounted for in accordance with ASC 830 – Foreign Currency Matters. Other than for the Company’s subsidiary in the United Kingdom, the functional currency for all subsidiaries is the respective local currency. 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. For the Company’s subsidiary in the United Kingdom, which is unable to generate sufficient cash flows in its local currency to sustain operational viability, all assets and liabilities are re-measured into United States dollars, with any resulting unrealized gains or losses being recorded as a component of other income (expense), net.

The Company reviews the functional currencies of its subsidiaries on a quarterly basis in accordance with the “Foreign/Parent Currency” indicators outlined in Appendix A to ASC 830 to determine if any changes should be made.

Foreign currency gain (loss) included in other income (expense), net for the years ended January 31, 2017, 2016 and 2015 was $166, $(322) and $344, respectively.

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially subject the Company to concentration of credit risks are principally cash and cash equivalents and accounts receivable. The Company invests its cash and cash equivalents with high credit quality financial institutions, and consequently, the Company believes that such funds are subject to minimal credit risk. The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits, but management believes that the deposits are not exposed to significant credit risk due to the financial position of the depository institutions in which those financial instruments are held.

Concentrated credit risk with respect to accounts receivable is limited to large creditworthy customers. The Company periodically assesses the financial strength of its customers and believes that its accounts receivable credit risk exposure is minimal.

The Company typically does not require collateral from its customers for sales on account. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in any specific industry or geographic region.

The following table provides information concerning customers that individually in the respective fiscal year accounted for greater than 10% of total revenues or 10% of accounts receivable, and their respective percentages of total revenues and accounts receivable, as of and for the years ended January 31, 2017, 2016 and 2015:

	Year Ended January 31,
	2017						2016						2015
	Percentage of total revenues			Percentage of accounts receivable at fiscal year end			Percentage of total revenues			Percentage of accounts receivable at fiscal year end			Percentage of total revenues
Customer A	*			*			*				14	%		10	%
Customer B	*				16	%	*				14	%	*
Customer C	*			*			*				29	%	*
Customer D	*				10	%	*				10	%	*
Customer E		10	%		24	%		12	%	*			*

*	less than 10%

Concentration of Other Risks

The Company has two main data center providers, and several support providers (which handle overflow), to host or provide access to hardware for the Company’s ExaCLOUD application services to customers. The disruption of these services could have a material adverse effect on the Company’s business, financial position, and results of operations.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of 90 days or less, that are not restricted as to withdrawal, to be the equivalent of cash for the purpose of consolidated balance sheet and statement of cash flows presentation. Cash equivalents consisted of money market accounts as of January 31, 2017 and 2016. The Company maintained $352 of restricted cash related to an operating lease at January 31, 2017 and 2016.

Accounts Receivable and Allowances for Doubtful Accounts

Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided to the extent that specific accounts receivable are considered to be uncollectible, based on historical experience, known collection issues, and management’s evaluation of outstanding accounts receivable at the end of the reporting period. Uncollectible amounts, if any, are written-off against the allowance after all collection efforts have been exhausted. The Company recorded no bad debt expense during fiscal years ended January 31, 2017, 2016 and 2015. Based on management’s analysis of its outstanding accounts receivable, and customers’ creditworthiness and collection history, the Company concluded that an allowance was not necessary as of January 31, 2017 and 2016.

Property and Equipment, net

Property and equipment, net is stated at cost. Major renewals, additions and betterments are capitalized to property accounts while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are expensed in the period incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statement of operations. Depreciation is computed using the straight-line method over the estimated useful life of each asset, generally as follows:

Asset classification		Estimated Useful Life
Computer equipment		3-5 years
Software		3 years
Office equipment and furniture		3-7 years
Leasehold improvements		Shorter of useful life or remaining life of lease

Leasehold improvements and assets acquired under capital leases are typically amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. However, assets acquired under capital leases that contain bargain purchase options that are typically exercised are amortized over the estimated useful life of the asset. Amortization of leasehold improvements and assets acquired under capital leases is included in depreciation expense.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such indicators include, but are not limited to, cost factors that could have a negative effect on future expected earnings and cash flows, declining financial performance, and legal, regulatory and other relevant entity-specific factors. Recoverability of these assets is measured by comparison of their carrying amounts to the future undiscounted cash flows the assets are expected to generate. If any long-lived assets are considered to be impaired, the impairment recognized equals the amount by which the carrying value of the assets exceeds its estimated fair value. The Company did not identify any indicators of impairment of its long-lived assets during the fiscal years ended January 31, 2017, 2016 and 2015.

Research and Development Expenses

Research and development expense includes costs incurred to develop intellectual property and are charged to expense as incurred. 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 are capitalized. The Company has determined that technological feasibility is established at the time a working model of software is completed. Because the Company believes that, under its current process for developing software, completion of the software is essentially concurrent with the establishment of technological feasibility, no costs have been capitalized to date.

Internal-Use Software

Costs incurred in the research and development of the Company’s software products are expensed as incurred. Costs incurred during the application development stage of internal-use software projects, such as those used to develop internal systems, are capitalized. Capitalized costs include external consulting fees and payroll and payroll-related costs for employees in the Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s internal-use software projects during the application development stage. Capitalization begins when the planning stage is complete and the Company commits resources to the software project. Amortization of the asset commences when the software is complete and placed in service. The Company amortizes completed internal-use software over its estimated useful life. Costs incurred during the planning, training and post-implementation stages of the software development life-cycle are expensed as incurred. Costs related to upgrades and enhancements of existing internal-use software that increase the functionality of the software are also capitalized.

Advertising Costs

Advertising costs are expensed as incurred. To date, the Company has not incurred material advertising costs.

Income Taxes

Income taxes are accounted for in accordance with ASC 740, Income Taxes. ASC 740 requires that deferred tax assets and liabilities are 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. The Company routinely assesses the likelihood that it will be able to realize its deferred tax assets.

In determining the realizability of the net United States federal and state deferred tax assets, the Company considers numerous factors including historical profitability, estimated future taxable income, prudent and feasible tax planning strategies and the industry in which it operates. Management reassesses the realization of the deferred tax assets each reporting period, which resulted in a valuation allowance against the full amount of the Company’s United States net deferred tax assets being recorded in fiscal year 2015 and continuing to be recorded as of January 31, 2017 and 2016. To the extent that the financial results of the United States operations improve in the future and the deferred tax assets become more likely than not realizable, the Company will reduce the valuation allowance through earnings.

The Company follows ASC 740-10-25 with regards to accounting for uncertain tax positions, which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return. For each tax position, the enterprise must determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is then measured to determine the amount of benefit to recognize within the financial statements. No benefits may be recognized for tax positions that do not meet the more likely than not threshold.

The Company’s intention is to indefinitely reinvest the total amount of its unremitted foreign earnings in the local international jurisdictions, except for instances where the Company can remit such earnings to the United States without an associated net tax cost. As a result, the Company currently does not provide for United States taxes on the unremitted earnings of its international subsidiaries.

Comprehensive Loss and Accumulated Other Comprehensive Loss

ASC 220, Comprehensive Income, requires the reporting and display of comprehensive income and its components. Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources. Accumulated other comprehensive loss consists entirely of foreign currency translation adjustments at January 31, 2017 and 2016.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation. 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 or vesting period. Determining the fair value of equity awards at the grant date requires judgment. The Company estimates the grant date fair value of stock options 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, (4) dividends and (5) the fair value of the Company’s common stock. 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 forfeitures rates differ from those estimates. Forfeitures are estimated based on historical experience.

The Company recognizes windfall tax benefits associated with the exercise of stock options or release of restricted stock units directly to stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by the Company upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that the Company had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, the Company follows the “with-and-without” method. Under the with-and-without method, the windfall is considered realized and recognized for financial statement purposes only when an incremental benefit is provided after considering all other tax benefits including the Company’s net operating losses. The with-and-without method results in the windfall from share-based compensation awards always being effectively the last tax benefit to be considered. Consequently, the windfall attributable to share-based compensation will not be considered realized in instances where our net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the current year’s taxable income before considering the effects of current-year windfalls.

Net Loss per Share

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

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, as a result of which more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2018, and interim periods therein. The two permitted transition methods under the new standard are: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).

Though the Company continues to evaluate the impact of its pending adoption of this standard, the Company plans to adopt the standard using the modified retrospective approach with the cumulative effect of initially adopting recognized at the date of adoption. The standard is expected to have a significant impact on the way the Company accounts and contracts for its on-premise software license contracts. Accounting for revenue related to services and ExaCLOUD offerings is expected to remain substantially unchanged due to the over-time nature of such performance obligations. Due to the complexity of certain of the Company’s license contracts, the actual revenue recognition treatment required under the standard may be dependent on contract-specific terms at the time of sale and adoption of the new standard. The Company is also assessing the impact of capitalizing costs associated with ongoing customer contracts, specifically commission payments.

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

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting. This standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for interim periods therein. The Company has evaluated this standard and believes that when it adopts the standard in the first quarter of fiscal year 2018, it will not have a material impact on the Company’s consolidated financial results. As part of the adoption, the Company expects to cease applying a forfeiture rate estimate when calculating share-based compensation expense, which is not expected to result in a material adjustment to retained earnings in fiscal year 2018. Additionally, while the Company has $1,199 of previously unrecognized excess tax benefits attributable to stock option exercises, the adoption is not expected to result in any adjustment to retained earnings because of the Company’s full valuation allowance in the United States. Excess tax benefits for share-based payments will now be included in net operating cash rather than in net financing cash. These changes related to excess tax benefits will be applied prospectively in accordance with this standard and prior periods will not be adjusted.

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