10-K 1 exa-10k_20170131.htm 10-K exa-10k_20170131.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

(Mark One)

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

For the Fiscal Year Ended January 31, 2017

OR

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

Commission File Number: 001-35584

 

EXA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

04-3139906

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

55 Network Drive

Burlington, MA 01803

(Address of Principal Executive Offices, Including Zip Code)

(781) 564-0200

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of class

 

 

 

Name of exchange on which registered

 

Common Stock, $.001 par value

 

NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Aggregate market value of the voting stock held by non-affiliates of the registrant as of July 31, 2016 based on the closing price of the registrant’s common stock on such date as reported by the NASDAQ Global Market: $199,689,982.

As of March 17, 2017, 14,896,484 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for our Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before May 31, 2017 are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

 

 

 


EXA CORPORATION

ANNUAL REPORT ON FORM 10-K

FOR FISCAL YEAR ENDED January 31, 2017

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I

 

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

13

Item 1B.

 

Unresolved Staff Comments

 

24

Item 2.

 

Properties

 

24

Item 3.

 

Legal Proceedings

 

25

Item 4.

 

Mine Safety Disclosures

 

25

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

26

Item 6.

 

Selected Financial Data

 

28

Item 7.

 

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

 

29

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

45

Item 8.

 

Financial Statements and Supplementary Data

 

46

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

73

Item 9A.

 

Controls and Procedures

 

73

Item 9B.

 

Other Information

 

73

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers And Corporate Governance

 

74

Item 11.

 

Executive Compensation

 

74

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

74

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

74

Item 14.

 

Principal Accounting Fees and Services

 

74

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

75

Item 16.

 

Form 10-K Summary

 

76

 

 

 

 

 

SIGNATURES

 

77

 

 

 

 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including the sections entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements. These statements may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance, plans for growth and future operations, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

There may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements contained in this Annual Report on Form 10-K after we file it, whether as a result of any new information, future events or otherwise. Before you invest in our common stock, you should be aware that the occurrence of any of the events described in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K could harm our business, prospects, operating results and financial condition. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

As used herein, except as otherwise indicated by context, references to “we,”, “us,” “our,” or the “Company” refer to Exa Corporation.

 

 

 

1


PART I

ITEM 1.

BUSINESS

Overview

We develop, sell and support simulation software and services that manufacturers use to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. Our solutions enable engineers and designers to augment or replace conventional methods of evaluating design alternatives that rely on expensive and inefficient physical prototypes and test facilities, such as wind tunnels used in vehicle design, with accurate digital simulations that are more useful and timely. Our simulation solutions enable our customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes. As a result, our customers realize significant cost savings and fundamental improvements in their vehicle development process.

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

We currently focus primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers. Over 150 manufacturers currently utilize our products and services, including the top 15 global passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen; truck and off-highway vehicle manufacturers such as Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo Truck; and suppliers to these manufacturers, such as Cummins, Denso and Delphi. We have recently expanded our technology offerings into the fields of aerospace and oil and gas production. We are continuing to explore other markets in which we believe the capabilities of PowerFLOW have broad application, such as the chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

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

One of the most critical challenges for our customers in their vehicle development processes is measuring or predicting how a vehicle feature or a mechanical system will interact with air, water or other fluids. For example, developing vehicles with reduced aerodynamic drag is critical to achieving the improvements in fuel efficiency that are increasingly desired by customers and mandated by government regulations. Our core product, PowerFLOW, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. PowerFLOW relies upon proprietary technology that enables it to predict complex fluid flows with a level of reliability comparable to or better than physical testing. The combination of PowerFLOW’s accuracy and timeliness provides results that are superior to those of alternative computational fluid dynamics, or CFD, methods.

We derive our revenue primarily from the sale of our simulation software, using an annual capacity-based licensing model. Our customers usually purchase PowerFLOW simulation capacity under one-year term licenses, with a minority utilizing multi-year arrangements or a “pay as you go” model. Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted ExaCLOUD offerings. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulation services, along with engineering and consulting services. ExaCLOUD continues to play an increasingly important role in our new customer acquisition go-to-market model, as virtually all of our projects are now being delivered using that facility, thereby exposing our customers to its capabilities. Customers typically license our products for one application, such as aerodynamics, and over time expand to other applications such as thermal management or aeroacoustics.

We sell our products and project services primarily through our direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, United Kingdom, France, Germany, Italy, Japan, Korea and China. We also conduct business in Sweden, India, Brazil, Russia, Canada, Finland, Spain and Australia. In our customer engagement model, our applications management teams engage with our customers in long-term relationships focused on identifying problems that we can help them solve, demonstrating the value of our solutions and ensuring that the customer achieves maximum benefit from them. In this process, we interact continuously with our customers to improve our software and services and add new solutions, and at the same time deepen our knowledge of their industry.

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We were founded in 1991 and had 345 employees worldwide at January 31, 2017. Our corporate headquarters, including our principal administrative, marketing, technical support, research and product development facilities, are located in Burlington, Massachusetts. Our website is www.exa.com, and we make available through the investor relations section of this site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission, or the SEC. Information included on our website is not included nor incorporated into our Form 10-K. We also make our code of ethics and certain other governance documents and policies available through our website. We intend to make required disclosures of amendments to our code of ethics, or waivers of a provision of our code of ethics, on the “Corporate Governance” page of our website’s investor center.

Customers and Markets

Our initial focus has been on the ground transportation market, and primarily on makers of passenger vehicles, due to the immediate benefits and strong value proposition of our solutions for vehicle manufacturers. Approximately 95% of our fiscal year 2017 revenues were generated from the ground transportation market, including 61% from our ten largest customers and 10% from our largest customer.

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

 

Passenger vehicle manufacturers;

 

Highway truck manufacturers;

 

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

 

Train manufacturers; and

 

Suppliers to the above manufacturers.

Over 150 manufacturers currently utilize our products and services, including the top 15 global passenger vehicle manufacturer groups, based on motor vehicle production volume for 2015, as reported by the Organisation Internationale des Constructeurs d’Automobiles, or the International Organization of Vehicle Manufacturers, such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen; truck and off-highway vehicle manufacturers such as Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo Truck; and suppliers to these manufacturers, such as Cummins, Denso and Delphi. We continue to add new customers as well as deploy our solutions more broadly into our current installed base. We believe that the top global passenger vehicle manufacturers continue to represent significant growth opportunities for us given the breadth of our applications and additional deployment expansion.

We have also recently expanded our technology offerings into the aerospace and oil and gas production markets and are continuing to explore new markets in which we believe the capabilities of PowerFLOW have broad application, including the chemical processing, architecture and construction, power generation, biomedical and electronics industries. For example, in the aerospace market, we are working with multiple customers on simulation solutions for landing gear and jet engine design, and we recently launched and licensed our first commercial product focused on the oil and gas production industry. We believe that our solution for multi-phase fluids would also be of value to the chemical and power generation markets. This wide range of industries face increasing and often conflicting demands to:

 

meet customer and regulatory requirements for improved efficiency in areas such as fuel economy and reduced environmental impact;

 

meet customer desires for innovative product designs;

 

optimize products for quality, performance and safety;

 

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

 

reduce product development, material and warranty costs.

All of these activities are significantly influenced by rising consumer expectations for more efficient and environmentally sensitive products, and by government regulatory activity that is pervasive in many industries. For example, in our key ground transportation market, the product strategies of automobile manufacturers have for years been shaped by their need to comply with an array of regulatory requirements, including mandatory corporate average fuel economy, or CAFE, standards. As an example, United States passenger car and light truck CAFE standard continues to rise, from 27.3 miles per gallon, or MPG, in 2011 to 35.5 MPG in 2017 and to a proposed, and newly under review, 56.2 MPG by 2025, requiring an approximately 60% increase in fuel economy performance over the next nine years. Similar mandates relating to particulate and CO2 emissions apply in other segments and regions

3


of the transportation industry, including the Worldwide harmonized Light vehicles Test Procedure (WLTP). For manufacturers of transportation systems, achieving these goals requires major improvements in aerodynamics, weight, and propulsion systems of their products. Our customers need to attain these goals while continuing to meet customer demands for aesthetically pleasing and innovative product designs.

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

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

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

Design. In this stage, designers in the studio develop the design of a new vehicle. They begin the process of bringing an innovative new vehicle to life within a set of packaging, powertrain, fuel efficiency and other attributes that must be met. For decades, physical systems such as clay models and wind tunnels have been the primary predictive tool used in the design and development process. As a result, our customers spend a significant portion of their research and development budgets, which we estimate (based upon our analysis of publicly available industry data and information provided to us by our customers) to be as much as 10% to 15%, or over $10 billion per year, on physical prototypes, test facilities and related travel and staff costs. These physical experimental methods are not only expensive and inefficient, but also limited in their ability to provide accurate predictive information early in the design process, when such information is most valuable.

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

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

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

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

4


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

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

 

increasing adoption of computer-aided design, or CAD, and product lifecycle management, or PLM, software by manufacturers and their suppliers;

 

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

 

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

In many industries, a critical element of optimizing product design is predicting how an object or mechanical system will interact with air, water or other fluids. Software-based simulation tools using computational fluid dynamics, or CFD, methods have been commercially available for over 40 years. In this approach, numerical methods are utilized to provide approximate solutions to the Navier-Stokes equations, which statistically describe the behavior of a fluid in motion. The limitations of this approach are not with the Navier-Stokes equations but with the numerical techniques utilized to find approximate solutions to them for industrial problems. Most existing fluid dynamics solutions are limited in their ability to analyze highly complex geometries and predict the flow at a high level of accuracy within practical time frames.

Technology, Products and Applications

Technology

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

 

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

 

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

 

accurate: validation studies by us and our customers demonstrate that digital simulations utilizing PowerFLOW are comparable in accuracy to the physical tests that they replace, and in some cases, are more accurate.

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

These combined attributes of PowerFLOW’s underlying technology enable us to bring simulation solutions to new levels of accuracy and robustness that have not been possible before.

Customers use our PowerFLOW simulation solutions to enhance the performance of their products, reduce product development costs and improve the efficiency of their product development processes. Our technology and products are catalyzing a disruptive change in how our customers design, engineer and optimize their products. Simulation-driven design enabled by PowerFLOW makes predictive information available earlier in the design process, permitting deeper exploration of the design space, with iterative simulations providing insight into how new concepts can improve the design. For example, our customers in the ground transportation market tell us that this has enabled them to improve their development processes by replacing physical prototype testing at many stages of the vehicle development process with robust, detailed and accurate digital simulations. This allows the final prototype stage to be primarily one of confirmation rather than discovery.

Products

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

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

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

The complete PowerFLOW software suite includes the simulation engine and grid generation engine (also called the discretizer), along with complementary pre- and post-processing software products. The software is delivered in a client/server architecture, or through our cloud-based offering, ExaCLOUD. When utilizing the client server architecture, the computationally intensive discretization and simulation processes generally run on a centralized multi-processor simulation server, while the front-end applications for simulation preparation and back-end applications for post-processing analysis run on desktop clients that interact with the central server. With the ExaCLOUD solution, many of the client features and functions are accessed through a web browser, and all of the complex computational intensive processes are run in our hosted high performance computing environment.

The main driver of our revenue is customers’ usage of simulation hours on the simulation server, to which we provide access under capacity-based term licenses. Customers usually purchase PowerFLOW simulation capacity under one-year licenses, or in some cases multi-year licenses, that provide the customer either with dedicated access to a specified number of processor cores throughout the contract term or with a block of “simulation hours” that may be used at any time but expire if not used by the end of the contract year. We separately license the client software that interfaces with our PowerFLOW simulation server for a fixed annual fee, based on the number of concurrent users. Our ExaCLOUD solution offers customers a range of options to address their simulation demands, including a “pay-as-you-use” model and an option to purchase a block of simulation capacity upfront to be used over a defined period.

Our product suite includes the following principal offerings:

 

Simulation  preparation

 

Key Features

 

 

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

 

 

 

PowerDELTA with PowerCLAY

 

Streamlines and automates the simulation model preparation process by applying proven concepts of parametric feature modeling and history tree model management to the process of simulation model creation and update. PowerDELTA now includes PowerCLAY morphing technology that allows users to perform real-time, studio-quality morphing of models for easy design optimization. Design data in most major CAD and mesh formats are supported—even at varying levels of quality.

 

 

 

PowerCASE

 

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

 

 

 

Simulation Server

 

Key Features

 

 

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

 

 

 

PowerFLOW

 

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

 

 

 

PowerTHERM

 

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

 

 

 

PowerCOOL

 

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

 

 

 

6


Simulation Analysis

 

Key Features

 

 

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

 

 

 

PowerINSIGHT

 

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

 

 

 

PowerVIZ

 

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

 

 

 

PowerACOUSTICS

 

PowerREALITY

 

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

 

Enables photo-realistic engineering and design communication of PowerFLOW simulation results.

 

 

 

 

ExaCLOUD

Simulation Platform

 

ExaCLOUD provides PowerFLOW simulation preparation and analysis functionality through a browser rather than through client software. It also manages the simulation server in the cloud.

 

Applications

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

Our integrated suite of aerodynamic, thermal management and aeroacoustics simulation capabilities provides a single solution for critical fluid dynamics problems, and our interactive visualization capabilities enable rapid iteration of design modifications and simulations. Our case preparation tools and user interface shorten set-up time, and reduce the need for personnel with extensive CAD expertise. Our product architecture and user interface facilitate sharing of data and collaboration across departments, design teams and engineers.

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

For example:

 

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

 

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

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

By adding functionality that addresses phenomena such as thermal radiation or acoustic transmission, we have been able to provide our customers with solutions that extend beyond our initial fluid dynamics focus. As we continue to add new applications solutions to broaden the range of simulation problems that PowerFLOW can address, adoption of our technology has spread from the automotive market that was our initial focus to other segments of the ground transportation industry. For example, the addition of thermal management capability to our product in fiscal year 2008 enabled us to offer simulation solutions to the truck and off-highway equipment markets, in which thermal management is a significant challenge.  In fiscal year 2017, these market segments accounted for approximately 18% of our total revenue. Deployment of each new functional solution results in increased utilization of simulation capacity by our customers, which leads to new license purchases and revenue. We believe the customer base for most of these applications remains only partially deployed. As our customers gradually alter their development processes to take more advantage of the digital development methods we are enabling, we seek opportunities to cross-sell our products to new engineering groups within our existing customers.

One of the earliest applications of our technology in the automotive market was the modeling of aerodynamic drag, a key concern of engineers in our customers’ aerodynamics departments. However, the same core transient simulation engine that enables the prediction of drag can also be extended to address the problems of a different group of engineers in the same company who are responsible for the vehicle’s soiling and water management attributes. This group works to understand and mitigate the amount of soil (road dirt, brake dust or salt) that accumulates on critical components such as doors, side glass and mirrors, for safety and quality reasons. Similarly, for off highway equipment, accumulation of particles in the air intake and cooling systems can significantly affect performance. All of this can now be studied and optimized digitally using PowerFLOW early in the design process where changes are less costly to implement.

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

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

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

Business Strengths

We believe that the following key business strengths will assist us in taking advantage of the opportunities we are pursuing:

 

Customer engagement model. Delivering value to our customers and ensuring their success is at the core of our business philosophy. Our dedicated field and applications management teams engage with our customers in long-term relationships focused on identifying problems we can help them solve, demonstrating the value of our solutions and ensuring that the customer achieves maximum benefit from them. In this process we interact continuously with our customers to improve our software and services and add new solutions, and at the same time deepen our knowledge of the industry. Our

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customer-centric focus, significant domain expertise and integrated accurate solutions have led to the establishment of stable and growing customer relationships. In addition, our close cooperation and communication with our customers provides us with invaluable information concerning the accuracy, usefulness and cost-effectiveness of our products.

 

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

 

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

 

Predictable business model. Our revenue is derived primarily from the sale of access to our simulation software, under annual capacity-based licenses for which we typically invoice our customers at the beginning of the license term. The principal driver of our revenue growth is customers’ increased consumption of simulation capacity, as our solutions penetrate more deeply and widely across their organizations. The recurring nature of our revenues, as customers annually renew or increase their simulation capacity, provides high visibility into future performance. On average over the last three fiscal years, more than 49% of our annual revenue was attributable to contractual commitments that were in place at the beginning of the fiscal year.

 

Proprietary and protected intellectual property. Our core and layered technologies, including our Digital Physics approach, are protected by patent coverage and non-disclosed trade secrets which provide a strong competitive advantage over alternative solutions. Our senior scientific and engineering leadership, some of whom have been with Exa since its founding, pioneered our proprietary approach to 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.

Growth Strategy

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

 

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

 

Add new customers in the ground transportation market. We believe that the addressable market in ground transportation is significantly underpenetrated and there continue to be favorable regulatory and market dynamics pushing the industry to improve fuel efficiency and emissions and enhance the performance and quality of its products. Hundreds of passenger car, highway truck and off-highway vehicle manufacturers and their suppliers worldwide represent potential new customers for us. We intend to continue to add sales personnel to capture this opportunity. We have launched the ExaCLOUD platform to extend our product capabilities into customer segments that were previously difficult to reach. With a low barrier of entry and access to significant computing capacity, we see this platform as an important part of our growth outside of our larger, core customer base.

 

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

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

 

Expand on our recent entries into the oil and gas production and aerospace markets and explore new vertical markets. We believe that our solution has the potential to transform the design process not only in the ground transportation market but in other markets that face similar problems. Our core technology is extendable to applications beyond those required in the ground transportation market. For example, we continue to invest in and develop our aerospace vertical business with domain expertise and new applications. We have built a customer base of both airframe and supply chain manufacturers. In addition, we recently launched and licensed our commercial product for use in the oil and gas production industry. We believe that our solutions would be also of value for use in the chemical processing, architecture, engineering and construction, power generation, biomedical, electronics, chemical and power generation markets, as well.

 

Selectively pursue strategic acquisitions. There are many fragmented and complementary software products and technologies that would enable us to expand our product and solutions offering, increase the value delivered to our customers, and expand our customer base. We plan to selectively pursue opportunities to acquire complementary business, products or technologies.

Sales and Marketing

We sell our products and services primarily through our field team of 185 persons in the United States, United Kingdom, France, Germany, Italy, Japan, Korea and China at January 31, 2017, including 30 sales executives, 28 technical account managers assigned to our most deployed customers, a worldwide staff of 117 applications engineers and 3 marketing coordinators. We also sell our products and services through a distributor in India and through a sales agent in Brazil.

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

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

Once our PowerFLOW technology has been adopted in one area of a customer’s organization, we seek opportunities to expand to other disciplines and departments. We are currently marginally deployed at many of our current customers and see significant growth potential from existing customers. For example, a manufacturer of luxury automobiles initially implemented our aerodynamic simulation solutions for use in styling evaluation and optimization. Over the course of our multi-year relationship with this customer, the range of our solutions deployed by the customer has expanded to include thermal management (including convective drive train cooling, brake cooling, underhood temperatures and climate control solutions) as well as aeroacoustics, resulting in an increase in simulation capacity purchased by this customer by a factor of over 50 times over a period of six years.

Customers usually purchase PowerFLOW simulation capacity under one-year licenses that provide the customer either with dedicated access to a specified number of processor cores throughout the contract year or with a block of “simulation hours” that may be used at any time but expire if not used by the end of the contract year. As an illustration, a highway truck customer, based on a new truck design program, may estimate that it will run a minimum of 200 aerodynamic simulations in its next fiscal year. A typical highway truck aerodynamics simulation requires 3,000 simulation-hours each. Thus, this customer will require a minimum of 600,000 simulation-hours.

Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted ExaCLOUD offerings. We provide our ExaCLOUD services primarily through data centers in Piscataway, New Jersey and Ashburn, Virginia, operated by IBM and Equinix, respectively. We separately license the front-end and back-end applications software that interfaces with our simulation server software for a fixed annual fee, based on the number of concurrent users at the customer. As customers continue to use our solutions and deploy them more widely within their organizations, their consumption of our simulation services typically increases. We offer volume discounts based on the annual volume of simulation capacity ordered.

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Research and Development

Our product development activities are carried out by our research and development organization, which at January 31, 2017 encompassed 122 persons, including 26 scientists engaged in basic research in fluid dynamics, 51 software engineers, 35 applications management personnel and 10 product management personnel. Our senior research and development scientists include leaders in the field of fluid dynamics who have pioneered the use of the lattice Boltzmann method. Our applications management teams, which are organized around the core engineering disciplines and departments within our customers’ organizations, perform a critical role in establishing and executing our product development roadmap, by identifying customer needs, developing product requirements and working with customers to implement and improve our solutions. Examples of our current research and development activities include basic research to improve the capabilities and performance of our core fluids simulation engine, which is currently in its fifth generation, as well as the expansion of our solutions to address new simulation applications, for example, modeling of moving geometries such as rotating machinery. Our total expenditures on research and development were $24.3 million, or 33.5% of total revenues in fiscal year 2017, $24.1 million, or 36.9% of total revenues in fiscal year 2016 and $21.8 million, or 35.5% of total revenues in fiscal year 2015. In order to maintain and extend our technology leadership and competitive position, we intend to continue to devote significant effort to our research and development activities.

Intellectual Property

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

We have obtained or applied for patent protection with respect to some of our core intellectual property, but generally do not rely on patents as a principal means of protecting intellectual property. As of January 31, 2017, we owned twelve patents issued in the United States and had nine pending patent applications in the United States.

We conduct business under our trademarks and use trademarks on some of our products. We believe that having distinctive marks may be an important factor in marketing our products. As of January 31, 2017, we had thirteen active trademark registrations in the United States and a limited subset in selected other countries. Although we have a foreign trademark registration program for selected marks, the laws of many countries protect trademarks solely on the basis of registration and we may not be able to register or use such marks in each foreign country in which we seek registration. We monitor use of our trademarks and intend to enforce our rights to our trademarks.

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

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

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

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Executive Officers and Directors

The following table sets forth information with respect to our executive officers as of March 22, 2017:

 

Name

 

Age

 

Position

Stephen A. Remondi

 

51

 

Chief Executive Officer, President, Director

 

 

 

 

 

Richard F. Gilbody

 

57

 

Chief Financial Officer

 

 

 

 

 

Jean-Paul Roux

 

53

 

Senior Vice President of Global Aerospace and European Operations

 

 

 

 

 

Hudong Chen, Ph.D.

 

60

 

Chief Scientist, Senior Vice President of Physics

 

 

 

 

 

James Hoch

 

52

 

Senior Vice President of Software Development

 

 

 

 

 

Suresh Sundaram, Ph.D.

 

51

 

Senior Vice President of Products and Marketing

 

 

 

 

 

Joel F. Dube

 

49

 

Vice President of Finance, Principal Accounting Officer

 

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

Richard F. Gilbody joined Exa in June 2014 and brings over 30 years of finance and operations experience. Prior to joining Exa, Mr. Gilbody served from 2011 to 2013 as Chief Financial Officer, Chief Operating Officer and Board member at Agencyport Software. From 2000 to 2011, Mr. Gilbody held senior finance and operating executive positions at IBM, including Vice President of the Business Analytics Division, and at Cognos Corporation, as President of Cognos Americas and Senior Vice President of Finance and Operations. Mr. Gilbody holds both a Bachelor of Science and a Masters in Business Administration from Boston College.

Jean-Paul Roux joined Exa in 2001 as our managing director for Southern and Western Europe and has been Senior Vice President of Global Aerospace and European Operations since 2014. In April 2003 Mr. Roux served as our Vice President of European Operations. Prior to joining Exa, Mr. Roux was Managing Director of Tecnomatix UK, a provider of product lifecycle management software, and its Scandinavian subsidiary. Mr. Roux has extensive experience selling software solutions to engineers in the manufacturing, electronics, automotive, aerospace and off-highway equipment industries. Mr. Roux holds a language degree from Catholic University and a business degree from Ecole Superieure de Commerce in Grenoble, France.

Dr. Hudong Chen joined Exa in 1993 and has been our Chief Scientist since 1997 and Senior Vice President of Physics since 2014. From 2000 to 2014, Dr. Chen served as our Vice President of Physics. Prior to his tenure at Exa, Dr. Chen was a visiting assistant physics professor at Dartmouth College and a postdoctoral fellow at Los Alamos National Laboratory. Dr. Chen has a Ph.D. in Physics from Dartmouth College, a M.S. in Physics from the College of William and Mary, and a B.S. in Physics from Fudan University in China. Dr. Chen is known for his pioneering work in lattice Boltzmann methods as well as contributions in turbulence and kinetic theory. Dr. Chen has been a Fellow of the American Physical Society since 2000.

James Hoch joined Exa in 1993 and has been our Senior Vice President of Software Development since 2014. From 1999, when he rejoined the Company, to 2014, Mr. Hoch served as our Vice President of Software Development. Prior to joining Exa, Mr. Hoch was the lead architect on several research parallel computer systems and related compiler projects at Sandia National Laboratories. Mr. Hoch was also chief architect at Maker Communications, a developer of network communications processors, from October 1998 to July 1999. Mr. Hoch has extensive experience in compiler technology and parallel computing and holds both M.S. and B.S. degrees from Purdue University in Computer and Electrical Engineering.

Suresh Sundaram, Ph.D. joined Exa in August 2016 as our Senior Vice President of Products and Marketing. Prior to joining Exa, Dr. Sundaram held a variety of leadership roles at Aspen Technology, Inc., a global provider of optimization software solutions, including Vice President of Sales Operations from March 2016 to July 2016, Vice President of Product Management from November 2013 to February 2016, Senior Vice President of Marketing from July 2011 to October 2013, and Senior Vice President of Products and Market Strategy from July 2007 to June 2011. Dr. Sundaram is a member of the board of directors of GSE Systems, Inc., a provider of real-time high-fidelity simulation systems and training solutions to the power and process

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industries. Dr. Sundaram holds M.S. and Ph.D. degrees in Chemical Engineering from MIT, a B.S. in Chemical Engineering from IIT Bombay, and has completed the Executive Education program from the Harvard Business School.

Joel F. Dube joined Exa in August 2016 and has over 18 years of finance and accounting leadership and experience. Mr. Dube joined Exa from Juniper Pharmaceuticals, Inc., a women’s health therapeutic company, where he was Vice President and Corporate Controller from September 2015 to July 2016. Prior to his tenure with Juniper, Mr. Dube was Vice President and Corporate Controller at CRA International, Inc., a global consulting firm, from June 2007 to September 2015 and held various accounting roles in organizations across the technology, manufacturing and public accounting sectors. Mr. Dube earned his Bachelor of Science degree in Business Administration from the University of Lowell, a postgraduate certification in Accountancy from Bentley College and is a Certified Public Accountant in New Hampshire.

Item 1A.

Risk Factors

You should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as overall U.S. and non-U.S. economic and industry conditions including a global economic slowdown, geopolitical events, changes in laws or accounting rules, fluctuations in interest and exchange rates, terrorism, international conflicts, major health concerns, natural disasters or other disruptions of expected economic and business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business operations and liquidity.

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.

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, we were negatively impacted by the suspension or postponement of vehicle development programs by our customers in response to the 2008 financial crisis and resulting recession, which significantly affected the automotive industry. Furthermore, political unrest, 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, the tightening of the financial and credit markets, changes or reduced clarity in regulatory requirements, 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.

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Significant changes in U.S. policy could have an adverse effect on us.

Changes in or uncertainty regarding future U.S. social, political, regulatory and economic conditions or laws and policies governing energy policy, foreign trade, manufacturing, and development and investment in the territories and countries where we or our customers operate could adversely affect our operating results and our business.

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.

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 2017, 2016 and 2015, approximately 61%, 64% and 58% of our revenue, respectively, was attributable to our ten largest customers in the aggregate. One customer accounted for approximately 10%, 12% and 10% of our revenue in fiscal years 2017, 2016 and 2015, respectively. In the past we have experienced revenue fluctuations within this concentrated account base due to customer internal budget constraints, corporate policy mandates regarding use of simulation tools, experimentation with alternative solutions and consolidation of independent companies or divisions. 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 effect on our results of operations.

Because our business relies heavily on foreign operations and revenues, changes in foreign currency exchange rates and our need to convert currencies may negatively affect our financial condition and results of operations.

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, 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. Changes in the relative values of currencies occur regularly and, in some circumstances, may have a significant impact on our operating results. We cannot predict with any certainty changes in foreign currency exchange rates or the degree to which we can cost-effectively mitigate these risks.

Our lengthy and technical 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. Delays in booking new license agreements 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.

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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 Siemens, with its products STAR-CD and STAR-CCM+, and ANSYS, with its products Fluent and CFX. Siemens 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 addition, some of our customers have attempted, and may in the future attempt, to develop digital simulation software solutions internally.

In most of our existing and potential new accounts, products such as these are already in use for a variety of purposes, and likely will remain so. Our ability to further penetrate the ground transportation market will therefore depend on our ability to demonstrate that our solutions deliver economic value in the form of significant process and cost improvements that competing products are unable to provide. As we expand our offerings into other markets, 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. We have experienced existing and potential customers perceiving the cost of our solution as being higher than that of our competitors’ products or an internally developed solution. This perception could become an obstacle to wider adoption of our simulation solutions, result in pressure to reduce our prices or change our capacity-based pricing model, or prompt our customers to explore lower cost solutions. We may not be able to compete successfully against current or future competitors or internally developed solutions and competitive pressures may materially adversely affect our business, financial condition and operating results.

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.

Changes in or interpretations of financial accounting standards may have an adverse impact on our reported results of operations.

Changes in or interpretations of financial accounting standards may have an adverse impact on our reported results of operations. We prepare our consolidated financial statements in conformity with generally accepted accounting principles in the United States, or GAAP. These principles are subject to interpretation by the Securities and Exchange Commission, or SEC, and various bodies formed to interpret and create accounting standards. It is possible that future requirements, including the recently released guidance related to revenue recognition (ASU 2014-09, Revenue from Contracts with Customers: Topic 606), could change our current application of GAAP, resulting in a material adverse impact on our reported results of operations or financial position, and may even affect our reporting of transactions completed before the change is effective.

New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the question of current practices may harm our operating results or the way we conduct our business.

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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.

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.

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 has been and will continue to 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.

If there are interruptions or delays in our ExaCLOUD 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 ExaCLOUD services primarily through data centers operated by IBM and Equinix under agreements pursuant to which these companies provide the data center hosting infrastructures. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems, or those in the data centers, to fail, resulting in interruptions in our service. Interruptions or delays in our ExaCLOUD service could result from the termination of our arrangement with either IBM or Equinix, 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.

If our security measures, or those of third-party providers for our ExaCLOUD services 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 ExaCLOUD services involve 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

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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 ExaCLOUD services could be harmed and we could lose sales and clients.

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.

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, customer orders for 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

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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.

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 globally. 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. Our ability to attract and retain these resources may also be impacted by the immigration policies of a number of countries. 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, 2017, 74% of our revenue was attributable to sales in international markets, and at January 31, 2017, we had 15 offices in eight 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;

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unexpected changes in tariffs or trade protection measures;

 

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

 

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

 

laws and business practices favoring local companies;

 

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.

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. In the United States, there are several proposals to reform corporate tax law that are currently under consideration. These proposals include reducing the corporate statutory tax rate, broadening the corporate tax base through the elimination or reduction of deductions, exclusions and credits, implementing a territorial regime of taxation, limiting the ability of United States corporations to deduct interest expense associated with offshore earnings, modifying the foreign tax credit rules, and reducing the ability to defer United States tax on offshore earnings. These or other changes in the United States tax laws could increase our effective tax rate which would affect our profitability.

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

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset our taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of our net operating loss carryforwards before they expire. Future transactions in our common stock could trigger an ownership change for purposes of Section 382, which could limit the amount of net operating loss carryforwards and other attributes that could be utilized annually in the future to offset our taxable income, if any. Any such limitation, whether as the result of sales of common stock by our existing stockholders or sales of common stock by us, could have a material adverse effect on our results of operations in future years.

During the first quarter of fiscal year 2015, management determined that we experienced an ownership change for purposes of Section 382. This ownership change resulted in annual limitations to the amount of net operating loss carryforwards that can be utilized to offset future taxable income, if any, at the federal level. The annual limit is approximately $16.8 million for each of fiscal years 2016 through 2019, $8.0 million for fiscal year 2020 and $6.4 million for each fiscal year thereafter. The ownership change also resulted in the loss of our ability to utilize approximately $0.8 million of state net operating loss carryforwards, credits and other state attributes, which resulted in a write-off of the $0.8 million of state deferred tax assets during the first quarter of fiscal year 2015.

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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 our cash on hand and cash flows from operations 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 and through our initial public offering. 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, 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.

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

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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. No third party has pursued claims of this type 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.

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Risks Related Ownership of Our Common Stock

The JOBS Act allows 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 JOBS Act, which was enacted in April 2012, 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 cease to be an emerging growth company as of 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 stockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding stockholder 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.

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. 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”. Among other things, this means that our independent registered public accounting firm will not be required to provide an 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 expect that the significant legal, accounting and other expenses we incur as a public company will increase once we are no longer an “emerging growth company”.

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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 Annual Report on Form 10-K:

 

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 and project sales;

 

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

 

changes in our pricing policies or those of our competitors;

 

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

 

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

 

unexpected outcomes of matters relating to litigation;

 

unanticipated changes in tax rates and tax laws;

 

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

 

failure to successfully integrate acquired businesses and technologies;

 

renegotiation or termination of royalty or intellectual property arrangements;

 

unanticipated impact of accounting for technology acquisitions, if any;

 

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

 

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

 

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

 

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

 

fluctuations in foreign currency exchange rates;

 

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

 

the purchasing and budgeting cycles of our customers.

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

We expect that the factors listed above and other risks discussed in this report will continue to affect our operating results for the foreseeable future. Because of the factors listed above and other risks discussed in this report, 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.

23


We do not currently intend to pay dividends on our common stock and, consequently, our stockholders’ ability to achieve a return on their investment in our common stock 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.

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.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our principal offices occupy approximately 44,000 square feet of leased office space in Burlington, Massachusetts pursuant to a lease agreement that expires in March 2023. We also maintain sales, support and applications management offices in Livonia, Michigan; Brisbane, California; Worcestershire, UK; Paris, France; Stuttgart, Germany; Munich, Germany; Ciriè, Italy; Yokohama, Japan; Seoul, Korea; and Shanghai, China. Additionally, we lease a total of approximately 2,300 square feet of space at two high performance computing data centers in Piscataway, New Jersey and Ashburn, Virginia. We believe that our current facilities are suitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.

24


ITEM 3.

LEGAL PROCEEDINGS

We are not a party to any pending legal proceedings. However, because of the nature of our business, we may be subject at any particular time to lawsuits or other claims arising in the ordinary course of our business, and we expect that this will continue to be the case in the future

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

25


PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock trades on the NASDAQ Global Market tier of the NASDAQ Stock Market under the symbol: “EXA.” The following table sets forth the high and low sales prices per share of our common stock, for each quarter during fiscal years 2017 and 2016.

 

 

 

2017

 

 

2016

 

 

 

High

 

 

Low

 

 

High

 

 

Low

 

First Quarter

 

$

13.90

 

 

$

10.02

 

 

$

12.34

 

 

$

9.53

 

Second Quarter

 

 

15.36

 

 

 

11.12

 

 

 

12.00

 

 

 

10.34

 

Third Quarter

 

 

16.74

 

 

 

13.47

 

 

 

11.48

 

 

 

9.02

 

Fourth Quarter

 

 

16.60

 

 

 

13.01

 

 

 

11.85

 

 

 

9.51

 

 

On March 17, 2017, the last reported sale price on the NASDAQ Global Market for our common stock was $13.80 per share. On March 17, 2017, there were approximately 70 holders of record of our common stock. This number does not include stockholders for whom our shares were held in “nominee” or “street” name.

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. 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.

Unregistered Sales of Equity Securities

For information regarding securities authorized for issuance under our equity compensation plans, see Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

26


Comparative Stock Performance

The following stock performance graph compares the cumulative total return to stockholders for our common stock for the period commencing June 26, 2012 (the date on which our common stock commenced trading on the NASDAQ Global Market) and ended January 31, 2017 against the cumulative total return of the NASDAQ Composite Index, the Russell 2000 Index and the NASDAQ Computer and Data Processing Index. The calculation of total cumulative returns assumes a $100 investment in our common stock, the NASDAQ Composite Index, the Russell 2000 Index and the NASDAQ Computer and Data Processing Index, and assumes reinvestment of all dividends, if any. The historical information set forth below is not necessarily indicative of future performance.

 

 

 

6/28/12

 

 

1/13

 

 

7/13

 

 

1/14

 

 

7/14

 

 

1/15

 

 

4/15

 

 

7/15

 

 

10/15

 

 

1/16

 

 

4/16

 

 

7/16

 

 

10/16

 

 

1/17

 

Exa Corporation

 

 

100.00

 

 

 

102.14

 

 

 

116.84

 

 

 

143.67

 

 

 

94.18

 

 

 

103.57

 

 

 

115.71

 

 

 

114.08

 

 

 

98.06

 

 

 

109.90

 

 

 

133.16

 

 

 

148.98

 

 

 

142.86

 

 

 

158.16

 

NASDAQ Composite

 

 

100.00

 

 

 

107.66

 

 

 

125.73

 

 

 

144.02

 

 

 

154.59

 

 

 

164.30

 

 

 

175.10

 

 

 

182.03

 

 

 

179.29

 

 

 

164.04

 

 

 

170.33

 

 

 

184.18

 

 

 

185.13

 

 

 

200.57

 

Russell 2000

 

 

100.00

 

 

 

113.91

 

 

 

132.90

 

 

 

144.70

 

 

 

144.27

 

 

 

151.09

 

 

 

158.69

 

 

 

161.63

 

 

 

152.16

 

 

 

136.10

 

 

 

149.26

 

 

 

161.63

 

 

 

158.41

 

 

 

181.73

 

NASDAQ Computer & Data Processing

 

 

100.00

 

 

 

107.23

 

 

 

127.01

 

 

 

157.71

 

 

 

167.25

 

 

 

164.35

 

 

 

179.73

 

 

 

187.36

 

 

 

200.52

 

 

 

199.94

 

 

 

200.41

 

 

 

217.33

 

 

 

226.12

 

 

 

236.23

 

 

Use of Proceeds

On July 3, 2012, we completed the initial public offering of our common stock pursuant to our Registration Statement on Form S-1 (File No. 333-176019), which was declared effective by the Securities and Exchange Commission on June 27, 2012. The underwriters for the offering were Stifel Nicolaus & Company, Incorporated, Robert W. Baird & Co. Incorporated, Canaccord Genuity Inc. and Needham & Company, LLC. We did not use any of the net proceeds from this offering for working capital or any other purposes during the three months ended January 31, 2017.

27


ITEM 6:

SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes in Part IV, Item 8 of this Annual Report on Form 10-K and with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K.

Our selected consolidated statement of operations data for the fiscal years ended January 31, 2017, 2016 and 2015 and our selected consolidated balance sheet data as of January 31, 2017 and 2016 are derived from our audited consolidated financial statements included elsewhere in this report. Our selected consolidated statement of operations data for the fiscal years ended January 31, 2014 and 2013 and selected consolidated balance sheet data as of January 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements which have not been included in this report.

Selected Consolidated Financial Data

 

 

 

Year Ended January 31,

 

 

 

2017

 

 

2016 (1)

 

 

2015 (2)

 

 

2014 (3)

 

 

2013 (4)

 

 

 

(in thousands, except share and per share data)

 

Statement of Operations Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

72,580

 

 

$

65,447

 

 

$

61,431

 

 

$

54,514

 

 

$

48,868

 

Operating income (loss)

 

 

396

 

 

 

(2,726

)

 

 

(2,447

)

 

 

(122

)

 

 

1,960

 

Net (loss) income

 

$

(1,132

)

 

$

(4,807

)

 

$

(19,157

)

 

$

(709

)

 

$

763

 

(Loss) earnings per share—basic

 

$

(0.08

)

 

$

(0.33

)

 

$

(1.39

)

 

$

(0.05

)

 

$

0.10

 

Weighted average shares—basic

 

 

14,779,117

 

 

 

14,520,834

 

 

 

13,735,897

 

 

 

13,326,883

 

 

 

7,929,364

 

(Loss) earnings per share—diluted

 

$

(0.08

)

 

$

(0.33

)

 

$

(1.39

)

 

$

(0.05

)

 

$

0.06

 

Weighted average shares—diluted

 

 

14,779,117

 

 

 

14,520,834

 

 

 

13,735,897

 

 

 

13,326,883

 

 

 

12,896,487

 

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,552

 

 

$

27,649

 

 

$

21,785

 

 

$

28,753

 

 

$

30,716

 

Total current assets

 

 

51,709

 

 

 

63,428

 

 

 

52,345

 

 

 

60,319

 

 

 

61,464

 

Total assets

 

 

69,074

 

 

 

79,021

 

 

 

63,053

 

 

 

84,849

 

 

 

84,070

 

Long-term debt and capital leases, net of current

   portion

 

 

914

 

 

 

2,549

 

 

 

1,602

 

 

 

2,695

 

 

 

7,842

 

Stockholders’ equity

 

$

19,174

 

 

$

17,487

 

 

$

18,891

 

 

$

35,533

 

 

$

34,771

 

 

(1)

The Balance Sheet Data table above reflects the early adoption of Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. We adopted this ASU prospectively as of January 31, 2016 and the adoption resulted in all current deferred tax assets and liabilities being reported as non-current as of January 31, 2016, while prior period deferred tax assets and liabilities were not adjusted. We determined that the adoption did not have a material effect on our financial position or results of operations.

(2)

Through the three months ended April 30, 2014, our results reflected a three-year cumulative loss position in the United States; prior thereto, our historical results reflected a three-year cumulative profit. As a result of our three-year cumulative loss position in the United States at April 30, 2014 and our projected cumulative loss position as a result of continued investment in the growth of our business, our management concluded that it was no longer more likely than not that our deferred tax assets would be realized, and that a valuation allowance was necessary in full amount of our United States net deferred tax assets. Accordingly, our income tax provision for fiscal year 2015 includes a $14.4 million non-cash charge to record a valuation allowance against our United States net deferred tax assets and a $0.8 million non-cash write-off of state deferred taxes. For further information, see Note 12 of the notes to our consolidated financial statements, which are included elsewhere in this report.

(3)

On May 31, 2013 we repaid, with available cash on hand, all outstanding obligations under our Loan and Security Agreement dated January 28, 2011 with Gold Hill Capital 2008, L.P. and Massachusetts Capital Resource Company. The repayment amount included $6.9 million of outstanding principal, $0.1 million of accrued interest and $0.2 million of deferred origination fees that were accrued for in other long-term liabilities. In addition, in accordance with the agreement terms, we incurred and paid a prepayment interest penalty of $0.3 million, representing 3% of the amount advanced to us under the agreement in January 2011, and 4% of the amount advanced to us under the agreement in March 2012. We recognized a loss from the extinguishment of this debt of $0.8 million during the second quarter of fiscal year 2014, representing the prepayment interest penalty and the write-off of unamortized debt discount.

(4)

On July 3, 2012, we completed our initial public offering in which we issued and sold 4,166,667 shares of common stock at a public offering price of $10.00 per share. We received net proceeds of $34.6 million after deducting underwriting discounts and commissions of approximately $2.9 million and other offering expenses of approximately $4.2 million. Upon the closing of the initial public offering, each share of our preferred stock was converted into two thirteenths of a share of our common stock.

28


ITEM 7:

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 consolidated financial statements and notes included in Part IV, Item 15 of this Annual Report on Form 10-K. 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 Annual Report, including but not limited to those set forth in “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”.

Overview

We develop, sell and support simulation software and services used primarily by vehicle manufacturers to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. 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. 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 150 manufacturers currently utilize our products and services, including the top 15 global passenger vehicle manufacturers. This data is based on motor vehicle production volume for 2015, 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 continue to expand our offerings in the aerospace and oil and gas production markets and explore other markets in which we believe the capabilities of PowerFLOW have broad application, such as the chemical processing, architecture engineering and construction, power generation, biomedical and electronics industries. The investment in our aerospace vertical business has increased our domain and portfolio of new applications. We have built a customer base of airframe, jet engine and supply manufacturers. We also recently announced the commercial launch and license of our product for use in the oil and gas production market.

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 ExaCLOUD offerings. 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 2017, we recorded total revenues, net loss and Adjusted EBITDA of $72.6 million, $(1.1) million and $6.5 million, respectively, as compared to $65.4 million, $4.8 million and $3.1 million, respectively, for the fiscal year 2016. Since generating our first commercial revenue in 1994, our annual revenue has increased for 22 consecutive years.

During the twelve months ended January 31, 2017, revenue growth was driven by continued deployment of our simulation solutions with our existing customer base as well as by the addition of new customers. We believe that our continued investments in field resources yield growth in both project and license revenue over time. While our geographic mix of revenue outside of the Americas during fiscal year 2017 was consistent with historical trends, the weakening U.S. dollar, particularly against the yen, had a material positive impact on revenue performance for fiscal year 2017 as compared to fiscal year 2016. During fiscal year 2017, 74% of our revenue came from outside of the Americas as compared to 71% for fiscal year 2016. Revenue growth for fiscal year 2017 was 10.9% over the same period a year ago and 9.0% when measured on a constant currency basis.

In the last two months of fiscal year 2017, we experienced increased caution regarding growth and deployment initiatives from our ground transportation customers, which impacted our incremental growth on some renewal orders. We attributed this to our

29


customers anticipating the impact of changes in the tax, trade and regulatory frameworks within which they operate. Based on renewal activity during this period, we expect that this will have an impact on revenue over the next fiscal year. In addition, as we have experienced on a limited basis in the past, we had a significantly reduced renewal commitment that will impact revenue and growth in the next fiscal year.

Throughout the last decade the market has increasingly recognized the benefits of the lattice Boltzmann-based CFD method to extend digital simulation possibilities. We have observed increased customer interest in not only Exa’s proprietary lattice Boltzmann technology, but also in alternative commercial, open source and in-house codes.  We believe that the increased market awareness of the lattice Boltzmann method is a positive trend for our product offering in the long run due to our technical leadership, intellectual property and experience with this technology.

Adjusted EBITDA and revenue on a constant currency basis are non-GAAP financial measures. For the definitions of Adjusted EBITDA and revenue on a constant currency basis, and explanation of our management’s use of these measures and a reconciliation of our Adjusted EBITDA to our net income, please see “— Non-GAAP Measures” below.

As a percent of revenue, our total operating expenses for fiscal year 2017 decreased approximately 4.7% when compared to the same period last year. This decrease is a result of our prior investments in resources to drive top line growth, including sales, marketing and research and development. While the majority of our expense base is in the United States, we have field resources based in our international offices which provide some natural foreign exchange hedge. As a result, the weakening dollar had a negative impact on total operating expenses when compared to the same period last year. For fiscal year 2017, total operating expenses were $72.2 million, with growth of 5.9% over the prior year and 5.7% when measured on a constant currency basis. See “— Non-GAAP Measures” below for information about how we calculate and use operating expenses on a constant currency basis.

As a percent of revenue, our income from operations for fiscal year 2017 was 0.5% compared with our loss from operations of 4.2% for fiscal year 2016, primarily as a result of cost-saving initiatives during fiscal year 2017 and the foreign currency impacts described above.

As of January 31, 2017, we had cash and cash equivalents of $24.6 million compared to $27.6 million as of January 31, 2016. The strong cash balance reflects strong accounts receivable collections activity and normal seasonal cash flows. Capital expenditures increased by $1.8 million during fiscal year 2017 compared to fiscal year 2016, primarily due to a $3.7 million investment in server equipment for our new high performance computing data center located in Virginia.

Seasonality

We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our software products. Many customers make purchase decisions based on their budget cycles, which typically coincide with the calendar year, except in Japan, where our customers’ budget cycle typically begins on April 1. Because our software products are sold pursuant to annual subscription agreements and we recognize revenue from these subscriptions over the term of the agreement, downturns or upturns in sales may not be immediately reflected in our operating results. However, these seasonal trends materially affect the timing of our cash flows, as we generally receive the annual license fee at the time the license term commences, or shortly thereafter. As a result, our cash flows from operations are typically highest in the first quarter of each fiscal year.

30


Results of Operations

The following tables set forth, for the periods presented, data from our consolidated statements of operation, as well as that data as a percentage of revenues. The information contained in these tables should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

 

 

 

Year Ended January 31,

 

(in thousands)

 

2017

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

License revenue

 

$

60,837

 

 

$

53,499

 

 

$

49,742

 

Project revenue

 

 

11,743

 

 

 

11,948

 

 

 

11,689

 

Total revenues

 

 

72,580

 

 

 

65,447

 

 

 

61,431

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

19,427

 

 

 

20,117

 

 

 

18,933

 

Sales and marketing

 

 

13,856

 

 

 

10,150

 

 

 

10,668

 

Research and development

 

 

24,319

 

 

 

24,140

 

 

 

21,809

 

General and administrative (2)

 

 

14,582

 

 

 

13,766

 

 

 

12,468

 

Total operating expenses

 

 

72,184

 

 

 

68,173

 

 

 

63,878

 

Income (loss) from operations

 

 

396

 

 

 

(2,726

)

 

 

(2,447

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange gain (loss)

 

 

166

 

 

 

(322

)

 

 

344

 

Interest expense

 

 

(140

)

 

 

(236

)

 

 

(342

)

Interest income

 

 

44

 

 

 

12

 

 

 

12

 

Other income, net

 

 

13

 

 

 

7

 

 

 

7

 

Total other income (expense), net

 

 

83

 

 

 

(539

)

 

 

21

 

Income (loss) before taxes

 

 

479

 

 

 

(3,265

)

 

 

(2,426

)

Provision for income taxes

 

 

(1,611

)

 

 

(1,542

)

 

 

(16,731

)

Net loss

 

$

(1,132

)

 

$

(4,807

)

 

$

(19,157

)

 

(1)

Amounts include stock-based compensation expense as follows:

 

 

 

Year Ended January 31,

 

(in thousands)

 

2017

 

 

2016

 

 

2015

 

Cost of revenues

 

$

162

 

 

$

234

 

 

$

209

 

Sales and marketing

 

 

269

 

 

 

405

 

 

 

413

 

Research and development

 

 

792

 

 

 

886

 

 

 

865

 

General and administrative

 

 

770

 

 

 

751

 

 

 

743

 

Total stock-based compensation expense

 

$

1,993

 

 

$

2,276

 

 

$

2,230

 

 

(2)

Includes amortization expense related to intangible assets as follows:

 

 

 

Year Ended January 31,

 

(in thousands)

 

2017

 

 

2016

 

 

2015

 

General and administrative

 

$

350

 

 

$

350

 

 

$

350

 

 

31


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

 

 

 

Year Ended January 31,

 

(as a percent of total revenue)

 

2017

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

License revenue

 

 

83.8

%

 

 

81.7

%

 

 

81.0

%

Project revenue

 

 

16.2

 

 

 

18.3

 

 

 

19.0

 

Total revenues

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

26.8

 

 

 

30.7

 

 

 

30.8

 

Sales and marketing

 

 

19.1

 

 

 

15.5

 

 

 

17.4

 

Research and development

 

 

33.5

 

 

 

36.9

 

 

 

35.5

 

General and administrative

 

 

20.1

 

 

 

21.0

 

 

 

20.3

 

Total operating expenses

 

 

99.5

 

 

 

104.2

 

 

 

104.0

 

Income (loss) from operations

 

 

0.5

 

 

 

(4.2

)

 

 

(4.0

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange gain (loss)

 

 

0.2

 

 

 

(0.5

)

 

 

0.6

 

Interest expense

 

 

(0.2

)

 

 

(0.4

)

 

 

(0.6

)

Interest income

 

 

0.1

 

 

 

0.0

 

 

 

0.0

 

Other income, net

 

 

0.0

 

 

 

0.0

 

 

 

0.0

 

Total other income (expense), net

 

 

0.1

 

 

 

(0.8

)

 

 

0.0

 

Income (loss) before taxes

 

 

0.7

 

 

 

(5.0

)

 

 

(3.9

)

Provision for income taxes

 

 

(2.2

)

 

 

(2.4

)

 

 

(27.2

)

Net loss

 

 

(1.6

)%

 

 

(7.3

)%

 

 

(31.2

)%

 

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

Comparison of Fiscal Years Ended January 31, 2017 and 2016

Revenue

 

 

 

Year Ended January 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2017

 

 

2016

 

 

Change

 

 

% Change

 

License revenue

 

$

60,837

 

 

$

53,499

 

 

$

7,338

 

 

 

13.7

%

Project revenue

 

 

11,743

 

 

 

11,948

 

 

 

(205

)

 

 

-1.7

%

Total revenues

 

$

72,580

 

 

$

65,447

 

 

$

7,133

 

 

 

10.9

%

 

License revenue increased 13.7% from $53.5 million in fiscal year 2016 to $60.8 million in fiscal year 2017. The $7.3 million increase was driven almost entirely by increased consumption of simulation capacity by existing customers and the addition of new license customers throughout the year. Deployment continues to expand in our core customer base across our portfolio of applications. We experienced particularly strong demand in our Asian markets. Project revenue decreased by $0.2 million during fiscal year 2017 compared to fiscal year 2016, which reflects our slowed investment in project capacity in fiscal year 2017, and we anticipate continued fluctuations in project revenue growth into fiscal year 2018. However, our project delivery capability continues to recycle into new opportunities to drive license growth. Both license and project revenue, particularly new customer opportunities, are leveraging the capabilities of our ExaCLOUD platform. Virtually all of our projects are now being delivered using ExaCLOUD exposing our customers to its capabilities. ExaCLOUD continues to play an increasingly important role in our new customer acquisition go-to-market model.

Foreign exchange fluctuations, particularly the strengthening of the Japanese yen, positively impacted total revenue in fiscal year 2017 by $1.2 million as compared to fiscal year 2016. On a constant currency basis, our total revenues in fiscal year 2017 increased 9.0%, compared with fiscal year 2016.

Cost of revenues

 

 

 

Year Ended January 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2017

 

 

2016

 

 

Change

 

 

% Change

 

Cost of revenues

 

$

19,427

 

 

$

20,117

 

 

$

(690

)

 

 

-3.4

%

32


 

Cost of revenues for fiscal year 2017 was $19.4 million, a decrease of $0.7 million, or 3.4%, compared with $20.1 million during fiscal year 2016. As a percentage of revenues, cost of revenues decreased to 26.8% for fiscal year 2017 from 30.7% for fiscal year 2016. The year-over-year decrease in cost of revenues was driven by decreased personnel-related costs of approximately $1.3 million associated with a change in headcount mix and lower stock-based compensations, along with a $0.2 million decrease in hosting fees driven by savings from an amended hosting agreement at our high performance computing data center in New Jersey. These decreases were partially offset by a $0.4 million increase in royalty costs and a $0.4 million increase in depreciation expense related to investments made to increase computing capacity.

Sales and marketing

 

 

 

Year Ended January 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2017

 

 

2016

 

 

Change

 

 

% Change

 

Sales and marketing

 

$

13,856

 

 

$

10,150

 

 

$

3,706

 

 

 

36.5

%

 

Sales and marketing expenses for fiscal year 2017 were $13.9 million, an increase of $3.7 million, or 36.5% compared with $10.2 million for fiscal year 2016. As a percentage of revenues, sales and marketing expenses increased to 19.1% for fiscal year 2017 from 15.5% for fiscal year 2016. The increase in sales and marketing expenses is primarily attributable to a $3.5 million increase in payroll and employee-related costs driven by a change in headcount mix, increased travel expenses, and increased commission expense related to the increased volume and timing of customer orders. The balance of the $0.2 million year-over-year change was driven primarily by increased recruiting fees and expenses for general marketing initiatives.

Research and development

 

 

 

Year Ended January 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2017

 

 

2016

 

 

Change

 

 

% Change

 

Research and development

 

$

24,319

 

 

$

24,140

 

 

$

179

 

 

 

0.7

%

 

Research and development expenses for fiscal year 2017 were $24.3 million, an increase of $0.2 million, or 0.7%, compared with $24.1 million for fiscal year 2016. As a percentage of revenues, research and development expense decreased to 33.5% for fiscal year 2017 from 36.9% for fiscal year 2016. The period-over-period increase in expense is attributable to a $0.3 million increase in professional service fees due to increased legal fees associated with the hiring of foreign employees and other software consulting fees; a net increase of $0.2 million in payroll and other employee-related costs driven by an increase in headcount and merit increases and partially offset by lower bonus and commission expense, lower travel expenses and lower stock-based compensation expense; and a $0.1 million increase in depreciation expense due to investments made to increase computing capacity. These increases were partially offset by decreases in network and facility expenses as a result of a $0.4 million decrease in hosting fees driven by savings from an amended hosting agreement at our high performance computing data center in New Jersey.

General and administrative

 

 

 

Year Ended January 31,

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

2017

 

 

2016

 

 

Change

 

 

% Change

 

General and administrative

 

$

14,582

 

 

$