S-1 1 ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on August 3, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

EXA CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   7372   23-3011410

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

55 Network Drive

Burlington, Massachusetts 01803

(781) 564-0200

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

 

 

Stephen A. Remondi

Chief Executive Officer

Exa Corporation

55 Network Drive

Burlington, Massachusetts 01803

Telephone: (781) 564-0200

Telecopy: (781) 564-0299

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

 

 

Copies to:

 

Robert W. Sweet, Jr., Esq.

John D. Patterson, Jr., Esq.

Foley Hoag LLP

Seaport West

155 Seaport Boulevard

Boston, Massachusetts 02210

Telephone: (617) 832-1000

Telecopy: (617) 832-7000

 

Kenneth J. Gordon, Esq.

Martin C. Glass, Esq.

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, Massachusetts 02109

Telephone: (617) 570-1000

Telecopy: (617) 523-1231

 

 

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Larger accelerated filer  ¨

   

Accelerated filer  ¨

Non-accelerated filer  x

 

(Do not check if a smaller reporting company)

 

Smaller reporting company  ¨

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered  

Proposed Maximum

Aggregate Offering Price(1)

 

Amount of

Registration Fee(2)

Common Stock, $0.001 par value

  $86,250,000   $10,014

 

 

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

 

 

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

 

 

 


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

 

SUBJECT TO COMPLETION, DATED AUGUST 3, 2011

LOGO

                     Shares

Common Stock

 

 

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

 

 

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

 

 

 

     Per Share      Total  

Public Offering Price

   $                    $                

Underwriting Discounts and Commissions

   $         $     

Proceeds to Us, Before Expenses

   $         $     

Proceeds to Selling Stockholders, Before Expenses

   $         $     

 

 

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

 

 

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

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

Stifel Nicolaus Weisel

 

Baird

      Canaccord Genuity
Needham & Company, LLC

The date of this Prospectus is                     , 2011.


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LOGO

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

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


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

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

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

 

 

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     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-Looking Statements

     25   

Use of Proceeds

     26   

Dividend Policy

     27   

Capitalization

     28   

Dilution

     29   

Selected Consolidated Financial Data

     31   

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

     34   

Business

     52   

Management

     69   

Principal and Selling Stockholders

     89   

Certain Relationships and Related Party Transactions

     91   

Description of Capital Stock

     93   

Shares Eligible for Future Sale

     95   

Underwriting

     97   

Legal Matters

     101   

Experts

     101   

Where You Can Find Additional Information

     102   

Index To Consolidated Financial Statements

     F-1   

 

 

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


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PROSPECTUS SUMMARY

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

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

Overview

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

Our core product, PowerFLOW®, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. PowerFLOW relies upon our proprietary technology that we refer to as Digital Physics®, which is based on algorithms known as the lattice Boltzmann method. Our proprietary technology enables PowerFLOW to predict complex fluid flows with a level of reliability comparable to or better than physical testing, with results that are more accurate and useful than those of alternative computational fluid dynamics, or CFD, methods.

We currently focus primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers. Over 80 manufacturers currently utilize our products and services, including 13 of the global top 15 passenger vehicle manufacturers. Global vehicle manufacturers face increasing pressure, from government mandates as well as from consumers, to improve the efficiency of their products. This requires different powertrain choices, changes in the shape of the vehicle, and reductions in vehicle weight, all of which we believe favor the adoption of simulation-driven design.

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

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

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

 

 

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Our Industry

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

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

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

Our Solution

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

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

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

 

 

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

Our Business Strengths

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

 

   

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

   

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

   

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

   

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

   

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

Our Growth Strategy

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

 

   

deepening deployment in our existing customer base;

   

adding new customers in the ground transportation market;

   

enabling additional applications and solutions;

   

penetrating new geographies;

   

exploring new vertical markets; and

   

selectively pursuing strategic acquisitions.

Risks Associated with Our Business

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

 

   

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

   

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

   

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

   

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

   

our sales cycle is lengthy and complicated;

   

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

 

 

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

   

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

   

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

Our Corporate Information

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

 

 

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THE OFFERING

 

Common stock offered by us

             Shares

 

Common stock offered by selling stockholders

             Shares

 

Common stock to be outstanding after this offering

             Shares

 

Over-allotment option

             Shares

 

Use of proceeds

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

 

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

 

Proposed NASDAQ Global Market symbol

EXA

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

 

   

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

 

   

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

 

   

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

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

 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

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

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

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

 

 

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

Consolidated Statement of Operations Data:

         

License revenue

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

Project revenue

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

Total revenue

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

Operating expenses: (1)

         

Cost of revenues

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

Sales and marketing

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

Research and development

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

General and administrative

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

Total operating expenses

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

(Loss) income from operations

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

Other income (expense), net

         

Foreign exchange gain (loss)

    549        (766     (198     180        (464

Interest expense

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

Other (expense) income

    (71     12        10        0        131   
                                       

Total other expense, net

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

(Loss) income before provision for income taxes

    (9,405     499        1,169        (568     851   

Provision for income taxes

    441        595        587        9        50   
                                       

Net (loss) income

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

Net (loss) income per common share:

         

Basic

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

Diluted

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

Weighted average number of common shares outstanding:

         

Basic

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

Diluted

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

 

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

 

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

Cost of revenues

   $ 33       $ 39       $ 45       $ 10       $ 9   

Sales and marketing

     87         62         63         15         2   

Research and development

     111         105         133         27         13   

General and administrative

     60         224         40         10         9   

 

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

Operating Data:

             

Adjusted EBITDA (2)

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

 

(2)

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

 

 

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

 

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

 

     The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with GAAP and should not be considered a measure of our liquidity. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies.

 

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

 

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

Net (loss) income

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

Depreciation and amortization

     2,853        2,699        1,560        428        322   

Interest expense, net

     1,218        586        1,262        567        242   

Other expense (income)

     71        (12     (10     (0     (131

Foreign exchange (gain) loss

     (549     766        198        (180     464   

Provision for income taxes

     441        595        587        9        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

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

Non-cash, share-based compensation expense

     291        430        281        62        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Consolidated Balance Sheet Data:

      

Cash

   $ 12,613      $ 12,613      $                

Total current assets

     19,394        19,394     

Total assets

     23,750        23,750     

Long-term debt, net of current portion

     4,481        4,481     

Convertible preferred stock

     32,663        —       

Stockholders’ (deficit) equity

     (48,955     (16,292  

 

 

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RISK FACTORS

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

Risks Related to Our Business and Industry

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

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

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

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

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

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

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

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

 

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

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

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

Our sales cycle is lengthy and complicated.

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

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

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

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

 

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

 

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

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

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

We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our software products. Many customers make purchase decisions based on their fiscal year budgets, which often coincide with the calendar year, except for our customers in Japan. These seasonal trends materially affect the timing of our cash flows, as license fees become due at the time the license term commences. As a result, new and renewal licenses have been concentrated in the fourth quarter of our fiscal year, and our cash flows from operations have been highest in the first quarter of the succeeding fiscal year.

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

Because our software products are sold pursuant to annual subscription agreements and we recognize revenue from these subscriptions over the term of the agreement, downturns or upturns in new or renewal licenses may not be fully reflected in our current period operating results. We do not intend to report or disclose our bookings or invoices on a current basis. If our new and renewal license purchases in any period decline or fail to grow at a rate consistent with our historical trends, particularly in the fourth quarter of our fiscal year, when a disproportionate percentage of our new license and renewal sales typically occur, our revenue in future periods could fall short of analysts’ expectations which, in turn, could adversely affect the price of our common stock.

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

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

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

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

 

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

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

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

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

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

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

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

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

 

   

changes in foreign currency exchange rates;

   

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

   

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

   

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

   

unexpected changes in tariffs or trade protection measures;

   

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

   

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

   

laws and business practices favoring local companies;

 

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

   

difficulties and costs of staffing and managing foreign operations;

   

disproportionate management attention or company resources;

   

changes in diplomatic and trade relationships;

   

international terrorism and anti-American sentiment;

   

possible future limitations on the ownership of foreign businesses;

   

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

   

longer accounts receivable payment cycles;

   

less effective protection of intellectual property; and

   

the challenges of handling legal disputes in foreign jurisdictions.

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

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

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

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

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

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

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

 

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

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

 

   

incur additional indebtedness;

   

redeem subordinated indebtedness;

   

create liens on our assets;

   

enter into transactions with affiliates;

   

make investments;

   

sell assets;

   

make material changes in our business or management;

   

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

   

consolidate or merge with other entities.

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

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

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

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

 

   

future revenue generation;

   

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

   

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

   

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

   

the effect of competing technological and market developments; and

   

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

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

 

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Risks Related to Our Intellectual Property

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

 

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

Risks Related to this Offering and Ownership of Our Common Stock

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

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

The market price for our common stock may be volatile.

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

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

 

   

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

   

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

   

the effects of seasonality on our business cycle;

   

success of competitive products and services;

   

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

   

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

   

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

   

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

   

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

   

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

   

changes in laws and regulations affecting our business;

   

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

   

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

   

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

   

any major change in our board or management;

   

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

   

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

 

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

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

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

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

 

   

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

   

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

   

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

   

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

   

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

   

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

   

changes in our pricing policies or those of our competitors;

   

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

   

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

   

unexpected outcomes of matters relating to litigation;

   

unanticipated changes in tax rates and tax laws;

   

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

   

failure to successfully integrate acquired businesses and technologies;

   

renegotiation or termination of royalty or intellectual property arrangements;

   

unanticipated impact of accounting for technology acquisitions, if any;

   

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

   

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

   

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

   

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

   

fluctuations in foreign currency exchange rates;

   

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

   

the purchasing and budgeting cycles of our customers.

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

 

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

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

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

 

   

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

   

institute a more comprehensive financial reporting and disclosure compliance function;

   

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

   

establish an internal audit function;

   

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

   

establish an investor relations function; and

   

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

 

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

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

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

 

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

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

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

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

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

 

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

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset our taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of our net operating loss carryforwards before they expire. The closing of this offering, alone or together with transactions that may occur in the future, may trigger an ownership change pursuant to Section 382, which could limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset our taxable income, if any. Any such limitation, whether as the result of this offering, sales of common stock by our existing stockholders or additional sales of common stock by us after this offering, could have a material adverse effect on our results of operations in future years. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

 

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USE OF PROCEEDS

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

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

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

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

 

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DIVIDEND POLICY

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

 

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CAPITALIZATION

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

 

   

on an actual basis;

 

   

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

 

   

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

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

 

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

Cash

   $ 12,613      $ 12,613      $                
  

 

 

   

 

 

   

 

 

 

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

     772        772     
  

 

 

   

 

 

   

 

 

 

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

     5,660        5,660     
  

 

 

   

 

 

   

 

 

 

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

     32,663        —          —     
  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity:

      

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

     3        59     

Additional paid-in capital

     13,016        45,623     

Accumulated deficit

     (62,137     (62,137  

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

     0        0     

Accumulated other comprehensive income

     163        163     
  

 

 

   

 

 

   

Total stockholders’ (deficit) equity

     (48,955     (16,292  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (9,860   $ (9,860   $     
  

 

 

   

 

 

   

 

 

 

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

 

   

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

 

   

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

 

   

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

 

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DILUTION

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

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

 

   

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

   

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

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

 

Assumed public offering price per share

      $                

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

   $                   

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

   $        
  

 

 

    

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

   $         $     
     

 

 

 

Dilution per share to new investors in the offering

      $     
     

 

 

 

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

 

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

Existing stockholders

              

New investors

              
  

 

  

 

  

 

  

 

  

 

Total

              
  

 

  

 

  

 

  

 

  

 

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

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

 

   

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

 

   

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

 

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

 

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SELECTED CONSOLIDATED FINANCIAL DATA

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

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

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

 

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

Consolidated Statement of Operations Data:

             

License revenue

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

Project revenue

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

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

Operating expenses: (1)

             

Cost of revenues

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

Sales and marketing

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

Research and development

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

General and administrative

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

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

(Loss) income from operations

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

Other income (expense), net

             

Foreign exchange (loss) gain

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

Interest expense

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

Other income (expense)

    7        15        (71     12        10        0        131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

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

(Loss) income before provision for income taxes

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

Provision for income taxes

    111        419        441        595        587        9        50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per common share:

             

Basic

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

Diluted

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

Weighted average number of common shares outstanding:

             

Basic

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

Diluted

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

 

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

 

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

Cost of revenues

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

Sales and marketing

     8        45        87        62         63         15         2   

Research and development

     29        55        111        105         133         27         13   

General and administrative

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

Operating Data:

                 

Adjusted EBITDA (2)

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

 

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

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

The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with GAAP and should not be considered a measure of our liquidity. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies.

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

 

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

Net (loss) income

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

Depreciation and amortization

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

Interest expense, net

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

Other (income) expense

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

Foreign exchange loss (gain)

     261        560        (549     766        198        (180     464   

Provision for income tax

     111        419        441        595        587        9        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

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

Non-cash, share-based compensation expense

     38        113        291        430        281        62        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Consolidated Balance Sheet Data:

               

Cash

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

Total current assets

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

Total assets

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

Long-term debt, net of current portion

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

Convertible preferred stock

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

Stockholders’ (deficit) equity

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

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial Data” and our financial statements and related notes that appear elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, including but not limited to those set forth in “Risk Factors” and “Special Note Regarding Forward-looking Statements.”

Overview

We develop, sell and support simulation software and services that vehicle manufacturers use to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. Our solutions enable our customers to augment or replace inefficient and expensive methods of evaluating designs, such as wind tunnel testing using physical prototypes, with accurate digital simulations that are more useful and timely. We enable significant cost savings and fundamental improvements in our customers’ vehicle development process by allowing their engineers and designers to gain crucial insights about design performance early in the product development cycle. We currently focus primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers.

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

 

   

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

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

 

   

deepening our deployment in our existing customer base;

   

adding new customers in the ground transportation market;

   

enabling additional applications and solutions;

   

penetrating new geographies;

   

exploring new vertical markets; and

   

selectively pursuing strategic acquisitions.

Key financial terms and metrics

Sources of revenue

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

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

Cost of revenues and operating expenses

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

 

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

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

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

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

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

Key metrics that we use to evaluate our performance

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

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

 

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management considers Adjusted EBITDA to be an important indicator of our operational strength and the performance of our business and a good measure of our historical operating trends. However, Adjusted EBITDA may have limitations as an analytical tool.

The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with GAAP and should not be considered a measure of our liquidity. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies.

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

 

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

Net (loss) income

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

Depreciation and amortization

     2,853        2,699        1,560        428        322   

Interest expense, net

     1,218        586        1,262        567        242   

Other expense (income)

     71        (12     (10     (0     (131

Foreign exchange (gain) loss

     (549     766        198        (180     464   

Provision for income tax

     441        595        587        9        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

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

Non-cash, share-based compensation expense

     291        430        281        62        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

 

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

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

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

Revenue is presented net of any taxes collected from customers.

Income Taxes

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

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

Stock-Based Compensation

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

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

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

 

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

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

 

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

Options granted

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

Weighted-average exercise price

  $ 1.00      $ 1.00      $ 1.00      $ 1.00   

Weighted-average grant date fair value of common stock

  $ 0.51      $ 0.54      $ 0.53      $ 0.53   

Assumptions:

       

Expected volatility

    49.6     53.0     57.5     57.0

Expected term (in years)

    6.17        6.22        6.25        6.25   

Risk-free interest rate

    3.20     2.81     2.84     2.72

Expected dividend yield

    0.0     0.0     0.0     0.0

Exercise price and fair value of common stock

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

Expected volatility

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

Expected term

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

Risk-free interest rate

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

Expected dividend yield

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

 

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

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

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

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

Equity-based compensation awards since February 1, 2010

 

Date of grant        

Aggregate Number of

Shares subject to award

        Award recipients        Exercise price

March 11, 2010

       197,000 shares of common stock       

9 non-executive

employees

      $1.00

June 3, 2010

       35,000 shares of common stock       

7 non-executive

employees

      $1.00

September 20, 2010

       75,000 shares of common stock       

19 non-executive

employees

      $1.00

December 3, 2010

       15,000 shares of common stock       

4 non-executive

employees

      $1.00

February 24, 2011

       27,500 shares of common stock       

5 non-executive

employees

      $1.00

March 21, 2011

       12,500 shares of common stock       

3 non-executive

employees

      $1.00

Awards during the three months ended April 30, 2010

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

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

 

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

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

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

Awards during the three months ended July 31, 2010

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

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

Awards during the three months ended October 31, 2010

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

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

Awards during the three months ended January 31, 2011

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

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

Awards during the three months ended April 30, 2011

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

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

 

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

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

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

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

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

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

Research and Development Expenses

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

Foreign Currency Translation

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

 

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

Valuation of Equity Participation Right

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

 

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Results of Operations

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

 

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

License revenue

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

Project revenue

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Cost of revenues

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

Sales and marketing

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

Research and development

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

General and administrative

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

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

Other income (expense), net;

          

Foreign exchange gain (loss)

     549        (766     (198     180        (464

Interest expense

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

Other (expense) income

     (71     12        10        0        131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

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

Provision for income taxes

     441        595        587        9        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   

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

License revenue

     82.7     75.4     81.1     83.3     90.0

Project revenue

     17.3     24.6     18.9     16.7     10.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Cost of revenues

     33.6     28.0     26.2     30.0     27.2

Sales and marketing

     20.4     14.9     16.2     16.4     12.3

Research and development

     44.0     35.4     33.9     37.9     30.9

General and administrative

     27.4     16.6     16.8     18.1     15.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     125.4     94.8     93.1     102.3     86.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (25.4 )%      5.2     6.9     (2.3 )%      13.8

Other income (expense), net

          

Foreign exchange gain (loss)

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

Interest expense

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

Other (expense) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

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

Provision for income taxes

     1.3  %      1.7  %      1.6  %      0.1  %      0.5  % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

Net Cash Flows from Operating Activities

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

 

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Cash payments from our customers fluctuate due to the timing of new and renewal license sales, which typically coincide with our customers’ budget cycles. The fourth quarter of each fiscal year generally has the highest license sales, with payment of the license fee becoming due at the commencement of the license term. As a result, our cash flows from operations are typically highest in the first quarter of each fiscal year. Cash payments to employees are typically ratable throughout the fiscal year, with the exception of annual incentive payments, which occur in the first quarter, and sales commissions on license sales.

Customers are invoiced in advance for their annual subscription fee and the invoices are recorded in accounts receivable and deferred revenue, with deferred revenues being recognized ratably over the term of the subscription agreement. Increases in deferred revenue are attributable to growth in new business, offset by the related license revenues that are recognized ratably over time.

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

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

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

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

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

 

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Net Cash Flows from Investing Activities

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

Net Cash Flows from Financing Activities

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

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

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

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

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

Capital Resources

Our future capital requirements may vary materially from those now planned and will depend on many factors, including the costs to develop and implement new solutions and applications, the sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications we develop, the expansion of our operations in the United States and internationally and the response of competitors to our solutions and applications. Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we grow our business.

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

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

Off-Balance Sheet Arrangements

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

Contractual Commitments

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

 

     Amounts Due by Period  

Contractual Obligations

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

Line of credit

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

Long-term debt obligations

     5,000         —           2,507         2,493         —     

Capital lease obligations

     295         221         74         —           —     

Operating lease obligations

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Quantitative and Qualitative Disclosures about Market Risk

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

 

   

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

   

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

   

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

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

Interest Rate Risk. Our outstanding long-term debt carries interest at a fixed rate. Our revolving bank line of credit bears interest at a floating rate; however, we currently have no borrowing outstanding under this facility. As a result, we do not believe that we are exposed to material interest rate risk. Our cash is maintained in interest bearing bank accounts. Interest income is sensitive to changes in the general level of U.S. and international interest rates. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Our cash and short-term investments are relatively insensitive to interest rate changes. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.

Seasonality

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

Recent Accounting Pronouncements

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

 

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

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

 

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BUSINESS

Overview

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

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

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

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

We currently focus primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers. Over 80 manufacturers currently utilize our products and services, including 13 of the global top 15 passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen/Porsche; truck and off-highway vehicle manufacturers such as AGCO, Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo; and suppliers to these manufacturers, such as Cummins, Denso and Magna Steyr. We are also beginning to explore other markets in which we believe the capabilities of PowerFLOW have broad application, such as the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

We derive our revenue primarily from the sale of our simulation software, using an annual capacity-based model. Customers usually purchase PowerFLOW simulation capacity under one-year licenses. Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulation services accessed via our OnDemand facilities, along with engineering and consulting services. Customers typically license our products for one application, such as aerodynamics, and over time expand to other applications such as thermal management or aeroacoustics.

 

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

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

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

 

   

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

   

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

   

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

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

Our Industry

Manufacturers’ requirements

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

 

   

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

   

meet customer desires for innovative product designs;

   

optimize products for quality, performance and safety;

   

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

   

reduce product development, material and warranty costs.

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

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

 

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The Vehicle Development Process

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

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

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

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

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

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

 

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

Emergence of simulation-driven design technologies

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

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

 

   

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

   

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

   

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

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

Challenges of fluid dynamics simulation

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

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

Our Solution

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

 

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

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

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

For example:

 

   

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

 

   

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

 

   

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

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

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

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

 

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

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

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

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

Our Business Strengths

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

Our Growth Strategy

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

Our Products and Applications

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

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

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

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

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

 

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Our Product Suite

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

LOGO

 

Simulation preparation 

 

Key Features

 

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

PowerDELTA

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

PowerCASE

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

PowerCLAY

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

 

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Simulation Server

 

Key Features

 

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

PowerFLOW

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

PowerTHERM

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

PowerCOOL

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

Simulation Analysis

 

Key Features

 

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

PowerINSIGHT

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

PowerVIZ

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

PowerACOUSTICS

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

Our Applications

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

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

 

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

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

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

LOGO

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

 

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

Our Technology

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

 

   

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

   

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

   

accurate.

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

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

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

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

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

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

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

 

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

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

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

Customers and Markets

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

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

 

   

Passenger vehicle manufacturers;

   

Highway truck manufacturers;

   

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

   

Train manufacturers; and

   

Suppliers to the above manufacturers.

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

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

Examples of Customer Deployments

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

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

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

 

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

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

 

   

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

   

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

   

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

   

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

LOGO

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

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

 

   

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

   

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

   

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

   

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

   

Composite sun visor—reduced drag with improved glare protection

   

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

   

Aerodynamic mirrors—improved shape to reduce drag

   

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

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

 

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Sales and Marketing

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

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

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

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

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

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

Research and Development

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

 

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

Competition

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

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

Intellectual Property

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

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

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

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

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

 

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

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

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

Employees

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

Facilities

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

Legal Proceedings

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

 

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MANAGEMENT

Executive Officers and Directors

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

 

Name

   Age     

Position

Stephen A. Remondi

     46       Chief Executive Officer, President, Director

Edmond L. Furlong

     47       Chief Operating Officer and Chief Financial Officer

Jean-Paul Roux

     47       Vice President of European Operations

Hudong Chen, Ph.D.

     54       Chief Scientist, Vice President of Physics

James Hoch

     47       Vice President of Software Development

John J. Shields, III (1)

     72       Chairman of the Board of Directors

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

     73       Director

Wayne Mackie (2)(3)

     62       Director

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

     72       Director

Robert Schechter (2)

     62       Director

 

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

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

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

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

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

 

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

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

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

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

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

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

 

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

Board of Directors

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

 

   

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

   

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

   

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

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

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

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

Committees of the Board of Directors

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

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

 

   

the integrity of our financial statements;

   

our compliance with legal and regulatory requirements;

   

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

   

the performance of our independent registered public accounting firm.

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

 

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

 

   

approves the compensation and benefits of our executive officers;

   

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

   

administers our equity compensation plans.

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

 

   

identifies individuals qualified to become board members;

   

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

   

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

Compensation Committee Interlocks and Insider Participation

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

Director Compensation

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

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

 

   

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

   

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

   

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

   

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

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

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

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

 

     Fees earned or paid in cash      Total  

John J. Shields, III (1)

   $ —         $ —     

John William Poduska

   $ 28,000       $ 28,000   

Wayne Mackie

   $ 37,500       $ 37,500   

John F. Smith, Jr.

   $ 26,500       $ 26,500   

Robert Schechter

   $ 28,500       $ 28,500   

Paul L. Mucci (1)(2)

   $ —         $ —     

 

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

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

Code of Ethics

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

 

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EXECUTIVE COMPENSATION

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

Summary Compensation Table for Fiscal Year 2011

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

 

Name and Principal Position

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

Stephen A. Remondi

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

Chief Executive Officer and

                

President

                

Edmond L. Furlong

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

Chief Operating Officer and

                

Chief Financial Officer

                

Hudong Chen

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

Chief Scientist and Vice

                

President of Physics

                

James Hoch

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

Vice President of Software

                

Development

                

Jean-Paul Roux

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

Vice President of European

                

Operations (1)

                

 

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

 

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Grants of Plan-Based Awards for Fiscal Year 2011

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

 

     Estimated Possible Payouts under Non-Equity
Incentive Plan Awards
 

Name and Principal Position

   Threshold ($)     Maximum ($)  

Stephen A. Remondi

     100,000  (1)      350,000  (1) 

Chief Executive Officer and

    

President

    

Edmond L. Furlong

     100,000  (1)      300,000  (1) 

Chief Operating Officer and

    

Chief Financial Officer

    

Hudong Chen

     75,000  (2)                    (2) 

Chief Scientist and Vice

    

President of Physics

    

James Hoch

     75,000  (2)                    (2) 

Vice President of Software

    

Development

    

Jean-Paul Roux

                   (3)                    (3) 

Vice President of European

    

Operations

    

 

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

 

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

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

 

    Option Awards  

Name and Principal Position

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

Stephen A. Remondi

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

Chief Executive Officer and President

       

Edmond L. Furlong Chief

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

Operating Officer and Chief Financial Officer

       

Hudong Chen

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

Chief Scientist and Vice President of Physics

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

James Hoch

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

Vice President of Software Development

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

Jean-Paul Roux

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

Vice President of European Operations

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

 

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

Option Exercises and Stock Vested for Fiscal Year 2011

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

Non-qualified Deferred Compensation Plans

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

Pension Benefits

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

Potential Payments Upon Termination or Change-in-Control

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

 

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

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

 

Name and Principal Position

   Potential Severance Payments ($)  

Hudong Chen

     240,000  (1) 

Chief Scientist and Vice President of Physics

  

James Hoch

     240,000  (1) 

Vice President of Software Development

  

Jean-Paul Roux

     258,076  (2) 

Vice President of European Operations

  

 

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

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

Compensation Discussion and Analysis

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

Elements and objectives of our executive compensation program.

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

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

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

 

   

salary;

   

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

   

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

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

 

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

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

Executive compensation process.

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

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

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

Role of executive officers in establishing compensation.

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

Executive compensation for fiscal year 2011.

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

 

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

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

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

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

 

Fiscal year 2011 invoice growth rate

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

20%

     100,000         —     

25%

     150,000         100,000   

30%

     200,000         150,000   

35%

     250,000         200,000   

40%

     300,000         250,000   

45%

     350,000         300,000   

The variable compensation of our chief scientist and vice president of physics, Dr. Chen, and our vice president of software development, Mr. Hoch, for fiscal year 2011 were determined by a formula that consisted of $40,000 plus the product of their respective base salaries multiplied by our invoice growth rate for fiscal year 2011, subject to guaranteed minimum variable compensation of $75,000 for fiscal year 2011.

The variable compensation for our vice president of European operations, Mr. Roux, was structured as a commission on the aggregate amount of the fiscal year 2011 invoices from the territories for which he was responsible, with the commission rate being determined by reference to a matrix based on our fiscal year 2011 European invoice growth rate, which was calculated in the same manner as for our other executive officers, except that it was limited to invoices generated in the territories for which he was responsible. The specified commission rate increased linearly, from zero at a European invoice growth rate of zero, to 1.9% at a European invoice growth rate of 50%.

 

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Based on the foregoing considerations, in February 2011 our compensation committee awarded to our named executive officers annual variable compensation as follows, which were computed by reference to our fiscal year 2011 invoice growth rate and European invoice growth rate, which the committee determined to be 35% and 45%, respectively:

 

Named executive officer

   Annual variable compensation earned
for fiscal year 2011 ($)
 

Chief executive officer

     250,000   

Chief financial officer

     200,000   

Chief scientist

     124,000   

Vice president of software development

     124,000   

Vice president of European operations

     327,015   

In addition to his annual variable compensation, our chief executive officer received a discretionary bonus of $50,000 for fiscal year 2011, in recognition of his role in leading the company through the challenging recession period and return to profitability in fiscal year 2011.

Under his employment agreement dated August 25, 2005, Mr. Roux is entitled to receive an expatriation bonus in connection with any travel that he is required to undertake outside of France, other than travel solely for periodic internal meetings. Mr. Roux is entitled to receive €600 per day in connection with any such travel inside Europe and €900 per day with respect to any such travel outside of Europe. In no event may the expatriation bonus paid to Mr. Roux in any year exceed 30% of his combined salary and commissions. We paid Mr. Roux an expatriation bonus of €38,100 or $50,269 (assuming an exchange rate of €1:$1.3194, which is the average of the daily noon buying rates of exchange for the year ended January 31, 2011, as reported by the Board of Governors of the United States Federal Reserve System) for fiscal year 2011.

Equity-based incentive awards. We believe that long-term equity-based incentives are important as a means of aligning the interests of management with stockholders’ interest in the financial performance of our company and value of our stock, and also in recruiting and retaining qualified executives. Options to purchase shares of our Series G Convertible Preferred Stock under our 2005 Series G Convertible Preferred Stock Incentive Plan, or our 2005 stock incentive plan, have historically been our primary form of long-term incentive compensation for our executive officers. Upon the conversion to common stock of our outstanding shares of Series G Convertible Preferred Stock, which will occur immediately prior to the closing of the offering contemplated by this prospectus, any options outstanding under the 2005 stock incentive plan will automatically be converted to options to purchase a like number of shares of our common stock, on the same terms. In order to provide a significant incentive to executive officers to remain with our firm and create long-term value for our stockholders, our compensation committee’s policy is ordinarily to provide that stock options awarded to our executive officers vest over a four-year period. We did not award any equity-based awards to our named executive officers during fiscal year 2011.

On July 19, 2011, our board of directors approved the issuance of options to purchase an aggregate of 825,000 shares of our common stock to our named executive officers. These options were issued under our 2007 Stock Incentive Plan and have an exercise price of $1.75 per share. The options will vest over a period of four years, with the first vesting commencing on October 1, 2013. The following table provides information regarding the numbers of shares of common stock subject to the options granted to our named executive officers on July 19, 2011:

 

Named executive officer

   Number of shares
of common stock subject to
options granted on July 19, 2011
 

Stephen A. Remondi

     250,000   

Edmond L. Furlong

     150,000   

Hudong Chen

     150,000   

James Hoch

     175,000   

Jean-Paul Roux

     100,000   

Section 162(m) of the Internal Revenue Code.

Section 162(m) of the Internal Revenue Code limits the tax deduction of public companies for compensation in excess of $1.0 million paid to their chief executive officer and the three most highly compensated executive officers (other than the chief financial officer) at the end of any fiscal year unless the compensation qualifies as “performance-based compensation.” Prior to the offering, compensation paid to our executive officers is not subject

 

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to the limitations on deductions imposed by Section 162(m). Our compensation committee’s policy going forward with respect to Section 162(m) is to make a reasonable effort to cause compensation to be deductible by us while simultaneously providing our executive officers with appropriate rewards for their performance.

Equity Incentive Plans

We have the following equity incentive plans: (i) 1999 Series G Convertible Preferred Nonqualified Stock Option Plan; (ii) 2005 Series G Convertible Preferred Stock Incentive Plan, (iii) 2007 Stock Incentive Plan, (iv) 2011 Stock Incentive Plan and (v) 2011 Employee Stock Purchase Plan. Following the completion of this offering, our 2011 Stock Incentive Plan and 2011 Employee Stock Purchase Plan will be the only effective equity compensation plans pursuant to which we will make new awards.

1999 Series G Convertible Preferred Nonqualified Stock Option Plan

Our 1999 Series G Convertible Preferred Nonqualified Stock Option Plan, or our 1999 stock option plan, provides for the issuance of non-qualified options to purchase shares of our Series G Convertible Preferred Stock.

The material features of our 1999 stock option plan are summarized below. The complete text of our 1999 stock option plan is filed as an exhibit to the registration statement of which this prospectus forms a part.

General. The total number of shares of Series G Convertible Preferred Stock reserved for issuance under the 1999 stock option plan is 2,500,000. Any shares that may be issued under our stock incentive plan to any person pursuant to an award are counted against this limit as one share for every one share granted.

Purposes. The purpose of our 1999 stock option plan is to provide additional incentive to our executives, key employees and consultants by affording them an opportunity to acquire, or increase their interest in, an ownership stake in our business.

Administration. Our 1999 stock option plan is administered by our board of directors.

Source of shares. The shares of Series G Convertible Preferred Stock issued or to be issued under our 1999 stock option plan consist of authorized but unissued shares. If any shares covered by an award are not purchased or are forfeited or if an award otherwise terminates without delivery of any shares, then the number of shares of Series G Convertible Preferred Stock counted against the aggregate number of shares available under the 1999 stock option plan with respect to the award will, to the extent of any such forfeiture or termination, be available for making awards under the 1999 stock option plan.

Eligibility. All of our officers, employees and directors, and the officers, employees and directors of our subsidiaries, are eligible to receive stock options pursuant to the 1999 stock option plan. In addition, stock options may be awarded under the 1999 stock option plan to consultants and other individuals providing services to us or any of our subsidiaries.

Amendment or termination of the 1999 stock option plan. Our board of directors may terminate or amend the 1999 stock option plan at any time. No amendment or termination of the 1999 stock option plan may adversely impair the rights or obligations under any option granted prior to such amendment or termination without the consent of the holder of the option. Unless terminated earlier, the 1999 stock option plan will terminate at such time that the total number of shares of Series G Convertible Preferred Stock available for issuance under the 1999 stock option plan shall have been so issued upon the exercise of stock options issued under the 1999 stock option plan.

Options. The 1999 stock option plan permits the granting of non-qualified stock options to our employees, directors, officers, consultants or advisors in the discretion of our board of directors.

The exercise price of any non-qualified stock option issued under the 1999 stock option plan will be determined by our board of directors and may be less than the fair market value of shares of our Series G Convertible Preferred Stock.

The term of each option may not exceed 10 years from the date of grant. The board of directors will determine at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The vesting and exercisability of options may be accelerated by our board of directors. The exercise price of an option may not be amended or modified after the grant of the option.

 

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In general, an optionee may pay the exercise price of an option by cash or, with the consent of our board of directors, by tendering shares of our Series G Convertible Preferred Stock with a fair market value equal to the exercise price of the option.

Options granted under our 1999 stock option plan may not be sold, transferred, pledged or assigned other than by will or under applicable laws of descent and distribution.

Following the completion of this offering, each outstanding option granted under our 1999 stock option plan will be exercisable for a number of shares of common stock equal to the number of shares of our Series G Convertible Preferred Stock for which such option was originally exercisable. No change will be made to the exercise price of any outstanding options granted under our 1999 stock option plan as a result of this offering.

Effect of a change in control. If we experience a “change of control,” as defined in the 1999 stock option plan, upon the exercise of any stock option issued under the 1999 stock option plan, in lieu of receiving shares of our Series G Convertible Preferred Stock the holder of such option shall receive the cash, securities or other property to which such holder would have been entitled under pursuant to the terms of the transaction giving rise to the change of control if, immediately prior to such event, the holder had been the holder of record of a number of shares of Series G Convertible Preferred Stock equal to the number of shares issuable upon such exercise. In lieu of the foregoing, in connection with any change of control, our board of directors may (i) accelerate the time for exercise of all unexercised or unexpired options to a date prior to the effective date of the change of control or (ii) cancel all outstanding options as of the effective time of the change of control provided that notice is given to each option holder and each option holder is given the right to exercise such options to the extent exercisable (after taking into account any acceleration) for the 30-day period prior to such change of control.

2005 Series G Convertible Preferred Stock Incentive Plan

Our 2005 Series G Convertible Preferred Stock Incentive Plan, or our 2005 stock incentive plan, provides for the issuance of options to purchase shares of our Series G Convertible Preferred Stock and restricted stock awards denominated in shares of our Series G Preferred Stock. We have not issued any restricted stock awards under the 2005 stock incentive plan to date. We will not make any new awards under the 2005 stock incentive plan following the completion of this offering.

The material features of our 2005 stock incentive plan are summarized below. The complete text of our 2005 stock incentive plan is filed as an exhibit to the registration statement of which this prospectus forms a part.

General. The total number of shares of Series G Convertible Preferred Stock reserved for issuance under the 2005 stock incentive plan is 12,000,000. Any shares that may be issued under our 2005 stock incentive plan to any person pursuant to an award are counted against this limit as one share for every one share granted.

Purposes. The purpose of our 2005 stock incentive plan is to secure for our company and our shareholders the benefits arising from capital stock ownership by employee, officers, and directors of, and consultants and advisors to, our company and its subsidiaries.

Administration. Our 2005 stock incentive plan is administered by our board of directors.

Source of shares. The shares of Series G Convertible Preferred Stock issued or to be issued under our 2005 stock incentive plan consist of authorized but unissued shares and reacquired shares. If any shares covered by an award are not purchased or are forfeited or if an award otherwise terminates without delivery of any shares, or if any shares of Series G Convertible Preferred Stock are tendered in payment of the exercise price of an option, then the number of shares of Series G Convertible Preferred Stock counted against the aggregate number of shares available under the 2005 stock incentive plan with respect to the award will, to the extent of any such forfeiture, termination or tender, be available for making awards under the 2005 stock incentive plan.

Eligibility. All of our employees and non-employee directors are eligible to be granted awards under the 2005 stock incentive plan. Certain individual consultants, advisors and independent contractors who render services to us are also eligible to participate in the 2005 stock incentive plan.

Amendment or termination of the 2005 stock incentive plan. Our board of directors may terminate or amend the 2005 stock incentive plan at any time. No amendment or termination may adversely impair the rights of grantees with respect to outstanding awards without the affected participant’s consent to such amendment. In addition, an

 

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amendment will be contingent on approval of our stockholders to the extent required by law. Unless terminated earlier, our stock incentive plan will terminate in 2015, but will continue to govern unexpired awards.

Options. Our 2005 stock incentive plan permits the granting of options to purchase shares of our Series G Convertible Preferred Stock intended to qualify as “incentive stock options” under the Internal Revenue Code as well as options that do not qualify as incentive stock options, which are referred to as non-qualified stock options. We may grant non-qualified stock options to our employees, directors, officers, consultants or advisors in the discretion of our board of directors. Incentive stock options will only be granted to our employees.

The exercise price of each incentive stock option may not be less than 100% of the fair market value of shares of our common stock on the date of grant. If we grant incentive stock options to any 10% stockholder, the exercise price may not be less than 110% of the fair market value of shares of our common stock on the date of grant. The exercise price of any non-qualified stock option will be determined by our board of directors and may not be less than the fair market value of shares of our Series G Convertible Preferred Stock.

The term of each option may not exceed 10 years from the date of grant. The board of directors will determine at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The vesting and exercisability of options may be accelerated by our board of directors. The exercise price of an option may not be amended or modified after the grant of the option.

In general, an optionee may pay the exercise price of an option by cash or, if so provided in the applicable option agreement, by tendering shares of our Series G Convertible Preferred Stock having a fair market value equal to the exercise price, by delivery of a personal recourse promissory note in the amount of the exercise price, by reducing the number of shares of Series G Convertible Preferred Stock issuable upon exercise of the option by a number of shares having an aggregate fair market value equal to the exercise price, or by any combination of these forms of payment.

Options granted under our 2005 stock incentive plan may not be sold, transferred, pledged or assigned other than by will or under applicable laws of descent and distribution. However, we may permit limited transfers of non-qualified options for the benefit of immediate family members of a grantee if a grantee is incapacitated and unable to exercise his or her option.

No options may be granted under our 2005 stock incentive plan to a resident of France unless the optionee is employed by us at the time of the grant. Additionally, options granted under our 2005 stock incentive plan to residents of France may not be exercised earlier than one year after the date the option is granted and any shares of our common stock issued upon the exercise of such an option may not be sold or transferred (other than by will or the laws of descent and distribution) within four years of the date the option is granted. Options granted under the 2005 stock incentive plan to residents of France may not provide for an exercise period longer than six months following the death of the optionee.

Following the completion of this offering, each outstanding option granted under our 2005 stock incentive plan will be exercisable for a number of shares of common stock equal to the number of shares of our Series G Convertible Preferred Stock for which such option was originally exercisable. No change will be made to the exercise price of any outstanding options granted under our 2005 stock incentive plan as a result of this offering.

Restricted stock awards. Restricted stock awards consist of shares of our Series G Convertible Preferred Stock that are subject to vesting restrictions determined by our board of directors, including the recipient’s continued employment by us or the achievement of pre-established goals or objectives. Restricted stock awards are issued pursuant to restricted stock agreements in such form as our board of directors may approve. Restricted stock agreements may provide for the forfeiture or repurchase by our company of shares subject to the restricted stock award in the event that vesting restrictions set forth in the agreement are not satisfied.

Restricted stock awards may have restrictions that lapse based upon length of service of the recipient or based upon the attainment of performance goals. Unless otherwise specified in the agreement governing the restricted stock award, all shares subject to the restricted stock award shall be entitled to vote and shall receive dividends during the periods of restriction.

 

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Adjustments for share dividends and similar events. We will make appropriate adjustments in outstanding awards and the number of shares available for issuance under our 2005 stock incentive plan, including the individual limitations on awards, to reflect share dividends, share splits, spin-offs and other similar events.

Effect of a change in control. In the event of (i) our consolidation or merger pursuant to which outstanding shares of capital stock are exchanged for securities, cash or other property of any other corporation or business entity, (ii) a sale of all or substantially all of our assets, or (iii) our liquidation, our board of directors, or the board of directors of any corporation assuming our obligations, may: (i) provide that some or all of the outstanding options issued under the 2005 stock incentive plan shall be assumed, or equivalent options be substituted, by the acquiring or succeeding corporation, (ii) upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee (to the extent otherwise then exercisable) within a specified period following the date of such notice, (iii) in the event of a merger under the terms of which holders of our Series G Convertible Preferred Stock will receive a cash payment for each share surrendered in the merger, which we refer to as the merger price, make or provide for a cash payment to the optionees equal to the difference between (A) the merger price times the number of shares of Series G Stock subject to outstanding options, which have an exercise price less than the merger price and (B) the aggregate exercise price of all such outstanding options, and (iv) provide that all or any outstanding options shall become exercisable in full immediately prior to such event.

In the event of a business combination or other transaction of the type described above, any securities, cash or other property received in exchange for shares of restricted stock shall continue to be governed by the provisions of the restricted stock agreement pursuant to which they were issued.

2007 Stock Incentive Plan

We have adopted our 2007 Stock Incentive Plan, which provides for the issuance of equity-based awards, denominated in shares of our common stock, including incentive stock options, non-qualified stock options, restricted stock awards, unrestricted stock awards, performance share awards, restricted stock units and stock appreciation rights. No restricted stock awards, performance share awards, restricted stock units or stock appreciation rights have been granted under the 2007 stock incentive plan. We will not make any new awards under the 2007 stock incentive plan following the completion of this offering.

The material features of our 2007 stock incentive plan are summarized below. The complete text of our 2007 stock incentive plan is filed as an exhibit to the registration statement of which this prospectus forms a part.

General. The total number of shares of common stock reserved for issuance is 7,000,000. Any shares that may be issued under our 2007 stock incentive plan to any person pursuant to an award are counted against this limit as one share for every one share granted. In no event may any person be granted awards under the 2007 stock incentive plan with respect to more than 500,000 shares of our common stock in any calendar year.

Purposes. The purpose of our 2007 stock incentive plan is to encourage and enable our officers and employees and other persons providing services to us an dour subsidiaries to acquire a proprietary interest in our business. We believe that by providing such persons with a direct stake in our welfare will assure a closer identification of their interests with our interests and the interests of our shareholders, thereby stimulating their efforts on our behalf and strengthening their desire to remain with us.

Administration. Our 2007 stock incentive plan is administered by the compensation committee of our board of directors. The compensation committee is comprised of individuals intended to be, “non-employee directors” for purposes of United States federal securities laws and will qualify as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code. Subject to the terms of our 2007 stock incentive plan, the compensation committee may determine the types of awards and the terms and conditions of such awards, interpret provisions of our 2007 stock incentive plan and select participants to receive awards.

Source of shares. The shares of common stock issued or to be issued under our 2007 stock incentive plan consist of authorized but unissued shares and shares that we have reacquired. Shares of common stock underlying any awards issued under the 2007 stock incentive plan that are forfeited, cancelled, reacquired by us or otherwise terminated (other than by exercise) shall be added back to the shares of common stock with respect to which awards may be granted under the 2007 stock incentive plan.

 

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Eligibility. Awards may be granted under the 2007 stock incentive plan to our and our subsidiaries’ officers, directors and employees and to consultants and advisers to and us and our subsidiaries.

Amendment or termination of our stock incentive plan. Our board of directors may terminate or amend the 2007 stock incentive plan at any time. No amendment or termination may adversely impair the rights of grantees with respect to outstanding awards without the affected participant’s consent to such amendment. In addition, an amendment will be contingent on approval of our stockholders to the extent required by law. Unless terminated earlier, our 2007 stock incentive plan will terminate in 2017, but will continue to govern unexpired awards.

Options. Our 2007 stock incentive plan permits the granting of options to purchase shares of common stock intended to qualify as “incentive stock options” under the Internal Revenue Code, and options that do not qualify as incentive stock options, which are referred to as non-qualified stock options. We may grant non-qualified stock options to our employees, directors, officers, consultants or advisors in the discretion of our board of directors. Incentive stock options will only be granted to our employees.

The exercise price of each incentive stock option may not be less than 100% of the fair market value of shares of our common stock on the date of grant. If we grant incentive stock options to any 10% stockholder, the exercise price may not be less than 110% of the fair market value of shares of our common stock on the date of grant. The exercise price of any non-qualified stock option will be determined by our board of directors and may note be less than the fair market value of shares of our common stock.

The term of each option may not exceed 10 years from the date of grant. The compensation committee will determine at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The vesting and exercisability of options may be accelerated by the compensation committee of our board of directors. The exercise price of an option may not be amended or modified after the grant of the option.

In general, an optionee may pay the exercise price of an option by cash or, if so provided in the applicable option agreement, by tendering shares of our common stock, by a “cashless exercise” through a broker supported by an irrevocable and unconditional undertaking by such broker to deliver sufficient funds to pay the applicable exercise price, by reducing the number of shares otherwise issuable to the optionee upon exercise of the option by a number of shares having a fair market value equal to the aggregate exercise price of the options being exercised, or by any combination of these forms of payment.

Options granted under our 2007 stock incentive plan may not be sold, transferred, pledged or assigned other than by will or under applicable laws of descent and distribution. However, we may permit limited transfers of non-qualified options for the benefit of immediate family members of a grantee if a grantee is incapacitated and unable to exercise his or her option.

No options may be granted under our 2007 stock incentive plan to a resident of France unless the optionee is employed by us at the time of the grant. Additionally, options granted under our 2007 stock incentive plan to residents of France may not be exercised earlier than one year after the date the option is granted and any shares of our common stock issued upon the exercise of such an option may not be sold or transferred (other than by will or the laws of descent and distribution) within four years of the date the option is granted. Options granted under the 2007 stock incentive plan to residents of France may not provide for an exercise period longer than six months following the death of the optionee.

Restricted stock awards. Restricted stock awards consist of shares of common stock that are subject to vesting restrictions. Shares subject to restricted stock awards may be issued for a purchase price or at no cost, subject to vesting restrictions. In the event that the employment of any recipient of a restricted stock award by us our any of our subsidiaries is terminated, any restricted stock awards that have not then vested shall automatically be forfeited to us.

Restricted stock awards may have restrictions that lapse based upon length of service of the recipient or based upon the attainment of performance goals. Unless otherwise specified in the agreement governing the restricted stock award, all shares subject to the restricted stock award shall be entitled to vote and shall receive dividends during the periods of restriction.

 

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Unrestricted stock awards. Unrestricted stock awards consist of shares of common stock free from any restrictions under the 2007 stock incentive plan. Unrestricted stock awards may be granted in respect of past services or for a purchase price that is determined by the compensation committee.

Performance share awards. Performance share awards entitle the recipient to acquire shares of common stock upon the attainment of specified performance goals. The performance goals applicable to each performance share award may include continued employment by the recipient or the achievement of specified goals by us, any of our subsidiaries or business units or the recipient.

Restricted stock units. Restricted stock units entitle the recipient to acquire shares of common stock pursuant to certain terms and conditions. The compensation committee determines the terms, conditions and restrictions, including vesting, if any, related to award of restricted stock units, including the number of shares of common stock that the recipient shall be entitled to receive or purchase, the price to be paid, if any, and all other limitations and conditions applicable to the restricted stock units.

Stock appreciation rights. Stock appreciation rights entitle the recipient to receive, upon exercise of the stock appreciation right, a number of shares of common stock or, alternatively, a cash payment or combination of shares and cash, having an aggregate fair market value equal to the product of (a) the excess of the fair market value (as of the exercise date) over the exercise price per share of common stock specified in the stock appreciation right, which may not be less than one hundred percent (100%) of the fair market value of the common stock on the date that the stock appreciation right is granted, multiplied by (b) the number of shares of common stock subject to the stock appreciation rights. Stock appreciation rights may be subject to vesting or other restrictions determined by our compensation committee.

Adjustments for share dividends and similar events. We will make appropriate adjustments in outstanding awards and the number of shares available for issuance under our stock incentive plan, including the individual limitations on awards, to reflect share dividends, share splits, spin-offs and other similar events.

Effect of a change in control. Upon the occurrence of a “change of control” (as defined in the 2007 stock incentive plan), unless otherwise provided by our compensation committee, each holder of an outstanding stock option will be entitled, upon exercise of the option, to receive, in lieu of shares of our common stock, shares of such stock or other securities, cash or property (or consideration based upon shares of such stock or other securities, cash or property) as the holders of shares of our common stock receive in connection with the change of control. In addition to or in lieu of the foregoing, our compensation committee may:

 

   

accelerate, fully or in part, the time for exercise of, and waive any or all conditions and restrictions on, each unexercised and unexpired stock option, restricted stock, restricted stock unit or other awards made under the 2007 stock incentive plan, effective upon a date prior or subsequent to the effective date of such change of control;

   

provide for a cash payment to be made to each holder of an outstanding stock option equal to the difference between (a) the fair market value of the per share consideration (whether cash, securities or other property or any combination of the above) the holder of a share of common stock would receive upon consummation of the change of control, which we refer to as the merger price, times the number of shares subject to the outstanding option to the extent then exercisable (or, in full, if the compensation committee shall have accelerated the time for exercise) and (B) the aggregate exercise price of all outstanding options, in exchange for the termination of such options; or

   

provide that each outstanding stock option will be cancelled as of the effective date of the change of control, provided that (a) prior written notice of such cancellation shall be given to each holder of such an option and (b) each holder of such an option shall have the right to exercise such option to the extent that the same is then exercisable or, in full, if the compensation committee accelerates the time for exercise of all such unexercised and unexpired options.

In addition to the provisions set forth above, the compensation committee has the discretion when granting awards under the 2007 stock incentive plan to provide for different or additional provisions with respect to the effect of a change of control on any award.

 

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2011 Stock Incentive Plan

Concurrently with this offering, we are establishing our 2011 Stock Incentive Plan, which provides for the issuance of equity-based awards, denominated in shares of our common stock, including incentive stock options, non-qualified stock options, restricted stock awards, unrestricted stock awards, performance share awards, restricted stock units and stock appreciation rights. A total of 5,000,000 shares will be reserved for issuance under the 2011 Stock Incentive Plan. Our board of directors has adopted the 2011 stock incentive plan and we expect our shareholders to approve it prior to the closing of this offering. No awards have been granted under the 2011 stock incentive plan.

The terms of the 2011 stock incentive plan are substantially the same as the terms of our 2007 stock incentive plan, except that:

 

   

the 2011 stock incentive plan permits the Compensation Committee to provide for the repurchase of shares of restricted stock upon the lapse of vesting;

   

the 2011 stock incentive plan prohibits any amendment to an option or stock appreciation right so as to directly or indirectly reduce its initial exercise price, or any cancellation and replacement of an option or stock appreciation right with a new award having a lower exercise or grant price, without the prior approval of our stockholders; and

   

Unless terminated earlier, our 2011 stock incentive plan will terminate in 2021.

2011 Employee Stock Purchase Plan

Concurrently with this offering, we are establishing our 2011 Employee Stock Purchase Plan, or the ESPP. Our board of directors has adopted, and we expect our stockholders to approve, the ESPP prior to the closing of this offering. Our executive officers and all of our other employees will be allowed to participate in our ESPP. A total of 3,000,000 shares of our common stock will be reserved for issuance under our ESPP. Our compensation committee has full and exclusive authority to interpret the terms of the ESPP and determine eligibility.

Our employees are eligible to participate at the beginning for the first offering period that begins following their commencement of employment with us. However, an employee may not be granted rights to purchase stock under our ESPP if such employee:

 

   

immediately after the grant would own stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock; or

   

holds rights to purchase stock under all of our employee stock purchase plans that would accrue at a rate that exceeds $25,000 worth of our stock for each calendar year.

Our ESPP is intended to qualify under Code Section 423, and provides for consecutive 6-month offering periods. The offering periods generally start on the first trading day on or after January 1 and July 1 of each year. Each offering period will begin after one exercise date and will end with the next exercise date approximately six months later. The administrator may, in its discretion, modify the terms of future offering periods.

Our ESPP permits participants to purchase common stock through payroll deductions of up to 15% of their compensation. On the last trading day of each offering period, each participant automatically is granted an option to purchase shares of our common stock. The option will be immediately exercisable for a number of shares equal to the total amount of the total amount of the participant’s payroll deductions during that period divided by 85% of the fair market value of our common stock on the last trading day of the offering period. The purchase price of the shares will be 85% of the fair market value of our common stock on the last trading day of the offering period. Participants may end their participation at any time during an offering period, and will be paid their accrued payroll deductions that have not yet been used to purchase shares of common stock. Participation ends automatically upon termination of employment with us.

A participant may not transfer rights granted under the ESPP other than by will, the laws of descent and distribution or as otherwise provided under the ESPP.

In the event of our merger or change in control, as defined under the ESPP, a successor corporation may assume or substitute each outstanding purchase right. If the successor corporation refuses to assume or substitute for the outstanding purchase rights, the offering period then in progress will be shortened, and a new exercise date will be set which will occur prior to the proposed merger or change in control. The administrator will notify each

 

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participant in writing that the exercise date has been changed and that the participant’s option will be exercised automatically on the new exercise date unless the participant has already withdrawn from the offering period.

Our ESPP will automatically terminate in 2021, unless we terminate it sooner. In addition, our board of directors has the authority to amend, suspend or terminate our ESPP, except that, subject to certain exceptions described in the ESPP, no such action may adversely affect any outstanding rights to purchase stock under our ESPP.

401(k) Plan

We maintain a defined contribution employee savings plan, or 401(k) plan, for our employees. All of our U.S. employees are eligible to participate in the 401(k) plan as of the first day of employment and participants are able to defer up to 60% of their eligible compensation subject to applicable annual Code limits. The 401(k) plan permits us to make profit sharing contributions to eligible participants, although such contributions are not required. In addition, the 401(k) plan permits us to making matching contributions to eligible participants. We did not make any matching contributions during fiscal year 2009, 2010 or 2011. Pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. Contributions that we make, if any, are subject to vesting over a two-year period; employees are immediately and fully vested in their contributions. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan and all contributions are deductible by us when made.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to beneficial ownership of our common stock, as of August 3, 2011, and as adjusted to reflect the sale of common stock in this offering, by:

 

   

each person or entity known by us to beneficially own more than five percent of our common stock;

   

each of our directors;

   

each of our named executive officers

   

all of our executive officers and directors as a group; and

   

each of the selling stockholders.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of August 3, 2011 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. Except as otherwise indicated, the address of each of the persons in this table is c/o Exa Corporation, 55 Network Drive, Burlington, Massachusetts 01803.

Each stockholder’s percentage ownership before the offering is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and is based on 3,200,783 shares of our common stock outstanding as of April 30, 2011, plus 55,232,073 shares of common stock into which our outstanding preferred stock will convert upon completion of this offering. Each stockholder’s percentage ownership after the offering assumes the issuance of the             shares of our common stock offered hereby. Except as otherwise set forth under the heading “Right to Acquire,” the table below assumes no exercise of stock options and warrants outstanding at April 30, 2011 to purchase an aggregate of approximately 11,913,256 shares of our common stock. We and the selling stockholders have granted the underwriters an option to purchase up to             additional shares of our common stock to cover over-allotments, if any, and the table below assumes no exercise of that option. Amounts under the heading “Right to Acquire” represent shares that may be acquired upon exercise of outstanding stock options or warrants exercisable within 60 days of the date of the table.

 

     Beneficial Ownership Prior to the Offering           Percentage of Shares
Outstanding

Name and Address of Beneficial Owner

   Shares
Outstanding
     Right to
Acquire
     Total      Number of
Shares to be
Offered
   Before the
Offering
    After the
Offering

FMR LLC (1)

     24,572,188         —           24,572,188            42.1  

InfoTech Fund I LLC (2)

     2,656,173         —           2,656,173            4.6  

Boston Capital Ventures III Limited Partnership (3)

     3,894,647         —           3,894,647            6.7  

Boston Capital Ventures IV Limited Partnership (4)

     18,286,185            18,286,185            31.3  

Stephen A. Remondi

     1,333,381         3,800,000         5,133,381            8.2  

Edmond L. Furlong

     265,636         1,500,000         1,756,636            2.9  

Hudong Chen

     335,488         1,000,000         1,335,488            2.2  

James Hoch

     244,031         950,000         1,194,031            2.0  

Jean-Paul Roux

     830,651         293,750         1,124,401            1.9  

John J. Shields, III (4)(5)

     93,177         —           93,177            *     

John William Poduska (6)

     326,259         —           326,259            *     

Wayne Mackie

     —           81,250         81,250            *     

John F. Smith, Jr.

     —           87,500         87,500            *     

Robert Schechter

     —           68,750         68,750            *     

All current executive officers and directors

     4,076,442         8,821,250         12,897,692            19.2  

 

* Less than 1.0%
(1)

Includes 23,531,621 shares beneficially owned by Fidelity Ventures Ltd. (“Ventures”), a Massachusetts partnership. The general partner of Ventures is Fidelity Capital Associates, Inc., a Massachusetts corporation,

 

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  which is a wholly-owned subsidiary of FMR LLC. FMR LLC may be deemed to beneficially own any shares held directly or indirectly held by Ventures. The address of FMR LLC and Ventures is 82 Devonshire Street, Boston, Massachusetts 02109.
(2) InfoTech Fund I LLC (“InfoTech”) is owned by the shareholders and certain employees of FMR LLC. Infotech may be deemed to be under common control with FMR LLC. The address of InfoTech is 100 Summer St., Boston, MA 02110.
(3) The address of Boston Capital Ventures III Limited Partnership (“BCV III”) is 84 State Street, Suite 320, Boston, Massachusetts 02109. Johan von der Goltz is a general partner of BCV III and Boston Capital Ventures IV Limited Partnership (“BCV IV”). Mr. Shields does not exercise voting or investment power over our shares held by BCV III, and disclaims beneficial ownership of such shares.
(4) John J. Shields, III, is a general partner of BCV IV and may be deemed to have shared voting and investment power over our shares held by BCV IV. Mr. Shields disclaims beneficial ownership over the shares held by BCV IV. The address of BCV IV is 84 State Street, Suite 320, Boston, Massachusetts 02109.
(5) Includes 30,545 shares held by King’s Point Holdings Incorporated, for which Mr. Shields serves as the chief executive officer and president. Mr. Shields and his spouse share voting and investment power over the shares held by King’s Point Holdings Incorporated.
(6) All shares reported as beneficially owned by Mr. Poduska are held by Poduska Family Limited Partnership II. Belmont Management Corporation of which Mr. Poduska’s five adult children own all the issued and outstanding shares, is the general partner of Poduska Family Limited Partnership II. Mr. Poduska, under an agreement with Belmont Management Corporation, exercises sole voting and investment power over our shares held by Poduska Family Limited Partnership II.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The following is a summary of transactions since February 1, 2008 in which we have participated, in which the amount involved exceeded or will exceed $120,000, and in which any of our directors or executive officers or holders of more than five percent of our capital stock (or any members of their immediate families) had or will have a direct or indirect material interest, other than compensation arrangements which are described under “Executive Compensation” and “Management—Director Compensation.” Share amounts have been adjusted to give effect to a 1-for-             reverse stock split to be effected prior to the consummation of this offering.

Sale of Series I Preferred Stock

On April 30, 2008, we sold 3,378,380 shares of our series I convertible preferred stock, which we refer to as our series I stock, in a private placement for a purchase price of $1.48 per share. The following table sets forth information regarding shares of series I stock purchased by our directors or executive officers or holders of more than five percent of our capital stock (or any members of their immediate families):

 

Name

   Number of Shares of Series I
Convertible Preferred Stock
Purchased
     Aggregate Purchase Price  

Fidelity Ventures Limited

     2,063,699       $ 3,054,275   

Infotech Fund I LLC

     482,118       $ 713,535   

Boston Capital Ventures IV, L.P.

     675,676       $ 1,000,000   

Jean-Paul Roux

     15,177       $ 22,462   

John J. Shields, III

     11,369       $ 16,826   

Also on April 30, 2008, we issued additional shares of series I stock and common stock to Boston Capital Ventures III, L.P. and Boston Capital Ventures IV, L.P. in exchange for the cancellation of certain indebtedness arising under 10% promissory notes that we issued to those entities on February 9, 2004 and which was scheduled to mature in December 2008. The following table sets forth information regarding the shares of series I stock and common stock issued to Boston Capital Ventures III, L.P. and Boston Capital Ventures IV, L.P.:

 

Name

   Number of Shares of
Series I Convertible
Stock Issued
     Number of Shares of
Common Stock
Issued
     Aggregate
Indebtedness
Cancelled
 

Boston Capital Ventures III, L.P.

     92,171         136,413       $ 272,826   

Boston Capital Ventures IV, L.P.

     584,872         865,611       $ 1,731,222   

Upon the completion of the offering to which this prospectus relates, each share of series I stock will be converted into one share of common stock. The purchase agreement dated April 30, 2008 relating to the sale of shares of series I stock and common stock allows the purchasers to require us to register the resale of their shares, under certain circumstances, following this offering. For a more detailed description of these registration rights, see “Description of Capital Stock—Registration Rights.”

Line of Credit

On July 14, 2009, we entered into a Loan and Security Agreement with FMR LLC, pursuant to which FMR LLC agreed to advance us a bridge loan of up to a maximum of $10.0 million, based on 80% of the value of certain accounts receivable. Advances under the Loan and Security Agreement were secured by substantially all our assets and bore interest at rate equal to the prime rate plus 5.0%. We borrowed an aggregate of $9.0 million in advances under the Loan and Security Agreement. The largest aggregate amount of principal outstanding at any time under the Loan and Security Agreement was $9.0 million and we paid an aggregate $433,469 in interest payments under the Loan and Security Agreement. As of May 7, 2010, we repaid all outstanding borrowings under the Loan and Security Agreement and the agreement has been terminated.

The FMR LLC bridge loan was scheduled to expire in September 2009, but was subsequently amended in September 2009 and again in April 2010, resulting in a final expiration of the arrangement in May 2010. In connection with the bridge financing, we granted to FMR LLC an equity participation right to invest up to $10 million at a 15% discount in our next equity investment round (if any), either by converting the existing debt or by participating with a cash investment. The equity participation right was originally scheduled to expire in July 2010

 

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but its term was extended in connection with the April 2010 amendment such that the term of the right is indefinite. The equity participation right does not apply to this offering and will expire upon the completion of this offering.

Agreement Regarding Inclusion of Shares in This Offering

On August 3, 2011, the holders of more than 70% of our preferred stock, on behalf of all the holders of our preferred stock, agreed to waive the contractual right of such holders to require inclusion of our securities held by them in the registration statement for this offering. In consideration of this waiver, we entered into a new agreement with FMR LLC and its affiliates Fidelity Ventures Limited Partnership and InfoTech Fund I LLC, which we refer to in this paragraph as the FMR entities, and with Boston Capital Ventures, III, Limited Partnership and Boston Capital Partners, IV, Limited Partnership, which we refer to as the BCV entities, in which we agreed to use our best efforts to include securities held by the FMR entities and the BCV entities in this offering, upon terms specified in the agreement. We also agreed that the minimum initial public offering price, the numbers of shares to be offered by each of us, the FMR entities and the BCV entities and the gross proceeds of the offering would be subject to the prior written approval of the holders of at least 70% of the then outstanding shares of our preferred stock.

Director Affiliations

John J. Shields, III, the Chairman of our Board of Directors, is a general partner of Boston Capital Ventures, which is an affiliate of Boston Capital Ventures III, L.P. and Boston Capital Ventures IV, L.P., which together own beneficially approximately 38% of our common stock, after giving effect to the conversion to common stock of our all of our preferred stock upon the completion of this offering. John Remondi, a senior officer and member of the Board of Directors of FMR LLC, is the father of Stephen Remondi, our chief executive officer and a member of our Board of Directors. In executing his duties at FMR LLC, John Remondi recuses himself from matters involving Exa. For more detailed information regarding our directors, see “Management—Executive Officers and Directors.”

Until August 2011, Paul L. Mucci served as a member of our board of directors. Mr. Mucci is the President of Northern Neck Investors LLC and Star Horizon Management LLC, the managers of investor entities owned by shareholders and employees of FMR LLC. Mr. Mucci was appointed to our board as a representative of FMR LLC pursuant to an agreement under which FMR LLC was entitled to have a representative on our board of directors. That agreement has expired, and Mr. Mucci resigned as a director, effective August 3, 2011.

We and the holders of a majority of the shares of our capital stock entitled to vote in the election of directors have agreed with the FMR entities that in the event that our initial public offering is not consummated by March 31, 2012, such holders will vote to elect a representative designated by Fidelity Ventures Limited to serve as one of our directors. We also agreed that until the initial public offering is consummated, a representative designated by Fidelity Ventures Limited, whom we expect will be Mr. Mucci, will be invited to participate as a non-voting observer in any meetings of our board or of any committees of which Mr. Mucci was a member at the time of his resignation.

Policies and Procedures for Related Person Transactions

We have not historically had a written policy with respect to the review and approval of transactions with our directors, officers and principal stockholders. On July 6, 2011, our board of directors adopted an amended and restated charter for our audit committee. Pursuant to the amended and restated charter, our audit committee is responsible for reviewing and approving in advance any related person transactions. For the purposes of this policy, a “related person transaction” is any transaction between us or any of our subsidiaries and any (a) of our directors or executive officers, (b) nominee for election as a director, (c) person known to us to own more than five percent of any class of our voting securities, or (d) member of the immediate family of any such person, if the nature of such transaction is such that it would be required to be disclosed under Item 404 of Regulation S-K (or any similar successor provision).

In determining whether to approve a related person transaction, the audit committee will take into account, among other factors it deems appropriate, whether the related person transaction is on terms no less favorable than terms generally available to an unaffiliated third-person under the same or similar circumstances and the extent of the related person’s interest in the transaction.

 

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DESCRIPTION OF CAPITAL STOCK

The following section contains a description of our common stock and other securities that we have issued from time to time. Our authorized capital stock immediately prior to this offering consists of 92,165,000 shares of common stock, $0.001 par value per share, and 77,835,000 shares of preferred stock, $0.001 par value per share. As of April 30, 2011, we had 3,200,783 shares of common stock issued and outstanding, 55,232,073 shares of preferred stock issued and outstanding, 2,358,465 shares of common stock potentially issuable pursuant to outstanding stock options, and 9,554,791 shares of preferred stock potentially issuable pursuant to outstanding stock options and warrants.

Common Stock

Voting rights. Holders of our common stock are entitled to one vote per share held of record on all matters to be voted upon by our stockholders. Our common stock does not have cumulative voting rights.

Dividends. Subject to preferences that may be applicable to the holders of any outstanding shares of our preferred stock, the holders of our common stock are entitled to receive such lawful dividends as may be declared by our board of directors.

Liquidation and dissolution. In the event of our liquidation, dissolution or winding up, and subject to the rights of the holders of any outstanding shares of our preferred stock, the holders of shares of our common stock will be entitled to receive pro rata all of our remaining assets available for distribution to our stockholders.

Other rights and restrictions. Our certificate of incorporation does not provide for the granting of preemptive rights to any stockholder. All outstanding shares are fully paid and nonassessable.

Preferred Stock

Immediately prior to this offering, our certificate of incorporation provided for nine series of preferred stock. In connection with this offering, all outstanding shares of preferred stock will be converted into shares of common stock in accordance with the provisions of our certificate of incorporation.

Upon the completion of this offering, our board of directors will be authorized, without stockholder approval, from time to time to issue up to 5,000,000 shares of preferred stock in one or more series, each of the series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as the board of directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for others to acquire, or of discouraging others from attempting to acquire, a majority of our outstanding voting stock. We have no current plans to issue any shares of preferred stock.

Registration Rights

Under the terms of securities purchase agreements between us and certain of our investors and stock purchase warrants dated January 28, 2011, the holders of approximately             million shares of common stock and warrants to purchase up to approximately 700,000 shares of common stock, or their transferees, have the right to require us to register their shares with the SEC so that those shares may be publicly resold, or to include their shares in certain registration statements we file.

Demand registration rights. At any time after the effective date of the registration statement for this offering, the holders who in the aggregate hold 50% or more of the shares having registration rights have the right to demand that we file up to six resale registration statements. These registration rights are subject to specified conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under certain circumstances.

Form S-3 registration rights. If we are eligible to file a registration statement on Form S-3, each holder of shares having registration rights has the right to demand that we file up to two resale registration statements per year for such holder on Form S-3 so long as the aggregate offering price, net of any underwriters’ discounts or commissions, of securities to be sold under the registration statement on Form S-3 is at least $500,000, subject to specified exceptions, conditions and limitations.

 

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“Piggyback” registration rights. If we register any securities for public sale, stockholders with registration rights will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares included in such offering for the account of stockholders with registration rights.

Expenses of registration. We will pay all expenses, other than underwriting discounts and commissions, relating to all demand registrations, Form S-3 registrations and piggyback registrations.

Expiration of registration rights. The registration rights described above will terminate upon the earlier of either five years following the closing of this offering or, as to a given holder of registrable securities, when such holder of registrable securities can sell all of such holder’s registrable securities without restriction pursuant to Rule 144(b)(1) promulgated under the Securities Act.

If our stockholders with registration rights cause a large number of securities to be registered and sold in the public market, those sales could cause the market price of our common stock to fall. If we were to initiate a registration and include registrable securities because of the exercise of registration rights, the inclusion of registrable securities could adversely affect our ability to raise capital.

Anti-Takeover Effects of Provisions of Delaware Law and Our Charter and By-laws

Provisions of Delaware law and our certificate of incorporation and by-laws could make it more difficult to acquire us by means of a tender offer, a proxy contest, open market purchases, removal of incumbent directors and otherwise. These provisions, summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because negotiation of these proposals could result in an improvement of their terms.

We must comply with Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to an interested stockholder. An “interested stockholder” includes a person who, together with affiliates and associates, owns, or did own within three years before the determination of interested stockholder status, 15% or more of the corporation’s voting stock. The existence of this provision generally will have an anti-takeover effect for transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

Upon the completion of this offering, our certificate of incorporation and by-laws will require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, upon the completion of this offering, special meetings of our stockholders may be called only by the board of directors, some of our officers or the holders of not less than 15% of our outstanding common stock who have held their shares for at least one year. Our by-laws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of candidates for election to our board of directors. Our certificate of incorporation and by-laws also provide that, effective upon the completion of this offering, our board of directors will be divided into three classes, with each class serving staggered three-year terms. These provisions may have the effect of deterring hostile takeovers or delaying changes in our control or management.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is                 .

NASDAQ Global Market Listing

We intend to apply to have our common stock listed for trading and quotation on the NASDAQ Global Market under the trading symbol “EXA.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

Before this offering, there has been no market for our common stock. We cannot predict the effect, if any, that sales of shares of common stock to the public or the availability of shares for sale to the public will have on the market price of the common stock prevailing from time to time. Nevertheless, if a significant number of shares of common stock are sold in the public market, or if people believe that such sales may occur, the prevailing market price of our common stock could decline and could impair our future ability to raise capital through the sale of our equity securities.

Upon completion of this offering, we will have outstanding              shares of common stock, assuming no exercise of outstanding options or warrants. Of these shares, the              shares sold in this offering will be freely tradable without restriction under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act.

The remaining shares of common stock were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act and are restricted securities. Of these shares, a total of shares are subject to lock-up agreements with the underwriters that provide that the holders of those shares may not dispose of or hedge any common stock or securities convertible into or exchangeable for shares of common stock. The restrictions imposed by the lock-up agreements will be in effect for a period of at least 180 days after the date of this prospectus, subject to extension under certain circumstances for an additional period of up to 18 days, as described under “Underwriting—No Sales of Similar Securities.” At any time and without notice, Stifel, Nicolaus & Company Incorporated may, in its sole discretion, release some or all of the securities from these lock-up agreements. The following table describes the number of outstanding shares that will become eligible for sale in the public market on several relevant dates, assuming no extension of the lock-up agreements, and assuming no resale registration statement is filed by us for the benefit of the holders of registration rights. See “Description of Capital Stock—Registration Rights.”

 

Relevant Dates

   Number of Shares
Eligible for Future
Sale
   Comments

On effective date

     

180 days after effective date

     

More than 181 days after effective date

     

Rule 144

In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.

In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described above, within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:

 

   

1% of the number of shares of our common stock then outstanding; or

 

   

the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.

Sales under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

Upon expiration of the lock-up period described above, additional shares of our common stock will be eligible for sale under Rule 144, including shares eligible for resale immediately upon the closing of this offering as described above. We cannot estimate the number of shares of our common stock that our existing stockholders will elect to sell under Rule 144.

 

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Rule 701

Any of our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provision of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling those shares. A total of              of the Rule 701 shares are subject to lock-up agreements and will only become eligible for sale at the earlier of (1) the expiration of the 180-day lock-up agreements and (2) no sooner than 90 days after the offering upon obtaining the prior written consent of Stifel, Nicolaus & Company, Incorporated.

Registration of Shares in Connection with Compensatory Benefit Plans

We are unable to estimate the number of shares that will be sold under Rules 144 or 701 because that number will depend on the market price for the common stock, the personal circumstances of the sellers and other factors. Prior to the closing of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering, among other things, shares of common stock covered by outstanding options under our stock plans. Based on the number of shares covered by outstanding options as of April 30, 2011 and currently reserved for issuance under the stock plans, the registration statement on Form S-8 would cover approximately shares. The registration statement will become effective upon filing. Accordingly, shares registered under the registration statement on Form S-8 will be available for sale in the open market immediately, after complying with Rule 144 volume limitations applicable to affiliates, with applicable lock-up agreements, and with the vesting requirements and restrictions on transfer affecting any shares that are subject to restricted stock awards.

Registration Rights

After the completion of this offering, holders of              shares of common stock will be entitled to specific rights to register those shares for sale in the public market. See “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration statement relating to such shares.

 

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UNDERWRITING

Stifel, Nicolaus & Company, Incorporated is acting as the sole book-running manager of the offering and as representative of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us, the selling stockholders and the underwriters, we and the selling stockholders have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us and the selling stockholders, the number of shares of common stock set forth opposite its name below.

 

Underwriter

   Number
of Shares

Stifel, Nicolaus & Company, Incorporated

  

Robert W. Baird & Co. Incorporated

  

Canaccord Genuity Inc.

  

Needham & Company, LLC

  
  

 

Total

  
  

 

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.

We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commissions and Discounts

The representative has advised us and the selling stockholders that the underwriters propose initially to offer the shares to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $             per share. After the initial offering, the public offering price, concession or any other term of the offering may be changed.

The following table shows the public offering price, underwriting discount and proceeds before expenses to us and the selling stockholders. The information assumes either no exercise or full exercise by the underwriters of their overallotment option.

 

     Per Share      Without Option      With Option  

Public offering price

   $                    $                    $                

Underwriting discount

   $         $         $     

Proceeds, before expenses, to Exa Corporation

   $         $         $     

Proceeds, before expenses, to the selling stockholders

   $         $         $     

The expenses of the offering, not including the underwriting discount, are estimated at $ million and are payable by us and the selling stockholders.

Overallotment Option

We and the selling stockholders have granted an option to the underwriters to purchase up to an additional              shares at the public offering price, less the underwriting discount. Of such amount, up to              shares subject to the option would be sold by the Company and up to shares subject to the option would be sold by the selling stockholders. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriter’s initial amount reflected in the above table.

 

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No Sales of Similar Securities

We and the selling stockholders, our executive officers and directors, and our other existing security holders have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for a period ending 180 days after the date of this prospectus without first obtaining the written consent of Stifel, Nicolaus & Company, Incorporated. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly:

 

   

offer, pledge, sell or contract to sell any common stock,

   

sell any option or contract to purchase any common stock,

   

purchase any option or contract to sell any common stock,

   

grant any option, right or warrant for the sale of any common stock,

   

lend or otherwise dispose of or transfer any common stock,

   

request or demand that we file a registration statement related to the common stock, or

   

enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock, whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.

This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. In the event that either (x) during the last 17 days of the lock-up period referred to above, we issue an earnings release or material news or a material event relating to us occurs or (y) prior to the expiration of the lock-up period, we announce that we will release earnings results or become aware that material news or a material event will occur during the 16-day period beginning on the last day of the lock-up period, the restrictions described above will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

NASDAQ Global Market Listing

We expect the shares to be approved for listing on the NASDAQ Global Market under the symbol “EXA.”

Before the offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us, the selling stockholders and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are:

 

   

the valuation multiples of publicly traded companies that the representative believes to be comparable to us,

   

our financial information,

   

the history of, and the prospects for, our company and the industries in which we compete,

   

an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues,

   

the present state of our development,

   

other relevant or appropriate factors, and

   

the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

In connection with the offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales

 

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and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ overallotment option described above. The underwriters may close out any covered short position by either exercising their overallotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. “Naked” short sales are sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the NASDAQ Global Market, in the over-the-counter market or otherwise.

Neither we, the selling stockholders nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we, the selling stockholders nor any of the underwriters makes any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Electronic Offer, Sale and Distribution of Shares

In connection with the offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, the underwriters may facilitate Internet distribution for the offering to certain of their Internet subscription customers. The underwriters may allocate a limited number of shares for sale to their online brokerage customers. An electronic prospectus is available on the Internet web sites maintained by the respective underwriters. Other than the prospectus in electronic format, the information on the respective underwriters’ web sites are not part of this prospectus.

Other Relationships

Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.

Notice to Prospective Investors in the EEA

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any shares which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

(c) by the underwriters to fewer than 100 natural or legal persons (other than “qualified investors” as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives for any such offer; or

 

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(d) in any other circumstances falling within Article 3(2) of the Prospectus Directive;

provided that no such offer of shares shall result in a requirement for the publication by us or any representative of a prospectus pursuant to Article 3 of the Prospectus Directive.

Any person making or intending to make any offer of shares within the EEA should only do so in circumstances in which no obligation arises for us, the selling stockholders or any of the underwriters to produce a prospectus for such offer. Neither we, the selling stockholders nor the underwriters have authorized, nor do we or they authorize, the making of any offer of shares through any financial intermediary, other than offers made by the underwriters which constitute the final offering of shares contemplated in this prospectus.

For the purposes of this provision, and your representation below, the expression an “offer to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase any shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

Each person in a Relevant Member State who receives any communication in respect of, or who acquires any shares under, the offer of shares contemplated by this prospectus will be deemed to have represented, warranted and agreed to and with us, the selling stockholders and each underwriter that:

(A) it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive; and

(B) in the case of any shares acquired by it as a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive, (i) the shares acquired by it in the offering have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than “qualified investors” (as defined in the Prospectus Directive), or in circumstances in which the prior consent of the representatives has been given to the offer or resale; or (ii) where shares have been acquired by it on behalf of persons in any Relevant Member State other than qualified investors, the offer of those shares to it is not treated under the Prospectus Directive as having been made to such persons.

In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). This document must not be acted on or relied on in the United Kingdom by persons who are not relevant persons. In the United Kingdom, any investment or investment activity to which this document relates is only available to, and will be engaged in with, relevant persons.

Notice to Prospective Investors in Switzerland

This document, as well as any other material relating to the shares which are the subject of the offering contemplated by this prospectus, do not constitute an issue prospectus pursuant to Article 652a and/or 1156 of the Swiss Code of Obligations. The shares will not be listed on the SIX Swiss Exchange and, therefore, the documents relating to the shares, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange. The shares are being offered in Switzerland by way of a private placement, i.e., to a small number of selected investors only, without any public offer and only to investors who do not purchase the shares with the intention to distribute them to the public. The investors will be individually approached by the issuer from time to time. This document, as well as any other material relating to the shares, is personal and confidential and do not constitute an offer to any other person. This document may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without express consent of the issuer. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in (or from) Switzerland.

 

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LEGAL MATTERS

The validity of the shares offered in this prospectus and certain other legal matters will be passed upon for us by Foley Hoag LLP, Boston, Massachusetts. The underwriters are represented by Goodwin Procter LLP, Boston, Massachusetts.

EXPERTS

The consolidated financial statements as of January 31, 2010 and 2011 and for each of the three years in the period ended January 31, 2011 appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given on the authority of said firm as experts in accounting and auditing.

In connection with its engagement to act as our independent registered accounting firm for purposes of this offering, Ernst & Young informed us that it had identified business and other relationships between Ernst & Young and our stockholder FMR LLC and certain subsidiaries and affiliates of FMR LLC, including the following:

 

   

FMR LLC was one of many sponsors of the 2010 New York Area Ernst & Young Entrepreneur of the Year program, a program that recognizes and awards those persons and companies that embody the entrepreneurial spirit in America;

 

   

FMR LLC was one of many sponsors of the 2010 Ernst & Young Strategic Growth Forum, a multi-day forum for high growth and entrepreneurial companies that culminates in the announcement of the Americas winners of the Entrepreneur of the Year program; and

 

   

J Robert Scott, which is a subsidiary of FMR LLC, was one of many sponsors of the 2008 to 2011 New England Entrepreneur of the Year programs; also, J Robert Scott, Ernst & Young and Harvard Business School have for 11 years jointly co-sponsored an annual compensation study, which is released to the public and promoted via jointly held webcasts.

Ernst & Young and FMR LLC have advised us that none of these relationships was material to either of them and that each of these relationships has been terminated.

Additionally, Ernst & Young informed us that in the ordinary course of its business it has been a consumer of services routinely offered by FMR LLC affiliates, such as administrative and investment advisory services provided to employee benefit plans maintained by Ernst & Young, transportation services purchased by Ernst & Young from FMR LLC’s subsidiary Boston Coach and that certain Ernst & Young pension plans, employees and partners have investments in mutual funds and other financial vehicles sponsored or managed by FMR LLC.

Ernst & Young has advised us that, after considering these relationships in light of the relationship between FMR LLC and us, it has concluded that it is capable of exercising objective and impartial judgment in connection with the audits of our consolidated financial statements and that its overall independence, as required by the auditor independence rules of the Securities and Exchange Commission and the Public Company Accounting Oversight Board, is not impaired. Our audit committee, after independent consideration of these matters, concurs in Ernst & Young’s conclusion that it is independent.

 

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form S-1 (File Number 333-            ) in connection with this offering. In addition, upon completion of the offering, we will be required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy the registration statement and any other documents we have filed at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public at the SEC’s website at: “http://www.sec.gov.”

This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this prospectus to any of our contracts or other documents, the reference may not be complete and, for a copy of the contract or document, you should refer to the exhibits that are a part of the registration statement.

 

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INDEX TO FINANCIAL STATEMENTS OF

EXA CORPORATION

 

Report of Independent Registered Public Accounting Firm

     F-1   

Consolidated Balance Sheets as of January 31, 2010 and 2011 and April 30, 2011, Actual (unaudited) and Pro Forma Consolidated Balance Sheet as of April 30, 2011 (unaudited)

     F-2   

Consolidated Statements of Operations for the Fiscal Years Ended January 31, 2009, 2010 and 2011 and the Three Months Ended April 30, 2010 (unaudited) and 2011 (unaudited)

     F-3   

Consolidated Statements of Convertible Preferred Stock, Stockholders’ Deficit and Other Comprehensive Income (Loss) for the Fiscal Years Ended January 31, 2009, 2010 and 2011, the Three Months Ended April 30, 2011, Actual (unaudited) and Pro Forma for the Three Months Ended April 30, 2011 (unaudited)

     F-4   

Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 2009, 2010 and 2011 and the Three Months Ended April 30, 2010 (unaudited) and 2011 (unaudited)

     F-5   

Notes to Consolidated Financial Statements

     F-6   


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Exa Corporation

We have audited the accompanying consolidated balance sheets of Exa Corporation (the Company) as of January 31, 2010 and 2011, and the related statements of operations, statements of convertible preferred stock, stockholders’ deficit, and other comprehensive income (loss) and statements of cash flows for each of the three years in the period ended January 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Exa Corporation at January 31, 2010 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2011, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts

July 28, 2011

 

 

 

 

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Table of Contents

EXA CORPORATION

CONSOLIDATED BALANCE SHEETS

 

    January 31,     April 30, 2011  
    2010     2011     Actual     Pro Forma  
                (unaudited)     (unaudited)  

ASSETS

       

Current assets:

       

Cash

  $ 2,402,007      $ 2,780,252      $ 12,612,938      $ 12,612,938   

Accounts receivable

    18,093,065        23,428,254        5,677,811        5,677,811   

Prepaid expenses and other current assets

    455,667        608,462        1,102,855        1,102,855   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    20,950,739        26,816,968        19,393,604        19,393,604   

Property and equipment, net

    3,200,900        2,001,986        3,350,758        3,350,758   

Other assets

    980,022        912,806        1,005,671        1,005,671   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 25,131,661      $ 29,731,760      $ 23,750,033      $ 23,750,033   
 

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

       

Current liabilities:

       

Accounts payable

  $ 977,679      $ 580,184      $ 708,870      $ 708,870   

Accrued expenses

    6,030,050        8,275,725        4,416,465        4,416,465   

Line of credit (1)

    9,000,000        2,994,901        —          —     

Current portion of long-term debt (1)

    —          —          154,168        154,168   

Current portion of deferred revenue

    23,920,696        27,333,400        25,837,782        25,837,782   

Current maturities of capital lease obligation

    886,873        200,846        617,968        617,968   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    40,815,298        39,385,056        31,735,253        31,735,253   
 

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt, net of current portion (1)

    —          4,587,366        4,480,774        4,480,774   

Deferred revenue

    216,837        117,586        80,094        80,094   

Capital lease obligations, net of current portion

    169,345        62,803        1,178,790        1,178,790   

Other long-term liabilities

    —          552,000        432,949        432,949   

Deferred rent

    2,460,884        2,223,162        2,134,172        2,134,172   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    43,662,364        46,927,973        40,042,032        40,042,032   
 

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies (Note 10)

       

Convertible preferred stock, $0.001 par value: series A to I, 77,835,000 shares authorized; 55,272,073, 55,232,073 and 55,232,073 shares issued and outstanding at January 31, 2010 and 2011 and April 30, 2011 (actual), respectively, at original issue price; no shares issued at April 30, 2011 (pro forma) (liquidation preference of $171,574,890 as of January 31, 2011)

    32,702,506        32,662,506        32,662,506        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ deficit:

       

Common stock, $0.001 par value: 92,165,000 shares authorized; 3,402,961, 3,407,961 and 3,412,023 shares issued at January 31, 2010 and 2011 and April 30, 2011 (actual); 58,644,096 shares issued at April 30, 2011 (pro forma)

    3,403        3,408        3,412        58,644   

Additional paid-in capital

    12,284,492        12,979,392        13,016,364        45,623,638   

Accumulated deficit

    (63,520,893     (62,938,578     (62,137,331     (62,137,331

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

    (211     (211     (211     (211

Accumulated other comprehensive income

    —          97,270        163,261        163,261   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

    (51,233,209     (49,858,719     (48,954,505     (16,291,999
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, convertible preferred stock and stockholders’ deficit

  $ 25,131,661      $ 29,731,760      $ 23,750,033      $ 23,750,033   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes amounts due to a related party as follows:

 

 

     January 31,      April 30, 2011  
     2010      2011      Actual      Pro Forma  
                   (unaudited)      (unaudited)  

Current portion of long-term debt

     —           —         $ 30,834       $ 30,834   

Line of credit

   $ 9,000,000         —           —           —     

Long-term debt, net of current portion

     —         $ 917,473         894,742         894,742   

The accompanying notes are an integral part of these consolidated financial statements.

 

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EXA CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

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

License revenue

   $ 28,226,248      $ 26,852,807      $ 30,591,737      $ 6,462,802      $ 9,305,201   

Project revenue

     5,896,524        8,743,354        7,139,926        1,293,960        1,039,213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     34,122,772        35,596,161        37,731,663        7,756,762        10,344,414   

Operating expenses:

          

Cost of revenues

     11,452,557        9,956,063        9,896,260        2,329,334        2,811,164   

Sales and marketing

     6,951,734        5,304,163        6,110,124        1,270,456        1,274,127   

Research and development

     15,025,180        12,594,542        12,776,503        2,936,924        3,201,403   

General and administrative

     9,358,079        5,902,426        6,329,930        1,401,570        1,631,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     42,787,550        33,757,194        35,112,817        7,938,284        8,917,697   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (8,664,778     1,838,967        2,618,846        (181,522     1,426,717   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

          

Foreign exchange gain (loss)

     548,986        (766,148     (198,216     180,343        (463,733

Interest expense, net

     (1,218,164     (585,996     (1,262,342     (567,047     (242,317

Other (expense) income

     (70,560     12,127        10,121        1        130,588   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense), net

     (739,738     (1,340,017     (1,450,437     (386,703     (575,462
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (9,404,516     498,950        1,168,409        (568,225     851,255   

Provision for income taxes

     441,100        594,597        586,094        9,215        50,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (9,845,616   $ (95,647   $ 582,315      $ (577,440   $ 801,247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share:

          

Basic

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

Diluted

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

Weighted-average number of common shares used in computing net (loss) income per share:

          

Basic

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

Diluted

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

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

EXA CORPORATION

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK, STOCKHOLDERS’ DEFICIT,

AND OTHER COMPREHENSIVE INCOME (LOSS)

 

    Convertible Preferred
Stock
         Common Stock     Additional
Paid-in
Capital
    Accumulated
Deficit
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income
    Total Stockholders’
Deficit
    Comprehensive
Income (Loss)
 
    Number of
Shares
    Amount          Number of
Shares
    Amount              

Balance at January 31, 2008

    17,697,185      $ 18,994,303            2,317,241      $ 2,317      $ 10,532,906      $ (53,579,630   $ (211   $ —        $ (43,044,618  

Preferred stock financing

    3,378,380        4,882,454            —          —          —          —          —          —          —       

Stock options exercised

    217,250        46,583            83,696        84        30,013        —          —          —          30,097     

Exchange of non-convertible debt in connection with preferred stock financing

    677,043        1,002,024            1,002,024        1,002        1,001,021        —          —          —          1,002,023     

Share-based compensation expense

    —          —              —          —          290,945        —          —          —          290,945     

Conversion of convertible debt

    32,394,765        8,098,692            —          —          —          —          —          —          —       

Comprehensive loss:

                    —           

Net loss

    —          —              —          —          —          (9,845,616     —          —          (9,845,616   $ (9,845,616
                       

 

 

 

Total comprehensive loss

                        $ (9,845,616
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 31, 2009

    54,364,623        33,024,056            3,402,961        3,403        11,854,885        (63,425,246     (211     —          (51,567,169  

Repurchase of preferred stock

    (458,800     (458,800         —          —          —          —          —          —          —       

Stock options exercised

    1,366,250        137,250            —          —          —          —          —          —          —       

Share-based compensation expense

    —          —              —          —          429,607        —          —          —          429,607     

Comprehensive loss:

                       

Net loss

    —          —              —          —          —          (95,647     —          —          (95,647   $ (95,647
                       

 

 

 

Total comprehensive loss

                        $ (95,647
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 31, 2010

    55,272,073        32,702,506            3,402,961        3,403        12,284,492        (63,520,893     (211     —          (51,233,209  

Repurchase of preferred stock

    (40,000     (40,000         —          —          —          —          —          —          —       

Stock options exercised

    —          —              5,000        5        1,595        —          —          —          1,600     

Share-based compensation expense

    —          —              —          —          280,671        —          —          —          280,671     

Preferred stock warrant

    —          —              —          —          412,634        —          —          —          412,634     

Comprehensive income:

                       

Net income

    —          —              —          —          —          582,315        —          —          582,315      $ 582,315   

Cumulative translation adjustment

    —          —              —          —          —          —          —          97,270        97,270        97,270  
                       

 

 

 

Total comprehensive income

                        $ 679,585   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 31, 2011

    55,232,073        32,662,506            3,407,961        3,408        12,979,392        (62,938,578     (211     97,270        (49,858,719  

Stock options exercised (unaudited )

    —          —              4,062        4        4,058        —          —          —          4,062     

Share-based compensation expense (unaudited)

    —          —              —          —          32,914        —          —          —          32,914     

Comprehensive income: (unaudited)

    —          —              —          —          —          —          —          —          —       

Net income

    —          —              —          —          —          801,247        —          —          801,247      $ 801,247   

Cumulative translation adjustment

    —          —              —          —          —          —          —          65,991        65,991        65,991  
                       

 

 

 

Total comprehensive income (unaudited)

                        $ 867,238   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 30, 2011 (unaudited)

    55,232,073        32,662,506            3,412,023        3,412        13,016,364        (62,137,331)        (211     163,261        (48,954,505  

Assumed conversion of convertible preferred stock into common stock (unaudited)

    (55,232,073     (32,662,506         55,232,073        55,232        32,607,274        —          —          —          32,662,506     
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Pro forma April 30, 2011 (unaudited)

    —        $ —              58,644,096     $ 58,644     $ 45,623,638      $ (62,137,331   $ (211   $ 163,261      $ (16,291,999  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

EXA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

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

Operating activities

         

Net (loss) income

  $ (9,845,616   $ (95,647   $ 582,315      $ (577,440   $ 801,247   

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

         

Depreciation and amortization

    2,852,962        2,699,389        1,560,473        428,227        322,275   

Non-cash interest expense

    647,492        —          552,000        400,000        10,949   

Deferred rent expense

    367,448        343,583        (287,212     (73,081     (57,742

Stock-based compensation

    290,945        429,607        280,671        61,784        32,914   

Change in value of equity participation right

    —          —          —          —          (130,000

Unrealized foreign currency exchange (gain) loss

    (534,007     845,794        129,451        (187,537     583,793   

Changes in assets and liabilities:

         

Accounts receivable

    7,482,073        (1,641,367     (5,401,554     13,513,462        18,101,199   

Prepaid expenses and other current assets

    500,725        705,508        (144,059     (465,372     (487,581

Other assets

    (549,694     2,036        78,193        247        (80,350

Accounts payable

    574,725        (2,057,647     (403,596     40,035        117,922   

Accrued expenses

    (2,738,424     1,226,036        2,295,486        (1,529,174     (4,156,539

Other liabilities

    —          —          (5,609     119,393        —     

Deferred revenue

    (1,018,106     (4,861,489     3,274,346        (1,548,266     (2,413,318
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (1,969,477     (2,404,197     2,510,905        10,182,278        12,644,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

         

Purchases of property and equipment

    (448,304     (53,444     (320,085     (9,321     (36,040
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (448,304     (53,444     (320,085     (9,321     (36,040
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

         

Net (decrease) increase in line of credit

    (389,997     1,345,400        (6,005,098     (7,500,000     (2,994,901

Payments on capital lease obligation

    (2,390,678     (2,190,039     (792,891     (311,422     (90,641

Net proceeds from preferred stock financing

    4,882,454        —          —          —          —     

Repurchase of preferred stock

    —          (458,800     (40,000     —          —     

Proceeds from long-term debt

    —          —          5,000,000        —          47,576   

Proceeds from stock option exercises

    76,681        137,250        1,600        1,600        4,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    2,178,460        (1,166,189     (1,836,389     (7,809,822     (3,033,904
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

    —          —          23,814        (99,882     257,861   

Net (decrease) increase in cash

    (239,321     (3,623,830     378,245        2,263,253        9,832,686   

Cash, beginning of period

    6,265,158        6,025,837        2,402,007        2,402,007        2,780,252   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of period

  $ 6,025,837      $ 2,402,007      $ 2,780,252      $ 4,665,260      $ 12,612,938   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information

         

Cash paid for interest

  $ 662,431      $ 374,460      $ 882,877      $ 167,409      $ 187,958   

Cash paid for income taxes

  $ 592,391      $ 514,605      $ 600,866      $ 262,276      $ 541,187   

Supplemental disclosure of non-cash investing and financing activities

         

Acquisition of equipment pursuant to capital lease obligations

  $ 1,414,519      $ 13,032      $ 100,197        —        $ 1,622,709   

Non-cash leasehold improvements to newly leased facility

  $ 1,958,448        —          —          —          —     

Conversion of nonconvertible debt to equity

  $ 2,004,047        —          —          —          —     

Maturity and conversion of convertible debt to equity

  $ 8,098,692        —          —          —          —     

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

1. Nature of Business

Exa Corporation (the “Company” or “Exa”), a Delaware corporation, develops, sells and supports simulation software and services that vehicle manufacturers use to enhance the performance of their products, reduce product development costs and improve efficiency of their design and engineering processes. The Company’s solutions enable engineers and designers to augment or replace conventional methods of evaluating designs that rely on expensive and inefficient physical prototypes and test facilities with accurate digital simulations that are more useful, cost effective and timely. The Company’s simulation solutions enable customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes, which result in cost savings and fundamental improvements in the development process. The Company is primarily focused on the ground transportation market, but is also beginning to explore the application of its capabilities in the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation biomedical and electronics industries.

Exa has offices and sells directly in the United States and through subsidiaries in France, Germany, Italy, Japan, Korea, and the United Kingdom. The Company also conducts business in China, India, and Brazil through distribution and sales representative relationships.

The Company is subject to a number of risks common to companies in similar stages of development, including dependence on a small number of significant customers for a substantial portion of its revenues, the ability to attract and retain key personnel, competition from substitute products and services and larger companies, the need to continually develop commercially viable products, and risks associated with changes in information technology.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Applicable Accounting Guidance

Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative nongovernmental United States generally accepted accounting principles as found in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known.

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

Unaudited Interim Financial Statements

The accompanying April 30, 2011 consolidated balance sheet, the consolidated statements of operations and cash flows for the three months ended April 30, 2010 and 2011, and the consolidated statements of convertible preferred stock, stockholders’ deficit, and other comprehensive income for the three months ended April 30, 2011 are

 

F-6


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

unaudited. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments, necessary for the fair presentation of such financial statements. The information disclosed in the notes to the financial statements for these periods is unaudited. The results for the three months ended April 30, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Unaudited Pro Forma Information

The unaudited pro forma balance sheet as of April 30, 2011 and the pro forma consolidated statements of convertible preferred stock, stockholders’ deficit, and other comprehensive income (loss) as of April 30, 2011 assume the conversion of all outstanding shares of the Company’s convertible preferred stock to common stock, to occur upon the closing of the Company’s proposed public offering.

Revenue Recognition

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

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

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

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

Revenue is presented net of any taxes collected from customers.

Foreign Currency Translation

The Company has foreign subsidiaries in England, France, Germany, Italy, Japan and Korea. Through fiscal 2010, all of the Company’s foreign subsidiaries used the United States dollar as their functional currency in accordance with ASC 830, Foreign Currency Matters. Foreign subsidiary records are maintained in the local currency. Through fiscal 2010, the Company re-measured all assets and liabilities of its subsidiaries into the functional currency, resulting in unrealized gains or losses recorded as a component of other income (expense), net

 

F-7


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

in the accompanying consolidated statements of operations. The Company reviews the functional currency of its subsidiaries on an annual basis in accordance with the “Foreign/Parent Currency” indicators outlined in Appendix A to ASC 830 to determine if the functional currency should be changed to the local currency. In fiscal 2011, management’s review of the operations of the Company’s foreign subsidiaries indicated that the functional currency should be changed to the respective local currency, except for the Company’s subsidiaries in England and Italy. As a result, beginning in fiscal 2011, the Company’s French, German, Japanese and Korean subsidiaries translate their assets and liabilities denominated in their functional currency at current rates of exchange in effect at the balance sheet date. Beginning in fiscal 2012, management’s review of the operations of the Company’s Italian subsidiary indicated that the functional currency should be changed to the local currency. As a result, beginning in fiscal 2012, the Company’s Italian subsidiary translates its assets and liabilities denominated in its functional currency at current rates of exchange in effect at the balance sheet date. The resulting gains and losses from translation are included as a component of other comprehensive income (loss). Transaction gains and losses and re-measurement of assets and liabilities denominated in currencies other than a subsidiary’s functional currency are included in other income (expense), net. Foreign currency (losses) gains included in other (expense) income, net for the years ended January 31, 2009, 2010, and 2011 were $548,986, $(766,148) and $(198,216), respectively. Foreign currency transaction (losses) gains included in other (expense) income, net for the three months ended April 30, 2010 and 2011 were $180,343 and $(463,733), respectively.

Concentration of Credit Risk and Significant Customers

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

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

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

The following table provides information concerning customers that individually accounted for greater than 10% of total revenues or 10% of accounts receivable, and their respective percentages of total revenues and accounts receivable, as of January 31, 2010 and 2011 and for the years ended January 31, 2009, 2010 and 2011:

 

     Year Ended January 31,  
     2009     2010     2011  
     Percentage of
Total Revenues
    Percentage of
Total Revenues
    Percentage of
Accounts
Receivable at
Fiscal Year End
    Percentage of Total
Revenues
    Percentage of
Accounts
Receivable at
Fiscal Year End
 

Customer A

     19     14     24     13     22

Customer B

     11        11        *        11        *   

Customer C

     *        *        13        *        11   

 

* less than 10%

 

F-8


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

The following table provides information concerning customers that accounted for greater than 10% of total revenues and 10% of accounts receivable, and their respective percentages of total revenues and accounts receivable, as of April 30, 2011 and for the three months ended year ended April 30, 2010 and 2011:

 

     Three Months Ended April 30,  
     2010     2011  
     Percentage
of Total
Revenues
    Percentage
of Total
Revenues
    Percentage of
Accounts
Receivable at
Quarter End
 

Customer A

     15     14     24

Customer B

     12        *        14   

 

* less than 10%

Concentration of Other Risks

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

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of 90 days or less, that are not restricted as to withdrawal, to be the equivalent of cash for the purpose of balance sheet and statement of cash flows presentation. Cash equivalents, which were nominal in amount, consisted of money market accounts as of January 31, 2010 and 2011 and April 30, 2011.

Accounts Receivable and Allowances for Doubtful Accounts

Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided to the extent that specific accounts receivable are considered to be uncollectible, based on historical experience, known collection issues, and management’s evaluation of outstanding accounts receivable at the end of the year. Uncollectible amounts, if any, are written off against the allowance after all collection efforts have been exhausted. Based on management’s analysis of its outstanding accounts receivable, and customers’ creditworthiness and collection history, the Company concluded no allowance was necessary at January 31, 2010, 2011 and April 30, 2011.

Accounts receivable allowance activity consisted of the following for the fiscal years ended January 31, 2009, 2010 and 2011.

 

            Additions                

Description

   Balance at
Beginning
of Period
     Provision      Write offs      Recoveries      Balance at
End of
Period
 

Allowance for Doubtful Accounts:

              

Year ended January 31, 2011

   $ —         $ —         $   —         $ —         $ —     

Year ended January 31, 2010

     162,200         —           —           162,200         —     

Year ended January 31, 2009

     29,568         162,200         —           29,568         162,200   

 

F-9


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

Property and Equipment

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

 

Asset Classification

  

Estimated Useful Life

Computer equipment

   3 years

Software

   3 years

Office equipment and furniture

   3-5 years

Leasehold improvements

   Shorter of useful life or remaining life of lease

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to the future undiscounted cash flows the assets are expected to generate. If any long-lived assets are considered to be impaired, the impairment recognized equals the amount by which the carrying value of the assets exceeds its estimated fair value. The Company did not identify any indicators of impairment of its long-lived assets during the years ended January 31, 2009, 2010 and 2011, and the three months ended April 30, 2011.

Research and Development Expenses

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

Advertising Costs

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

Income Taxes

Income taxes are accounted for in accordance with ASC 740, Income Taxes. ASC 740 requires that deferred tax assets and liabilities are recorded based on temporary differences between the financial statement amounts and the tax basis of assets and liabilities, measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company periodically evaluates the realizability of its net deferred tax assets and records a valuation allowance against net deferred tax assets when uncertainties exist as to their realization prior to expiration. A valuation allowance is recorded, if based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Comprehensive Income (Loss) and Accumulated Comprehensive Income

ASC 220, Comprehensive Income requires the reporting and display of comprehensive income and its components. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

period from transactions, and other events and circumstances from non-owner sources. Accumulated other comprehensive income consists entirely of foreign currency translation adjustments at January 31, 2011 and April 30, 2011.

Stock-Based Compensation

The Company accounts for stock based compensation in accordance with ASC 718, Compensation—Stock Compensation. Under the fair value recognition provisions of ASC 718, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or vesting period. Determining the fair value of equity awards at the grant date requires judgment. The Company estimates the grant date fair value of stock options using the Black-Scholes option valuation model. This option valuation model requires the input of subjective assumptions including: (1) expected life (estimated period of time outstanding) of the options granted, (2) volatility, (3) risk-free rate and (4) dividends. Because share-based compensation expense is based on awards ultimately expected to vest, it is reduced for estimated forfeitures.

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures rates differ from those estimates. Forfeitures are estimated based on historical experience.

Net Income (Loss) per Share

Net income (loss) per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted amounts per share include the impact of the Company’s outstanding potential common shares, such as shares issuable upon exercise of in-the-money stock options or warrants or upon conversion of convertible preferred stock, when dilutive. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income (loss) per common share. The impact of the accretion of unpaid and undeclared dividends has not been reflected in the weighted average shares used to compute diluted net loss per share as the convertible preferred stock is not entitled to receive undeclared dividends upon such conversion

The following table sets forth the components of the computation of basic and diluted net income (loss) per common share for the periods indicated:

 

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

Numerator:

           

Net (loss) income

   $ (9,845,616   $ (95,647)      $ 582,315       $ (577,440)      $ 801,247   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Denominator:

           

Weighted average common shares outstanding, basic

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

Options to purchase common stock

     —          —          370,971         —          378,936   

Options to purchase preferred stock

     —          —          7,530,405         —          7,537,759   

Warrants to purchase preferred stock

     —          —          457         —          42,000   

Convertible preferred stock

     —          —          55,251,747         —          55,232,073   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average common shares outstanding, fully diluted

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income per share-basic

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income per share-fully diluted

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

F-11


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

The following outstanding options, warrants and preferred stock were excluded from the computation of diluted net income (loss) per share for the periods indicated because including them would have had an anti-dilutive effect:

 

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

Options to purchase common and preferred stock

     13,080,094         11,129,375         1,679,364         11,225,937         1,682,748   

Convertible preferred stock

     54,364,623         55,272,073         —           55,272,073         —     

Segment Information

ASC 280, Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in annual and interim reports issued to stockholders. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief decision maker, as defined under ASC 280, is a combination of the chief executive officer and the chief operating officer. The Company views its operations and manages its business as one operating segment.

Revenues by geographic location in total and as a percentage of total revenues are as follows:

 

     Year Ended January 31,  
     2009     2010     2011  
     Revenue      Percentage of
Revenue
    Revenue      Percentage of
Revenue
    Revenue      Percentage of
Revenue
 

Geographic location:

               

United States

   $ 8,461,468         24.8   $ 6,734,483         18.9   $ 5,825,902         15.4

Japan

     7,726,328         22.6     7,950,315         22.3     8,404,536         22.3

France

     7,972,748         23.4     8,901,125         25.0     6,783,224         18.0

Germany

     5,765,408         16.9     4,224,383         11.9     5,780,103         15.3

Korea

     2,450,649         7.2     3,007,197         8.4     3,686,053         9.8

UK

     544,248         1.6     2,274,604         6.4     2,593,911         6.9

Sweden

     232,447         0.7     1,623,485         4.6     2,826,840         7.5

Other

     969,476         2.8     880,569         2.5     1,831,094         4.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 34,122,772         100.0   $ 35,596,161         100.0   $ 37,731,663         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Three Months Ended April 30,  
     2010     2011  
     Revenue      Percentage of
Revenue
    Revenue      Percentage of
Revenue
 

Geographic location:

          

United States

   $ 1,173,496         15.1   $ 2,410,785         23.3

Japan

     2,044,001         26.4     2,140,704         20.7

France

     1,473,573         19.0     2,128,026         20.6

Germany

     1,144,410         14.8     1,231,596         11.9

Korea

     732,314         9.4     914,450         8.8

UK

     482,723         6.2     672,516         6.5

Sweden

     395,950         5.1     469,354         4.5

Other

     310,295         4.0     376,983         3.7
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 7,756,762         100.0   $ 10,344,414         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

Net long-lived assets, consisting of net property and equipment, are subject to geographic risks because they are generally difficult to move and to effectively utilize in another geographic area in a reasonable time period and because they are not relatively liquid.

Net long-lived assets by principal geographic areas were as follows:

 

     As of January 31,      As of
April 30,
2011
 
     2009      2010      2011     

United States

   $ 5,547,611       $ 2,940,284       $ 1,743,244       $ 3,080,204   

Japan

     95,672         117,181         133,639         132,134   

France

     97,135         73,625         63,805         61,863   

Germany

     69,497         46,684         43,780         56,476   

Other

     36,931         23,126         17,518         20,081   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,846,846       $ 3,200,900       $ 2,001,986       $ 3,350,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value of Financial Instruments

Financial instruments primarily consist of cash and cash equivalents, accounts receivable, capital lease obligations, debt and an equity participation right. As of January 31, 2011 and 2010, the carrying amounts of these instruments approximate their fair values. The estimated fair values have been determined from information obtained from market sources and management estimates.

In determining the fair value of its financial assets and liabilities, the Company uses various valuation approaches. ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

 

Level 1

    Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2

    Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

Level 3

    Valuations based on inputs that are unobservable and significant to the overall fair value measurement and that are based on management’s best estimate of inputs market participants would use for pricing the asset or liability at the measurement date, including assumptions about risk.

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of January 31, 2011:

 

     Total Fair
Value
     Quoted Prices in
Active Markets
(Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

Liabilities

           

Other liabilities—equity participation right (See Note 6)

   $ 552,000       $ —         $ —         $ 552,000   

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

2. Summary of Significant Accounting Policies (continued)

 

There were no such financial assets or liabilities measured at fair value on a recurring basis as of January 31, 2010. The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement.

Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) during the year ended January 31, 2011 and three months ended April 30, 2011 were as follows:

 

Balance as of January 31, 2010

   $ —     

Equity participation right financial liability

     (552,000
  

 

 

 

Balance as of January 31, 2011

     (552,000

Reduction in value of equity participation right (unaudited)

     130,000   
  

 

 

 

Balance as of April 30, 2011 (unaudited)

   $ (422,000
  

 

 

 

Related Party Transactions:

In July 2009, the Company entered into a Bridge Loan and Security Agreement with a related party, bearing interest at the prime rate, as defined, plus 5% (8.25% at January 31, 2010). On January 28, 2011, the Company entered into an $8.5 million Loan and Security Agreement, of which $1.0 million was with a related party.

See Note 6 for further detailed discussion regarding the debt owed to related parties.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted the new guidance on a prospective basis as of February 1, 2011 for revenue arrangements entered into or materially modified after January 31, 2011. The adoption of the new guidance did not have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for the Company in its first quarter of fiscal year 2013 and should be applied retroactively. There will be no impact to the consolidated financial results of the Company as the amendments relate only to changes in financial statement presentation.

 

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EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

3. Property and Equipment

Property and equipment consists of the following:

 

     January 31,     April  30,
2011
 
     2010     2011    

Computer equipment and software

   $ 8,912,739      $ 9,157,276      $ 10,839,482   

Office equipment and furniture

     205,564        204,900        216,969   

Leasehold improvements

     2,327,900        2,493,565        2,498,419   
  

 

 

   

 

 

   

 

 

 

Total property and equipment

     11,446,203        11,855,741        13,554,870   

Less accumulated depreciation

     (8,245,303     (9,853,755     (10,204,112
  

 

 

   

 

 

   

 

 

 

Property and equipment, net

   $ 3,200,900      $ 2,001,986      $ 3,350,758   
  

 

 

   

 

 

   

 

 

 

Depreciation expense was $2,852,962, $2,699,389 and $1,560,473 for the years ended January 31, 2009, 2010 and 2011, respectively. Depreciation expense for the three months ended April 30, 2010 and 2011 was $428,227 and $322,275, respectively. Included in computer equipment and software and office equipment and furniture is equipment held pursuant to capital leases with costs of $8,087,850, $8,185,959, and $9,810,742 and accumulated amortization of $6,953,862, $7,886,809, and $8,058,115 at January 31, 2010 and 2011 and April 30, 2011, respectively.

4. Accrued Expenses

Accrued expenses consist of the following:

 

     January 31,      April  30,
2011
 
     2010      2011     

Accrued commissions and bonuses

   $ 1,442,123       $ 3,684,840       $ 1,177,983   

Accrued payroll

     1,081,773         1,311,902         1,366,187   

Sales and withholding taxes

     1,630,868         1,873,240         522,349   

Other accrued expenses

     1,875,286         1,405,743         1,349,946   
  

 

 

    

 

 

    

 

 

 

Total accrued expenses

   $ 6,030,050       $ 8,275,725       $ 4,416,465   
  

 

 

    

 

 

    

 

 

 

5. Deferred Rent

In connection with its corporate headquarters lease entered into in July 2008, the Company received a tenant improvement allowance of $1,958,448 from the landlord. This lease incentive was recorded as leasehold improvements and deferred rent and is being amortized as part of rent expense on a straight-line basis over the life of the lease. In addition, the Company’s facility leases typically contain other than straight-line payment features. The difference between the straight-line rent expense of the lease and the cash payments is recorded as deferred rent. Deferred rent, long-term, at January 31, 2010 and 2011 and April 30, 2011 is as follows:

 

     January 31,      April  30,
2011
 
     2010      2011     

Leasehold improvement lease incentive

   $ 1,628,373       $ 1,364,312       $ 1,298,297   

Non-cash rent expense

     1,119,723         1,096,570         1,104,843   
  

 

 

    

 

 

    

 

 

 

Total deferred rent

     2,748,096         2,460,882         2,403,140   

Less current portion included in accrued expenses

     287,212         237,720         268,968   
  

 

 

    

 

 

    

 

 

 

Total long-term

   $ 2,460,884       $ 2,223,162       $ 2,134,172   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

6. Debt

Long-term Debt

On January 28, 2011, the Company entered into a Loan and Security Agreement that provided for term loans of up to $8.5 million, of which $1.0 million was with a related party. The Company has drawn $5.0 million and has the ability to borrow an additional $3.5 million through September 30, 2011. The loan agreement is for 54 months and bears interest at 10.5% per annum. An additional 2.5% ($125,000 as of January 31, 2011) of the amount borrowed is due at maturity and is being accreted using the effective interest method over the life of the debt. Interest only payments are payable during the first twelve months with principal and interest payments required for forty-two months thereafter. Early prepayment of the debt results in additional interest penalties of 4% on the principal if prepaid prior to the second anniversary of funding and 3% on the principal if prepaid after the second anniversary but before the third anniversary of funding. The loan agreement provided for the issuance of 700,000 freestanding warrants for shares of Series G Convertible Preferred Stock that may be exercised by the lenders at a price of $0.94 cents per share (See Note 8). The warrants may be exercised in whole or in part at any time for a period of ten years, expiring in January 2021. The Company allocated the aggregate proceeds of the borrowing between the warrants and the debt based on their relative fair values as codified in ASC 470-20-25, Debt—Debt with Conversion Options—Recognition. The fair value of the warrants issued to the debt holders was calculated utilizing the Black-Scholes option pricing model. The Company is amortizing the resultant debt discount to interest expense over the term to debt maturity using the effective interest method. Under this method, interest expense is recognized each period until the instrument reaches maturity. If the maturity of the debt is accelerated because of pre-payment, then the amortization will be accelerated. The term loan agreement includes customary representations, warranties and reporting requirements, but no financial covenants.

As of January 31, 2011, the aggregate principal maturities (including debt discount) for the next five years are as follows:

 

Year ended January 31,

      

2012

   $ —     

2013

     1,135,461   

2014

     1,371,874   

2015

     1,525,263   

2016

     967,402   
  

 

 

 

Total debt repayments

   $ 5,000,000   
  

 

 

 

Lines of Credit

In July 2009, the Company entered into a Bridge Loan and Security Agreement with a related party bearing interest at the prime rate plus 5% (8.25% at January 31, 2010). The bridge loan was originally scheduled to expire in September 2009, but was subsequently amended in September 2009 and in April 2010, extending the expiration date to May 2010. The Company could borrow up to $10.0 million on a revolving basis based on 80% of the value of the specific eligible accounts receivable. The bridge loan was collateralized by specific accounts receivable and a first priority security interest in all assets of the Company. Additionally, the related party had the right to invest up to $10 million at a 15% discount in the next equity investment round of the Company (if any), by either converting the existing debt or participating with a cash investment (the Equity Participation Right). The Equity Participation Right was originally scheduled to expire in July 2010 but the term was modified in connection with the April 2010 amendment such that the term of the right is indefinite until such time as it is either exercised or the occurrence of an initial public offering of the Company’s common stock, at which time the right terminates. The bridge loan agreement contained certain restrictive financial covenants requiring the maintenance of an adjusted quick ratio. At January 31, 2010, the Company was in compliance with such covenants and the amount outstanding under the bridge loan was $9,000,000. On May 7, 2010 the outstanding obligation was paid in full.

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

6. Debt (continued)

 

The Equity Participation Right was deemed to have a fair value that was not material at the date of its issuance and as of January 31, 2010. The fair value of such right was estimated to be $552,000 in connection with the April 2010 amendment and was recognized as a deferred financing cost and amortized to non-cash interest expense through the maturity of the debt in May 2010. The fair value of the Equity Participation Right is marked to market each reporting period until expiration and changes in the value are recognized within other income (expense) in the accompanying statements of operations. The fair value of the right at January 31, 2011 and April 30, 2011 is approximately $552,000 and $422,000, respectively, and is recorded within other long-term liabilities on the accompanying balance sheets.

In May 2010, the Company secured a new $10.0 million line-of-credit agreement with a bank bearing interest at the bank’s prime rate plus 1.50% on existing accounts receivable and 2.5% on certain forecasted renewal invoices, expiring one year from closing. The line of credit agreement requires collateral of specific accounts receivable and a first priority security interest in all assets of the Company. The Company can borrow against 80% of the value of the specific accounts receivable, but borrowings on certain foreign receivables are restricted to $1.0 million. The Company is required to pay a collateral handing fee of 0.25% per month on outstanding balances from existing accounts receivable, and 0.375% per month on certain forecasted renewal invoices. The agreement contains certain restrictive financial covenants requiring the maintenance of an adjusted quick ratio. At January 31, 2011, the Company was in compliance with such covenants and the amount outstanding under the agreement was $2,994,901. At April 30, 2011, no amounts were outstanding under the line of credit.

On May 23, 2011 the line of credit was extended for a period of two years (see Note 13).

Interest expense was $1,265,326, $595,264 and $1,266,753 for the years ended January 31, 2009, 2010 and 2011, respectively and $568,061 and $242,317 for the three months ended April 30, 2010 and 2011, respectively. Included in interest expense was interest paid to related parties of $0, $282,793 and $150,676 for the years ended January 31, 2009, 2010 and 2011, respectively, and $148,271 and $34,353 for the three months ended April 30, 2010 and 2011, respectively.

 

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EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

7. Convertible Preferred Stock

As of January 31, 2010 and 2011, and April 30, 2011, the Company was authorized to issue up to 77,835,000 of $0.001 par value convertible preferred stock. Convertible preferred stock as of January 31, 2010 and 2011 and April 30, 2011 consisted of the following:

 

     January 31,      April  30,
2011
 
     2010      2011     

Series A convertible preferred stock: $0.001 par value; 2,500,000 shares authorized; 2,421,661 shares issued and outstanding

   $ 3,329,695       $ 3,329,695       $ 3,329,695   

Series B convertible preferred stock: $0.001 par value; 4,100,000 shares authorized; 4,063,694 shares issued and outstanding

     6,380,000         6,380,000         6,380,000   

Series C convertible preferred stock: $0.001 par value; 4,000,000 shares authorized; 2,911,040 shares issued and outstanding

     5,353,723         5,353,723         5,353,723   

Series D convertible preferred stock: $0.001 par value; 475,000 shares authorized; no shares issued and outstanding

     —           —           —     

Series E convertible preferred stock: $0.001 par value; 1,000,000 shares authorized; 750,000 shares issued and outstanding

     1,716,606         1,716,606         1,716,606   

Series F convertible preferred stock: $0.001 par value; 1,660,000 shares authorized; 652,174 shares issued and outstanding

     1,500,000         1,500,000         1,500,000   

Series G convertible preferred stock: $0.001 par value; 25,000,000 shares authorized; 8,023,316, 7,983,316 and 7,983,316 shares issued and outstanding at January 31, 2010, 2011 and April 30, 2011, respectively

     439,312         399,312         399,312   

Series H convertible preferred stock: $0.001 par value; 35,000,000 shares authorized; 32,394,765 shares issued and outstanding

     8,098,693         8,098,693         8,098,693   

Series I convertible preferred stock: $0.001 par value; 4,100,000 shares authorized; 4,055,423 shares issued and outstanding

     5,884,477         5,884,477         5,884,477   
  

 

 

    

 

 

    

 

 

 
   $ 32,702,506       $ 32,662,506       $ 32,662,506   
  

 

 

    

 

 

    

 

 

 

The rights and preferences of the convertible preferred stock are as follows:

Conversion—The holder of any share of preferred stock shall have the right, at its option at any time, to convert such share of preferred stock into one fully paid and non-assessable shares of common stock.

Conversion is at the option of the holder and is automatic upon the occurrence of the closing of a qualified public offering of the Company’s common stock in which the price paid by the public will be at least $25,000,000 or upon a vote or written consent of the holders of at least seventy percent of the outstanding preferred stock voting as a single class.

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

7. Convertible Preferred Stock (continued)

 

Liquidation Rights—In the event of liquidation, the holders of preferred stock are to be paid a per share amount plus all accrued and unpaid dividends whether or not declared by the Company. As of January 31, 2011, the total liquidation preference of the preferred stock was as follows:

 

Series

   Per Share
Amount
     Cumulative
Undeclared
Dividends
     Total Liquidation
Preference,
Including
Accrued
Undeclared
Dividends
 

Series A

   $ 1.57       $ 6,689,817       $ 10,491,824   

Series B

     1.57         10,370,558         16,750,558   

Series C

     1.57         6,554,884         11,125,217   

Series E

     2.00         1,906,438         3,406,438   

Series F

     2.30         1,952,466         3,452,466   

Series G

     2.30         10,022,747         28,384,374   

Series H

     2.30         15,799,770         90,307,730   

Series I

     1.48         1,654,257         7,656,283   
     

 

 

    

 

 

 
      $ 54,950,937       $ 171,574,890   
     

 

 

    

 

 

 

As of January 31, 2011, the Company has 8,856,041 vested outstanding preferred options to purchase Series G shares and 700,000 outstanding warrants to purchase Series G shares. In the event that these options and warrants are exercised, the liquidation preference for Series G would increase from $28,384,374 to $48,753,268. If all vested outstanding Series G options were exercised prior to a liquidation event, the total liquidation preference of all series of the Company’s preferred stock would increase from $171,574,890 to $193,553,785.

If the assets of the Company are insufficient to pay the preferred stockholders, the assets will be distributed pro rata to the holders of preferred stock in accordance with the respective amounts which would have been distributed to such holders if the assets had been sufficient to pay the preferred stockholders. The Series H and Series I preferred stock have an alternative senior liquidation preference which entitles holders to be paid the greater of the pro rata liquidation preference with other classes of preferred stock or debt value plus accrued interest prior to payment to the other classes of preferred stock. After the payments are made to all of the preferred stockholders in liquidation, any remaining funds shall be distributed to the holders of shares of common stock in proportion to the number of shares of common stock owned by such holders.

Voting—Each holder of the preferred stock is entitled to vote on all matters and is entitled to the number of votes equal to the number of shares of common stock into which the shares of preferred stock held by such holder can be converted. Except as otherwise required by law, the holders of preferred stock shall be entitled to vote on all matters submitted to a vote of the holders of the common stock together with such holders of common stock.

Dividends—The holders of the Series A, Series B and Series C preferred stock are entitled to receive dividends per annum at the rate of $0.157 per share. The holders of the Series D, Series E, Series F, Series G, Series H, and Series I preferred stock are entitled to receive dividends per annum at the rate of $0.314, $0.20, $0.23, $0.23, $0.23 and $0.148 per share, respectively. Preferred stock dividends are cumulative and the stockholders are entitled to receive the dividends only if declared by the Board of Directors. No dividends have been declared on any series of preferred stock since their respective issuance dates.

Redemption Rights—The preferred stock does not contain redemption rights.

Participation, Registration and Co-sale Rights—All holders of preferred stock have the first right of refusal to participate in future financings of the Company based upon their proportionate percentage owned. These rights do not apply to the Company’s initial public offering.

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

7. Convertible Preferred Stock (continued)

 

Holders of preferred stock are entitled to six demand registrations—two outright demand registrations and four demand registrations after 180 days from the effective date of a registration of Company securities under the 1933 Act. In addition, if the Company proposes to register an offering of its securities under the 1933 Act, preferred stockholders have a right to participate in such offering and the Company is required to give preferred stockholders a 30 day notice of their right to participate. If preferred stockholders give notice to participate, the Company is required to use best efforts to have these shares included in the offering. However, the underwriters of the offering are entitled to limit or completely restrict participation of these shares in the offering. In August 2011, the holders of the requisite number of shares of preferred stock, on behalf of themselves and all other holders of shares of preferred stock, waived their registration rights with respect to the Company’s initial public offering.

Preferred stockholders are entitled to pro rata co-sale rights. These rights do not apply to the Company’s initial public offering.

8. Stockholders’ Deficit

Common Stock

The Company has reserved common stock for issuance upon the exercise of stock options and warrants and conversion of convertible preferred stock issued by the Company.

As of January 31, 2011 reserved common stock is as follows:

 

Stock options

     18,714,777   

Warrants

     700,000   

Convertible preferred stock

     55,232,073   
  

 

 

 

Total

     74,646,850   
  

 

 

 

Stock Plans

The Company has in effect equity compensation plans under which incentive stock options and nonqualified stock options have been granted to employees, directors and consultants to purchase shares of the Company’s common and Series G preferred stock at a price not less than the fair market value of the stock at the date of grant.

The Company has adopted and has options outstanding under its common and preferred stock plans as follows:

 

Plan

   Authorized and
Reserved
     Outstanding
January 31,
2011
     Outstanding April 30,
2011
 

1999 Series G Convertible Preferred Nonqualified Stock Option Plan

     2,500,000         328,334         328,334   

2005 Series G Convertible Preferred Stock Incentive Plan

     12,000,000         8,527,707         8,526,457   

2007 Stock Incentive Plan

     7,000,000         2,358,864         2,358,465   
  

 

 

    

 

 

    

 

 

 
     21,500,000         11,214,905         11,213,256   
  

 

 

    

 

 

    

 

 

 

As of April 30, 2011, the Company had options available to issue under the plans as follows:

 

Plan

   Available to
Issue
 

1999 Series G Convertible Preferred Nonqualified Stock Option Plan

     262,014   

2005 Series G Convertible Preferred Stock Incentive Plan

     2,608,168   

2007 Stock Incentive Plan

     4,627,277   
  

 

 

 
     7,497,459   
  

 

 

 

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

8. Stockholders’ Deficit (continued)

 

The Company’s equity compensation plans generally provide the Board the authority to grant incentive stock options, nonqualified stock options, restricted stock awards, unrestricted stock awards, performance share awards, restricted stock units, and stock appreciation rights (collectively, options) and to select the employees and consultants to whom options are granted and determine the terms of each option, including (i) the number of shares of common or preferred stock subject to the option, (ii) when the option becomes exercisable, (iii) the option exercise price, which, in the case of incentive stock options, must be at least 100% (110% in the case of incentive stock options granted to a stockholder owning in excess of 10% of the Company’s common stock) of the fair market value of the stock as of the date of grant and (iv) the duration of the option (which, in the case of incentive stock options, may not be less than five years or exceed 10 years). Options generally expire 10 years from the date of issuance.

Grant-Date Fair Value

The Company has granted stock options at exercise prices no less than the fair market value of the common stock at the date of grant, as determined by the Board of Directors. The Company’s Board of Directors exercised judgment in determining the estimated fair value of the Company’s common stock on the date of grant based on a number of objective and subjective factors, including valuations performed by a third party valuation firm, the Company’s operating and financial performance, external market conditions affecting the Company’s industry sector, an analysis of publicly traded peer companies, the prices at which it sold shares of convertible preferred stock, secondary transactions in the Company’s common stock, the superior rights and preferences of securities senior to the Company’s common stock and/or the Series G preferred stock at the time of each grant, and the likelihood of achieving a liquidity event such as an initial public offering or sale of the Company. As the Company’s common stock is not actively traded, the determination of fair value involves assumptions, judgments and estimates.

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of stock options issued. The Black-Scholes model requires estimates regarding the risk-free rate of return, dividend yields, expected life of the award and estimated forfeitures of awards during the service period. The Company computes volatility under the “calculated value method” of ASC 718 by utilizing the average of a peer group comprised of publicly-traded companies. The peer group was determined based upon companies considered to be direct competition or having been presented by independent parties as a “comparable” company based upon market sector. In determining a comparable, the Company has excluded “large-cap” entities. Since adopting ASC 718, the Company has been unable to use historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. As such, the Company has utilized the “simplified” method, as prescribed by Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate on a formula basis the expected term of its stock options considered to have “plain vanilla” characteristics. For option issuances that do not have “plain vanilla” characteristics, the Company uses an average based on the specific facts and circumstances of such issuances.

The Company utilizes the Federal Reserve Board’s published Treasury Constant Maturity rate which most closely matches the option term. As an example, for a 6.25 year term, the Company would use the 7-year rate coinciding with the option issuance date.

The Company has never paid dividends and does not currently intend to pay dividends, and this has assumed a dividend yield of zero.

The Company estimates potential forfeitures of stock grants and adjusts compensation cost recorded accordingly. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

8. Stockholders’ Deficit (continued)

 

The fair value of a stock option award was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions in fiscal years 2011, 2010, 2009 and three months ended April 30, 2011:

 

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

Expected volatility

     49.6     53.0     57.5     57.0

Expected term (in years)

     6.17        6.22        6.25        6.25   

Risk-free interest rate

     3.20     2.81     2.84     2.72

Expected dividend yield

     0.0     0.0     0.0     0.0

A summary of the changes in common and preferred stock options issued under all of the existing stock option plans is as follows:

 

     Year Ended January 31, 2011      Three Months Ended April 30, 2011  
     Number of
Options
    Weighted
Average
Exercise Price
     Number of
Options
    Weighted
Average
Exercise
Price
 

Outstanding—beginning of period

     11,129,375      $ 0.28         11,214,905      $ 0.29   

Granted

     322,000        1.00         40,000        1.00   

Exercised

     (5,000     0.32         (4,062     1.00   

Cancelled

     (231,470     0.68         (37,587     0.92   
  

 

 

      

 

 

   

Outstanding—end of period

     11,214,905      $ 0.29         11,213,256      $ 0.29   
  

 

 

      

 

 

   

Exercisable—end of period

     10,247,936      $ 0.24         10,381,616      $ 0.24   

The weighted-average fair value of stock options granted during the years ended January 31, 2009, 2010 and 2011 was $0.51, $0.54 and $0.53 per share respectively and $0.53 for the three months ended April 30, 2011. The aggregate intrinsic value of options exercised during the year ended January 31, 2011 and for the three months ended April 30, 2011 was $3,400, and $0, respectively.

Shares available for issuance under the Company’s option plans totaled 7,499,872 at January 31, 2011.

Options outstanding that had vested or were expected to vest were as follows:

 

     Number of
Shares
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term

(in Years)
     Aggregate
Intrinsic
Value (1)
 

January 31, 2011

     11,127,502       $ 0.29         5.10       $ 7,946,228   

April 30, 2011

     11,138,051       $ 0.29         4.90       $ 7,944,194   

 

(1) The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s stock on January 31, 2011 and April 30, 2011 of $1.00 and the exercise price of the underlying options.

As of January 31, 2011, there was $381,874 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan. The cost is expected to be recognized over a weighted average period of 1.9 years.

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

8. Stockholders’ Deficit (continued)

 

On July 19, 2011 the Company granted options to purchase 2,905,000 shares of common stock to directors and employees at an exercise price of $1.75 per share.

Stock-Based Compensation Expense

The Company records stock-based compensation expenses over the estimated service/vesting period. The amount of stock-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.

Total stock-based compensation expense was recorded within the statement of operations for the fiscal years ended January 31, 2009, 2010 and 2011, and the three months ended April 30, 2010 and 2011 as follows:

 

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

Cost of revenues

   $ 33,156       $ 39,196       $ 44,555       $ 9,930       $ 9,057   

Sales and marketing

     87,231         61,234         62,980         15,262         1,621   

Research and development

     111,037         105,082         133,525         26,941         12,773   

General and administrative

     59,521         224,095         39,611         9,651         9,463   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-cash, share-based compensation expense

   $ 290,945       $ 429,607       $ 280,671       $ 61,784       $ 32,914   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Warrants

As of January 31, 2010 and 2011, and April 30, 2011, the Company had warrants outstanding to purchase 700,000 shares of Series G Convertible Preferred Stock that may be exercised at a price of $0.94 cents per share. The warrants, may be exercised in whole or in part at any time for a period of ten years, expiring in January 2021.

9. Income Taxes

(Loss) income before the provision for income taxes consists of the following:

 

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

Domestic

   $ (7,192,973   $ (1,860,173   $ (1,937,702   $ (987,725   $ 1,045,573   

Foreign

     (2,211,543     2,359,123        3,106,111        419,500        (194,318
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (9,404,516   $ 498,950      $ 1,168,409      $ (568,225   $ 851,255   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The provision for income taxes in the accompanying consolidated financial statements, all of which is currently payable, consists of the following:

 

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

Federal

   $ —         $ —         $ (22,778   $ (5,694   $ —     

State

     30,000         30,000         30,000        7,500        4,325   

Foreign

     411,100         564,597         578,872        7,409        45,683   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 441,100       $ 594,597       $ 586,094      $ 9,215      $ 50,008   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

F-23


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

9. Income Taxes (continued)

 

A reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate is as follows:

 

     Year Ended January 31,  
     2009     2010     2011  

Tax at statutory rates

     34.0     34.0     34.0

Foreign tax rate differential

     (5.4     257.3        2.2   

State income taxes

     2.7        180.7        0.7   

Nondeductible expenses

     (2.8     8.1        21.6   

Stock-based compensation

     (0.9     —          8.2   

Research and development credits

     (0.3     40.4        (0.7

Change in valuation allowance

     (32.0     (401.3     (15.8
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     (4.7 )%      119.2     50.2
  

 

 

   

 

 

   

 

 

 

The approximate income tax effect of each type of temporary difference and carryforward as of January 31, 2011 and 2010 is as follows:

 

     Year Ended January 31,  
     2010     2011  

Net operating loss carryforwards

   $ 11,582,418      $ 10,954,192   

Tax credit carryforwards

     1,679,049        1,675,992   

Depreciation and amortization

     (59,967     146,122   

Accrued expenses and reserves

     107,740        179,896   

Deferred compensation

     432,587        377,638   

Deferred revenue

     864,023        52,849   

Other temporary differences

     334,952        (106,205
  

 

 

   

 

 

 

Deferred tax assets

     14,940,802        13,280,484   

Valuation allowance

     (14,940,802     (13,280,484
  

 

 

   

 

 

 

Net deferred tax assets

   $ —        $ —     
  

 

 

   

 

 

 

The Company has provided a full valuation allowance against its deferred tax assets. In assessing the ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical taxable income and projections for future taxable income over the period in which the deferred tax assets are deductible, at this time, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences.

As of January 31, 2011, the Company had federal and state net operating losses of approximately $31.2 million which are available to offset future taxable income, if any, through 2029. The Company had research and development tax credits of $1.5 million which may expire in various amounts through 2029. Net operating loss carryforwards and other tax attributes may be limited in the event the Company incurs or has incurred an ownership change as defined under Internal Revenue Code Section 382.

On February 1, 2009, the Company adopted the guidance for accounting for uncertain tax positions under ASC 740. The adoption did not have an impact on the Company’s retained earnings balance. As of January 31, 2010 and January 31, 2011, the Company had no accruals for uncertain tax positions.

The Company recognizes interest and penalties as a component of income tax expense. As of January 31, 2010 and January 31, 2011, the Company had no accruals related to interest or penalties from uncertain tax positions.

 

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Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

9. Income Taxes (continued)

 

The Company files income tax returns in the U.S. Federal tax jurisdiction, various state and various foreign jurisdictions. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the federal, state, and foreign tax authorities for all tax years in which a loss carryforward is available.

The Company’s current intention is to reinvest the total amount of its unremitted earnings in the local international jurisdiction or to repatriate the earnings only when tax-effective. As a result, the Company has not provided for U.S. taxes on the unremitted earnings of its international subsidiaries.

10. Commitments and Contingencies

Capital Leases

The Company leases certain equipment under capital leases expiring through fiscal 2014. Future minimum lease payments under these capital leases as of January 31, 2011 are as follows:

 

Year ended January 31,

      

2012

   $ 220,715   

2013

     44,939   

2014

     29,754   
  

 

 

 

Total future minimum lease payments

     295,408   

Less: Interest

     31,759   
  

 

 

 

Present value of future minimum lease payments

     263,649   

Current portion of capital lease obligation

     200,846   
  

 

 

 

Long-term capital lease obligation

   $ 62,803   
  

 

 

 

During the three months ended April 30, 2011, the Company acquired additional equipment under capital leases of $1,622,709, that require total lease payments of $1,831,984 through April 2014.

Operating Leases

The Company has a lease for the rental of office space for its corporate headquarters. The lease covers the rental of up to 65,941 square feet available to the Company at certain time periods over eight years, expiring in 2016. In connection with the lease, the Company entered into a letter of credit agreement with a bank that allows the landlord, under certain default conditions, to draw up to $525,000. The Company deposited $525,000 into a restricted cash account at this bank as security for the letter of credit. This amount is included in other assets (non-current) at January 31, 2010 and 2011 and April 30, 2011.

The Company leases office facilities for all its other locations under operating leases expiring on various dates through September 2016. The Company also leases certain office equipment under operating leases that expire on various dates through July 2013. Future minimum lease payments under operating lease commitments as of April 30, 2011 are as follows:

 

Year ended January 31,

      

2012 (9 months ended)

   $ 2,363,679   

2013

     3,178,240   

2014

     2,957,380   

2015

     2,549,043   

2016 and thereafter

     2,750,286   
  

 

 

 

Total future operating lease commitments

   $ 13,798,628   
  

 

 

 

 

F-25


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

10. Commitments and Contingencies (continued)

 

Rent expense is calculated on a straight-line basis over the term of the lease. Rent expense recognized under all operating leases totaled approximately $2,039,771, $2,596,249 and $2,403,173 for the years ended January 31, 2009, 2010 and 2011, respectively and $602,496 and $615,391 for the three months ended April 30, 2010 and 2011, respectively.

The Company has a 24-month sub-rental lease agreement with a third-party which expires on December 31, 2011. Sub-rental income was $0, $60,500 and $291,113 for the years ended January 31, 2009, 2010 and 2011, respectively and $71,500 and $86,840 for the three months ended April 30, 2010 and 2011, respectively.

Legal Contingencies

From time to time the Company is involved in legal proceedings arising in the ordinary course of business. There is no litigation pending that could, individually or in the aggregate, have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

The Company has recently been notified by the Massachusetts Institute of Technology, or MIT, that MIT believes that Exa is utilizing the intellectual property covered by a license agreement between the Company and MIT, and therefore is in arrears in the payment of royalties under the agreement. The Company has advised MIT that it does not believe that the Company utilized the underlying technology at any time since at least 1998, or that any royalties are owed under the agreement. MIT has not commenced suit against the Company with respect to its claims, and if any such suit is commenced by MIT, the Company intends to defend it vigorously. The Company believes that if MIT were to prevail in any such litigation, the royalties due under the terms of the license agreement, after giving effect to the approximately $200,000 in minimum royalties that we have already paid, would not exceed approximately $2.6 million (excluding any interest or costs of litigation). Based on the early stages of this development, the Company is not able to assess whether a loss is probable or estimate the reasonably possible or probable amount of such loss.

Guarantees and Indemnification Obligations

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification provisions is generally perpetual after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these agreements is unlimited.

Based on historical experience and information known as of January 31, 2011, the Company has not recorded any liabilities for the above guarantees and indemnities.

11. Restructuring Expenses

During fiscal year 2010, the Company announced and implemented a restructuring program to streamline operations and increase operating margins by a reduction in staff. The reduction in force occurred in the first quarter of fiscal year 2010, and included the termination of 33 full-time employees, or approximately 20% of the Company’s workforce. For the fiscal year ended January 31, 2010, the Company recorded a charge of $661,595 in connection with the severance and other termination benefits related to the reduction in force in accordance with ASC 420, Exit or Disposal Cost Obligations.

 

F-26


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

11. Restructuring Expenses (continued)

 

All obligations related to the reduction in force have been paid and no amounts are outstanding as of January 31, 2011. Detail of the restructuring expenses by geographic region is as follows:

 

United States

   $ 371,489   

Europe

     290,106   
  

 

 

 

Total

   $ 661,595   
  

 

 

 

Restructuring expenses recorded within the statement of operations for the fiscal year ended January 31, 2010 are as follows:

 

Cost of revenues

   $ 185,498   

Sales and marketing

     294,720   

Research and development

     80,525   

General and administrative

     100,852   
  

 

 

 

Total

   $ 661,595   
  

 

 

 

12. Employee Benefit Plans

401(k) Plan

The Company has an employee benefit plan for its U.S. based employees under Section 401(k) of the Internal Revenue Code. The Plan allows all eligible employees to make contributions up to a specified percentage of their compensation. Under the Plan, the Company may, but is not obligated to, match a portion of the employee contribution up to a defined maximum. The Company made no matching contribution for the years ended January 31, 2009, 2010 and 2011, and for the quarter ended April 30, 2011.

Foreign Defined Contribution Plans

The Company, through its wholly owned subsidiaries, contributes to local defined contribution plans that provide retirement benefits for the Company’s foreign based employees. For the years ended January 31, 2009, 2010 and 2011, and for the quarter ended April 30, 2011, the Company, through its subsidiaries, made contributions of $655,368, $707,220, $568,425 and $184,084, respectively, to these plans.

13. Subsequent Events

The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued to provide additional evidence relative to certain estimates or identify matters that require additional disclosures. The Company has evaluated subsequent events after the balance sheet date of April 30, 2011 through August 3, 2011.

Line of Credit

On May 23, 2011, the Company extended its $10.0 million bank line of credit for an additional two years. The terms of the extension are substantially consistent with the previous terms (Note 6).

Certain Corporate Actions

In July 2011, the Company’s board of directors authorized, subject to stockholder approval, the following measures:

(a) an amendment to the Company’s certificate of incorporation to effect a reverse stock split, in a ratio, between 1-for-5 and 1-for-10, to be determined by the board of directors, such reverse stock split to take effect upon such board determination and filing with the Secretary of State of Delaware of the related certificate of amendment;

 

F-27


Table of Contents

EXA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF APRIL 30, 2011 AND FOR THE THREE MONTHS ENDED APRIL 30, 2010 AND 2011 IS UNAUDITED)

 

13. Subsequent Events (continued)

 

(b) further amendments to the certificate of incorporation of the Company to clarify the conversion provisions of the preferred stock, to authorize a new class of blank-check preferred stock and to implement corporate governance features considered by the board to be appropriate for a newly-public company, such amendments to take effect at the closing of the Company’s initial public offering and filing with the Secretary of State of Delaware of the related certificates of amendment;

(c) the adoption of amended and restated bylaws providing for a classified board of directors and other corporate governance features considered by the board to be appropriate for a newly-public company, such bylaws to take effect at the closing of the Company’s initial public offering;

(d) adoption of the Company’s 2011 Stock Incentive Plan, under which stock-based awards for up to 5 million shares of common stock may be issued, such adoption to be effective at the closing of the Company’s initial public offering; and

(e) adoption of the Company’s 2011 Employee Stock Purchase Plan, under which qualified employees of the Company may purchase up to 3 million shares of common stock, such adoption to be effective at the closing of the Company’s initial public offering.

 

F-28


Table of Contents

LOGO


Table of Contents

 

LOGO

 

             Shares

Common Stock

 

 

 

 

PROSPECTUS

            , 2011

 

 

 

Stifel Nicolaus Weisel

 

Baird

      Canaccord Genuity
Needham & Company, LLC

 

 

Neither we nor any of the underwriters have authorized anyone to provide information different from that contained in this prospectus. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus. Neither the delivery of this prospectus nor the sale of our common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares of common stock in any circumstances under which the offer or solicitation is unlawful.

Until                 , all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotment or subscriptions.

 


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the expenses payable by us in connection with the sale of the common stock being registered, other than the underwriting discounts and commissions. All amounts are estimates except the SEC registration fee, the FINRA filing fee and the NASDAQ Global Market listing fee.

 

    

Amount to be Paid

 

SEC registration fee

   $ 10,014   

FINRA filing fee

     9,125   

NASDAQ Global Market listing fee

     *   

Accounting fees and expenses

     *   

Legal fees and expenses

     *   

Blue Sky fees and expenses

     *   

Transfer agent fees

     *   

Printing and engraving expenses

     *   

Miscellaneous

     *   
  

 

 

 

Total

   $ *   
  

 

 

 

 

* To be filed by amendment

 

Item 14. Indemnification of Directors and Officers.

Section 102 of the Delaware General Corporation Law permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit.

Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

As permitted by the Delaware General Corporation Law, our amended and restated certificate of incorporation and bylaws provide that: (i) we are required to indemnify our directors to the fullest extent permitted by the Delaware General Corporation Law; (ii) we may, in our discretion, indemnify our employees and agents as set forth in the Delaware General Corporation Law; (iii) we are required, upon satisfaction of certain conditions, to advance all expenses incurred by our directors and officers in connection with certain legal proceedings; (iv) the rights conferred in the bylaws are not exclusive; and (v) we are authorized to enter into indemnification agreements with our directors, officers, employees and agents.

We maintain a directors’ and officers’ liability insurance policy. The policy insures directors and officers against unindemnified losses arising from certain wrongful acts in their capacities as directors and officers and reimburses us for those losses for which we have lawfully indemnified the directors and officers. The policy contains various exclusions.

Please see section              of the underwriting agreement relating to the offering, filed as Exhibit 1.1 to this Registration Statement, for indemnification arrangements between us and the underwriters.

 

II-1


Table of Contents
Item 15. Recent Sales of Unregistered Securities.

At various times since July 1, 2008 we have issued options to purchase 3,889,500 shares of our common stock to our employees, directors, and consultants pursuant to our 2007 Stock Incentive Plan. During this time, we also issued 1,573,508 shares of our common stock and preferred stock upon the exercise of options issued pursuant to our equity compensation plans. The issuance of these options and shares was exempt from registration under Section 4(2) of the Securities Act, as a sale not involving a public offering, and pursuant to Rule 701 of the Securities Act of 1933, as securities issued pursuant to a compensatory benefit plan. The following table provides information regarding the number of options and shares of stock, giving effect to the conversion to common stock of our outstanding preferred stock immediately prior to the completion of the offering, issued in each calendar year during this period.

 

Year

   Shares of
common stock
subject to
options issued (#)
     Weighted average
exercise price of
issued options ($)
     Shares of
common stock
issued upon exercise
of outstanding
options (#)
     Weighted average
exercise price of
exercised options ($)
 

Fiscal year 2009 (July 1 through January 31, 2009)

     232,500       $ 1.00         198,196       $ 0.25   

Fiscal year 2010

     390,000       $ 1.00         1,366,250       $ 0.10   

Fiscal year 2011

     322,000       $ 1.00         5,000       $ 0.32   

Fiscal year 2012 (through July 20, 2011)

     2,945,000       $ 1.74         4,062       $ 1.00   

On January 28, 2011, we entered into a loan and security agreement with Gold Hill Capital 2008, L.P., as agent for the lenders thereunder, the lenders thereunder, and Massachusetts Capital Resource Company. Under the terms of the loan and security agreement, the lenders agreed to provide capital advances to us in an aggregate amount of not less than $5,000,000 and not more than $8,500,000. In connection with the entry into the loan and security agreement, we issued stock purchase warrants to Gold Hill Capital 2008, L.P. and Massachusetts Capital Resource Company. Upon the date of each capital advance made under the loan and security agreement, each warrant becomes exercisable for a number of shares of our preferred stock or, following the completion of this offering, common stock equal to the product of 0.1316 multiplied by the amount of such advance funded by the holder of the warrant or its affiliates, divided by the then-current exercise price of the warrants. The exercise price for the warrants, which is currently $0.94 per share, is subject to proportionate adjustment in the event that we subdivide, combine or consolidate, by reclassification or otherwise, our shares of common stock. The warrants are currently exercisable for an aggregate of 700,000 shares.

 

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Table of Contents
Item 16. Exhibits and Financial Schedules.

 

  (a) Exhibits

 

Exhibit

Number

  

Exhibit Title

*1.1    Underwriting Agreement
  3.1    Amended and Restated Certificate of Incorporation of Exa Corporation
  3.2    First Amendment to the Amended and Restated Certificate of Incorporation of Exa Corporation (to become effective prior to the effectiveness of the Registration Statement)
  3.3    Second Amendment to the Amended and Restated Certificate of Incorporation of Exa Corporation (to become effective prior to the date of the offering)
  3.4    Proposed form of Amended and Restated Certificate of Incorporation of Exa Corporation (to become effective as of the closing of the offering)
  3.5    By-Laws of Exa Corporation
  3.6    Proposed form of Amended and Restated By-Laws of Exa Corporation (to become effective as of the closing of the offering)
*4.1    Specimen certificate for common stock of Exa Corporation
  4.2    Form of Stock Purchase Warrant issued on January 28, 2011
  4.3    Series A Preferred Stock and Warrant Purchase Agreement dated April 30, 1993 by and among Exa Corporation and Fidelity Ventures Ltd, Philip Cooper, Robert S. Kniffin, Kim Molvig and Stephen A. Remondi
  4.4    Series B Preferred Stock and Warrant Purchase Agreement dated November 2, 1994 by and among Exa Corporation and Fidelity Ventures Ltd., Boston Capital Ventures III, Limited Partnership, Edelson Technology Partners, Massachusetts Capital Resource Company, Associated Group, Inc., John J. Shields, III and John William Poduska
  4.5    Series C Convertible Preferred Stock Purchase Agreement dated September 30, 1996 by and among Exa Corporation and Fidelity Ventures Ltd., InfoTech Fund I LLC (formerly Fidelity Investors Limited Partnership), Boston Capital Ventures III, Limited Partnership, Edelson Technology Partners, Massachusetts Capital Resource Company, Associated Group, Inc., Itochu Corporation, Itochu Techno-Science Corporation, Itochu Technology, Inc., John J. Shields, III and John William Poduska
  4.6    Series E Convertible Preferred Stock Purchase Agreement dated January 28, 1998 by and among Exa Corporation and Boston Capital Ventures III, Limited Partnership, Associated Group, Inc., Edelson Technology Partners, Itochu Techno-Science Corporation, John William Poduska and King’s Point Holdings, Inc.
  4.7    Series F Convertible Preferred Stock Purchase Agreement dated January 28, 1998 by and among Exa Corporation and Ford Motor Company
  4.8    Note Purchase Agreement dated February 9, 2004 by and among Exa Corporation, Edelson Technology Partners, InfoTech Fund I LLC, FMR Corp., Boston Capital Ventures III, Limited Partnership, and Boston Capital Ventures IV, Limited Partnership
  4.9    Stock Purchase Agreement dated April 30, 2008 by and among Exa Corporation, Fidelity Ventures Limited, InfoTech Fund I LLC, Boston Capital Ventures III, Limited Partnership, Boston Capital Ventures IV, Limited Partnership, and the additional investors parties thereto
  4.10    Letter Agreement dated August 3, 2011 between Exa Corporation and Boston Capital Ventures III, Limited Partnership, Boston Capital Ventures IV, Limited Partnership, FMR LLC, Fidelity Ventures Limited and Infotech Fund I LLC
  4.11    Voting Agreement dated August 3, 2011 between Exa Corporation, FMR LLC, Fidelity Ventures Limited, Infotech Fund I LLC, Boston Capital Ventures III, Limited Partnership and Boston Capital Ventures IV, Limited Partnership

 

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Table of Contents

Exhibit

Number

    

Exhibit Title

  4.12       Amendment and Waiver dated February 15, 2008 by and among Exa Corporation and the stockholders of Exa Corporation signatory thereto
  4.13       Exa Corporation 1999 Series G Convertible Preferred Nonqualified Stock Option Plan**
  4.14       Form of Nonqualified Stock Option Agreement for use under the Exa Corporation 1999 Series G Convertible Preferred Nonqualified Stock Option Plan**
  4.15       Exa Corporation 2005 Series G Convertible Preferred Stock Incentive Plan**
  4.16       Form of Incentive Stock Option Agreement for use under the Exa Corporation 2005 Series G Convertible Preferred Stock Incentive Plan**
  4.17       Form of Nonqualified Stock Option Agreement for use under the Exa Corporation 2005 Series G Convertible Preferred Stock Incentive Plan**
  4.18       Exa Corporation 2007 Stock Incentive Plan**
  4.19       Form of Incentive Stock Option Agreement for use under the Exa Corporation 2007 Stock Incentive Plan**
  4.20       Form of Nonqualified Stock Option Agreement for use under the Exa Corporation 2007 Stock Incentive Plan**
  4.21       Exa Corporation 2011 Stock Incentive Plan (to take effect upon the closing of the offering)**
  *4.22       Form of Incentive Stock Option Agreement for use under the Exa Corporation 2011 Stock Incentive Plan**
  *4.23       Form of Nonqualified Stock Option Agreement for use under the Exa Corporation 2011 Stock Incentive Plan**
  4.24       Exa Corporation 2011 Employee Stock Purchase Plan (to take effect upon the closing of the offering)**
  *5.1         Opinion of Foley Hoag LLP
  †10.1        

IBM Customer Agreement dated July 11, 2006 between Exa Corporation and International Business Machines Corporation

  †10.2         IBM Global Technology Services Statement of Work for IBM Managed Resiliency Services – managed continuity dated February 3, 2011
  †10.3         Schedule of IBM Managed Resiliency Services – managed continuity effective February 12, 2011
  †10.4         Sales Agreement dated July 12, 2001 between science + computing ag and Exa Corporation
  †10.5         OEM License Agreement dated October 26, 2006 between ThermoAnalytics, Inc. and Exa Corporation
  †10.6         First Amendment to OEM License Agreement dated as of June 10, 2011 by and between ThermoAnalytics, Inc. and Exa Corporation
  10.7         Loan and Security Agreement dated as of July 14, 2009 between FMR LLC and Exa Corporation
  10.8         First Amendment to Loan and Security Agreement dated as of August 31, 2009 by and between FMR LLC and Exa Corporation
  10.9         Second Amendment to Loan and Security Agreement dated as of September 30, 2009 by and between FMR LLC and Exa Corporation
  10.10       Letter Agreement dated April 12, 2010 between Exa Corporation and FMR LLC
  10.11       Letter Agreement dated July 13, 2011 between Exa Corporation and FMR LLC
  10.12       Loan and Security Agreement dated as of May 24, 2010 between Silicon Valley Bank and Exa Corporation
  10.13       First Loan Modification Agreement dated as of May 23, 2011 by and between Silicon Valley Bank and Exa Corporation

 

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Table of Contents

Exhibit

Number

  

Exhibit Title

10.14    Loan and Security Agreement dated as of January 28, 2011 by and among Gold Hill Capital 2008, L.P. as agent, and the Lenders party thereto, and Exa Corporation
10.15    Form of Secured Promissory Note dated January 28, 2011
10.16    Lease dated July 21, 2008 between Netview 5 and 6 LLC and Exa Corporation
21.1    List of Subsidiaries
23.1    Consent of Ernst & Young LLP
23.2    Consent of Foley Hoag LLP (included in Exhibit 5.1)
24.1    Power of Attorney (contained on page II-6 of this Registration Statement)

 

* To be filed by amendment.
** Indicates management contract or compensatory plan or arrangement.
Portions of this exhibit have been omitted subject to a pending request for confidential treatment under Rule 406 of the Securities Act of 1933, and in connection with that request, an unredacted copy of this exhibit has been filed with the SEC.

 

  (b) Financial Statement Schedules

All schedules are omitted because they are not applicable or the required information is shown in our financial statements and related notes.

 

Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) or the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes to provide the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Exa Corporation has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Burlington, Massachusetts, as of August 3, 2011.

 

/S/    STEPHEN A. REMONDI

Stephen A. Remondi

Chief Executive Officer and President

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints each of Stephen A. Remondi and Edmond L. Furlong as such person’s true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for such person in such person’s name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with all exhibits thereto, and all documents in connection therewith, with the SEC, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that any said attorney-in-fact and agent, or any substitute or substitutes of any of them, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/S/    STEPHEN A. REMONDI

Stephen A. Remondi

   Chief Executive Officer, President and Director (Principal Executive Officer)   August 3, 2011

/S/    EDMOND L. FURLONG

Edmond L. Furlong

   Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer)   August 3, 2011

/S/    JOHN J. SHIELDS, III

John J. Shields, III

  

Director

  August 3, 2011

/S/    JOHN WILLIAM PODUSKA

John William Poduska

  

Director

  August 3, 2011

/S/    WAYNE MACKIE

Wayne Mackie

  

Director

  August 3, 2011

/S/    JOHN F. SMITH, JR.

John F. Smith, Jr.

  

Director

  August 3, 2011

/S/    ROBERT SCHECHTER

Robert Schechter

  

Director

  August 3, 2011

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

  

Exhibit Title

*1.1    Underwriting Agreement
  3.1    Amended and Restated Certificate of Incorporation of Exa Corporation
  3.2    First Amendment to the Amended and Restated Certificate of Incorporation of Exa Corporation (to become effective prior to the effectiveness of the Registration Statement)
  3.3    Second Amendment to the Amended and Restated Certificate of Incorporation of Exa Corporation (to become effective prior to the date of the offering)
  3.4    Proposed form of Amended and Restated Certificate of Incorporation of Exa Corporation (to become effective as of the closing of the offering)
  3.5    By-Laws of Exa Corporation
  3.6    Proposed form of Amended and Restated By-Laws of Exa Corporation (to become effective as of the closing of the offering)
*4.1    Specimen certificate for common stock of Exa Corporation
  4.2    Form of Stock Purchase Warrant issued on January 28, 2011
  4.3    Series A Preferred Stock and Warrant Purchase Agreement dated April 30, 1993 by and among Exa Corporation and Fidelity Ventures Ltd, Philip Cooper, Robert S. Kniffin, Kim Molvig and Stephen A. Remondi
  4.4    Series B Preferred Stock and Warrant Purchase Agreement dated November 2, 1994 by and among Exa Corporation and Fidelity Ventures Ltd., Boston Capital Ventures III, Limited Partnership, Edelson Technology Partners, Massachusetts Capital Resource Company, Associated Group, Inc., John J. Shields, III and John William Poduska
  4.5    Series C Convertible Preferred Stock Purchase Agreement dated September 30, 1996 by and among Exa Corporation and Fidelity Ventures Ltd., InfoTech Fund I LLC (formerly Fidelity Investors Limited Partnership), Boston Capital Ventures III, Limited Partnership, Edelson Technology Partners, Massachusetts Capital Resource Company, Associated Group, Inc., Itochu Corporation, Itochu Techno-Science Corporation, Itochu Technology, Inc., John J. Shields, III and John William Poduska
  4.6    Series E Convertible Preferred Stock Purchase Agreement dated January 28, 1998 by and among Exa Corporation and Boston Capital Ventures III, Limited Partnership, Associated Group, Inc., Edelson Technology Partners, Itochu Techno-Science Corporation, John William Poduska and King’s Point Holdings, Inc.
  4.7    Series F Convertible Preferred Stock Purchase Agreement dated January 28, 1998 by and among Exa Corporation and Ford Motor Company
  4.8    Note Purchase Agreement dated February 9, 2004 by and among Exa Corporation, Edelson Technology Partners, InfoTech Fund I LLC, FMR Corp., Boston Capital Ventures III, Limited Partnership, and Boston Capital Ventures IV, Limited Partnership
  4.9    Stock Purchase Agreement dated April 30, 2008 by and among Exa Corporation, InfoTech Fund I LLC, Fidelity Investors Limited Partnership, Boston Capital Ventures III, Limited Partnership, Boston Capital Ventures IV, Limited Partnership, and the additional investors parties thereto
  4.10    Letter Agreement dated August 3, 2011 between Exa Corporation and Boston Capital Ventures III, Limited Partnership, Boston Capital Ventures IV, Limited Partnership, FMR LLC, Fidelity Ventures Limited and Infotech Fund I LLC
  4.11    Voting Agreement dated August 3, 2011 between Exa Corporation, FMR LLC, Fidelity Ventures Limited, Infotech Fund I LLC, Boston Capital Ventures III, Limited Partnership and Boston Capital Ventures IV, Limited Partnership
  4.12    Amendment and Waiver dated February 15, 2008 by and among Exa Corporation and the stockholders of Exa Corporation signatory thereto


Table of Contents

Exhibit

Number

  

Exhibit Title

  4.13    Exa Corporation 1999 Series G Convertible Preferred Nonqualified Stock Option Plan**
  4.14    Form of Nonqualified Stock Option Agreement for use under the Exa Corporation 1999 Series G Convertible Preferred Nonqualified Stock Option Plan**
  4.15    Exa Corporation 2005 Series G Convertible Preferred Stock Incentive Plan**
  4.16    Form of Incentive Stock Option Agreement for use under the Exa Corporation 2005 Series G Convertible Preferred Stock Incentive Plan**
  4.17    Form of Nonqualified Stock Option Agreement for use under the Exa Corporation 2005 Series G Convertible Preferred Stock Incentive Plan**
  4.18    Exa Corporation 2007 Stock Incentive Plan**
  4.19    Form of Incentive Stock Option Agreement for use under the Exa Corporation 2007 Stock Incentive Plan**
  4.20    Form of Nonqualified Stock Option Agreement for use under the Exa Corporation 2007 Stock Incentive Plan**
  4.21    Exa Corporation 2011 Stock Incentive Plan (to take effect upon the closing of the offering)**
*4.22    Form of Incentive Stock Option Agreement for use under the Exa Corporation 2011 Stock Incentive Plan**
*4.23    Form of Nonqualified Stock Option Agreement for use under the Exa Corporation 2011 Stock Incentive Plan**
  4.24    Exa Corporation 2011 Employee Stock Purchase Plan (to take effect upon the closing of the offering)**
*5.1    Opinion of Foley Hoag LLP
  10.1   

IBM Customer Agreement dated July 11, 2006 between Exa Corporation and International Business Machines Corporation

†10.2    IBM Global Technology Services Statement of Work for IBM Managed Resiliency Services – managed continuity dated February 3, 2011
†10.3    Schedule of IBM Managed Resiliency Services – managed continuity effective February 12, 2011
†10.4    Sales Agreement dated July 12, 2001 between science + computing ag and Exa Corporation
†10.5    OEM License Agreement dated October 26, 2006 between ThermoAnalytics, Inc. and Exa Corporation
†10.6    First Amendment to OEM License Agreement dated as of June 10, 2011 by and between ThermoAnalytics, Inc. and Exa Corporation
10.7    Loan and Security Agreement dated as of July 14, 2009 between FMR LLC and Exa Corporation
10.8    First Amendment to Loan and Security Agreement dated as of August 31, 2009 by and between FMR LLC and Exa Corporation
10.9    Second Amendment to Loan and Security Agreement dated as of September 30, 2009 by and between FMR LLC and Exa Corporation
10.10    Letter Agreement dated April 12, 2010 between Exa Corporation and FMR LLC
10.11    Letter Agreement dated July 13, 2011 between Exa Corporation and FMR LLC
10.12    Loan and Security Agreement dated as of May 24, 2010 between Silicon Valley Bank and Exa Corporation
10.13    First Loan Modification Agreement dated as of May 23, 2011 by and between Silicon Valley Bank and Exa Corporation
10.14    Loan and Security Agreement dated as of January 28, 2011 by and among Gold Hill Capital 2008, L.P. as agent, and the Lenders party thereto, and Exa Corporation
10.15    Form of Secured Promissory Note dated January 28, 2011
10.16    Lease dated July 21, 2008 between Netview 5 and 6 LLC and Exa Corporation


Table of Contents

Exhibit

Number

  

Exhibit Title

21.1    List of Subsidiaries
23.1    Consent of Ernst & Young LLP
23.2    Consent of Foley Hoag LLP (included in Exhibit 5.1)
24.1    Power of Attorney (contained on page II-6 of this Registration Statement)

 

* To be filed by amendment.
** Indicates management contract or compensatory plan or arrangement.
Portions of this exhibit have been omitted subject to a pending request for confidential treatment under Rule 406 of the Securities Act of 1933, and in connection with that request, an unredacted copy of this exhibit has been filed with the SEC.