TMCnet News
EXA CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Result of Operations appearing in our Annual Report on Form 10-K, filed with the SEC on March 26, 2014. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions 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 report. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. As used herein, except as otherwise indicated by context, references to "we," "us," "our," or the "Company" refer to Exa Corporation. 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 core product, 12-------------------------------------------------------------------------------- Table of Contents PowerFLOW, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. 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. 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 125 manufacturers currently utilize our products and services, including 14 of the global top 15 passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen; truck and off-highway vehicle manufacturers such as Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo Truck; and suppliers to these manufacturers, such as Cummins, Denso and Magna Steyr. During fiscal 2015, we have continued to make significant strategic investments to bring additional ground transportation applications to market as well as products for the aerospace and oil and gas production markets. As we continue to grow, we will continue to explore other markets where we believe the capabilities of PowerFLOW can be broadly applied such as the 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 licensing 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. We sell our products and project services primarily through our direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, United Kingdom, France, Germany, Italy, Japan, Korea and China and through a distributor in 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 283 employees worldwide at July 31, 2014. Our corporate headquarters, including our principal administrative, marketing, technical support, research and product development facilities, is located in Burlington, Massachusetts. 13 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three Months Ended July 31, 2014 and 2013 The following tables set forth, for the periods presented, data from our consolidated statements of operation, as well as that data as a percentage of revenues. Three Months Ended July 31, (in thousands) 2014 2013 Revenue: License revenue $ 12,316 $ 10,719 Project revenue 2,527 1,985 Total revenues 14,843 12,704 Operating expenses: (1) Cost of revenues 4,632 3,833 Sales and marketing 2,509 2,179 Research and development 5,404 4,450 General and administrative (2) 3,217 2,426 Total operating expenses 15,762 12,888 Loss from operations (919 ) (184 ) Other income (expense), net: Foreign exchange gain (loss) 175 (93 ) Interest expense (94 ) (176 ) Interest income 2 5 Loss on extinguishment of debt - (755 ) Other income, net 3 3 Total other income (expense), net 86 (1,016 ) Loss before income taxes (833 ) (1,200 ) (Provision) benefit for income taxes (176 ) 402 Net loss $ (1,009 ) $ (798 ) (1) Amounts include stock-based compensation expense as follows: Three Months Ended July 31, (in thousands) 2014 2013 Cost of revenues $ 44 $ 33 Sales and marketing 86 52 Research and development 191 77 General and administrative 179 89 Total stock-based compensation expense $ 500 $ 251 (2) Includes amortization expense related to intangible assets as follows: General and administrative 88 87 14 -------------------------------------------------------------------------------- Table of Contents Three Months Ended July 31, (as a percent of total revenue) 2014 2013 Revenue: License revenue 83.0 % 84.4 % Project revenue 17.0 % 15.6 % Total revenues 100.0 % 100.0 % Operating expenses: Cost of revenues 31.2 % 30.2 % Sales and marketing 16.9 % 17.2 % Research and development 36.4 % 35.0 % General and administrative 21.7 % 19.1 % Total operating expenses 106.2 % 101.4 % Loss from operations (6.2 )% (1.4 )% Other expense, net: Foreign exchange (loss) gain 1.2 % (0.7 )% Interest expense (0.6 )% (1.4 )% Interest income 0.0 % 0.0 % Loss on extinguishment of debt 0.0 % (5.9 )% Other income, net 0.0 % 0.0 % Total other expense, net 0.6 % (8.0 )% Loss before income taxes (5.6 )% (9.4 )% (Provision) benefit for income taxes (1.2 )% 3.2 % Net loss (6.8 )% (6.3 )% Due to rounding, totals may not equal the sum of line items in the table above. Comparison of Three Months Ended July 31, 2014 and 2013 Revenue Three Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change License revenue $ 12,316 $ 10,719 $ 1,597 14.9 % Project revenue 2,527 1,985 542 27.3 % Total revenues $ 14,843 $ 12,704 $ 2,139 16.8 % License revenue increased 14.9%, from $10.7 million for the three months ended July 31, 2013 to $12.3 million for the three months ended July 31, 2014. The $1.6 million increase was driven almost entirely by increased utilization of simulation capacity by existing customers. Project revenue increased $0.5 million during the three months ended July 31, 2014 compared to the three months ended July 31, 2013 due to expanded sales and engineering efforts and greater activity with existing customers. Foreign exchange fluctuations, particularly the strengthening of the Euro, positively impacted total revenue in the three months ended July 31, 2014 by $0.2 million as compared to the three months ended July 31, 2013. On a constant currency basis, our total revenues in the three months ended July 31, 2014 increased 15.1%, compared with the three months ended July 31, 2013. 15-------------------------------------------------------------------------------- Table of Contents Cost of revenue Three Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change Cost of revenue $ 4,632 $ 3,833 $ 799 20.8 % Cost of revenue for the three months ended July 31, 2014 was $4.6 million, an increase of $0.8 million, or 20.8%, compared with $3.8 million during the three months ended July 31, 2013. As a percentage of revenues, cost of revenues increased to 31.2% for the three months ended July 31, 2014 compared to 30.2% for the three months ended July 31, 2013. Increased payroll and employee related costs, including travel, accounted for approximately $0.5 million of the increase, primarily as a result of the net addition of 14 new application engineers and merit-based compensation increases for existing personnel. In addition, royalty costs increased by $0.2 million due to increased invoicing by the Company and amendments to certain royalty agreements. The balance of the increase is primarily attributable to capacity expansions at our New Jersey data center resulting increased facility and hosting costs of approximately $0.1 million. Sales and marketing Three Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change Sales and marketing $ 2,509 $ 2,179 $ 330 15.1 % Sales and marketing expenses for the three months ended July 31, 2014 were $2.5 million, an increase of $0.3 million, or 15.1% compared to $2.2 million for the three months ended July 31, 2013. As a percentage of revenues, sales and marketing expenses decreased to 16.9% for the three months ended July 31, 2014 compared to 17.2% for the three months ended July 31, 2013. Increased non-commission payroll and employee related costs accounted for approximately $0.1 million of the increase, primarily as a result of the net addition of 4 new sales people, manager and executive level promotions and merit-based compensation increases for existing personnel. Commission expense increased by approximately $0.1 million, primarily due to an increase in invoicing levels during the three months ended July 31, 2014 as compared to the prior fiscal year period. The balance of the increase is primarily attributable to increased marketing and trade show expenses. Research and development Three Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change Research and development $ 5,404 $ 4,450 $ 954 21.4 % Research and development expenses for the three months ended July 31, 2014 were $5.4 million, an increase of $1.0 million, or 21.4%, compared to $4.5 million for the three months ended July 31, 2013. As a percentage of revenues, research and development expense increased to 36.4% for the three months ended July 31, 2014 compared to 35.0% for the three months ended July 31, 2013. Increased payroll and employee related costs accounted for approximately $0.6 million of the increase, primarily as a result of the net addition of 13 new scientists and software engineers and merit-based compensation increases for existing personnel. In addition, approximately $0.3 million of the increase is attributable to capacity expansions at our New Jersey data center resulting in increased facility and hosting costs. Lastly, approximately $0.1 million of the increase is attributable to increased software consulting costs related to product development. General and administrative Three Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change General and administrative $ 3,217 $ 2,426 $ 791 32.6 % General and administrative expenses for the three months ended July 31, 2014 were $3.2 million, an increase of $0.8 million, or 32.6%, compared to $2.4 million for the three months ended July 31, 2013. As a percentage of revenues, general and administrative expenses increased to 21.7% for the three months ended July 31, 2014, compared to 19.1% for the three months ended July 31, 2013. 16 -------------------------------------------------------------------------------- Table of Contents Increased payroll and employee related costs accounted for approximately $0.3 million of the increase, primarily as a result of the net addition of 3 new support personnel and compensation increases for existing personnel, including increased stock-based compensation expense associated with employee equity awards that were granted in the second quarter of fiscal year 2015. Approximately $0.3 million of the increase is primarily attributable to professional service fees, including costs associated with a tax study, a foreign statutory audit, patent legal fees and recruiting services. The balance of the increase is primarily attributable to increased Internet service charges. Other income (expense), net Three Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change Other income (expense), net $ 86 $ (1,016 ) $ 1,102 108.5 % For the three months ended July 31, 2014, other income, net was $0.1 million, as compared to other expense, net of $1.0 million for the three months ended July 31, 2013. Other income, net for the three-months ended July 31, 2014 primarily consisted of $0.2 million of foreign exchange gains, partially offset by $0.1 million of interest expense. Other expense, net for the three months ended July 31, 2013 primarily consisted of a $0.8 million loss from the extinguishment of debt related to the repayment of all outstanding obligations under our loan and security agreement in May 2013 and interest expense of $0.2 million. (Provision) benefit for income taxes Three Months Ended July 31, (in thousands, except percentages) 2014 2013 Change % Change (Provision) benefit for income taxes $ (176 ) $ 402 $ (578 ) (143.8 )% Income taxes changed from a $0.4 million benefit in the three months ended July 31, 2013 to a provision of $0.2 million in the three months ended July 31, 2014. The provision for the three months ended July 31, 2014 primarily consists of foreign income taxes. For the three months ended July 31, 2013, the effective income tax rate differed from the federal statutory rate mainly due to nondeductible compensation offset by the tax benefit of federal and state research and development credits. The effective tax rate for the three months ended July 31, 2013 was also impacted discretely by foreign exchange gains and losses and the loss on extinguishment of debt. We do not expect that our unrecognized tax benefit will change significantly within the next twelve months. We and one or more of our subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, we are no longer subject to federal, state, local or foreign examinations for years prior to January 31, 2011. However, carryforward attributes that were generated prior to January 31, 2011 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period. 17-------------------------------------------------------------------------------- Table of Contents Results of Operations for the Six Months Ended July 31, 2014 and 2013 The following tables set forth, for the periods presented, data from our consolidated statements of operation, as well as that data as a percentage of revenues. Six Months Ended July 31, (in thousands) 2014 2013 Revenue: License revenue $ 23,976 $ 21,411 Project revenue 4,637 3,781 Total revenues 28,613 25,192 Operating expenses: (1) Cost of revenues 9,228 7,504 Sales and marketing 5,076 4,296 Research and development 10,506 8,836 General and administrative (2) 6,339 5,197 Total operating expenses 31,149 25,833 Loss from operations (2,536 ) (641 ) Other expense, net: Foreign exchange gain (loss) 131 (56 ) Interest expense (177 ) (557 ) Interest income 6 9 Loss on extinguishment of debt - (755 ) Other income, net 3 5 Total other expense, net (37 ) (1,354 ) Loss before income taxes (2,573 ) (1,995 ) (Provision) benefit for income taxes (15,656 ) 656 Net loss $ (18,229 ) $ (1,339 ) (1) Amounts include stock-based compensation expense as follows: Six Months Ended July 31, (in thousands) 2014 2013 Cost of revenues $ 82 $ 64 Sales and marketing 161 102 Research and development 347 154 General and administrative 280 176 Total stock-based compensation expense $ 870 $ 496 (2) Includes amortization expense related to intangible assets as follows: General and administrative 175 175 18 -------------------------------------------------------------------------------- Table of Contents Six Months Ended July 31, (as a percent of total revenue) 2014 2013 Revenue: License revenue 83.8 % 85.0 % Project revenue 16.2 % 15.0 % Total revenues 100.0 % 100.0 % Operating expenses: Cost of revenues 32.3 % 29.8 % Sales and marketing 17.7 % 17.1 % Research and development 36.7 % 35.1 % General and administrative 22.2 % 20.6 % Total operating expenses 108.9 % 102.5 % Loss from operations (8.9 )% (2.5 )% Other expense, net: Foreign exchange (loss) gain 0.5 % (0.2 )% Interest expense (0.6 )% (2.2 )% Interest income 0.0 % 0.0 % Loss on extinguishment of debt 0.0 % (3.0 )% Other income, net 0.0 % 0.0 % Total other expense, net (0.1 )% (5.4 )% Loss before income taxes (9.0 )% (7.9 )% (Provision) benefit for income taxes (54.7 )% 2.6 % Net loss (63.7 )% (5.3 )% Due to rounding, totals may not equal the sum of line items in the table above. Comparison of Six Months Ended July 31, 2014 and 2013 Revenue Six Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change License revenue $ 23,976 $ 21,411 $ 2,565 12.0 % Project revenue 4,637 3,781 856 22.6 % Total revenues $ 28,613 $ 25,192 $ 3,421 13.6 % License revenue increased 12.0%, from $21.4 million for the six months ended July 31, 2013 to $24.0 million for the six months ended July 31, 2014. The $2.6 million increase was driven almost entirely by increased utilization of simulation capacity by existing customers. Project revenue increased $0.9 million during the six months ended July 31, 2014 compared to the six months ended July 31, 2013 due to expanded sales and engineering efforts and greater activity with existing customers. Foreign exchange fluctuations, particularly the strengthening of the Euro, positively impacted total revenue in the six months ended July 31, 2014 by $0.3 million as compared to the six months ended July 31, 2013. On a constant currency basis, our total revenues in the six months ended July 31, 2014 increased 12.5%, compared with the six months ended July 31, 2013. 19-------------------------------------------------------------------------------- Table of Contents Cost of revenue Six Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change Cost of revenue $ 9,228 $ 7,504 $ 1,724 23.0 % Cost of revenue for the six months ended July 31, 2014 was $9.2 million, an increase of $1.7 million, or 23.0%, compared with $7.5 million during the six months ended July 31, 2013. As a percentage of revenues, cost of revenues increased to 32.3% for the six months ended July 31, 2014 compared to 29.8% for the six months ended July 31, 2013. Increased payroll and employee related costs, including travel, accounted for approximately $1.2 million of the increase, primarily as a result of the net addition of 14 new application engineers and merit-based compensation increases for existing personnel. In addition, royalty costs increased by $0.4 million due to increased invoicing by the Company and amendments to certain royalty agreements. The balance of the increase is primarily attributable to capacity expansions at our New Jersey data center resulting increased facility and hosting costs of approximately $0.1 million. Sales and marketing Six Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change Sales and marketing $ 5,076 $ 4,296 $ 780 18.2 % Sales and marketing expenses for the six months ended July 31, 2014 were $5.1 million, an increase of $0.8 million, or 18.2% compared to $4.3 million for the six months ended July 31, 2013. As a percentage of revenues, sales and marketing expenses increased to 17.7% for the six months ended July 31, 2014 compared to 17.1% for the six months ended July 31, 2013. Increased non-commission payroll and employee related costs accounted for approximately $0.5 million of the increase, primarily as a result of the net addition of 4 new sales people, manager and executive level promotions and merit-based compensation increases for existing personnel. Commission expense increased by approximately $0.3 million, primarily due to an increase in invoicing levels during the six months ended July 31, 2014, as compared to the prior fiscal year period. Research and development Six Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change Research and development $ 10,506 $ 8,836 $ 1,670 18.9 % Research and development expenses for the six months ended July 31, 2014 were $10.5 million, an increase of $1.7 million, or 18.9%, compared to $8.8 million for the six months ended July 31, 2013. As a percentage of revenues, research and development expense increased to 36.7% for the six months ended July 31, 2014 compared to 35.1% for the six months ended July 31, 2013. Increased payroll and employee related costs accounted for approximately $1.1 million of the increase, primarily as a result of the net addition of 13 new scientists and software engineers and merit-based compensation increases for existing personnel. In addition, capacity expansions at our New Jersey data center resulted in increased facility and hosting costs of approximately $0.5 million. The balance of the increase is primarily attributable to increased software consulting costs related to product development. General and administrative Six Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change General and administrative $ 6,339 $ 5,197 $ 1,142 22.0 % General and administrative expenses for the six months ended July 31, 2014 were $6.3 million, an increase of $1.1 million, or 22.0%, compared to $5.2 million for the six months ended July 31, 2013. As a percentage of revenues, general and administrative expenses increased to 22.2% for the six months ended July 31, 2014, compared to 20.6% for the six months ended July 31, 2013. Increased payroll and employee related costs accounted for approximately $0.7 million of the increase, primarily as a result of the net addition of 3 new support personnel and compensation increases for existing personnel, including increased stock-based compensation associated with employee equity awards that were granted in the second quarter of fiscal year 2015. Approximately 20-------------------------------------------------------------------------------- Table of Contents $0.3 million of the increase is primarily attributable to professional service fees, including costs associated with a tax study, a foreign statutory audit, patent legal fees and recruiting services. The balance of the increase is primarily attributable to increased Internet service charges. Other expense, net Six Months Ended July 31, (in thousands, except percentages) 2014 2013 Increase % Change Other expense, net $ (37 ) $ (1,354 ) $ 1,317 97.3 % For the six months ended July 31, 2014, other expense, net was less than $0.1 million, as compared to other expense, net of $1.4 million for the six months ended July 31, 2013. Other expense, net for the six months ended July 31, 2014 primarily consists of $0.2 million in interest expense partially offset by $0.1 million of foreign exchange gains. Other expense, net for the six months ended July 31, 2013 primarily consisted of a $0.8 million loss from the extinguishment of debt related to the repayment of all outstanding obligations under our loan and security agreement in May 2013 and interest expense of $0.6 million. (Provision) benefit for income taxes Six Months Ended July 31, (in thousands, except percentages) 2014 2013 Change % Change (Provision) benefit for income taxes $ (15,656 ) $ 656 $ (16,312 ) (2,486.6 )% For the six months ended July 31, 2014, our income tax provision was $15.7 million which includes a $14.5 million non-cash charge to record a valuation allowance against our United States net deferred tax assets and a $0.7 million non-cash write-off of state deferred taxes (discussed further below). Through the three months ended April 30, 2014, our results reflected a three-year cumulative loss position in the United States; prior thereto, our historical results reflected a three-year cumulative profit. Reflecting management's plans to continue investing in the business for future growth, management's projections reflect our continuing in a three-year cumulative loss position through fiscal year 2015. This historical loss position at April 30, 2014 and projected cumulative loss position caused management to modify its assessment of its deferred tax assets, concluding that it no longer was more likely than not that these deferred tax assets would be realized and thus, a valuation allowance was necessary against the full amount of its United States net deferred tax assets. Note that most of our revenues are generated from ground transportation customers outside the United States but a significantly disproportionate amount of our operating expenses, including investments in future products, are incurred in the United States, causing the results of operations in the United States to reflect losses during this period of investment. Management will reassess the realization of the deferred tax assets each reporting period. To the extent that the financial results of our United States operations improve and the deferred tax asset becomes realizable, we will reduce the valuation allowance through earnings. 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 can be utilized annually in the future to offset its United States federal taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a three-year period. During the first quarter of fiscal year 2015, management determined that we had experienced an ownership change for purposes of Section 382. This ownership change resulted in annual limitations to the amount of net operating loss carryforwards that can be utilized to offset future taxable income, if any, at the federal level. The annual limit is approximately $14.0 million for fiscal year 2015, $16.8 million for each of fiscal years 2016 through 2019, $8.1 million for fiscal year 2020 and $6.4 million for each fiscal year thereafter. The ownership change also resulted in the loss of our ability to utilize $0.7 million of its $0.8 million of state net operating loss carryforwards, credits and other state attributes, which resulted in a write-off of the $0.7 million of state deferred tax assets during the first quarter of fiscal year 2015. We do not expect that our unrecognized tax benefit will change significantly within the next twelve months. We and one or more of our subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, we are no longer subject to federal, state, local or foreign examinations for years prior to January 31, 2011. However, carryforward attributes that were generated prior to January 31, 2011 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period. 21-------------------------------------------------------------------------------- Table of Contents Non-GAAP Measures From time to time we provide certain non-GAAP financial measures to investors as additional information in order to supplement our consolidated financial statements, which are presented in accordance with accounting principles generally accepted in the United States, or GAAP. 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 or used by other companies and therefore should not be used to compare our performance to that of other companies. Revenue on a constant currency basis. Our international operations generate and incur expenses that are denominated in foreign currencies, and changes in currency exchange rates can materially affect our consolidated results of operations. Our principal exposures are to fluctuations in exchange rates for the United States dollar versus the British pound, Chinese yuan, Euro, Japanese yen, and Korean won. To provide investors with information concerning underlying trends in our business, we disclose revenue on a constant currency basis, which we define as GAAP revenue, adjusted to reverse the impact of changes in the exchange rates of the principal currencies in which our international operations generated revenue and incurred expenses. We calculate revenue on a constant currency basis by converting revenue that was generated in the currencies specified above during the three and six months ended July 31, 2014 to United States Dollars at assumed exchange rates equal to the exchange rates in effect for such currencies during the corresponding period of the previous fiscal year, rather than the exchange rates actually in effect during the current fiscal year. Adjusted EBITDA. We define Adjusted EBITDA as EBITDA, excluding non-cash, stock-based compensation expense. We define EBITDA as net loss, excluding depreciation and amortization, interest expense, loss on extinguishment of debt, other income (expense), foreign exchange gain (loss) and provision for income taxes. The GAAP measure most comparable to Adjusted EBITDA is net income. Non-GAAP operating (loss) income. We define non-GAAP operating (loss) income as GAAP operating (loss) income excluding non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP operating (loss) income is operating (loss) income. Non-GAAP net loss. We define non-GAAP net loss as GAAP net loss excluding the after tax impact of non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP net loss is net loss. Non-GAAP net loss per diluted share. We define non-GAAP net loss per diluted share as GAAP net loss per diluted share excluding the after tax impact of non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP net loss per diluted share is net loss per diluted share. 22-------------------------------------------------------------------------------- Table of Contents Our management uses these non-GAAP financial measures to evaluate our operating performance and for internal planning and forecasting purposes. We believe that these measures help identify underlying trends in our business, are useful for comparing current results with prior period results, and are helpful to investors and financial analysts in assessing our operating performance. For example, our 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, each of these non-GAAP financial measures may have limitations as an analytical tool. In considering our Adjusted EBITDA, non-GAAP operating loss, non-GAAP net loss and non-GAAP net loss per diluted share, investors should take into account the following reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures: Adjusted EBITDA: Three Months Ended Six Months Ended July 31, July 31, (in thousands) 2014 2013 2014 2013 Net loss $ (1,009 ) $ (798 ) $ (18,229 ) $ (1,339 ) Add back: Depreciation and amortization 731 543 1,394 1,039 Interest expense, net 92 171 171 548 Loss on extinguishment of debt - 755 - 755 Other income, net (3 ) (3 ) (3 ) (5 ) Foreign exchange (gain) loss (175 ) 93 (131 ) 56 Provision (benefit) for income taxes 176 (402 ) 15,656 (656 ) EBITDA (188 ) 359 (1,142 ) 398 Stock-based compensation expense 500 251 870 496 Adjusted EBITDA $ 312 $ 610 $ (272 ) $ 894 Non-GAAP operating (loss) income: Three Months Ended Six Months Ended July 31, July 31, (in thousands) 2014 2013 2014 2013 Operating loss $ (919 ) $ (184 ) $ (2,536 ) $ (641 ) Add back: Stock-based compensation expense 500 251 870 496 Amortization of acquired intangible assets 88 87 175 175 Non-GAAP operating (loss) income $ (331 ) $ 154 $ (1,491 ) $ 30 Non-GAAP net loss: Three Months Ended Six Months Ended July 31, July 31, (in thousands) 2014 2013 2014 2013 Net loss $ (1,009 ) $ (798 ) $ (18,229 ) $ (1,339 ) Add back: Stock-based compensation expense 500 251 870 496 Amortization of acquired intangible assets 88 87 175 175 Income tax effect (1) (203 ) (117 ) (363 ) (233 ) Non-GAAP net loss $ (624 ) $ (577 ) $ (17,547 ) $ (901 ) 23 -------------------------------------------------------------------------------- Table of Contents Non-GAAP net loss, per diluted share: Three Months Ended Six Months Ended July 31, July 31, 2014 2013 2014 2013 Net loss, per diluted share (2) $ (0.07 ) $ (0.06 ) $ (1.34 ) $ (0.10 ) Add back: Stock-based compensation expense 0.04 0.02 0.06 0.04 Amortization of acquired intangible assets 0.01 0.01 0.01 0.01 Income tax effect (1) (0.02 ) (0.01 ) (0.03 ) (0.02 ) Non-GAAP net loss, per diluted share (2)(3): $ (0.05 ) $ (0.04 ) $ (1.29 ) $ (0.07 ) (1) The tax effect of non-cash stock-based compensation expense and non-cash amortization of acquired intangibles is estimated using a blended rate equivalent to our annual estimated United States federal tax rate and our state tax rate, exclusive of our net federal benefit. This rate is based on our estimated annual GAAP income tax rate forecast. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities. (2) Share amounts utilized on a fully diluted basis were approximately 13.8 million and 13.6 million, respectively, for the three and six months ended July 31, 2014 and 13.3 million for both the three and six months ended July 31, 2013. (3) Due to rounding, totals may not equal the sum of line items in the table above. Liquidity Overview Our primary sources of liquidity during the six months ended July 31, 2014 were cash and cash equivalents on hand and cash flows provided by operating activities. Our primary uses of cash during the six months ended July 31, 2014 were capital expenditures and capital lease obligations. As of July 31, 2014, we had $32.0 million in cash and cash equivalents. On December 10, 2013, we filed a shelf registration statement on Form S-3, which included a base prospectus relating to, among other things, the registration of $75 million of our common stock that may be offered and sold by us from time to time pursuant to Rule 415 promulgated under the Act, in amounts, at prices and on terms to be determined at the time of the offering. Net Cash Flows from Operating Activities 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 working capital accounts, mainly accounts receivable and deferred revenue, the timing of cash payments from our customers and of our cash expenditures, principally employee salaries, accounts payable and payments of value added taxes and consumption taxes on the receivables of our foreign subsidiaries. Cash payments from our customers fluctuate due to 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. Generally, 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 six months ended July 31, 2014, net cash provided by operating activities totaled $4.8 million, as compared to $11.4 million over the six months ended July 31, 2013. The overall decrease in cash provided by operating activities for the six months ended July 31, 24-------------------------------------------------------------------------------- Table of Contents 2014 as compared to the prior year period is primarily due to decreased profitability and fluctuations in working capital. Accounts receivable decreased $19.4 million during the current year period compared to $23.0 million in the prior year period, primarily due to the timing of collections from certain large customers. In addition, accrued expenses decreased by $4.1 million during the current year period compared to $2.2 million in the prior year period, primarily due to the timing of value-added-tax, commission and compensation payments. Lastly, deferred revenue decreased $9.4 million during the current year period compared to $8.2 million in the prior year period, due primarily to the timing of invoicing for customer license orders. Net Cash Flows from Investing Activities Net cash used in investing activities for the six months ended July 31, 2014 and 2013 was $0.6 million for both periods. Investing activities consist of expenditures for purchases of property and equipment to support the growth in our business operations. Net Cash Flows from Financing Activities Net cash used in financing activities for the six months ended July 31, 2014 was $0.9 million, which consists primarily of payments on our capital lease obligations of $1.4 million, partially offset by proceeds from stock option exercises of $0.4 million. Net cash used in financing activities for the six months ended July 31, 2013 was $8.5 million, which consisted primarily of long-term debt payments of $7.4 million, payment of previously accrued debt issuance costs of $0.2 million and payments on our capital lease obligations of $1.0 million. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of either July 31, 2014 or January 31, 2014. 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. Our practice has been to reinvest the undistributed earnings of our foreign subsidiaries in their local jurisdictions, and we currently do not intend to repatriate such earnings. As of July 31, 2014 and January 31, 2014, $10.3 million and $8.0 million, respectively, of our cash is held in bank accounts outside the United States and may not be completely available to fund our domestic operations and obligations without paying taxes upon repatriation. We expect to be able to meet the funding needs of our United States operations and do not intend on repatriating undistributed earnings that have been indefinitely reinvested in our international subsidiaries. We believe our cash on hand and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future, including at least the next twelve months. Seasonality We have experienced and expect to continue to experience seasonal variations in the timing of customers' purchases of our software products. Many customers make purchase decisions based on their budget cycles, which typically coincide with the calendar year, except in Japan, where our customer budget cycles typically begin on April 1. Because our software products are sold pursuant to annual subscription agreements and we recognize revenue from these subscriptions over the term of the agreement, downturns or upturns in 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. |