EXA CORP

During the second quarter of fiscal year 2018, the Company entered into an agreement to lease space and high performance computing capacity at a data center located in Japan. The three-year agreement will provide access to up to 20 kilovolt-amps (kVA) of computing capacity, which the Company believes will be suitable and adequate to meet the growing demands of its customers in Asia.

During the three months ended July 31, 2017, the Company’s stockholders approved the Company’s 2017 Stock Incentive Plan, which provides for, among other things, the issuance of up to 1,400,000 additional shares of the Company’s common stock over the number previously authorized for issuance under the Company’s Amended and Restated 2011 Stock Incentive Plan. Following the approval of the 2017 Stock Incentive Plan, the Company ceased making new awards under its 2011 Amended and Restated Stock Incentive Plan.

As disclosed in our Annual Report on Form 10-K for the year ended January 31, 2017, during the last two months of fiscal year 2017, we experienced reduced and delayed renewal commitments from some of our customers. The impact of these reductions and delays is reflected in our revenue recognized during the six months ended July 31, 2017 and in our rate of license revenue growth during that period. In addition, the U.S. dollar strengthened on average against the Euro and Japanese yen on a year-to-date basis, which resulted in a negative impact on revenue performance as compared to the same period last year. The geographic mix of revenue outside the Americas reflects both the impact of these weaker currencies and, consistent with recent trends, a stronger presence in the Americas. During the six months ended July 31, 2017 and 2016, 69% and 75% of our revenue, respectively, came from outside of the Americas. Revenue for the six months ended July 31, 2017 remained relatively flat at $34.0 million compared with the same period a year ago and increased approximately 1.3% when measured on a constant currency basis. See “— Non-GAAP Measures” below for information about how we calculate and use revenue on a constant currency basis.

General and administrative expenses for the six months ended July 31, 2017 were $8.2 million, an increase of $1.3 million, or 18.9%, compared to $6.9 million for the six months ended July 31, 2016. As a percentage of revenues, general and administrative expenses increased to 24.2% for the six months ended July 31, 2017 compared to 20.4% for the six months ended July 31, 2016. The period-over-period increase is primarily attributable to a $0.8 million increase in employee-related expenses driven primarily by newly hired full-time employees and increased share-based compensation expense associated with awards issued to certain executives in fiscal year 2018, along with a $0.3 million increase in consulting costs associated with support for our new ERP system, and a $0.3 million increase in accounting and other professional costs. These increases were partially offset by a $0.1 million decrease in hosting costs related to the allocation of expenses for our high-performance computing data center.

Though we continue to evaluate the impact of our pending adoption of this standard, we plan to adopt the standard using the modified retrospective approach with the cumulative effect of initially adopting recognized at the date of adoption. The standard is expected to have a significant impact on the way we account and contract for our on-premise software license contracts, as well as the way we report the revenues derived from those contracts. Due to the complexity of certain of our license contracts, the actual revenue recognition treatment required under the standard is expected to be dependent on contract-specific terms at the time of sale and adoption of the new standard. As such, we have begun to review individual customer contracts whose license terms span the transition date to the new revenue recognition standards to ensure consistent revenue recognition through the transition period. Accounting for revenue related to services and ExaCLOUD  offerings is expected to remain substantially unchanged due to the over-time nature of such performance obligations. We are also assessing the impact of capitalizing costs associated with ongoing customer contracts, specifically commission payments. As of July 31, 2017, we have not yet completed our assessment.