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 registration statement on Form S-1 (File No. 333-176019), filed with the SEC, which we refer to as the Registration Statement. 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 under "Part II, Other Information-Item 1A, Risk Factors." 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.

Except as otherwise indicated, all share and per share information referenced in this report has been adjusted to reflect the 1-for-6.5 reverse split with respect to our common stock effected on June 8, 2012.

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, 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 90 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; truck and off-highway vehicle manufacturers such as AGCO, Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo Truck; 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 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 236 employees worldwide at October 31, 2012. Our corporate headquarters, including our principal administrative, marketing, technical support, research and product development facilities, are located in Burlington, Massachusetts.

Critical Accounting Policies

The preparation of our unaudited financial statements requires that we make estimates that affect the reported accounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

For a description of those of our accounting policies that, in our opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgments or estimates were made, materially affect our reported results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Registration Statement.

Restatement

As disclosed in The Registration Statement, we restated our financial results for the first two quarters of fiscal year 2012. These restated results are reflected in our financial results for the nine months ended October 31, 2011 results as described below.

Fiscal year 2012 interim financial statements (unaudited)

On January 28, 2011 we issued warrants for preferred stock which were inappropriately classified as equity awards rather than liability awards and were not marked to market at April 30, 2011 and July 31, 2011. As a result we recorded $65 and $452 of additional expense during the three months ended April 30, 2011 and July 31, 2011, respectively, which had not previously been recorded. In addition, we corrected a number of other errors relating to the fiscal year 2012 interim financial statements as follows: recorded $124 and $144 of net revenue adjustments due to errors in recognizing revenue over the appropriate term during each of the three months ended April 30, 2011 and July 31, 2011, respectively, reclassified $38 of deferred financing costs from operating costs into interest expense during the three months ended July 31, 2011, recorded $38 of state tax expense due to previously unidentified sales tax expense in certain states where we did not collect and remit sales tax during each of the three months ended April 30, 2011 and July 31, 2011, and expensed $12 of previously capitalized costs, which did not qualify for capitalization in connection with our initial public offering of our common stock in the three months ended July 31, 2011. The effects of the restatement on our unaudited consolidated statement of operations for the three months ended April 30, 2011 and July 31, 2011, respectively, are reflected in our financial results for the nine months ended October 31, 2011.

Results of Operations

The following table sets forth, for the periods indicated, our results of
operations:



                                                Three Months Ended October 31,
  (in thousands)                                  2012                   2011
  Revenue:
  License revenue                            $       10,402         $        9,942
  Project revenue                                     2,295                  1,742

  Total revenue                                      12,697                 11,684


  Operating expenses: (1)
  Cost of revenues                                    3,644                  2,910
  Sales and marketing                                 1,529                  1,341
  Research and development                            4,113                  3,655
  General and administrative                          2,570                  1,732

  Total operating expenses                           11,856                  9,638


  Income from operations                                841                  2,046
  Foreign exchange (loss) gain                         (115 )                   50
  Interest and other income (expense), net             (400 )                 (253 )

  Income before income taxes                            326                  1,843
  Provision for income taxes                            362                    488


  Net income (loss)                          $          (36 )       $        1,355

(1) Amounts include stock-based compensation expense, as follows:

                                          Three Months Ended October 31,
           (in thousands)                   2012                  2011
           Cost of revenues             $          27         $          27
           Sales and marketing                     49                    47
           Research and development                76                    79
           General and administrative              83                    91

           Total                        $         235         $         244

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

                                                Three Months Ended October 31,
                                                2012                      2011
 Revenue:
 License revenue                                     81.9 %                    85.1 %
 Project revenue                                     18.1                      14.9

 Total revenue                                        100                       100
 Operating expenses:
 Cost of revenues                                    28.7                      24.9
 Sales and marketing                                 12.0                      11.5
 Research and development                            32.4                      31.3
 General and administrative                          20.2                      14.8

 Total operating expenses                            93.3                      82.5
 Income from operations                               6.7                      17.5
 Foreign exchange (loss) gain                        (0.9 )                     0.4
 Interest and other income (expense), net            (3.2 )                    (2.2 )

 Income before income taxes                           2.6                      15.7
 Provision for income taxes                           2.9                       4.2

 Net income (loss)                                   (0.3 %)                   11.5 %

Three months ended October 31, 2012 compared to three months ended October 31, 2011

Revenues. License revenue increased 4.6%, to $10.4 million for the three months ended October 31, 2012 from $9.9 million for the three months ended October 31, 2011. Of the net increase, $0.3 million was due to an increase in consumption of licensed simulation capacity by our existing customers, and $0.1 million was attributable to new customers. License revenue growth was impacted by the loss of one significant motorsport customer that contributed to revenue in the three months ended October 31, 2011, but has since closed its motorsport division. Project revenue increased 31.7%, to $2.3 million for the three months ended October 31, 2012 from $1.7 million for the three months ended October 31, 2011, due to increased project activity of which $0.3 million was attributable to new customers. Foreign exchange fluctuations, particularly the weakness of the Euro, negatively impacted total revenue by $0.5 million for the three months ended October 31, 2012.

Cost of Revenues. Cost of revenues increased 25.2%, to $3.6 million for the three months ended October 31, 2012 from $2.9 million for the three months ended October 31, 2011, and also increased as a percentage of total revenue from 24.9% to 28.7%, respectively. Increases of $0.5 million in employee related costs due to increases in headcount in our application engineering organizations, $0.1 million in other employee related costs including travel expenses, 401(k) fees and recruitment expenses, $0.1 million in consulting services, $0.1 million in increased data center hosting fees and processing costs, and $0.1 million in building rent, were partially offset by decreases of $0.2 million in royalty costs. The decrease in royalty costs was the result of our acquisition from science and computing AG in November 2011 of certain intellectual property assets related to our PowerVIZ product on which we have previously paid royalties.

Sales and Marketing Expenses. Sales and marketing expenses increased 14.0%, to $1.5 million, or 12.0% of total revenue for the three months ended October 31, 2012 from $1.3 million, or 11.5% of total revenue for the three months ended October 31, 2011. The increase in sales and marketing expenses was primarily due to increases of $0.1 million in employee-related costs for existing and additional sales and marketing personnel and $0.1 million in customer and tradeshow related travel expenses.

Research and Development Expenses. Research and development expenses increased 12.5%, to $4.1 million, or 32.4% of total revenue for the three months ended October 31, 2012 from $3.7 million, or 31.3% of total revenue for the three months ended October 31, 2011. The increase in research and development expenses was primarily due to increases of $0.3 million in salaries and wages due to additional staff, and $0.1 million in employee related costs including 401(k) administration expenses and training expenses.

General and Administrative Expenses. General and administrative expenses increased 48.3%, to $2.6 million for the three months ending October 31, 2012 from $1.7 million for the three months ended October 31, 2011, and also increased as percentage of total revenues to 20.2% from 14.8%, respectively. The majority of the increase is a result of additional public company costs, and includes: $0.1 million in salaries and wages due to additional staff, $0.2 million in accounting, audit and tax fees, $0.1 million in legal fees, $0.1 million in other professional services such as consulting and translation fees, $0.1 million in company liability insurance, and $0.1 million in depreciation expense.

Foreign Exchange gain (loss). We recorded $0.1 million in foreign exchange losses for the three months ended October 31, 2012 as compared to $0.1 million in foreign exchange gains for the three months ended October 31, 2011. The change relates to the monthly translation of our foreign operations from local currency (primarily the Euro and the Yen) to United States Dollars, and the settlement of our intercompany balances.

Interest, Net. Interest expense, net for the three months ended October 31, 2012 was $0.4 million, compared to $0.3 million for the three months ended October 31, 2011. Interest charges on borrowings under our Loan and Security Agreement and our line of credit plus increased amortization of debt financing costs account for the increase.

Other Income (Expense), Net. Other income (expense) for the three months ended October 31, 2012 and October 31, 2011 remained unchanged at $0 million for each of the three months ended October 31, 2012 and 2011, but decreased as a percentage of total revenue to 0.0% from 0.1%, respectively.

Provision for Income Taxes. Our provision for income taxes for the three months ended October 31, 2012 was $0.4 million, compared to $0.5 million for the three months ended October 31, 2011. Our effective income tax rate, including discrete items, was 111% and 26% for the three months ended October 31, 2012 and 2011, respectively. Our effective income tax rate is based upon estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods and the resolution or identification of tax position uncertainties. The rate for the nine months ended October 31, 2012 was impacted discretely for a mark-to-market adjustment on our warrants and equity participation rights for which there is no tax provision. Additionally, the rate for the three months ended October 31, 2012 was also impacted discretely by a provision on foreign exchange gains and return to tax provision adjustments related to our net operating loss and credit carryforwards which were not originally forecasted in the first half of the year. For the three months ended October 31, 2012, the effective income tax rate deviated from the federal statutory tax rate mainly due to the effects of permanent tax adjustments, discrete items, state research and development credits, and state taxes. Additionally, the effective rate is impacted by the different tax rates for income in foreign jurisdictions.

Results of Operations

The following table sets forth, for the periods indicated, our results of
operations:



                                                 Nine Months Ended October 31,
  (in thousands)                                  2012                   2011
  Revenue:
  License revenue                            $       30,575         $       28,671
  Project revenue                                     5,194                  4,050

  Total revenue                                      35,769                 32,721


  Operating expenses: (1)
  Cost of revenues                                    9,979                  8,486
  Sales and marketing                                 4,837                  3,925
  Research and development                           12,410                 10,419
  General and administrative                          6,510                  5,249

  Total operating expenses                           33,736                 28,079


  Income from operations                              2,033                  4,642
  Foreign exchange gain (loss)                          211                   (322 )
  Interest and other income (expense), net             (711 )               (1,022 )

  Income before income taxes                          1,533                  3,298
  Provision for income taxes                            661                  1,223


  Net income                                 $          872         $        2,075

(1) Amounts include stock-based compensation expense, as follows:

                                           Nine Months Ended October 31,
           (in thousands)                   2012                  2011
           Cost of revenues             $          82         $          50
           Sales and marketing                    143                    72
           Research and development               232                   144
           General and administrative             253                   120

                                        $         710         $         386

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

                                                 Nine Months Ended October 31,
                                                 2012                    2011
  Revenue:
  License revenue                                     85.5 %                  87.6 %
  Project revenue                                     14.5                    12.4

  Total revenue                                        100                     100
  Operating expenses:
  Cost of revenues                                    27.9                    25.9
  Sales and marketing                                 13.5                    12.0
  Research and development                            34.7                    31.8
  General and administrative                          18.2                    16.0

  Total operating expenses                            94.3                    85.7
  Income from operations                               5.7                    14.3
  Foreign exchange gain (loss)                         0.6                    (1.0 )
  Interest and other income (expense), net            (2.0 )                  (3.1 )

  Income before income taxes                           4.3                    10.2
  Provision for income taxes                           1.8                     3.7

  Net income                                           2.5 %                   6.5 %

Nine Months Ended October 31, 2012 Compared to Nine Months Ended October 31, 2011

Revenues. Revenues for the nine months ended October 31, 2012 were $35.8 million, an increase of $3.1 million, or 9.3% over revenues of $32.7 million for the nine months ended October 31, 2011. The net increase was due to $0.4 million in sales of simulation capacity to new customers and a $1.5 million increase in consumption of simulation capacity by existing customers. License revenue growth was impacted by the loss of one significant motorsport customer who contributed to revenue in the nine months ended October 31, 2011, but has since closed their motorsport division. Project revenue increased 28.2% over the nine months ended October 31, 2011 due to increased project activity, and the addition of two new significant clients. Foreign exchange fluctuations, particularly the weakness of the Euro, negatively impacted total revenue for the nine months ended October 31, 2012 by $1.1 million compared to the nine months ended October 31, 2011.

Cost of Revenues. Cost of revenues for the nine months ended October 31, 2012 was $10.0 million, an increase of $1.5 million, or 17.6% over cost of revenues of $8.5 million for the nine months ended October 31, 2011. As a percentage of revenues, cost of revenues increased to 27.9% for the nine months ended October 31, 2012 from 25.9% from the nine months ended October 31, 2011. A significant component of the $1.5 million increase in costs related to newly hired application engineers and increased costs for existing personnel. Newly hired personnel increased by 18 employees during the nine months ended October 31, 2012 as compared to the nine months ended October 31, 2011. Other costs for the nine month ended October 31, 2012 included $0.1 million in travel expenses, $0.1 million in 401(k) administration expenses and $0.2 million in increased data center costs and processing fees, and $0.1 million in depreciation expense. These costs were partially offset by a decrease of $0.6 million in royalty costs. The decrease in royalty costs was the result of our acquisition from science + computing AG in November 2011 of certain intellectual property assets related to our PowerVIZ product on which we had previously paid royalties.

Sales and Marketing Expenses. Sales and marketing expenses for the nine months ended October 31, 2012 were $4.8 million, an increase of $0.9 million, or 23.2% over sales and marketing expenses of $3.9 million for the nine months ended October 31, 2011. As a percentage of revenues, sales and marketing expenses increased to 13.5% for the nine months ended October 31, 2012 from 12.0% for the . . .