UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 001-38263
ALTAIR ENGINEERING INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1820 East Big Beaver Road, Troy, Michigan
(Address of principal executive offices)
38-2591828
(I.R.S. Employer
Identification No.)
48083
(Zip Code)
248-614-2400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock $0.0001 par value per share
Trading Symbol
ALTR
Name of each exchange on which registered
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based upon the closing sale price of a share of the
registrant’s Class A common stock on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the NASDAQ
stock market, was $1.6 billion. Shares of the registrant’s Class A common stock and Class B common stock held by each executive officer, director, and each other person
who may be deemed to be an affiliate of the registrant, have been excluded from this computation. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
On February 12, 2021, there were 44,757,500 shares of the registrant’s Class A common stock outstanding and 29,840,732 shares of the registrant’s Class B common stock
outstanding.
Portions of the registrant’s Proxy Statement relating to the 2021 Annual Meeting of Stockholders, scheduled to be filed with the Securities and Exchange Commission
within 120 days after the end of the registrant’s fiscal year ended December 31, 2020, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Documents Incorporated By Reference:
ALTAIR ENGINEERING INC.
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2020
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
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105
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates,
intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which
may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied
by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You
can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,”
“believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and
other similar words and expressions of the future.
There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made
by us. These factors include, but are not limited to:
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our ability and the time it takes to acquire new customers;
reduced spending on product design and development activities by our customers;
our ability to successfully renew our outstanding software licenses;
our ability to maintain or protect our intellectual property;
our ability to retain key executive members;
our ability to internally develop new software products, inventions and intellectual property;
our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments;
demand for our software by customers other than simulation engineering specialists and in additional industry verticals;
acceptance of our enhanced business model by customers and investors;
our susceptibility to factors affecting the automotive, aerospace, and financial services industries where we derive a substantial portion of our
revenues;
the accuracy of our estimates regarding expenses and capital requirements;
our susceptibility to foreign currency risks that arise because of our substantial international operations;
the significant quarterly fluctuations of our results; and
the uncertain effect of COVID-19 or other future pandemics or events on our business, operating results and financial condition, including
disruption to our customers, our employees, the global economy and financial markets.
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that
we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Please see “Risk factors” in this
Annual Report on Form 10-K under Part I, Item 1A, for additional risks which could adversely impact our business and financial performance.
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have
no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new
information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith, and we believe they have a reasonable
basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.
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Item 1.
General
Business
PART I
Altair Engineering Inc. (“Altair,” the “Company,” “we,” “us” or “our”) is a global technology company providing software and cloud solutions in the areas
of simulation, high-performance computing (HPC), data analytics, and artificial intelligence (AI). We enable organizations across broad industry segments
to compete more effectively in a connected world while creating a more sustainable future.
Throughout this document we refer to AI as a term to encompass sub-disciplines including data analytics, data science, data preparation, and machine
learning. Altair has been incorporating AI technologies into our products for several years and we believe the evolving broad use of the term is appropriate
for our product offerings, customer applications, and market opportunities.
Our simulation and AI-driven approach to innovation is powered by our broad portfolio of high-fidelity and high-performance physics solvers, our market
leading technology for optimization and HPC, and our end-to-end platform for developing AI and Internet of Things (IoT) solutions. Our integrated suite of
software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal, electromagnetics, system modeling,
and embedded systems, while also providing AI solutions and true-to-life visualization and rendering. Our HPC solutions maximize the efficient utilization
of complex compute resources and streamline the workflow management of compute-intensive tasks for applications including AI, modeling and
simulation, and visualization. Our data analytics, AI, and IoT products include data preparation, data science, MLOps, orchestration, and visualization
solutions that fuel engineering, scientific, and business decisions.
We believe a critical component of our success has been our company culture, based on our core values of innovation, envisioning the future,
communicating honestly and broadly, seeking technology and business firsts, and embracing diversity. This culture is important because it helps attract and
retain top people, encourages innovation and teamwork, and enhances our focus on achieving Altair’s corporate objectives.
Products
Rising expectations of end-market customers are expanding the use of advanced simulation, data analytics, and AI across many industry verticals. Altair’s
thirty-six year heritage is in solving some of the most challenging problems faced by engineers and scientists.
Altair is a leading provider of simulation software enabling customers to enhance product performance, compress development time, and reduce costs. We
believe we are unique in the industry for the depth and breadth of our engineering application software offerings combined with our domain expertise and
proprietary technology for harnessing HPC, cloud infrastructures, and AI technology.
Our high-performance and cloud computing workload and workflow tools empower customers to explore designs and analyze data in ways not possible in
traditional computing environments. Our customers include universities, government agencies, manufacturers, pharmaceutical firms, Banking, financial
services, and insurance (BFSI), weather prediction agencies, and electronics design companies.
We are a leading provider of low-code AI technology for data preparation, data science, MLops, data management, and visualization. BFSI customers as
well as finance departments in various industries including manufacturing, retail, and life sciences use our software to capture disparate data streams and
apply analytics to make more informed business decisions.
Software Products
Altair’s software products represent a comprehensive, open architecture solution for simulation, HPC, data analytics, and AI to empower decision making
for improved product design and development, manufacturing, energy management and exploration, financial services, health care, and retail operations.
We believe Altair’s solutions are compelling due to their openness and usability.
Altair’s products offer a comprehensive set of technologies to design and optimize high performance, efficient, innovative, and sustainable products and
processes in an increasingly connected world. Our products are categorized by:
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Physics Simulation and Concept Design
High Performance and Cloud Computing
Data Analytics, AI, IoT, and Smart Product Development
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Physics Simulation and Concept Design
At the core of Altair’s simulation software portfolios are mathematical software “solvers” that use advanced computational algorithms to predict physical
performance. Optimization leverages these solvers to derive the most efficient solutions to meet desired complex multi-objective requirements.
Altair’s solvers are a comprehensive set of fast, scalable and reliable physics algorithms for complex problems in linear and non-linear mechanics, fluid
dynamics, electromagnetics, motion, discrete elements, systems and manufacturing simulation.
We invest continuously to improve the speed and accuracy of our solvers. Altair’s solvers are now engaging GPU technology to accelerate solution times.
Two of our products in the area of fluid mechanics, ultraFluidX (external aerodynamics) and nanoFluidX (machinery lubrication), were developed from the
ground up to leverage GPUs and deliver significant performance advantages versus the competition.
We believe the breakthrough technology of SimSolid is game-changing and delivers extremely easy to model, fast, and accurate simulation results for
complex designs versus the competition. SimSolid is especially relevant for simulation-driven design and seeing rapid adoption in many customer
environments.
Altair’s optimization technology combined with superior multi-physics and multi-domain simulation is a key differentiator and spans our product offering.
We believe customers using our technologies gain a sustainable competitive advantage by developing better products in less time.
Altair’s design, modeling, and visualization tools allow for advanced physics attributes to be modeled and rendered on top of object geometry in high
fidelity. These tools are becoming more user friendly, design-centric and relevant earlier in the development process.
Addressing the large market of designers, design engineers, and manufacturing engineers who are not experts in simulation is important toward increasing
the use of simulation in design processes. Altair has several technologies focused on this market, including Inspire and SimSolid for mechanical design and
Pollex for electronic systems and printed circuit board design.
Our industrial and concept design tools generate early concepts to address requirements for ergonomics, aesthetics, performance, manufacturing feasibility,
and cost. These tools are all driven by simulation and machine learning algorithms. We believe these products are emerging as a market force with the
potential to eclipse traditional computer-aided design (CAD) in both the mechanical and electronics worlds.
Models are increasingly required to deliver performance across a range of physics, including mechanical systems, communication and control, printed
circuit boards, and combinations of these at various levels of fidelity. Altair’s math and system design tools help engineers to quickly explore requirements
and performance throughout the design process.
We believe Altair’s solutions are compelling due to their openness and usability, and their ability to develop signal-based controls, mixed physics models,
and electronics all within one environment and at varying levels of fidelity to support decision making in each stage of a product’s lifecycle. For example,
our multi-disciplinary models may include mechanics, fluids, electronics, and software among other technical elements, and encompass a scope of products
ranging from components to IoT-enabled “systems of systems”. By employing varying degrees of fidelity, we aid the modeling process where
computational requirements or data availability might otherwise prove to be obstacles.
A key strength to Altair’s math and systems solutions is allowing development organizations to move seamlessly in this multi-discipline, multi-component,
multi-detail space while integrating models from various authoring tools. With a broad range of multi-physics solvers based on an open-system approach, a
strong set of model reduction techniques can be employed toward IoT-enabled product development which can then be carried forward into device
management and application development.
We believe Altair’s tools for simulation of communications and control, data analytics, and real-time data streaming are particularly relevant as more
products are connected and collecting data to operate in complex environments.
High-Performance Computing
Altair’s high-performance computing software applications are designed to maximize the efficient utilization of customers’ complex compute resources and
streamline the workflow management of compute-intensive tasks. The quantity of data collected, stored and processed is growing exponentially, and our
HPC technology has evolved to support big data and input/output (IO) intensive environments with storage-aware scheduling. We support applications such
as modeling, simulation, artificial intelligence, and visualization in fields such as banking, financial services, insurance, weather prediction, bio-
informatics, electronic design analysis, product development and lifecycle management.
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Altair’s high-performance tools manage and optimize where and when jobs are running and how storage is accessed and managed for customers and
research institutes. We believe that HPC is increasingly mission critical for organizations around the world. Predictive modeling and analysis is
computationally intensive and computing environments increasingly rely on a mix of on-premise and cloud resources.
Our powerful and easy to use solutions help IT administrators and business decision makers maximize throughput and minimize costs by leveraging
sophisticated scheduling algorithms. Altair’s HPC solutions are designed to enable seamless shifting of workloads from on-premise data centers to the
cloud, and between different cloud providers, depending on cost or resource availability including managing spot computing purchases. We also deliver
powerful orchestration capabilities to manage extremely large-scale workflows with complex dependency management for applications in electronic design
automation, artificial intelligence and others.
Data Analytics, AI, IoT, and Smart Product Development
Altair’s data analytics, AI, and IoT offerings include low-code solutions for data preparation, data science, MLOps, and visualization that fuel engineering,
scientific, and business decisions. Altair’s AI tools are extensively used by banks, credit unions, health care, and other financial services organizations.
They are also used in finance departments across many industries, including manufacturing. We have been actively integrating ML and AI technologies in
our broad product portfolio to capitalize on the significant momentum toward applying AI across a substantial number of companies and in many different
industries.
Our data preparation tools allow users to import, clean and organize structured and unstructured data for use in reporting and in data science applications.
Altair’s data science solutions allow users to develop machine learning workflows with market-leading decision tree technology and scoring algorithms,
and innovative approaches to AutoML and Explainable AI. Our visualization tools allow users to gain deep insights quickly with both live-streamed and
historical data.
Altair’s tools also include solutions to support smart connected product development including device enablement, data capture and management, edge
orchestration, digital twins, and application development for connected devices. Our software is used to design IoT solutions and monitor and optimize
their performance.
Going forward, we believe that development lifecycles will include digital replicas of complex processes, services and physical assets and systems, or what
is known as “digital twins” which leverage the convergence of simulation and AI and are essential to creating better products, marketing them efficiently,
and optimizing their performance. In our view, AI technology is transforming engineering design and process development, leveraging both synthetic data
from simulations and rapidly growing databases of sensor data from field operations. Altair’s customers are using AI not only to create better products but
also to lower scrap rates, reduce warranty issues, and derive other business benefits.
Altair Partner Alliance
The Altair Partner Alliance, or APA, provides access to a broad spectrum of complementary software products using customers’ existing Altair Units. Our
units-based subscription licensing model allows flexible and shared access to our applications and those of our partners, which can all be downloaded on-
demand. This constantly growing portfolio extends their simulation and design capabilities to help create better products faster.
Software products in the APA include technologies ranging from computational fluid dynamics and fatigue to manufacturing process simulation and cost
estimation, with applications specific to industry verticals including marine, motorcycles, aerospace, chemicals, and architecture. Altair plans to continue to
add valuable third-party software solutions to empower innovation with comprehensive enterprise analytic and data analytics tools.
Software Services
To enable customer success and deepen our relationships with them, we engage with our customers to provide services related to our software including
consulting, training, and implementation services, especially when applying optimization and data science. Altair’s headquarters includes an industrial
design studio, a prototype shop, and test facilities. We have expertise designing and working with controls, power electronics, traditional and composite
structures, and total system level development in the automotive, aerospace, consumer products and other markets. Our team of data scientists is
experienced with applications ranging from credit scoring to predictive analytics of physical assets.
Implementation and custom software services are available to help customers leverage their investment in Altair’s software to streamline workflows and
solve specialized industry vertical engineering and business problems. We work closely with our clients to increase organizational efficiency and decision
making by tailoring these solutions to a client’s own environment and processes.
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We believe the unique combination of our broad industry domain knowledge and software expertise has enabled Altair to enhance and replace customers’
legacy applications, integrate our software applications with client business systems, develop clean-sheet designs or custom software solutions, and
transform their product development and business processes.
Software Related Services
Altair engages with our customers to provide technical services throughout their entire product development lifecycle including design, engineering, and
development, especially when applying optimization and data analysis. Our headquarters includes an industrial design studio, a prototype shop, and test
facilities. We have expertise designing and working with controls, power electronics, traditional and composite structures, and total system level
development in the automotive, aerospace, consumer products and other markets. Our team of data analysts is experienced with applications ranging from
credit scoring to predictive analytics of physical assets.
Client Engineering Services
Altair provides Client Engineering Services, or CES, to support our customers with long-term ongoing expertise. This has the benefit of embedding us
within customers, deepening our understanding of their processes, and allowing us to more quickly perceive trends in the overall market. Our presence at
our customers’ sites helps us to better tailor our software products’ research and development, or R&D, and sales initiatives.
We operate our CES business by hiring engineers and data scientists for placement at a customer site for specific customer-directed assignments. We
employ and pay them only for the duration of the placement.
We concentrate on placing simulation specialists, industrial designers, design engineers, materials experts, development engineers, manufacturing engineers
and information technology specialists. As a leader in the simulation and data science technology markets, Altair attracts high caliber talent from around
the world. CES is focused on placements that align strategically with customer usage of our software. We have a strong recruiting operation with sourcing
specialists who identify, attract, vet, and hire technical professionals for our in-house and customer needs. We maintain a candidate database of over
200,000 highly qualified engineers, designers and data scientists. Our CES candidates and placed employees are valuable sources of talent acquisition for
Altair’s other business segments.
In response to COVID-19, some of our CES customers furloughed staff positions, while some other customers reduced CES staff working hours, reduced
billing rates or eliminated certain positions. We have acted in concert with those customers to furlough or curtail the hours and compensation of those
impacted employees until such time as our customers return to normal staffing, billing rates or required working hours.
Research and Development
Our research and development efforts are focused on enhancing the functionality, breadth, and scalability of our software, addressing new use cases, and
developing additional innovative simulation technologies. Timely development of new products is essential to maintaining our competitive position, and
we release new versions of our software on a regular basis.
Customer feedback, combined with our roadmap, enables us to deliver long-term value and stay ahead of market trends. The majority of product
enhancements and new capabilities added to our offerings over the years have been developed internally, with acquisitions used to augment our capabilities
with strategic technology.
From time-to-time, we incubate related technologies developed by our employees. For example, we developed and patented next-generation solid-state
lighting technology as a result of an internal initiative. We commercialized this technology under our toggled subsidiary.
Our research and development initiatives foster a culture of innovation within the organization, helping us attract and retain a highly motivated team.
Altair’s research and development team consists of approximately 1,200 people worldwide. We maintain research and development centers with specific
technical expertise in several geographies throughout the Americas, Asia-Pacific, Europe, the Middle East and Africa.
Our research and development efforts relating to our software focus on three areas:
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Physics Simulation and Concept Design: At the core of Altair’s simulation software portfolio are mathematical software “solvers” that use
advanced computational algorithms to predict physical performance. Altair initially specialized in structural simulation, and our solvers are now a
comprehensive set of fast, scalable and reliable physics algorithms for complex problems in linear and non-linear mechanics, fluid dynamics,
electromagnetics, motion, discrete elements, systems and manufacturing simulation. Altair also invests to “couple” our solvers to simulate
multiple physics domains
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simultaneously and is considered a market leader in the development of optimization technology, which drives solvers to find solutions to
complex multi-objective design problems. R&D is also conducted to leverage high-performance computing technology for these compute
intensive applications. Solver and optimization development is conducted principally by researchers with advanced degrees in engineering,
physics, computer science and mathematics.
The graphical applications used to construct and visualize simulation models require continuous R&D in the areas of data structures,
computational methods, graphics, geometric modeling, mesh generation, and user interface design. Altair’s modeling tools are becoming more
design-centric and are adopting some of the capabilities of traditional CAD while leveraging simulation and optimization technology to drive
design decisions rather than just simulate designs. Specific areas of R&D include handling large scale models of highly detailed and complex
products, developing new methods to derive design geometry from optimizations, and unifying the modeling environment for multi-physics
simulation. Adapting modeling and visualization technology for cloud deployment is also an area of active development as is supporting virtual
and augmented reality hardware. Simulation-driven design requires tools to generate early concepts addressing requirements for ergonomics,
aesthetics, performance, and manufacturing feasibility. We believe these tools are emerging as an alternative to traditional CAD tools and will
enable the democratization of simulation capabilities for designers and engineers who are not simulation specialists.
Our industrial and concept design tools generate early concepts to address requirements for ergonomics, aesthetics, performance, manufacturing
feasibility, and cost. These tools are all driven by simulation and machine learning algorithms.
•
High-performance Computing: Altair’s high-performance computing software applications are designed to maximize utilization of complex
compute resources and streamline the workflow management of compute-intensive tasks for applications such as data analytics, AI, modeling
and simulation, and visualization in fields such as financial services, weather prediction, bioinformatics, electronic design analysis, product
development and lifecycle management.
Altair develops best-in-class HPC workload management technology for large scale, highly parallel job environments as well as solutions for
chip design workloads which require massive numbers of jobs to be spawned and managed for relatively short durations. We also develop
powerful orchestration capabilities to manage extremely large-scale workflows with complex dependency management for applications in
electronic design automation, artificial intelligence and other areas.
We develop solutions for both CPU and GPU architectures and support all of the major computer vendors. This requires ongoing collaboration
with hardware suppliers who depend on our solutions to make their products run efficiently for customers.
Much of our more recent R&D investments allow customers to easily move and manage workflows in hybrid compute environments of on-
premise and cloud resources.
The quantity of data collected, stored and processed is growing exponentially, and our HPC technology has evolved to support big data and IO
intensive environments with storage-aware scheduling. We also develop and deliver powerful orchestration capabilities to manage extremely
large-scale workflows with complex dependency management for applications in electronic design automation, artificial intelligence and others.
Altair’s HPC development teams work closely with the simulation, data analytics, AI, and IoT development teams to ensure that our overall
technology portfolio interoperates effectively and shares a common infrastructure and user experience.
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Data Analytics, AI, IoT, and Smart Product Development: Altair’s data analytics, AI, and IoT offerings include low-code solutions for data
preparation, data science, MLOps, and visualization that fuel engineering, scientific, and business decisions. We develop solutions allowing users
to develop machine learning workflows with best-in-class decision tree technology and scoring algorithms, and innovative approaches to
AutoML and Explainable AI. We develop and release new software on a regular basis to support customers with enhancements and other
requested features and technologies for data preparation, data science and visualization. In addition, we have integrated our data analytics
capabilities into a modern, cloud-based solution to deliver a more unified user experience. This solution includes important enterprise level
capabilities such as security, data discovery, collaboration, and operationalization of user developed machine learning workflows to gain deep
insights quickly.
Altair’s solutions support smart connected product development including device enablement, data capture and management, edge orchestration,
digital twins, and application development for connected devices. Our software is used to design and optimize IoT devices and connectivity, and
for modeling in-service product performance. We are investing to deliver an end-to-end solution for customers developing connected products.
We believe our products operate well as a complete and integrated suite, and are open such that they are designed to work seamlessly with other
IoT or data analytics solutions in a
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disaggregated fashion. Altair’s toggled LED lighting subsidiary is an important learning and deployment environment as we gain real-world
experience with these technologies and share that knowledge with our customers.
Our digital twin platform supports product development for the IoT through a math-based programming environment, multi-disciplinary system
modeling, and control system development, and is an important ongoing research and development effort. We believe that AI technology is
transforming engineering design and process development, leveraging both synthetic data from simulations and rapidly growing databases of
sensor data from field operations.
We support our own high-level matrix-based numerical computing language, as well as more commonly used general purpose programming
languages, like Python and Tcl, in an interactive programming environment for all types of math operations. We expect to add more language and
library support, broaden the math libraries, and integrate these products more deeply with Altair’s other software.
In order to maintain and extend our technology leadership and competitive position, we intend to continue devoting significant effort to our research and
development activities.
Sales
We serve customers in the product lifecycle management, simulation, data analytics, AI, and high-performance computing markets. Our primary users are
highly educated and technical engineers and data scientists.
We engage with our enterprise customers through Altair’s experienced direct sales force. We are increasing our use of inside sales and indirect channels to
more efficiently address a broader set of customers in consumer products, electronics, energy and other industries.
Approximately 90% of our 2020 software revenue was generated through our direct global sales force. These sales teams interact with key decision makers,
engage deeply with users of our products by leveraging a team of Altair’s technical specialists, and work with user-group managers and executives to
ensure they are maximizing the utility of our software solutions. We have been expanding our direct sales team including our inside sales operations
aggressively to reach more customers and market verticals.
Our direct sales force is responsible for developing new customers, ensuring high recurring rates from our existing customers, and expanding the use of
Altair and partner products within customers’ environments through continuous training, support, and consulting engagements. Each of our field sales
professionals are supported by technical specialists with deep knowledge of our products and the broader product development domain. We believe this
approach differentiates Altair from our competitors, as our focus on establishing a strong working relationship with the user community has led to
expanded usage of Altair and APA partner products. Our direct sales force is organized by geographic regions, consisting of Americas, EMEA, and APAC.
We leverage indirect sales channels especially in APAC and Eastern Europe and have been investing to extend our reseller relationships in all markets.
Approximately 10% of our 2020 software revenue was generated through our growing network of indirect channel partners and resellers.
Data Analytics, AI, IoT, and Smart Product Development
The data analytics and AI market is segmented by industry verticals where specific domain expertise is important for success. Altair’s primary data
analytics and AI customer base is banks, insurance companies, health care, and other financial services organizations along with finance departments across
most industries including manufacturing. As we cross sell into Altair traditional manufacturing customer accounts, we are targeting both the finance
departments, leveraging the expertise of our financial markets sales and technical teams, as well as engineering departments looking to apply data analytics
and AI to improve designs, manufacturing, warranty, and in-service operations. We intend to leverage our existing direct and indirect sales channels in
order to support greater market opportunities.
High-Performance Computing Solutions
Altair’s HPC solutions are sold by our global strategic sales force with sales overlay support from Altair HPC sales specialists and application engineers.
We have original equipment manufacturer, or OEM, arrangements for these solutions with most of the major hardware companies. We believe these
arrangements reduce competition, grow our market share and improve sales efficiency.
We offer Altair PBS Professional as both an open source and a commercial solution. Commercial sites generally license the commercial version along with
support. However, many universities, government agencies and small commercial sites prefer the open source version as their work often needs to be freely
available for societal benefit. Large government and research installations generally still purchase support and often pay for specific development.
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Licensing
There are two licensing methods we employ to deliver our software solutions:
• Most products are available under our unique, patented units-based licensing model.
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A small subset of our products is available on a node-locked, or hardware specific, and named-user basis. This is especially true for our data
analytics solutions.
Altair pioneered a patented units-based subscription licensing model for software and other digital content. This units-based subscription licensing model
allows flexible and shared access to our offerings, along with over 150 partner products. Our customers license a pool of units for their organizations giving
individual users access to our entire portfolio of software applications as well as our growing portfolio of partner products. We believe our units-based
subscription licensing model lowers barriers to adoption, creates broad engagement, encourages users to work within our ecosystem, and increases revenue.
This, in turn, helps drive our recurring software license rate which has been on average approximately 89% over the past five years. Each year
approximately 60% of new software revenue comes from expansion within existing customers.
Marketing
Altair’s global marketing team of approximately 95 people is focused on generating new business opportunities by driving awareness, deepening customer
engagement, and developing content specific to technical fields and industry verticals. Our corporate marketing programs include social media, earned
media, publications, blogs, white papers and case studies. Our regional marketing program supports working relationships with our user community
through education, participation in local industry events, Altair technical conferences, and webinars.
We provide marketing support to our ecosystem of resellers and third-party technology partners on both a corporate and regional level.
In order to continue to drive growth and extend our market position, we intend to continue to invest significant resources into our marketing initiatives.
Customers
As of December 31, 2020, we had more than 11,000 customers worldwide. Our simulation and HPC customers are primarily large manufacturing
enterprises, with a growing presence in small and mid-size companies. Our AI customers include banks, credit unions, health care organizations, and other
financial services organizations along with finance departments across most industries including manufacturing.
Automotive and aerospace combined account for approximately 45% of our 2020 billings, including 15 out of 15 of the world’s leading automotive
manufacturers and 10 out of 10 of the world’s leading aerospace manufacturers. Other important industries include heavy machinery, rail and ship design,
energy, government, life and earth sciences, BFSI, and consumer electronics. No single customer, nor any of our resellers and OEMS, accounted for more
than 2% of our 2020 software billings. In 2020, we generated 38%, 31% and 31% of our total billings from customers in the Americas, EMEA, and APAC,
respectively. Billings consists of our total revenue plus the change in our deferred revenue, excluding deferred revenue from acquisitions during the period,
and is discussed under Non-GAAP Financial Measures included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations of this Annual Report on Form 10-K.
For a summary of our financial information by geographic location, see Note 18 of Notes to consolidated financial statements in Item 15, Part IV of this
Annual Report on Form 10-K, which is incorporated by reference.
Competition
The market for simulation, HPC, data analytics, and AI software is highly fragmented. Our primary competitors include companies such as IBM, Dassault
Systèmes, Siemens, Ansys, MSC Software (a Hexagon company), and Alteryx. Many are large public companies, with significant financial resources. In
addition to these competitors, we compete with many smaller companies offering similar software applications.
We believe the breadth and depth of Altair’s software offering is unique and no single competitor addresses our entire solution set. The units model further
extends this advantage with a growing APA marketplace of third party software.
Our simulation solutions including modeling, visualization and solvers are noted in the market for their ability to handle large and complex models. Our
software applications deliver high performance and high scalability, including massive parallelization, which is
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extremely important in the high-end simulation market. Altair is a leader in integrating optimization technology across all our products, including multi-
disciplinary applications.
We believe our solutions for data preparation, data science and AI are extremely strong, easy to use, powerful, and broadly adopted and have several unique
capabilities including handling large, complex data sets coupled with our ability to intelligently import unstructured data.
To ensure customer success and deepen our relationships with them, we engage with our customers to provide consulting, implementation services,
training, and support, especially when applying optimization. We believe these services, combined with our ability to leverage HPC as the industry
transitions to cloud computing, positions us for future success.
We compete on a variety of factors including the breadth, depth, performance, and quality of our technical solutions. We believe our patented units-based
subscription licensing model provides us with a competitive advantage by lowering barriers to adoption, creating broad engagement, and encouraging users
to work within our ecosystem.
Intellectual property
We believe that our intellectual property rights are valuable and important to our business. We actively protect our investment in technology through
establishment and enforcement of intellectual property rights. We protect our intellectual property through a combination of patent, copyright, trademark
and trade secret protections, confidentiality procedures, and contractual provisions. The nature and extent of legal protection associated with each such
intellectual property right depends on, among other things, the type of intellectual property right and the given jurisdiction in which such right arises.
As of December 31, 2020, we have 271 issued patents and more than 90 published patent applications worldwide. These patents and patent applications
seek to protect proprietary inventions relevant to our business. We intend to pursue additional patent protection to the extent we believe it would be
beneficial and cost effective. Additionally, we are the registered holder of a variety of trademarks and domain names that include “Altair” and similar
variations.
Nonetheless, our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented, or challenged. In addition,
the laws and enforcement of the laws of various countries where our products are distributed do not protect our intellectual property rights to the same
extent as United States laws. Our inability to assert or enforce our intellectual property rights could harm our business.
From time to time, we receive claims alleging infringement of a third party’s intellectual property rights, including patents. Disputes involving our
intellectual property rights or those of another party have in the past and may in the future lead to, among other things, costly litigation, diversion of time,
money and resources to develop or obtain non-infringing products, or delay product distribution. Any significant impairment of our core intellectual
property rights could harm our business or our ability to compete.
Our products are licensed to users pursuant to signed license agreements or ‘click through’ agreements containing restrictions on use, duplication,
disclosure, and transfer. Cloud based products and associated services are provided to users pursuant to online or signed terms of service agreements
containing appropriate restrictions on access and use.
We are unable to measure the full extent to which piracy of our software products exists. We believe, however, that software piracy is and can be expected
to be a persistent problem that negatively impacts our revenue and financial results. We believe that our predominant subscription based business model
combined with the change from desktop to cloud based computing will shift the incentives and means by which software is pirated.
In addition, through various licensing arrangements, we receive certain rights to intellectual property of others. We expect to maintain current licensing
arrangements and to secure additional licensing arrangements in the future, as needed and to the extent available on reasonable terms and conditions, to
support continued development and sales of our products and services. Some of these licensing arrangements require or may require royalty payments and
other licensing fees. The amount of these payments and fees may depend on various factors, including but not limited to: the structure of royalty payments,
offsetting considerations, if any, and the degree of use of the licensed technology.
Employees
As of December 31, 2020, we had more than 2,700 in-house employees and more than 350 on-site Client Engineering Services employees globally. More
than two-thirds of our employees are located in the United States, India, France and Germany. None of our employees in the United States are represented
by a labor organization or are party to any collective bargaining arrangement. In some of the European countries in which we operate, we are subject to,
and comply with, local labor law requirements in relation to the establishment of works councils. We are often required to consult and seek the consent or
advice of these councils. We have never
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experienced a work stoppage and we believe our employee relations are good. We continually recruit for top talent and invest in our global workforce to
fuel diversity, professional and personal growth, and innovation.
Diversity
We believe that empowering each individual authentic voice encourages an entrepreneurial mindset. We have worked to create a culture of inclusion where
diversity and experiences are embraced and essential to our success and long-term growth. We recognize and believe that everyone deserves respect and
equal treatment. We believe that we comply in all material respects with all applicable U.S. Federal, state, local and international laws governing
nondiscrimination in employment in every location in which the Company operates. Our goal is to assure that all applicants and employees are treated with
the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation,
gender identity, disability, or protected veteran status.
Human capital metrics
We monitor human capital metrics such as recruitment, attrition, development, and diversity. Our strong brand, innovative product portfolio, cross-industry
expertise, and culture support our ability to recruit and retain top talent.
COVID-19
Altair’s culture has historically embraced flexible work arrangements. As the COVID-19 pandemic spread, our workforce transitioned to nearly full remote
working. Our culture, technology and people allowed us to react quickly when the crisis initially emerged. As a result, we maintained high levels of
productivity and employee engagement. We adopted global and local COVID-19 safety protocols and guidelines to ensure the safety, health and wellness of
our employees, families, and local communities. We also provide virtual health and wellness programs, such as Pilates, meditation, mental health tips, and
information sessions by medical professionals to educate and answer questions about COVID-19. Our executive staff, including the CEO, was highly
engaged with our workforce through podcasts, town halls, and other methods of outreach enabled by the accelerated adoption of virtual communication
platforms.
Sustainability and environment
As the world is demanding safer, more efficient and innovative products and processes, our vision is to help customers drive decisions leveraging the
convergence of simulation, HPC, and AI. By helping our customers, we help to reduce the environmental impact of goods and services across a broad array
of industries worldwide.
We believe that our software technology and consulting services are by their very essence at the core of designing a healthier and more sustainable future
for humanity. These efforts include:
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Enabling structural optimization to inspire and refine product designs that minimize material usage and maximize performance
Conducting high-performance computing (HPC) workload management to ensure efficiency of energy usage and run time
Utilizing simulation- and AI-driven innovation to rapidly develop products, processes, and experiences in a virtual world without the carbon and
waste stream impact of multiple physical prototypes
Supporting additive manufacturing and other advanced manufacturing techniques to embody the most optimal designs developed from simulation
methodologies at the lowest cost
Offering cloud-based applications which allow efficiently scaled shared infrastructure to be used by multiple organizations, thus eliminating
countless independent compute server installations, and giving access to a broad range of applications relevant to sustainable design
We also are committed to conducting our business in a manner that manages environmental issues responsibly. We fulfill this commitment by our efforts to:
Comply with local environmental regulations across all of our global offices
Conduct operations in an environmentally sound manner
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Acquisitions
We have acquired 37 companies or strategic technologies since 1996, including 26 in the last five years. These acquisitions brought strategic IP assets, and
talented developers with expertise in disciplines ranging from electronics, material science, crash and safety to industrial design and rendering. Products
which are commercially available as a result of these acquisitions include Click2Extrude, Altair PBS Professional, Radioss, Evolve, Acusolve, SimLab,
Embed, Click2Cast, Multi-scale Designer, FEKO, FLUX, WinProp, Thea Render, Modeliis, SmartWorks, ESAComp, SimSolid, Monarch, Knowledge
Studio, Panopticon, EDEM, PollEx, PolyFoam, Mistral, and Breeze.
Our 2020 acquisitions include the following:
• M-Base Engineering + Software GmbH: In October, we acquired M-Base Engineering + Software GmbH (“M-Base”) a leading international
supplier of material database and material information systems, with a focus on plastics.
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Ellexus: In September, we acquired Ellexus, a provider of a leading input/output (I/O) analysis tool, which helps customers find and address
issues quickly, improving speed accuracy and cloud readiness.
Univa: In September, we acquired Univa, a leading innovator in enterprise-grade workload management, scheduling, and optimization solutions
for HPC and AI on-premises and in the cloud.
S&Wise Co., Ltd.: In July, we acquired S&Wise Co., Ltd., a Seoul-based leading provider of polyurethane foaming simulation.
• WRAP: In May, we acquired the WRAP software business from a Swedish company WRAP International AB. WRAP is a leading software
technology for spectrum management and radio network planning.
For further information about our acquisitions, see Note 4 of the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on
Form 10-K.
Seasonal variations
We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our software and services. Many
customers make purchase decisions based on their fiscal year budgets, which often coincide with the calendar year. These seasonal trends materially affect
the timing of our cash flows, as license fees become due at the time the license term commences based upon agreed payment terms that customers may not
adhere to. As a result, new and renewal licenses have been concentrated in the first and fourth quarter of the year, and our cash flows from operations have
been highest late in the first quarter and early in the second quarter of the succeeding fiscal year.
Backlog
We generally enter into single year term-based software licensing subscription contracts for our solutions. The timing of our invoices to the customer is a
negotiated term and thus varies among our subscription contracts. For multi-year agreements, it is common to invoice an initial amount at contract signing
followed by subsequent annual invoices. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. As
we generally enter into single year subscription contracts for our platform, backlog is not significant.
Governmental Regulation
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and
enforcing employment and labor laws, workplace safety and environmental laws, privacy and data protection laws, financial services laws, anti-bribery
laws, import and export controls, federal securities laws and tax laws and regulations. In certain foreign jurisdictions, these regulatory requirements may be
more stringent than those in the United States. These laws and regulations are subject to change over time and thus we must continue to monitor and
dedicate resources to ensure continued compliance. We strive to maintain compliance with all applicable laws and regulations and to anticipate future
regulatory developments. For additional information, see “Risk Factors - Risks related to legal or regulatory matters.”
Segments
We have identified two reportable segments: Software and Client Engineering Services. For additional information about our reportable segments, see
Note 18 of the Notes to consolidated financial statements in Item 15, Part IV of this Annual Report on Form 10-K, which is incorporated by reference.
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Corporate information
We were incorporated in Michigan in 1985 and became a Delaware company in October 2017. Our principal executive offices are located at 1820 E. Big
Beaver Road, Troy, Michigan 48083.
Unless the context otherwise requires, the terms “Altair,” “the Company,” “we,” “us” and “our” in this Annual Report on Form 10-K refer to Altair
Engineering Inc. and its subsidiaries. The Altair design logo and the marks “OptiStruct,” “RADIOSS,” “AcuSolve,” “FEKO,” “Flux,” “WinProp,”
“Multiscale Designer,” “HyperStudy,” “HyperMesh,” “HyperView,” “SimLab,” “HyperCrash,” “HyperGraph,” “Inspire,” “solidThinking Evolve,” “Thea
Render,” “Click2Cast,” “Click2Extrude,” “Click2Form,” “Carriots,” “Altair PBS Works,” “Altair PBS Professional,” “Altair PBS Cloud,” “MotionView,”
“MotionSolve,” “Altair PBS Access,” “SimSolid,” “Knowledge Studio,” “Monarch,” “Panopticon,” “EDEM,” “PollEx” and our other registered or
common law trade names, trademarks or service marks appearing in this Annual Report on Form 10-K are our property.
Available information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to
reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The SEC also maintains a website
at http://www.sec.gov that contains reports, proxy and information statements and other information regarding Altair Engineering Inc. and other companies
that file materials with the SEC electronically. Copies of Altair’s reports on Form 10-K, Forms 10-Q and Forms 8-K, may be obtained, free of charge,
electronically through our internet website, http://investor.altair.com under the Financials tab.
Our website is www.altair.com. Investors and others should note that we announce material financial information to investors using press releases, SEC
filings and public conference calls. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K or in
any other report or document we file with the SEC.
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Item 1A. Risk Factors
An investment in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below,
together with all the other information in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and the related notes. If any of the following risks actually occurs, our business,
reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Unless otherwise indicated, references to our
business being seriously harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, revenue,
liquidity and future prospects.
SUMMARY
The following summarizes key risks and uncertainties that could materially adversely affect us. You should read this summary together with the
more detailed description of each risk factor contained below.
Risks relating to our business and industry, including risks relating to:
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the sustainability of our revenue growth rate and the impact of our revenue mix;
the sustainability of our culture of innovation, teamwork and communications;
our ability to expand the usage of our software by existing customers;
our ability to introduce our software to new customers;
the length of our sales cycle;
our customers’ ability and plans to spend on product design and development;
our customers’ software license renewal rates;
the impact that acquisitions of businesses and products may have upon us;
the impact of competition;
the strength of the markets into which we sell, including automotive and financial services;
the impact of COVID-19 and other global conditions outside our control;
fluctuations in our quarterly results;
fluctuations in foreign currency exchange rates;
the extent to which software vendors participate in our APA program;
the performance of our distributors and resellers;
our ability to adapt to and lead technology changes;
the impact on profitability of our focus on growth and research & development;
the impact of any unanticipated departures by key employees;
the impact of our global presence;
the impact of any impairments of goodwill or intangible assets; and
the impact of any product liability claims or other legal proceedings.
Risks relating to our intellectual property, including risks relating to:
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the impact of potential defects or errors in our software;
our ability to protect and enforce our technology and intellectual property rights;
the impact of intellectual property disputes;
the impact of any security breaches, computer malware, computer hacking attacks and other security incidents;
any failure of software to work seamlessly with our customers’ existing software;
product liability claims that may arise as a result of our customers’ use of our software or services;
any failures by us to adequately train our customers regarding the use and benefits of our software; and
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our use of open source software and open source technology.
Risks relating to legal or regulatory matters, including risks relating to:
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the difficulties associated with complying with a wide range of complex regulations in a variety of jurisdictions and the impact of any non-
compliance;
the impact of changes in laws, regulations, regulatory policies and regulatory practices and uncertainties resulting from potential changes,
including potential tax law changes;
the impact of export and import controls on our ability to operate and compete in international markets;
the breadth of data privacy and anti-bribery laws and regulations;
our ability to use our deferred tax assets in the United States; and
the impact of any challenges to our global tax methodology.
Risks relating to ownership of our Class A Common Stock, including risks relating to:
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the sustainability of an active public trading market for our stock;
the volatility of the market price of our stock;
our expectations that we will not pay dividends in the foreseeable future;
the impact of any failure to maintain effective internal controls;
the difficulty of predicting the impact of our dual class common stock structure;
the nature and content of public research or reports about our company;
the potential dilutive impact of future sales of our Class A Common Stock, including upon conversion of our Convertible Notes; and
the impact of antitakeover provisions in our governing documents and under Delaware law.
Risks relating to our indebtedness, including risks relating to:
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the effective subordination of our Convertible Notes to our secured debt and to our subsidiaries’ liabilities;
the impact of our organizational structure, pursuant to which a substantial portion of our operations are conducted through, and a substantial
portion of our assets are held by, our subsidiaries;
our current debt service obligations and potential future debt service obligations;
limitations on our ability to pay cash in whole or in part upon conversion of our Convertible Notes;
the dilutive impact of issuing our Class A Common Stock upon such conversions;
the potential that our Convertible Notes may become convertible sooner than the mandatory convertibility date as a result of increases in the
market price of our Class A Common Stock;
the accounting method applicable for convertible debt securities; and
the impact of operating and financial covenants in our loan agreements.
General risks, including risks relating to:
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our ability to attract and retain key personnel;
any need we may have to raise additional capital;
the difficulties associated with predicting our growth;
business interruptions; and
the impact of potential changes in accounting principles.
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Risks relating to our business and industry
We have experienced significant revenue growth and we may fail to sustain that growth rate or may not grow in the future.
We were founded in 1985 and launched our first commercial software in 1990. Our growth has primarily been attributed to the increasing sales of our
simulation, high-performance computing and data analytics technologies to enhance decision making, product performance, compress development time,
and reduce costs. Revenue from our software segment has historically constituted a significant portion of our total revenue. Our revenue growth could
decline over time as a result of a number of factors, including increasing competition from smaller entities and well-established, larger organizations,
limited ability to, or our decision not to, increase pricing, contraction of our overall market, the manner in which the markets for our products, including
our data analytics products, evolve or our failure to capitalize on growth opportunities. Other factors include managing our global organization, revenues
generated outside the United States that are subject to adverse currency fluctuations, uncertain international geopolitical landscapes and the acquisition of
businesses which may grow more slowly than our business. Accordingly, we may not achieve similar growth rates in future periods, and you should not
rely on our historical revenue growth as an indication of our future revenue or revenue growth.
If we cannot maintain our company culture of innovation, teamwork, and communication, our business may be harmed.
We believe that a critical component to our success has been our company culture, which is based on our core values of innovation, envisioning the future,
communicating honestly and broadly, seeking technology and business firsts, and embracing diversity. We have invested substantial time and resources in
building a company embodying this culture. As we continue to develop the infrastructure of a public company and continue to grow, we may find it
difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture, or embed our culture in our acquired businesses,
could negatively impact our future success, including our ability to attract and retain personnel, encourage innovation and teamwork, and effectively focus
on and pursue our corporate objectives.
If our existing customers or users do not increase their usage of our software, or we do not add new customers, the growth of our business may be
harmed.
Our software includes a comprehensive open architecture solution for simulation, high-performance computing, data analytics, and artificial intelligence.
Our future success depends, in part, on our ability to increase the:
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number of customers and users accessing our software;
usage of our software to address expanding design, engineering, AI, computing and analytical needs; and/or
number of our applications and functionalities accessed by users and customers through our licensing model.
Our future success may also depend upon the degree to which the evolution of our units licensing model is accepted by our current and potential
customers.
In addition, through our Altair Partner Alliance, or APA, our customers have access to additional software offered by independent third parties, without the
need to enter into additional license agreements.
If we fail to increase the number of customers or users and/or application usage among existing users of our software and the software of our APA partners,
our ability to license additional software will be adversely affected, which would harm our operating results and financial condition.
Our ability to acquire new customers is difficult to predict because our software sales cycle can be long.
Our ability to increase revenue and maintain or increase profitability depends, in part, on widespread acceptance of our software by mid- to- large-size
organizations worldwide. We face long, costly, and unpredictable sales cycles. As a result of the variability and length of the sales cycle, we have only a
limited ability to forecast the timing of sales. A delay in or failure to complete sales could harm our business and financial results, and could cause our
financial results to vary significantly from period to period. Our sales cycle varies widely, reflecting differences in potential customers’ decision-
making processes, procurement requirements, budget cycles and the specific software or products being purchased, and is subject to significant risks over
which we have little or no control, including:
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longstanding use of competing products and hesitancy to change;
customers’ budgetary constraints and priorities;
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timing of customers’ budget cycles;
need by some customers for lengthy evaluations;
hesitation to adopt new processes and technologies;
length and timing of customers’ approval processes; and
development of software by our competitors perceived to be equivalent or superior to our software.
To the extent any of the foregoing occur, our average sales cycle may increase and we may have difficulty acquiring new customers.
Reduced spending on product design and development activities by our customers may negatively affect our revenues.
Our revenues are largely dependent on our customers’ overall product design and development activities, particularly demand from mid- to- large-size
organizations worldwide and their supplier base. The licensing of our software is discretionary. Our customers may reduce their research and development
budgets, which could cause them to reduce, defer, or forego licensing of our software. To the extent licensing of our software is perceived by existing and
potential customers to be extraneous to their needs, our revenue may be negatively affected by our customers’ delays or reductions in product development
research and development spending. Customers may delay or cancel software licensing or seek to lower their costs. Deterioration in the demand for product
design and development software for any reason would harm our business, operating results, and financial condition in the future.
Our business largely depends on annual renewals of our software licenses.
We typically license our software to our customers on an annual basis. In order for us to maintain or improve our operating results, it is important that our
customers renew and/or increase the amount of software licensed on an annual basis. Customer renewal rates may be affected by a number of factors,
including:
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our pricing or license term and those of our competitors;
our reputation for performance and reliability;
new product releases by us or our competitors;
customer satisfaction with our software or support;
consolidation within our customer base;
availability of comparable software from our competitors;
effects of global or industry specific economic conditions;
our customers’ ability to continue their operations and spending levels; and
other factors, a number of which are beyond our control.
If our customers fail to renew their licenses or renew on terms that are less beneficial to us, our renewal rates may decline or fluctuate, which may harm our
business.
We believe our future success will depend, in part, on the growth in demand for our software by customers other than simulation engineering
specialists and in additional industry verticals.
Historically, our customers have been simulation engineering specialists. To enable concept engineering, driven by simulation, we make our physics solvers
more accessible to designers by wrapping them in powerful simple interfaces. We believe our future success will depend, in part, on growth in demand for
our software by these designers, which could be negatively impacted by the lack of:
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continued and/or growing reliance on software to optimize and accelerate the design process;
adoption of simulation technology by designers other than simulation engineering specialists;
continued proliferation of mobility, large data sets, cloud computing and IoT;
our ability to predict demands of designers other than simulation engineering specialists and achieve market acceptance of our software or
products within these additional areas and customer bases or in additional industry verticals; or
our ability to respond to changes in the competitive landscape, including whether our competitors establish more widely adopted products for
designers other than simulation engineering specialists.
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If some or all of this software does not achieve widespread adoption, our revenues and profits may be adversely affected.
Our ability to grow our business may be adversely impacted by difficulties we may experience in integrating recent acquisitions or in integrating future
acquisitions.
We believe that our recent acquisitions result in certain benefits, including expanding our portfolio of software and products and enabling us to better serve
our customers’ needs. However, to realize some of these anticipated benefits, the acquired businesses must be successfully integrated. The success of these
acquisitions will depend in part on our ability to realize these anticipated benefits. We may fail to realize the anticipated benefits of these acquisitions for a
variety of reasons, including the following:
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failure to successfully manage relationships with new or potential customers;
failure of existing customers to accept new service and product offerings from us;
revenue attrition in excess of anticipated levels;
unanticipated incompatibility of technologies and systems;
failure to leverage the increased scale of our business quickly and effectively;
potential difficulties integrating and harmonizing financial reporting systems;
the loss of key employees;
failure to effectively coordinate sales and marketing efforts to communicate the capabilities of our enhanced portfolio of software and
products;
failure to combine product offerings and product lines quickly and effectively;
failure to convert an increasing amount of new or acquired customer relationships revenue from perpetual to annual recurring revenue
streams; or
failure to effectively invest in further sales, marketing, and research and development efforts that lead to increased revenues.
We face significant competition, which may adversely affect our ability to add new customers, retain existing customers, and grow our business.
The market for simulation, data analytics, and high-performance computing software is highly fragmented. Our primary competitors include companies
such as IBM, Dassault Systèmes, Siemens, Ansys, MSC Software (a Hexagon company), and Alteryx. Many are large public companies, with significant
financial resources. In addition to these competitors, we compete with many smaller companies offering similar software applications.
A significant number of companies have developed or are developing software and services that currently, or in the future, may compete with some or all of
our software and services. We may also face competition from participants in adjacent markets, including two-dimensional, or 2D, and three-dimensional,
or 3D, CAD, and broader PLM competitors and others that may enter our markets by leveraging related technologies and partnering with or acquiring other
companies.
The principal competitive factors in our industry include:
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breadth, depth and integration of software;
domain expertise of sales and technical support personnel;
consistent global support;
performance and reliability; and
price.
Many of our current and potential competitors have longer-term and more extensive relationships with our existing and potential customers that provide
them with an advantage in competing for business with those customers. They may be able to devote greater resources to the development and
improvement of their offerings than we can. These competitors could incorporate additional functionality into their competing products from their wider
product offerings or leverage their commercial relationships in a manner that uses product bundling or closed technology platforms to discourage
enterprises from purchasing our applications.
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Many existing and potential competitors enjoy competitive advantages over us, such as:
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larger sales and marketing budgets and resources;
access to larger customer bases, which often provide incumbency advantages;
broader global distribution and presence;
greater resources to make acquisitions;
the ability to bundle competitive offerings with other software and services;
greater brand recognition;
lower labor and development costs;
greater levels of aggregate investment in research and development;
larger and more mature intellectual property portfolios; and
greater financial, technical, management and other resources.
These competitive pressures in our markets or our failure to compete effectively may result in fewer customers, price reductions, licensing of fewer units,
increased sales and marketing expenses, reduced revenue and gross profits and loss of market share. Any failure to address these factors could harm our
business.
Because we derive a substantial portion of our revenues from customers in the automotive industry, we are susceptible to factors affecting this industry.
Billings in the automotive industry accounted for approximately 36% of our 2020 billings. An adverse occurrence, including industry slowdown, due to the
impacts of COVID-19 or otherwise, recession, political instability, costly or constraining regulations, rapid technological obsolescence, excessive inflation,
prolonged disruptions in one or more of our automotive customers’ production schedules, supply disruptions, or labor disturbances, that results in a
significant decline in the volume of sales in this industry, or in an overall downturn in the business and operations of our customers in this industry, could
adversely affect our business.
The automotive industry is highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. Any
weakness in demand in this industry, the insolvency of a manufacturer or suppliers, or constriction of credit markets may cause our automotive customers
to reduce their amount of software licensed or services requested or request discounts or extended payment terms, any of which may cause fluctuations or a
decrease in our revenues and timing of cash flows.
The COVID-19 pandemic, or other potential future pandemics or events, may cause severe business interruptions either globally or regionally, that
could have a negative impact on our financial results.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) pandemic. The outbreak of the COVID-19
pandemic has significantly affected our customers, the global economy and financial markets. The full extent to which COVID-19 will impact global or
regional economies will depend on future developments that are highly uncertain, especially in light of the emergence of new variants and potential for
additional variants to emerge and cannot be accurately predicted. New information is likely to emerge concerning COVID-19, including information related
to the development, effectiveness and roll-out of vaccines, new variants of the virus, and the actions to contain it or treat COVID-19 with uncertain
economic impact on local, regional, national, and international markets. Our future results of operations, financial condition and cash flows could be
materially adversely affected by COVID-19, particularly if the pandemic persists for a significant amount of time causing a substantial longer-term
contraction in business for our customer base, prior to eventual recovery.
Many governments have enacted a rapid massive global response leveraging monetary and fiscal policy to mitigate long term economic harm, while
providing short term economic support. While the implementation of policy responses varies country by country, and regionally, and has included
mitigation efforts related to social distancing requirements, quarantine requirements, travel restrictions, and shelter in place orders, among others, the
totality of the global response is based upon expectations that the response will serve to minimize the chance for a deep prolonged negative economic
impact from COVID-19. Certain jurisdictions have begun to “re-open” their economies, within a relatively short time period of having engaged in
substantial closure of most economic activity. Other jurisdictions have begun to consider moves to gradually “re-open” or have actually “re-opened”. In
certain instances, governments deemed it necessary to reverse re-opening planning. The long term outcome of mitigation efforts is presently uncertain. The
global distribution of COVID-19 vaccines is at an early stage and it is not possible to predict with certainty the impact of vaccines considering the logistical
hurdles and current and potential COVID-19 variants that have developed or may emerge in the future.
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Additional risks from COVID-19 include the inability of our employees and those businesses upon which we rely for operations to carry out their
responsibilities at levels of performance necessary to maintain our performance undisturbed as a result of measures taken by governmental authorities to
limit the spread of COVID-19. It is possible that some of our furloughed CES personnel do not return to work when their positions return. The COVID-19
pandemic continues to rapidly evolve. COVID-19 may also affect our operating and financial results in a manner that is not presently known to us, or that
we currently to do not consider presenting significant risks to our operations.
The impact of COVID-19 on some of our customers has primarily contributed to the decrease in revenue for software related and client engineering
services. While we continue to robustly engage with our customers, primarily virtually, to mitigate the uncertain extent of the negative impact of COVID-
19 on our customers, our ability to attract, serve, retain, or expand customers will continue to be uncertain. A negative impact on our customers may cause
them to delay entering into new or expanded software licenses, request extended payment terms, delayed invoicing, higher discounts, lower renewal
amounts or cancelations, and a reduction in demand for software related and client engineering services. Existing and potential customers may choose to
reduce or delay technology spending in response to COVID-19, or attempt to renegotiate contracts and obtain concessions, which may materially and
negatively impact our operating results, financial condition and prospects.
Since we have substantial international operations that arise from our normal business operations, our financial results in 2021 may be impacted by
COVID-19 driven variations in foreign currency exchange rates, apart from the traditional elements that underlie foreign currency exchange rate changes.
Recent developments with respect to COVID-19 vaccines have the potential to affect the scope and duration of the pandemic. While a number of COVID-
19 vaccines have received regulatory approval and are available in limited quantities in the United States and other parts of the world, a degree of
uncertainty exists with respect to the distribution, utilization, and long-term efficacy of vaccinations among the general population.
Adverse global conditions, including economic uncertainty, may negatively impact our financial results.
Global conditions, including the effects of the United Kingdom’s exit from the European Union, or Brexit, dislocations in the financial markets or any
negative financial impacts affecting United States corporations operating on a global basis as a result of tax reform or changes to existing trade agreements
or tax conventions, could adversely impact our business in a number of ways, including longer sales cycles, lower prices for our software license fees,
reduced licensing renewals, customer disruption or foreign currency fluctuations.
The long term effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets. The measures
could potentially disrupt some of the markets we serve and may cause those customers to closely monitor their costs and reduce their spending budget on
our products and services. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom
determines which European Union laws to replace or replicate. Given the lack of comparable precedent, it is unclear what the longer term financial, trade
and legal implications the withdrawal of the United Kingdom from the European Union will have on us.
The United Kingdom Financial Conduct Authority, or the FCA, has announced its intention to phase out LIBOR rates by the end of 2021. It is not possible
to predict the effect of this change, or other reforms or the establishment of alternative reference rates in the United Kingdom or elsewhere. We currently
expect that, as a result of any phase out of LIBOR, the interest rates under our loan agreement would be amended as necessary to provide for an interest
rate that approximates the existing interest rate as calculated in accordance with LIBOR, but could result in an increase in the cost of our variable rate
indebtedness.
During challenging economic times our customers may be unable or unwilling to make timely payments to us, which could cause us to incur increased bad
debt expenses. Our customers may unilaterally extend the payment terms of our invoices, adversely affecting our short-term or long-term cash flows.
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Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations and our key metrics, including Billings, Adjusted EBITDA and Free Cash Flow, may vary significantly in the future and
seasonally. Many customers make purchase decisions based on their fiscal year budgets, which often coincide with the calendar year. These seasonal trends
materially affect our financial results, as license fees become due at the time the license term commences based upon agreed payment terms that customers
may not adhere to. As a result, new and renewal licenses have been concentrated in the first and fourth quarter of the year, and our cash flows from
operations have been highest late in the first quarter and early in the second quarter of the succeeding fiscal year. Period-to-period comparisons of our
operating results may not be meaningful. The results of any one quarter should not be relied upon as an indication of future performance. Our quarterly
financial results and key metrics may fluctuate as a result of a variety of factors including:
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seasonal variations in customer purchasing patterns;
our ability to retain and/or increase sales to existing customers at various times;
our ability to attract new customers;
the addition or loss of large customers, including through their acquisitions or industry consolidations;
the timing of recognition of revenues;
the amount and timing of billings;
the amount and timing of operating expenses and capital expenditures;
the length of sales cycles;
significant security breaches, technical difficulties or unforeseen interruptions to the functionality of our software;
the number of new employees added;
the amount and timing of billing for professional services engagements;
the timing and success of new products, features, enhancements or functionalities introduced by us or our competitors;
changes in our pricing policies or those of our competitors;
changes in the competitive dynamics of our industry, including consolidation among competitors;
the timing of expenses related to the development or acquisition of technology;
any future charges for impairment of goodwill from acquired companies;
extraordinary expenses such as litigation or other dispute-related settlement payments;
the impact of new accounting pronouncements; and
general economic conditions.
Billings have historically been highest in the first and fourth quarters of any calendar year and may vary in future quarters. This seasonality or the
occurrence of any of the factors above may cause our results of operations to vary and our financial statements may not fully reflect the underlying
performance of our business.
In addition, we may choose to grow our business for the long-term rather than to optimize for profitability or cash flows for a particular shorter-term
period. If our quarterly results of operations fall below the expectations of investors or securities analysts, the price of our Class A common stock could
decline and we could face lawsuits, including securities class action suits.
Fluctuations in foreign currency exchange rates could result in declines in our reported revenue and operating results.
As a result of our international activities, we have revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies
including Euros, British Pounds Sterling, Indian Rupees, Japanese Yen, and Chinese Yuan. Foreign currency risk arises primarily from the net difference
between non-United States dollar receipts from customers and non-United States dollar operating expenses. The value of foreign currencies against the
United States dollar can fluctuate significantly, and those fluctuations may occur quickly. We cannot predict the impact of future foreign currency
fluctuations.
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Strengthening of the United States dollar could cause our software to become relatively more expensive to some of our customers leading to decreased
sales and a reduction in billings and revenue not denominated in United States dollars. A reduction in revenue or an increase in operating expenses due to
fluctuations in foreign currency exchange rates could have an adverse effect on our financial condition and operating results. Such foreign currency
exchange rate fluctuations may make it more difficult to detect underlying trends in our business and operating results.
We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations. In the future, we may use derivative instruments,
such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such
hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the
limited time the hedges are in place, and the cost of those hedging techniques may have a significant negative impact on our operating results. The use of
hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. If we are not able to successfully
manage or hedge against the risks associated with currency fluctuations, our financial condition and operating results could be adversely affected.
If we fail to attract new or retain existing third party independent software vendors to participate in the APA, we may not be able to grow the APA
program.
Our APA program allows our customers to use third party software that may be unrelated to our software, without the need to enter into additional license
agreements. The APA program results in increased revenues through revenue sharing, and encourages users to stay within the Altair software ecosystem. If
third party software providers are unwilling to join the APA on appropriate terms, including agreeing with our revenue share allocations, or if we are unable
to retain our current APA participants, we may not be able to grow the APA program.
Licensing of our software is dependent, in part, on performance of our distributors and resellers.
We have historically licensed our software primarily through our direct sales force. We have enhanced our units licensing model such that it is able to be
licensed through a network of distributors and resellers. If these distributors and resellers are unable to successfully adjust their sales methods to support
our annual recurring licensing model, or become unstable, financially insolvent, or otherwise do not perform as we expect, our revenue growth derived
from the distributor and reseller channels could be negatively impacted.
If we fail to adapt to technology changes our software may become less marketable, less competitive, or obsolete.
Our success depends in part on our ability to:
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anticipate customer needs;
foresee changes in technology, including to cloud-enabled hardware, software, networking, browser and database technologies;
differentiate our software;
maintain operability of our software with changing technology standards; and
develop or acquire additional or complementary technologies.
We may not be able to develop or market new or enhanced software in a timely manner, which could result in our software becoming less marketable, less
competitive, or obsolete.
We believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our profitability in the near term.
Part of our business strategy is to focus on our long-term growth. As a result, our profitability may be lower in the near term than it would be if our strategy
were to maximize short-term profitability. Expanding our research and development efforts, sales and marketing efforts, infrastructure and other such
investments may not ultimately grow our business or cause higher long-term profitability. If we are ultimately unable to achieve greater profitability at the
level anticipated by analysts and our stockholders, our Class A common stock price may decline.
Our research and development may not generate revenue or yield expected benefits.
A key element of our strategy is to focus on innovation and invest significantly in research and development to create new software and enhance our
existing software to address additional applications and serve new markets, both internally and through acquisitions. Research and development projects
can be technically challenging and expensive, and there may be delays between the time we incur expenses and the time we are able to generate revenue, if
any. Anticipated customer demand for any software we may develop could
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decrease after the development cycle has commenced, and we could be unable to avoid costs associated with the development of any such software. If we
expend a significant amount of resources on research and development and our efforts do not lead to the timely introduction or improvement of software
that is competitive in our current or future markets, it could harm our business.
If we lose our senior executives, we may be unable to achieve our business objectives.
We currently depend on the continued services and performance of James Scapa, our chief executive officer, and other senior executives. Many members of
this executive team have served the Company for more than 15 years, with Mr. Scapa having served since our founding in 1985. Loss of Mr. Scapa’s
services or those of other senior executives could delay or prevent the achievement of our business objectives.
Acquisitions may dilute our stockholders, disrupt our core business, divert our resources, or require significant management attention.
Most of our software has been developed internally with acquisitions used to augment our capabilities. We may not effectively identify, evaluate, integrate,
or use acquired technology or personnel from prior or future acquisitions, or accurately forecast the financial impact of an acquisition, including accounting
charges.
After the completion of an acquisition, it is possible that our valuation of such acquisition for purchase price allocation purposes may change compared to
initial expectations and result in unanticipated write-offs or charges, impairment of our goodwill, or a material change to the fair value of the assets and
liabilities associated with a particular acquisition.
We may pay cash, incur debt, or issue equity securities to fund an acquisition. The payment of cash will decrease available cash. The incurrence of debt
would likely increase our fixed obligations and could subject us to restrictive covenants or obligations. The issuance of equity securities would likely be
dilutive to our stockholders. We may also incur unanticipated liabilities as a result of acquiring companies. Future acquisition activity may disrupt our core
business, divert our resources, or require significant management attention.
International operations expose us to risks inherent in international activities.
Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that
are different from those in the United States. We face risks in doing business internationally that could adversely affect our business, including:
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the need to localize and adapt our software for specific countries, including translation into foreign languages and associated expenses;
foreign exchange risk;
import and export restrictions and changes in trade regulation, including uncertainty regarding renegotiation of international trade agreements
and partnerships;
sales and customer service challenges associated with operating in different countries;
enhanced difficulties of integrating foreign acquisitions;
difficulties in staffing and managing foreign operations and working with foreign partners;
different pricing environments, longer sales cycles, longer accounts receivable payment cycles, and collections issues;
compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including the
Foreign Corrupt Practices Act of 1977, or the FCPA, employment, ownership, trade, tax, privacy and data protection laws and regulations;
limitations on enforcement of intellectual property rights;
more restrictive or otherwise unfavorable government regulations;
increased financial accounting and reporting burdens and complexities;
restrictions on the transfer of funds;
withholding and other tax obligations on remittance and other payments made by our subsidiaries; and
unstable regional, economic and political conditions.
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Our inability to manage any of these risks successfully, or to comply with these laws and regulations, could reduce our sales and harm our business.
If we are unable to match engineers to open positions in our CES business or are otherwise unable to grow our CES business, our revenue could be
adversely affected.
We operate our client engineering services business by hiring engineers and data scientists for placement at a customer site for specific customer-directed
assignments and pay them only for the duration of the placement. The success of this business is dependent upon our ability to recruit and retain highly
skilled, CES staff to meet the requirements of our customers and to maintain ongoing relationships with these customers. Our CES business constituted
approximately 9% and 11% of our total revenues for the year ended December 31, 2020 and 2019, respectively. Some of our customers satisfy their
engineering personnel needs through managed service providers, or MSPs. A significant percentage of the engineers we place, either directly or through
MSPs, are with U.S.-based customers and are citizens of countries other than the United States. In the event these engineers are unable to enter into, or
remain in, the United States legally, we may be unable to match engineers with the appropriate skill sets matched to open customer positions. If we are
unable to attract highly skilled, qualified CES staff because of competitive factors or immigration laws, or otherwise fail to match CES staff to open
customer positions, our revenue may be adversely affected.
Our sales to government agencies and their suppliers may be subject to reporting and compliance requirements.
Our customers include agencies of the various governments, including, but not limited to the United States, and their suppliers of products and services.
These customers may procure our software and services through various governments’ mandated procurement regulations. Because of governmental
reporting and compliance requirements, we may incur unexpected costs. Government agencies and their suppliers may have statutory, contractual or other
legal rights to terminate contracts for convenience or due to a default, and any such termination may adversely affect our future operating results.
Our revenue mix may vary over time, which could harm our gross margin and operating results.
Our revenue mix may vary over time due to a number of factors, including the mix of term-based licenses and perpetual licenses. Due to the differing
revenue recognition policies applicable to our term-based licenses, perpetual licenses and professional services, shifts in the mix between subscription and
perpetual licenses from quarter to quarter, or increases or decreases in revenue derived from our professional engineering services, which have lower gross
margins than our software services, could produce substantial variation in revenues recognized even if our billings remain consistent. Our gross margins
and operating results could be impacted by changes in revenue mix and costs, together with other factors, including: entry into new markets or growth in
lower margin markets; entry into markets with different pricing and cost structures; pricing discounts; and increased price competition. Any one of these
factors or the cumulative effects of certain of these factors may result in significant fluctuations in our gross margin and operating results. This variability
and unpredictability could result in our failure to meet internal expectations or those of securities analysts or investors for a particular period. If we fail to
meet or exceed such expectations for these or any other reasons, the market price of our common stock could decline.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings, which could harm our business.
Under GAAP, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.
Goodwill is required to be tested for impairment at least annually. As of December 31, 2020 and 2019, respectively, we had $264.5 million and
$233.7 million of goodwill and $76.1 million and $67.1 million of other intangible assets—net. An adverse change in market conditions, particularly if
such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result
in an impairment charge.
In addition to our software, we source, distribute and sell products, which may expose us to product liability claims, product recalls, and warranty
claims that could be expensive and harm our business.
We source, distribute and sell products, in part, through certain of our wholly owned subsidiaries. To the extent these products do not perform as expected,
cause injury or death or are otherwise unsuitable for usage, we may be held liable for claims, including product liability and other claims. A product
liability claim, any product recalls or an excessive warranty claim, whether arising from defects in design or failure in our supply chains could negatively
affect our sales or require a change in the design process or our product sourcing, any of which may harm our reputation and business.
Risks related to our intellectual property
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Defects or errors in our software could result in loss of revenue or harm to our reputation.
Our software is complex and, despite extensive testing and quality control, may contain undetected or perceived bugs, defects, errors, or failures. From time
to time we have found defects or errors in our software and we may discover additional defects in the future. We may not find defects or errors in new or
enhanced software before release and these defects or errors may not be discovered by us or our customers until after they have used the software. We have
in the past issued, and may in the future need to issue, corrective releases or updates of our software to remedy bugs, defects and errors or failures. The
occurrence of any real or perceived bugs, defects, errors, or failures could result in:
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lost or delayed market acceptance of our software;
delays in payment to us by customers;
injury to our reputation;
diversion of our resources;
loss of competitive position;
claims by customers for losses sustained by them;
breach of contract claims or related liabilities;
increased customer support expenses or financial concessions; and
increased insurance costs.
Any of these problems could harm our business.
Failure to protect and enforce our proprietary technology and intellectual property rights could substantially harm our business.
The success of our business depends, in part, on our ability to protect and enforce our proprietary technology and intellectual property rights, including our
trade secrets, patents, trademarks, copyrights, and other intellectual property. We attempt to protect our intellectual property under trade secret, patent,
trademark, and copyright laws. Despite our efforts, we may not be able to protect our proprietary technology and intellectual property rights, if we are
unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. It may be possible for unauthorized third parties to copy our
technology and use information that we regard as proprietary to create products and services that compete with ours. Provisions in our licenses protect
against unauthorized use, copying, transfer and disclosure of our technology, but such provisions may be difficult to enforce or are unenforceable under the
laws of certain jurisdictions and countries. The laws of some countries do not protect proprietary rights to the same extent as the laws of the United States.
Our international activities expose us to unauthorized copying and use of our technology and proprietary information.
We primarily rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets,
unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions that we enter into with
employees, consultants, partners, vendors and customers may not be sufficient to prevent unauthorized use or disclosure of our proprietary technology or
trade secrets and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or trade secrets.
Policing unauthorized use of our technologies, software and intellectual property is difficult, expensive and time-consuming, particularly in countries where
the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual
property rights may be weak. We may be unable to detect or determine the extent of any unauthorized use or infringement of our software, technologies or
intellectual property rights.
From time to time, we may need to engage in litigation or other administrative proceedings to protect our intellectual property rights or to defend against
allegations by third parties that we have infringed or misappropriated their intellectual property rights, including in connection with requests for
indemnification by our customers who may face such claims. We have been approached and may be approached in the future by certain of our customers to
indemnify them against third party intellectual property claims. Litigation and/or any requests for indemnification by our customers could result in
substantial costs and diversion of resources and could negatively affect our business and revenue. If we are unable to protect and enforce our intellectual
property rights, our business may be harmed.
Intellectual property disputes could result in significant costs and harm our business.
Intellectual property disputes may occur in the markets in which we compete. Many of our competitors are large companies with significant intellectual
property portfolios, which they may use to assert claims of infringement, misappropriation or other violations of intellectual property rights against us or
our customers. Any allegation of infringement, misappropriation or other violation of
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intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract
our management from our business, and could cause uncertainty among our customers or prospective customers, all of which could have an adverse effect
on our business or revenue.
Our agreements may include provisions that require us to indemnify others for losses suffered or incurred as a result of our infringement of a third party’s
intellectual property rights infringement, including certain of our employees and customers.
An adverse outcome of a dispute or an indemnity claim may require us to:
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pay substantial damages;
cease licensing our software or portions of it;
develop non-infringing technologies;
acquire or license non-infringing technologies; and
make substantial indemnification payments.
Any of the foregoing or other damages could harm our business, decrease our revenue, increase our expenses or negatively impact our cash flow.
Security breaches, computer malware, computer hacking attacks and other security incidents could harm our business, reputation, brand and
operating results.
Security incidents have become more prevalent across industries and may occur on our systems. Security incidents may be caused by, or result in but are
not limited to, security breaches, computer malware or malicious software, computer hacking, unauthorized access to confidential information, denial of
service attacks, security system control failures in our own systems or from vendors we use, email phishing, software vulnerabilities, social engineering,
sabotage and drive-by downloads. Such security incidents, whether intentional or otherwise, may result from actions of hackers, criminals, nation states,
vendors, employees or customers.
Our company is a highly automated business which relies on our network infrastructure and enterprise applications, cloud-based services, internal
technology systems and website for development, marketing, operational, support and sales activities. A disruption or failure of these systems or in those of
our external service providers, in the event of a major storm, earthquake, fire, telecommunications failure, cyber-attack, terrorist attack or other catastrophic
event could cause system interruptions, reputational harm, delays in our product development and loss of critical data and could materially and adversely
affect our ability to operate our business.
We may experience disruptions, data loss, outages and other performance problems on our systems due to service attacks, unauthorized access or other
security related incidents. Any security breach or loss of system control caused by hacking, which involves efforts to gain unauthorized access to
information or systems, or to cause intentional malfunctions or loss, modification or corruption of data, software, hardware or other computer equipment
and the inadvertent transmission of computer malware could harm our business.
In addition, our software stores and transmits customers’ confidential business information in our facilities and on our equipment, networks, corporate
systems and in the cloud. Security incidents could expose us to litigation, remediation costs, increased costs for security measures, loss of revenue, damage
to our reputation and potential liability. Our customer data and corporate systems and security measures may be compromised due to the actions of outside
parties, employee error, malfeasance, capacity constraints, a combination of these or otherwise and, as a result, an unauthorized party may obtain access to
our data or our customers’ data. Outside parties may attempt to fraudulently induce our employees to disclose sensitive information in order to gain access
to our customers’ data or our information. We must continuously examine and modify our security controls and business policies to address new threats,
the use of new devices and technologies, and these efforts may be costly or distracting.
Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain
dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or
implement sufficient control measures to defend against these techniques. Though it is difficult to determine what harm may directly result from any
specific incident or breach, any failure to maintain confidentiality, availability, integrity, performance and reliability of our systems and infrastructure may
harm our reputation and our ability to retain existing customers and attract new customers. If an actual or perceived security incident occurs, the market
perception of the effectiveness of our security controls could be harmed, our brand and reputation could be damaged, we could lose customers, and we
could suffer financial exposure due to such events or in connection with remediation efforts, investigation costs, regulatory fines and changed security
control, system architecture and system protection measures.
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We may lose customers if our software does not work seamlessly with our customers’ existing software.
Our customers may use our software, which in many instances has been designed to seamlessly interface with software from some of our competitors,
together with their own software and software they license from third parties. If our software ceases to work seamlessly with our customers’ existing
software applications, we may lose customers.
Many of our customers use our software and services to design and develop their products, which when built and used may expose us to claims.
Many of our customers use our software and services, together with software and services from other third parties and their own resources, to assist in the
design and development of products intended to be used in a commercial setting. To the extent our customers design or develop a product that results in
potential liability, including product liability, we may be included in resulting litigation. We may be subject to litigation defense costs or be subject to
potential judgments or settlement costs for which we may not be fully covered by insurance, which would result in an increase of our expenses.
We also license certain of our software on Altair branded computer hardware, which we acquire from original equipment manufacturers, which we refer to
as OEMs, exposing us to potential liability for the hardware, such as product liability. To the extent this liability is greater than the warranty and liability
protection from our OEM, we may incur additional expenses, which may be significant.
If we fail to educate and train our users regarding the use and benefits of our software, we may not generate additional revenue.
Our software is complex and highly technical. We continually educate and train our existing and potential users regarding the depth, breadth, and benefits
of our software including through classroom and online training. If these users do not receive education and training regarding the use and benefits of our
software, or the education and training is ineffective, they may not increase their usage of our software. We may incur costs of training directly related to
this activity prior to generating additional revenue.
We currently open source certain of our software and may open source other software in the future, which could have an adverse effect on our
revenues and expenses and our use of open source technology could impose limitations on our ability to commercialize our software.
We offer our open matrix language, or OML, source code and a portion of our Altair PBS workload management software in an open source version to
generate additional usage and broaden user-community development and enhancement of the software. We offer related software and services on a paid
basis. We believe increased usage of open source software leads to increased purchases of these related paid offerings. We may offer additional software on
an open source basis in the future. There is no assurance that the incremental revenues from related paid offerings will outweigh the lost revenues and
incurred expenses attributable to the open sourced software.
We use open source software in some of our software and expect to continue to use open source software in the future. Although we monitor our use of
open source software to avoid subjecting our software to conditions we do not intend, we may face allegations from others alleging ownership of, or
seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works, or our proprietary
source code that was developed using such software. These allegations could also result in litigation. The terms of many open source licenses have not been
interpreted by United States courts. There is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions
on our ability to commercialize our software. In such an event, we may be required to seek licenses from third parties to continue commercially offering
our software, to make our proprietary code generally available in source code form, to re-engineer our software or to discontinue the sale of our software if
re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business and revenue.
The use of open source software subjects us to a number of other risks and challenges. Open source software is subject to further development or
modification by anyone. Others may develop such software to be competitive with or no longer useful by us. It is also possible for competitors to develop
their own solutions using open source software, potentially reducing the demand for our software. If we are unable to successfully address these challenges,
our business and operating results may be adversely affected, and our development costs may increase.
Risks related to legal or regulatory matters
We operate internationally and must comply with employment and related laws in various countries, which may, in turn, result in unexpected expenses.
We are subject to a variety of domestic and foreign employment laws, including those related to safety, discrimination, whistle-blower, privacy and data
protection, employment of unauthorized or undocumented employees, classification of employees,
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wages, statutory benefits, and severance payments. Such laws are subject to change as a result of judicial decisions or otherwise, and there can be no
assurance that we will not be found to have violated any such laws in the future. Such violations could lead to the assessment of significant fines against us
by federal, state or foreign regulatory authorities or to the award of damages claims, including severance payments, against us in judicial or administrative
proceedings by employees or former employees, any of which would reduce our net income or increase our net loss.
Changes in government trade, immigration or currency policies may harm our business.
We operate our business globally in multiple countries that have policies and regulations relating to trade, immigration and currency, which may change.
Governments may change their trade policies by withdrawing from negotiations on new trade policies, renegotiating existing trade agreements, imposing
tariffs or imposing other trade restrictions or barriers. Any such changes may result in:
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changes in currency exchange rates;
changes in political or economic conditions;
import or export licensing requirements or other restrictions on technology imports and exports;
laws and business practices favoring local companies;
changes in diplomatic and trade relationships;
modification of existing or implementation of new tariffs;
imposition or increase of trade barriers; or
establishment of new trade or currency restrictions.
Any of these changes, changes in immigration policies, government intervention in currency valuation or other government policy changes may adversely
impact our ability to sell software and services, which could, in turn, harm our revenues and our business. We are headquartered in the United States and
may be particularly impacted by changes affecting the United States.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing
requirements and subject us to liability if we are not in compliance with applicable laws.
Our software, services and hardware are subject to export control and import laws and regulations. As a company headquartered in the United States we are
subject to regulations, including the International Traffic in Arms Regulations, or ITAR, and Export Administration Regulations, or EAR, United States
Customs regulations and various economic and trade sanctions regulations administered by the United States Treasury Department’s Office of Foreign
Assets Control, presenting further risk of unexpected reporting and compliance costs. Compliance with these regulations may also prevent and restrict us
from deriving revenue from potential customers in certain geographic locations for certain of our technologies.
If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including
the possible loss of export or import privileges, fines which may be imposed on us and responsible employees or managers and, in extreme cases, the
incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be
time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our software or changes in applicable
export or import regulations may create delays in the introduction and sale of our software in international markets, prevent our customers with
international operations from deploying our software or, in some cases, prevent the export or import of our software to certain countries, governments or
persons altogether.
We incorporate encryption technology into portions of our software. Various countries regulate the import of certain encryption technology, including
through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our software or could limit our
customers’ ability to implement our software in those countries. Encrypted software and the underlying technology may also be subject to export control
restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required
import or export approval for our software, when applicable, could harm our international sales and adversely affect our revenue. Compliance with
applicable regulatory requirements regarding the export of our software, including with respect to new releases of our software, may create delays in the
introduction of our software in international markets, prevent our customers with international operations from deploying our software throughout their
globally-distributed systems or, in some cases, prevent the export of our software to some countries altogether.
United States export control laws and economic sanction programs prohibit the shipment of certain software and services to countries, governments and
persons that are subject to United States economic embargoes and trade sanctions, including, but not limited to, Iran, Cuba, North Korea, Syria and Sudan.
Any violations of such economic embargoes and trade sanction regulations could have negative consequences, including government investigations,
penalties and reputational harm.
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Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change
in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our software by, or in our decreased
ability to export or license our software to, existing or potential customers with international operations. Any decreased use of our software or limitation on
our ability to export or license our software could adversely affect our business.
Our business is subject to a wide range of laws and regulations, and our failure to comply with those laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and
enforcing employment and labor laws, workplace safety and environmental laws, privacy and data protection laws, financial services laws, anti-bribery
laws, import and export controls, federal securities laws and tax laws and regulations. In certain foreign jurisdictions, these regulatory requirements may be
more stringent than those in the United States. These laws and regulations are subject to change over time and thus we must continue to monitor and
dedicate resources to ensure continued compliance. Non-compliance with applicable regulations or requirements could subject us to investigations,
sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any
governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results, and financial
condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention
and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.
If we or any of our employees violate the FCPA, the U.K. Bribery Act or similar anti-bribery laws we could be adversely affected.
The FCPA, the U.K. Bribery Act and similar anti-bribery laws generally prohibit companies and their intermediaries from authorizing, offering or
providing, directly or indirectly, improper payments or benefits for the purpose of obtaining or retaining business to government officials, political parties
and private-sector recipients. United States based companies are required to maintain records that accurately and fairly represent their transactions and have
an adequate system of internal accounting controls. We operate in areas of the world that potentially experience corruption by government officials to some
degree and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure that our
employees, resellers or distributors will not engage in prohibited conduct. If we are found to be in violation of the FCPA, the U.K. Bribery Act or other
anti-bribery laws, we could suffer criminal or civil penalties or other sanctions.
We have significant deferred tax assets in the United States, which we may not use in future taxable periods.
As of December 31, 2020 and 2019, we had gross deferred tax assets, or DTAs, of $133.4 million and $117.5 million, respectively, primarily related to net
operating loss carryforwards, tax credits, share-based compensation, lease obligations and employee benefits. We are entitled to a United States federal tax
deduction when non-qualified stock options, or NSOs, are exercised. In connection with our IPO, a significant number of NSOs were exercised resulting in
a tax deduction for United States income tax purposes. This deduction, in conjunction with our other expected deferred tax asset reversals, resulted in the
establishment of a valuation allowance for $47.0 million in 2017 for the United States DTAs. Our ability to utilize any net operating losses or tax credits
may be limited under provisions of the Internal Revenue Code of 1986, or the Code, if we undergo an ownership change after our IPO (generally defined as
a greater than 50-percentage-point cumulative change, by value, in the equity ownership of certain stockholders over a rolling three-year period). We also
inherited net operating losses, or NOLs, from the acquisition of Datawatch and Univa, which are subject to specific limitations on usage. We may or may
not be able to realize the benefits of the acquired NOLs due to a number of factors, including those enumerated above. We may also be unable to realize our
tax credit carryforwards prior to their expiry.
In addition, the recently enacted Coronavirus Aid, Relief, and Economic Security, or CARES Act and the Consolidated Appropriations Act, 2021 (CAA)
provide relief to U.S. federal corporate taxpayers through temporary adjustments to net operating loss rules, changes to limitations on interest expense
deductibility, and the acceleration of available refunds for minimum tax credit carryforwards. The CARES Act and the CAA did not have a material effect
on the Company’s consolidated financial statements.
If our global tax methodology is challenged, our tax expense may increase.
As a global business headquartered in the United States, we are required to pay tax in a number of different countries, exposing us to transfer pricing and
other adjustments. Transfer pricing refers to the methodology of allocating revenue and expenses for tax purposes to particular countries. Taxing authorities
may challenge our transfer pricing methodology, which if successful could increase our professional expenses and result in one-time or recurring tax
charges, a higher worldwide effective tax rate, reduced cash flows, and lower overall profitability of our operations.
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Our tax expense could be impacted depending on the applicability of withholding and other taxes including taxes on software licenses and related
intercompany transactions under the tax laws of jurisdictions in which we have business operations. Our future income taxes may fluctuate if there is a
change in the mix of income in the applicable tax jurisdictions in which we operate. We are subject to review and audit by the United States and other
taxing authorities. Any review or audit could increase our professional expenses and, if determined adversely, could result in unexpected costs.
Sales and use, value-added and similar tax laws and rates vary by jurisdiction. Any of these jurisdictions may assert that such taxes are applicable, which
could result in tax assessments, penalties and interest.
New legislation or tax-reform policies that would change U.S. or foreign taxation of international business activities, including uncertainties in the
interpretation and application of the 2017 Tax Cuts and Jobs Act, could materially affect our tax obligations and effective tax rate.
We are subject to income tax in the numerous jurisdictions in which we operate. Reforming the taxation of international businesses has been a priority for
politicians, and a wide variety of potential changes have been proposed. Some proposals, several of which have been enacted, impose incremental taxes on
gross revenue, regardless of profitability. Furthermore, it is reasonable to expect that global taxing authorities will be reviewing current legislation for
potential modifications in reaction to the implementation of the 2017 Tax Cuts and Jobs Act (the “Tax Act”) in the U.S. Due to the large and expanding
scale of our international business activities, any changes in the taxation of such activities may increase our worldwide effective tax rate and the amount of
taxes we pay and seriously harm our business.
In the U.S., the Tax Act enacted on December 22, 2017 significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational
corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we
will apply the law and impact our results of operations in the period issued. It is possible that U.S. tax law will be modified by increasing corporate tax
rates, eliminating, or modifying some of the provisions enacted in the 2017 Tax Act or other changes that could have an adverse effect on us.
The Tax Act requires complex computations not previously provided in U.S. tax law. As such, the application of accounting guidance for such items remain
uncertain. Further, compliance with the Tax Act and the accounting for such provisions requires an accumulation of information not previously required or
regularly produced. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, and as we perform
additional analysis on the application of the law, our effective tax rate could be materially different.
Our business may collect personal information and is subject to data protection laws.
Companies that collect personal information are required to comply with data protection laws adopted by the United States and various state and foreign
jurisdictions, including the European Union General Data Protection Regulation and implementing legislation adopted by member states of the European
Union (“GDPR”), and the United Kingdom Data Protection Act 2018 (the “UK GDPR”). These data protection laws regulate the collection, use, storage,
disclosure and security of personal information, such as names, email addresses, Internet Protocol addresses and other online indentifiers, business contact
data, and customer profiles, that may be used to identify or locate an individual, including a customer or an employee.
Data protection laws and regulations may require us to implement privacy and security policies, permit individuals to access, correct and delete their own
personal information collected, stored or maintained by us, inform individuals of security breaches that affect their personal information, and, in some
cases, obtain individuals’ consent to use or disclose their personal information for certain purposes. Governments could prohibit any personal information
collected in a country from being transferred or disclosed outside of that country. We also may find it necessary or desirable to join industry or other self-
regulatory bodies or other information security, or data protection, related organizations that require compliance with their rules pertaining to information
security and data protection. We may agree to be bound by additional contractual obligations relating to our collection, use and disclosure of personal,
financial and other data. Our failure to comply with these data protection laws or any actual or suspected security incident may result in governmental
actions, fines and non-monetary penalties, or civil actions, which may harm our business.
On January 2, 2020, the California Consumer Privacy Act, or the CCPA, became effective. The CCPA protects the personal information of California
residents, households and devices by placing certain requirements on the regulated businesses that collect, process, store and disclose personal information.
The CCPA also provides for civil penalties for violations, as well as an individual private right of action in connection with data breaches that may result in
more frequent data breach litigation, including class actions. The impact of this legislation is far-reaching and may require us to modify our data processing
practices and policies and incur substantial costs and expenses in an effort to comply. In November 2020, California legislators approved the California
Privacy Rights Act (CPRA”), which substantially amends the CCPA. Among other developments, the CPRA created an entirely new state agency to
enforce the CPRA and other state data privacy and security laws. The CPRA becomes effective in January 2023, but has a 12 month look back so regulated
businesses must be compliant by January 1, 2022. Virginia recently adopted a data protection law which is
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currently scheduled to become effective in 2023. It remains unclear how the regulators, courts or commercial parties will interpret the CCPA, the CPRA or
the Virginia Law. We may also be subject to new comprehensive data protection laws including legislation currently pending in other states including
Washington and New York. We may also from time to time be subject to, or face assertions that we are subject to, additional obligations relating to personal
information by contract or due to assertions that self-regulatory obligations or industry standards apply to our practices. Our failure to comply with any of
these data protection laws self-regulatory obligations or industry standards or any actual or suspected security incident may result in governmental actions,
fines and non-monetary penalties, or civil liability, which may harm our business.
Proposed or new legislation and regulations could significantly affect our business.
The GDPR, which became effective in May 2018, applies to all our business conducted in the European Economic Area (the “EEA”). With Brexit in effect
and the transition period having expired, our business in the United Kingdom is regulated by the U.K. GDPR. The GDPR and the U.K. GDPR (collectively,
the “Regulations”) impose many obligations, and we will need to continue dedicating financial resources and management time to compliance and training
in the coming years. The Regulations require, for example, that regulated entities expand disclosures about how personal data is used, mechanisms for
obtaining consent from data subjects, controls for data subjects with respect to their personal data (including by enabling them to exercise rights to erasure
and data portability), limitations on retention of personal data and mandatory data breach notifications. Additionally, the Regulations place companies
under obligations relating to data transfers and the security of the personal data they process and there are substantial fines and penalties associated with
infringement. For example, the GDPR provides that supervisory authorities in the European Union may impose administrative fines for certain
infringements of the GDPR (up to EUR 20,000,000, or 4% of an undertaking’s total, worldwide, annual revenue, whichever is higher). Individuals who
sustain damages because a regulated entity fails to comply with the GDPR have the right to seek compensation from such entity directly. Compliance with
the Regulations and continued monitoring and training will require significant expenditure of resources on an ongoing basis, and there can be no assurance
that the measures we have taken for the purposes of compliance will be successful in preventing infringements thereof. Given the potential fines, liabilities
and damage to our reputation in the event of an actual or perceived infringement of the Regulations, such an infringement may have an adverse effect on
our business and operations.
As the number of jurisdictions with data privacy regulations increase and our global footprint expands, it may be necessary for us to increase the amount
we expend on compliance and training in this area.
Risks related to ownership of our Class A common stock
An active public trading market for our Class A common stock may not be sustained.
Prior to our initial public offering in the fourth quarter of 2017, there had been no public market or active private market for trading shares of our Class A
common stock. Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “ALTR.” However, we cannot assure you that
an active trading market will be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a
price that you consider reasonable. The lack of an active market may also reduce the price of shares of Class A common stock. An inactive market may
impair our ability to raise capital by selling shares and our ability to use our capital stock to acquire other companies or technologies. We cannot predict the
prices at which our Class A common stock will trade.
The market price of our Class A common stock can be volatile.
The market price of our Class A common stock has and may continue to fluctuate from time to time. Our market price may continue to fluctuate
substantially depending on a number of factors, many of which are beyond our control and may not be related to our operating performance. These
fluctuations could cause you to lose all or part of your investment in our Class A common stock, since you might not be able to sell your shares at or above
the price you paid for our Class A common stock. Factors that could cause fluctuations in the market price of our Class A common stock include the
following:
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price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;
volatility in the market prices and trading volumes of technology stocks;
changes in operating performance and stock market valuations of other technology companies generally, or those in our industries in
particular;
the volume of shares of our Class A common stock available for public sale;
sales of shares of our Class A common stock;
additional shares of our Class A common stock being sold into the market by our existing stockholders, or the anticipation of such sales,
including sales of our Class A common stock upon exercise of outstanding options or upon conversion of our Class B common stock into
shares of Class A common stock;
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failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure
to meet these estimates or the expectations of investors;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
announcements by us or our competitors of new software or new or terminated significant contracts, commercial relationships or capital
commitments;
public analyst or investor reaction to our press releases, other public announcements and filings with the SEC;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes or fluctuations in our operating results;
actual or anticipated developments in our business, our customers’ businesses, or our competitors’ businesses or the competitive landscape
generally;
litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
developments or disputes concerning our intellectual property or our solutions, or third party proprietary rights;
announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations or principles;
any major changes in our management or our board of directors;
general economic conditions and slow or negative growth of our markets; and
other events or factors, including those resulting from major weather events, war, potential global health issues, incidents of terrorism or
responses to these events.
In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may affect the
market price of our Class A common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market
and the market prices of a particular company’s securities, securities class action litigation has often been instituted against that company. We may become
the target of this type of litigation in the future. Securities litigation, if instituted against us, could result in substantial costs and divert our management’s
attention and resources from our business.
We do not intend to pay dividends in the foreseeable future. As a result, your ability to achieve a return on your investment will depend on appreciation
in the price of our Class A common stock.
We have never declared or paid any cash dividends on our Class A common stock. We currently intend to retain all available funds and any future earnings
for use in the operation of our business and do not anticipate paying any dividends on our Class A common stock in the foreseeable future. Any
determination to pay dividends in the future will be at the discretion of our board of directors. Consequently, your only opportunity to achieve a return on
your investment in our company will be if the market price of our Class A common stock appreciates and you sell your shares at a profit. There is no
guarantee that the price of our Class A common stock that will prevail in the market will ever exceed the price that you paid.
If we fail to maintain effective internal controls, we may not be able to report financial results accurately or on a timely basis, or to detect fraud, which
could have a material adverse effect on our business or share price.
Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent financial
fraud. Pursuant to SOX, we are required to periodically evaluate the effectiveness of the design and operation of our internal controls. Internal controls over
financial reporting may not prevent or detect misstatements because of inherent limitations, including the possibility of human error or collusion, the
circumvention or overriding of controls, or fraud. If we fail to maintain an effective system of internal controls, our business and operating results could be
harmed, and we could fail to meet our reporting obligations, which could have a material adverse effect on our business and our share price.
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As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls.
Section 404 of SOX requires annual management assessments of the effectiveness of our internal controls over financial reporting. We have designed,
implemented and tested the internal control over financial reporting required to comply with this obligation, which was and is time consuming, costly, and
complicated. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In the
past, we have identified material weaknesses in our controls which we subsequently remediated. We cannot assure investors that we will not have material
weaknesses in the future. If we identify material weaknesses in our internal control over financial reporting in the future or if we are unable to successfully
remediate the identified material weaknesses or, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our
internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market
price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our
securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
We cannot predict the impact our capital structure may have on our stock price.
In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not be
eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for these stock indices. Additionally, FTSE
Russell, another provider of widely followed stock indices, has stated that it plans to require new constituents of its indices to have at least five percent of
their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such
indices, and these funds would be unable to purchase our Class A common stock. We cannot assure you that other stock indices will not take a similar
approach to S&P Dow Jones or FTSE Russell in the future. Given the sustained flow of investment funds into passive strategies that seek to track certain
indexes, exclusion from indices could make our Class A common stock less attractive to investors. As a result, the market price of our Class A common
stock could be adversely affected.
If financial or industry analysts do not publish research or reports about our business or if they issue inaccurate or unfavorable commentary or
downgrade our Class A common stock, our stock price and trading volume could decline.
The trading market for our Class A common stock may be influenced by the research and reports that industry or financial analysts publish about us or our
business. We do not control these analysts, or the content and opinions included in their reports. As a relatively new public company, we may be slow to
attract research coverage, and the analysts who publish information about our Class A common stock still have relatively little experience with our
company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. If any of the analysts
who cover us issue an inaccurate or unfavorable opinion regarding our stock price, our stock price would likely decline. In addition, the stock prices of
many companies in the technology industry have declined significantly after those companies have failed to meet, or often times failed to exceed, the
financial guidance publicly announced by the companies or the expectations of analysts. If our financial results fail to meet, or fail to significantly exceed,
our announced guidance or the expectations of analysts or public investors, analysts could downgrade our Class A common stock or publish unfavorable
research about us. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or trading volume to decline.
Future sales of substantial amounts of our Class A common stock may cause our stock price to decline.
Future sales of a substantial number of shares of our Class A common stock, particularly sales by our directors, executive officers and significant
stockholders could adversely affect the market price of our Class A common stock and may make it more difficult to sell Class A common stock at a time
and price that you deem appropriate. As of December 31, 2020, we had an aggregate of 44,215,900 shares of Class A common stock and 30,110,732 shares
of Class B common stock outstanding.
All of the shares of Class A common stock sold in our initial public offering and June 2018 follow-on public offering are freely tradable without restrictions
or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule
144 under the Securities Act.
Shares held by directors, executive officers and other affiliates are subject to volume limitations under Rule 144 under the Securities Act and various
vesting agreements.
We have registered the offer and sale of an aggregate of approximately 22,132,893 shares of Class A common stock that have been issued or reserved for
future issuance under our equity compensation plans on a Form S-8 registration statement. These shares can be freely sold in the public market upon
issuance, unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act. Additionally, the number of shares of Class A
common stock available for grant and issuance under our 2017 Equity Incentive Plan is subject to an automatic annual increase on January 1 of each year
beginning in 2018 by an amount equal to the lesser of (i) 3% of the number of shares of all classes of our common stock outstanding on December 31 of
the preceding calendar year or (ii) a lesser number of shares of Class A common stock determined by our board of directors. We also intend to register the
offer and sale of any
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shares of Class A common stock resulting from such increases. If the holders of these shares choose to sell a large number of shares, they could adversely
affect the market price for our Class A common stock.
We may also issue shares of our Class A common stock or securities convertible into shares of our Class A common stock from time to time in connection
with a financing, acquisition, investment or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the
trading price of our Class A common stock to decline.
The dual class structure of our common stock has the effect of concentrating voting control with certain stockholders who hold shares of our Class B
common stock, including our founders, certain of our directors and executive officers and affiliates, who hold in the aggregate approximately 87% of
the voting power of our capital stock. This will limit or preclude your ability to influence corporate matters, including the election of directors,
amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate
transaction requiring stockholder approval.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. Our Class B stockholders, including our
founders, certain of our directors and executive officers, and affiliates, hold, in the aggregate approximately 87% of the voting power of our capital stock.
The ten-to-one voting ratio between our Class B and Class A common stock, results in the holders of our Class B common stock collectively controlling a
majority of the combined voting power of our common stock and therefore being able to control all matters submitted to our stockholders for approval until
2029, or upon the occurrence of a triggering event at which time all shares of our Class B common stock will automatically convert into shares of our
Class A common stock, or on an earlier date, as set forth in our Delaware certificate of incorporation.
This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors,
amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate
transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that
you may feel are in your best interest as one of our stockholders.
Future transfers by holders of our Class B common stock will generally result in those shares converting to Class A common stock, subject to the specific
exceptions set forth in our Delaware certificate of incorporation, such as certain transfers effected for estate planning purposes and between or among our
founders. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of
those holders of Class B common stock who retain their shares in the long-term.
Certain provisions in our charter documents and Delaware law could prevent an acquisition of our company, limit attempts by our stockholders to
replace or remove members of our board of directors or current management and may adversely affect the market price of our Class A common stock.
Our Delaware certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company that stockholders
may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also
prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:
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providing for a dual class common stock structure for 12 years following the completion of our IPO;
providing for a classified board of directors with staggered three-year terms, which could delay the ability of stockholders to change the
membership of a majority of our board of directors;
authorizing our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including
preferences and voting rights, without stockholder approval;
the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, our chief executive
officer, our president, or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a
proposal or to take action, including the removal of directors;
requiring the affirmative vote of holders of at least 66 2 / 3 % of the voting power of all of the then outstanding shares of the voting stock,
voting together as a single class, to adopt, amend, or repeal provisions of (i) our certificate of incorporation relating to the issuance of
preferred stock without stockholder approval, voting rights of our Class A common stock and our Class B common stock, and management of
our business, and (ii) our bylaws relating to the ability of stockholders to call a special meeting and amending our bylaws in their entirety,
which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;
the ability of our board of directors, by majority vote, to amend our bylaws, which may allow our board of directors to take additional actions
to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and
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requiring advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose
matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of
proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large
stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.
These and other provisions in our certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the
price that investors might be willing to pay for shares of our Class A common stock in the future and result in the market price being lower than it would be
without these provisions.
Risks Related to Our Indebtedness
Our 0.250% Convertible Senior Notes due 2024, or the Convertible Notes, are effectively subordinated to our secured debt and any liabilities of our
subsidiaries.
The Convertible Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Convertible
Notes; equal in right of payment to any of our liabilities that are not so subordinated; effectively junior in right of payment to any of our secured
indebtedness (including all amounts outstanding under our revolving credit facility) to the extent of the value of the assets securing such indebtedness; and
structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation,
reorganization or other winding up, our assets that secure debt ranking senior or equal in right of payment to the Convertible Notes (including all amounts
outstanding under our revolving credit facility) will be available to pay obligations on the Convertible Notes only after the secured debt has been repaid in
full from these assets, and the assets of our subsidiaries will be available to pay obligations on the Convertible Notes only after all claims senior to the
Convertible Notes have been repaid in full. There may not be sufficient assets remaining to pay amounts due on any or all of the Convertible Notes then
outstanding. The indenture governing the Convertible Notes will not prohibit us from incurring additional senior debt or secured debt, nor does it prohibit
any of our subsidiaries from incurring additional liabilities.
The Convertible Notes are our obligations only and a substantial portion of our operations are conducted through, and a substantial portion of our
consolidated assets are held by, our subsidiaries.
The Convertible Notes are our obligations exclusively and are not guaranteed by any of our operating subsidiaries. A substantial portion of our operations
is conducted through, and a substantial portion of our consolidated assets is held by, our subsidiaries. Accordingly, our ability to service our debt, including
the Convertible Notes, depends in part on the results of operations of our subsidiaries and upon the ability of such subsidiaries to provide us with cash,
whether in the form of dividends, loans or otherwise, to pay amounts due on our obligations, including the Convertible Notes. Our subsidiaries are separate
and distinct legal entities and have no obligation, contingent or otherwise, to make payments on the Convertible Notes or to make any funds available for
that purpose. In addition, dividends, loans or other distributions to us from such subsidiaries may be subject to contractual and other restrictions and are
subject to other business considerations.
Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our future indebtedness, including the amounts payable under
our revolving credit facility and the Convertible Notes, depends on our future performance, which is subject to economic, financial, competitive and other
factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make
necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets,
restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will
depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities
on desirable terms, which could result in a default on our debt obligations. In addition, any of our future debt agreements may contain restrictive covenants
that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not
cured or waived, could result in the acceleration of our debt.
We may still incur substantially more debt or take other actions which would intensify the risks discussed above.
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We and our subsidiaries may be able to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of
which may be secured debt. We will not be restricted under the terms of the indenture governing the Convertible Notes from incurring additional debt,
securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing the
Convertible Notes that could have the effect of diminishing our ability to make payments on the Convertible Notes when due. Our existing revolving credit
facility restricts our ability to incur additional indebtedness, including secured indebtedness, but if the facility matures or is repaid, we may not be subject
to such restrictions under the terms of any subsequent indebtedness.
We may not have the ability to raise the funds necessary to settle conversions of the Convertible Notes in cash or to repurchase the Convertible Notes
upon a fundamental change, and our current debt contains, and our future debt may contain, limitations on our ability to pay cash upon conversion or
repurchase of the Convertible Notes.
Holders of the Convertible Notes will have the right to require us to repurchase their Convertible Notes upon the occurrence of a fundamental change at a
defined repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. In
addition, upon conversion of the Convertible Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion (other
than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Notes being converted.
However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes
surrendered therefor or Convertible Notes being converted.
In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversions of the Convertible Notes may be limited by law, by regulatory
authority or by agreements governing our indebtedness including our existing revolving credit facility. Our failure to repurchase Convertible Notes at a
time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Convertible Notes as required by the
indenture would constitute a default under the indenture. A default under the indenture or the occurrence of a fundamental change itself would likely also
lead to a default under our revolving credit facility and may lead to a default under agreements governing our future indebtedness. If the repayment of the
related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and
repurchase the Convertible Notes or make cash payments upon conversions thereof.
Our revolving credit facility limits our ability to pay any cash amount upon the conversion or repurchase of the Convertible Notes.
Our existing revolving credit facility prohibits us from making any cash payments on the conversion or repurchase of the Convertible Notes if a default
under such credit facility exists or would be created thereby. In addition, our ability to make cash payments on the conversion or repurchase of the
Convertible Notes will be limited to the extent we do not satisfy certain financial covenant tests after giving effect to such payments. Any new credit
facility that we may enter into may have similar restrictions. Our failure to make cash payments upon the conversion or repurchase of the Convertible
Notes as required under the terms of the Convertible Notes would permit holders of the Convertible Notes to accelerate our obligations under the
Convertible Notes.
Our loan agreements contain operating and financial covenants that may restrict our business and financing activities.
Our credit agreement, as amended, provides for an initial aggregate commitment amount of $150 million, with a sublimit for the issuance of letters of credit
of up to $5 million and a sublimit for swing line loans of up to $5 million and matures on December 15, 2023 (the “2019 Amended Credit Agreement”).
Our 2019 Amended Credit Agreement is unconditionally guaranteed by us and all existing and subsequently acquired controlled domestic subsidiaries. It is
also collateralized by a first priority, perfected security interest in, and mortgages on, substantially all of our tangible assets. The 2019 Amended Credit
Agreement contains operating financial restrictions and covenants, including liens, limitations on indebtedness, fundamental changes, limitations on
guarantees, limitations on sales of assets and sales of receivables, dividends, distributions and other restricted payments, transactions with affiliates,
prepayment of indebtedness and limitations on loans and investments in each case subject to certain exceptions. In addition, the 2019 Amended Credit
Agreement contains financial covenants relating to maintaining a minimum interest coverage ratio of 3.0 to 1.0, a maximum senior secured leverage ratio
of 3.0 to 1.0, and maximum net leverage ratio of 5.0 to 1.0, as defined in the 2019 Amended Credit Agreement. The restrictions and covenants in the 2019
Amended Credit Agreement, as well as those contained in any future debt financing agreements that we may enter into, may restrict our ability to finance
our operations and engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants and restrictions
may be affected by events beyond our control, and breaches of these covenants and restrictions could result in a default under the loan agreement and any
future financing agreements that we may enter into.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
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In the event the conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the
Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to
satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional
share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
In addition, even if holders of the Convertible Notes do not elect to convert their Convertible Notes, we could be required under applicable accounting rules
to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a
material reduction of our net working capital.
If the last reported sale price of our Class A Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive
trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion
price on each applicable trading day, our Convertible Notes will be convertible in the next calendar quarter (the “Sale Price Condition”). At present, the
conversion price is approximately $46.50; 130% of such price is approximately $60.45. The closing sale price of our Class A common stock has met or
exceeded $60.45 during the current or future calendar quarters, although we cannot presently determine whether the Sale Price Condition will be satisfied
with respect to the current calendar quarter. If the Sale Price Condition is satisfied during the current or future calendar quarters, our Convertible Notes will
be convertible during the succeeding calendar quarter.
The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our
reported financial results.
Under Financial Accounting Standards Board Accounting Standards Codification 470-20, Debt with Conversion and Other Options (“ASC 470-20”), an
entity must separately account for the liability and equity components of the convertible debt instruments (such as the Convertible Notes) that may be
settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the
accounting for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity
on our consolidated balance sheet, and the value of the equity component would be treated as debt discount for purposes of accounting for the debt
component of the Convertible Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented
as a result of the amortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible Notes. We
will report larger net losses (or lower net income) in our financial results because ASC 470-20 will require interest to include both the current period’s
amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading
price of our Class A common stock and the trading price of the Convertible Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash are
currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Convertible Notes are not
included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds their principal
amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of Class A
common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. As our stock price increases, the
number of shares of Class A common stock used in the computation of fully diluted earnings per share also increases, which will adversely affect our
diluted earnings per share.
In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-06, ASC Subtopic 470-20, Debt — Debt
with Conversion and Other Options and Accounting Standards Codification subtopic 815-40, Hedging — Contracts in Entity's Own Equity, that change the
accounting for the convertible debt instruments. Under the new standard, an entity may no longer separately account for the liability and equity components
of convertible debt instruments. Additionally, the guidance eliminates the treasury stock method to calculate diluted earnings per share for convertible debt
instruments and requires the use of the “if converted” method. Application of the “if converted” method may negatively affect our diluted earnings per
share. The standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years and early adoption is
permitted.
Transactions relating to the Convertible Notes may affect the value of our Class A common stock.
The conversion of some or all of the Convertible Notes would dilute the ownership interests of existing stockholders to the extent we satisfy our conversion
obligation by delivering shares of our Class A common stock upon any conversion of the Convertible Notes. If holders of our Convertible Notes elect to
convert their notes, we may settle our conversion obligation by delivering to them a significant number of shares of our Class A common stock, which
would cause dilution to our existing stockholders.
General Risk Factors
If we are unable to attract and retain key personnel, we may be unable to achieve our business objectives.
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Our business is dependent on our ability to attract and retain highly skilled software engineers, data scientists, salespeople, and support teams. There is
significant industry competition for these individuals. We have many employees whose equity awards in our company are fully vested and may increase
their personal wealth, which could affect their decision to remain with the Company. Failure to attract or retain key personnel could delay or prevent the
achievement of our business objectives.
We may require additional capital to support our business, which may not be available on acceptable terms.
We expect to continue to make investments in our business, which may require us to raise additional funds. We may raise these funds through either equity
or debt financings. Issuances of equity or convertible debt securities may significantly dilute stockholders and any new equity securities could have rights,
preferences and privileges superior to those holders of our Class A common stock. In addition to the restrictions under our current credit agreement, any
future debt financings could contain restrictive covenants relating to our capital raising activities and other financial and operational matters, which may
make it more difficult for us to obtain additional capital, manage our business and pursue business opportunities, including potential acquisitions.
We may not be able to obtain additional financing on terms favorable to us. If we are unable to obtain adequate financing or financing on terms satisfactory
to us when we require it, our ability to continue to support our growth, develop new software or add capabilities and enhancements to our existing software
and respond to business challenges could be significantly impaired, and our business may be adversely affected.
The estimates of market opportunity and forecasts of market growth included in our periodic reports or other public disclosures may prove to be
inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts included in our periodic reports or other public disclosures, including those we have generated
ourselves, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Even if the market in which
we compete meets the size estimates and growth forecasted in our periodic reports or other public disclosures, our business could fail to grow for a variety
of reasons, which would adversely affect our results of operations.
Business interruptions could adversely affect our business.
Our operations and our customers are vulnerable to interruptions by fire, flood, earthquake, power loss, telecommunications failure, terrorist attacks, wars,
pandemics, environmental and climate change, and other events beyond our control. A catastrophic event that results in the destruction of any of our critical
business or information technology systems could severely affect our ability to conduct normal business operations, including system interruptions,
reputational harm, delays in our software development, breaches of data security and loss of critical data.
We rely on our network and third-party infrastructure and applications, internal technology systems, and our websites for our development, marketing,
operational support, hosted services and sales activities. If these systems were to fail or be negatively impacted as a result of a natural disaster or other
event, our ability to deliver software and training to our customers could be impaired.
Our business interruption insurance may not be sufficient to compensate us fully for losses or damages that may occur as a result of these events, if at all.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
GAAP are subject to interpretation by the Financial Accounting Standards Board, or FASB, the United States Securities and Exchange Commission, or the
SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a
significant effect on our reported financial results for periods prior and subsequent to such change. The adoption of new standards may require
enhancements or changes in our systems and will continue to require significant time and effort of our financial management team.
We cannot predict the impact of all of the future changes to accounting principles or our accounting policies on our consolidated financial statements going
forward, which could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the
announcement of the change. In addition, if we were to change our critical accounting estimates, including those related to the recognition of license
revenue and other revenue sources, our operating results could be significantly affected.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Our corporate headquarters are located in Troy, Michigan. We own our corporate headquarters facility, a building in Korea, and an undeveloped parcel of
land adjacent to our headquarters, which we may develop over the next few years.
We lease or sublease all of our other domestic and international offices. We expect to add facilities as we grow our employee base and expand
geographically. We do not manage our facilities by segment because they may be used for multiple purposes, such as administration, sales, and
development. We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable additional space
will be available to accommodate expansion of our operations.
Item 3. Legal Proceedings
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We have received, and may in the future continue
to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to
defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third party proprietary rights, or to establish and
enforce our proprietary rights. The results of any current or future litigation cannot be predicted with certainty and regardless of the outcome, litigation can
have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Swedish Tax Litigation
The Swedish Tax Authorities, or STA, assessed tax (net of utilization of tax attributes) penalties and interest in the amount of $6.2 million related to the
acquisition of Panopticon AB by Datawatch Corporation, in 2013 for the years 2013, 2014 and 2015. The STA, upon auditing the acquisition transaction,
reached a conclusion that post acquisition, certain assets were removed from Sweden, triggering the tax obligation. The STA is also of the opinion that
some services related to product development provided to the new parent company in the U.S. were performed by Panopticon AB at a price below market
price triggering tax obligations. Datawatch contested the findings by the STA throughout the audit process including contesting the STA position in the first
level of administrative courts. On May 29, 2019, the Administrative Court issued its ruling in favor of Datawatch AB. On July 4, 2019, the STA filed an
appeal of the Administrative Court ruling with the Administrative Court of Appeals in Stockholm, effectively continuing to assert that the assessments are
in fact appropriate. After relevant submissions by the Company and the STA, the Court of Appeals held a hearing on February 20, 2020.
On March 27, 2020, the Court of Appeals issued its finding in favor of the STA. Pursuant to requirements in Sweden, the Company paid the assessed tax,
penalties and interest on April 24, 2020. The Company, in accordance with its right to appeal the ruling to the Administrative Supreme Court of Sweden,
filed an appeal of the Court of Appeals ruling citing specific grounds for reconsideration. On November 4, 2020, the Supreme Administrative Court issued
a decision that they would not grant leave to appeal, effectively eliminating any further appeal rights in this matter.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our Class A common stock began trading on the Nasdaq Global Select Market under the symbol “ALTR” on November 1, 2017. Prior to that date, there
was no public trading market for our Class A common stock.
PART II
Our Class B common stock is not listed nor traded on any stock exchange.
Holders
As of February 15, 2021, there were 35 registered stockholders of our Class A common stock and 4 registered stockholders of our Class B common stock.
We are unable to estimate the total number of stockholders because many of our shares of Class A common stock are held by brokers, banks or other
institutions on behalf of stockholders.
Dividends
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. The terms of our 2019
Amended Credit Agreement also restrict our ability to pay dividends, and we may also enter into credit agreements or other borrowing arrangements in the
future that will restrict our ability to declare or pay cash dividends on our capital stock. Any future determination regarding the declaration and payment of
dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating
results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant. There can be no
assurance that any dividends will be paid in the future.
Unregistered Sales of Equity Securities
On September 9, 2020, and November 23, 2020, in connection with the acquisition of Ellexus, the Company issued to shareholders of Ellexus an aggregate
of 41,210 shares of the Company’s Class A Common Stock, par value $0.0001 per share. All shares were issued without registration under the Securities
Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act. Ellexus’s existing stockholders provided customary
representations for a private placement of securities and agreed to customary restrictions on transferability.
On October 7, 2020, in connection with the acquisition of M-Base, the Company issued to shareholders of M-Base an aggregate of 30,000 shares of the
Company’s Class A Common Stock, par value $0.0001 per share. All shares were issued without registration under the Securities Act, pursuant to Section
4(a)(2) of the Securities Act. M-Base’s existing stockholders provided customary representations for a private placement of securities and agreed to
customary restrictions on transferability.
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Performance Graph
The following shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference
into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act .
The graph below compares the cumulative total stockholder return on our Class A common stock with the cumulative total return on the Nasdaq Composite
Index and the Nasdaq Computer Index. The graph assumes $100 was invested at the market close on November 1, 2017, which was our initial trading day,
in our Class A common stock, the Nasdaq Composite Index and the Nasdaq Computer Index.
Data for the Nasdaq Composite Index and the Nasdaq Computer Index assumes reinvestment of dividends. The offering price of our Class A common stock
in our IPO, which had a closing stock price of $18.31, was $13.00 per share.
The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our Class A
common stock.
Item 6. Selected Financial Data
Not applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated
financial statements (and notes thereto) for the year ended December 31, 2020 included elsewhere in this Annual Report on Form 10-K. This discussion
contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors
that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk factors” and
“Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K.
Overview
We are a global technology company providing software and cloud solutions in the areas of simulation, high-performance computing (“HPC”), data
analytics, and artificial intelligence (“AI”). We enable organizations across broad industry segments to compete more effectively in a connected world
while creating a more sustainable future.
Our simulation and AI-driven approach to innovation is powered by our broad portfolio of high-fidelity and high-performance physics solvers, our market-
leading technology for optimization and HPC, and our end-to-end platform for developing AI and Internet of Things (“IoT”) solutions. Our integrated suite
of software optimizes design performance across multiple disciplines encompassing structures, motion, fluids, thermal, electromagnetics, system modeling,
and embedded systems, while also providing AI solutions and true-to-life visualization and rendering. Our HPC solutions maximize the efficient utilization
of complex compute resources and streamline the workflow management of compute-intensive tasks for applications including AI, modeling and
simulation, and visualization. Our data analytics, AI and IoT products include data preparation, data science, MLOps, orchestration, and visualization
solutions that fuel engineering, scientific, and business decisions.
Altair’s software products represent a comprehensive, open architecture solution for simulation, HPC, data analytics, and AI to empower decision making
for improved product design and development, manufacturing, energy management and exploration, financial services, health care, and retail operations.
We believe Altair’s solutions are compelling due to their openness and usability.
Altair’s products offer a comprehensive set of technologies to design and optimize high-performance, efficient, innovative and sustainable products and
processes in an increasingly connected world. Our products are categorized by:
•
•
•
Physics Simulation and Concept Design;
High Performance and Cloud Computing; and
Data Analytics, AI, IoT and Smart Product Development.
Altair also provides Client Engineering Services, or CES, to support our customers with long-term ongoing expertise. This has the benefit of embedding us
within customers, deepening our understanding of their processes, and allowing us to more quickly perceive trends in the overall market. Our presence at
our customers’ sites helps us to better tailor our software products’ research and development, or R&D, and sales initiatives.
Licensing
There are two licensing methods we employ to deliver our software solutions:
• Most products are available under our unique, patented units-based licensing model known as Altair Units.
•
A small subset of our products is available on a node-locked, or hardware specific, and named-user basis. This is especially true for our data
analytics solutions.
Altair pioneered a patented units-based subscription licensing model for software and other digital content. This units-based subscription licensing model
allows flexible and shared access to our offerings, along with over 150 partner products. Our customers license a pool of units for their organizations giving
individual users access to our entire portfolio of software applications as well as our growing portfolio of partner products. We believe our units-based
subscription licensing model lowers barriers to adoption, creates broad engagement, encourages users to work within our ecosystem, and increases revenue.
This, in turn, helps drive our recurring software license rate which has been on average approximately 89% over the past five years. Each year
approximately 60% of new software revenue comes from expansion within existing customers.
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Recent Business Developments
Impact of COVID-19
In March 2020, The World Health Organization declared the outbreak of COVID-19, a pandemic and a public health emergency of international concern.
The global spread of COVID-19 has created significant volatility and uncertainty. Such conditions are expected to continue. To limit the spread of COVID-
19, governments have taken various actions, from time to time, including the issuance of travel restrictions, complete or partial prohibitions of non-
essential activities, restrictions or shutdowns of non-essential businesses, stay-at-home orders and social distancing guidelines. Some of these actions have
varied from initial responses, pivoting between full or complete to partial or limited restrictions depending upon local or regional conditions. Accordingly,
many businesses have adjusted to these actions by reducing or suspending operating or other activities. This has negatively impacted several of the markets
we serve, including the automotive and aerospace markets.
The ensuing discussion is provided to summarize the impacts of COVID-19 upon the Company, inclusive of some of the principal measures undertaken by
the Company to date to respond to the pandemic. It is difficult to predict with any level of precision the broad effects of COVID-19 on specific industries or
individual companies. Locally or regionally imposed restrictions in concert with the duration of pandemic conditions, along with the development and
distribution of vaccines, may create disparate impacts across the globe, including the primary countries or regions in which the Company and its customers
operate.
The uncertain impact from the rapidly changing market and economic conditions due to COVID-19 has disrupted the business of many of our customers
and partners. These disruptions have had an adverse effect on our business and consolidated results of operations and could impact our financial condition
in the future. For example, a negative impact on our customers may cause them to delay entering into new or expanded software licenses, request extended
payment terms, delayed invoicing, higher discounts, lower renewal amounts or cancelations, and a reduction in demand for software related and client
engineering services. These actions could have a negative impact on our financial results and liquidity. While adjustments to costs in previous periods have
been undertaken to mitigate the potential loss of revenue, including through the reduction in use of outside contractors and furloughing those employees
associated with client engineering services for whom their associated customer contracts were interrupted or terminated, we believe that it is important on a
long term basis to retain much of the deeply technical and specialized engineering resources typically engaged in providing software related services.
We have adopted several measures in response to COVID-19 adhering to local and regional restrictions, including instructing employees to work from
home, adjusting our expenses and cash flow to correlate with potential declines in billings and cash collections from customers, shifting certain of our
customer events to online-only webcasts and restricting non-critical business travel by our employees. Historically, a portion of field sales, professional
services and other activities were conducted in person. Currently, because of travel restrictions related to COVID-19, substantially all of our sales,
professional services and other activities are being conducted virtually. We have developed contingency plans to reduce costs further if the current situation
changes. We continue to actively monitor business conditions and government mandates related to COVID-19 and may take further actions that alter our
business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers,
suppliers and shareholders.
Throughout this period, our response is focused on maintaining the health and safety of our employees, customers, and partners. We are committed to, and
we believe we are capable of continuing to provide the same excellent level of service and technical support for our customers during these uncertain times.
Our team is comfortable and highly experienced with remote collaboration, as it is a normal part of our global culture. During this crisis, customers
working remotely can move their existing licenses from their on-premise servers to servers utilizing hosted Altair Units, or request temporary term-based
software licenses for increased productivity and security. We are also providing access to an increased number of online training, marketing and sales
resources.
We have converted our business to being capable of operating nearly 100% “virtual” as required or recommended under COVID-19 restrictions, leveraging
our global technology infrastructure. While we are capable of sustained operations primarily in a virtual environment, we expect that we will gradually
resume normalized operations, when permitted, based on local conditions and restrictions, with the primary focus of preserving employee welfare, while
continuing to support customers. We have undertaken certain measures to manage operating expenses given the uncertainties with the COVID-19
environment. Previously, we introduced temporary wage reductions, or other measures, in accordance with local labor laws and regulations, to reduce near
term compensation costs. These adjustments, which were beneficial during the period of heightened uncertainty early in COVID-19, have been rolled back,
such that effective October 2020, the temporary wage reductions have been rescinded. We have, where possible, negotiated reductions in costs for
consultants, professional and advisory fees, and other costs. Given global travel restrictions, we have substantially reduced expenses for travel related costs
while many sales and marketing activities have reverted to being virtualized, further reducing certain expenditures on a net basis.
COVID-19 restrictions have begun to ease in certain jurisdictions, and we have been able to re-open offices in certain countries. However, certain
jurisdictions that eased restrictions have subsequently heightened their restrictions. We have taken proactive steps to protect the health and safety of our
employees, customers, and partners, preparing our offices for a safe return in compliance with
43
local and regional regulations and requirements and enacting rigorous safety measures, including employee training and self-monitoring for symptoms of
COVID-19. Adhering to local and regional requirements, these measures include a combination of the taking of all employee temperatures upon reporting
to work, encouraging employees to continue to work from home, implementing social distancing protocols, maintaining suspension of travel, instituting
facility protocols and cleaning guidelines, establishing hand sanitizer stations, disinfecting workspaces, and requiring the wearing of masks with respect to
those employees who must be physically present in their workplace. In the event an employee contracts the virus or tests positive for COVID-19, we have
mandated quarantining and have instructed employees not to return to work until such time that they have been cleared to do so. We expect to continue to
practice these measures until we determine that COVID-19 is adequately contained for purposes of our business, and we may take further actions as
government authorities require or recommend or as we determine to be in the best interests of our employees, customers, and partners.
We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. The value of the U.S.
dollar has fluctuated in comparison to certain foreign currencies, including in Europe, driven in part by COVID-19 events and news. Since we have
substantial international operations that arise from our normal business operations, our financial results in 2021 may be impacted by COVID-19 driven
variations in foreign currency exchange rates, apart from the traditional elements that underlie foreign currency exchange rate changes.
We have performed an assessment of certain tangible and intangible assets to determine whether events or changes in circumstances caused by the COVID-
19 pandemic resulted in indicators of impairment as of December 31, 2020. Based on present expectations, we determined that it is not more likely than not
that indicators of impairment existed as of December 31, 2020. Notwithstanding this conclusion, if business conditions were to deteriorate in a significant
manner or for an extended duration within our customer base, the likelihood of impairment would increase, and we would again assess whether events or
changes in circumstances indicate that an asset impairment that is more likely than not exists. Specifically, certain non-amortizing intangible assets from
recent acquisitions valued on the basis of short-term forecasts of revenue will be re-assessed for indicators of impairment and it is possible that an
impairment charge will be reflected in the future should COVID-19 business conditions worsen or extend substantially in duration.
As reflected in our period to period analysis below, we believe the emergence of COVID-19 has negatively affected our results of operations. COVID-19’s
impact on some of our customers has primarily contributed to the decrease in revenue for software related and client engineering services. Our software
product revenue has been affected by elongated sales cycles, greater challenges in securing renewals, as well as new and expansion business. While we
continue to robustly engage with our customers, primarily virtually, to mitigate the uncertain extent of the negative impact of COVID-19 on our customers,
our ability to attract, serve, retain, or expand customers will continue to be uncertain. Existing and potential customers may choose to reduce or delay
technology spending in response to COVID-19, or attempt to renegotiate contracts and obtain concessions, which may materially and negatively impact our
operating results, financial condition and prospects. In certain cases, we provided longer than normal payment terms to certain of our customers; however,
the terms are less than one year, and we do not expect this to materially affect our consolidated financial statements. We are unable to accurately predict the
full impact that COVID-19 will have due to numerous uncertainties, including the full scope of the disease, the duration of the outbreak, the number and
intensity of subsequent waves of infections, actions that may be taken by governmental authorities, the impact to the businesses of our customers and
partners, the development of treatments and vaccines, and other factors identified in Part I, Item 1A – Risk Factors included elsewhere in this Annual
Report on Form 10-K. Even after the COVID-19 pandemic subsides, we may experience material adverse impacts to our business as a result of any
economic recession or depression that has occurred or may occur in the future. We will continue to evaluate the nature and extent of the impact to our
business, consolidated results of operations, and financial condition.
Business combinations
In September 2020, we acquired all of the outstanding capital stock and equity interests of Univa Corporation (“Univa”) for a preliminary purchase price of
$30.2 million, subject to certain adjustments. Univa is headquartered in Chicago, with offices in Canada and Germany. The financial results of Univa have
been included in the Company’s consolidated financial statements since the acquisition date. Univa is a leading innovator in enterprise-grade workload
management, scheduling, and optimization solutions for HPC and artificial intelligence (AI) on-premises and in the cloud. Univa’s technology
complements Altair’s HPC and data analytics solutions and enables the Company to further expand into life sciences and financial services.
During the year ended December 31, 2020, the Company completed other business acquisitions that were individually insignificant to the Company’s
consolidated financial statements. The aggregate purchase price of these other acquisitions was $16.9 million and was allocated to assets acquired and
liabilities assumed at their estimated fair values.
We believe that our recent acquisitions result in certain benefits, including expanding our portfolio of software and products and enabling us to better serve
our customer’s requests for data analytics and simulation technology. However, to realize some of these anticipated benefits, the acquired businesses must
be successfully integrated. The success of these acquisitions will depend in part on our ability to realize these anticipated benefits. We may fail to realize
the anticipated benefits of these acquisitions for a variety of reasons.
44
Factors affecting our performance
We believe that our future success will depend on many factors, including those described below. While these areas present significant opportunity, they
also present risks that we must manage to achieve successful results. If we are unable to address these challenges, our business, operating results and
prospects could be harmed. See Part I, Item 1A. – Risk Factors included elsewhere in this Annual Report on Form 10-K.
Seasonality and quarterly results
Our billings have historically been highest in the first and fourth quarters of any calendar year and may vary in future quarters. The timing of recording
billings and the corresponding effect on our cash flows may vary due to the seasonality of the purchasing patterns of our customers. In addition, the timing
of the recognition of revenue, the amount and timing of operating expenses, including employee compensation, sales and marketing activities, and capital
expenditures, may vary from quarter-to-quarter which may cause our reported results to fluctuate significantly. In addition, we may choose to grow our
business for the long-term rather than to optimize for profitability or cash flows for a particular shorter-term period. This seasonality or the occurrence of
any of the factors above may cause our results of operations to vary and our financial statements may not fully reflect the underlying performance of our
business.
Foreign currency fluctuations
Because of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, as well as our
transactions that are denominated in foreign currencies, including the Euro, British Pound Sterling, Indian Rupee, Japanese Yen, and Chinese Yuan. To
present the changes in our underlying business without regard to the impact of currency fluctuations, we evaluate certain of our operating results both on an
as reported basis, as well as on a constant currency basis.
Constant currency amounts exclude the effect of foreign currency fluctuations on our reported results. Our comparative financial results were impacted by
fluctuations in the value of the United States dollar relative to other currencies during the year ended December 31, 2020, as compared to the year ended
December 31, 2019. To present this information, the results for 2020 for entities whose functional currency is a currency other than the United States dollar
were converted to United States dollars at rates that were in effect for 2019. These adjusted amounts are then compared to our current period reported
amounts to provide operationally driven variances in our results.
The net effects of currency fluctuations on our Revenue, Net loss, Adjusted EBITDA and Billings are reflected in the table below. Amounts in brackets
indicate a net adverse effect from currency fluctuations.
(in thousands)
Revenue
Net loss
Adjusted EBITDA
Billings
Business segments
Year ended
December 31, 2020
1,034
221
(31)
3,846
$
$
$
$
We have identified two reportable segments: Software and Client Engineering Services:
•
•
Software —Our Software segment includes software and software related services. The software component of this segment includes our
portfolio of software products including our solvers and optimization technology products, high-performance computing software
applications and hardware products, modeling and visualization tools, data analytics and analysis products, IoT platform and analytics tools
as well as support and the complementary software products we offer through our Altair Partner Alliance, or APA. The APA includes
technologies ranging from computational fluid dynamics and fatigue to manufacturing process simulation and cost estimation. The software
related services component of this segment includes consulting, implementation services, and training focused on product design and
development expertise and analysis from the component level up to complete product engineering at any stage of the lifecycle.
Client Engineering Services — Our client engineering services, or CES, segment provides client engineering services to support our
customers with long-term, ongoing expertise. We operate our CES business by hiring engineers and data
45
scientists for placement at a customer site for specific customer-directed assignments. We employ and pay them only for the duration of the
placement.
Our other businesses which do not meet the criteria to be separate reportable segments are combined and reported as “Other” which represents innovative
services and products, including toggled, our LED lighting business. toggled is focused on developing and selling next-generation solid state lighting
technology along with communication and control protocols based on our intellectual property for the direct replacement of fluorescent light tubes with
LED lamps. Other businesses combined within Other include potential services and product concepts that are still in their development stages, and our
WEYV business, which ceased operations in the third quarter of 2019.
For additional information about our reportable segments and other businesses, see Note 18 in the Notes to consolidated financial statements in Item 15,
Part IV of this Annual Report on Form 10-K.
Components of results of operations
Revenue
We primarily derive revenue from the licensing of our software, which includes our units-based subscription licensing model and for term and perpetual
software licenses, as well as software related services. Our CES business derives revenue from providing engineers and data scientists to support our
customers’ long-term, ongoing projects.
Software
Software revenue is principally comprised of subscription licenses, and to a lesser extent, perpetual licenses and associated maintenance and support fees.
Subscriptions are typically governed by contracts with annual terms which include product updates, maintenance and support. We generally recognize
software license revenue up front, while maintenance and support revenue is generally recognized over the term of the contract. To a much lesser extent,
Software also includes revenue from the sale of hardware products.
Software includes consulting, implementation services and training. Our software related services team is comprised of approximately 300 highly technical
people globally. We focus on establishing a strong working relationship with the user community allowing us to offer guidance and expertise throughout
their product creation process. We generally recognize revenue for software related services as those services are performed.
Software related services
Consulting services from product design and development projects are considered distinct performance obligations and are provided to customers on a
time-and-materials, or T&M, or fixed-price basis. Altair recognizes services revenue from our T&M contracts using input-based estimates, utilizing direct
labor and contractually agreed-upon hourly rates as the input measure. For fixed-price contracts, software services revenue is recognized over time using a
method that measures the extent of progress towards completion of a performance obligation, generally using a cost-input method where revenue is
recognized based on the proportion of total cost incurred to estimated total costs at completion. If output or input measures are not available or cannot be
reasonably estimated, revenue is recognized upon completion of the services.
Client engineering services
We operate our CES business by hiring engineers and data scientists for placement at a customer site for specific customer-directed assignments. We
employ and pay them only for the duration of the placement.
Our CES business generates revenue from placing simulation specialists, industrial designers, design engineers, materials experts, development engineers,
manufacturing engineers, and information technology specialists. We recognize CES revenue based upon hours worked and contractually agreed-upon
hourly rates.
Other
Our Other revenue consists primarily of revenue related to our LED lighting business operated out of our wholly-owned subsidiary, toggled. toggled
designs, and sources through contract manufacturers, LED lighting and related products for sale to consumers and businesses. We also generate revenue
through royalties from licensing toggled technology to third party manufacturers and resellers.
46
Cost of revenue
Cost of software
Cost of software revenue consists of expenses related to software licensing, hardware sales and customer support. Significant expenses include employee
compensation and related costs for support team members, including salaries, benefits, bonuses and stock-based compensation, as well as hardware costs,
travel costs, certain data center and facility costs and royalties for third-party software products available to customers through our products or as part of
our APA.
Cost of software related services
Cost of software related services revenue consists of personnel and related costs, such as salaries, benefits, bonuses and stock-based compensation, as well
as travel expenses and certain data center and facility costs.
Cost of client engineering services
Cost of engineering services revenue consists primarily of employee compensation and related costs. We employ and pay them only for the duration of the
placement at a customer site.
Cost of other
Cost of other revenue includes the cost of LED lighting products and freight related to products sold to retail and commercial sales channels.
Operating expenses
Operating expenses, as defined and discussed below, support all the products and services that we provide to our customers and, as a result, they are
presented in an aggregate total.
Research and development
Research and development expenses consist primarily of employee compensation and related costs associated with our development team, including
salaries, benefits, bonuses, professional consulting and development fees, and stock-based compensation expense. Our research and development efforts are
focused on enhancing the functionality, breadth and scalability of our software, addressing new use cases, and developing additional innovative
technologies. Timely development of new products is essential to maintaining our competitive position, and we release new versions of our software on a
regular basis. All software development costs are expensed as incurred as our current software development process is essentially completed concurrent
with the establishment of technological feasibility.
Sales and marketing
Sales and marketing expenses consist primarily of employee compensation and related costs associated with our sales and marketing staff, including
salaries, benefits, bonuses, commissions and stock-based compensation, as well as costs relating to our marketing and business development programs
including trade shows and events. We intend to continue to invest resources in our sales and marketing initiatives to drive growth and extend our market
position.
General and administrative
General and administrative expenses consist of employee compensation and related costs for executive, finance, legal, human resources, recruiting, and
employee-related information technology and administrative personnel, including salaries, benefits, bonuses and stock-based compensation expense,
professional fees for external legal and accounting services, depreciation, facilities, recruiting and other consulting services.
Amortization of intangible assets
Amortization of intangible assets consists primarily of amortization of intangibles associated with acquisitions. We expect to incur additional amortization
expenses resulting from future strategic acquisitions.
47
Other operating income
Other operating income consists primarily of government subsidies, primarily in France, in the form of grant income associated with certain of our research
and development activities and other items as disclosed.
Interest expense
Interest expense consists of interest expense on our outstanding indebtedness and amortization of debt issuance costs.
Other (income) expense, net
Other (income) expense, net is comprised primarily of foreign currency exchange gains and losses generated from the settlement and remeasurement of
transactions denominated in currencies other than the functional currency of our operating units and interest income on invested cash.
Income tax expense
Income tax expense is comprised primarily of income taxes related to United States, foreign, and state jurisdictions in which we conduct business. Income
tax expense also includes taxes withheld outside of the United States attributable to remittances to the Company from certain foreign subsidiaries. We
record interest and penalties related to income tax matters as income tax expense. We expect the amount of income tax expense (benefit), if any, to vary
each reporting period depending upon fluctuations in our quantum and tax jurisdictional mix of income (loss). We have substantial United States net
operating loss carryforwards with no expiration period for losses generated 2018 onwards, and tax credit carryforwards which began to expire in 2018. The
ability to utilize these tax attributes is highly dependent upon our ability to generate taxable income in the United States in the future.
Our future effective annual tax rate may be materially impacted by the amount of benefits and charges from tax amounts associated with our foreign
earnings that are taxed at rates different from the federal statutory rate, the taxation of the foreign earnings in the U.S. under the Global Intangible Low-
Taxed Income, or GILTI, regime, changes in valuation allowances, level of profit before tax, accounting for uncertain tax positions, stock-based
compensation, business combinations, payments to the Company from certain foreign subsidiaries, closure of statute of limitations, settlements of tax
audits, and changes in tax laws including United States tax law changes that were enacted in December 2017. A significant amount of our earnings is
generated in our EMEA and APAC regions. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in
countries where we have lower statutory tax rates.
As of December 31, 2020 and 2019, we had gross deferred tax assets, or DTAs, of $133.4 million and $117.5 million, respectively, primarily related to net
operating loss carryforwards, tax credits, share-based compensation, lease obligations and employee benefits. We are entitled to a United States federal tax
deduction when non-qualified stock options, or NSOs, are exercised. In connection with our IPO, a significant number of our NSOs were exercised,
resulting in a tax deduction for United States income tax purposes. This deduction, in conjunction with other expected deferred tax asset reversals, resulted
in the establishment of a valuation allowance for $47.0 million in 2017 for the United States DTAs. Our ability to utilize any net operating losses or tax
credits may be limited under provisions of the Code if we undergo an ownership change after our IPO (generally defined as a greater than 50-percentage
point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period). We also inherited net operating losses,
or NOLs, from the acquisition of Datawatch and Univa, which are subject to specific limitations on usage. We may also be unable to realize our tax credit
carryforwards which began to expire in 2018.
Based on the evidence available, including a lack of taxable earnings in the United States, we recorded a valuation allowance against substantially all of our
net deferred tax assets in the United States. If a change in judgment regarding this valuation allowance were to occur in the future, we will record a
potentially material deferred tax benefit, which could result in a favorable impact on our effective tax rate in that period. The utilization of tax attributes to
offset taxable income reduces the amount of deferred tax assets subject to a valuation allowance.
The Tax Cuts and Jobs Act, or the Tax Act, was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate from 35%
to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new
taxes on certain foreign sourced earnings. Previously, we applied the guidance in Staff Accounting Bulletin No. 118, Income Tax Accounting Implications
of the Tax Cut and Jobs Act when accounting for the enactment-date effects of the Tax Act. As of December 31, 2018, we completed our accounting for the
tax effects of the Tax Act; we have not recorded any adjustments to the provisional amounts recorded at December 31, 2017 related to the remeasurement
of our deferred balances. At December 31, 2017, we originally recorded a provisional amount for its one-time transition tax of $4.2 million, which was
substantially offset by available foreign tax credits. During the year ended December 31, 2018, we revised our estimate of the provisional amount of the
one-time transition tax. Upon further analyses of certain aspects of the Tax Act and refinement of its
48
calculations, we increased our provisional amount of transition tax by approximately $0.6 million for the year ended December 31, 2018. This resulted in
no change to income tax expense due to the impact of foreign tax credits.
The Tax Act subjects a U.S. shareholder to current tax on Global Intangible Low-Taxed Income, or GILTI, earned by certain foreign subsidiaries. The
impact of GILTI resulted in no incremental tax expense for the year ended December 31, 2020 due to a full valuation allowance on U.S. net deferred tax
assets. We have made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. In addition, the recently
enacted CARES Act and the Consolidated Appropriations Act, 2021 (CAA) provide relief to U.S. federal corporate taxpayers through temporary
adjustments to net operating loss rules, changes to limitations on interest expense deductibility, and the acceleration of available refunds for minimum tax
credit carryforwards. The CARES Act and the CAA did not have a material effect on the Company’s consolidated financial statements.
49
Results of operations
The following table sets forth our results of operations and certain financial data for the years ended December 31, 2020 and 2019:
(in thousands)
Revenue:
Software
Software related services
Total software and related services
Client engineering services
Other
Total revenue
Cost of revenue:
Software
Software related services
Total software and related services
Client engineering services
Other
Total cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Other operating income, net
Total operating expenses
Operating income
Interest expense
Other income, net
Income before income taxes
Income tax expense
Net loss
Other financial information:
Billings (1)
Adjusted EBITDA (2)
Net cash provided by operating activities
Free cash flow (3)
Year ended December 31,
2020
2019
$
$
$
$
$
$
$
391,711
26,454
418,165
44,320
7,436
469,921
58,325
21,243
79,568
35,684
6,053
121,305
348,616
126,081
111,440
86,432
16,376
(3,426)
336,903
11,713
11,598
(1,917)
2,032
12,532
(10,500) $
480,447 $
57,288 $
32,882 $
26,789 $
366,702
34,576
401,278
48,987
8,650
458,915
59,686
25,640
85,326
39,875
7,398
132,599
326,316
117,510
106,051
82,178
14,442
(2,072)
318,109
8,207
6,371
(1,552)
3,388
10,930
(7,542)
475,963
39,549
31,393
21,733
(1)
Billings consists of our total revenue plus the change in our deferred revenue, excluding deferred revenue from acquisitions. For more information
about Billings and our other non-GAAP financial measures and reconciliations of our non-GAAP financial measures to the most directly
comparable financial measures calculated and presented in accordance with GAAP, see “Non-GAAP financial measures” contained herein.
(2) We define Adjusted EBITDA as net income (loss) adjusted for income tax expense (benefit), interest expense, interest income and other,
depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairment charges and other special items as
determined by management. For more information about Adjusted EBITDA and our other non-GAAP financial measures and reconciliations of our
non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-
GAAP financial measures” contained herein.
(3) We define Free Cash Flow as net cash provided by operating activities less capital expenditures. For a reconciliation of Free Cash Flow to the most
directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP financial measures” contained herein.
50
The following table sets forth our revenue growth on a constant currency basis for the year ended December 31, 2020 compared to the year ended
December 31, 2019:
(dollars in thousands)
Revenue:
Software
Software related services
Total software and related services
Client engineering services
Other
Total revenue
Year ended
December 31,
2020
2019
Change
%
Constant
currency
change (1)
%
$
$
391,711 $
26,454
418,165
44,320
7,436
469,921 $
366,702
34,576
401,278
48,987
8,650
458,915
7%
(23%)
4%
(10%)
(14%)
2%
7%
(24%)
4%
(9%)
(14%)
2%
_____________________________
(1)
The results for entities whose functional currency is a currency other than the United States dollar were converted to United States dollars at rates
that were in effect for the corresponding period of the prior year.
Years ended December 31, 2020 and 2019
Revenue
Total revenue increased by $11.0 million, or 2%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase
was primarily attributable to an increase in software revenue, partially offset by a decrease in software related services revenue and CES revenue as a result
of the slowdown in economic activity by our customers primarily due to COVID-19.
Software
(dollars in thousands)
Software revenue
As a percent of software segment revenue
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
391,711
$
366,702
$
25,009
7%
94%
83%
91%
80%
The 7% increase in our software revenue for the year ended December 31, 2020, as compared to the year ended December 31, 2019, was primarily resulted
from expansion with existing customers and an increase in software subscription arrangements.
Software related services
(dollars in thousands)
Software related services revenue
As a percent of software segment revenue
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
26,454
$
34,576
$
(8,122)
(23%)
6%
6%
9%
8%
Software related services revenue decreased 23% for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease
was largely the result of customers reducing their demand for these services primarily due to the impact of COVID-19 on their business operations.
Client engineering services
(dollars in thousands)
Client engineering services revenue
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
44,320
$
48,987
$
(4,667)
(10%)
9%
11%
Our CES business is primarily affected by customer demand and our ability to fill customers’ open positions. As noted above in
response to COVID-19, in April some of our CES customers furloughed staff positions, while some other customers reduced
CES staff working hours, reduced billing rates or eliminated certain positions. We have acted in concert with those customers to furlough or curtail the
hours and compensation of those impacted employees until such time as our customers return to normal
51
staffing, billing rates, or required working hours. The 10% decrease in CES revenue for the year ended December 31, 2020, as compared to the year ended
December 31, 2019, reflects those steps, offset in part by our ability to fulfill demand for our client engineering services in the first quarter of 2020.
Other
(dollars in thousands)
Other revenue
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
7,436
$
8,650
$
(1,214)
(14%)
2%
2%
The 14% decrease in other revenue for the year ended December 31, 2020, as compared to the year ended December 31, 2019, was primarily due to lower
revenue from decreased unit sales at lower selling prices from toggled, our LED lighting business, and decreased royalty income of $0.5 million. The
decrease in unit sales was driven by COVID-19.
Cost of revenue
Software
(dollars in thousands)
Cost of software revenue
As a percent of software revenue
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
58,325
$
59,686
$
(1,361)
(2%)
15%
12%
16%
13%
Cost of software revenue decreased by $1.4 million, or 2%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This
decrease was primarily attributable to a $2.3 million decrease in travel expense and a $1.3 million decrease in hardware costs related to software revenue,
partially offset by a $1.4 million increase in employee compensation and related costs and $1.4 million increase in stock-based compensation expense.
Software related services
(dollars in thousands)
Cost of software related services revenue
As a percent of software related services revenue
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
21,243
$
25,640
$
(4,397)
(17%)
80%
5%
74%
6%
Cost of software related services revenue decreased 17%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The
decrease in the current year period was primarily due to a $3.7 million decrease in employee compensation and related costs due to a decline in consulting
services and a $0.5 million decrease in travel expenses as a result of COVID-19 restrictions.
Client engineering services
(dollars in thousands)
Cost of client engineering services revenue
As a percent of client engineering services segment revenue
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
35,684
$
39,875
$
(4,191)
(11%)
81%
8%
81%
9%
Cost of CES revenue decreased 11%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019, consistent with the change
in CES revenue. In response to reduced customer demand for these services, we furloughed or curtailed the hours and compensation of employees until
such time as our customers return to normalized staffing or required working hours.
Other
52
(dollars in thousands)
Cost of other revenue
As a percent of other revenue
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
6,053
$
7,398
$
(1,345)
(18%)
81%
1%
86%
2%
The cost of other revenue decreased 18%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease is due
to cost reductions for products sold and lower sales volumes for our LED lighting business.
Gross profit
(dollars in thousands)
Gross profit
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
348,616
$
326,316
$
22,300
7%
74%
71%
Gross profit increased by $22.3 million, or 7%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase in
gross profit was primarily attributable to the growth of software revenue and reduction in cost of revenue as described above.
Operating expenses
Operating expenses, as discussed below, support all the products and services that we provide to our customers and, as a result, they are reported and
discussed here in the aggregate.
Research and development
(dollars in thousands)
Research and development
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
126,081
$
117,510
$
8,571
7%
27%
26%
Research and development expenses increased by $8.6 million, or 7%, for the year ended December 31, 2020, as compared to the year ended December 31,
2019. Stock-based compensation expense increased $5.5 million, employee compensation and related expense increased $4.5 million, primarily due to
increased headcount, and cloud hosting expense increased $1.2 million. These increases were partially offset by a $1.9 million decrease in travel expense.
Sales and marketing
(dollars in thousands)
Sales and marketing
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
111,440
$
106,051
$
5,389
5%
24%
23%
Sales and marketing expenses increased by $5.4 million, or 5%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019.
Employee compensation and related expense increased $11.0 million, primarily due to increased headcount, and stock-based compensation expense
increased $4.2 million. These increases were partially offset by a decrease in travel and selling related expenses of $9.1 million from suspension or
cancellation of certain in-person sales and marketing activities as a result of COVID-19.
General and administrative
(dollars in thousands)
General and administrative
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
86,432
$
82,178
$
4,254
5%
18%
18%
53
General and administrative expenses increased by $4.3 million, or 5%, for the year ended December 31, 2020, as compared to the year ended December 31,
2019. This increase was primarily attributable to a $2.0 million increase in employee compensation and related expenses, a $1.8 million increase in stock-
based compensation expense, and a $0.8 million increase in software maintenance expense.
Amortization of intangible assets
(dollars in thousands)
Amortization of intangible assets
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
16,376
$
14,442
$
1,934
13%
3%
3%
Amortization of intangible assets increased by $1.9 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This
was attributable to an increase in intangible assets resulting from acquisitions in the current year and in the fourth quarter of 2019.
Other operating income, net
(dollars in thousands)
Other operating income, net
As a percent of consolidated revenue
Year ended
December 31,
2020
2019
$
(3,426)
$
(1%)
(2,072) $
—%
Change
$
1,354
%
65%
Other operating income, net increased $1.4 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This
increase was primarily the result of a $1.0 million gain recognized from settlements related to a historical acquisition in the year ended December 31, 2020,
and the $1.0 million of impairment charges for royalty contracts recognized in the year ended December 31, 2019, partially offset by an $0.6 million
increase in the provision for credit losses in the current year.
Interest expense
(dollars in thousands)
Interest expense
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
$
11,598
$
6,371
$
5,227
%
NM
2%
1%
Interest expense increased $5.2 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase in interest
expense was primarily the result of the amortization of the debt discount and issuance costs on the Convertible Notes was for a full year in 2020 compared
to a shorter period in 2019.
Other income, net
(dollars in thousands)
Other income, net
As a percent of consolidated revenue
Year ended
December 31,
Change
2020
2019
$
%
$
(1,917) $
—%
(1,552) $
—%
365
24%
Other income, net increased by $0.4 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase was
primarily the result of foreign currency fluctuations in the United States dollar relative to other functional currencies during the year ended December 31,
2020, compared to the year ended December 31, 2019. This increase was partially offset by a decrease in interest income in the current year period due to
lower interest rates as compared to the prior year period.
Income tax expense
(dollars in thousands)
Income tax expense
Year ended
December 31,
Change
2020
2019
$
%
$
12,532 $
10,930 $
1,602
15%
54
The effective tax rate was 617% and 323% for the year ended December 31, 2020 and 2019, respectively. The tax rate is affected by the Company being a
U.S. resident taxpayer, the tax rates in the U.S. and other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction
and the relative amount of losses or income for which no benefit or expense is recognized. The effective tax rate was impacted by the geographic income
mix in 2020 as compared to 2019, primarily related to a United States pre-tax loss of $22.1 million for the year ended December 31, 2020, for which a tax
benefit was not recognized due to the valuation allowance, compared to a United States pre-tax loss of $14.7 million for the year ended December 31,
2019, for which a tax benefit was not recognized due to the valuation allowance. Income tax expense also includes taxes withheld outside of the United
States attributable to remittances to the Company from certain foreign subsidiaries for which offsetting tax credits are not recognizable due to valuation
allowance considerations.
Net loss
(dollars in thousands)
Net loss
Year ended
December 31,
Change
2020
2019
$
%
$
(10,500) $
(7,542) $
(2,958)
(39%)
Net loss increased by $3.0 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase was primarily
attributable to the increase in employee compensation and related expense, stock-based compensation expense and interest expense as described above.
For information regarding the comparison of results of operations for the years ended December 31, 2019 and 2018, please see Item 7 of our
Annual Report on Form 10-K for the year ended December 31, 2019.
Non-GAAP financial measures
We monitor the following key non-GAAP (United States generally accepted accounting principles) financial and operating metrics to help us evaluate our
business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. In analyzing and
planning for our business, we supplement our use of GAAP financial measures with non-GAAP financial measures, including Billings as a liquidity
measure, Adjusted EBITDA as a performance measure and Free Cash Flow as a liquidity measure.
(in thousands)
Billings
Adjusted EBITDA
Free Cash Flow
2020
Year ended December 31,
2019
$
$
$
480,447 $
57,288 $
26,789 $
475,963 $
39,549 $
21,733 $
2018
401,913
50,180
29,571
Billings. Billings consists of our total revenue plus the change in our deferred revenue, excluding deferred revenue from acquisitions during the period.
Given that we generally bill our customers at the time of sale but typically recognize a portion of the related revenue ratably over time, management
believes that Billings is a meaningful way to measure and monitor our ability to provide our business with the working capital generated by upfront
payments from our customers. While we believe that Billings provides valuable insight into the cash that will be generated from sales of our software and
services, this metric may vary from period-to-period for a number of reasons including the impact of changes in foreign currency exchange rates and the
potential impact of acquisitions. See the section entitled “Reconciliation of non-GAAP financial measures” for a reconciliation of Billings to revenue, the
most directly comparable financial measure calculated in accordance with GAAP.
Billings increased by $4.5 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase in Billings was
attributable to an increase in Software segment billings.
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) adjusted for income tax expense (benefit), interest expense, interest income and other,
depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairment charges and other special items as determined
by management. We believe that Adjusted EBITDA is a meaningful measure of performance as it is commonly utilized by us and the investment
community to analyze operating performance in our industry. See the section entitled “Reconciliation of non-GAAP financial measures” for a
reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.
Adjusted EBITDA increased by $17.7 million, or 45%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This
increase in Adjusted EBITDA was primarily attributable to the increase in gross profit.
55
Free Cash Flow. Free Cash Flow is a non-GAAP financial measure that we calculate as cash flow provided by operating activities less capital expenditures.
We believe that Free Cash Flow is useful in analyzing our ability to service and repay debt, when applicable, and return value directly to stockholders. See
the section entitled “Reconciliation of non-GAAP financial measures” for a reconciliation of Free Cash Flow to net cash provided by operating activities,
the most directly comparable financial measure calculated in accordance with GAAP.
Free Cash Flow increased by $5.1 million, or 23%, for the year ended December 31, 2020, as compared to year ended December 31, 2019. This increase in
Free Cash Flow was primarily attributable to reduced capital expenditures of $3.6 million in the year ended December 31, 2020.
These non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results and the
accompanying reconciliations to corresponding GAAP financial measures included in the tables below, may provide a more complete understanding of
factors and trends affecting our business. These non-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures and
are by definition an incomplete understanding of the Company and must be considered in conjunction with GAAP measures.
We believe that the non-GAAP measures disclosed herein are only useful as an additional tool to help management and investors make informed decisions
about our financial and operating performance and liquidity. By definition, non-GAAP measures do not give a full understanding of the Company. To be
truly valuable, they must be used in conjunction with the comparable GAAP measures. In addition, non-GAAP financial measures are not standardized. It
may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. We
strongly encourage investors to review our consolidated financial statements and the notes thereto in their entirety and not to rely on any single financial
measure.
Reconciliation of non-GAAP financial measures
The following tables provide reconciliations of revenue to Billings, net income (loss) to Adjusted EBITDA, and net cash provided by operating activities to
Free Cash Flow:
Billings
(in thousands)
Revenue
Ending deferred revenue
Adoption of ASC 606 on beginning deferred revenue
Beginning deferred revenue
Deferred revenue acquired
Billings
Adjusted EBITDA
(in thousands)
Net (loss) income
Income tax expense
Stock-based compensation
Interest expense
Interest income and other (1)
Depreciation and amortization
Adjusted EBITDA
2020
Year ended December 31,
2019
2018
469,921 $
95,079
—
(83,567)
(986)
480,447 $
458,915 $
83,567
—
(66,519)
—
475,963 $
396,379
66,519
82,909
(139,762)
(4,132)
401,913
2020
Year Ended December 31,
2019
2018
(10,500) $
12,532
21,355
11,598
(1,503)
23,806
57,288 $
(7,542) $
10,930
8,528
6,371
(260)
21,522
39,549 $
15,535
11,489
3,339
200
4,883
14,734
50,180
$
$
$
$
(1)
Included for the year ended December 31, 2020 are a) $1.0 million of proceeds from settlements related to a historical acquisition, and b) $0.6 million of severance expense. Included for
the year ended December 31, 2019 are a) acquisition related costs of $0.6 million, b) severance expenses of $0.4 million and c) impairment charges for royalty contracts for $1.0 million.
Included for the year ended December 31, 2018 are a) costs from the acquisition of Datawatch of $10.4 million, b) gain on the sale of a building of $4.4 million and c) impairment
charges for royalty contracts and trade names of $2.8 million, and d) an income adjustment for a change in estimated legal expenses of $2.0 million.
Free Cash Flow
56
(in thousands)
Net cash provided by operating activities
Capital expenditures
Free Cash Flow
2020
Year ended December 31,
2019
2018
$
$
32,882 $
(6,093)
26,789 $
31,393 $
(9,660)
21,733 $
36,230
(6,659)
29,571
Recurring Software License Rate. A key factor to our success is our recurring software license rate which we measure through billings, primarily derived
from annual renewals of our existing subscription customer agreements. We calculate our recurring software license rate for a particular period by dividing
(i) the sum of software term-based license billings, software license maintenance billings, and 20% of software perpetual license billings which we believe
approximates maintenance as an element of the arrangement by (ii) the total software license, including all term-based subscriptions, maintenance and
perpetual license billings from all customers for that period. Our recurring software license rate was 92% for the year ended December 31, 2020, 87%, for
the year ended December 31, 2019, and 89% for each of the years ended December 31, 2018 and 2017.
Liquidity and capital resources
Our principal sources of liquidity have been the net payments received from global customers using our software and services and proceeds from our initial
public offering, follow-on offering and our convertible debt offering, as well as periodic draws on our credit facilities, when needed.
We have commenced the planning to update zoning to allow for future expansion of our corporate headquarters facilities on the adjacent property we own
to enable development consistent with our long-term needs. We have not yet determined the nature and scope of the overall timeline and investment beyond
the immediate rezoning efforts necessary for our potential use in the future.
We continue to evaluate possible acquisitions and other strategic transactions designed to expand our business. As a result, our expected uses of cash could
change, our cash position could be reduced, or we may incur additional debt obligations to the extent we complete additional acquisitions.
Our existing cash and cash equivalents may fluctuate during fiscal 2021, due to changes in our planned cash expenditures, including changes in incremental
costs such as direct costs and integration costs related to acquisitions. Cash from operations could also be affected by various risks and uncertainties,
including, but not limited to, the effects of COVID-19. It is possible that certain customers may unilaterally decide to extend payments on accounts
receivable, however the Company’s customer base is comprised primarily of larger organizations with typically strong liquidity and capital resources.
We believe that our existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient
to finance our operations and meet our foreseeable cash requirements for the next twelve months. We also believe that our financial resources, along with
managing discretionary expenses, will allow us to manage the impact of COVID-19 on our business operations for the foreseeable future, which could
include reductions in revenue and delays in payments from customers and partners. We will continue to evaluate our financial position as developments
evolve relating to COVID-19.
Revolving credit facility
We have a $150.0 million credit facility that was amended on June 5, 2019, to permit the issuance of the Convertible Notes and extend the maturity date of
the credit facility to December 15, 2023 (“2019 Amended Credit Agreement”). The 2019 Amended Credit Agreement allows us to request that the
aggregate commitments under the 2019 Amended Credit Agreement be increased by up to $50.0 million for a total of $200.0 million, subject to certain
conditions.
As of December 31, 2020, we had $30.0 million of outstanding borrowings under the 2019 Amended Credit Agreement and there was $120.0 million
available for future borrowing. In January 2021, the Company repaid the $30.0 million borrowing outstanding at December 31, 2020. The 2019 Amended
Credit Agreement is available for general corporate purposes, including working capital, capital expenditures and permitted acquisitions.
The 2019 Amended Credit Agreement is secured by collateral including (i) substantially all of our properties and assets, and the properties and assets of our
domestic subsidiaries but excluding any patents, copyrights, patent applications or copyright applications or any trade secrets or software products and
(ii) pledges of the equity interests in all present and future domestic subsidiaries (subject to certain exceptions as provided for under the 2019 Amended
Credit Agreement). Our direct and indirect domestic subsidiaries are guarantors of all of the obligations under the 2019 Amended Credit Agreement. In
addition, the 2019 Amended Credit Agreement contains financial covenants which require, as of the end of each fiscal quarter, the maintenance of a
minimum Interest Coverage Ratio of 3.0 to 1.0 a maximum Senior Secured Leverage Ratio of 3.0 to 1.0 and a maximum net Leverage Ratio of 5.0 to 1.0,
as such terms are defined in the 2019 Amended Credit Agreement. At December 31, 2020, we were in compliance with all financial
57
covenants. For additional information about the 2019 Amended Credit Agreement, see Note 7 in the Notes to consolidated financial statements in Item 15,
Part IV of this Annual Report on Form 10-K.
Cash flows
As of December 31, 2020 and 2019, respectively, we had an aggregate of cash and cash equivalents of $241.2 million and $223.1 million, which we held
for working capital purposes, acquisitions, and capital expenditures. At December 31, 2020 and 2019, respectively, $187.9 million and $180.5 million of
this aggregate amount was held in the United States, and $45.7 million and $35.1 million was held in the APAC and EMEA regions with the remainder
held in Canada, Mexico, and South America.
Other than statutory limitations, there are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Altair.
Based on our current liquidity needs and repatriation strategies, we expect that we can manage our global liquidity needs without material adverse tax
implications. The 2017 changes in U.S. tax law could materially affect our tax obligations. For further discussion, please see “Item 1A. Risk Factors – New
legislations or tax-reform policies that would change U.S. or foreign taxation of international business activities, including uncertainties in the
interpretation and application of the 2017 Tax Cuts and Jobs Act, could materially affect our tax obligations and effective tax rate.”
The following table summarizes our cash flows for the periods indicated:
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
_____________________________
Year ended December 31,
2020
2019 (1)
2018 (1)
32,882 $
(49,092)
31,250
3,010
18,050 $
31,393 $
(35,839)
191,916
342
187,812 $
36,230
(206,210)
167,530
(1,443)
(3,893)
$
$
(1)
For information regarding a comparison of net cash provided/used in operating activities, investing activities and financing activities for the years
ended December 31, 2019 and 2018, please see Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.
Net cash provided by operating activities
Net cash provided by operating activities for the year ended December 31, 2020 was $32.9 million, which reflects an increase of $1.5 million compared to
the year ended December 31, 2019. This increase was the result of changes to our working capital position, offset in part by an increase in our net loss for
year ended December 31, 2020, as compared to the year ended December 31, 2019.
Net cash used in investing activities
Net cash used in investing activities for the year ended December 31, 2020 was $49.1 million, which reflects an increase of $13.3 million compared to the
year ended December 31, 2019. This increase was primarily the result of an increase in net cash payments of $15.3 million for business acquisitions for the
year ended December 31, 2020, partially offset by a $3.6 million reduction in cash payments for capital expenditures as compared to year ended December
31, 2019.
Net cash provided by financing activities
Net cash provided by financing activities for the year ended December 31, 2020 was $31.3 million, which reflects a decrease in cash provided of $160.7
million compared with the year ended December 31, 2019. For the year ended December 31, 2020, we had cash borrowings on our revolving credit facility
of $30.0 million. For the year ended December 31, 2019, we received aggregate proceeds of $223.1 million from our Convertible Notes offering, net of
underwriters’ discounts and commissions, and we had net cash payments on our revolving credit facility of $31.0 million.
Effect of exchange rate changes on cash, cash equivalents and restricted cash
The favorable effect of exchange rate changes on cash, cash equivalents and restricted cash for the year ended December 31, 2020, increased $2.7 million
compared to the year ended December 31, 2019, primarily due to currency fluctuations in the Euro.
58
Commitments and contractual obligations
Our principal commitments and contractual obligations at December 31, 2020 consist of our Convertible Notes due in 2024, line of credit, obligations
under operating leases for our office facilities and other debt obligations. The following summarizes our non-cancelable contractual obligations as of
December 31, 2020:
(in thousands)
Convertible senior notes
Line of credit (1)
Aggregate interest obligations (2)
Operating lease obligations
Royalties
Finance lease obligations
Other long-term liabilities
Total
_________________________________________
Total
230,000 $
30,000
1,965
38,179
1,298
814
28,338
330,594 $
$
$
Less
than
1 year
Payments due by period
1-3 years
3-5 years
More
than
5 years
— $
—
575
11,704
723
453
7,671
21,126 $
— $
30,000
1,150
16,308
575
344
13,800
62,177 $
230,000 $
—
240
6,964
—
17
6,867
244,088 $
—
—
—
3,203
—
—
—
3,203
(1) We repaid the $30.0 million outstanding balance on the line of credit in January 2021.
(2) Represents estimated aggregate interest obligations for our outstanding convertible senior notes that are payable in cash.
The table does not include contractual obligations associated with our pension and post-retirement benefit plans. As of December 31, 2020, we had
recognized a net benefit liability of $15.2 million. For additional information on pension and other post-retirement benefits, including expected benefit
payments for the next 10 years, see Note 15 in the Notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The table also does not include liabilities associated with uncertain tax positions due to the high degree of uncertainty regarding the future cash outflows
associated with these amounts. For additional discussion of uncertain tax positions, see Note 13 in the Notes to consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
Off-balance sheet arrangements
Through December 31, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or
special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Critical accounting policies and estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues
generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we
believe are 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. Actual results may differ from these estimates under different assumptions or conditions. We believe that
the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant
areas involving management’s judgments and estimates. For further discussion on our significant accounting policies, see Note 2 in the Notes to
consolidated financial statements in Item 15, Part IV of this Annual Report on Form 10-K.
Revenue recognition
We generate revenue from our Software and CES segments and our other businesses. Revenue is recognized by identifying a contract with a customer,
identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in
the contract, and recognizing revenue when (or as) we satisfy a performance obligation.
Software
Software revenue includes product revenue from software product licensing arrangements, related services consisting of software maintenance and support
in the form of post-contract customer support (PCS or maintenance) and professional services such as consulting and training services. Software products
are sold to customers primarily under a term-based software licensing model and
59
to a lesser degree, perpetual software licenses. We enter into contracts that include combinations of products, maintenance and services, which are
accounted for as separate performance obligations with differing revenue recognition patterns.
Most term-based software license agreements include our patented units-based subscription model which allows customers to license a pool of units for
their organizations, providing individual users flexible access to our entire portfolio of engineering software applications as well as to our growing portfolio
of partner products. The amount of software usage is limited by the number of the units licensed by the customer. Revenue from these arrangements is
fixed (based on the units licensed) and is not based on actual customer usage of each software product.
Revenue from term-based software licenses is classified as license software revenue. Term-based licenses are sold only as a bundled arrangement that
includes the rights to a term software license and PCS, which includes unspecified technical enhancements and customer support. Maximizing the use of
observable inputs, we determined that a majority of the estimated standalone selling price of the term-based license is attributable to the term license and a
minority is attributable to the PCS. The license component is recognized as revenue upon the later of delivery of the licensed product or the beginning of
the license period. The PCS is classified as maintenance revenue and is recognized ratably over the term of the contract, as we provide the PCS benefit over
time.
In addition to term-based software licenses, we sell perpetual licenses. Typically, our perpetual licenses are sold with PCS, which includes unspecified
technical enhancements and customer support. Revenue from the software component is classified as license software revenue and is recognized upon the
later of delivery of the licensed product or the beginning of the license period. We allocate values in bundled perpetual and PCS arrangements based on the
standalone selling prices of the perpetual license and PCS. Revenue from PCS is classified as maintenance revenue and is recognized ratably over the term
of the contract, as we satisfy the PCS performance obligation over time.
Revenue from training, consulting and other services is recognized as the services are performed. For contracts in which the service consists of a single
performance obligation, such as providing a training class to a customer, we recognize revenue upon completion of the performance obligation. For service
contracts that are longer in duration and often include multiple performance obligations (for example, both training and consulting), we measure the
progress toward completion of the obligations and recognize revenue accordingly. In measuring progress towards the completion of performance
obligations, we typically utilize output-based estimates for services with contractual billing arrangements that are not based on time and materials, and
estimate output based on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates are utilized for
services that involve general consultations with contractual billing arrangements based on time and materials, utilizing direct labor as the input measure.
We also execute arrangements through indirect channel partners in which the channel partners are authorized to market and distribute our software products
to end users of our products and services in specified territories. In sales facilitated by channel partners, the channel partner generally bears the risk of
collection from the end-user customer. We recognize revenue from transactions with channel partners in a manner consistent with the direct sales described
above for both perpetual and term-based licenses. Revenue from channel partner transactions is the amount remitted to us by the channel partners. This
amount includes a fee for PCS that is compensation for providing technical enhancements and the second level of technical support to the end user, which
is recognized over the period that PCS is to be provided. We do not offer right of return, product rotation or price protection to any of its channel partners.
Some of our contracts with customers contain multiple performance obligations. Judgment is required in determining whether each performance obligation
is distinct. We allocate the transaction price for each contract to each performance obligation based on the relative standalone selling price, or SSP, for each
performance obligation within each contract. The SSP is the price that we would sell a promised service separately to one of our customers. Judgment is
required to determine the SSP for each distinct performance obligation. We estimate SSP using information such as past transactions, internally approved
pricing guidelines related to the performance obligations and other information reasonably available to us.
Non-income related taxes collected from customers and remitted to governmental authorities are recorded on the consolidated balance sheet as accounts
receivable, net and other accrued expenses and current liabilities. These amounts are reported on a net basis in the consolidated statements of operations
and do not impact reported revenues or expenses. Certain hardware revenue is included within software revenue and is recognized when all revenue
recognition criteria stated above are met, which is generally when the products are delivered to end customers.
Software related services
Consulting services from product design and development projects are considered distinct performance obligations and are provided to customers on a
time-and-materials, or T&M, or fixed-price basis. Altair recognizes services revenue from our T&M contracts using input-based estimates, utilizing direct
labor and contractually agreed-upon hourly rates as the input measure. For fixed-price contracts, software services revenue is recognized over time using a
method that measures the extent of progress towards completion of a performance obligation, generally using a cost-input method where revenue is
recognized based on the proportion of total cost
60
incurred to estimated total costs at completion. If output or input measures are not available or cannot be reasonably estimated, revenue is recognized upon
completion of the services.
Client engineering services
CES revenue is derived from our hiring of engineers and data scientists for placement at a customer site for specific customer-directed assignments. These
professional services are considered distinct performance obligations and are provided to customers on a T&M basis. We recognize client engineering
services revenue based upon hours worked and contractually agreed-upon hourly rates.
Other
Other revenue includes product revenue from the sale of LED products primarily for the replacement of fluorescent tubes. Revenue from the sale of LED
products is recognized when all revenue recognition criteria stated above are met, which is generally when the products are delivered to resellers or to end
customers. Sales returns, which reduce revenue and cost of revenue, are estimated using historical experience.
Acquisitions
We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. We allocate the fair
value of purchase consideration of acquired businesses to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction
based upon their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. During the
measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with
the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
We determine the estimated fair values using information available to us and engage independent third-party valuation specialists when necessary. We
generally use an income approach to determine the fair value of intangible assets acquired. Estimating fair values can be complex and subject to significant
business judgment. Critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to, future expected cash flows
from product sales, customer contracts and acquired technologies, expenses to operate the acquired business, and discount rates. Unanticipated events and
circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results. Although we believe the
assumptions and estimates we have made in the past have been reasonable and appropriate, these estimates are based on historical experience and
information obtained from the management of the acquired companies and are inherently uncertain.
Accounting for income taxes
We utilize the asset and liability method of accounting for income taxes in accordance with ASC 740, Accounting for Income Taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities. Deferred tax
assets and liabilities are measured using the enacted tax rates and statutes that will be in effect when those differences are expected to reverse. Deferred tax
assets can result from unused operating losses, research and development credits, foreign tax credit carryforwards, and deductions recorded for financial
statement purposes prior to them being deductible on a tax return. Valuation allowances are provided against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of taxable temporary differences.
We consider, among other available information, scheduled reversals of deferred tax liabilities, projected future taxable income, limitations on the
availability of tax credit carryforwards, and other evidence assessing the potential realization of deferred tax assets. Adjustments to the valuation allowance
are included in the tax provision in our consolidated statements of operations in the period they become known or can be estimated.
The valuation allowance is based on our estimates of taxable income for jurisdictions in which we operate and the period over which our deferred tax assets
may be recoverable. Historically, we have had substantial United States tax credit carryforwards which began to expire in 2018. The ability to utilize these
DTAs is highly dependent upon our ability to generate taxable income in the United States in the future.
We apply a more-likely-than-not recognition threshold to our accounting for tax uncertainties. We review all of our tax positions and make determinations
as to whether our tax positions are more likely than not to be sustained upon examination by the relevant taxing authorities. Only those benefits, or
exposures, that have a greater than fifty percent likelihood of being sustained upon examination by taxing authorities are recognized. Interest and penalties
related to uncertain tax positions are recorded in income tax expense (benefit) in the consolidated statements of operations.
61
Recently issued accounting pronouncements
For information regarding recent accounting guidance and the impact of this guidance on our consolidated financial statements, see Note 2 of the Notes to
consolidated financial statements in Item 15, Part IV of this Annual Report on Form 10-K, which is incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain global market risks, including foreign currency exchange risk and interest rate risk associated with our debt.
Foreign Currency Risk
As a result of our substantial international operations, we are exposed to foreign currency risks that arise from our normal business operations, including in
connection with our transactions that are denominated in foreign currencies. In addition, we translate sales and financial results denominated in foreign
currencies into United States dollars for purposes of our consolidated financial statements. As a result, appreciation of the United States dollar against these
foreign currencies generally will have a negative impact on our reported revenue and operating income while depreciation of the United States dollar
against these foreign currencies will generally have a positive effect on reported revenue and operating income.
To date, we have not entered into any foreign currency hedging contracts, since exchange rate fluctuations have not had a material impact on our operating
results and cash flows. Based on our current international operations, we do not plan on engaging in hedging activities in the near future.
Market Risk and Interest Rate Risk
In June 2019, we issued $230.0 million aggregate principal amount of 0.250% Convertible Notes. Our Convertible Notes have fixed annual interest rates at
0.250% and, therefore, we do not have interest rate exposure on our Convertible Notes. However, the value of the Convertible Notes is exposed to interest
rate risk. Generally, the fair market value of our fixed interest rate Convertible Notes will increase as interest rates fall and decrease as interest rates rise. In
addition, the fair values of the Convertible Notes are affected by our stock price. The fair value of the Convertible Notes will generally increase as our
Class A common stock price increases in value and will generally decrease as our Class A common stock price declines in value. Additionally, we carry the
Convertible Notes at face value less unamortized discount and issuance costs on our balance sheet, and we present the fair value for required disclosure
purposes only.
As of December 31, 2020 and 2019, we had cash, cash equivalents and restricted cash of $241.5 million and $223.5 million, respectively, consisting
primarily of bank deposits and money market funds. As of December 31, 2020, we had $30.0 million of borrowings outstanding under our 2019 Amended
Credit Agreement. Such interest-bearing instruments carry a degree of interest rate risk; however, historical fluctuations of interest expense have not been
significant.
Interest rate risk relates to the gain/increase or loss/decrease we could incur on our debt balances and interest expense associated with changes in interest
rates. Changes in interest rates would impact the amount of interest income we realize on our invested cash balances. It is our policy not to enter into
derivative instruments for speculative purposes, and therefore, we hold no derivative instruments for trading purposes.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this Item 8 are included in our consolidated financial statements and set forth in the pages indicated in Part IV, Item
15(a) of this Annual Report on Form 10-K and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) that are designed to ensure
that information required to be disclosed in periodic reports filed with the SEC under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to
the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company's management, with the
62
participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of
December 31, 2020. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of December 31, 2020.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f) and 15d(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting
principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will
not be prevented or detected on a timely basis.
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2020 based on the criteria established by Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework). In accordance with guidance issued by the Securities and Exchange
Commission, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting for the first fiscal year in
which the acquisition occurred. Accordingly, we have excluded from our assessment the internal control over financial reporting of Univa Corporation, M-
Base Engineering + Software GmbH, S&Wise Co. Ltd., Ellexus Limited and WRAP, which are included in our December 31, 2020 consolidated financial
statements and constituted 2% and 1% of total and net assets (excluding acquired goodwill and intangible assets), respectively, as of December 31, 2020,
and 1% of revenues for the year then ended. We have excluded all current year acquisitions from our annual assessment of and conclusion on the
effectiveness of our internal control over financial reporting.
Based on the evaluation under these frameworks, management has concluded that our internal control over financial reporting was effective as of
December 31, 2020. The results of management’s assessment have been reviewed with the Audit Committee.
The effectiveness of our internal control over financial reporting at December 31, 2020, has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report which is included elsewhere herein.
(c) Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act) that occurred
during the fourth quarter ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information.
None.
63
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information called for by this item will be set forth in our Proxy Statement for the 2021 Annual Meeting of Stockholders, or Proxy Statement, to be
filed with the SEC within 120 days of the fiscal year ended December 31, 2020, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information called for by this item will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required by this item will be set forth in our Proxy Statement and is incorporated herein by reference.
64
Item 15. Exhibits, Financial Statement Schedules.
(a)
Documents Filed as Part of This Annual Report on Form 10-K:
PART IV
(1)
Financial Statements: The following consolidated financial statements and reports of the independent registered account firm are filed as part
of this report:
Reports of Independent Registered Public Accounting Firm
Consolidated financial statements
Consolidated balance sheets
Consolidated statements of operations
Consolidated statements of comprehensive (loss) income
Consolidated statement of changes in stockholders’ equity
Consolidated statements of cash flows
Notes to consolidated financial statements
Page
66
69
70
71
72
73
74
(2)
(3)
Financial Statement Schedule: The schedules have been omitted because they are not applicable, are not required, or the information required
to be set forth therein is included in the consolidated financial statements or notes thereto.
Exhibits: The exhibits listed in the accompanying Exhibit Index immediately following the financial statements are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
(b)
(c)
Exhibits: See Item 15(a)(3) as set forth above.
Financial Statement Schedules: See Item 15(a)(2) as set forth above.
65
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Altair Engineering Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Altair Engineering Inc. and subsidiaries (the Company) as of December 31, 2020 and
2019, the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2021 expressed an unqualified
opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
Software Revenue Recognition
Description of the
Matter
As described in Note 3, the Company’s software contracts with customers typically include a promise to transfer licenses and
services to a customer. Judgement is required to allocate the transaction price to each of these performance obligations. The
Company’s determination of standalone selling price for performance obligations is based on the midpoint of the range of
historical observable prices for goods and services sold separately. In addition, the Company estimates the standalone selling
price for certain performance obligations where observable prices are not directly available or a significant portion of historical
prices are not within the range. The Company estimates the standalone selling price for each performance obligation at contract
inception considering all information that is reasonably available and is based on the amount of consideration for which the
Company expects to be entitled in exchange for transferring the promised good or service to the customer.
Auditing the Company’s estimate of the standalone selling prices in software contracts was challenging and complex due to the
Company’s wide range of observable prices from goods or services sold separately and the estimation used for certain
performance obligations where observable prices are not available.
66
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's process and
controls to establish and monitor the relative standalone selling price for each distinct performance obligation in software
contracts.
To test the estimated standalone selling prices, our audit procedures included, among others, evaluating the assumptions used
by the Company to determine the standalone selling price for each distinct performance obligation in software contracts. For
example, we evaluated the methodology used to determine the standalone selling price by testing a historical analysis prepared
by the Company and practices observed in the industry. We also tested the data used in the analysis and recalculated the
standalone selling prices.
Business Combination
Description of the
Matter
As described in Note 4, the Company completed the acquisition of Univa Corporation for consideration of $30.2 million. This
transaction was accounted for as a business combination.
The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to the underlying
assumptions regarding future performance of the acquired business and the limited historical data on which to base these
assumptions. The significant assumptions used to estimate the value of the identified intangible assets include valuation
methods selected, discount rates, and certain assumptions that form the basis of the forecasted results (e.g., revenue growth
rates, and operating expenses as a percentage of revenue).
How We Addressed the
Matter in Our Audit
Auditing the Company's accounting for the acquisition of Univa Corporation was complex due to the significant
estimation required in determining the fair value of the identified intangibles, which primarily consisted of developed
technology of $9.0 million and customer relationships of $4.8 million.
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over its
accounting for acquisitions. For example, we tested controls over the estimation process supporting the recognition and
measurement of the identified intangible assets, including management’s evaluation of underlying assumptions (e.g., revenue
growth rates, operating expenses and as a percentage of revenue). In addition, we tested controls over management’s review of
specialist valuation calculation, the review includes validating the discount rates selected and methods used.
To test the estimated fair value of the identified intangible assets, our audit procedures included, evaluating the Company's
selection of valuation methodology and testing the significant assumptions used in the model. We involved our valuation
specialists to assist with our evaluation of the methodology and discount rates used by the Company and significant
assumptions included in the fair value estimates. We performed procedures to test the assumptions in the forecasted data which
is used in the model. For example, we compared revenue growth rates to historical results of the acquired business, to third
party market data, to peer companies with in the same industry and to other acquisitions completed by the Company in the past.
We compared operating expenses as a percentage of revenue to historical results of the acquired company, and to other
acquisitions completed by the Company in the past.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2015.
Detroit, Michigan
February 26, 2021
67
To the Stockholders and the Board of Directors of Altair Engineering Inc.
Opinion on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
We have audited Altair Engineering Inc. and subsidiaries internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the
COSO criteria). In our opinion, Altair Engineering Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2020, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the internal controls of Univa Corporation , M-Base Engineering + Software
GmbH, S&Wise Co Ltd., Ellexus Limited and WRAP, which are included in the December 31, 2020 consolidated financial statements of the Company and
constituted 2% and 1% of total and net assets (excluding acquired goodwill and intangible assets), respectively, as of December 31, 2020 and 1% of
revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal
control over financial reporting of all current year acquisitions.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020
consolidated financial statements of the Company and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Detroit, Michigan
February 26, 2021
68
ALTAIR ENGINEERING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2020
2019
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Income tax receivable
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right of use assets
Goodwill
Other intangible assets, net
Deferred tax assets
Other long-term assets
TOTAL ASSETS
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term debt
Accounts payable
Accrued compensation and benefits
Current portion of operating lease liabilities
Other accrued expenses and current liabilities
Deferred revenue
Total current liabilities
Long-term debt, net of current portion
Operating lease liabilities, net of current portion
Deferred revenue, non-current
Other long-term liabilities
TOTAL LIABILITIES
Commitments and contingencies
MEZZANINE EQUITY
STOCKHOLDERS’ EQUITY
Preferred stock ($0.0001 par value), authorized 45,000 shares, none issued or outstanding
Common stock ($0.0001 par value)
Class A common stock, authorized 513,797 shares, issued and outstanding 44,216
and 41,271 shares as of December 31, 2020 and 2019, respectively
Class B common stock, authorized 41,203 shares, issued and outstanding 30,111
and 31,131 shares as of December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
69
$
$
$
$
241,221 $
117,878
6,736
21,100
386,935
36,332
33,526
264,481
76,114
7,125
25,389
829,902 $
30,384 $
8,594
34,772
10,331
30,982
85,691
200,754
188,653
24,323
9,388
27,414
450,532
784
—
4
3
474,669
(93,293)
(2,797)
378,586
829,902 $
223,117
104,984
7,264
17,092
352,457
36,297
28,134
233,683
67,075
5,791
19,708
743,145
430
8,585
30,676
9,141
28,603
75,431
152,866
178,238
20,174
8,136
26,672
386,086
2,352
—
4
3
446,633
(82,405)
(9,528)
354,707
743,145
ALTAIR ENGINEERING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2020
Year ended December 31,
2019
2018
(in thousands, except per share data)
Revenue
License
Maintenance and other services
Total software
Software related services
Total software and related services
Client engineering services
Other
Total revenue
Cost of revenue
License
Maintenance and other services
Total software
Software related services
Total software and related services
Client engineering services
Other
Total cost of revenue
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Other operating income
Total operating expenses
Operating income
Interest expense
Other income, net
Income before income taxes
Income tax expense
Net (loss) income
(Loss) income per share:
Net (loss) income per share attributable to common stockholders, basic
Net (loss) income per share attributable to common stockholders, diluted
Weighted average shares outstanding:
Weighted average number of shares used in computing net (loss) income
per share, basic
Weighted average number of shares used in computing net (loss) income
per share, diluted
See accompanying notes to consolidated financial statements.
70
$
$
$
$
259,965 $
131,746
391,711
26,454
418,165
44,320
7,436
469,921
19,637
38,688
58,325
21,243
79,568
35,684
6,053
121,305
348,616
126,081
111,440
86,432
16,376
(3,426)
336,903
11,713
11,598
(1,917)
2,032
12,532
(10,500) $
244,321 $
122,381
366,702
34,576
401,278
48,987
8,650
458,915
21,285
38,401
59,686
25,640
85,326
39,875
7,398
132,599
326,316
117,510
106,051
82,178
14,442
(2,072)
318,109
8,207
6,371
(1,552)
3,388
10,930
(7,542) $
(0.14) $
(0.14) $
(0.11) $
(0.11) $
73,241
71,544
73,241
71,544
207,164
97,197
304,361
36,945
341,306
47,852
7,221
396,379
16,119
29,655
45,774
26,415
72,189
38,979
4,805
115,973
280,406
97,592
80,277
79,751
7,739
(9,597)
255,762
24,644
200
(2,580)
27,024
11,489
15,535
0.23
0.21
67,468
74,878
ALTAIR ENGINEERING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Net (loss) income
Other comprehensive income (loss), net of tax:
Foreign currency translation (net of tax effect of $0 for all periods)
Retirement related benefit plans (net of tax effect of $308, $(16) and
$318, respectively)
Total other comprehensive income (loss)
Comprehensive (loss) income
2020
Year ended December 31,
2019
2018
$
(10,500) $
(7,542) $
15,535
7,782
1,895
(1,051)
6,731
(3,769) $
(133)
1,762
(5,780) $
$
(5,449)
(769)
(6,218)
9,317
See accompanying notes to consolidated financial statements.
71
ALTAIR ENGINEERING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
Common stock
Class A
Class B
Shares
Amount
Shares
Amount
Additional
paid-in
capital
36,508
$
4
$
232,156
(5,072) $
Balance at January 1, 2018
26,725
$
Cumulative effect of an accounting
change
Net income
Follow-on public offering,
net of offering costs of $370
Adjustment for acquisitions
Issuance of common stock
for acquisitions
Exercise of stock options
Conversion from Class B to Class A
common stock
Stock-based compensation
Foreign currency translation,
net of tax
Retirement related benefit plans,
net of tax
Balance at December 31, 2018
Net loss
Equity component of convertible senior
notes, net of issuance costs
Issuance of common stock
for acquisitions
Exercise of stock options and other
Vesting of restricted stock
Conversion from Class B to Class A
common stock
Stock-based compensation
Foreign currency translation,
net of tax
Retirement related benefit plans,
net of tax
Balance at December 31, 2019
Cumulative effect of an accounting
change
Net loss
Issuance of common stock
for acquisitions
Exercise of stock options
Vesting of restricted stock
Conversion from Class B to Class A
common stock
Stock-based compensation
Reclassification of mezzanine equity to
permanent equity
Foreign currency translation,
net of tax
Retirement related benefit plans,
net of tax
Balance at December 31, 2020
—
—
5,731
—
145
3,086
2,662
—
—
—
38,349
—
—
250
1,571
61
1,040
—
—
—
41,271
—
—
230
1,472
223
1,020
—
—
—
—
44,216
$
2
—
—
1
—
—
1
—
—
—
—
4
—
—
—
—
—
—
—
—
4
—
—
—
—
—
—
—
—
—
4
See accompanying notes to consolidated financial statements.
72
—
—
(1,675)
—
—
—
(2,662)
—
—
—
32,171
—
—
—
—
—
(1,040)
—
—
—
31,131
—
—
—
—
—
(1,020)
—
—
—
—
30,111
$
Accumulated
other
comprehensive
loss
Accumulated
deficit
(168,142) $
$
Total
stockholders'
equity (deficit)
58,948
—
—
77,744
15,535
135,201
(96)
8,681
2,076
—
1,814
—
—
379,832
—
50,009
7,637
1,510
—
—
7,645
—
—
446,633
—
—
3,504
1,710
—
—
21,254
1,568
—
—
—
—
—
—
—
—
—
(74,863)
(7,542)
—
—
—
—
—
—
—
—
(82,405)
(388)
(10,500)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
77,744
15,535
135,201
(96)
8,681
2,077
—
1,814
(5,449)
(5,449)
(769)
(11,290)
—
—
—
—
—
—
—
1,895
(133)
(9,528)
—
—
—
—
—
—
—
—
7,782
(769)
293,686
(7,542)
50,009
7,637
1,510
—
—
7,645
1,895
(133)
354,707
(388)
(10,500)
3,504
1,710
—
—
21,254
1,568
7,782
—
474,669
$
—
(93,293) $
$
(1,051)
(2,797) $
(1,051)
378,586
—
—
(1)
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
—
3
ALTAIR ENGINEERING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization
Provision for credit loss
Amortization of debt discount and issuance costs
Stock-based compensation expense
Gain on sale of assets held for sale
Impairment of intangible assets
Deferred income taxes
Other, net
Changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other long-term assets
Accounts payable
Accrued compensation and benefits
Other accrued expenses and current liabilities
Operating lease right of use assets and liabilities, net
Deferred revenue
Net cash provided by operating activities
INVESTING ACTIVITIES:
Payments for acquisition of businesses, net of cash acquired
Capital expenditures
Payments for acquisition of developed technology
Proceeds from sale of assets held for sale and other
Other investing activities, net
Net cash used in investing activities
FINANCING ACTIVITIES:
Borrowings under revolving commitment
Proceeds from the exercise of stock options
Proceeds from issuance of convertible senior notes,
net of underwriters' discounts and commissions
Payments on revolving commitment
Payments for issuance costs of convertible senior notes
Proceeds from issuance of Class A common stock in follow-on public
offering, net of underwriters' discounts and commissions
Other financing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosures of cash flow:
Interest paid
Income taxes paid
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock in connection with acquisitions
Promissory notes issued and deferred payment obligations
for acquisitions
Finance leases
Property and equipment in accounts payable and other current liabilities
See accompanying notes to consolidated financial statements.
2020
Year Ended December 31,
2019
2018
$
(10,500) $
(7,542) $
15,535
23,806
1,259
10,829
21,355
—
—
(10,350)
118
(11,032)
(2,131)
(4,527)
(1,839)
1,985
5,771
(142)
8,280
32,882
(41,028)
(6,093)
(2,133)
—
162
(49,092)
30,000
1,710
—
—
—
—
(460)
31,250
3,010
18,050
223,497
241,547 $
731 $
12,666 $
3,504 $
1,266 $
118 $
1,671 $
21,522
671
5,663
8,528
—
—
(950)
6
(7,901)
(2,396)
(2,591)
(426)
(1,232)
513
102
17,426
31,393
(25,720)
(9,660)
(473)
—
14
(35,839)
96,992
1,510
223,101
(127,941)
(1,233)
—
(513)
191,916
342
187,812
35,685
223,497 $
664 $
7,686 $
7,637 $
497 $
632 $
259 $
14,734
394
23
3,339
(4,503)
608
(1,057)
(206)
(1,394)
204
(1,660)
1,647
5,678
(6,667)
—
9,555
36,230
(203,438)
(6,659)
(2,727)
6,614
—
(206,210)
37,041
2,077
—
(6,091)
—
135,572
(1,069)
167,530
(1,443)
(3,893)
39,578
35,685
223
6,735
8,681
1,729
895
330
$
$
$
$
$
$
$
73
ALTAIR ENGINEERING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business
Altair Engineering Inc. (“Altair” or the “Company”) is incorporated in the state of Delaware. The Company is a global technology company providing
software and cloud solutions in the areas of simulation, high-performance computing (“HPC”), data analytics, and artificial intelligence (“AI”). Altair
enables organizations across broad industry segments to compete more effectively in a connected world while creating a more sustainable future. The
Company is based in Troy, Michigan.
The Company’s simulation and AI-driven approach to innovation is powered by the Company’s broad portfolio of high-fidelity and high-performance
physics solvers, our market leading technology for optimization and HPC, and our end-to-end platform for developing AI and Internet of Things (“IoT”)
solutions. The Company’s integrated suite of software optimizes design performance across multiple disciplines encompassing structures, motion, fluids,
thermal management, electromagnetics, system modeling, and embedded systems, while also providing AI solutions and true-to-life visualization and
rendering.
Altair’s software products represent a comprehensive, open architecture solution for simulation, HPC, data analytics, and AI to empower decision making
for improved product design and development, manufacturing, energy management and exploration, financial services, health care, and retail operations.
Altair believes its products offer a comprehensive set of technologies to design and optimize high-performance, efficient, innovative and sustainable
products and processes in an increasingly connected world.
Altair also provides Client Engineering Services to support its customers with long-term ongoing product design and development expertise. This has the
benefit of embedding the Company within customers, deepening its understanding of their processes, and allowing the Company to more quickly perceive
trends in the overall market, helping the Company to better tailor its software products’ research and development and sales initiatives. The Company hires
engineers and data scientists for placement at a customer site for specific customer-directed assignments.
Follow-on public offering
In June 2018, the Company closed its follow-on public offering (the “Offering”), in which the Company issued and sold 4,056,004 shares of Class A
common stock (inclusive of 763,424 shares sold upon the exercise by the underwriters of their option to purchase additional shares of our Class A common
stock). The price per share to the public was $35.00. The Company received aggregate proceeds of $135.6 million from the Offering, net of underwriters’
discounts and commissions, before deducting offering costs of approximately $0.4 million.
The Offering also included the sale of 2,307,420 shares of Class A common stock by selling stockholders, giving effect to the conversion of 1,675,420
shares of the Company’s Class B common stock into an equivalent number of shares of Class A common stock and the exercise of 257,000 options to
purchase Class A common stock. The Company did not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders
other than the $0.5 million in proceeds from exercises of stock options by certain selling stockholders.
74
2. Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America
(“GAAP”). The consolidated financial statements include the results of the Company and its controlled subsidiaries. Third-party holdings of equity
interests in the Company’s subsidiaries that are less than controlled represent noncontrolling interests. Intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Use of estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of
revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its significant estimates including the stand alone selling
price, or SSP, for each distinct performance obligation included in customer contracts with multiple performance obligations, the incremental borrowing
rate used in the valuation of lease liabilities, fair value of convertible senior notes, provision for doubtful accounts, tax valuation allowances, liabilities for
uncertain tax provisions, impairment of goodwill and intangible assets, retirement obligations, useful lives of intangible assets, revenue for fixed price
contracts, valuation of common stock, and stock-based compensation. Actual results could differ from those estimates.
Foreign currency translation
The functional currency of the Company’s foreign subsidiaries is their respective local currency. The assets and liabilities of the subsidiaries are translated
to U.S. dollars at the exchange rate on the balance sheet date. Equity balances and transactions are translated using historical exchange rates. Revenues and
expenses are translated at the average exchange rate during the period. Translation adjustments arising from the use of differing exchange rates from period
to period are recorded as a component of accumulated other comprehensive loss within stockholders’ equity.
All assets and liabilities denominated in a currency other than the functional currency are remeasured into the functional currency with gains and losses
recognized in foreign currency losses, net, in the consolidated statements of operations. The Company has no transactions which hedge purchase
commitments and no intercompany balances which are designated as being of a long-term investment in nature.
Revenue recognition
Software revenue
Revenue is derived principally from the licensing of software products and from related maintenance contracts. The Company enters into contracts that
include combinations of products, maintenance and services, which are accounted for as separate performance obligations with differing revenue
recognition patterns.
Revenue from term-based software licenses is classified as software revenue. Term-based licenses are sold only as a bundled arrangement that includes the
rights to a term-based software license and post-contract customer support (PCS), which includes unspecified technical enhancements and customer
support. Maximizing the use of observable inputs, the Company determined that a majority of the estimated standalone selling prices of the term-based
license is attributable to the term-based license and a minority is attributable to the PCS. The license component is classified as license revenue and
recognized as revenue upon the later of delivery of the licensed product or the beginning of the license period. PCS is classified as maintenance and other
services and is recognized ratably over the term of the contract, as the Company provides the PCS benefit over time as a stand ready to perform obligation.
In addition to term-based software licenses, the Company sells perpetual licenses. Software revenue is recognized upon the later of delivery of the licensed
product or the beginning of the license period. Typically, the Company’s perpetual licenses are sold with PCS. The Company allocates value in bundled
perpetual and PCS arrangements based on the value relationship between the software license and maintenance. Revenue from PCS is classified as
maintenance and other services and is recognized ratably over the term of the contract, as the Company satisfies the PCS performance obligation over time
as a stand ready to perform obligation.
75
Revenue from training, consulting and other services is recognized as the services are performed, and is classified as maintenance and other services in the
consolidated statement of operations. For contracts in which the service consists of a single performance obligation, such as providing a training class to a
customer, the Company recognizes revenue upon completion of the performance obligation. For service contracts that are longer in duration and often
include multiple performance obligations (for example, point-in-time training and consulting), the Company measures the progress toward completion of
the obligations and recognizes revenue accordingly. In measuring progress towards the completion of performance obligations, the Company typically
utilizes output-based estimates for services with fixed fee arrangements, and estimates output based on the total tasks completed as compared to the total
tasks required for each contract. Input-based estimates are utilized for services that involve general consultations with contractual billing arrangements
based on time and materials, utilizing direct labor as the input measure.
The Company also executes arrangements through indirect channel partners in which the channel partners are authorized to market and distribute the
Company's software products to end users of the Company's products and services in specified territories. In sales facilitated by channel partners, the
channel partner bears the risk of collection from the end-user customer. The Company recognizes revenue from transactions with channel partners in a
manner consistent with the direct sales described above for both perpetual and term-based licenses. Revenue from channel partner transactions is the
amount remitted to the Company by the channel partners. This amount includes a fee for PCS that is compensation for providing technical enhancements
and the second level of technical support to the end user, which is recognized over the period that PCS is to be provided. The Company does not offer right
of return, product rotation, or price protection to any of its channel partners.
Non-income related taxes collected from customers and remitted to governmental authorities are recorded on the consolidated balance sheets as accounts
receivable, net and other accrued expenses and current liabilities. These amounts are reported on a net basis in the consolidated statements of operations
and do not impact reported revenues or expenses. Certain hardware revenue is included within software revenue and is recognized when all revenue
recognition criteria stated above are met, which is generally when the products are delivered to end customers.
Software related services
Consulting services from product design and development projects are considered distinct performance obligations and are provided to customers on a
time-and-materials (“T&M”) or fixed-price basis. The Company recognizes software services revenue for T&M contracts based upon hours worked and
contractually agreed upon hourly rates using the input method. Revenue from fixed-price engagements is recognized using the output method based on the
ratio of costs incurred to total estimated project costs.
Client engineering services
Client engineering services revenue are derived from professional services for staffing primarily representing engineers and data scientists located at a
customer site. These professional services are considered distinct performance obligations and are provided to customers on a T&M basis. The Company
recognizes this revenue for T&M contracts based upon hours worked and contractually agreed upon hourly rates using the input method.
Other
Other revenue includes product revenue from the sale of LED products primarily for the replacement of fluorescent tubes. Revenue from the sale of LED
products is recognized when all revenue recognition criteria stated above are met, which is generally when the products are delivered to resellers or to end
customers. Sales returns, which reduce revenue, are estimated using historical experience.
Cash, cash equivalents and restricted cash
The Company considers all highly liquid investments with original or remaining maturities of 90 days or less at the date of purchase to be cash equivalents.
Cash and cash equivalents are recorded at cost, which approximates fair value. Restricted cash is included in Other long-term assets on the consolidated
balance sheets. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets that
sum to the total of the amounts reported in the consolidated statements of cash flows (in thousands):
Cash and cash equivalents
Restricted cash included in other long-term assets
Total cash, cash equivalents, and restricted cash
December 31,
2020
2019
$
$
241,221 $
326
241,547 $
223,117
380
223,497
Restricted cash represents amounts required for a contractual agreement with an insurer for the payment of potential health insurance claims, and term
deposits for bank guarantees.
76
Accounts receivable, net
Accounts receivable, net consisted of the following (in thousands):
Accounts receivable, trade
Contract assets
Accounts receivable, net
December 31,
2020
2019
$
$
111,162 $
6,716
117,878 $
100,461
4,523
104,984
A provision for expected credit losses for groups of billed and unbilled receivables and contract assets that share similar risk characteristics is recorded
based on an evaluation of historical loss experience, current conditions, and reasonable and supportable forecasts. Accounts are written off when it becomes
apparent that such amounts will not be collected, generally when amounts are past due by greater than one year. Generally, the Company does not require
collateral or charge interest on accounts receivable. Accounts receivable were reported net of a provision for credit loss of $2.6 million and $1.4 million at
December 31, 2020 and 2019, respectively. Activity in the provision for credit loss was as follows (in thousands):
Balance, beginning of year
Adoption of ASC 326 on beginning allowance
Provision charged to expense
Write-offs, net of recoveries
Effects of foreign currency translation
Balance, end of year
2020
For the Year Ended December 31,
2019
2018
$
$
(1,415) $
(388)
(1,259)
563
(60)
(2,559) $
(1,150) $
—
(671)
413
(7)
(1,415) $
(798)
—
(394)
3
39
(1,150)
The change in the provision for credit loss was driven by the $0.4 million from the adoption of ASU 2016-13 and incremental losses in the current year
including an immaterial impact of COVID-19 as the Company adjusted expected credit loss rates subsequent to adoption. The impact resulting from the
increased credit loss rates did not have a material effect on the Company’s consolidated financial statements and is reflected in the amounts noted above.
Property and equipment, net
Property and equipment are stated at cost, less accumulated depreciation and amortization. Equipment held under capital leases are stated at the present
value of minimum lease payments less accumulated amortization. Depreciation is calculated using the straight-line method over the estimated useful lives
of the assets.
Expenditures for maintenance and repairs are charged to expense in the period incurred. Major expenditures for betterments are capitalized when they meet
the criteria for capitalization. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in the consolidated statements of operations in the period realized.
Building and improvements is depreciated over an estimated useful life of five to thirty-nine years. Computer equipment and software is depreciated over
an estimated useful life of three to five years. Office furniture and equipment is depreciated over an estimated useful life of five to fifteen years. Leasehold
improvements and assets acquired under capital leases are amortized over the lease term or the estimated useful life of the related asset or improvement,
whichever is shorter.
Software development costs
Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred. Technological feasibility is established
upon the completion of a detailed program design. Capitalization of software development costs begins upon the establishment of technological feasibility
and ends when the product is available for general release. Generally, the time between the establishment of technological feasibility and commercial
release of software is short. As such, all internal software development costs have been expensed as incurred and included in research and development
expense in the accompanying consolidated statements of operations.
77
Impairment of long-lived assets
Long-lived assets, such as property and equipment, and definite-lived intangible assets, including developed technology and customer relationships, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company compares the undiscounted future cash flows
expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable
on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying amount exceeds its fair value. Fair value is
determined through various valuation techniques, including discounted cash flow models and third-party independent appraisals. No impairment losses
were recognized in 2020, 2019, or 2018.
Goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of the consideration transferred for an acquired entity over the estimated fair values of the net tangible assets and the
identifiable assets acquired. As described in Note 4—Acquisitions and disposals, the Company has recorded goodwill in connection with certain
acquisitions. Goodwill and other indefinite-lived intangible assets are not amortized, but rather are reviewed for impairment annually or more frequently if
facts or circumstances indicate that the carrying value may not be recoverable.
The Company has determined that there is one reporting unit with goodwill subject to goodwill impairment testing. An entity has the option to perform a
qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount prior to
performing the quantitative two-step impairment test.
The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it
is more likely than not that the fair value of a reporting unit is less than its carrying amount prior to performing the quantitative two-step impairment test.
The qualitative assessment evaluates various events and circumstances, such as macro-economic conditions, industry and market conditions, cost factors,
relevant events and financial trends that may impact a reporting unit’s fair value. If, after assessing the totality of events or circumstances, an entity
determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, then additional
impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform the two-step goodwill impairment test.
The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value
exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment
loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount
of goodwill allocated to the reporting unit.
The Company performs its annual impairment review of goodwill in the fourth quarter of each year and when a triggering event occurs between annual
impairment dates. For 2020, the Company performed a qualitative assessment of goodwill and determined that it was not more likely than not that the fair
value of its reporting unit with goodwill was less than the carrying amounts. Accordingly, the Company determined that its goodwill was not impaired.
The Company performs its annual impairment review of indefinite-lived intangibles in the fourth quarter of each year and when a triggering event occurs
between annual reporting dates. In 2020, the Company performed a qualitative assessment of indefinite-lived trade names and determined there was no
indication of impairment. Accordingly, no impairment charges were recognized in 2020. During the quarter ended September 30, 2018, the Company
performed a test of indefinite-lived trade names. This test was triggered by the Company’s decision during the quarter to rename and rebrand certain
products in the Software segment. Upon completion of the impairment test, the Company recorded an impairment charge of $0.6 million which is included
in other operating income for the year ended December 31, 2018.
Receivable for R&D credit
The French government provides a research and development (“R&D”) tax credit known as Credit Impôt Recherche, or CIR, in order to encourage
Companies to invest in R&D. The tax credit is deductible from the French income tax and any excess is carried forward for three years. After three years,
any unused credit may be reimbursed to the Company by the French government. As of December 31, 2020, the Company had approximately $13.2 million
receivables from the French government related to CIR, of which $3.2 million is recorded in income tax receivable and the remaining $10.0 million is
recorded in other long-term assets. As of December 31, 2019, the Company had approximately $12.1 million receivables from the French government
related to CIR, of which $2.5 million was recorded in income tax receivable and the remaining $9.6 million was recorded in other long-term assets. CIR is
subject to customary audit by the French tax authorities.
78
Derivative financial instruments
The Company may use derivative financial instruments, primarily interest rate swap contracts or foreign currency contracts, to hedge its exposure to
interest rate or foreign exchange risk. Such derivative financial instruments are initially recorded at fair value on the date on which a derivative contract is
entered into and are subsequently remeasured to fair value at period end. Any gains or losses arising from changes in fair value on derivative contracts
during the year are recorded in other (income) expense, net in the consolidated statement of operations. Hedge accounting has not been applied.
Income taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and
for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent it believes that
these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability and if it is determined
that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which increase the provision for income taxes. In
making such determination, the Company considers all available positive and negative evidence, including historical taxable income, projected future
taxable income, the expected timing and reversal of existing temporary differences, ability to carryback losses, and tax planning strategies. If based upon
the evidence, it is more likely than not that the deferred tax asset will not be realized, a valuation allowance is recorded. A valuation allowance is
recognized to reduce deferred tax assets to the amount that management believes is more likely than not to be realized.
The Company applies a more-likely-than-not recognition threshold to its accounting for tax uncertainties. The Company reviews all of its tax positions and
makes determinations as to whether its tax positions are more likely than not to be sustained upon examination by the relevant taxing authorities. Only
those benefits that have a greater than fifty percent likelihood of being sustained upon examination by taxing authorities are recognized. Interest and
penalties related to uncertain tax positions are recorded in the provision for income taxes in the consolidated statements of operations.
Research and development costs
Research and development costs are expensed as incurred. Research and development expenses consist primarily of salaries and benefits of research and
development employees and costs incurred related to the development of new software products and significant enhancements and engineering changes to
existing software products.
Advertising costs
Advertising costs are expensed as incurred. Advertising expenses were $4.0 million, $4.5 million and $4.4 million for the years ended December 31, 2020,
2019 and 2018, respectively.
Mezzanine equity
In 2017, the Company issued 200,000 shares of Class A common stock to a third party as partial consideration for the purchase of developed technology.
These shares have a put right that can be exercised by the holder five years from date of purchase at $12.50 per share that requires the shares to be recorded
at fair value and classified as mezzanine equity in the consolidated balance sheet. The put right option is terminated if the shareholders sell their shares. As
of December 31, 2017, the Company concluded that it is no longer probable that the put option will be exercised as the put value is substantially below
market value and subsequent adjustment is not required.
During the year ended December 31, 2020, the third party holder sold 133,336 shares on the open market and as a result, the issuance value of those shares
was reclassified into permanent equity from mezzanine equity. The remaining 66,664 shares continue to be classified as mezzanine equity until one of the
following three events take place: (1) the shares are sold on the open market; (2) a redemption feature lapses; or (3) there is a modification of the terms of
the instrument.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current
portion of operating lease liabilities, and operating lease liabilities, net of current portion on the Company’s consolidated balance sheets. Finance leases are
included in property and equipment, current portion of long-term debt, and long-term
79
debt, net of current portion on the consolidated balance sheets. The Company did not receive any lease concessions related to COVID-19 that had a
material effect on the Company’s consolidated financial statements.
Stock-based compensation
Employee stock-based awards, consisting of stock options or restricted stock units (RSUs) expected to be settled by issuing shares of Class A common
stock, are recorded as equity awards. The fair value of stock options on the date of grant is measured using the Black-Scholes option pricing model. The
Company expenses the grant date fair value of its time-vested stock options subject to graded vesting using the straight-line method over the applicable
service period. The fair value of RSUs is measured using the fair value of the Company’s Class A common stock on the date of the grant. The fair value of
RSUs is recognized as expense on a straight-line basis over the requisite service period, which is generally four years.
Business combinations
The Company accounts for business acquisitions using the acquisition method of accounting. The fair value of purchase consideration of the acquired
businesses is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed in the transaction based upon their estimated fair
values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. During the measurement period, which
may be up to one year from the acquisition date. The Company may record adjustments to the assets acquired and liabilities assumed with the
corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
Recent accounting guidance
Accounting standards adopted
Credit Losses – In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. The ASU significantly changed how entities measure credit losses on most financial assets. The Company adopted ASU 2016-13
effective January 1, 2020 and recorded a cumulative effect adjustment to retained earnings of $0.4 million related to the adoption of ASU 2016-13; prior
periods have not been adjusted.
Fair Value – In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements, by removing, modifying, or
adding certain disclosures. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of this guidance did not have a material effect on the
Company’s consolidated financial statements.
Intangibles – In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU clarifies and aligns the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software. The Company adopted ASU 2018-15 on January 1, 2020, on a prospective basis.
The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Accounting standards not yet adopted
Retirement Benefits – In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits- Defined Benefit Plans – General (Subtopic
715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies the disclosure requirements for
defined benefit pension or other postretirement plans. The amendments are effective for fiscal years ending after December 15, 2020; early adoption is
permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures and does
not expect this guidance to have a material effect on its consolidated financial statements.
Income Taxes – In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU
simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and improves consistent application of
GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2020; early adoption is permitted. The Company is currently evaluating the impact of the new
guidance on its consolidated financial statements and related disclosures and does not expect this guidance to have a material effect on its consolidated
financial statements.
Reference Rate Reform – In March 2020, the FASB issued ASU 2020-04. Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate
Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying U.S.
80
GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be
discontinued. The amendments in the guidance are optional and effective for all entities as of March 12, 2020 through December 31, 2022. The Company
is currently evaluating the impact of this new guidance on its consolidated financial statements and related disclosures and does not expect this guidance to
have a material effect on its consolidated financial statements.
Debt – In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies the accounting for convertible instruments by eliminating certain
separation models. Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate
accounting for embedded conversion features. The update also requires the if-converted method to be used for convertible instruments and the effect of
potential share settlement be included in the diluted earnings per share calculation when an instrument may be settled in cash or shares. The amendments in
this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The guidance allows entities to
use a modified or full retrospective transition method. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020,
including interim periods within those fiscal years. The Company is currently evaluating the timing and method of adoption and the related effect of the
new guidance on its consolidated financial statements and earnings per share attributable to common stockholders.
3. Revenue from contracts with customers
Revenue recognition
Software revenue
Revenue is derived principally from the licensing of software products and from related maintenance contracts. The Company enters into contracts that
include combinations of products, maintenance and services, which are accounted for as separate performance obligations with differing revenue
recognition patterns.
Revenue from term-based software licenses is classified as software revenue. Term-based licenses are sold only as a bundled arrangement that includes the
rights to a term-based software license and post-contract customer support (PCS), which includes unspecified technical enhancements and customer
support. Maximizing the use of observable inputs, the Company determined that a majority of the estimated standalone selling prices of the term-based
license is attributable to the term-based license and a minority is attributable to the PCS. The license component is classified as license revenue and
recognized as revenue upon the later of delivery of the licensed product or the beginning of the license period. PCS is classified as maintenance and other
services and is recognized ratably over the term of the contract, as the Company provides the PCS benefit over time as a stand ready to perform obligation.
In addition to term-based software licenses, the Company sells perpetual licenses. Software revenue is recognized upon the later of delivery of the licensed
product or the beginning of the license period. Typically, the Company’s perpetual licenses are sold with PCS. The Company allocates value in bundled
perpetual and PCS arrangements based on the value relationship between the software license and maintenance. Revenue from PCS is classified as
maintenance and other services and is recognized ratably over the term of the contract, as the Company satisfies the PCS performance obligation over time
as a stand ready to perform obligation.
Revenue from training, consulting and other services is recognized as the services are performed, and is classified as maintenance and other services in the
consolidated statement of operations. For contracts in which the service consists of a single performance obligation, such as providing a training class to a
customer, the Company recognizes revenue upon completion of the performance obligation. For service contracts that are longer in duration and often
include multiple performance obligations (for example, point-in-time training and consulting), the Company measures the progress toward completion of
the obligations and recognizes revenue accordingly. In measuring progress towards the completion of performance obligations, the Company typically
utilizes output-based estimates for services with fixed fee arrangements, and estimates output based on the total tasks completed as compared to the total
tasks required for each contract. Input-based estimates are utilized for services that involve general consultations with contractual billing arrangements
based on time and materials, utilizing direct labor as the input measure.
The Company also executes arrangements through indirect channel partners in which the channel partners are authorized to market and distribute the
Company's software products to end users of the Company's products and services in specified territories. In sales facilitated by channel partners, the
channel partner bears the risk of collection from the end-user customer. The Company recognizes revenue from transactions with channel partners in a
manner consistent with the direct sales described above for both perpetual and term-based licenses. Revenue from channel partner transactions is the
amount remitted to the Company by the channel partners. This amount includes a fee for PCS that is compensation for providing technical enhancements
and the second level of technical support to the end user, which is recognized over the period that PCS is to be provided. The Company does not offer right
of return, product rotation, or price protection to any of its channel partners.
81
Non-income related taxes collected from customers and remitted to governmental authorities are recorded on the consolidated balance sheets as accounts
receivable, net and other accrued expenses and current liabilities. These amounts are reported on a net basis in the consolidated statements of operations
and do not impact reported revenues or expenses. Certain hardware revenue is included within software revenue and is recognized when all revenue
recognition criteria stated above are met, which is generally when the products are delivered to end customers.
Software related services revenue
Consulting services from product design and development projects are considered distinct performance obligations and are provided to customers on a
time-and-materials (“T&M”) or fixed-price basis. The Company recognizes software services revenue for T&M contracts based upon hours worked and
contractually agreed upon hourly rates using the input method. Revenue from fixed-price engagements is recognized using the output method based on the
ratio of costs incurred, to the total estimated project costs.
Client engineering services and Other revenue
Client engineering services revenue are derived from professional services for staffing primarily representing engineers and data scientists located at a
customer site. These professional services are considered distinct performance obligations and are provided to customers on a T&M basis. The Company
recognizes this revenue for T&M contracts based upon hours worked and contractually greed upon hourly rates using the input method. No significant
judgments were made for revenue recognition within Other revenue.
Significant judgments
Software revenue
The Company’s contracts with customers typically include promises to transfer licenses and services to a customer. Judgment is required to determine if the
promises are separate performance obligations within the context of the arrangement, and if so, the allocation of the transaction price to each performance
obligation. The Company’s determination of standalone selling price for performance obligations is based on the midpoint of the range of historical
observable prices for goods and services sold separately. In addition, the Company estimates the standalone selling price for certain performance
obligations where observable prices are not directly available, or a significant portion of historical prices are not within the range. In instances where
standalone selling price was not determined based on the range of historical observable prices for goods and services sold separately, the Company used an
adjusted market assessment approach to estimate the standalone selling price. In such cases the Company has considered market conditions and other
observable inputs, such as internal price lists, peer data, and industry data for a similar or identical product. The Company estimates standalone selling
price at contract inception considering all information that is reasonably available and is based on the amount of consideration for which the Company
expects to be entitled in exchange for transferring the promised good or service to the customer. The corresponding revenues are recognized as the related
performance obligations are satisfied.
The Company’s contracts do not include a significant financing component requiring adjustment to the transaction price. Payment terms vary by contract
type; however, arrangements typically stipulate a requirement for the customer to pay within 30 to 60 days.
The Company rarely enters into agreements to modify previously executed contracts, which constitute contract modifications. The Company assesses each
of these contract modifications to determine (i) if the additional products and services are distinct from the products and services in the original
arrangement; and (ii) if the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products
and services, as adjusted for contract-specific circumstances. A contract modification meeting both criteria is accounted for as a separate contract. A
contract modification not meeting both criteria is considered a change to the original contract and is accounted for on either (i) a prospective basis as a
termination of the existing contract and the creation of a new contract; or (ii) a cumulative catch-up basis. Generally, the Company’s contract modifications
meet both criteria and are accounted for as a separate contract, as adjusted for contract-specific circumstances.
Disaggregation of revenue
The Company disaggregates its software revenue by type of performance obligation and timing of revenue recognition as follows (in thousands):
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Term licenses
Perpetual licenses
Maintenance
Professional software services
Software related services
Client engineering services
Other
Total revenue
2020
Year Ended December 31,
2019
2018
$
$
224,472 $
35,493
117,159
14,587
26,454
44,320
7,436
469,921 $
201,881 $
42,440
103,699
18,682
34,576
48,987
8,650
458,915 $
168,909
38,255
86,150
11,047
36,945
47,852
7,221
396,379
The Company derived approximately 10% of its total revenue through indirect sales channels for the years ended December 31, 2020, 2019 and 2018.
Costs to obtain a contract
The Company pays commissions for new software product and PCS sales as well as for renewals of existing software and PCS contracts. Commissions
paid to obtain renewal contracts are not commensurate with the commissions paid for new product sales and therefore, a portion of the commissions paid
for new contracts relate to future renewals.
The Company accounts for new product sales commissions using a portfolio approach and allocates the cost of commissions in proportion to the allocation
of transaction price of license and PCS performance obligations. Commissions allocated to the license and license renewal components are expensed at the
time the license revenue is recognized. Commissions allocated to PCS are capitalized and amortized on a straight-line basis over a period of four years,
reflecting the Company’s estimate of the expected period that it will benefit from those commissions. As of December 31, 2020 and 2019, respectively,
capitalized costs to obtain a contract were $3.7 million and $2.3 million recorded in Prepaid and other current assets and $0.6 million and $0.8 million
recorded in Other long-term assets. Sales commissions were $5.0 million and $4.5 million for the years ended December 31, 2020 and 2019, respectively,
and were included in sales and marketing expense in the Company’s consolidated statement of operations.
Contract assets
At December 31, 2020, contract assets were $6.7 million included in Accounts receivable, $1.4 million included in Prepaid expenses and other current
assets, and $1.3 million included in Other long-term assets. At December 31, 2019, contract assets were $4.5 million included in Accounts receivable and
$2.7 million included in Prepaid expenses and other current assets.
Deferred revenue
Deferred revenue consists of billings made or payments received in advance of revenue recognition from software license, PCS and professional services
agreements. The timing of revenue recognition may differ from the timing of billings to customers. Payment terms vary by the type and location of
customer and the products or services offered. The term between invoicing and when payment is due is not significant. The Company generally invoices its
customers annually for the forthcoming year of software licenses, and more frequently for other products and services. Accordingly, the Company’s
deferred revenue balance does not include revenue for future years of multiple year non-cancellable contracts that have not yet been billed.
Approximately $74.5 million of revenue was recognized during 2020 was included in the deferred revenue balances at the beginning of the year.
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue
and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue not yet recognized was $131.4 million and $113.5
million at December 31, 2020 and 2019, respectively, of which the Company expects to recognize approximately 84% and 80% of the revenue,
respectively, over the next 12 months and the remainder thereafter.
4. Acquisitions and disposals
Univa
In September 2020, the Company acquired all of the outstanding capital stock and equity interests of Univa Corporation (“Univa”) for a preliminary base
purchase price of $30.2 million, subject to certain adjustments. Univa is a leading innovator in enterprise-grade workload management, scheduling, and
optimization solutions for HPC and artificial intelligence (AI) on-premises and in the cloud. Univa’s technology complements Altair’s HPC and data
analytics solutions and enables the Company to further expand into life
83
193
956
164
200
9,000
4,800
(891)
(874)
(1,100)
12,448
17,736
sciences and financial services. Univa is headquartered in Chicago, with offices in Canada and Germany. The financial results of Univa have been included
in the Company’s consolidated financial statements since the acquisition date.
The acquisition of Univa has been accounted for as a business combination under the acquisition method of accounting, which results in acquired assets
and assumed liabilities being measured at their estimated fair value as of the acquisition date. The following table summarizes the preliminary purchase
consideration transferred to acquire Univa and the amounts of identified assets acquired and liabilities assumed at the acquisition date (in thousands):
Fair value of consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed:
$
30,184
Cash
Accounts receivable
Other assets
Trade names (4-year life)
Developed technology (6-year life)
Customer relationships (7-year life)
Accounts payable and other liabilities
Deferred revenue
Deferred tax liabilities
Total net identifiable assets acquired and liabilities assumed
Goodwill
(1) Goodwill is primarily attributable to market synergies expected to arise after the acquisition and is not deductible for tax purposes. All goodwill is recorded in the Software segment.
$
The preliminary estimated fair values of assets acquired and liabilities assumed, and identifiable intangible assets may be subject to change as additional
information is received. The primary areas that remain preliminary relate to the fair value of intangible assets acquired, certain tangible assets and liabilities
acquired, income taxes and residual goodwill. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the
acquisition date.
Other business acquisitions
During the year ended December 31, 2020, the Company completed other business acquisitions that were individually insignificant to the Company’s
consolidated financial statements. The aggregate purchase price of these other acquisitions was $16.9 million and was allocated to assets acquired and
liabilities assumed at their estimated fair values. The allocation included $6.2 million to developed technology, $2.2 million to customer relationships and
$8.2 million to goodwill, and approximately $0.7 million is deductible for tax purposes. The operating results of each acquisition have been included in the
consolidated financial statements since the respective dates of acquisition. All goodwill is recorded in the Software segment.
Polliwog
In October 2019, the Company entered into a stock purchase agreement and simultaneously acquired 97% of the outstanding capital stock of Polliwog Co.
Ltd. (“Polliwog”), a software company based near Seoul, Korea, for aggregate consideration of $19.3 million. In October 2022, the Company will purchase
the remaining three percent of Polliwog’s outstanding capital stock for aggregate consideration of $0.8 million, subject to a second stock purchase
agreement. The allocation of fair value of purchase consideration was finalized in 2020, and there were no material changes to the fair value of assets
acquired and liabilities assumed, as previously reported.
DEM Solutions Limited
In November 2019, the Company entered into a stock purchase agreement and simultaneously acquired 100% of the outstanding capital stock of DEM
Solutions Limited (“DEM Solutions”), a company based in Edinburgh, UK, for aggregate consideration of $13.1 million. The allocation of fair value of
purchase consideration was finalized in 2020, and there were no material changes to the fair value of assets acquired and liabilities assumed, as previously
reported.
WEYV
In July 2019, the Company decided to sunset operations of its WEYV business, a consumer music and content service. The Company concluded that this
decision was not a strategic shift that has or will have a major effect on its operations and financial results, and therefore did not meet the accounting
criteria to be classified as a discontinued operation.
84
The operations of WEYV ceased in the third quarter of 2019. The loss on disposal was not material and is included in other operating income in the
consolidated statement of operations. WEYV had a loss before income tax of $3.0 million and $4.2 million for the years ended December 31, 2019 and
2018, respectively. The WEYV business is reported in All Other within the Company’s segment information in Note 18.
5. Property and equipment, net
Property and equipment consisted of the following (in thousands):
Land
Building and improvements
Computer equipment and software
Office furniture and equipment
Leasehold improvements
Right of use assets under finance leases
Total property and equipment
Less: accumulated depreciation and amortization
Property and equipment, net
Estimated
useful lives
December 31,
2020
2019
Indefinite $
5-39 years
3-5 years
5-15 years
(1)
(1)
$
10,067
15,630
41,451
10,136
9,652
2,665
89,601
53,269
36,332
$
$
9,942
15,512
37,361
8,029
9,014
2,745
82,603
46,306
36,297
(1)
Shorter of lease term or estimated useful life, generally ranging from five to ten years.
Depreciation expense, including amortization of ROU assets under finance leases, was $7.4 million, $7.1 million and $7.0 million for the years ended
December 31, 2020, 2019 and 2018, respectively.
6. Goodwill and other intangible assets
Goodwill
The changes in the carrying amount of goodwill, which is attributable to the Software reportable segment, are as follows (in thousands):
Balance at December 31, 2018
Acquisitions
Effects of foreign currency translation and other
Balance at December 31, 2019
Acquisitions
Effects of foreign currency translation and other
Balance at December 31, 2020
Other intangible assets
A summary of other intangible assets is shown below (in thousands):
Definite-lived intangible assets:
Developed technology
Customer relationships
Other intangibles
Total definite-lived intangible assets
Indefinite-lived intangible assets:
Trade names
Total other intangible assets
$
$
210,532
21,922
1,229
233,683
25,932
4,866
264,481
December 31, 2020
Weighted
average
amortization
period
Gross
carrying
amount
Accumulated
amortization
Net carrying
amount
4-6 years $
7-10 years
4-10 years
$
85
78,841 $
40,207
344
119,392
11,130
130,522 $
37,651 $
16,673
84
54,408
54,408 $
41,190
23,534
260
64,984
11,130
76,114
Definite-lived intangible assets:
Developed technology
Customer relationships
Other intangibles
Total definite-lived intangible assets
Indefinite-lived intangible assets:
Trade names
Total other intangible assets
December 31, 2019
Weighted
average
amortization
period
Gross
carrying
amount
Accumulated
amortization
Net carrying
amount
4-6 years $
7-10 years
10 years
60,916 $
32,582
111
93,609
25,838 $
11,575
62
37,475
$
10,941
104,550 $
37,475 $
35,078
21,007
49
56,134
10,941
67,075
Amortization expense related to amortizing intangible assets was $16.4 million, $14.4 million and $7.7 million for the years ended December 31, 2020,
2019 and 2018, respectively.
Estimated amortization expense for the next five years as of December 31, 2020 is as follows (in thousands):
Year ending
December 31, 2021
December 31, 2022
December 31, 2023
December 31, 2024
December 31, 2025
Thereafter
Total
7. Debt
The carrying value of debt is as follows (in thousands):
Convertible senior notes
Revolving credit facility
Obligations for finance leases
Total debt
Less: unamortized debt discount
Less: unamortized debt issuance costs
Less: current portion of long-term debt
Long-term debt, net of current portion
Convertible senior notes
$
$
December 31,
2020
2019
$
$
230,000 $
30,000
775
260,775
37,190
4,548
30,384
188,653 $
17,763
14,348
15,406
8,204
4,745
4,518
64,984
230,000
—
1,174
231,174
46,820
5,686
430
178,238
In June 2019, the Company issued $230.0 million aggregate principal amount of 0.25% convertible senior notes due in 2024 (the "Convertible Notes"),
which includes the underwriters’ exercise in full of their option to purchase an additional $30.0 million principal amount of the Convertible Notes, in a
public offering. The net proceeds from the issuance of the Convertible Notes were $221.9 million after deducting the underwriting discounts and
commissions and issuance costs.
The Company entered into a First Supplemental Indenture relating to the issuance by the Company of the Convertible Notes (the “Supplemental
Indenture”) supplementing the Indenture, dated June 10, 2019 (the “Base Indenture,” and together with the Supplemental Indenture, the “Indenture”), by
and between the Company and U.S. Bank National Association, as trustee (the “Trustee”). The Indenture includes customary covenants and sets forth
certain events of default after which the Convertible Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or
insolvency events of default involving the Company after which the Convertible Notes become automatically due and payable. The Convertible Notes are
senior unsecured obligations of the Company.
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The Convertible Notes bear interest at a rate of 0.25% per year, payable semi-annually in arrears on June 1 and December 1 of each year, commencing
December 1, 2019. The Convertible Notes will mature on June 1, 2024, unless, earlier repurchased or redeemed by the Company or converted pursuant to
their terms.
The Convertible Notes have an initial conversion rate of 21.5049 shares of the Company's Class A common stock per $1,000 principal amount of
Convertible Notes, which is equivalent to an initial conversion price of approximately $46.50 per share of its Class A common stock. The conversion rate
will be subject to adjustment upon the occurrence of certain events specified in the Indenture but will not be adjusted for any accrued and unpaid interest.
In addition, upon the occurrence of a make whole fundamental change or a redemption period (each as defined in the Indenture), the Company will, in
certain circumstances, increase the conversion rate by a specified number of additional shares for a holder who elects to convert its Convertible Notes in
connection with such make whole fundamental change or during the relevant redemption period.
Holders of the Convertible Notes may convert all or any portion of their Convertible Notes at any time prior to the close of business on December 1, 2023,
in integral multiples of $1,000 principal amount, only under the following circumstances:
•
•
•
•
During any calendar quarter, if the last reported sale price of the Class A Common Stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding
calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as
defined in the Indenture) per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than
98% of the product of the last reported sale price of the Class A Common Stock and the conversion rate on each such trading day;
If the Company calls any or all of the Convertible Notes for redemption (which the Company may not do prior to June 6, 2022), at any
time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
Upon the occurrence of specified corporate events.
On or after December 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may convert their
Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company may satisfy its conversion obligation by paying
and/or delivering, as the case may be, cash, shares of Class A Common Stock or a combination of cash and shares of the Class A Common Stock, at the
Company’s election, in the manner and subject to the terms and conditions provided in the Indenture. The Company intends to settle the principal amount
of the Convertible Notes in cash and the conversion spread in shares.
During the quarter ended December 31, 2020, the conditions allowing holders of the Convertible Notes to convert were not met. Therefore, the Convertible
Notes were classified as long-term debt on the consolidated balance sheet as of December 31, 2020.
As of December 31, 2020, the “if-converted value” exceeded the principal amount of the Convertible Notes by $57.8 million.
The Company accounts for the Convertible Notes as separate liability and equity components. The carrying amount of the liability component of the
Convertible Notes was calculated by measuring the fair value of similar debt instruments that did not have an associated convertible feature. The carrying
amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par
value of the Convertible Notes. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to
interest expense over the term of the Convertible Notes using the effective interest method. The $51.8 million difference between the gross proceeds
received from issuance of the Convertible Notes of $230.0 million and the estimated fair value of the liability component of $178.2 million, represents the
equity component that was recorded in additional paid-in capital. The equity component is not remeasured as long as it continues to meet the conditions for
equity classification.
The Company allocated issuance costs related to the issuance of the Convertible Notes to the liability and equity components using the same proportions as
the initial carrying value of the Convertible Notes. Issuance costs attributable to the liability component are being amortized to interest expense using the
effective interest method over the term of the Convertible Notes. Issuance costs attributable to the equity component are included with the equity
component in stockholders’ equity.
The net carrying value of the liability component of the Convertible Notes was as follows (in thousands):
87
Principal
Less: unamortized debt discount
Less: unamortized debt issuance costs
Net carrying amount
December 31,
2020
2019
$
$
230,000 $
37,190
4,510
188,300 $
230,000
46,820
5,686
177,494
The net carrying value of the equity component of the Convertible Notes was $50.0 million at December 31, 2020 and 2019.
The interest expense related to the Convertible Notes was as follows (in thousands):
Contractual interest expense
Amortization of debt issuance cost and discount
Total
Credit agreement
Revolving credit facility
For the Year Ended December 31,
2020
2019
$
$
575
10,806
11,381
$
$
313
5,635
5,948
The Company has a $150.0 million credit agreement that was amended on June 5, 2019, to permit the issuance of the Convertible Notes and extend the
maturity date of the credit facility to December 15, 2023 (“2019 Amended Credit Agreement”). The 2019 Amended Credit Agreement provides for an
accordion feature that allows the Company to expand the size of the revolving line of credit by an additional $50.0 million, subject to certain conditions, by
obtaining additional commitments from the existing lenders or by causing a person acceptable to the administrative agent to become a lender (in each case
subject to the terms and conditions set forth in the 2019 Amended Credit Agreement).
As of December 31, 2020, the Company had $30.0 million of outstanding borrowings under the 2019 Amended Credit Agreement and there was
$120.0 million available for future borrowing at that time. In January 2021, the Company repaid the $30.0 million borrowing outstanding at December 31,
2020. The 2019 Amended Credit Agreement is available for general corporate purposes, including working capital, capital expenditures, and permitted
acquisitions.
Borrowings under the 2019 Amended Credit Agreement bear interest at a rate per annum equal to an agreed upon applicable margin plus, at the Company’s
option, either the Alternate Base Rate (defined as the greatest of (1) the Prime Rate (as defined in the 2019 Amended Credit Agreement) in effect on such
day, (2) the Federal Funds Effective Rate (as defined in the 2019 Amended Credit Agreement) in effect on such day plus 1/2 of 1.00% or (3) the Adjusted
LIBO Rate (as defined in the 2019 Amended Credit Agreement) for a one month interest period on such day (or if such day is not a business day, the
immediately preceding business day) plus 1.00%) or the Adjusted LIBO Rate. The applicable margin for borrowings under the 2019 Amended Credit
Agreement is based on the Company’s most recently tested consolidated total net leverage ratio and will vary from (a) in the case of Eurodollar loans,
1.25% to 2.00%, and (b) in the case of ABR loans or swingline loans, 0.25% to 1.00%. The Company pays a commitment fee ranging from 0.15% to
0.30% on the unused portion of the 2019 Amended Credit Agreement. The weighted average interest rate on borrowings under the 2019 Amended Credit
Agreement was 1.5% for the year ended December 31, 2020.
Collateral and guarantees
The 2019 Amended Credit Agreement is secured by collateral including (i) substantially all of the Company’s properties and assets, and the properties and
assets of the Company’s domestic subsidiaries but excluding any patents, copyrights, patent applications or copyright applications or any trade secrets or
software products and (ii) pledges of the equity interests in all present and future domestic subsidiaries (subject to certain exceptions as provided for under
the 2019 Amended Credit Agreement). The Company’s direct and indirect domestic subsidiaries are guarantors of all the obligations under the 2019
Amended Credit Agreement.
Debt covenants
The 2019 Amended Credit Agreement requires the Company to maintain the following financial covenants:
•
Maximum Net Leverage Ratio : On the last day of each fiscal quarter, the Company on a consolidated basis will not permit the ratio of total
indebtedness (net of unrestricted domestic cash in excess of $20.0 million) to EBITDA, as such terms are defined in the 2019 Amended
Credit Agreement, for the rolling four quarter period ending on such date to be greater than 5.00 to 1.00 as of the last day of each fiscal
quarter.
88
•
•
Senior Secured Leverage Ratio : On the last day of each fiscal quarter, the Company on a consolidated basis will not permit the ratio of total
indebtedness secured by a lien (net of unrestricted domestic cash in excess of $20.0 million) to EBITDA, as such terms are defined in the
2019 Amended Credit Agreement, for the rolling four quarter period ending on such date to be greater than 3.00 to 1.00 as of the last day of
each fiscal quarter.
Consolidated Interest Coverage Ratio : On the last day of each fiscal quarter, the Company on a consolidated basis will not permit the ratio of
(x) EBITDA to (y) cash Consolidated Interest Expense, as such terms are defined in the 2019 Amended Credit Agreement, in each case for
the rolling four quarter period ending on such date, to be less than 3.00 to 1.00 as of the last day of each fiscal quarter.
At December 31, 2020, the Company was in compliance with all of the above financial covenants.
Other
The Company has available overdraft and line of credit facilities in several countries in which it operates. These credit facilities are with various domestic
and international banks and are at quoted market rates. At December 31, 2020 and 2019, the Company had $3.6 million and $3.5 million, respectively, of
availability under these facilities and there were no outstanding commitments.
8. Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease assets and operating lease obligations
on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, current portion of long-term debt, and long-term
debt on the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make
lease payments under the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum
lease payments over the lease term at commencement date. At commencement date, the ROU asset also includes adjustments for lease prepayments, lease
incentives received and the lessee's initial direct costs, if applicable. As most of the Company’s leases do not provide an implicit rate, the Company uses its
incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The incremental
borrowing rates are determined using rates specific to the term of the lease, economic environments where lease activity is concentrated, value of lease
portfolio, and assuming full collateralization of the loans. Subsequent to the commencement date, the operating ROU asset is equal to the remeasured lease
liability adjusted for cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, unamortized lease incentives,
unamortized initial direct costs and any impairment of the ROU assets. The lease terms may include options to extend or terminate the lease when it is
reasonably certain that the Company will exercise that option. Lease cost for minimum lease payments is recognized on a straight-line basis over the lease
term.
The Company does not recognize a lease liability or ROU asset for short-term leases (leases with a term of twelve months or less). For contracts with lease
and non-lease components, the Company does not allocate the contract consideration, and accounts for the lease and non-lease components as a single lease
component.
The Company’s operating leases consist of office facilities, office equipment and cars and the Company’s finance leases consist of office equipment and
cars. The Company’s leases have remaining terms of less than one year to 8.7 years, some of which include one or more options to renew, with renewal
terms up to six years and some of which include options to terminate the leases within the next three years.
The components of lease cost were as follows (in thousands):
Operating lease cost
Finance lease cost:
Amortization of ROU assets
Interest on lease liabilities
Total finance lease cost
For the Year Ended December 31,
2020
2019
13,412 $
13,287
634 $
32
666 $
525
21
546
$
$
$
Operating lease cost includes short-term leases and variable lease costs, which are immaterial. Rent cost related to operating leases for office facilities
was $12.1 million, $11.8 million and $11.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
89
$
$
$
$
$
$
$
$
$
$
$
$
Supplemental balance sheet information related to lease liabilities was as follows:
(in thousands, except lease term and discount rate)
Operating leases:
Operating lease ROU assets
Current portion of operating lease liabilities
Operating lease liabilities, net of current portion
Total operating lease liabilities
Weighted average remaining lease term
Weighted average discount rate
Finance leases:
Property and equipment
Accumulated depreciation
Property and equipment, net
Current portion of long-term debt
Long-term debt, net of current portion
Total finance lease liabilities
Weighted average remaining lease term
Weighted average discount rate
Supplemental cash flow information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
ROU assets obtained in exchange for lease obligations:
Operating leases
Finance leases
Maturities of operating lease liabilities at December 31, 2020, were as follows (in thousands):
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: imputed interest
Total operating lease liabilities
90
December 31,
2020
2019
33,526
$
10,331
24,323
34,654
$
$
4.2
4.7%
2,665
(1,797)
868
$
$
422
353
775
$
$
2.1
3.1%
For the Year Ended December 31,
2019
2020
(11,875) $
(32) $
(456) $
11,713 $
118 $
$
$
28,134
9,141
20,174
29,315
4.2
5.6%
2,745
(1,447)
1,298
430
744
1,174
2.7
3.5%
(11,355)
(46)
(438)
11,251
632
11,704
9,408
6,900
4,178
2,786
3,203
38,179
3,525
34,654
9. Other liabilities
The following table provides the details of other accrued expenses and current liabilities (in thousands):
Income taxes payable
Accrued VAT
Accrued professional fees
Accrued royalties
Obligations for acquisition of businesses
Defined contribution plan liabilities
Non-income tax liabilities
Billings in excess of cost
Other current liabilities
Total
The following table provides the details of other long-term liabilities (in thousands):
Pension and other post retirement liabilities
Deferred tax liabilities
Other liabilities
Total
10. Fair value measurements
December 31,
2020
2019
7,250 $
6,604
3,156
2,009
1,957
1,660
1,366
1,108
5,872
30,982 $
December 31,
2020
2019
14,497 $
8,028
4,889
27,414 $
6,008
5,312
2,581
2,314
1,362
1,593
1,253
879
7,301
28,603
10,379
6,275
10,018
26,672
$
$
$
$
The accounting guidance for fair value, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands
disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting
date. The framework for measuring fair value consists of a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly
summarized as follows:
Level 1— Quoted prices in active markets for identical assets and liabilities at the measurement date;
Level 2— Observable inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3— Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair
value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. Interest on
the Company’s line of credit is at a variable rate, and as such the debt obligation outstanding approximates fair value.
The carrying value of the Company’s Convertible Notes are at face value less unamortized debt discount and issuance costs. The estimated fair values of
the Convertible Notes, which the Company has classified as Level 2 financial instruments, were determined based on quoted bid prices of the Convertible
Notes on the last trading day of each reporting period. At December 31, 2020, the fair value of the Convertible Notes was $316.3 million and is presented
for required disclosure purposes only. For further information on the Convertible Notes see Note 7.
91
The Company is exposed to certain financial market risks related to its ongoing business operations. The Company can manage foreign currency exchange
rate risk and interest rate risk through derivative financial instruments and hedging activities. Derivative financial instruments and hedging activities can be
utilized to protect the Company’s cash flow from adverse movements in foreign currency exchange rates and to manage interest costs. Although the
Company is exposed to credit loss in the event of nonperformance by the counterparty to the derivative financial instruments, the Company attempts to
limit this exposure by entering into agreements directly with major financial institutions that meet the Company’s credit standards and that are expected to
fully satisfy their obligations under the contracts. The Company had no foreign exchange contracts or derivative financial instruments at December 31,
2020 or 2019.
11. Stockholders’ equity
Preferred stock
As of December 31, 2020, the Company had authorized 45,000,000 shares of preferred stock, par value $0.0001, of which no shares were issued or
outstanding. The Board of Directors has the authority to issue the preferred stock in one or more series and to fix rights, preferences, privileges, and
restrictions, including dividends and the number of shares constituting any series or the designation of such series, without any further vote or action by the
stockholders.
Common stock
As of December 31, 2020, the Company had authorized 513,796,572 shares of Class A common stock, par value $0.0001, and 41,203,428 shares of Class B
common stock, par value $0.0001. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to
voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten
votes per share and is convertible into one share of Class A common stock.
The holders of Class A and Class B common stock are entitled to dividends at the sole discretion of the Board of Directors. No common stock dividends
were declared or paid in 2020, 2019, or 2018.
12. Stock-based compensation
2001 stock-based compensation plans
Nonqualified stock option plan
In 2001, the Company established the Nonqualified Stock Option Plan (“NSO Plan”) under which 2,533,931 stock options with an exercise price of
$.000025 remain outstanding at December 31, 2020. The NSO Plan was terminated in 2003. Stock options under the NSO plan were immediately vested
and have a contractual term of 35 years from the date of grant. The outstanding awards will continue to be governed by their existing terms under the NSO
Plan. The NSO Plan is accounted for as an equity plan.
The following table summarizes the stock option activity under the NSO Plan:
Outstanding at January 1, 2020
Exercised
Forfeited
Outstanding and exercisable at December 31, 2020
Number of
options
Weighted
average
exercise price
per share
Weighted
average
remaining
contractual
term (years)
Aggregate
intrinsic value (in
millions)
3,557,436 $
(1,023,505) $
— $
2,533,931 $
0.000025
0.000025
—
0.000025
17.0 $
127.8
16.0 $
147.4
The total intrinsic value of the NSO Plan stock options exercised during the years ended December 31, 2020, 2019 and 2018, was $43.1 million, $28.8
million and $68.4 million, respectively.
Incentive and nonqualified stock-based plan
Also, in 2001, the Company established the Incentive and Nonqualified Stock-based Plan (“ISO Plan”) which was terminated in 2011 and was authorized
to issue nonqualified stock options (“NQSO”) and incentive stock options (“ISO”) totaling 11,153,872 shares of Class A common stock. The NQSO grants
could be issued at less than the fair market value at date of grant under the terms of the ISO Plan, while ISO grants were issued at a price equal to or greater
than the fair market value at date of grant. Options generally vest over a two to three-year period. All options have a contractual term of ten years from the
date of grant.
92
The following table summarizes the stock option activity under the 2001 Stock-based compensation plans for the periods indicated as follows:
Outstanding at January 1, 2020
Exercised
Forfeited
Outstanding and exercisable at December 31, 2020
Number of
options
103,000 $
(103,000) $
— $
— $
Weighted
average
exercise price
per share
Weighted
average
remaining
contractual
term (years)
Aggregate
intrinsic value
(in millions)
0.64
0.64
—
—
1.0 $
3.6
—
—
The total intrinsic value of the ISO Plan stock options exercised during the years ended December 31, 2020, 2019 and 2018, was $3.8 million,
$14.4 million, and $5.2 million, respectively.
2012 stock-based compensation plans
During 2012, the Company established the 2012 Incentive and Nonqualified Stock Option Plan (“2012 Plan”) which permits the issuance of 5,200,000
shares of Class A common stock for the grant of nonqualified stock options (“NQSO”) and incentive stock options (“ISO”) for management, other
employees, and board members of the Company. The options are issued at a price equal to or greater than fair market value at date of grant. All options
have a contractual term of 10 years from date of grant.
The 2012 Plan is accounted for as an equity plan. For those options expected to vest, compensation expense is recognized on a straight-line basis over a
four-year period, the total requisite service period of the awards. Total compensation cost related to nonvested awards not yet recognized as of
December 31, 2020, was $0.1 million and is expected to be recognized over a weighted average period of 0.4 years.
The following table summarizes the stock option activity under the 2012 Plan for the periods indicated as follows:
Outstanding at January 1, 2020
Granted
Exercised
Forfeited
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Number of
options
1,183,817 $
— $
(351,165) $
(8,000) $
824,652 $
691,362 $
Weighted
average
exercise price
per share
4.23
—
4.18
4.31
4.26
4.08
Weighted
average
remaining
contractual
term (years)
6.1
Aggregate
intrinsic value
(in millions)
5.1
4.8 $
37.4
The total intrinsic value of the 2012 Plan stock options exercised during the years ended December 31, 2020, 2019, and 2018, was $13.9 million, $11.2
million and $18.0 million, respectively.
2017 stock-based compensation plan
In 2017, the Company’s board of directors adopted the 2017 Equity Incentive Plan (“2017 Plan”), which was approved by the Company’s stockholders.
The 2017 Plan provides for the grant of incentive stock options to the Company’s employees and any parent and subsidiary corporations’ employees, and
for the grant of nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, other
cash-based and stock-based awards to the Company’s employees, directors and consultants and the Company’s parent, subsidiary, and affiliate
corporations’ employees and consultants. The 2017 Plan has 10,277,034 authorized shares of the Company’s Class A common stock reserved for issuance.
The following table summarizes the restricted stock units, or RSUs, awarded under the 2017 Plan for the period:
93
Outstanding at January 1, 2020
Granted
Vested
Forfeited
Outstanding at December 31, 2020
The following table summarizes the stock option activity under the 2017 Plan for the period:
Number of RSUs
781,301
641,723
(222,716)
(45,372)
1,154,936
Outstanding at January 1, 2020
Granted
Exercised
Forfeited
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Number of
options
20,000 $
4,209,454 $
(5,000) $
(20,972) $
4,203,482 $
158 $
Weighted
average
exercise price
per share
Weighted
average
remaining
contractual
term (years)
Aggregate
intrinsic value (in
millions)
38.11
45.68
38.11
40.80
45.68
29.22
9.2
9.7
0.2
The weighted average grant date fair value of the RSUs was $32.22 and the RSUs generally vest in four equal annual installments. The fair value of RSUs
that vested during the year ended December 31, 2020, was $6.7 million. Total compensation cost related to nonvested awards not yet recognized as of
December 31, 2020, was $90.9 million, and is expected to be recognized over a weighted average period of 2.7 years.
Fair value of equity awards
The Company measures the fair value of its stock options on the date of grant using the Black-Scholes option pricing model. This valuation model requires
the Company to make certain estimates and assumptions, including assumptions related to the expected price volatility of the Company’s stock, the period
under which the options will be outstanding, the rate of return on risk-free investments, and the expected dividend yield for the Company’s stock.
The fair values of the Company’s stock options granted during the year ended December 31, 2020 and 2019, were estimated using the following
assumptions:
Weighted average grant date fair value per share
Expected volatility
Expected term (in years)
Risk-free interest rate
Expected dividend yield
These assumptions and estimates are as follows:
$
2020 grants
$29.22 - 57.72
34 - 35%
6.25
0.46 - 0.6%
0%
2019 grants
38.11
42%
6.25
1.80%
0%
•
•
•
•
Fair Value of Common Stock. The Company used the publicly quoted price as reported on the Nasdaq Global Select Market as the fair value of its
common stock.
Expected Term. The Company used the simplified method to determine the expected term.
Risk-Free Interest Rate. The Company based the risk-free interest rate on U.S. Treasury zero-coupon yield curves with a remaining term equal to
the expected term of the option.
Expected Volatility. As the Company does not have an extensive trading history for its common stock, the expected volatility was derived using
the historical volatility of the returns of comparable publicly traded companies combined with the brief trading history of the Company’s
common stock.
The Company did not grant any stock options during the year ended December 31, 2018.
94
Other
In connection with the acquisition of Polliwog, per the Stock Purchase Agreement, 256,594 shares of the Company’s Class A Common Stock will be issued
to existing employees, subject to continuing employment. The shares will be issued on the one-, two- and three-year anniversaries of the closing, subject to
potential reduction in certain circumstances. The accounting treatment for these shares in the context of the business combination is to recognize the
expense as a post-combination expense, not as transaction consideration.
The estimated post combination expense to the Company as a result of the business combination was approximately $8.7 million which is recognized on a
straight-line basis over the employment period that was stipulated in the Stock Purchase Agreement. As of December 31, 2020, the weighted average
remaining service period is 1.8 years. Once the vesting conditions of the service period are met, the Company will issue shares for each award. Stock-based
compensation expense includes $2.9 million and $0.7 million expense related to these shares for the years ended December 31, 2020 and 2019,
respectively.
Stock-based compensation expense
The stock-based compensation expense was recorded as follows (in thousands):
Cost of revenue-software
Research and development
Sales and marketing
General and administrative
Total stock-based compensation expense
2020
Year ended December 31,
2019
2018
$
$
2,473 $
8,372
6,423
4,087
21,355 $
1,069 $
2,917
2,250
2,292
8,528 $
31
740
910
1,658
3,339
13. Income taxes
The components of income (loss) before income taxes are as follows (in thousands):
U.S.
Non-U.S.
The significant components of the income tax expense are as follows (in thousands):
2020
Year ended December 31,
2019
2018
$
$
(22,127) $
24,159
2,032 $
(14,732) $
18,120
3,388 $
4,228
22,796
27,024
Current
U.S. Federal
Non-U.S.
U.S. State and Local
Total current
Deferred
U.S. Federal
Non-U.S.
U.S. State and Local
Total deferred
Income tax expense
2020
Year ended December 31,
2019
2018
$
— $
— $
23,197
(315)
22,882
(881)
(9,849)
380
(10,350)
12,532 $
11,434
446
11,880
193
(1,143)
—
(950)
10,930 $
$
95
2
12,629
(16)
12,615
1,714
(2,823)
(17)
(1,126)
11,489
The reconciliation of income taxes calculated at the U.S. Federal statutory income tax rate to income tax expense is as follows (in thousands):
2020
Year ended December 31,
2019
U.S. federal statutory rate
Income taxes at U.S. federal statutory rate
Foreign income taxes at rates other than the federal statutory rate
U.S. state and local income taxes, net of U.S. federal tax benefit
U.S. effect of changes in tax laws
U.S. effect of foreign operations
Change in valuation allowance
Foreign withholding taxes
U.S. foreign tax credit and deduction
Research and development tax credit
Stock-based compensation
Meals & entertainment
Other
Uncertain tax positions
Acquisition costs
Tax law changes
Income tax expense
$
$
21%
427
1,161
(4,892)
4,946
1,205
5,215
6,691
(1,308)
2,576
(5,001)
77
640
720
75
—
12,532
$
$
21%
711
1,247
(6,836)
—
8,609
18,138
5,975
(7,059)
(2,600)
(4,574)
246
(1,068)
(1,859)
—
—
10,930
2018
21%
5,675
2,179
(3,453)
—
—
21,544
5,103
(5,648)
(2,819)
(14,964)
181
1,206
903
503
1,079
11,489
$
$
The Tax Act subjects a U.S. shareholder to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The impact
of GILTI resulted in no incremental tax expense for the year ended December 31, 2020 due to a full valuation allowance on U.S. net deferred tax assets. In
addition, the Company has made an accounting policy election to treat taxes due under the GILTI provision as a current period expense. On July 23, 2020,
the Department of Treasury published final regulations under the GILTI and Subpart F provisions of the Code regarding the treatment of income that is
subject to a high rate of foreign tax (“high-tax exclusion”). These regulations, among other things, permit U.S. shareholders of foreign corporations to make
an election for a controlled foreign corporation to exclude from subpart F income any item of income received by the controlled foreign corporation if that
income is subject to an effective tax rate greater than 90% of the maximum U.S. corporate income tax rate of 21%. The Company has evaluated the impact
of these regulations and made an election to avail the high-tax exclusion for tax years 2018 and 2019. Since this is an annual election, the Company intends
to make a high-tax exclusion election for 2020 tax year and has recorded the impact of the election in its 2020 year-end tax provision.
The Tax Cuts and Jobs Act, or the Tax Act, was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate from 35%
to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new
taxes on certain foreign sourced earnings. The Company applied the guidance in Staff Accounting Bulletin No. 118, Income Tax Accounting Implications
of the Tax Cut and Jobs Act when accounting for the enactment-date effects of the Tax Act. At December 31, 2018, the Company had completed its
accounting for the tax effects of the Tax Act; the Company did not record any adjustments to the provisional amounts recorded at December 31, 2017
related to the remeasurement of its deferred balances. At December 31, 2017, the Company originally recorded a provisional amount for its one-time
transition tax of $4.2 million, which was substantially offset by available foreign tax credits. During the year ended December 31, 2018, the Company
revised its estimate of the provisional amount of the one-time transition tax. Upon further analyses of certain aspects of the Tax Act and refinement of its
calculations, the Company increased its provisional amount of transition tax by approximately $0.6 million for the year ended December 31, 2018. This
resulted in no change to income tax expense due to the impact of foreign tax credits.
96
Deferred income tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial statements purposes. The
approximate tax effect of each type of temporary difference, and operating losses and tax credit carryforwards that give rise to a significant portion of the
deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Deferred revenue
Net operating loss carryforwards
Tax credit carryforwards
Stock-based compensation
Capitalized research and development
Lease obligation
Employee benefits
Other
Total gross deferred tax assets
Less: valuation allowances
Net deferred tax assets (1)
Deferred tax liabilities:
Prepaid royalties
Property and equipment and intangibles
Deferred tax on investment in subsidiary
Lease right of use asset
Convertible debt, net of issuance costs
Other
Total deferred tax liabilities
Total net deferred tax (liabilities) assets
December 31,
2020
2019
$
12,135 $
66,160
26,299
3,766
6,472
9,956
5,980
2,618
133,386
(96,831)
36,555
584
16,177
790
9,610
8,685
1,612
37,458
$
(903) $
11,408
38,745
38,981
6,480
7,162
7,579
5,189
1,968
117,512
(84,356)
33,156
—
13,588
474
7,247
10,899
1,432
33,640
(484)
(1)
Reflects gross amount before jurisdictional netting of deferred tax assets and liabilities.
Deferred tax assets and liabilities are determined separately for each tax jurisdiction on a separate or on a consolidated tax filing basis, as applicable, in
which the Company conducts its operations or otherwise incurs taxable income or losses. A valuation allowance is recorded when it is more likely than not
that some portion or all of the gross deferred tax assets will not be realized. The realization of deferred tax assets depends on the ability to generate
sufficient taxable income of the appropriate character within the carryback or carryforward periods provided for in the tax law for each applicable tax
jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:
•
•
•
•
taxable income in prior carryback years;
future reversals of existing taxable temporary differences;
future taxable income exclusive of reversing temporary differences and carryforwards; and
prudent and feasible tax planning strategies that the Company would be willing to undertake to prevent a deferred tax asset from otherwise
expiring.
The assessment regarding whether a valuation allowance is required or whether a change in judgment regarding the valuation allowance has occurred also
considers all available positive and negative evidence, including but not limited to:
•
•
•
•
•
nature, frequency, and severity of cumulative losses in recent years;
duration of statutory carryforward and carryback periods;
statutory limitations against utilization of tax attribute carryforwards against taxable income;
historical experience with tax attributes expiring unused; and
near‑ and medium‑term financial outlook.
The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accordingly, it
is generally difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as
cumulative losses in recent years. The Company uses the actual results for the last two years and current year results as the primary measure of cumulative
losses in recent years.
97
The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events recognized in the financial statements or
tax returns and future profitability. The recognition of deferred tax assets represents the Company’s best estimate of those future events. Changes in the
current estimates, due to unanticipated events or otherwise, could have a material effect on the Company’s results of operations and financial condition.
In certain tax jurisdictions, the Company’s analysis indicates that it has cumulative losses in recent years. This is considered significant negative evidence,
which is objective and verifiable and, therefore, difficult to overcome. However, the cumulative loss position is not solely determinative and, accordingly,
the Company considers all other available positive and negative evidence in its analysis. Based on its analysis, the Company has recorded a valuation
allowance for the portion of deferred tax assets where based on the weight of available evidence it is unlikely to realize those deferred tax assets.
Based on the evidence available including a lack of sustainable earnings, the Company in its judgment previously recorded a valuation allowance against
substantially all of its net deferred tax assets in the United States. If a change in judgment regarding this valuation allowance were to occur in the future, the
Company will record a potentially material deferred tax benefit, which could result in a favorable impact on the effective tax rate in that period.
As a result of the Tax Act, the Company has not had a change in judgement regarding the gross book-tax basis differences in its non-U.S. consolidated
subsidiaries. The Tax Act required a one-time transition tax for deemed repatriation of accumulated undistributed earnings of certain foreign investments. If
we determine that all or a portion of our foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes,
U.S. taxes on foreign currency fluctuations on these accumulated undistributed earnings, and incremental U.S. state income taxes, beyond the Tax Act's
one-time transition tax. The Company continues to record deferred foreign taxes on gross book-tax basis differences to the extent of foreign distributable
reserves and excess cash balances for its subsidiary in India. Determining the amount of unrecognized deferred tax liability related to any remaining
undistributed foreign earnings is not practicable.
The following table summarizes the changes to the valuation allowance balance (in thousands):
Beginning balance
Additions charged to expense
Other
Ending balance
2020
December 31,
2019
2018
$
$
84,356 $
5,215
7,260
96,831 $
78,155 $
18,138
(11,937)
84,356 $
56,761
21,544
(150)
78,155
The change in valuation allowance in Other for 2020 of $7.3 million is primarily related to a valuation allowance recorded on deferred tax assets
established during purchase accounting from the Univa acquisition. The change in valuation allowance in Other for 2019 of $11.9 million is related to the
issuance of convertible debt, net of issuance costs. The change in valuation allowance in Other for 2018 of $0.2 million is related to a decrease in valuation
allowance from ASC 606 adoption of $12.6 million, the tax benefit recorded in other comprehensive income of $0.2 million, offset by an increase in
valuation allowance recorded for business combinations of $12.6 million.
The following table summarizes the amount and expiration dates of operating loss and tax credit carryforwards at December 31, 2020 (in thousands):
U.S. general business credits and loss carryforwards
Foreign loss carryforwards
U.S. foreign tax credits
Total operating loss and tax credit carryforwards
Expiration dates
Amounts
2021-Indefinite $
Indefinite
2027
$
79,591
9,990
2,878
92,459
98
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
Unrecognized tax benefits—January 1
Increase in unrecognized tax benefits as a result of:
Additions for tax positions of current period
Additions for tax positions of prior periods
Reductions for tax positions of prior periods
Reductions due to statute of limitations
Unrecognized tax benefits—December 31
2020
Year ended December 31,
2019
2018
$
15,540 $
17,097 $
6,157
310
1,890
(8,816)
—
8,924 $
(203)
642
(1,834)
(162)
15,540 $
234
10,866
(100)
(60)
17,097
$
At December 31, 2020, the Company had $3.5 million of gross unrecognized tax benefits that if recognized would affect the effective tax rate. The
Company expects a reduction over the next 12 months in the gross unrecognized tax benefits of approximately $0.4 million which if recognized would not
impact the effective tax rate during 2021.
The Company operates globally but considers its more significant tax jurisdictions to include the United States, India, Germany, Japan, and China. India
has tax years open for examination from 2009 through 2020. All other significant jurisdictions have open tax years from 2015 through 2020.
The Company records interest and penalties with respect to unrecognized tax benefits as a component of the provision for income taxes. For the years
ended December 31, 2020 and 2019, accrued interest and penalties related to unrecognized tax benefits were insignificant.
14. Net (loss) income per share
Basic net (loss) income per share attributable to common stockholders is computed using the weighted average number of shares of common stock
outstanding for the period, excluding stock options and restricted stock units (“RSUs”). Diluted net (loss) income per share attributable to common
stockholders is based upon the weighted average number of shares of common stock outstanding for the period and potentially dilutive common shares,
including the effect of stock options and RSUs under the treasury stock method. The following table sets forth the computation of the numerators and
denominators used in the basic and diluted net (loss) income per share amounts (in thousands, except per share data):
Numerator:
Net (loss) income
Denominator:
Denominator for basic (loss) income per share—
weighted average shares
Effect of dilutive securities, stock options and RSUs
Denominator for dilutive (loss) income per share
Net (loss) income per share attributable to common stockholders, basic
Net (loss) income per share attributable to common stockholders, diluted
$
$
2020
Year ended December 31,
2019
2018
$
(10,500) $
(7,542) $
15,535
73,241
—
73,241
(0.14) $
(0.14) $
71,544
—
71,544
(0.11) $
(0.11) $
67,468
7,410
74,878
0.23
0.21
Since the Company was in a net loss position for the years ended December 31, 2020 and 2019, basic net loss per share attributable to common
stockholders is the same as diluted net loss per share for those periods as the inclusion of all potential common shares outstanding would have been anti-
dilutive. For the years ended December 31, 2020 and 2019, respectively, there were 3.1 million and 5.7 million potentially anti-dilutive shares, which were
excluded from the computation of net loss per share. For the year ended December 31, 2018, there were no anti-dilutive shares, which were excluded from
the computation of net income per share.
The Company expects to settle the principal amount of the Convertible Notes in cash, and therefore, the Company uses the treasury stock method for
calculating any potential dilutive effect of the Conversion Option on diluted net (loss) income per share, if applicable. The Conversion Option will have a
dilutive impact on net income per share of common stock when the average market price of the Company’s Class A common stock for a given period
exceeds the conversion price of the Convertible Notes of $46.50 per share. During the years ended December 31, 2020 and 2019, the Company's weighted
average common stock price was below the conversion price of the Convertible Notes.
99
15. Retirement benefits
The Company sponsors a 401(k)-profit sharing plan (the “Plan”) for all eligible U.S. employees. This Plan allows eligible employees to contribute up to
80% of their compensation to the Plan. The Company makes discretionary matching contributions to the Plan provided the employee is employed on the
last day of the year. Such discretionary contributions vest ratably over five years of service. The Company’s contributions to the Plan were $1.6 million,
$1.6 million and $1.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company also participates in government-mandated retirement and/or termination indemnity plans, benefiting certain non-U.S. employees.
Termination benefits are generally lump sum payments based upon an individual’s years of credited service and annual salary at retirement. These plans are
generally unfunded, and employees receive payments at the time of retirement or termination under applicable labor laws or agreements. The amount of net
benefit cost recorded in the consolidated statements of operations for these plans was $2.7 million, $1.8 million and $1.2 million in 2020, 2019 and 2018,
respectively. The amount of benefits paid under these plans was $0.5 million, $0.4 million and $0.4 million in 2020, 2019 and 2018, respectively. The
accumulated benefit obligation, unlike the projected benefit obligation, does not reflect expected benefit increases from future salary levels, and was
$8.7 million and $6.8 million at December 31, 2020 and 2019, respectively, under these plans. The projected benefit obligation, net of plan assets, was
$15.2 million and $11.0 million at December 31, 2020 and 2019, respectively.
A summary of the components of the pension benefits obligation recorded in the consolidated balance sheets are as follows (in thousands):
Accrued compensation and benefits
Other long-term liabilities
December 31,
2020
2019
$
$
657 $
14,497
15,154 $
596
10,379
10,975
The estimated future benefit payments, which reflect expected future service, that are expected to be paid for each of the next five years are as follows (in
thousands):
Year ending
December 31, 2021
December 31, 2022
December 31, 2023
December 31, 2024
December 31, 2025
Next five years
$
$
$
$
$
$
677
480
624
662
577
4,772
100
16. Accumulated other comprehensive loss
The components of accumulated other comprehensive loss are as follows (in thousands):
Balance at December 31, 2017
$
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive loss
Tax effects
Other comprehensive income (loss)
Balance at December 31, 2018
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive loss
Tax effects
Other comprehensive income (loss)
Balance at December 31, 2019
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive loss
Tax effects
Other comprehensive income (loss)
Balance at December 31, 2020
$
Foreign
currency
translation
Retirement
related
benefit plans
Total
(3,374) $
(5,449)
—
—
(5,449)
(8,823)
1,895
—
—
1,895
(6,928)
7,782
—
—
7,782
854 $
(1,698) $
90
(1,177)
318
(769)
(2,467)
62
(179)
(16)
(133)
(2,600)
(501)
(858)
308
(1,051)
(3,651) $
(5,072)
(5,359)
(1,177)
318
(6,218)
(11,290)
1,957
(179)
(16)
1,762
(9,528)
7,281
(858)
308
6,731
(2,797)
17. Commitments and contingencies
Swedish Tax Litigation
The Swedish Tax Authorities, or STA, assessed tax (net of utilization of tax attributes), penalties and interest in the amount of $6.2 million related to the
acquisition of Panopticon AB by Datawatch Corporation, in 2013 for the years 2013, 2014 and 2015. The STA, upon auditing the acquisition transaction,
reached a conclusion that post acquisition, certain assets were removed from Sweden, triggering the tax obligation. The STA is also of the opinion that
some services related to product development provided to the new parent company in the U.S. were performed by Panopticon AB at a price below market
price triggering tax obligations. Datawatch contested the findings by the STA throughout the audit process including contesting the STA position in the first
level of administrative courts. On May 29, 2019, the Administrative Court issued its ruling in favor of Datawatch AB. On July 4, 2019, the STA filed an
appeal of the Administrative Court ruling with the Administrative Court of Appeals in Stockholm, effectively continuing to assert that the assessments are
in fact appropriate. After relevant submissions by the Company and the STA, the Court of Appeals held a hearing on February 20, 2020.
On March 27, 2020, the Court of Appeals issued its finding in favor of the STA. Pursuant to requirements in Sweden, the Company paid the assessed tax,
penalties and interest on April 24, 2020. The Company, in accordance with its right to appeal the ruling to the Administrative Supreme Court of Sweden,
filed an appeal of the Court of Appeals ruling citing specific grounds for reconsideration. On November 4, 2020, the Supreme Administrative Court issued
a decision that they would not grant leave to appeal, effectively eliminating any further appeal rights in this matter.
Legal proceedings
From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company has received, and may in
the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation
may be necessary to defend the Company, its partners and its customers by determining the scope, enforceability and validity of third-party proprietary
rights, or to establish and enforce the Company’s proprietary rights. The results of any current or future litigation cannot be predicted with certainty and
regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management
resources and other factors.
Commitments
The Company has entered into various renewable, nonexclusive license agreements under which the Company has been granted access to the licensor’s
technology and the right to sell or use the technology in the Company’s products. Royalties are payable to developers of the software at various rates and
amounts, which generally are based upon unit sales or revenue. Royalty fees were
101
$10.4 million, $10.6 million, and $9.7 million for the years ended December 31, 2020, 2019 and 2018, respectively, and are reported in Cost of revenue—
software.
Additionally, the Company has current contractual purchase obligations for services supporting business operations, including non-cancelable agreements.
The future purchase obligations for these agreements are as follows (in thousands):
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total
18. Segment information
$
$
6,436
6,884
6,509
3,560
3,307
—
26,696
The Company defines its operating segments as components of its business where separate financial information is available and used by the chief
operating decision maker (“CODM”) in deciding how to allocate resources to its segments and in assessing performance. The Company’s CODM is its
Chief Executive Officer.
The Company has identified two reportable segments for financial reporting purposes: Software and Client Engineering Services. The primary measure of
segment operating performance is Adjusted EBITDA, which is defined as net income (loss) adjusted for income tax expense (benefit), interest expense,
interest income and other, depreciation and amortization, stock-based compensation expense, restructuring charges, asset impairment charges and other
special items as determined by management. Adjusted EBITDA includes an allocation of corporate headquarters costs.
The Software reportable segment derives revenue from the sale and lease of software licenses and cloud solutions in the areas of simulation, high-
performance computing, and artificial intelligence to design and optimize high-performance, efficient, innovative and sustainable products and processes
for improved business performance. The Software segment also generates revenue by providing services related to the Company’s software, including
consulting, training, and implementation services. To a much lesser extent, the Software segment includes revenue from the sale of hardware products.
The Client Engineering Services reportable segment provides support to the Company’s customers with long-term ongoing expertise. The Company hires
simulation specialists, industrial designers, design engineers, materials experts, development engineers, manufacturing engineers, data scientists, and
information technology specialists for placement at customer sites for specific customer-directed assignments.
The “All other” represents innovative services and products, including toggled ®, the Company’s LED lighting business. toggled® is focused on developing
and selling next-generation solid state lighting technology along with communication and control protocols based, in part, on intellectual property for the
direct replacement of fluorescent tubes with LED lighting. Other businesses combined within Other include potential services and product concepts that are
still in their development stages and the Company’s WEYV business, which ceased operations in the third quarter of 2019.
Inter-segment sales are not significant for any period presented. The CODM does not review asset information by segment when assessing performance,
therefore no asset information is provided for reportable segments. The accounting policies of the segments are the same as those described in Note 2—
Summary of significant accounting policies.
The following tables are in thousands:
Year ended December 31, 2020
Revenue
Adjusted EBITDA
Year ended December 31, 2019
Revenue
Adjusted EBITDA
Software
CES
All other
Total
418,165 $
53,820 $
44,320 $
5,129 $
7,436 $
(1,661) $
469,921
57,288
Software
CES
All other
Total
401,278 $
38,834 $
48,987 $
5,255 $
8,650 $
(4,540) $
458,915
39,549
$
$
$
$
102
Year ended December 31, 2018
Revenue
Adjusted EBITDA
Software
CES
All other
Total
$
$
341,306 $
48,643 $
47,852 $
5,155 $
7,221 $
(3,618) $
396,379
50,180
Reconciliation of Adjusted EBITDA to GAAP income (loss)
before income taxes:
Adjusted EBITDA
Stock-based compensation expense
Interest expense
Interest income and other (1)
Depreciation and amortization
Income before income taxes
2020
Year ended December 31,
2019
2018
$
$
57,288 $
(21,355)
(11,598)
1,503
(23,806)
2,032 $
39,549 $
(8,528)
(6,371)
260
(21,522)
3,388 $
50,180
(3,339)
(200)
(4,883)
(14,734)
27,024
(1)
Included for the year ended December 31, 2020 are a) $1.0 million of proceeds from settlements related to a historical acquisition, and b) $0.6 million of severance expense. Included for
the year ended December 31, 2019 are a) acquisition related costs of $0.6 million, b) severance expense of $0.4 million, and c) impairment charges for royalty contracts of $1.0 million.
Included for the year ended December 31, 2018 are a) costs from the acquisition of Datawatch of $10.4 million, b) gain on the sale of a building of $4.4 million, c) impairment charges for
royalty contracts and trade names of $2.8 million, and d) an income adjustment for a change in estimated legal expenses of $2.0 million.
Revenue is attributed to geographic areas based on the country of origin. The following table provides sales to external customers and long-lived assets for
each of the geographic areas in which the Company operates (in thousands):
United States
Other countries
Total Americas
Germany
France
Other countries
Total Europe, Middle East and Africa
Japan
Other countries
Total Asia Pacific
Total
Revenue
Year ended December 31,
2019
2020
2018
2020
2019
Long-lived assets (1)
December 31,
$
$
233,611 $
12,127
245,738
48,559
15,287
49,403
113,249
41,109
69,825
110,934
469,921 $
219,053 $
14,753
233,806
50,102
17,210
49,312
116,624
37,757
70,728
108,485
458,915 $
186,026 $
8,604
194,630
45,664
16,154
42,846
104,664
35,478
61,607
97,085
396,379 $
60,479 $
8,378
68,857
9,201
1,078
11,730
22,009
2,009
8,441
10,450
101,316 $
55,319
10,190
65,509
3,405
1,224
11,316
15,945
2,036
8,941
10,977
92,431
(1)
Includes property and equipment, net and definite-lived intangible assets, net.
Concentrations of credit risk
The Company’s financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and trade receivables. The risk
with respect to trade receivables is partially mitigated by the diversity, both by geography and by industry, of the Company’s customer base. The
Company’s accounts receivable is derived from sales to a large number of direct customers and resellers around the world. Sales to customers within the
automotive industry accounted for approximately 36%, 40%, and 45% of the Company’s 2020, 2019 and 2018 revenue, respectively, with no other industry
representing more than 10% of revenue. No individual customer accounted for 10% or more of revenue in the years ended December 31, 2020, 2019 or
2018.
103
Description
Form
File No.
Exhibit
Filing
Date
Filed
Herewith
Incorporated by Reference
Exhibit No.
2.1
Agreement and Plan of Merger, dated as of
November 5, 2018, by and among the
Registrant, Dallas Merger Sub, Inc. and
Datawatch Corporation
8-K
333-220710
3.1
Certificate of Incorporation, as amended and
as currently in effect
S-1/A
333-220710
3.2
Bylaws, as currently in effect
S-1/A
333-220710
4.1
Description of Capital Stock
10-K
2.1
3.1
3.2
4.1
11/5/2018
10/6/2017
10/6/2017
3/2/2020
4.1
6/10/2019
4.2
6/10/2019
8-K
8-K
4.2
4.3
4.4
10.1
10.2+
10.3+
10.4+
Indenture, dated as of June 10, 2019, b y and
between Altair Engineering Inc. and U.S.
Bank National Association
First Supplemental Indenture, dated as of June
10, 2019, by and between Altair Engineering
Inc. and U.S. Bank National Association
Form of 0.250% Convertible Senior Note Due
June 1, 2024 (included as Exhibit A to the
First Supplemental Indenture, dated as of
June 10, 2019, by and between Altair
Engineering Inc. and U.S. Bank National
Association attached as Exhibit 4.2 hereto).
Form of Indemnification Agreement between
the Registrant and each of its directors and
executive officers
2001 Incentive and Non-Qualified Stock
Option Plan
Form of 2001 Incentive and Non-Qualified
Stock Option Plan Incentive Stock Option
Agreement
Form of 2001 Incentive and Non-Qualified
Stock Option Plan Stock Restriction and
Repurchase Agreement
8-K
4.3
6/10/2019
S-1
333-220710
10.1
9/29/2017
S-1
333-220710
10.2
9/29/2017
S-1
333-220710
10.3
9/29/2017
10.5+
2001 Non-Qualified Stock Option Plan
S-1
333-220710
S-1
333-220710
10.4
10.5
9/29/2017
9/29/2017
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
Form of 2001 Non-Qualified Stock Option
Plan Non-Qualified Stock Option Agreement
Form of 2001 Non-Qualified Stock Option
Plan Stock Restriction Agreement
2012 Incentive and Non-Qualified Stock
Option Plan
Form of 2012 Incentive and Non-Qualified
Stock Option Plan Option Agreement
Form of 2012 Incentive and Non-Qualified
Stock Option Plan Stock Restriction and
Repurchase Agreement
Form of 2012 Incentive and Non-Qualified
Stock Option Plan Stock Restriction and
Repurchase Agreement (Directors)
S-1
333-220710
10.6
9/29/2017
S-1
333-220710
10.7
9/29/2017
S-1
333-220710
10.8
9/29/2017
S-1
333-220710
10.9
9/29/2017
S-1
333-220710
10.10
9/29/2017
S-1
333-220710
10.11
9/29/2017
2017 Equity Incentive Plan and forms of
equity agreements thereunder
S-1/A
333-220710
10.12
10/6/2017
Employment Letter, dated January 10, 2013,
by and between the Registrant and Howard N.
Morof as amended on July 19, 2017
Consulting Agreement, effective as of
January 1, 2017, by and between the
Registrant and Advanced Studies Holding
Future SRL, an Italian Company, as amended
S-1
333-220710
10.13
9/29/2017
S-1
333-220710
10.15
9/29/2017
10.15
2017 Third Amended and Restated Credit
S-1/A
333-220710
10.16
10/19/2017
Agreement, dated October 18, 2017, by and
among the Registrant, the foreign subsidiary
10.16
10.17
borrowers, the Lenders named therein and JP
Morgan Chase Bank, N.A. as administrative
agent
First Amendment to 2017 Third Amended and
Restated Credit Agreement, dated October 31,
2018, by and among the Registrant, the foreign
subsidiary borrowers, the Lenders named
therein and JP Morgan Chase Bank, N.A. as
administrative agent
Second Amendment to the Company’s Third
Amended and Restated Credit Agreement, by
and among the Company, as borrower, the
lenders party thereto, and JPMorgan Chase
Bank, N.A., as Administrative Agent.
8-K
10.18+
Form of 2020 Stock Option Award Agreement
8-K
10.19+
10.20+
10.21+
10.22+
21.1
23.1
31.1
31.2
Executive Severance Agreement dated August
17. 2020, between Altair Engineering Inc., and
James R. Scapa
Executive Severance Agreement dated August
17. 2020, between Altair Engineering Inc., and
Brett Chouinard
Executive Severance Agreement dated August
17. 2020, between Altair Engineering Inc., and
Dr. Uwe Schramm
Executive Severance Agreement dated August
17. 2020, between Altair Engineering Inc., and
Amy Messano
List of Subsidiaries of the Registrant
Consent of Independent Registered Public
Accounting Firm
Certification of the Chief Executive Officer of
Altair Engineering Inc. pursuant to Rule 13a-
14(a)/Rule 15d-14(a) under the Securities
Exchange Act of 1934, as amended
Certification of the Chief Financial Officer of
Altair Engineering Inc. pursuant to Rule 13a-
14(a)/Rule 15d-14(a) under the Securities
Exchange Act of 1934, as amended
8-K
8-K
8-K
8-K
104
8-K
10.1
11/5/2018
10.1
10.1
6/6/2019
6/8/2020
10.1
8/17/2020
10.2
8/17/2020
10.3
8/17/2020
10.4
8/17/2020
X
X
X
X
32.1*
Certification of the Chief Executive Officer
and Chief Financial Officer of Altair
Engineering Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
X
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL
tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been
formatted in Inline XBRL.
+
*
Indicates management contract or compensatory plan.
The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by
reference.
Item 16. Form 10-K Summary
None.
105
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 26, 2021
Date: February 26, 2021
ALTAIR ENGINEERING INC.
By:
/s/ James Scapa
James R. Scapa
Chief Executive Officer (Principal Executive Officer)
By:
/s/ Howard N. Morof
Howard N. Morof
Chief Financial Officer (Principal Financial and
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James R. Scapa and Howard
N. Morof, jointly and severally, his or her true and lawful attorneys-in-fact and agent, each with the power of substitution, for him in any and all capacities,
to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
Name
/s/ James Scapa
James R. Scapa
Title
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Howard N. Morof
Howard N. Morof
Chief Financial Officer (Principal Financial
and Accounting Officer)
/s/ Mary C. Boyce
Mary C. Boyce
/s/ Brett Chouinard
Brett Chouinard
/s/ Stephen Earhart
Stephen Earhart
/s/ Trace Harris
Trace Harris
/s/ Richard Hart
Richard Hart
/s/ Jan Kowal
Jan Kowal
Director
Director
Director
Director
Director
Director
106
Date
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
Subsidiary
Altair Product Design, Inc.
Altair Engineering India Pvt. Ltd.
Altair Engineering Ltd.
Datawatch Corporation
LIST OF SUBSIDIARIES
Jurisdiction of Organization
Michigan, United States
India
Japan
Delaware, United States
Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-221312) pertaining to the 2001 Non-Qualified Stock Option Plan, 2001 Incentive and Non-
Qualified Stock Option Plan, 2012 Incentive and Non-Qualified Stock Option Plan, and 2017 Equity Incentive Plan of Altair
Engineering Inc.,
(2) Registration Statement (Form S-8 No. 333-223833) pertaining to the 2017 Equity Incentive Plan of Altair Engineering Inc.,
(3) Registration Statement (Form S-8 No. 333-230019) pertaining to the 2017 Equity Incentive Plan of Altair Engineering Inc.,
(4) Registration Statement (Form S-3 No. 333-231948), and
(5) Registration Statement (Form S-8 No. 333- 236814) pertaining to the 2017 Equity Incentive Plan of Altair Engineering Inc.
of our reports dated February 26, 2021, with respect to the consolidated financial statements of Altair Engineering Inc., and the effectiveness of
internal control over financial reporting of Altair Engineering Inc. included in this Annual Report (Form 10-K) for the year ended December 31,
2020.
/s/ Ernst & Young LLP
Detroit, Michigan
February 26, 2021
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James R. Scapa, certify that:
1. I have reviewed this annual report on Form 10-K of Altair Engineering Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
/s/ James Scapa
James R. Scapa
Chief Executive Officer
(Principal Executive Officer)
February 26, 2021
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard N. Morof, certify that:
1. I have reviewed this annual report on Form 10-K of Altair Engineering Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
/s/ Howard N. Morof
Howard N. Morof
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 26, 2021
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Altair Engineering Inc. (the “Company”), on Form 10-K for the period ended December 31, 2020, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officers of the Company certify to their knowledge and in their
respective capacities, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ James Scapa
James R. Scapa
Chief Executive Officer
(Principal Executive Officer)
/s/ Howard N. Morof
Howard N. Morof
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 26, 2021