PURE STORAGE, INC., 10-K filed on 3/25/2016
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Jan. 31, 2016
Mar. 22, 2016
Class A Common Stock
Mar. 22, 2016
Class B Common Stock
Document And Entity Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jan. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
PSTG 
 
 
Entity Registrant Name
Pure Storage, Inc. 
 
 
Entity Central Index Key
0001474432 
 
 
Current Fiscal Year End Date
--01-31 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
47,780,342 
144,330,855 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
$ 1,249 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jan. 31, 2016
Jan. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 604,742 
$ 192,707 
Accounts receivable, net of allowance of $210 and $944 as of January 31, 2015 and 2016
126,324 
59,032 
Inventory
20,649 
21,605 
Deferred commissions, current
15,703 
9,431 
Prepaid expenses and other current assets
20,652 
11,195 
Total current assets
788,070 
293,970 
Property and equipment, net
52,629 
39,859 
Intangible assets, net
6,980 
8,284 
Deferred income taxes, non-current
536 
Other long-term assets
22,568 
14,177 
Total assets
870,783 
356,290 
Current liabilities:
 
 
Accounts payable
38,187 
11,007 
Accrued compensation and benefits
32,995 
13,811 
Accrued expenses and other liabilities
14,076 
6,106 
Deferred revenue, current
94,514 
32,199 
Liability related to early exercised stock options
4,760 
6,485 
Total current liabilities
184,532 
69,608 
Deferred revenue, non-current
121,690 
41,470 
Deferred income taxes, non-current
300 
Other long-term liabilities
1,207 
802 
Total liabilities
307,429 
112,180 
Commitments and contingencies (Note 5)
Convertible preferred stock, par value of $0.0001 per share— 123,880 and no shares authorized as of January 31, 2015 and 2016, 122,281 and no shares issued and outstanding as of January 31, 2015 and 2016; aggregate liquidation preference of $551,858 as of January 31, 2015
543,940 
Stockholders’ (deficit) equity:
 
 
Preferred stock, par value of $0.0001 per share— no and 20,000 shares authorized as of January 31, 2015 and 2016; no shares issued and outstanding as of January 31, 2015 and 2016
Class A and Class B common stock, par value of $0.0001 per share— 230,812 (Class A 1, Class B 230,811) and 2,250,000 (Class A 2,000,000, Class B 250,000) shares authorized as of January 31, 2015 and 2016; 36,465 (Class B 36,465) and 190,509 (Class A 28,769, Class B 161,740) shares issued and outstanding as of January 31, 2015 and 2016
19 
Additional paid-in capital
1,118,670 
41,749 
Accumulated deficit
(555,335)
(341,583)
Total stockholders’ (deficit) equity
563,354 
(299,830)
Total liabilities, convertible preferred stock, and stockholders’ (deficit) equity
$ 870,783 
$ 356,290 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jan. 31, 2016
Jan. 31, 2015
Accounts receivable, net of allowance
$ 944 
$ 210 
Convertible preferred stock, par value per share
$ 0.0001 
$ 0.0001 
Convertible preferred stock, shares authorized
123,879,952 
Convertible preferred stock, shares issued
122,280,679 
Convertible preferred stock, shares outstanding
122,280,679 
Convertible preferred stock, aggregate liquidation preference
$ 0 
$ 551,858 
Preferred stock, par value
$ 0.0001 
$ 0.0001 
Preferred stock, shares authorized
20,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, shares authorized
2,250,000,000 
230,812,000 
Common stock, shares issued
190,509,000 
36,465,000 
Common stock, shares outstanding
190,509,000 
36,465,000 
Class A Common Stock
 
 
Common stock, par value per share
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
2,000,000,000 
1,000 
Common stock, shares issued
28,769,572 
Common stock, shares outstanding
28,769,572 
Class B Common Stock
 
 
Common stock, par value per share
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
250,000,000 
230,811,000 
Common stock, shares issued
161,739,883 
36,465,000 
Common stock, shares outstanding
161,739,883 
36,465,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Jan. 31, 2016
Jan. 31, 2015
Jan. 31, 2014
Revenue:
 
 
 
Product
$ 375,733 
$ 154,836 
$ 39,228 
Support
64,600 
19,615 
3,505 
Total revenue
440,333 
174,451 
42,733 
Cost of revenue:
 
 
 
Product
132,870 
63,425 
19,974 
Support
35,023 
14,127 
4,155 
Total cost of revenue
167,893 
77,552 
24,129 
Gross profit
272,440 
96,899 
18,604 
Operating expenses:
 
 
 
Research and development
166,645 
92,707 
36,081 
Sales and marketing
240,574 
152,320 
54,750 
General and administrative
75,402 
32,354 
5,902 
Total operating expenses
482,621 
277,381 
96,733 
Loss from operations
(210,181)
(180,482)
(78,129)
Other income (expense), net
(2,002)
(1,412)
(141)
Loss before provision for income taxes
(212,183)
(181,894)
(78,270)
Provision for income taxes
1,569 
1,337 
291 
Net loss
$ (213,752)
$ (183,231)
$ (78,561)
Net loss per share attributable to common stockholders, basic and diluted
$ (2.59)
$ (6.56)
$ (3.24)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
82,460 
27,925 
24,237 
Consolidated Statements of Convertible Preferred Stock and Stockholders' (Deficit) Equity (USD $)
Total
Series E Convertible Preferred Stock
Series F Convertible Preferred Stock
Series F-1 Convertible Preferred Stock
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Temporary equity balance at Jan. 31, 2013
$ 95,137,000 
 
 
 
 
 
 
Stockholders' equity balance at Jan. 31, 2013
(39,150,000)
 
 
 
3,000 
3,317,000 
(42,470,000)
Temporary equity balance (in shares) at Jan. 31, 2013
79,409,000 
 
 
 
 
 
 
Stockholders' equity balance (in shares) at Jan. 31, 2013
 
 
 
 
27,438,000 
 
 
Issuance of convertible preferred stock
 
167,833,000 
 
 
 
 
 
Issuance of convertible preferred stock (in shares)
 
24,697,000 
 
 
 
 
 
Issuance of common stock upon exercise of stock options
336,000 
 
 
 
336,000 
Issuance of common stock upon exercise of stock options (in shares)
 
 
 
 
4,047,000 
 
 
Repurchase of common stock in connection with tender offer (Note 9)
(7,202,000)
 
 
 
(7,202,000)
Repurchase of common stock in connection with tender offer (Note 9) (in shares)
 
 
 
 
(3,046,000)
 
 
Stock-based compensation expense
8,298,000 
 
 
 
8,298,000 
Vesting of early exercised stock options
192,000 
 
 
 
192,000 
Net loss
(78,561,000)
 
 
 
(78,561,000)
Temporary equity balance at Jan. 31, 2014
262,970,000 
 
 
 
 
 
 
Stockholders' equity balance at Jan. 31, 2014
(116,087,000)
 
 
 
3,000 
12,143,000 
(128,233,000)
Temporary equity balance (in shares) at Jan. 31, 2014
104,106,000 
 
 
 
 
 
 
Stockholders' equity balance (in shares) at Jan. 31, 2014
 
 
 
 
28,439,000 
 
 
Issuance of convertible preferred stock
 
450,000 
220,803,000 
59,717,000 
 
 
 
Issuance of convertible preferred stock (in shares)
 
65,000 
14,308,000 
3,802,000 
 
 
 
Issuance of common stock upon exercise of stock options, including stock options exercised via promissory notes (Note 9)
3,047,000 
 
 
 
2,000 
3,045,000 
Issuance of common stock upon exercise of stock options, including stock options exercised via promissory notes (Note 9) (in shares)
 
 
 
 
11,879,000 
 
 
Repurchase of common stock in connection with tender offer (Note 9)
(30,120,000)
 
 
 
(1,000)
(30,119,000)
Repurchase of common stock in connection with tender offer (Note 9) (in shares)
 
 
 
 
(3,803,000)
 
 
Repurchase of common stock from early exercised stock options
 
 
 
Repurchase of common stock from early exercised stock options (in shares)
 
 
 
 
(50,000)
 
 
Stock-based compensation expense
25,399,000 
 
 
 
25,399,000 
Vesting of early exercised stock options
1,162,000 
 
 
 
1,162,000 
Net loss
(183,231,000)
 
 
 
(183,231,000)
Temporary equity balance at Jan. 31, 2015
543,940,000 
168,283,000 
220,803,000 
59,717,000 
 
 
 
Stockholders' equity balance at Jan. 31, 2015
(299,830,000)
 
 
 
4,000 
41,749,000 
(341,583,000)
Temporary equity balance (in shares) at Jan. 31, 2015
122,280,679 
24,761,984 
14,307,603 
3,801,746 
 
 
 
Stockholders' equity balance (in shares) at Jan. 31, 2015
 
 
 
 
36,465,000 
 
 
Conversion of convertible preferred stock to common stock upon initial public offering
543,940,000 
 
 
 
12,000 
543,928,000 
Conversion of convertible preferred stock to common stock upon initial public offering (in shares)
 
 
 
 
122,281,000 
 
 
Temporary equity, conversion of convertible preferred stock to common stock upon initial public offering
(543,940,000)
 
 
 
 
 
 
Temporary equity, conversion of convertible preferred stock to common stock upon initial public offering (in shares)
(122,281,000)
 
 
 
 
 
 
Issuance of common stock upon initial public offering, net of offering costs of $4,539
455,138,000 
 
 
 
3,000 
455,135,000 
Issuance of common stock upon initial public offering (in shares)
 
 
 
 
28,750,000 
 
 
Issuance of common stock to Pure Good Foundation
11,900,000 
 
 
 
 
11,900,000 
 
Issuance of common stock to Pure Good Foundation (in shares)
 
 
 
 
700,000 
 
 
Issuance of common stock upon exercise of stock options (in shares)
2,313,598 
 
 
 
 
 
 
Stock-based compensation expense
58,225,000 
 
 
 
58,225,000 
Vesting of early exercised stock options
1,725,000 
 
 
 
1,725,000 
Net loss
(213,752,000)
 
 
 
(213,752,000)
Issuance of common stock upon exercise of stock options, net of repurchases
6,008,000 
 
 
 
6,008,000 
Issuance of common stock upon, net of repurchases exercise of stock options (in shares)
 
 
 
 
2,313,000 
 
 
Temporary equity balance at Jan. 31, 2016
 
 
 
 
 
 
Stockholders' equity balance at Jan. 31, 2016
$ 563,354,000 
 
 
 
$ 19,000 
$ 1,118,670,000 
$ (555,335,000)
Temporary equity balance (in shares) at Jan. 31, 2016
 
 
 
 
 
 
Stockholders' equity balance (in shares) at Jan. 31, 2016
 
 
 
 
190,509,000 
 
 
Consolidated Statements of Convertible Preferred Stock and Stockholders' (Deficit) Equity (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended 12 Months Ended
Jan. 31, 2016
Common Stock
Jan. 31, 2014
Series E Convertible Preferred Stock
Jan. 31, 2015
Series E Convertible Preferred Stock
Jan. 31, 2015
Series F Convertible Preferred Stock
Jan. 31, 2015
Series F-1 Convertible Preferred Stock
Convertible Preferred Stock, value per share
 
$ 6.93 
$ 6.93 
$ 15.73 
$ 15.73 
Convertible preferred stock, issuance costs
 
$ 3,354 
 
$ 4,197 
$ 69 
Issuance costs
$ 4,539 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 31, 2016
Jan. 31, 2015
Jan. 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$ (213,752)
$ (183,231)
$ (78,561)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
32,254 
15,392 
4,431 
Stock-based compensation expense
58,225 
25,399 
8,298 
Contribution of common stock to the Pure Good Foundation
11,900 
Other
(1,093)
277 
92 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(67,292)
(44,197)
(12,038)
Inventory
1,481 
(13,713)
(5,077)
Deferred commissions
(13,021)
(9,838)
(7,129)
Prepaid expenses and other assets
(8,704)
(6,550)
(4,400)
Accounts payable
24,901 
3,474 
5,243 
Accrued compensation and other liabilities
24,710 
12,450 
6,771 
Deferred revenue
142,535 
56,842 
15,141 
Net cash used in operating activities
(7,856)
(143,695)
(67,229)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(39,355)
(42,227)
(12,273)
Purchases of intangible assets
(9,125)
Increase in restricted cash
(2,485)
(1,613)
(3,034)
Net cash used in investing activities
(41,840)
(52,965)
(15,307)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from initial public offering, net of issuance costs
459,425 
Proceeds from issuance of convertible preferred stock, net of issuance costs
280,970 
167,833 
Net proceeds from exercise of stock options, including proceeds from repayment of promissory notes
6,008 
7,665 
2,670 
Repurchase of common stock in connection with tender offers
(30,120)
(7,202)
Payments of deferred offering costs
(3,702)
(33)
Net cash provided by financing activities
461,731 
258,482 
163,301 
Net increase in cash and cash equivalents
412,035 
61,822 
80,765 
Cash and cash equivalents, beginning of period
192,707 
130,885 
50,120 
Cash and cash equivalents, end of period
604,742 
192,707 
130,885 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for income taxes
1,118 
429 
87 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION
 
 
 
Conversion of convertible preferred stock to common stock upon initial public offering
543,940 
Property and equipment purchased but not yet paid
6,212 
1,323 
1,224 
Vesting of early exercised stock options and restricted stock awards
1,725 
1,162 
192 
Cashless exercise of stock options during tender offers
2,057 
640 
Unpaid deferred offering costs
$ 546 
$ 55 
$ 0 
Business Overview
Business Overview

Note 1. Business Overview

Organization and Description of Business

Pure Storage, Inc. (the “Company”, “we”, “us”, or other similar pronouns) was originally incorporated in the state of Delaware in October 2009 under the name OS76, Inc. In January 2010, we changed our name to Pure Storage, Inc. We provide an enterprise data storage platform that transforms business through a dramatic increase in performance and reduction in complexity and costs. We are headquartered in Mountain View, California and have wholly owned subsidiaries throughout the world.

Initial Public Offering

In October 2015, we completed our IPO of Class A common stock, in which we sold 28,750,000 shares. The shares were sold at an initial public offering price of $17.00 per share for net proceeds of $459.4 million, after deducting underwriting discounts and commissions of $29.3 million but before deducting offering costs of $4.5 million. Upon the closing of our IPO, all outstanding shares of our convertible preferred stock automatically converted into 122,280,679 shares of Class B common stock. Following the IPO, we have two classes of authorized common stock – Class A common stock and Class B common stock.

Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Pure Storage, Inc. and our wholly owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP). All intercompany balances and transactions have been eliminated in consolidation.

Stock Split

In November 2013, we effected a 2-for-1 stock split. All references to common stock and convertible preferred stock shares and per share amounts including options to purchase common stock have been retroactively restated to reflect this stock split.

Foreign Currency

The functional currency of our foreign subsidiaries is the U.S. dollar. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are remeasured using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations. For the fiscal years ended January 31, 2014, 2015 and 2016, we recorded net foreign currency transaction losses of $16,000, $648,000, and $2.3 million, respectively.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates. Such estimates include, but are not limited to, the determination of best estimate of selling price included in multiple-deliverable revenue arrangements, sales commissions, useful lives of intangible assets and property and equipment, fair values of stock-based awards, provision for income taxes, including related reserves, and contingent liabilities, among others. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Concentration Risk

Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. As of January 31, 2015 and 2016, substantially all of our cash and cash equivalents have been invested with one and three financial institutions, respectively, and such deposits exceed federally insured limits. Management believes that the financial institutions that hold our investments are financially sound and, accordingly, are subject to minimal credit risk. We define a customer as an end user that purchases our products and services from one of our channel partners or from us directly. Our revenue and accounts receivable are derived substantially from the United States across a multitude of industries. We perform ongoing evaluations to determine customer credit. As of January 31, 2015, we had one channel partner that individually represented 13% of total accounts receivable on that date. As of January 31, 2016, we had two channel partners that each individually represented 11% of total accounts receivable on that date. No single channel partner or customer represented over 10% of revenue for the fiscal years ended January 31, 2014, 2015 and 2016. We rely on a limited number of suppliers for our contract manufacturing and certain raw material components. In instances where suppliers fail to perform their obligations, we may be unable to find alternative suppliers or satisfactorily deliver our products to our customers on time.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks and highly liquid investments, primarily money market funds, purchased with an original maturity of three months or less.

Restricted Cash

Restricted cash is comprised of certificates of deposit related to our leases. As of January 31, 2015 and 2016, we had restricted cash of $4.6 million and $7.1 million, respectively, which was included in other long-term assets in the consolidated balance sheets.

Fair Value of Financial Instruments

The carrying value of our financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximates fair value.

Accounts Receivable and Allowance

Accounts receivable are recorded at the invoiced amount, and stated at realizable value, net of an allowance for doubtful accounts. Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for doubtful accounts.

We assess the collectability of the accounts by taking into consideration the aging of our trade receivables, historical experience, and management judgment. We write off trade receivables against the allowance when management determines a balance is uncollectible and no longer actively pursues collection of the receivable.

The following table presents the changes in the allowance for doubtful accounts:

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

 

 

 

 

 

 

(in thousands)

 

Allowance for doubtful accounts, beginning

   balance

 

$

0

 

 

$

160

 

 

$

210

 

Provision

 

 

160

 

 

 

50

 

 

 

918

 

Writeoffs

 

 

 

 

 

 

 

 

(184

)

Allowance for doubtful accounts, ending

   balance

 

$

160

 

 

$

210

 

 

$

944

 

 

Inventory

Inventory consists of finished goods and component parts, which are purchased from contract manufacturers. Product demonstration units, which we regularly sell, are the primary component of our inventories. Inventories are stated at the lower of cost or market. Cost is determined using the specific identification method for finished goods and weighted-average method for component parts. We account for excess and obsolete inventory by reducing the carrying value to the estimated net realizable value of the inventory based upon management’s assumptions about future demand and market conditions. In addition, we record a liability for firm, non-cancelable and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of future demand forecasts consistent with excess and obsolete inventory valuations. Inventory write-offs were insignificant for the fiscal years ended January 31, 2014, 2015 and 2016.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets (test equipment—2 years, computer equipment and software—2 to 3 years, furniture and fixtures—7 years). Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term. Depreciation commences once the asset is placed in service.

Intangible Assets

Intangible assets are stated at cost, net of accumulated amortization. During the fiscal year ended January 31, 2015, we acquired certain technology patents for $9.1 million. This amount is being amortized on a straight-line basis over an estimated useful life of seven years.

Impairment of Long-Lived Assets

We review our long-lived assets, including property and equipment, and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure the recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If the total of the future undiscounted cash flows is less than the carrying amount of an asset, we record an impairment charge for the amount by which the carrying amount of the asset exceeds its fair market value. There have been no impairment charges recorded in any of the periods presented in the consolidated financial statements.

Deferred Commissions

Deferred commissions consist of direct and incremental costs paid to our sales force related to customer contracts. The deferred commission amounts are recoverable through the revenue streams that will be recognized under the related customer contracts. Direct sales commissions are deferred when earned and amortized over the same period that revenue is recognized from the related customer contract. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.

As of January 31, 2015 and 2016, we recorded short-term deferred commissions of $9.4 million and $15.7 million, respectively, and long-term deferred commissions of $7.5 million and $14.3 million, respectively, in other long-term assets in the consolidated balance sheets. During the fiscal years ended January 31, 2014, 2015 and 2016, we recognized sales commission expenses of $11.0 million, $27.7 million, and $47.2 million, respectively.

Deferred Offering Costs

Deferred offering costs, consisting of legal, accounting and filing fees directly related to our IPO, are capitalized. The deferred offering costs were offset against the IPO proceeds upon the completion of the offering.

Revenue Recognition

We derive revenue from two sources: (1) product revenue which includes hardware and embedded software and (2) support revenue which includes customer support, hardware maintenance and software upgrades on a when-and-if-available basis.

We recognize revenue when:

 

·

Persuasive evidence of an arrangement exists—We rely upon sales agreements and/or purchase orders to determine the existence of an arrangement.

 

·

Delivery has occurred—We typically recognize product revenue upon shipment, as title and risk of loss are transferred to our channel partners at that time. Products are typically shipped directly by us to customers, and our channel partners do not stock our inventory.

 

·

The fee is fixed or determinable—We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction.

 

·

Collection is reasonably assured—We assess collectability based on credit analysis and payment history.

Our product revenue is derived from the sale of hardware and operating system software that is integrated into the hardware and therefore deemed essential to its functionality. The hardware and the operating system software essential to the functionality of the hardware are considered non-software deliverables and, therefore, are not subject to industry-specific software revenue recognition guidance.

Support revenue is derived from the sale of maintenance and support agreements. Maintenance and support agreements include the right to receive unspecified software upgrades and enhancements on a when-and-if-available basis, bug fixes, parts replacement services related to the hardware, as well as access to our cloud-based management and support platform. Revenue related to maintenance and support agreements are recognized ratably over the contractual term, which generally range from one to three years. Costs related to maintenance and support agreements are expensed as incurred. In addition, our Forever Flash program provides our customers who continually maintain active maintenance and support for three years with an included controller refresh with each additional three year maintenance and support renewal. In accordance with multiple-element arrangement accounting guidance, the controller refresh represents an additional deliverable that is a separate unit of accounting and the allocated revenue is recognized in the period in which these controllers are shipped.

Most of our arrangements, other than stand-alone renewals of maintenance and support agreements, are multiple-element arrangements with a combination of product and support related deliverables (as defined above). Under multiple-element arrangements, we allocate consideration at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the hierarchy provided by the multiple-element arrangement accounting guidance, which includes (i) vendor-specific objective evidence (“VSOE”), of selling price, if available; (ii) third-party evidence (“TPE”), of selling price, if VSOE is not available; and (iii) best estimate of selling price (“BESP”), if neither VSOE nor TPE is available. As discussed below, because we have not established VSOE for any of our deliverables and TPE typically cannot be obtained, we typically allocate consideration to all deliverables based on BESP.

 

·

VSOE—We determine VSOE based on our historical pricing and discounting practices for the specific products and services when sold separately. In determining VSOE, we require that a substantial majority of the stand-alone selling prices fall within a reasonably narrow pricing range. We have not established VSOE for any of our hardware and support related deliverables given that our pricing is not sufficiently concentrated (based on an analysis of separate sales of the deliverables) to conclude that we can demonstrate VSOE of selling prices.

 

·

TPE—When VSOE cannot be established for deliverables in multiple-element arrangements, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for interchangeable products or services when sold separately to similarly situated customers. However, because our products contain a significant element of proprietary technology and our solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained.

 

·

BESP—When neither VSOE nor TPE can be established, we utilize BESP to allocate consideration to deliverables in a multiple-element arrangement. Our process to determine BESP for products and support is based on qualitative and quantitative considerations of multiple factors, which primarily include historical sales, margin objectives and discount behavior. Additional considerations are given to other factors such as customer demographics, costs to manufacture products or provide support, pricing practices and market conditions.

Deferred Revenue

Deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue and primarily consists of support. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet date.

Warranty Costs

We generally provide a three-year warranty on hardware and a 90-day warranty on our software embedded in the hardware. Our hardware warranty provides for parts replacement for defective components and our software warranty provides for bug fixes. With respect to our hardware warranty obligation, we have a warranty agreement with our contract manufacturer under which our contract manufacturer is generally required to replace defective hardware within three years of shipment. Furthermore, our maintenance and support agreement provides for the same parts replacement that customers are entitled to under our warranty program, except that replacement parts are delivered according to targeted response times to minimize disruption to our customers’ critical business applications. Substantially all customers purchase maintenance and support agreements.

Therefore, given the warranty agreement with our contract manufacturer and that substantially all our products sales are sold together with maintenance and support agreements, we generally do not have exposure related to warranty costs and no warranty reserve has been recorded.

Research and Development

Research and development costs are expensed as incurred. Research and development costs consist primarily of personnel costs including stock-based compensation expense, expensed prototype, to the extent there is no alternative use for that equipment, consulting services, depreciation of equipment used in research and development and allocated overhead costs.

Software Development Costs

We expense software development costs before technological feasibility is reached. We have determined that technological feasibility is reached shortly before the release of our products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products have not been significant and accordingly, all software development costs have been expensed as incurred.

Software development costs also include costs incurred related to our hosted applications used to deliver our support services. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable the project will be completed and the software will be used to perform the intended function. Total costs related to our hosted applications incurred to date have been insignificant and as a result no software development costs were capitalized during the fiscal years ended January 31, 2014, 2015 and 2016.

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expenses were $195,000, $1.4 million and $6.2 million for the fiscal years ended January 31, 2014, 2015 and 2016, respectively.

Stock-Based Compensation

We determine the fair value of our stock options under our equity plans and purchase rights issued to employees under our ESPP on the date of grant utilizing the Black-Scholes option pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions regarding a number of subjective variables. These variables include the expected common stock price volatility over the term of the awards, the expected term of the awards, risk-free interest rates and expected dividend yield.  

We recognize stock-based compensation expense for stock-based awards on a straight-line basis over the period during which an employee is required to provide services in exchange for the award (generally the vesting period of the award). Stock-based compensation expense is recognized only for those awards expected to vest. We estimate future forfeitures at the date of grant and revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For stock-based awards granted to employees with a performance condition, we recognize stock-based compensation expense for these awards under the accelerated attribution method over the requisite service period when management determines it is probable that the performance condition will be satisfied.

We determine the fair value of our stock options issued to non-employees on the date of grant utilizing the Black-Scholes option pricing model. Stock-based compensation expense for stock options issued to non-employees is recognized over the requisite service period or when it is probable that the performance condition will be satisfied. Options subject to vesting are periodically remeasured to current fair value over the vesting period.

Comprehensive Loss

We did not have any other comprehensive income or loss during the periods presented and therefore comprehensive loss was the same as net loss.

Income Taxes

We account for income taxes using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance to amounts that are more likely than not to be realized.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

    

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), requiring an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 will supersede nearly all existing revenue recognition guidance under U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, deferring the effective date for ASU 2014-09 by one year, and thus, the new standard will be effective for us beginning on February 1, 2018 with early adoption permitted on or after February 1, 2017. This standard may be adopted using either the full or modified retrospective methods. We are currently evaluating adoption methods and the impact of this standard on our consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. We have early adopted this standard in the fourth quarter of fiscal 2016 on a retrospective basis. Prior periods have been retrospectively adjusted.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize all leases with terms in excess of one year on their balance sheet as a right-of-use asset and a lease liability at the commencement date. The new standard also simplifies the accounting for sale and leaseback transactions. The amendments in this update are effective for annual periods beginning after December 15, 2018, and interim periods therein and must be adopted using a modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating adoption methods and the impact of this standard on our consolidated financial statements.

Reclassifications

As a result of the adoption of ASU 2015-17, we made the following reclassifications to the January 31, 2014 balance sheet: a $2.5 million decrease to non-current deferred tax assets, a $2.6 million decrease to current deferred tax liability, and an increase of $92,000 to non-current deferred tax liability, and to the January 31, 2015 balance sheet: a $5.5 million decrease to non-current deferred tax assets, a $5.8 million decrease to current deferred tax liability, and an increase of $300,000 to non-current deferred tax liability.

 

Fair Value Measurements
Fair Value Measurements

Note 3. Fair Value Measurements

We define fair value as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

 

·

Level I—Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;

 

·

Level II—Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments; and

 

·

Level III—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.

We classify our money market funds within Level I because they are valued using quoted market prices. We classify our restricted cash within Level II because they are valued using inputs other than quoted prices which are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded.

The following tables set forth the fair value of our financial assets measured at fair value on a recurring basis as of January 31, 2015 and 2016 using the above input categories (in thousands):

 

 

 

January 31, 2015

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

190,621

 

 

$

 

 

$

 

 

$

190,621

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

4,648

 

 

 

 

 

 

4,648

 

Total assets measured at fair value

 

$

190,621

 

 

$

4,648

 

 

$

 

 

$

195,269

 

 

 

 

January 31, 2016

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

45,614

 

 

$

 

 

$

 

 

$

45,614

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

7,132

 

 

 

 

 

 

7,132

 

Total assets measured at fair value

 

$

45,614

 

 

$

7,132

 

 

$

 

 

$

52,746

 

 

Balance Sheet Components
Balance Sheet Components

Note 4. Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consists of the following (in thousands):

 

 

 

January 31,

 

 

 

2015

 

 

2016

 

Test equipment

 

$

37,059

 

 

$

65,663

 

Computer equipment and software

 

 

19,022

 

 

 

31,388

 

Furniture and fixtures

 

 

2,460

 

 

 

2,852

 

Leasehold improvements

 

 

3,776

 

 

 

4,935

 

Total property and equipment

 

 

62,317

 

 

 

104,838

 

Less: accumulated depreciation and amortization

 

 

(22,458

)

 

 

(52,209

)

Property and equipment, net

 

$

39,859

 

 

$

52,629

 

 

Depreciation and amortization expense related to property and equipment was $4.4 million, $14.6 million and $31.0 million for the fiscal years ended January 31, 2014, 2015 and 2016, respectively.

Intangible Assets, Net

Intangible assets, net consist of the following (in thousands):

 

 

 

January 31,

 

 

 

2015

 

 

2016

 

Technology patents

 

$

9,125

 

 

$

9,125

 

Accumulated amortization

 

 

(841

)

 

 

(2,145

)

Intangible assets, net

 

$

8,284

 

 

$

6,980

 

 

Intangible assets amortization expense was $841,000 and $1.3 million for the fiscal years ended January 31, 2015 and 2016, respectively. No intangible assets amortization expense was recorded for the fiscal year ended January 31, 2014. Due to the defensive nature of these patents, the amortization is included in general and administrative expenses in the consolidated statements of operations.

As of January 31, 2016, expected amortization expense for intangible assets for each of the next five years and thereafter is as follows (in thousands):

 

Fiscal Year Ending January 31,

 

Estimated Future

Amortization

Expense

 

2017

 

$

1,304

 

2018

 

 

1,304

 

2019

 

 

1,304

 

2020

 

 

1,304

 

2021

 

 

1,304

 

Thereafter

 

 

460

 

Total

 

$

6,980

 

 

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following (in thousands):

 

 

 

January 31,

 

 

 

2015

 

 

2016

 

Sales and use tax payable

 

$

591

 

 

$

299

 

Accrued professional fees

 

 

1,502

 

 

 

3,044

 

Accrued travel and entertainment expenses

 

 

1,138

 

 

 

2,182

 

Income tax payable

 

 

779

 

 

 

1,791

 

Other accrued liabilities

 

 

2,096

 

 

 

6,760

 

Total accrued expenses and other liabilities

 

$

6,106

 

 

$

14,076

 

 

Commitments and Contingencies
Commitments and Contingencies

 

Note 5. Commitments and Contingencies

 

Operating Leases

 

We lease our office facilities under operating lease agreements expiring through December 2025. Certain of these lease agreements have escalating rent payments. We recognize rent expense under such agreements on a straight-line basis over the lease term, and the difference between the rent paid and the straight-line rent is recorded in accrued expenses and other liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

 

As of January 31, 2016, the aggregate future minimum payments under non-cancelable operating leases consist of the following (in thousands):

 

Fiscal Year Ending January 31,

 

Operating Leases

 

2017

 

$

14,402

 

2018

 

 

14,976

 

2019

 

 

10,637

 

2020

 

 

8,534

 

2021

 

 

5,477

 

Thereafter

 

 

6,728

 

Total

 

$

60,754

 

 

Rent expense recognized under our operating leases were $1.8 million, $7.5 million and $11.0 million for the fiscal years ended January 31, 2014, 2015 and 2016, respectively.

 

Purchase Obligations

As of January 31, 2015 and 2016, we had $626,000 and $5.9 million of non-cancelable contractual purchase obligations related to certain software service contracts.

 

Letters of Credit

As of January 31, 2015 and 2016, we had letters of credit in the aggregate amount of $4.6 million and $7.1 million, respectively, in connection with our facility leases. The letters of credit are collateralized by restricted cash in the same amount and mature at various dates through March 2023.

Legal Matters

On November 4, 2013, EMC filed a complaint against us in the U.S. District Court for the District of Massachusetts, alleging that our hiring of EMC employees evidences a scheme to misappropriate EMC’s confidential information and trade secrets and to unlawfully interfere with EMC’s business relationships with its customers and contractual relationships with its employees. The complaint seeks damages and injunctive relief. On November 26, 2013, we answered and counterclaimed, denying EMC’s allegations and alleging that EMC surreptitiously obtained and tested our product in a manner that constituted misappropriation of our trade secrets, a breach of contract, breach of the covenant of good faith and fair dealing, unlawful interference with our contractual and business relationships as well as unfair competition and a violation of Massachusetts General Law 93A, Sections 2 and 11. On November 18, 2014, we amended our counterclaim, additionally alleging that EMC has engaged in commercial disparagement, violated the Lanham Act and engaged in defamation. Our counterclaim seeks damages and declaratory and injunctive relief. Fact discovery deadline has passed. Expert discovery is scheduled to conclude on April 15, 2016, and the deadline for filing dispositive motions is May 6, 2016. The District Court has scheduled a trial date for October 24, 2016.In a separate litigation matter, on November 26, 2013, EMC filed a complaint against us in the U.S. District Court for the District of Delaware, alleging infringement of five patents held by EMC. The five patents are U.S. Patent 6,904,556 entitled “Systems and Methods Which Utilize Parity Sets,” U.S. Patent 6,915,475 entitled “Data Integrity Management for Data Storage Systems,” U.S. Patent 7,373,464 entitled “Efficient Data Storage System” and the related U.S. Patent 7,434,015 entitled “Efficient Data Storage System” and U.S. Patent 8,375,187 entitled “I/O Scheduling For Flash Drives.” The complaint seeks damages and injunctive and equitable relief, with respect to the FlashArray 400-Series and predecessor products. Prior to trial, EMC dropped U.S. Patent No. 6,915,475 from the suit, and the District Court found, in a summary judgment ruling, that we did not infringe U.S. Patent No. 8,375,187 and did infringe certain claims of U.S. Patent No. 7,434,015, (“’015 patent”). The remaining two patents and the validity of ‘015 patent went to trial.

On March 15, 2016, the jury returned a verdict finding that we did not infringe U.S. Patent Nos. 6,904,556 and 7,373,464, and that the ‘015 patent, which the District Court ruled us to have infringed, is valid. The jury awarded EMC $14.0 million in royalty damages for infringement of the '015 patent. The jury declined to award any lost profit damages. On March 21, 2016, EMC filed an additional complaint for infringement of the '015 patent with respect to the FlashArray//m product, which EMC did not seek permission from the District Court to add to the lawsuit when FlashArray//m was launched in June of 2015. This new complaint seeks damages and injunctive and equitable relief based on the District Court's previous ruling with respect to the '015 patent. The infringement ruling represents a reasonably possible loss contingency under the applicable accounting standards of up to $14.0 million. We believe there are strong grounds to challenge the infringement ruling by the District Court and the validity finding by the jury, with respect to the ‘015 patent. We intend to vigorously challenge the findings with respect to the ‘015 patent in post-trial motions before the District Court and, if necessary, appeal to the U.S. Court of Appeals for the Federal Circuit. At present, we do not believe it is probable that a loss has been incurred.  As a result, we have not recorded any loss contingency on our consolidated balance sheet as of January 31, 2016.

From time to time, we have become involved in claims and other legal matters arising in the normal course of business. We investigate these claims as they arise. Although claims are inherently unpredictable, we currently are not aware of any matters that may have a material adverse effect on our business, financial position, results of operations or cash flows. Accordingly we have not recorded any loss contingency on our consolidated balance sheets as of January 31, 2015 and 2016.

Indemnification

Our arrangements generally include certain provisions for indemnifying customers against liabilities if our products or services infringe a third party’s intellectual property rights. Other guarantees or indemnification arrangements include guarantees of product and service performance and standby letters of credit for lease facilities. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, we have not incurred any material costs as a result of such obligations and have not accrued any liabilities related to such obligations in the consolidated financial statements. In addition, we indemnify our officers, directors and certain key employees while they are serving in good faith in their respective capacities. To date, there have been no claims under any indemnification provisions.

Line of Credit
Line of Credit

Note 6. Line of Credit

In August 2014, we entered into a two-year loan and security agreement with a financial institution to provide up to $15.0 million on a revolving line based on 80% of qualifying accounts receivable. Borrowings under this revolving line of credit bear interest at prime rate plus 1%. Interest expense is paid on a monthly basis based on the principal amount outstanding under the line of credit. The revolving line of credit matures in August 2016. Early termination is allowed but subject to a non-refundable termination fee of $150,000 if terminated on or after the first year from the effective date of the credit facility.

Borrowings under this line of credit are collateralized by substantially all of our assets, excluding any intellectual property. We are also required to comply with certain financial covenants, including a minimum quarterly revenue target, delivery of financial and other information, as well as limitations on dispositions, mergers, or consolidations and other corporate activities. The terms of our outstanding loan and security agreements also restrict our ability to pay dividends.

As of January 31, 2015 and 2016, we had no borrowings from this line of credit and we were in compliance with our financial covenants.

 

Convertible Preferred Stock
Convertible Preferred Stock

Note 7. Convertible Preferred Stock

Upon the closing of our IPO in October 2015, all shares of our then-outstanding convertible preferred stock automatically converted on a one-to-one basis into an aggregate of 122,280,679 shares of Class B common stock.

Convertible preferred stock outstanding as of January 31, 2015 and as of immediately prior to the conversion into Class B common stock consisted of the following (in thousands, except share data):

 

Convertible Preferred Stock:

 

Shares

Authorized

 

 

Shares Issued and Outstanding

 

 

Aggregate Liquidation Preference

 

 

Net

Proceeds

 

Series A

 

 

24,360,000

 

 

 

24,360,000

 

 

$

5,075

 

 

$

5,038

 

Series B

 

 

30,211,506

 

 

 

30,211,506

 

 

 

20,000

 

 

 

19,925

 

Series C

 

 

14,253,774

 

 

 

14,253,774

 

 

 

30,444

 

 

 

30,346

 

Series D

 

 

10,584,066

 

 

 

10,584,066

 

 

 

39,916

 

 

 

39,828

 

Series E

 

 

24,761,984

 

 

 

24,761,984

 

 

 

171,637

 

 

 

168,283

 

Series F

 

 

15,897,337

 

 

 

14,307,603

 

 

 

225,000

 

 

 

220,803

 

Series F-1

 

 

3,811,285

 

 

 

3,801,746

 

 

 

59,786

 

 

 

59,717

 

Total convertible preferred stock

 

 

123,879,952

 

 

 

122,280,679

 

 

$

551,858

 

 

$

543,940

 

 

Stockholders' Equity
Stockholders’ Equity

Note 8. Stockholders’ Equity

Preferred Stock

Upon the closing of our IPO in October 2015, we filed an Amended and Restated Certificate of Incorporation, which authorized 20,000,000 shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by our board of directors. As of January 31, 2016, there were no shares of preferred stock issued or outstanding.

Class A and Class B Common Stock

We have two classes of authorized common stock, Class A common stock and Class B common stock.  As of January 31, 2016, we had 2,000,000,000 shares of Class A common stock authorized with a par value of $0.0001 per share and 250,000,000 shares of Class B common stock authorized with a par value of $0.0001 per share. As of January 31, 2016, 28,769,572 shares of Class A common stock were issued and outstanding and 161,739,883 shares of Class B common stock were issued and outstanding.

The rights of the holders of Class A and Class B common stock are identical, except with respect to voting. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted to Class A common stock at any time at the option of the stockholder. Shares of Class B common stock automatically convert to Class A common stock upon the following: (i) sale or transfer of such share of Class B common stock; (ii) the death of the Class B common stockholder (or nine months after the date of death if the stockholder is one of our founders); and (iii) on the final conversion date, defined as the earlier of (a) the first trading day on or after the date on which the outstanding shares of Class B common stock represent less than 10% of the then outstanding Class A and Class B common stock; (b) the tenth anniversary of the IPO; or (c) the date specified by vote of the holders of a majority of the outstanding shares of Class B common stock, voting as a single class.

Class A and Class B common stock are referred to as common stock throughout the notes to the consolidated financial statements, unless otherwise noted.

In August 2015, we established the Pure Good Foundation as a non-profit organization, and in September 2015 we issued 700,000 shares of our Class B common stock to this foundation. As a result, we incurred a one-time general and administrative expense of $11.9 million during the fiscal year ended January 31, 2016, the amount of which was equal to the fair value of the shares of Class B common stock issued.  We anticipate that the proposed programs of the Pure Good Foundation will include grants, humanitarian relief, volunteerism and social development projects. We believe that the Pure Good Foundation will foster employee morale, strengthen our community presence and provide increased brand visibility. 

Common Stock Reserved for Issuance

As of January 31, 2016, we had reserved shares of common stock for future issuance as follows:

 

 

 

January 31, 2016

 

Shares underlying outstanding stock options

 

 

68,879,087

 

Shares reserved for future equity awards

 

 

25,337,800

 

Shares reserved for future employee stock purchase

   plan awards

 

 

3,500,000

 

Total

 

 

97,716,887

 

 

Equity Incentive Plans
Equity Incentive Plans

Note 9. Equity Incentive Plans

Equity Incentive Plans

We maintain two equity incentive plans: the 2009 Equity Incentive Plan (our “2009 Plan”) and the 2015 Equity Incentive Plan (our “2015 Plan”). In August 2015, our board of directors adopted, and in September 2015 our stockholders approved, the 2015 Plan, which became effective in connection with our IPO in October 2015 and serves as the successor to our 2009 Plan. Our 2015 Plan provides for the issuance of incentive stock options to our employees and non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to our employees, directors and consultants. No new awards are issued under our 2009 Plan after the effective date of our 2015 Plan. Outstanding awards granted under our 2009 Plan will remain subject to the terms of our 2009 Plan and applicable award agreements, until such outstanding awards that are stock options are exercised, terminated or expired by their terms, and until any restricted stock awards become vested or are forfeited.

We have initially reserved 27,000,000 shares of our Class A common stock for issuance under our 2015 Plan. The number of shares reserved for issuance under our 2015 Plan will increase automatically on the first day of February of each of 2016 through 2025, in an amount equal to 5% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31.

The exercise price of stock options will generally not be less than 100% of the fair market value of our common stock on the date of grant, as determined by our board of directors. Our equity awards generally vest over a two to four year period and expire no later than ten years from the date of grant. As of January 31, 2016, 25,337,800 shares of our Class A common stock were reserved for future issuance under the 2015 Plan.

2015 Employee Stock Purchase Plan

In August 2015, our board of directors adopted and our stockholders approved, the 2015 Employee Stock Purchase Plan (“2015 ESPP”), which became effective in connection with our IPO in October 2015. A total of 3,500,000 shares of Class A common stock was initially reserved for issuance under the 2015 ESPP. The 2015 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions (or other payroll contributions) of up to 30% of their eligible compensation, subject to a cap of 3,000 shares on any purchase date or $25,000 in any calendar year (as determined under applicable tax rules). Except for the initial offering period, the 2015 ESPP provides for 24 month offering periods beginning March and September of each year, and each offering period will consist of four six-month purchase periods. The initial offering period began in October 2015, and will end on September 15, 2017. On each purchase date, eligible employees will purchase our Class A common stock at a price per share equal to 85% of the lesser of the fair market value of our Class A common stock (1) on the first trading day of the applicable offering period or (2) the purchase date. For the first offering period, the fair market value of our Class A common stock on the offering date was $17.00, the price at which our Class A common stock was first sold to the public in our IPO. As of January 31, 2016, 3,500,000 shares were reserved for future issuance under the 2015 ESPP.

Early Exercise of Stock Options and Promissory Notes

Certain employees and directors have exercised options granted under the 2009 Plan prior to vesting. The unvested shares are subject to a repurchase right held by us at the original purchase price. The proceeds initially are recorded as liability related to early exercised stock options and reclassified to additional paid in capital as the repurchase right lapses. We issued 642,248  shares of common stock upon early exercise of stock options during the fiscal year ended January 31, 2015, for total exercise proceeds of $1.9 million. No unvested stock options were exercised during the fiscal year ended January 31, 2016. For the fiscal years ended January 31, 2015 and 2016, we repurchased 50,000  and 15,000 shares of unvested common stock related to early exercised stock options at the original purchase price due to the termination of an employee. As of January 31, 2015 and 2016, 4,710,454 and 2,809,264 shares held by employees and directors were subject to repurchase at an aggregate price of $6.5 million and $4.8 million.

We entered into promissory notes with certain of our executives and employees in connection with the exercise of their stock option awards. These notes bore fixed interest rates ranging from 0.95% to 1.84% per annum. As of January 31, 2014, outstanding promissory notes were $3.2 million and 6,295,056 shares of common stock were outstanding from stock options exercised via promissory notes. As the promissory notes were solely collateralized by the underlying common stock, they are considered nonrecourse from an accounting standpoint and therefore, stock options exercised via nonrecourse promissory notes are not considered outstanding shares. Accordingly, as of January 31, 2014, we did not record these transactions related to promissory notes. During the fiscal year ended January 31, 2015, an additional 300,000 stock options were early exercised via a nonrecourse promissory note in the amount of $773,000, which was also not recorded in our financial statements. All outstanding promissory notes and the related accrued interest, which totaled $4.0 million, were repaid in full as of January 31, 2015, and accordingly, the underlying common stock was recorded as outstanding shares. Proceeds from the repayment of promissory notes were included in additional paid-in capital for the portion of the underlying common stock that was vested, and in liability related to early exercised stock options for the portion of the underlying common stock that was unvested.

Stock Options

A summary of activity under our equity incentive plans and related information is as follows:

 

 

 

Options Outstanding

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise Price

 

 

Weighted-

Average

Remaining

Contractual

Life (Years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Balance as of January 31, 2015

 

 

54,284,474

 

 

$

3.02

 

 

 

8.3

 

 

$

523,654

 

Options granted

 

 

19,269,524

 

 

 

15.76

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(2,313,598

)

 

 

2.58

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

(2,361,313

)

 

 

7.96

 

 

 

 

 

 

 

 

 

Balance as of January 31, 2016

 

 

68,879,087

 

 

$

6.43

 

 

 

7.9

 

 

$

505,131

 

Vested and exercisable as of January 31, 2016

 

 

24,297,716

 

 

$

2.04

 

 

 

6.7

 

 

$

267,213

 

Vested and expected to vest as of January 31, 2016

 

 

66,945,857

 

 

$

6.37

 

 

 

7.9

 

 

$

494,544

 

 

The aggregate intrinsic value of options vested and exercisable and vested and expected to vest as of January 31, 2016 is calculated based on the difference between the exercise price and the closing price $13.01 of our Class A common stock on January 31, 2016. The aggregate intrinsic value of options exercised for the fiscal years ended January 31, 2014, 2015 and 2016 was $8.5 million, $43.2 million and $29.5 million, respectively.

The weighted-average grant date fair value of options granted was $1.50, $5.71 and $8.38 per share for the fiscal years ended January 31, 2014, 2015 and 2016, respectively. The total grant date fair value of options vested for the fiscal years ended January 31, 2014, 2015 and 2016 was $3.5 million, $9.9 million and $35.4 million, respectively.

As of January 31, 2016, total unrecognized employee compensation cost, net of estimated forfeitures, was $201.8 million, which is expected to be recognized over a weighted-average period of approximately 3.7 years. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation related to these awards will be different from our expectations.

During the fiscal years ended January 31, 2014, 2015 and 2016, we granted options to purchase 3,883,654, 499,750, and 238,000 shares of common stock, net of cancellations, that vest upon satisfaction of a performance condition. For those options that management determined that it is probable that the performance condition will be satisfied, stock-based compensation expense of $596,000, $1.7 million and $2.5 million was recognized during the fiscal years ended January 31, 2014, 2015 and 2016, respectively.

2015 ESPP

During the fiscal year ended January 31, 2016, we recognized $4.4 million of stock-based compensation expense related to our 2015 ESPP. As of January 31, 2016, there was $21.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to our 2015 ESPP that is expected to be recognized over the remaining term of the offering period.

Determination of Fair Value

The fair value of stock options granted to employees and to be purchased under ESPP is estimated on the grant date using the Black-Scholes option pricing model. This valuation model for stock-based compensation expense requires us to make assumptions and judgments about the variables used in the calculation including the fair value of the underlying common stock, expected term, the expected volatility of the common stock, a risk-free interest rate and expected dividend yield.

We estimate the fair value of employee stock options and ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

Employee Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

5.3 - 7.3

 

 

5.0 - 6.9

 

 

6.0 - 7.4

 

Expected volatility

 

65% - 69%

 

 

55% - 68%

 

 

48%-52%

 

Risk-free interest rate

 

0.8% - 2.1%

 

 

1.3% - 2.2%

 

 

1.5%-1.9%

 

Dividend rate

 

 

 

 

 

 

 

 

 

Fair value of common stock

 

$1.46 - $2.98

 

 

$4.81 - $12.65

 

 

$13.94-$19.68

 

Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

 

 

 

 

 

 

0.4 - 1.9

 

Expected volatility

 

 

 

 

 

 

 

49%

 

Risk-free interest rate

 

 

 

 

 

 

 

0.1% - 0.7%

 

Dividend rate

 

 

 

 

 

 

 

 

 

 

The assumptions used in the Black-Scholes option pricing model were determined as follows.

Fair Value of Common Stock—Prior to our IPO in October 2015, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each grant date. These factors included, but were not limited to (i) contemporaneous third-party valuations of common stock; (ii) the prices for our convertible preferred stock sold to outside investors; (iii) the rights and preferences of convertible preferred stock relative to common stock; (iv) the lack of marketability of our common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or sale of Pure Storage, given prevailing market conditions. Subsequent to our IPO, we use the market closing price of our Class A common stock as reported on the New York Stock Exchange to determine the fair value of our common stock at each grant date.

Expected Term—The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options and ESPP purchase rights.

Expected Volatility—Since we do not have a trading history of our common stock, the expected volatility was derived from the average historical stock volatilities of several public companies within the same industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock option grants and ESPP purchase rights.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock option grants and ESPP purchase rights.

Dividend Rate—We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.

Non-Employee Stock Option Awards

We estimate the fair value of non-employee stock options on the date of grant using a Black-Scholes option pricing model with the following assumptions:

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

Expected term (in years)

 

 

10.0

 

 

 

10.0

 

 

 

10.0

 

Expected volatility

 

62% - 65%

 

 

62% - 63%

 

 

49%

 

Risk-free interest rate

 

1.1% - 2.6%

 

 

1.6% - 2.6%

 

 

1.5%

 

Dividend rate

 

 

 

 

 

 

 

 

 

Fair value of common stock

 

$1.79 - $2.98

 

 

$9.40 - $12.40

 

 

$

17.00

 

 

For the fiscal years ended January 31, 2014, 2015 and 2016, we granted non-employee stock options to purchase 1,126,400, 83,500, and 22,500 shares of common stock, respectively. We recognized stock-based compensation related to non-employee stock options of $1.1 million, $2.5 million and $3.1 million for the fiscal years ended January 31, 2014, 2015 and 2016, respectively.

Restricted Stock Awards

At the inception of the Company, we issued 18,300,000 shares of common stock to our founders under restricted stock agreements at a grant date fair value of $0.0005 per share that vested over four years. The unvested shares are subject to a repurchase right held by us at the original purchase price.

For the fiscal year ended January 31, 2014, 2,812,500 shares of our restricted stock awards vested, and the related stock-based compensation was immaterial. All restricted stock awards were fully vested as of January 31, 2014.

Repurchase of Common Stock in Connection with Tender Offers

In November 2013, our board of directors approved a tender offer which allowed our employees to sell fully vested shares of common stock or unexercised stock options to the company. We repurchased 1,442,098 shares of common stock and 1,603,536 vested stock options from participating employees for a total consideration of $20.5 million, net of exercise proceeds of $640,000. The common stock repurchased was retired immediately thereafter. Of the $20.5 million total consideration, the fair value of the shares tendered net of exercise proceeds, was recorded in accumulated deficit, which totaled $7.2 million, while the amounts paid in excess of the fair value of our common stock at the time of repurchase were recorded as stock-based compensation expense, which totaled $13.3 million.

In July 2014, our board of directors approved another tender offer which allowed our employees to sell fully vested shares of common stock or unexercised stock options to the company. We repurchased 735,426 shares of common stock and 3,067,910 vested stock options from participating employees for a total consideration of $57.7 million, net of exercise proceeds of $2.1 million. The common stock repurchased was retired immediately thereafter. Of the $57.7 million total consideration, the fair value of the shares tendered net of exercise proceeds, was recorded in accumulated deficit, which totaled $30.1 million, while the amounts paid in excess of the fair value of our common stock at the time of repurchase were recorded as stock-based compensation expense, which totaled $27.6 million.

Stock-Based Compensation Expense

The following table summarizes the components of stock-based compensation expense recognized in the consolidated statements of operations (in thousands):

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

Cost of revenue—product

 

$

253

 

 

$

303

 

 

$

276

 

Cost of revenue—support

 

 

316

 

 

 

1,273

 

 

 

2,388

 

Research and development

 

 

11,477

 

 

 

22,512

 

 

 

31,135

 

Sales and marketing

 

 

9,014

 

 

 

22,466

 

 

 

16,966

 

General and administrative

 

 

506

 

 

 

6,479

 

 

 

7,460

 

Total stock-based compensation

 

$

21,566

 

 

$

53,033

 

 

$

58,225

 

 

The stock-based compensation expense for the fiscal years ended January 31, 2014 and 2015 included $13.3 million and $27.6 million related to the repurchase of common stock in excess of fair value in connection with tender offers.

Net Loss per Share Attributable to Common Stockholders
Net Loss per Share Attributable to Common Stockholders

Note 10. Net Loss per Share Attributable to Common Stockholders

Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. We consider all series of our convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common stockholders is not allocated to the convertible preferred stock as the holders of our convertible preferred stock do not have a contractual obligation to share in our losses.

Basic net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible preferred stock, stock options, unvested restricted stock units, repurchasable shares from early exercised stock options and shares subject to ESPP withholding are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive.

The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share attributed to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. We did not present dilutive net loss per share on an if-converted basis because the impact was not dilutive.

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

Net loss

 

$

(78,561

)

 

$

(183,231

)

 

 

(213,752

)

Weighted-average shares used in computing net loss

   per share attributable to common stockholders,

   basic and diluted

 

 

24,237

 

 

 

27,925

 

 

 

82,460

 

Net loss per share attributable to common

   stockholders, basic and diluted

 

$

(3.24

)

 

$

(6.56

)

 

$

(2.59

)

 

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (in thousands):

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

Convertible preferred stock (on an if-converted

   basis)

 

 

90,103

 

 

 

117,794

 

 

 

 

Stock options to purchase common stock

 

 

33,715

 

 

 

50,429

 

 

 

61,795

 

Early exercised stock options and restricted

   stock awards

 

 

9,768

 

 

 

8,047

 

 

 

3,618

 

Employee stock purchase plan

 

 

 

 

 

 

 

 

170

 

Total

 

 

133,586

 

 

 

176,270

 

 

 

65,583

 

 

Income Taxes
Income Taxes

Note 11. Income Taxes

The geographical breakdown of income (loss) before provision for income taxes is as follows (in thousands):

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

Domestic

 

$

(79,588

)

 

$

(186,922

)

 

$

(195,019

)

International

 

 

1,318

 

 

 

5,028

 

 

 

(17,164

)

Total

 

$

(78,270

)

 

$

(181,894

)

 

$

(212,183

)

 

The components of the provision for income taxes are as follows (in thousands):

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

State

 

 

37

 

 

 

56

 

 

 

210

 

Foreign

 

 

162

 

 

 

1,073

 

 

 

2,198

 

Total

 

 

199

 

 

 

1,129

 

 

 

2,408

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

92

 

 

 

208

 

 

 

(839

)

Total provision for income taxes

 

$

291

 

 

$

1,337

 

 

$

1,569

 

 

The reconciliation of the federal statutory income tax rate and effective income tax rate is as follows:

 

 

 

Fiscal Year Ended January 31,

 

 

 

2014

 

 

2015

 

 

2016

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Tax at federal statutory rate

 

$

(26,611

)

 

$

(61,844

)

 

$

(72,142

)

State tax, net of federal benefit

 

 

32

 

 

 

44

 

 

 

152

 

Stock-based compensation expense

 

 

1,570

 

 

 

5,328

 

 

 

10,866

 

Research and development tax credits

 

 

(1,036

)