PURE STORAGE, INC., 10-K filed on 3/29/2017
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Jan. 31, 2017
Jul. 31, 2016
Mar. 20, 2017
Class A common stock
Mar. 20, 2017
Class B common stock
Document And Entity Information [Line Items]
 
 
 
 
Document Type
10-K 
 
 
 
Amendment Flag
false 
 
 
 
Document Period End Date
Jan. 31, 2017 
 
 
 
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
Large Accelerated Filer 
 
 
 
Entity Well-Known Seasoned Issuer
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Public Float
 
$ 1.3 
 
 
Entity Common Stock, Shares Outstanding
 
 
91,703,752 
114,907,590 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jan. 31, 2017
Jan. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 183,675 
$ 604,742 
Marketable securities
362,986 
Accounts receivable, net of allowance of $944 and $2,000 as of January 31, 2016 and 2017
168,978 
126,324 
Inventory
23,498 
20,649 
Deferred commissions, current
15,787 
15,700 
Prepaid expenses and other current assets
25,157 
20,652 
Total current assets
780,081 
788,070 
Property and equipment, net
81,695 
52,629 
Intangible assets, net
6,560 
6,980 
Deferred income taxes, non-current
844 
536 
Other assets, non-current
30,565 
22,568 
Total assets
899,745 
870,783 
Current liabilities:
 
 
Accounts payable
52,719 
38,187 
Accrued compensation and benefits
39,252 
32,995 
Accrued expenses and other liabilities
21,697 
14,076 
Deferred revenue, current
158,095 
94,514 
Liability related to early exercised stock options
1,362 
4,760 
Total current liabilities
273,125 
184,532 
Deferred revenue, non-current
145,031 
121,690 
Other liabilities, non-current
3,159 
1,207 
Total liabilities
421,315 
307,429 
Commitments and contingencies (Note 5)
   
   
Stockholders’ equity:
 
 
Preferred stock, par value of $0.0001 per share— 20,000 shares authorized as of January 31, 2016 and 2017; no shares issued and outstanding as of January 31, 2016 and 2017
Class A and Class B common stock, par value of $0.0001 per share— 2,250,000 (Class A 2,000,000, Class B 250,000) shares authorized as of January 31, 2016 and 2017; 190,509 (Class A 28,769, Class B 161,740) and 204,364 (Class A 87,027, Class B 117,337) shares issued and outstanding as of January 31, 2016 and 2017
20 
19 
Additional paid-in capital
1,281,452 
1,118,670 
Accumulated other comprehensive loss
(562)
Accumulated deficit
(802,480)
(555,335)
Total stockholders’ equity
478,430 
563,354 
Total liabilities and stockholders’ equity
$ 899,745 
$ 870,783 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jan. 31, 2017
Jan. 31, 2016
Accounts receivable, allowance
$ 2,000 
$ 944 
Preferred stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Preferred stock, shares authorized (in shares)
20,000,000 
20,000,000 
Preferred stock, shares issued (in shares)
Preferred stock, shares outstanding (in shares)
Common stock, shares authorized (in shares)
2,250,000,000 
2,250,000,000 
Common stock, shares issued (in shares)
204,364,000 
190,509,000 
Common stock, shares outstanding (in shares)
204,364,000 
190,509,000 
Class A common stock
 
 
Common stock, par value per share (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized (in shares)
2,000,000,000 
2,000,000,000 
Common stock, shares issued (in shares)
87,027,014 
28,769,000 
Common stock, shares outstanding (in shares)
87,027,000 
28,769,000 
Class B common stock
 
 
Common stock, par value per share (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized (in shares)
250,000,000 
250,000,000 
Common stock, shares issued (in shares)
117,337,000 
161,740,000 
Common stock, shares outstanding (in shares)
117,337,000 
161,740,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Jan. 31, 2017
Jan. 31, 2016
Jan. 31, 2015
Revenue:
 
 
 
Product
$ 590,001 
$ 375,733 
$ 154,836 
Support
137,976 
64,600 
19,615 
Total revenue
727,977 
440,333 
174,451 
Cost of revenue:
 
 
 
Product
194,150 
132,870 
63,425 
Support
58,129 
35,023 
14,127 
Total cost of revenue
252,279 
167,893 
77,552 
Gross profit
475,698 
272,440 
96,899 
Operating expenses:
 
 
 
Research and development
245,817 
166,645 
92,707 
Sales and marketing
360,035 
240,574 
152,320 
General and administrative
84,652 
75,402 
32,354 
Legal settlement
30,000 
Total operating expenses
720,504 
482,621 
277,381 
Loss from operations
(244,806)
(210,181)
(180,482)
Other income (expense), net
1,627 
(2,002)
(1,412)
Loss before provision for income taxes
(243,179)
(212,183)
(181,894)
Provision for income taxes
1,887 
1,569 
1,337 
Net loss
$ (245,066)
$ (213,752)
$ (183,231)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share)
$ (1.26)
$ (2.59)
$ (6.56)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted (in shares)
194,714 
82,460 
27,925 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 31, 2017
Jan. 31, 2016
Jan. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net loss
$ (245,066)
$ (213,752)
$ (183,231)
Other comprehensive loss:
 
 
 
Change in unrealized net loss on available-for-sale securities
(562)
Comprehensive loss
$ (245,628)
$ (213,752)
$ (183,231)
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Series E Convertible Preferred Stock
Series F Convertible Preferred Stock
Series F-1 Convertible Preferred Stock
Beginning balance at Jan. 31, 2014
$ (116,087)
$ 3 
$ 12,143 
$ 0 
$ (128,233)
 
 
 
Beginning balance at Jan. 31, 2014
262,970 
 
 
 
 
 
 
 
Beginning balance (in shares) at Jan. 31, 2014
104,106,000 
 
 
 
 
 
 
 
Beginning balance (in shares) at Jan. 31, 2014
 
28,439,000 
 
 
 
 
 
 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
 
 
 
 
Issuance of convertible preferred stock (in shares)
 
 
 
 
 
65,000 
14,308,000 
3,802,000 
Issuance of convertible preferred stock
 
 
 
 
 
450 
220,803 
59,717 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Issuance of common stock upon exercise of stock options, including stock options exercised via promissory notes (Note 7) (in shares)
 
11,879,000 
 
 
 
 
 
 
Issuance of common stock upon exercise of stock options, including stock options exercised via promissory notes (Note 7)
3,047 
3,045 
 
 
 
 
 
Repurchase of common stock in connection with tender offer (Note 7) (in shares)
 
(3,803,000)
 
 
 
 
 
 
Repurchase of common stock in connection with tender offer (Note 7)
(30,120)
(1)
 
 
(30,119)
 
 
 
Repurchase of common stock from early exercised stock options (in shares)
 
(50,000)
 
 
 
 
 
 
Repurchase of common stock from early exercised stock options
 
 
 
 
 
 
 
Stock-based compensation expense
25,399 
 
25,399 
 
 
 
 
 
Vesting of early exercised stock options
1,162 
 
1,162 
 
 
 
 
 
Net loss
(183,231)
 
 
 
(183,231)
 
 
 
Ending balance at Jan. 31, 2015
(299,830)
41,749 
(341,583)
 
 
 
Ending balance at Jan. 31, 2015
543,940 
 
 
 
 
 
 
 
Ending balance (in shares) at Jan. 31, 2015
122,281,000 
 
 
 
 
 
 
 
Ending balance (in shares) at Jan. 31, 2015
 
36,465,000 
 
 
 
 
 
 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
 
 
 
 
Conversion of convertible preferred stock to common stock upon initial public offering (in shares)
(122,281,000)
 
 
 
 
 
 
 
Conversion of convertible preferred stock to common stock upon initial public offering
(543,940)
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Conversion of convertible preferred stock to common stock upon initial public offering (in shares)
 
122,281,000 
 
 
 
 
 
 
Conversion of convertible preferred stock to common stock upon initial public offering
543,940 
12 
543,928 
 
 
 
 
 
Issuance of common stock upon initial public offering (in shares)
 
28,750,000 
 
 
 
 
 
 
Issuance of common stock upon initial public offering, net of offering costs
455,138 
455,135 
 
 
 
 
 
Issuance of common stock to Pure Good Foundation (in shares)
 
700,000 
 
 
 
 
 
 
Issuance of common stock to Pure Good Foundation
11,900 
 
11,900 
 
 
 
 
 
Issuance of common stock upon exercise of stock options, net of repurchases (in shares)
 
2,313,000 
 
 
 
 
 
 
Issuance of common stock upon exercise of stock options, net of repurchases
6,008 
6,008 
 
 
 
 
 
Stock-based compensation expense
58,225 
 
58,225 
 
 
 
 
 
Vesting of early exercised stock options
1,725 
 
1,725 
 
 
 
 
 
Net loss
(213,752)
 
 
 
(213,752)
 
 
 
Ending balance at Jan. 31, 2016
563,354 
19 
1,118,670 
(555,335)
 
 
 
Ending balance at Jan. 31, 2016
 
 
 
 
 
 
 
Ending balance (in shares) at Jan. 31, 2016
 
 
 
 
 
 
 
Ending balance (in shares) at Jan. 31, 2016
 
190,509,000 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
Cumulative-effect adjustment from adoption of ASU 2016-09 (Accounting Standards Update 2016-09)
 
2,079 
 
(2,079)
 
 
 
Issuance of common stock upon exercise of stock options, net of repurchases (in shares)
 
10,180,000 
 
 
 
 
 
 
Issuance of common stock upon exercise of stock options, net of repurchases
15,031 
15,030 
 
 
 
 
 
Stock-based compensation expense
116,668 
 
116,668 
 
 
 
 
 
Vesting of early exercised stock options
3,399 
 
3,399 
 
 
 
 
 
Vesting of restricted stock units (in shares)
 
1,238,000 
 
 
 
 
 
 
Vesting of restricted stock units
 
 
 
 
 
 
 
Common stock issued under employee stock purchase plan (in shares)
 
2,437,000 
 
 
 
 
 
 
Common stock issued under employee stock purchase plan
25,606 
 
25,606 
 
 
 
 
 
Other comprehensive income (loss)
(562)
 
 
(562)
 
 
 
 
Net loss
(245,066)
 
 
 
(245,066)
 
 
 
Ending balance at Jan. 31, 2017
478,430 
20 
1,281,452 
(562)
(802,480)
 
 
 
Ending balance at Jan. 31, 2017
$ 0 
 
 
 
 
 
 
 
Ending balance (in shares) at Jan. 31, 2017
 
 
 
 
 
 
 
Ending balance (in shares) at Jan. 31, 2017
 
204,364,000 
 
 
 
 
 
 
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended 12 Months Ended
Jan. 31, 2016
Common 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, par value per share (in dollars per share)
 
$ 6.93 
$ 15.73 
$ 15.73 
Issuance costs
 
 
$ 4,197 
$ 69 
Offering costs
$ 4,539 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 31, 2017
Jan. 31, 2016
Jan. 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$ (245,066)
$ (213,752)
$ (183,231)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
50,203 
32,254 
15,392 
Stock-based compensation expense
116,668 
58,225 
25,399 
Contribution of common stock to the Pure Good Foundation
11,900 
Other
1,584 
(1,093)
277 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(44,049)
(67,292)
(44,197)
Inventory
(3,776)
1,481 
(13,713)
Deferred commissions
(740)
(13,021)
(9,838)
Prepaid expenses and other current assets
(6,133)
(8,704)
(6,550)
Accounts payable
10,644 
24,901 
3,474 
Accrued compensation and other liabilities
19,381 
24,710 
12,450 
Deferred revenue
86,922 
142,535 
56,842 
Net cash used in operating activities
(14,362)
(7,856)
(143,695)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(76,773)
(39,355)
(42,227)
Purchase of intangible assets
(1,000)
(9,125)
Purchases of marketable securities
(526,717)
Sales of marketable securities
114,354 
Maturities of marketable securities
48,513 
Net increase in restricted cash
(5,600)
(2,485)
(1,613)
Net cash used in investing activities
(447,223)
(41,840)
(52,965)
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 
Net proceeds from exercise of stock options, including proceeds from repayment of promissory notes
14,912 
6,008 
7,665 
Proceeds from issuance of common stock under employee stock purchase plan
25,606 
Repurchase of common stock in connection with tender offer
(30,120)
Payments of deferred offering costs
(3,702)
(33)
Net cash provided by financing activities
40,518 
461,731 
258,482 
Net increase in cash and cash equivalents
(421,067)
412,035 
61,822 
Cash and cash equivalents, beginning of period
604,742 
192,707 
130,885 
Cash and cash equivalents, end of period
183,675 
604,742 
192,707 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for income taxes
2,866 
1,118 
429 
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
7,414 
6,212 
1,323 
Vesting of early exercised stock options
3,399 
1,725 
1,162 
Cashless exercise of stock options during tender offer
2,057 
Unpaid deferred offering costs
$ 0 
$ 546 
$ 55 
Business Overview
Business Overview
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 are building a data 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 initial public offering (IPO) of Class A common stock, in which we sold 28,750,000 shares. The shares were sold at an IPO 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
Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the company 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.
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 years ended January 31, 2015, 2016 and 2017, we recorded net foreign currency transaction losses of $648,000, $2.3 million, and $2.6 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, 2016 and 2017, substantially all of our cash and cash equivalents have been invested with three financial institutions 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, 2016, we had two channel partners that individually represented 11% of total accounts receivable on that date. As of January 31, 2017, we had one channel partner that represented 10% of total accounts receivable on that date. No single channel partner represented over 10% of revenue for the years ended January 31, 2015 and 2016. One channel partner represented 11% of revenue for the year ended January 31, 2017. No customer represented over 10% of revenue for the years ended January 31, 2015, 2016 and 2017. 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 cash collateral for a vendor credit card program and letters of credit related to our leases. As of January 31, 2016 and 2017, we had restricted cash of $7.1 million and $12.7 million, respectively, which was included in other assets, non-current in the consolidated balance sheets.
Marketable Securities
We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification at each balance sheet date. We may sell these securities at any time for use in current operations even if they have not yet reached maturity. As a result, we classify our securities, including those with maturities beyond twelve months, as current assets in the consolidated balance sheets. We carry these securities at fair value and record unrealized gains and losses in other comprehensive income (loss), which is reflected as a component of stockholders' equity. We evaluate our securities to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses from the sale of marketable securities and declines in value deemed to be other than temporary are determined based on the specific identification method. Realized gains and losses are reported in other income (expense), net in the consolidated statements of operations.
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:
 
 
Year Ended January 31,
 
2015
 
2016
 
2017
 
(in thousands) 
Allowance for doubtful accounts, beginning balance
$
160

 
$
210

 
$
944

Provision
50

 
918

 
1,394

Writeoffs

 
(184
)
 
(338
)
Allowance for doubtful accounts, ending balance
$
210

 
$
944

 
$
2,000


 
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 years ended January 31, 2015, 2016 and 2017.
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 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. During the year ended January 31, 2017, we acquired certain technology patents for $1.0 million. This amount is being amortized on a straight-line basis over an estimated useful life of five 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, 2016 and 2017, we recorded deferred commissions, current, of $15.7 million and $15.8 million, respectively, and deferred commissions, non-current, of $14.3 million and $14.9 million, respectively, in other assets, non-current, in the consolidated balance sheets. During the years ended January 31, 2015, 2016 and 2017, we recognized sales commission expenses of $27.7 million, $47.2 million, and $84.8 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 five years. Costs related to maintenance and support agreements are expensed as incurred. In addition, our Evergreen Storage 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, we allocate consideration to support related deliverables based on VSOE and to all other deliverables based on BESP as TPE typically cannot be obtained.
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. During the three months ended October 31, 2016, we established VSOE for support related deliverables as our stand-alone selling prices are now sufficiently concentrated based on an analysis of our historical data. We have not established VSOE for any of our hardware or other deliverables.
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 primarily 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 years ended January 31, 2015, 2016 and 2017.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses were $1.4 million, $6.2 million and $10.7 million for the years ended January 31, 2015, 2016 and 2017, respectively.
Stock-Based Compensation
Stock-based compensation includes restricted stock units (RSUs), stock options and purchase rights issued to employees under our ESPP. 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. RSUs are measured at the fair market value of the underlying stock at the grant date. 
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). Prior to the adoption of Accounting Standards Update (ASU) No. 2016-09 (ASU 2016-09) on February 1, 2016, stock-based compensation expense was recognized only for those awards expected to vest. Subsequent to the adoption, we account for forfeitures as they occur. 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.
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.
Recently Adopted Accounting Standards
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 non-current amounts in the consolidated balance sheets. The amendments in the update require that all deferred tax assets and liabilities be classified as non-current in the consolidated balance sheets. We early adopted this standard in the fourth quarter of fiscal 2016 on a retrospective basis. Prior periods have been retrospectively adjusted.
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We elected to early adopt this standard in the second quarter of fiscal 2017 with February 1, 2016 being the effective date of adoption. ASU 2016-09 eliminates the requirement to delay the recognition of excess tax benefits until they reduce current taxes payable. Under this standard, previously unrecognized excess tax benefits shall be recognized on a modified retrospective basis. However, as of February 1, 2016, the previously unrecognized excess tax benefits of $10.5 million had no impact on our accumulated deficit balance as the related U.S. deferred tax assets were fully offset by a valuation allowance. ASU 2016-09 also requires excess tax benefits and deficiencies to be recognized prospectively in our provision for income taxes rather than additional paid-in capital. As a result of the adoption, our provision for income taxes decreased by $1.0 million during the year ended January 31, 2017. Additionally, we elected to account for forfeitures as they occur rather than estimate expected forfeiture using a modified retrospective transition method. Accordingly, we recorded a cumulative-effect adjustment of $2.1 million to accumulated deficit and an increase of stock-based compensation expense of $864,000 during the first quarter of fiscal 2017. Finally, ASU 2016-09 requires excess tax benefits to be presented as a component of operating cash flows rather than financing cash flows. We elected to adopt this requirement prospectively and accordingly, prior periods have not been adjusted. Excess tax benefits were not material for all periods presented.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued 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. The new standard will be effective for us beginning on February 1, 2018 which is the mandatory adoption date and we do not plan to early adopt. This standard may be adopted using either the full or modified retrospective methods. We currently anticipate adopting the standard retrospectively to all prior periods presented. Our ability to apply the requirements retrospectively to all prior periods presented is dependent on system readiness, including software procured from third-party providers, and the completion of our analysis of information necessary to restate prior period financial statements.
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 will be effective for us beginning on February 1, 2019 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.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. The amendments in this update will be effective for us beginning on February 1, 2020 with early adoption permitted on or after February 1, 2019. We are currently evaluating the impact of this standard on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 will be effective for us beginning on February 1, 2018 and will be applied on a modified retrospective basis. Early adoption is permitted. We do not expect the adoption of this standard to have any impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for us beginning on February 1, 2018 and will be applied on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
Reclassifications
As a result of the adoption of ASU 2015-17 in the fourth quarter of fiscal 2016, we made the following reclassifications to the January 31, 2015 balance sheet: a $5.5 million decrease to deferred tax assets, non-current, a $5.8 million decrease to deferred tax liability, current, and an increase of $300,000 to deferred tax liability, non-current.
Financial Instruments
Financial Instruments
Financial Instruments

Fair Value Measurements
We measure our cash equivalents, marketable securities and restricted cash at fair value on a recurring basis. 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 cash equivalents, marketable securities and restricted cash within Level 1 or Level 2 because they are valued using either quoted market prices or 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. Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers. The valuation techniques used to measure the fair value of our marketable securities were derived from non-binding market consensus prices that are corroborated by observable market data and quoted market prices for similar instruments.
Cash Equivalents, Marketable Securities and Restricted Cash
The following tables summarize our cash equivalents, marketable securities and restricted cash by significant investment categories as of January 31, 2016 and 2017 (in thousands):
 
 
January 31, 2016
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash Equivalents
 
Restricted Cash
Level 1
 

 
 

 
 

 
 

 
 
 
 
Money market funds
$

 
$

 
$

 
$
45,614

 
$
45,614

 
$

Level 2
 

 
 

 
 

 
 

 
 
 
 
Certificates of deposit

 

 

 
7,132

 

 
7,132

Total
$

 
$

 
$

 
$
52,746

 
$
45,614

 
$
7,132

 
 
January 31, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash Equivalents
 
Marketable Securities
 
Restricted Cash
Level 1
 

 
 

 
 

 
 

 
 
 
 
 
 
Money market accounts
$

 
$

 
$

 
$
12,734

 
$

 
$

 
$
12,734

Level 2
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government treasury notes
148,298

 
22

 
(289
)
 
148,031

 
13,226

 
134,805

 

U.S. government agencies
40,398

 
2

 
(159
)
 
40,241

 

 
40,241

 

Corporate debt securities
185,701

 
242

 
(379
)
 
185,564

 

 
185,564

 

Foreign government bonds
2,377

 
2

 
(3
)
 
2,376

 

 
2,376

 

Total
$
376,774

 
$
268

 
$
(830
)
 
$
388,946

 
$
13,226

 
$
362,986

 
$
12,734


The amortized cost and estimated fair value of our marketable securities are shown below by contractual maturity (in thousands):
 
January 31, 2017
 
Amortized Cost
 
Fair Value
Due within one year
$
103,213

 
$
103,238

Due in one to five years
260,335

 
259,748

Total
$
363,548

 
$
362,986



As of January 31, 2017, there were no securities that were in an unrealized loss position for more than 12 months. Based on our evaluation of available evidence, we concluded that the gross unrealized losses on our marketable securities as of January 31, 2017 were temporary in nature. The following table presents gross unrealized losses and fair values for those investments that were in a continuous unrealized loss position for less than 12 months as of  January 31, 2017, aggregated by investment category (in thousands):
 
Less than 12 months
 
Fair Value
 
Unrealized Loss
U.S. government treasury notes
$
82,228

 
$
(289
)
U.S government agencies
34,485

 
(159
)
Corporate debt securities
99,710

 
(379
)
Foreign government bonds
877

 
(3
)
Total
$
217,300

 
$
(830
)


Gross realized gains on sale of marketable securities for the year ended January 31, 2017 were $253,000.
Balance Sheet Components
Balance Sheet Components
Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
 
January 31,
 
2016
 
2017
Test equipment
$
65,663

 
$
105,955

Computer equipment and software
31,388

 
54,521

Furniture and fixtures
2,852

 
4,494

Leasehold improvements
4,935

 
10,332

Total property and equipment
104,838

 
175,302

Less: accumulated depreciation and amortization
(52,209
)
 
(93,607
)
Property and equipment, net
$
52,629

 
$
81,695


 
Depreciation and amortization expense related to property and equipment was $14.6 million, $31.0 million and $48.8 million for the years ended January 31, 2015, 2016 and 2017, respectively.
Intangible Assets, Net
Intangible assets, net consist of the following (in thousands):
 
 
January 31,
 
2016
 
2017
Technology patents
$
9,125

 
$
10,125

Accumulated amortization
(2,145
)
 
(3,565
)
Intangible assets, net
$
6,980

 
$
6,560


 
Intangible assets amortization expense was $841,000, $1.3 million and $1.4 million for the years ended January 31, 2015, 2016 and 2017, respectively. The weighted-average remaining useful life of the technology patents is 4.2 years. 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, 2017, expected amortization expense for intangible assets for each of the next five years is as follows (in thousands):
 
Year Ending January 31,
Estimated Future
Amortization
Expense
2018
$
1,504

2019
1,504

2020
1,504

2021
1,504

2022
544

Total
$
6,560


Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
 
 
January 31,
 
2016
 
2017
Sales and use tax payable
$
299

 
$
540

Accrued professional fees
3,044

 
1,765

Accrued marketing
2,684

 
6,718

Accrued travel and entertainment expenses
2,182

 
2,235

Income tax payable
1,791

 
1,135

Other accrued liabilities
4,076

 
9,304

Total accrued expenses and other liabilities
$
14,076

 
$
21,697

Commitments and Contingencies
Commitments and Contingencies
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, 2017, the aggregate future minimum payments under non-cancelable operating leases consist of the following (in thousands):
 
Year Ending January 31,
Operating Leases
2018
$
17,937

2019
14,762

2020
13,565

2021
14,118

2022
11,972

Thereafter
15,063

Total
$
87,417


 
Rent expense recognized under our operating leases were $7.5 million, $11.0 million and $16.6 million for the years ended January 31, 2015, 2016 and 2017, respectively.
 
Purchase Obligations
As of January 31, 2016 and 2017, we had $5.9 million and $4.1 million of non-cancelable contractual purchase obligations related to certain software service contracts.

Letters of Credit
As of January 31, 2016 and 2017, we had letters of credit in the aggregate amount of $7.1 million and $7.7 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 June 2024.
Legal Matters
On November 4, 2013, EMC filed a complaint against us in the U.S. District Court for the District of Massachusetts, alleging misappropriation of confidential information and trade secrets and unlawful interference with business and contractual relationships. The complaint sought damages and injunctive relief. On November 26, 2013 and November 18, 2014, we counterclaimed, alleging, among other things, misappropriation of trade secrets, unlawful interference with contractual and business relationships, unfair competition, commercial disparagement, and defamation. Our counterclaim sought damages and declaratory and injunctive relief. In a separate litigation matters, on November 26, 2013 and March 21, 2016, EMC filed complaints against us in the U.S. District Court for the District of Delaware, alleging patent infringement. The complaints sought damages and injunctive and equitable relief.
On October 18, 2016, we entered into an agreement with Dell Inc. (Dell), as successor-in-interest to EMC to settle all litigation between EMC and us. The terms of the settlement include a payment to Dell, the dismissal of all litigation between the parties, mutual releases, and a license to the disputed patent. Accordingly, we paid Dell a one-time settlement amount of $30.0 million, and all litigation between EMC and us was dismissed prior to October 31, 2016. We evaluated the settlement as a multiple-element arrangement, which requires us to allocate the one-time payment to the identifiable elements based on their relative fair values. Based on our estimates of fair value, we determined that the sole benefit of the settlement is to avoid further litigation costs with no value attributable to future use or benefit. Accordingly, we recorded the $30.0 million as a legal settlement charge in general and administrative expenses during the three months ended October 31, 2016.
On September 1, 2016, a purported securities class action entitled Ramsay v. Pure Storage, Inc., et al. was filed in the Superior Court of the State of California (San Mateo County) against us and certain of our officers, directors, investors and underwriters for our initial public offering, asserting claims under sections 11, 12 and 15 of the Securities Act of 1933 on behalf of a purported class consisting of purchasers of our common stock pursuant or traceable to our initial public offering, and seeking unspecified compensatory damages and other relief. Substantially identical lawsuits were subsequently filed in the same court, bringing the same claims against the same defendants, captioned Peter Galanis v. Pure Storage, Inc., et al. (filed September 14, 2016), Curtis Wilson v. Pure Storage, Inc., et al. (filed September 15, 2016), Loren Moe v. Pure Storage, Inc., et al. (filed September 23, 2016), and Mason Delahooke and Mahsa Shirazikia v. Pure Storage, Inc., et al. (filed October 5, 2016). On October 27, 2016, the aforementioned actions were consolidated under the caption In re Pure Storage, Inc. Shareholder Litigation. On December 13, 2016, the plaintiffs filed an amended consolidated complaint. On January 26, 2017, the defendants filed a demurrer (motion to dismiss) to the consolidated action, which is scheduled to be heard on March 30, 2017. We believe there is no merit to the allegations and intend to defend ourselves vigorously.
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 sheet as of January 31, 2017.
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.
Stockholders' Equity
Stockholders’ Equity
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, 2017, 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, 2017, 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, 201787,027,014 shares of Class A common stock were issued and outstanding and 117,336,663 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 year ended January 31, 2016, the amount of which was equal to the fair value of the shares of Class B common stock issued. Programs of the Pure Good Foundation 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, 2017, we had reserved shares of common stock for future issuance as follows:
 
January 31, 2017
Shares underlying outstanding stock options
56,840,189

Shares underlying outstanding restricted stock units
8,783,024

Shares reserved for future equity awards
24,457,623

Shares reserved for future employee stock purchase plan awards
2,968,087

Total
93,048,923

Equity Incentive Plans
Equity Incentive Plans
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.
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 increases 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.
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. A total of 3,500,000 shares of Class A common stock was initially reserved for issuance under the 2015 ESPP. The number of shares reserved for issuance under our 2015 ESPP increases automatically on the first day of February of each of 2016 through 2025, in an amount equal to the lesser of (i) 1% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31, and (ii) 3,500,000 shares of Class A common stock.

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 16th and September 16th of each year, and each offering period will consist of four six-month purchase periods, subject to a reset provision. If the closing stock price on the offering date of a new offering falls below the closing stock price on the offering date of an ongoing offering, the ongoing offering would terminate immediately following the purchase of ESPP shares on the purchase date immediately preceding the new offering and participants in the terminated ongoing offering would automatically be enrolled in the new offering (ESPP reset). 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. The initial offering period began on October 7, 2015 and ended on March 15, 2016 as our closing stock price on the new offering date of March 16, 2016 was lower than the closing stock price on October 7, 2015 which triggered an ESPP reset. The ESPP reset resulted in a modification charge of approximately $10.6 million which is being recognized over the new 24-month offering period ending March 15, 2018.
During the years ended January 31, 2016 and 2017, we recognized $4.4 million and $18.3 million of stock-based compensation expense related to our 2015 ESPP. As of January 31, 2017, there was $22.1 million of unrecognized stock-based compensation expense related to our 2015 ESPP which is expected to be recognized over a weighted-average period of approximately 1.2 years.
Early Exercise of Stock Options
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 year ended January 31, 2015, for total exercise proceeds of $1.9 million. No unvested stock options were exercised during the years ended January 31, 2016 and 2017. For the 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. No shares were repurchased during the year ended January 31, 2017. As of January 31, 2016 and 2017, 2,809,264 and 494,117 shares held by employees and directors were subject to repurchase at an aggregate price of $4.8 million and $1.4 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 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, 2016
68,879,087

 
$
6.43

 
7.9
 
$
505,131

Options granted
1,999,000

 
12.69

 
 
 
 

Options exercised
(10,180,258
)
 
1.47

 
 
 
 

Options cancelled/forfeited
(3,857,640
)
 
12.18

 
 
 
 

Balance as of January 31, 2017
56,840,189

 
$
7.15

 
7.0
 
$
315,502

Vested and exercisable as of January 31, 2017
29,575,922

 
$
4.12

 
6.2
 
$
228,436


 
The aggregate intrinsic value of options vested and exercisable as of January 31, 2017 is calculated based on the difference between the exercise price and the closing price of $11.37 of our Class A common stock on January 31, 2017. The aggregate intrinsic value of options exercised for the years ended January 31, 2015, 2016 and 2017 was $43.2 million, $29.5 million and $114.2 million, respectively.
The weighted-average grant date fair value of options granted was $5.71, $8.38 and $5.57 per share for the years ended January 31, 2015, 2016 and 2017, respectively. The total grant date fair value of options vested for the years ended January 31, 2015, 2016 and 2017 was $9.9 million, $35.4 million and $61.8 million, respectively.
As of January 31, 2017, total unrecognized employee compensation cost was $132.6 million, which is expected to be recognized over a weighted-average period of approximately 2.9 years.
During the years ended January 31, 2015 and 2016 we granted options to purchase 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 $1.7 million, $2.5 million and $3.3 million was recognized during the years ended January 31, 2015, 2016 and 2017, respectively. At January 31, 2017, there were no outstanding stock options subject to performance vesting conditions.
In November 2016, we modified employee stock option awards to purchase 800,000 shares of our common stock. The modification included an immediate acceleration of performance-based options to purchase 360,000 shares of common stock and an acceleration of time-based options to purchase 440,000 shares of common stock contingent on continued employment through January 31, 2017. This modification resulted in stock-based compensation expense  of $5.9 million that was recognized during the three months ended January 31, 2017.
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:
 
 
Year Ended January 31,
 
2015
 
2016
 
2017
Employee Stock Options
 
 
 
 
 
Expected term (in years)
5.0 - 6.9

 
6.0 - 7.4

 
6.1

Expected volatility
55% - 68%

 
48% - 52%

 
44
%
Risk-free interest rate
1.3% - 2.2%

 
1.5% - 1.9%

 
1.25% - 1.49%

Dividend rate

 

 

Fair value of common stock
$4.81 - $12.65

 
$13.94 - $19.68

 
$10.37 - $14.52

Employee Stock Purchase Plan
 

 
 

 
 

Expected term (in years)

 
0.4 - 1.9

 
0.5 - 2.0

Expected volatility

 
49
%
 
41
%
Risk-free interest rate

 
0.1% - 0.7%

 
0.5% - 0.9%

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 have limited 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:
 
 
Year Ended January 31,
 
2015
 
2016
 
2017
Expected term (in years)
10.0

 
10.0

 

Expected volatility
62% - 63%

 
49
%
 

Risk-free interest rate
1.6% - 2.6%

 
1.5
%
 

Dividend rate

 

 

Fair value of common stock
$9.40 - $12.40

 

$17.00

 



For the years ended January 31, 2015 and 2016 we granted non-employee stock options to purchase 83,500 and 22,500 shares of common stock, respectively. No stock options were granted to non-employees in the year ended January 31, 2017. We recognized stock-based compensation expense related to non-employee stock options of $2.5 million, $3.1 million and $0.7 million for the years ended January 31, 2015, 2016 and 2017, respectively.
Restricted Stock Units
A summary of the restricted stock unit activity under our 2015 Plan and related information is as follows:
 
Number of Restricted Stock Units Outstanding
 
Weighted-Average Grant Date Fair value
 
Aggregate Intrinsic Value
 
 
 
 
 
(in thousands) 
Unvested Balance as of January 31, 2016
53,000
 
$
16.98

 
$
690

Granted
10,501,600
 
13.15

 
 
Vested
(1,237,502)
 
13.95

 
 
Forfeited
(534,074)
 
13.16

 
 
Unvested Balance of January 31,2017
8,783,024
 
$
13.06

 
$
99,863



The aggregate fair value, as of the respective vesting dates, of restricted stock units that vested during the year ended January 31, 2017 was $14.8 million. As of January 31, 2017, total unrecognized employee compensation cost related to outstanding restricted stock units was $103.1 million, which is expected to be recognized over a weighted-average period of approximately 2.8 years.
Repurchase of Common Stock in Connection with Tender Offer
In July 2014, 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 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):
 
 
Year Ended January 31,
 
2015
 
2016
 
2017
Cost of revenue—product
$
303

 
$
276

 
$
601

Cost of revenue—support
1,273

 
2,388

 
5,639

Research and development
22,512

 
31,135

 
63,495

Sales and marketing
22,466

 
16,966

 
34,317

General and administrative
6,479

 
7,460

 
12,616

Total stock-based compensation expense
$
53,033

 
$
58,225

 
$
116,668


 
The stock-based compensation expense for the year ended January 31, 2015 included $27.6 million related to the repurchase of common stock in excess of fair value in connection with the tender offer.
Net Loss per Share Attributable to Common Stockholders
Net Loss per Share Attributable to Common Stockholders
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):
 
 
Year Ended January 31,
 
2015
 
2016
 
2017
Net loss
$
(183,231
)
 
$
(213,752
)
 
(245,066
)
Weighted-average shares used in computing net loss
   per share attributable to common stockholders, basic and diluted
27,925

 
82,460

 
194,714

Net loss per share attributable to common stockholders,
basic and diluted
$
(6.56
)
 
$
(2.59
)
 
$
(1.26
)

 
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):
 
 
Year Ended January 31,
 
2015
 
2016
 
2017
Convertible preferred stock (on an if-converted basis)
117,794

 

 

Stock options to purchase common stock
50,429

 
61,795

 
63,984

Restricted stock units

 

 
5,216

Employee stock purchase plan

 
170

 
1,310

Early exercised stock options
8,047

 
3,618

 
2,106

Total
176,270

 
65,583

 
72,616

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

 
Year Ended January 31,
 
2015
 
2016
 
2017
Domestic
$
(186,922
)
 
$
(195,019
)
 
$
(200,355
)
International
5,028

 
(17,164
)
 
(42,824
)
Total
$
(181,894
)
 
$
(212,183
)
 
$
(243,179
)

 
The components of the provision for income taxes are as follows (in thousands):
 
Year Ended January 31,
 
2015
 
2016
 
2017
Current:
 

 
 

 
 

State
$
56

 
$
210

 
$
389

Foreign
1,073

 
2,198

 
1,806

Total
$
1,129

 
$
2,408

 
$
2,195

Deferred:
 

 
 

 
 

Foreign
208

 
(839
)
 
(308
)
Provision for income taxes
$
1,337

 
$
1,569

 
$
1,887


 
The reconciliation of the federal statutory income tax rate and effective income tax rate is as follows (in thousands):
 
Year Ended January 31,
 
2015
 
2016
 
2017
Tax at federal statutory rate
$
(61,844
)
 
$
(72,142
)
 
$
(82,682
)
State tax, net of federal benefit
44

 
152

 
276

Stock-based compensation expense
5,328

 
10,866

 
(5,242
)
Research and development tax credits
(1,999
)
 
(3,832
)
 
(1,570
)
Foreign rate differential
(429
)
 
7,106

 
15,878

Change in valuation allowance
60,042

 
58,979

 
73,863

Other
195

 
440

 
1,364

Provision for income taxes
$
1,337

 
$
1,569

 
$
1,887



Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant component of our deferred tax assets and liabilities were as follows (in thousands):

 
January 31,
 
2016
 
2017
Deferred tax assets:
 

 
 

Net operating loss carryforwards
$
137,456

 
$
173,942

Tax credit carryover
12,406

 
15,319

Accruals and reserves
1,921

 
3,112

Deferred revenue
20,314

 
53,424

Stock-based compensation expense
12,588

 
26,401

Depreciation and amortization
3,397

 
7,302

Charitable contribution carryforwards
4,380

 
4,345

Total deferred tax assets
192,462

 
283,845

Valuation allowance
(180,926
)
 
(271,779
)
Total deferred tax assets, net of valuation allowance
11,536

 
12,066

Deferred tax liabilities:
 

 
 

Deferred commissions
(11,000
)
 
(11,222
)
Total deferred tax liabilities
(11,000
)
 
(11,222
)
Net deferred tax assets
$
536

 
$
844


 
As of January 31, 2017, the undistributed earnings of $11.1 million from non-U.S. operations held by our foreign subsidiaries are designated as permanently reinvested outside the U.S. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
 
As of January 31, 2017, we had net operating loss carryforwards for federal income tax purposes of approximately $464.2 million and state income tax purposes of approximately $323.8 million. These net operating loss carryforwards will expire, if not utilized, beginning in 2028 for federal and state income tax purposes.
We had federal and state research and development tax credit carryforwards of approximately $12.1 million and $12.6 million as of January 31, 2017. The federal research and development tax credit carryforwards will expire commencing in 2028, while the state research and development tax credit carryforwards have no expiration date.
Realization of deferred tax assets is dependent on future taxable income, the existence and timing of which is uncertain. Based on our history of losses, management has determined that it is more likely than not that the U.S. deferred tax assets will not be realized, and accordingly has placed a full valuation allowance on the net U.S. deferred tax assets. The valuation allowance increased by $66.6 million, $68.0 million, and $90.9 million, respectively, during the years ended January 31, 2015, 2016 and 2017.
Utilization of the net operating loss carryforwards and credits may be subject to substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
Uncertain Tax Positions
The activity related to the unrecognized tax benefits is as follows (in thousands):
 
Year Ended January 31,
 
2015
 
2016
 
2017
Gross unrecognized tax benefits—beginning balance
$
4,676

 
$
13,874

 
$
15,470

Decreases related to tax positions taken during
   prior years

 
(3,969
)
 
(11,286
)
Increases related to tax positions taken during
   prior years

 
35

 

Increases related to tax positions taken during
   current year
9,198

 
5,530

 
2,191

Gross unrecognized tax benefits—ending balance
$
13,874

 
$
15,470

 
$
6,375


 
As of January 31, 2017, our gross unrecognized tax benefit was approximately $6.4 million and if recognized, would have no impact to the effective tax rate because it would be offset by the reversal of deferred tax assets which are subject to a full valuation allowance.
As of January 31, 2017, we had no current or cumulative interest and penalties related to uncertain tax positions.
It is difficult to predict the final timing and resolution of any particular uncertain tax position. Based on our assessment, including experience and complex judgments about future events, we do not expect that changes in the liability for unrecognized tax benefits during the next twelve months will have a significant impact on our consolidated financial position or results of operations.
We file income tax returns in the U.S. federal jurisdiction as well as many U.S. states and foreign jurisdictions. Our fiscal year 2014 is currently under examination by the Internal Revenue Service. The fiscal years 2013 through 2016 remain open to examination by the major jurisdictions in which we are subject to tax. Fiscal years outside the normal statutes of limitation remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized.
Segment Information
Segment Information
Segment Information
Our chief operating decision maker is a group which is comprised of our Chief Executive Officer, our Chief Financial Officer, and our President. This group reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations or operating results. Accordingly, we have a single reportable segment.
The following table sets forth revenue by geographic area based on the billing address of our customers (in thousands):
 
 
Year Ended January 31,
 
2015
 
2016
 
2017
United States
$
134,920

 
$
343,625

 
$
561,352

Rest of the world
39,531

 
96,708

 
166,625

Total revenue
$
174,451

 
$
440,333

 
$
727,977



Long-lived assets by geographic area are summarized as follows (in thousands):

 
January 31,
 
2016
 
2017
United States
$
50,501

 
$
78,692

Rest of the world
2,128

 
3,003

Total long-lived assets
$
52,629

 
$
81,695

401(k) Plan
401(k) Plan
401(k) Plan
We have a 401(k) savings plan (the 401(k) plan) which qualifies as a deferred salary arrangement under section 401(k) of the Internal Revenue Code. Under the 401(k) plan, participating employees may elect to contribute up to 100% of their eligible compensation, subject to certain limitations. We have not made any matching contributions to date.
Related Party Transactions
Related Party Transactions
Related Party Transactions
Certain members of our board of directors are executive officers of our end customers. During the years ended January 31, 2015, 2016 and 2017, we recognized revenue of $2.1 million, $6.2 million and $6.2 million, respectively, from sales transactions to these end customers. We purchased $420,000, $728,000 and $798,000 of products and related services from these end customers during the years ended January 31, 2015, 2016 and 2017.
Basis of Presentation and Summary of Significant Accounting Policies (Policies)
Principles of Consolidation
The consolidated financial statements include the accounts of the company 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.
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.
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, 2016 and 2017, substantially all of our cash and cash equivalents have been invested with three financial institutions 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.
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 cash collateral for a vendor credit card program and letters of credit related to our leases.
Marketable Securities
We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification at each balance sheet date. We may sell these securities at any time for use in current operations even if they have not yet reached maturity. As a result, we classify our securities, including those with maturities beyond twelve months, as current assets in the consolidated balance sheets. We carry these securities at fair value and record unrealized gains and losses in other comprehensive income (loss), which is reflected as a component of stockholders' equity. We evaluate our securities to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses from the sale of marketable securities and declines in value deemed to be other than temporary are determined based on the specific identification method. Realized gains and losses are reported in other income (expense), net in the consolidated statements of operations.
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.
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.
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.
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.
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.
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 five years. Costs related to maintenance and support agreements are expensed as incurred. In addition, our Evergreen Storage 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, we allocate consideration to support related deliverables based on VSOE and to all other deliverables based on BESP as TPE typically cannot be obtained.
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. During the three months ended October 31, 2016, we established VSOE for support related deliverables as our stand-alone selling prices are now sufficiently concentrated based on an analysis of our historical data. We have not established VSOE for any of our hardware or other deliverables.
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 primarily 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.
Advertising Expenses
Advertising costs are expensed as incurred.
Stock-Based Compensation
Stock-based compensation includes restricted stock units (RSUs), stock options and purchase rights issued to employees under our ESPP. 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. RSUs are measured at the fair market value of the underlying stock at the grant date. 
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). Prior to the adoption of Accounting Standards Update (ASU) No. 2016-09 (ASU 2016-09) on February 1, 2016, stock-based compensation expense was recognized only for those awards expected to vest. Subsequent to the adoption, we account for forfeitures as they occur. 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.
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.
Recently Adopted Accounting Standards
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 non-current amounts in the consolidated balance sheets. The amendments in the update require that all deferred tax assets and liabilities be classified as non-current in the consolidated balance sheets. We early adopted this standard in the fourth quarter of fiscal 2016 on a retrospective basis. Prior periods have been retrospectively adjusted.
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We elected to early adopt this standard in the second quarter of fiscal 2017 with February 1, 2016 being the effective date of adoption. ASU 2016-09 eliminates the requirement to delay the recognition of excess tax benefits until they reduce current taxes payable. Under this standard, previously unrecognized excess tax benefits shall be recognized on a modified retrospective basis. However, as of February 1, 2016, the previously unrecognized excess tax benefits of $10.5 million had no impact on our accumulated deficit balance as the related U.S. deferred tax assets were fully offset by a valuation allowance. ASU 2016-09 also requires excess tax benefits and deficiencies to be recognized prospectively in our provision for income taxes rather than additional paid-in capital. As a result of the adoption, our provision for income taxes decreased by $1.0 million during the year ended January 31, 2017. Additionally, we elected to account for forfeitures as they occur rather than estimate expected forfeiture using a modified retrospective transition method. Accordingly, we recorded a cumulative-effect adjustment of $2.1 million to accumulated deficit and an increase of stock-based compensation expense of $864,000 during the first quarter of fiscal 2017. Finally, ASU 2016-09 requires excess tax benefits to be presented as a component of operating cash flows rather than financing cash flows. We elected to adopt this requirement prospectively and accordingly, prior periods have not been adjusted. Excess tax benefits were not material for all periods presented.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued 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. The new standard will be effective for us beginning on February 1, 2018 which is the mandatory adoption date and we do not plan to early adopt. This standard may be adopted using either the full or modified retrospective methods. We currently anticipate adopting the standard retrospectively to all prior periods presented. Our ability to apply the requirements retrospectively to all prior periods presented is dependent on system readiness, including software procured from third-party providers, and the completion of our analysis of information necessary to restate prior period financial statements.
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 will be effective for us beginning on February 1, 2019 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.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. The amendments in this update will be effective for us beginning on February 1, 2020 with early adoption permitted on or after February 1, 2019. We are currently evaluating the impact of this standard on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 will be effective for us beginning on February 1, 2018 and will be applied on a modified retrospective basis. Early adoption is permitted. We do not expect the adoption of this standard to have any impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for us beginning on February 1, 2018 and will be applied on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
Basis of Presentation and Summary of Significant Accounting Policies (Tables)
Schedule of Changes in Allowance for Doubtful Accounts
The following table presents the changes in the allowance for doubtful accounts:
 
 
Year Ended January 31,
 
2015
 
2016
 
2017
 
(in thousands) 
Allowance for doubtful accounts, beginning balance
$
160

 
$
210

 
$
944

Provision
50

 
918

 
1,394

Writeoffs

 
(184
)
 
(338
)
Allowance for doubtful accounts, ending balance
$
210

 
$
944

 
$
2,000

Financial Instruments (Tables)
The following tables summarize our cash equivalents, marketable securities and restricted cash by significant investment categories as of January 31, 2016 and 2017 (in thousands):
 
 
January 31, 2016
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash Equivalents
 
Restricted Cash
Level 1
 

 
 

 
 

 
 

 
 
 
 
Money market funds
$

 
$

 
$

 
$
45,614

 
$
45,614

 
$

Level 2
 

 
 

 
 

 
 

 
 
 
 
Certificates of deposit

 

 

 
7,132

 

 
7,132

Total
$

 
$

 
$

 
$
52,746

 
$
45,614

 
$
7,132

 
 
January 31, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash Equivalents
 
Marketable Securities
 
Restricted Cash
Level 1
 

 
 

 
 

 
 

 
 
 
 
 
 
Money market accounts
$

 
$

 
$

 
$
12,734

 
$

 
$

 
$
12,734

Level 2
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government treasury notes
148,298

 
22

 
(289
)
 
148,031

 
13,226

 
134,805

 

U.S. government agencies
40,398

 
2

 
(159
)
 
40,241

 

 
40,241

 

Corporate debt securities
185,701

 
242

 
(379
)
 
185,564