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

9 Months Ended

Oct. 31, 2018

The condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Consolidated Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 2018.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year 2019 or any future period. Certain prior period amounts have been adjusted as a result of adoption of new accounting pronouncements. Refer to "Recently Adopted Accounting Pronouncements" below for further information.

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 standalone selling price for revenue arrangements with multiple performance obligations, useful lives of intangible assets, property and equipment and deferred sales commissions, stock-based compensation, provision for income taxes including related reserves, valuation of intangible assets and goodwill, and contingent liabilities. 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.

Restricted Cash

Restricted cash is comprised of cash collateral related to our leases and for a vendor corporate credit card program.

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 accompanying condensed consolidated balance sheets. We carry these securities at fair value and record unrealized gains and losses, in accumulated other comprehensive 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 on the specific identification method. To date, there have been no declines in value deemed to be other than temporary in any of our securities. Realized gains and losses are reported in other income (expense), net in the condensed consolidated statements of operations.

Business Combination

We allocate the purchase price to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. The results of operations of the acquired businesses are included in our condensed consolidated financial statements from the date of acquisition. Acquisition-related expenses are expensed as incurred.

Deferred Commissions

Deferred commissions consist of incremental costs paid to our sales force to obtain customer contracts. Deferred commissions related to product revenues are recognized upon transfer of control to customers and deferred commissions related to support subscription revenue are amortized over an expected useful life of six years. We determine the expected useful life based on an estimated benefit period by evaluating our technology development life cycle, expected customer relationship period, and other factors. We classify deferred commissions as current and non-current on our condensed consolidated balance sheets based on the timing of when we expect to recognize the expense. Amortization of deferred commissions is included in sales and marketing expense in the condensed consolidated statements of operations.

Revenue Recognition

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

Our product revenue is derived from the sale of storage hardware and operating system software that is integrated into the hardware. We typically recognize product revenue upon transfer of control to our customers. Products are typically shipped directly by us to customers, and our channel partners do not stock our inventory.

Our support subscription revenue is derived from the sale of support subscription, which includes 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 support subscription is recognized ratably over the contractual term, which generally ranges from one to six years and represents our performance obligations period. The vast majority of our products are sold with support subscription agreements, which typically commence upon transfer of control of the corresponding products to our customers. Costs to service the support subscription are expensed as incurred. In addition, our Evergreen Storage program provides our customers who continually maintain active support subscription agreements for three years with an included controller refresh with each additional three year support subscription renewal. In accordance with revenue recognition guidance, the controller refresh represents an additional performance obligation and the allocated revenue is recognized in the period in which these controllers are shipped.

We recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. This is achieved through applying the following five-step approach:


•	Identification of the contract, or contracts, with a customer


•	Identification of the performance obligations in the contract


•	Determination of the transaction price


•	Allocation of the transaction price to the performance obligations in the contract


•	Recognition of revenue when, or as, we satisfy a performance obligation

When applying this five-step approach, we apply judgment in determining the customer's ability and intention to pay, which is based on a variety of factors including the customer's historical payment experience and/or published credit and financial information pertaining to the customer. To the extent a customer contract includes multiple promised goods or services, we determine whether promised goods or services are capable of being distinct in the context of the contract to be accounted for as a combined performance obligation. We allocate transaction price to each performance obligation for contracts that contain multiple performance obligations based on a relative standalone selling price, taking into account available information such as market conditions and internally approved pricing guidelines related to performance obligations.

Deferred Revenue

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

Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09 or ASC 606), 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. ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP upon its effective date. The standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of applying the standard recognized at the date of application (cumulative catch-up transition method).

We adopted the standard using the full retrospective method beginning February 1, 2018, for the year ending January 31, 2019, and our historical financial information for the years ended January 31, 2017 and 2018 has been adjusted to conform to the new standard.

The most significant impact of the standard related to the removal of limitation on contingent revenue, resulting in an increase in product revenue and a decrease in support subscription revenue. In addition, the adoption of ASC 606 also resulted in differences in the timing of recognition of sales commissions. While the adoption of the standard changes certain line items within the net cash flow from operating activities, it had no impact on the net cash provided by or used in operating, investing, or financing activities on our condensed consolidated statements of cash flows.

The following line items on our condensed consolidated balance sheet as of January 31, 2018 have been adjusted to reflect the adoption of ASC 606 (in thousands):



	As of January 31, 2018
	As Previously Reported			Adjustment			As Adjusted
Assets:
Deferred commissions, current	$	22,437		$	(1,349	)	$	21,088
Deferred commissions, non-current	20,288			45,937			66,225
Total deferred commissions	$	42,725		$	44,588		$	87,313
Liabilities:
Deferred revenue, current	$	209,377		$	(18,148	)	$	191,229
Deferred revenue, non-current	196,632			(13,759		)	182,873
Total deferred revenue	$	406,009		$	(31,907	)	$	374,102
Stockholders' equity:
Accumulated deficit	$	(980,082	)	$	76,495		$	(903,587	)

The following line items on our unaudited condensed consolidated statement of operations for the three and nine months ended October 31, 2017 have been adjusted to reflect the adoption of ASC 606 (in thousands, except per share data):



	Three Months Ended October 31, 2017									Nine Months Ended October 31, 2017
	As Previously Reported			Adjustment			As Adjusted			As Previously Reported			Adjustment			As Adjusted
Revenue:
Product	$	223,196		$	4,576		$	227,772		$	536,634		$	13,657		$	550,291
Support subscription	54,478			(4,659		)	49,819			148,132			(13,517		)	134,615
Total revenue	$	277,674		$	(83	)	$	277,591		$	684,766		$	140		$	684,906

Gross profit	$	181,815		$	(83	)	$	181,732		$	448,908		$	140		$	449,048
Sales and marketing	$	129,299		$	(12,328	)	$	116,971		$	346,896		$	(20,610	)	$	326,286
Total operating expenses	$	223,632		$	(12,328	)	$	211,304		$	618,276		$	(20,610	)	$	597,666
Loss from operations	$	(41,817	)	$	12,245		$	(29,572	)	$	(169,368	)	$	20,750		$	(148,618	)
Loss before provision for income taxes	$	(40,679	)	$	12,245		$	(28,434	)	$	(162,969	)	$	20,750		$	(142,219	)
Net loss	$	(41,649	)	$	12,245		$	(29,404	)	$	(165,724	)	$	20,750		$	(144,974	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.20	)	$	0.06		$	(0.14	)	$	(0.79	)	$	0.10		$	(0.69	)

Unaudited revenue by geographic location based on bill-to location, which reflects the adoption impact of ASC 606, are as follows (in thousands):



	Three Months Ended October 31, 2017							Nine Months Ended October 31, 2017
	As Previously Reported		Adjustment			As Adjusted		As Previously Reported		Adjustment		As Adjusted
Revenue:
United States	$	192,977	$	(58	)	$	192,919	$	504,937	$	108	$	505,045
Rest of the world	84,697		(25		)	84,672		179,829		32		179,861
Total revenue	$	277,674	$	(83	)	$	277,591	$	684,766	$	140	$	684,906

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 restricted cash. We adopted ASU 2016-18 effective February 1, 2018 on a retrospective basis. Upon adoption, restricted cash is 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. The adoption of this standard increased our previously reported net cash flow from investing activities for the periods in which there were changes in restricted cash but did not impact our net cash flow from operating activities or financing activities presented on our consolidated statements of cash flows.

The following line items in our unaudited condensed consolidated statement of cash flows for the nine months ended October 31, 2017 have been adjusted to reflect the adoption of ASU 2016-18 and ASC 606 (in thousands):



	Nine Months Ended October 31, 2017
	As Previously Reported			Adjustment			As Adjusted
Net loss⁽¹⁾	$	(165,724	)	$	20,750		$	(144,974	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred commissions⁽¹⁾	$	(7,629	)	$	(6,340	)	$	(13,969	)
Accrued compensation and other liabilities ⁽¹⁾	$	14,629		$	(14,270	)	$	359
Deferred revenue⁽¹⁾	$	54,404		$	(140	)	$	54,264
Cash provided by operating activities	$	13,756		$	—		$	13,756
Net increase in restricted cash ⁽²⁾	$	(2,029	)	$	2,029		$	—
Net cash used in investing activities ⁽²⁾	$	(53,290	)	$	2,029		$	(51,261	)
Net increase (decrease) in cash, cash equivalents and restricted cash⁽²⁾	$	(1,636	)	$	2,029		$	393
Cash, cash equivalents and restricted cash, beginning of period ⁽²⁾	$	183,675		$	12,734		$	196,409
Cash, cash equivalents and restricted cash, end of period ⁽²⁾	$	182,039		$	14,763		$	196,802

_____________________________________________________

(1) Adjustment pertaining to the adoption of ASC 606.

(2) Adjustment pertaining to the adoption of ASU 2016-18.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718) (ASU 2018-07). ASU 2018-07 aligns the accounting for share-based awards to employees and non-employees to follow the same model. The new standard is effective for fiscal years beginning after December 15, 2018 using a modified retrospective transition approach. Early adoption is permitted. We adopted this standard for the three and nine months ended October 31, 2018 and the adoption of this standard did not materially impact our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

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. ASU 2016-02 requires the use of the modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU No. 2018-10, Leases (Topic 842), Codification Improvements to Topic 842, Leases (ASU 2018-10) and ASU No. 2018-11, Leases (Topic 842), Targeted Improvements (ASU 2018-11). ASU 2018-11 provides a new transition method in which an entity can initially apply the new lease standards at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. These standards will be effective for us beginning on February 1, 2019 and early adoption is permitted. We expect to apply the new transition method prescribed by ASU 2018-11 at the adoption date. We are currently evaluating the impact of these standards on our consolidated financial statements and expect that most of our operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets, which will increase our total assets and total liabilities upon adoption.

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 January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. This standard is effective, on a prospective basis, for our goodwill impairment tests beginning February 1, 2020. Early adoption is permitted. We are evaluating the impact of this standard on our consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the Tax Act) and requires certain disclosures about stranded tax effects. This standard will be effective for us beginning February 1, 2019 and should be applied either in the period of adoption or retrospectively. Early adoption is permitted. We do not expect this standard to have any impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) which amended its conceptual framework to improve the effectiveness of disclosures in notes to financial statements. ASU 2018-13 eliminates such disclosures around the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The guidance also adds new disclosure requirements for Level 3 measurements. ASU 2018-13 is effective for us beginning February 1, 2020. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASC 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard will be effective for us beginning February 1, 2020 and should be applied either retrospectively or prospectively. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. We are evaluating the impact of this guidance on our condensed consolidated financial statements and expect to adopt this guidance in the first quarter of fiscal 2020.

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 1 - Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;


•	Level 2 - 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 3 - 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 or quoted market prices for similar instruments.

In addition to our cash equivalents, marketable securities, and restricted cash, we measure the fair value of our convertible senior notes (the Notes) on a quarterly basis for disclosure purposes. We consider the fair value of the Notes at October 31, 2018 to be a Level 2 measurement due to limited trading activity of the Notes. Refer to Note 6 for further information.