S-1 1 d120560ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on June 1, 2017

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

TINTRI, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   3572   26-2906978
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

303 Ravendale Drive

Mountain View, CA 94043

(650) 810-8200

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Ken Klein

Chairman and Chief Executive Officer

Tintri, Inc.

303 Ravendale Drive

Mountain View, CA 94043

(650) 810-8200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Tony Jeffries

Michael Coke

Ben Hance

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300

 

Ian Halifax

Chief Financial Officer

Mike Coleman

Vice President Legal

303 Ravendale Drive

Mountain View, CA 94043

(650) 810-8200

 

Richard A. Kline

An-Yen E. Hu

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, CA 94025

(650) 752-3100

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee

Common Stock, $0.00005 par value per share

  $100,000,000   $11,590.00

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes the aggregate offering price of additional shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued June 1, 2017

                Shares

 

LOGO

COMMON STOCK

 

 

Tintri, Inc. is offering             shares of its common stock. This is our initial public offering and no public market currently exists for our shares of common stock. We anticipate that the initial public offering price will be between $         and $         per share.

 

 

We have applied to list our common stock on The NASDAQ Global Select Market under the symbol “TNTR.”

 

 

We are an “emerging growth company” as defined under the federal securities laws. Investing in our common stock involves risks. See “Risk Factors” beginning on page 15.

 

 

PRICE $             A SHARE

 

 

 

      

Price to
Public

      

Underwriting
Discounts and
Commission(1)

      

Proceeds to
Tintri

 

Per Share

       $                   $                   $           

Total

       $                          $                          $                  

 

(1) See “Underwriters” for a description of the compensation payable to the underwriters.

We have granted the underwriters the right to purchase up to an additional             shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                 , 2017.

 

 

 

MORGAN STANLEY   BofA MERRILL LYNCH  

PACIFIC CREST SECURITIES

             a division of KeyBanc Capital Markets

 

NEEDHAM & COMPANY   PIPER JAFFRAY   RAYMOND JAMES   WILLIAM BLAIR

            , 2017


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LOGO

 

Public cloud agility

in your data center


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LOGO

 

What If Your Organization Could: Stop guessing and simply let your cloud forecast its needs up to 18 months in advance. Manage cloud native and enterprise applications from one platform. Scale from a few terabytes to many petabytes without adding more staff or receiving surprise bills. Ask a bot via Slack or Amazon’s Alexa to add capacity for a SQL database without lifting a finger. Run your applications on resource pools that span VMware, Microsoft, and OpenStack. Spin up and tear down a DevOps environment with a few mouse clicks, then test new products in days instead of weeks. Tintri Enterprise Cloud customers can. 1250+ customers 70% enterprises & CSPs Tintri is highly rated by users on: 21 of the Fortune 100 7 of the top 15 Fortune 100 Our Top 25 customers have ordered 19x the amount ordered in their first quarter as customers* *Top 25 customers based on cumulative orders through January 31, 2017 by customers that have been our customers for at least 12 months.


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Unless the context otherwise requires, the terms “Tintri,” “Tintri, Inc.,” “the company,” “we,” “us” and “our” in this prospectus refer to Tintri, Inc. and its subsidiaries. Neither we nor the underwriters have authorized anyone to provide you with any information or make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial condition, operating results and prospects may have changed since that date.

Through and including             , 2017 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside of the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes to those consolidated financial statements before making an investment decision. Some of the statements in this prospectus constitute forward-looking statements. For more information, see “Special Note Regarding Forward-Looking Statements.”

TINTRI, INC.

Company Overview

Our mission is to provide large organizations and cloud service providers with an enterprise cloud platform that offers public cloud capabilities inside their own data centers and that can also connect to public cloud services.

Our highly-differentiated and extensible enterprise cloud platform combines cloud management software, web services and a range of all-flash storage systems. Our enterprise cloud platform not only delivers many of the benefits of public cloud infrastructure, but also gives organizations the control and functionality they need to run both enterprise and cloud-native applications in their own private cloud. Organizations use our platform as a foundation for their own private clouds—to build agile development environments and run mission-critical enterprise applications. We enable users to guarantee the performance of their organization’s applications, automate common IT tasks to reduce operating expenses, troubleshoot across compute, storage and network, predict their organization’s needs to scale and provide needed elasticity on demand. Our enterprise cloud platform enables organizations to easily scale to support tens of thousands of virtual machines on a single system across multiple hypervisors and containers. Our solution helps our customers optimize infrastructure by significantly simplifying deployment and operations, which can lead to substantial reductions in capital expenditures and operating expenses.

Our enterprise cloud platform is based on the Tintri CONNECT web services architecture, which has similar design characteristics as public cloud architecture—using web services that are easy to assemble, integrate, tear down, reconfigure, and connect to other services. Our CONNECT architecture uses a building-block approach that is predicated on REST application programming interfaces, or APIs, and virtual machine, or VM, and container level abstraction. REST APIs are needed to write automation scripts and connect to other elements of infrastructure, and make it possible for web services to be combined and to communicate with other services effectively. Through a comprehensive set of proprietary software tool kits and plugins, we enable users to develop customized workflows and to automate their operations. Our CONNECT architecture is based on our virtualization-aware file system that allows an organization to view, manage and analyze application performance and quality of service, or QoS. CONNECT integrates with all major virtualization architectures, including those offered by VMware, Microsoft, Citrix, Red Hat and OpenStack, and can connect with public cloud service providers. Our platform addresses a large variety of use cases, including server virtualization, virtual desktop infrastructure, or VDI, disaster recovery and data protection, and development operations, or DevOps.

We were founded in June 2008 and introduced our first products in March 2011. We focus on large private and public sector organizations and cloud service providers, or CSPs. As of January 31, 2017, we had more than 1,250 customers, including seven of the top 15 Fortune 100 companies and 21 of the Fortune 100 companies,

 



 

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which span a diverse set of industry verticals, such as education, financial services and insurance, healthcare, manufacturing and technology. Many of our customers continue to purchase from us on an ongoing basis. We define our customers as the end-users who have purchased one or more of our products. Our top 25 customers (as measured by their cumulative orders through January 31, 2017) that have been our customers for at least twelve months have on average cumulatively ordered more than 19x the amount they ordered from us in their first quarter as a customer. We plan to continue to focus on acquiring customers and maximizing their lifetime value through our demonstrated land-and-expand strategy.

We have experienced significant revenue growth, with revenue increasing from $49.8 million in fiscal 2015 to $86.0 million in fiscal 2016 and to $125.1 million in fiscal 2017, representing year-over-year growth of 73% and 45%, respectively, for our two most recent fiscal years. Our net loss was $69.7 million, $101.0 million, and $105.8 million in fiscal 2015, 2016, and 2017 respectively. We have funded our activities primarily through debt and equity financings. As of January 31, 2017, we had an accumulated deficit of approximately $338.7 million.

Industry Background

Cloud technologies are changing how organizations deploy, manage and support the applications that are critical to running their businesses.

Adoption of Private and Public Cloud Solutions to Address Diverse Application Requirements

The conventional IT model, which has been constrained by siloed, costly and inflexible infrastructure, is giving way to cloud architectures that are designed to serve business applications with increased agility, productivity and cost-efficiency. Enterprises are seeking to deploy cloud technologies through either public clouds or private clouds, which includes both on-premise and hosted options.

Many organizations also have realized that while public cloud delivers many benefits, it is not the right solution for all problems. Moving applications to public cloud platforms can result in significant migration cost and effort, requiring applications to be recoded, reconfigured, refactored, and reintegrated. In addition, while public cloud infrastructure is able to scale applications with fluctuating demand, the unexpected cost from unpredictable data growth or the cost of a large scale cloud deployment can quickly get out of control. Private clouds provide many of the benefits of public clouds, such as resource pooling, rapid scaling, automation and self-service, but with superior security, control and flexibility for the organization’s applications. Private clouds give organizations more control over access and usage of their applications, making private clouds ideal for larger businesses or those with strict data, regulatory and governance obligations. Unlike public-cloud solutions, private clouds can satisfy the needs of both enterprise and cloud-native applications. Many companies now utilize a combination of public clouds and private clouds.

In recent years, businesses have significantly increased their use of virtualization and containers to achieve greater infrastructure cost-efficiencies and scale. IDC estimates that by the end of 2020, virtualized instances would represent over 90% of the instances deployed globally. IDC’s CloudView Survey respondents expect their IT budget for the private cloud to grow 51.5% from 2016 to 2018. Many companies now utilize a combination of public clouds and private clouds. A recent IDC report predicted that more than 85% of enterprise IT organizations will commit to multicloud architectures encompassing a mix of public cloud services, private clouds and hosted clouds by 2018.

Emergence of Enterprise Cloud

The compelling benefits of private cloud and the desire to have access to public cloud give rise to what is generally referred to as an enterprise cloud, which is a cloud infrastructure deployed in an organization’s own

 



 

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data center with connections to public cloud services. An enterprise cloud possesses many of the same benefits and capabilities as public cloud, including autonomous services, automation, self-service and analytics, with added control, security, and support for enterprise applications that only a private cloud can provide. The National Institute of Standards and Technology definition lists five essential characteristics of cloud computing—on-demand self-service, broad network access, resource pooling, rapid elasticity or expansion and measured services, which are the key attributes of the functionality offered by enterprise cloud. With this functionality, an enterprise cloud solution can deliver many of the benefits of public cloud and can achieve the desired functionality, scalability and efficiency that organizations need.

Limitations of Conventional Data Center Infrastructure

While private cloud can deliver many of the benefits of public cloud, we believe that organizations have difficulty deploying an enterprise cloud platform built using conventional architectures. While many infrastructure components, including server, network and security, have evolved to support virtualized infrastructure and migration to the cloud, innovation in storage has lagged and lacked granular level operation at the VM and container level. As a result, organizations that have deployed next-generation servers, networking and security infrastructure have found it significantly more time-consuming and complex to manage, diagnose and fix performance issues with their conventional storage.

The industry has attempted to bridge the gap between conventional and cloud architecture through hyperconverged infrastructure, or HCI. We believe enterprise customers require the ability to support tens of thousands of VMs, which HCI solutions struggle to achieve. Additionally, it can be harder to independently scale resources with HCI systems. Because of these limitations, HCI systems do not meet many of the requirements of an enterprise cloud platform.

Requirements of an Enterprise Cloud Platform

An enterprise cloud platform combines cloud management with storage to simplify the management and operation of enterprise or cloud-native applications. We believe the requirements of an enterprise cloud platform are:

 

    consistent and autonomous QoS;

 

    application level insight;

 

    comprehensive automation capabilities;

 

    ease of deployment and highly scalable;

 

    simple self-service models;

 

    private and public cloud integration; and

 

    software-based services with ability to mix and match services.

Our Solution

Our highly differentiated and extensible enterprise cloud platform combines cloud management software and a range of all-flash storage systems. Organizations use our platform as a foundation for their own private clouds—to build and run agile development environments for cloud-native applications and mission-critical enterprise applications.

Our enterprise cloud platform is based on the Tintri CONNECT web services architecture, which is designed using a building-block approach predicated on REST APIs and VM and container level abstraction.

 



 

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Through a comprehensive set of proprietary software tool kits and plugins, we enable customers to develop customized workflows and to automate their operations. Our platform addresses a large variety of use cases, including DevOps, disaster recovery and data protection, server virtualization and desktop virtualization.

Tintri’s enterprise cloud platform addresses the requirements of the modern data center, especially in large and complex environments across multiple hypervisors. By creating an architecture fully aligned with virtualized applications, our enterprise cloud solutions provide the following benefits to our customers.

 

    Autonomous Operation—Deliver Consistent Application Performance. Our CONNECT architecture provides automated QoS to help ensure that every application performs as desired. By contrast, traditional storage requires users to manually intervene to manage performance levels.

 

    Analytics—Improve Decisions with Real-time and Predictive Analysis. Our solution allows for deeper visibility into every application, identifies underperforming applications and addresses the root cause of latency with minimal time and effort. By contrast, conventional storage and software products aggregate and average metrics over hundreds of virtualized applications.

 

    Automation—Simplify Deployment and Management at Scale. Our solution is easy to install, configure and manage. Most installations of our systems take less than 60 minutes and can be deployed entirely by the customer at a greatly reduced cost without our field engineers and support staff. By contrast, conventional storage generally requires specialized storage expertise or third-party software to manage and operate which increases cost, complexity and potential for error.

 

    Self-service—Remove Dependencies on IT to Accelerate Business. Using our self-service tools, IT generalists in the data center, or non-IT staff members in a business unit, can administer our platform to simplify tasks such as requesting capacity, performance, policies and other actions.

 

    Support and Manage Complex Environments Using an Open and Versatile Architecture. Our open architecture natively supports all major virtualization architectures and can connect with public cloud service providers, making it an ideal solution for complex enterprise and cloud environments.

 

    Provide Customers with Software-Based Choice. Our software allows organizations to choose the specific features such as replication, encryption, cloning, snapshots and predictive analytics based on relevance to their unique deployments. We are thus able to configure software solutions to meet the specific needs of various customers.

We believe that our highly differentiated solution delivers compelling value for virtualized organizations over conventional data center architectures.

Market Opportunity

Our enterprise cloud platform solution and software products address the key enterprise cloud requirements, and deliver them through a mix of on-premises storage hardware, value-added storage software and SaaS-based software services for virtualized environments. We participate in the global virtualized x86 storage systems market, which according to IDC is expected to grow from $25.7 billion in 2017 to $27.0 billion in 2018, and the virtualized x86 storage software market, which according to IDC is expected to grow from $9.5 billion in 2017 to $10.4 billion in 2018.

To address the global virtualized x86 storage systems and software market opportunity, which according to IDC is expected to be $37.4 billion in 2018, Tintri taps into the following demand drivers:

 

    Adoption of Virtualization-Centric Storage Systems. IDC expects the subset of the storage segment for virtualized x86 server environments which are based on IP protocols, which we define as NAS and iSCSI combined, to grow from $7.1 billion in 2017 to $7.4 billion in 2018.

 



 

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    Move to Flash-Based Storage. IDC expects the all-flash array storage market to grow from $5.8 billion in 2017 to $6.8 billion in 2018.

 

    Use of Primary Storage Platforms for Data Protection and Recovery. IDC forecasts that the market for disk-based data protection and recovery will grow from $15.5 billion in 2017 to $16.1 billion in 2018.

Our enterprise cloud solutions allow us to capture spend from the following markets (some of which may overlap with the above listed storage systems and software market segments), which have an estimated combined spend of $27.2 billion in 2018, according to IDC:

 

    The spend on storage hardware deployed in private clouds, which is expected to be $7.8 billion;

 

    The spend on storage software deployed on-premise, which is expected to be $15.5 billion; and

 

    The spend on cloud systems management software deployed on-premise, which is expected to be $3.9 billion.

Our Competitive Strengths

We believe we have competitive strengths that will enable us to maintain and expand our position in the enterprise cloud market, including:

 

    Our Solution Is Purpose-Built for Enterprise Cloud. Our solution’s ability to monitor and manage at the individual virtual machine and container level is central to our ability to deliver differentiated value to customers. Since 2008, we have spent over 400 human years to develop solutions purpose-built for enterprise cloud environments. We believe that our competitors would need to materially re-architect their products’ hardware and software to provide similar functionality.

 

    Our Value Stems from Highly Differentiated Software. Tintri CONNECT operates at the individual virtual machine and container level, which unlocks the potential of our software and makes it possible for customers to, for example, guarantee application performance by automatically optimizing system resources; move and protect data and troubleshoot at VM and container level; predict future performance and capacity growth; and provide VM and container level visibility across the entire infrastructure.

 

    Our Customers Purchase Our Software Products Incrementally. Our customers may buy software products incrementally or as part of a suite on an as-needed basis and tailor their solutions to their specific enterprise environment requirements. We believe that by offering our customers this flexibility, we provide them with differentiated value, thereby enabling us to drive incremental product sales.

 

    We Offer Our Customers the Ability to Balance Private Cloud and Public Cloud Deployments. We enable organizations to achieve the right mix of private and public cloud deployments to meet their objectives. Our architecture offers the benefits of public clouds to those workloads that best reside in the enterprise data center. We have developed connector software that is designed to connect the private cloud with public clouds. Competitive alternatives do not offer comprehensive APIs that enable full automation, serve as a building block, or simplify connections to public clouds.

 

    We Successfully Sell Enterprise Cloud to Large Organizations and CSPs. We sell to a growing list of large organizations and CSP customers. Our value proposition to these customers is particularly compelling given that these organizations have large data centers with complex requirements and can benefit the most from self-service, automated workflows, predictive analytics and guaranteed application performance through autonomous operation.

 



 

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    Our Partners Build Added Value Solutions and Services. Our partners help bring value to our platform by offering differentiated solutions and services that are tightly integrated with our architecture and software solutions. Our partners leverage our platform to build cloud services, delivering our value proposition to DevOps and lines of business that typically engage less with infrastructure buying decisions. Our partners also use our APIs to offer customers differentiated automation and orchestration services. This allows us to position our partners as strategic advisors for our customers.

Our Growth Strategy

We intend to extend our position as a leader in providing enterprise cloud solutions to large organizations and CSPs. Key elements of our growth strategy include:

 

    Extend Our Differentiation in Enterprise Cloud through Continued Software Innovation. We plan to continue to invest in enhancing our CONNECT architecture and our enterprise cloud platform, and extending our portfolio of software products, thereby driving cross-selling and attach rates.

 

    Pursue Additional Large Organizations and CSPs. We intend to continue our sales efforts to further penetrate the Global 2000 enterprises and CSPs with the most demanding workloads and complex cloud requirements.

 

    Leverage Line of Business Buyers to Accelerate Adoption. We intend to continue to focus on selling to line of business buyers, who generally have their own IT budgets, and leverage those relationships to sell more broadly within their organizations.

 

    Increase Sales to Installed Base. We intend to continue expanding our footprint with our existing customers by supporting additional use cases and selling additional software products. These additional use cases include data protection and disaster recovery, to expand our total addressable market.

 

    Expand Sales and Marketing Presence in New and Existing Markets. We plan to expand our presence in both existing and new markets, including territories in the Middle East, Asia and Europe.

 

    Support Value-Add Channel Partners. We expect to focus our efforts on supporting those partners offering cloud services, including infrastructure “stacks” that include our solutions.

 

    Expand and Deepen Technology Partnerships and Integrations. We intend to expand and deepen our relationships with leading technology companies. We expect to continue to work closely with our partners to achieve certifications and integrations as well as to seek additional partnerships that will allow us to address new customer use cases and deployments.

Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in “Risk Factors” immediately following this Prospectus Summary. These risks include, but are not limited to, the following:

 

    we have a history of losses and may not be able to achieve or maintain profitability;

 

    we have a limited operating history, which makes our future operating results difficult to predict and exposes our business to a number of risks and uncertainties;

 

    our revenue growth rate in recent periods may not be indicative of our future performance;

 

    our operating results may fluctuate significantly on a quarterly basis, which could make our future results difficult to predict and could cause our operating results to fall below expectations;

 

    we face intense competition from numerous established companies and new entrants;

 



 

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    we have experienced rapid growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems, processes and controls, our business may be adversely affected;

 

    if the enterprise cloud market does not evolve as we anticipate or our target customers do not adopt our enterprise cloud solutions, we may not be able to compete effectively, and our ability to generate revenue will suffer;

 

    our growth depends in part on our ability to attract new customers and sell additional solutions and renewals to existing customers;

 

    if our third-party channel partners fail to perform, our ability to sell and distribute our solutions will be limited, and our operating results will be adversely affected;

 

    reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels;

 

    the markets for enterprise cloud systems and storage solutions are rapidly evolving and, if we fail to correctly anticipate and respond to developing industry trends, demand for our solutions may decline;

 

    if we fail to develop or introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be adversely affected;

 

    our solutions must interoperate with third-party hypervisors and operating systems, software applications and hardware, and if we fail to maintain the compatibility of our solutions with such software and hardware, we may lose or fail to increase our market share and may experience reduced demand for our solutions; and

 

    if we are not able to successfully increase sales of our solutions to large organizations and CSPs, our operating results may suffer.

Corporate Information

We were incorporated in Delaware in June 2008. Our principal executive offices are located at 303 Ravendale Drive, Mountain View, CA 94043. Our telephone number at that location is (650) 810-8200. Our website address is www.tintri.com. Information on our website is not part of this prospectus and should not be relied upon in determining whether to make an investment decision.

The Tintri design logo and the marks “Tintri,” “VMstore,” “Tintri OS,” “Tintri Global Center,” “ReplicateVM,” “SecureVM,” “SyncVM” and “VM Scale-out” are the property of Tintri. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to:

 

    reduced disclosure of financial information in this prospectus, including two years of audited financial information and two years of selected financial information;

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

    reduced disclosure obligations regarding executive compensation;

 



 

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    exemptions from the requirements of holding a non-binding advisory vote on executive compensation and golden parachute arrangements; and

 

    delayed adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have elected to include reduced disclosure of financial information and reduced disclosure regarding executive compensation in this prospectus. In addition, we have irrevocably elected not to avail ourselves of the exemption allowing for delayed adoption of new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Other than with respect to our election regarding the timing of the adoption of the new accounting standards, we may choose to take advantage of one or more of these exemptions in the future.

We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

 



 

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THE OFFERING

 

Common stock offered by us

                   shares

Option to purchase additional shares being offered by us

  


We have granted the underwriters a 30-day option to purchase up to                 additional                 shares                 of common stock at the public offering price less underwriting discounts and commissions.

Common stock to be outstanding after this offering

                   shares (                    shares, if the underwriters exercise their option to purchase additional shares in full)

Use of proceeds

   We estimate that the net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $        million, or $        million if the underwriters’ option to purchase additional shares is exercised in full.
  

We intend to use the net proceeds from this offering for general corporate purposes, including working capital, sales and marketing activities, engineering initiatives, including enhancement of our solution and investment in technology and development, general and administrative expenses and capital expenditures. We also may use a portion of the net proceeds from this offering to acquire or invest in businesses, products, services or technologies that complement our business, although we have no present commitments to complete any such transactions.

Concentration of Ownership

   Upon the completion of this offering, our executive officers and directors and stockholders holding more than 5% of our outstanding shares, and their affiliates, will beneficially own, in the aggregate, approximately         % of our outstanding shares as of January 31, 2017. See “Principal Stockholders” for additional information.

Proposed NASDAQ trading symbol

   “TNTR”

The number of shares of our common stock to be outstanding after this offering is based on 133,854,232 shares of our common stock outstanding as of January 31, 2017, and excludes:

 

    22,679,673 shares of common stock issuable upon the exercise of options outstanding as of January 31, 2017, with a weighted-average exercise price of $2.07 per share;

 

    6,497,026 shares of common stock issuable upon the exercise of options granted after January 31, 2017 with a weighted-average exercise price of $2.28 per share;

 



 

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    874,500 shares of common stock issuable upon the exercise of warrants outstanding as of January 31, 2017, with a weighted-average exercise price of $2.22 per share;

 

    510,900 and 10,000,000 shares of common stock issuable upon the exercise of warrants issued after January 31, 2017, with an exercise price of $2.45 per share and $2.74 per share, respectively;

 

    1,716,600 shares of common stock issuable upon the vesting of RSUs outstanding as of January 31, 2017;

 

    8,963,572 shares of common stock issuable upon the vesting of RSUs granted or approved after January 31, 2017;

 

                shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 6,389,882 shares of common stock reserved for future issuance under our 2008 Stock Plan, (ii)                 shares of common stock reserved for future issuance under our 2017 Equity Incentive Plan which will become effective one business day prior to the effectiveness of the registration statement of which this prospectus is made a part, and (iii)                 shares of common stock reserved for future issuance under our 2017 Employee Stock Purchase Plan, which will become effective on the day of its adoption by our board of directors. In addition, the shares of common stock that are available under our 2017 Equity Incentive Plan and 2017 Employee Stock Purchase Plan may be increased pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

    a one-for-         reverse split of our common stock to be effected prior to the effectiveness of the registration statement of which this prospectus forms a part;

 

    the effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering;

 

    the automatic conversion and reclassification of all outstanding shares of our convertible preferred stock into an aggregate of 107,958,277 shares of our common stock, which will occur immediately prior to the completion of this offering;

 

    the conversion of all outstanding warrants to purchase convertible preferred stock into warrants to purchase shares of common stock at the then-applicable conversion rate;

 

    no exercise of outstanding options or warrants subsequent to January 31, 2017; and

 

    no exercise of the underwriters’ option to purchase additional shares.

 



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. The summary consolidated statements of operations data presented below for fiscal 2015, 2016 and 2017 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The following summary consolidated financial data should be read together with our consolidated financial statements and the related notes, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results in any future period.

 

    Fiscal Year Ended January 31,   
    2015     2016     2017  
   

(in thousands, except
share and per share data)

 

Consolidated Statement of Operations Data:

     

Revenue:

     

Product

  $ 41,420     $ 68,652     $ 97,330  

Support and maintenance

    8,379       17,360       27,775  
 

 

 

   

 

 

   

 

 

 

Total revenue

    49,799       86,012       125,105  
 

 

 

   

 

 

   

 

 

 

Cost of revenue:

     

Product(1)

    17,144       25,138       34,738  

Support and maintenance(1)

    4,565       7,110       9,437  
 

 

 

   

 

 

   

 

 

 

Total cost of revenue

    21,709       32,248       44,175  
 

 

 

   

 

 

   

 

 

 

Gross profit:

     

Product

    24,276       43,514       62,592  

Support and maintenance

    3,814       10,250       18,338  
 

 

 

   

 

 

   

 

 

 

Total gross profit

    28,090       53,764       80,930  
 

 

 

   

 

 

   

 

 

 

Operating expenses:

     

Research and development(1)

    28,155       43,179       53,445  

Sales and marketing(1)

    55,060       87,993       108,903  

General and administrative(1)

    13,941       18,773       19,364  
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    97,156       149,945       181,712  
 

 

 

   

 

 

   

 

 

 

Loss from operations

    (69,066     (96,181     (100,782

Other expense, net:

     

Interest expense

    (279     (4,407     (5,231

Other income (expense), net

    (119     254       677  
 

 

 

   

 

 

   

 

 

 

Total other expense, net

    (398     (4,153     (4,554
 

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (69,464     (100,334     (105,336

Provision for income taxes

    222       634       465  
 

 

 

   

 

 

   

 

 

 

Net loss

  $ (69,686   $ (100,968   $ (105,801
 

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

  $ (4.22   $ (5.36   $ (5.12
 

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted(2)

    16,502,481       18,845,680       20,655,296  
 

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted—unaudited(2)

      $ (0.82
     

 

 

 

Pro forma weighted-average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted—unaudited(2)

        128,613,573  
     

 

 

 

 



 

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(1) Includes stock-based compensation expense as follows:

 

     Fiscal Year Ended January 31,  
           2015                  2016                  2017        
    

(in thousands)

 

Cost of product revenue

   $ 82      $ 181      $ 264  

Cost of support and maintenance revenue

     92        176        323  

Research and development

     1,762        2,906        5,227  

Sales and marketing

     1,658        3,073        4,115  

General and administrative

     1,600        3,419        3,905  
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $         5,194      $         9,755      $         13,834  
  

 

 

    

 

 

    

 

 

 

 

(2) See Note 12 to our consolidated financial statements that are included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share attributable to common stockholders, and unaudited pro forma net loss per share attributable to common stockholders calculations.

 

     As of January 31, 2017  
     Actual     Pro Forma(1)     Pro Forma as
Adjusted(2)(3)
 
                 (unaudited)  
    

(in thousands)

 

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 48,048     $ 48,048    

Working capital

     27,110       27,110    

Total assets

     104,902       104,902    

Deferred revenue, current and non-current

     56,445       56,445    

Long-term debt, current and non-current

     48,914       48,914    

Convertible preferred stock

     257,141          

Total stockholders’ deficit

     (298,981     (41,272  

 

(1) The pro forma column reflects the conversion of all outstanding shares of convertible preferred stock into 107,958,277 shares of common stock immediately upon the closing of this offering.
(2) The pro forma as adjusted column further reflects the receipt of $         in net proceeds from our sale of                 shares of common stock in this offering at the initial public offering price of $         per share, the midpoint of the range on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(3) Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the offering price range set forth on the cover of this prospectus, would increase or decrease, respectively, the amount of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1.0 million in the number of shares we are offering would increase or decrease, respectively, the amount of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by approximately $         million, assuming the assumed initial public offering price per share, as set forth on the cover page of this prospectus, remains the same after deducting underwriting discounts and commissions. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

 



 

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Key Financial and Operational Metrics

We monitor the following key financial and operational metrics:

 

     As of or for the
Fiscal Year Ended January 31,
 
         2015             2016             2017      
     (dollars in thousands)  

Total revenue

   $ 49,799     $ 86,012     $ 125,105  

Period-over-period percentage increase

     92     73     45

Gross margin

     56     63     65

Deferred revenue, current and non-current

   $ 23,022     $ 41,864     $ 56,445  

Net cash used in operating activities

   $ (51,098   $ (62,109   $ (70,366

Net cash provided by (used in) investing activities

   $ (26,437   $ (56,409   $ 58,334  

Net cash provided by (used in) financing activities

   $ (958   $ 161,597     $ 9,425  

Free cash flow as a percentage of total revenue

     (120 )%      (85 )%      (60 )% 

Total customers (unaudited)

     573       928       1,273  

Deferred Revenue

Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue as of the period end. The majority of our deferred revenue balance consists of support and maintenance revenue that is recognized ratably over the contractual service period. These service periods range from one to five years and, as of January 31, 2017, averaged approximately two years.

Free Cash Flow as a Percentage of Total Revenue

Free cash flow as a percentage of total revenue is a non-GAAP financial measure we calculate by dividing free cash flow by total revenue. We define free cash flow, a non-GAAP financial measure, as cash used in operating activities less purchase of property and equipment. We have included free cash flow as a percentage of total revenue in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our free cash flow in relation to our revenue growth. In addition, we consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the purchases of property, equipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. See “Selected Consolidated Financial and Other Data—Certain Key Financial and Operational Metrics” for information regarding the limitations of using free cash flow as a financial measure. A reconciliation of free cash flow to cash flow provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:

 

     Fiscal Year Ended
January 31,
 
         2015             2016                 2017          
    

(in thousands, except percentages)

 

Cash flow used in operating activities

   $ (51,098   $ (62,109   $ (70,366

Less: purchase of property and equipment

     (8,668     (10,914     (4,337
  

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (59,766   $ (73,023   $ (74,703
  

 

 

   

 

 

   

 

 

 

Total revenue

   $ 49,799     $ 86,012     $ 125,105  

Free cash flow as a percentage of total revenue

     (120 )%      (85 )%      (60 )% 

Net cash provided by (used in) investing activities

   $ (26,437   $ (56,409   $ 58,334  

Net cash provided by (used in) financing activities

   $ (958   $ 161,597     $ 9,425  

 



 

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Total Customers

We define a customer as an end user that purchases our products and services either from one of our channel partners or from us directly. In situations where there are multiple purchases by multiple subsidiaries or divisions, universities, or governmental organizations affiliated with a single entity, each separate buying unit within an organization is counted as representing a separate customer. We do not include our channel partners or distributors in our definition of a customer.

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business

We have a history of losses and may not be able to achieve or maintain profitability.

We have incurred losses in all fiscal years since our inception, and we expect that we will continue to incur net losses for the foreseeable future. We experienced net losses of $69.7 million, $101.0 million and $105.8 million for fiscal 2015, 2016 and 2017, respectively. As of January 31, 2017, we had an accumulated deficit of $338.7 million. We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to hire additional employees, develop our technology and enhance our product and service offerings, expand our sales and marketing teams, make investments in our distribution channels, expand our operations and prepare to become a public reporting company. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses, or at all. Revenue growth may slow or revenue may decline for a number of possible reasons, including slowing demand for our products or services, increasing competition, a decrease in the growth of our overall market or a failure to capitalize on growth opportunities. Any failure to increase our revenue as we grow our business could prevent us from achieving or maintaining profitability or positive free cash flow.

We have a limited operating history, which makes our future operating results difficult to predict and exposes our business to a number of risks and uncertainties.

We were founded in June 2008 and began selling our solution and generating revenue in 2011. We have a limited operating history in an industry characterized by rapid technological change, changing customer needs, intense competition, evolving industry standards and frequent introductions of new products and services. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. All of these factors, as well as the other risks described in this prospectus, make our future operating results difficult to predict, which may impair our ability to manage our business and reduce your ability to assess our prospects.

We have encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in rapidly changing industries. Our limited operating history makes it more difficult for us to predict these risks and uncertainties. If our assumptions regarding these risks and uncertainties (which we use to plan our business) are incorrect or change, or if we do not address these risks and uncertainties successfully, our operating and financial results could differ from our expectations, and our business and prospects could suffer.

Our revenue growth rate in recent periods may not be indicative of our future performance.

We have experienced significant growth in recent periods, with revenue growing from $86.0 million in fiscal 2016 to $125.1 million in fiscal 2017, representing year-over-year growth of 45% for our most recent fiscal year. If we are able to achieve greater revenue scale, we may not be able to maintain revenue growth rates consistent with this historical growth rate. You should not rely on our revenue for any prior quarterly or annual periods as any indication of our revenue or revenue growth for any future period.

 

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Our operating results may fluctuate significantly on a quarterly basis, which could make our future results difficult to predict and could cause our operating results to fall below expectations.

Our operating results may fluctuate on a quarterly basis due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. If our revenue or operating results in any particular period fall below investor expectations, the price of our common stock would likely decline. Factors that are difficult to predict and that could cause our quarterly operating results to fluctuate include:

 

    the timing and magnitude of orders and shipments of our products in any quarter;

 

    our ability to attract new and retain existing customers;

 

    our ability to increase and maintain sales coverage and effectiveness;

 

    our ability to sell additional products to our existing customers;

 

    disruptions in our sales channels or termination of our relationship with important distributors, channel partners, OEMs, contract manufacturers and suppliers;

 

    our seasonal sales cycles;

 

    reductions in customers’ budgets for information technology purchases;

 

    fluctuations in demand for our solution;

 

    the mix of solutions sold and the mix between product revenue and support and maintenance revenue;

 

    the timing of introductions of plans of new products and our ability to manufacture and sell new products;

 

    the amount and timing of expenses to grow our business;

 

    the timing of revenue recognition for our sales;

 

    regulatory, tax, accounting and other changes in requirements or policies applicable to us;

 

    volatility in our share price, which may lead to higher stock-based compensation expense; and

 

    general socioeconomic and political conditions in the countries where we operate or where our solution is sold or used.

Any one of the factors above or the cumulative effect of the factors above may result in significant fluctuations in our operating results from period to period. This variability and unpredictability could result in our failure to meet our internal operating plan or the expectations of securities analysts or investors for any period. If we fail to meet such expectations, the market price of our common stock could decline and we could face costly lawsuits, including securities class action litigation.

We face intense competition from numerous established companies and new entrants.

We face intense competition from numerous established companies that sell competitive enterprise cloud infrastructure systems or storage solutions. These competitors include large system vendors, consisting primarily of EMC and NetApp, and also Dell Technologies, Hitachi Data Systems, HP Enterprise, IBM and VMware, that offer a broad range of data center systems targeting various use cases and end markets. We also face competition from other companies, including companies that offer solutions powered entirely or partially by flash memory technology, such as Nimble Storage, a Hewlett Packard Enterprise company, Nutanix and Pure Storage. These competitors, as well as other potential competitors, where compared to us may have:

 

    greater name recognition and longer operating histories;

 

    larger sales and marketing and customer support budgets and resources;

 

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    the ability to bundle enterprise cloud infrastructure systems or storage solutions with other products and services to address customers’ needs;

 

    more comprehensive enterprise cloud infrastructure systems or storage solutions;

 

    greater resources to make acquisitions and develop new solutions;

 

    infrastructure solutions that are, or that are perceived to be, simpler and faster to deploy, or able to store and process data more effectively;

 

    infrastructure solutions that store and process both physical and virtualized workloads;

 

    larger and more mature intellectual property portfolios; and

 

    substantially greater financial, technical and other resources.

Furthermore, many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at many of our current and prospective customers. We expect that our competitors will seek to leverage these existing relationships to discourage customers from purchasing our solution. If we are unsuccessful in establishing or maintaining relationships with customers, or if customers are reluctant or unwilling to try our solution, our ability to compete in the marketplace or to grow our revenue could be impaired.

Our competitors utilize a broad range of competitive strategies. For example, some of our competitors have offered bundled products and services in order to reduce the initial cost of their storage solutions. Our competitors may also compete on purchase price and total cost of ownership, and may choose to adopt more aggressive pricing policies than we choose to adopt in the future.

Certain of our competitors may have developed, claim to have developed or have indicated that they intend to develop enterprise cloud technologies that may compete with our solution. We expect our competitors to continue to improve the performance of their solutions, reduce their prices and introduce new services and technologies that may, or that they may claim to, offer greater performance and improved total cost of ownership as compared to our solution. These and other competitive pressures may prevent us from competing successfully against current or future competitors. If we are unable to acquire customers, or if we are forced to reduce prices in order to do so, our business, operating results and financial condition may be adversely affected.

We have experienced rapid growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems, processes and controls, our business may be adversely affected.

We have experienced rapid growth and increased demand for our solution over the last several years. Our employee headcount and number of customers have increased significantly, and we expect to continue to grow our headcount and customer base significantly in the future.

Furthermore, we have increasingly managed more complex deployments of our products and services with larger customers. The growth of our business and our offerings creates an ongoing strain on our management, operational and financial resources. To manage our growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and our ability to manage headcount, capital and processes in an efficient manner. The increased operational complexity and higher costs of international product deployments and infrastructure expansion makes managing our growth outside of the United States uniquely challenging. Our failure to scale or manage improvements in these functions, processes and controls could disrupt existing customer relationships, limit the deployments of our solution, reduce the quality of our products and services, increase our technical support costs and impair our ability to operate our business and protect our assets. Failure to manage any future growth effectively could result in increased costs and harm our business, operating results and financial condition.

 

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If the enterprise cloud market does not evolve as we anticipate or our target customers do not adopt our enterprise cloud solutions, we may not be able to compete effectively, and our ability to generate revenue will suffer.

We compete in the new enterprise cloud category with our Tintri VMstore solutions, and the market for enterprise cloud solutions is still in an early stage. Our success depends upon our ability to provide enterprise cloud infrastructure solutions that address the needs of customers more effectively and economically than those of other competitors or existing technologies.

Many of our target customers have never purchased enterprise cloud infrastructure solutions and may not have the desire or available budget to invest in new technologies such as ours. Market awareness of our value proposition will be essential to our continued growth and our success, particularly for the enterprise and CSP markets. It is difficult to predict with any precision customer adoption rates, customer demand for our solution or the future growth rate and size of our market.

Changes or advances in alternative technologies or adoption of alternative enterprise cloud infrastructure offerings could adversely affect the demand for our solution. If the enterprise cloud infrastructure market does not develop in the way we anticipate, if our solution does not offer benefits compared to competing solutions or if customers do not recognize the benefits that our solution provides, then our business, operating results and financial condition could be adversely affected.

Our growth depends in part on our ability to attract new customers and sell additional solutions and renewals to existing customers.

Our future success depends in part on our ability to increase sales of our solution to new customers domestically and internationally, as well as to increase sales of additional solutions and renewals to our existing customers. The rate at which new and existing customers purchase solutions depends on a number of factors, including customers’ perceived need for enterprise cloud infrastructure solutions, general economic conditions and our ability to compete effectively with our competitors. We may also be forced to engage in sophisticated and costly sales efforts, which may not result in additional sales.

Furthermore, the rate at which our customers purchase additional enterprise cloud infrastructure solutions is subject to a number of risks, including the nature and extent of their IT infrastructure needs, their level of satisfaction with our prices and features relative to competitive offerings, their spending levels on IT infrastructure solutions and other factors outside of our control.

We provide our support services under limited term contracts, which range from one to five years. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our solution, our customer support and increased competition and the pricing of our, or competing, services. Even if our customers choose to renew their support contracts, they may renew for shorter contract periods or on other terms that are less beneficial to us. We have limited historical data with respect to rates of customer renewals, so we may not accurately predict future renewal trends.

We cannot ensure that our customers will purchase our solution or will renew their support contracts, and their failure to make such purchases or renewals may adversely affect our business, operating results and financial condition.

If our third-party channel partners fail to perform, our ability to sell and distribute our solution will be limited, and our operating results will be adversely affected.

We depend on channel partners and distributors for a substantial majority of our sales. Approximately 89% and 85% of our revenue was derived from sales to our channel partners and distributors in fiscal 2016 and fiscal

 

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2017, respectively. We also depend upon our channel partners to manage the customer sales process and to generate sales opportunities. To the extent our channel partners are unsuccessful in fulfilling our sales, managing the sales process or selling our solution, or we are unable to enter into arrangements with, and retain a sufficient number of high-quality, motivated partners in each of our sales regions, our ability to sell our solution will be adversely affected.

Our contracts with channel partners are typically terminable without cause by either party after an initial term of one year. Our channel partner agreements do not prohibit them from offering competitive products or services and do not contain any purchase commitments. Many of our channel partners also sell our competitors’ solutions. If our channel partners give higher priority to our competitors’ storage solutions, we may be unable to grow our revenue and our net loss could increase. Further, in order to develop and expand our channels, we must continue to scale and improve our processes and procedures that support our channel partners, including investments in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. If we fail to maintain existing channel partners or develop relationships with new channel partners, our business, operating results and financial condition may be adversely affected.

Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels.

As a result of customer buying patterns and related sales efforts, we have historically received a substantial portion of sales orders and generated a substantial portion of revenue during the last few weeks of each fiscal quarter. If expected revenue at the end of any fiscal quarter is delayed for any reason, including any failure of anticipated sales transactions to materialize, any inability on our part to ship products prior to fiscal quarter-end to fulfill sales orders received near the end of the fiscal quarter, any failure on our part to manage inventory to meet demand, any inability on our part to release new solutions on schedule, any failure of our systems related to order review and processing and other terms that may delay the recognition of revenue or any unexpected sales cancellations, our revenue for that quarter could fall below our expectations and the estimates of analysts, which could adversely impact our business, operating results and financial condition.

The markets for enterprise cloud systems and storage solutions are rapidly evolving and, if we fail to correctly anticipate and respond to developing industry trends, demand for our solution may decline.

The IT infrastructure and storage industries are characterized by rapidly evolving technology, customer needs and industry standards. To remain competitive, we must correctly anticipate and invest in the adoption of new and emerging technologies, and continue to innovate our solution to provide superior benefits to our customers. The process of developing or adapting our solution to new technologies is complex and uncertain, and our product development efforts may fail to successfully address our customers’ changing needs. We must commit significant resources to developing new products and product enhancements before knowing whether our investments will result in products the market will accept. If we fail to implement or respond to a technology that gains widespread market acceptance, demand for our solution may decline. Conversely, if we adopt a technology for which market demand fails to materialize, then we may incur significant development and marketing expense for which we fail to realize an adequate return. In addition, one or more new technologies could be introduced that compete favorably with our products or that cause our solution to no longer be able to compete successfully.

The success of our products also depends in large part on our ability to successfully adapt our solution to emerging industry standards. The servers, network, software and other components and systems within a datacenter must comply with industry standards in order to interoperate and function efficiently together. If larger companies that are more influential in driving industry standards do not support the same standards we use, market acceptance of our solution could be adversely affected, or we may be required to spend significant time and resources duplicating efforts to adapt to different standards.

Our failure to successfully identify new product opportunities, develop and bring new products to market in a timely manner or respond to changing industry standards would result in a lower revenue growth rate or

 

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decreased revenue, either of which would negatively impact our business, operating results and financial condition.

If we fail to develop or introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be adversely affected.

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. We will need to continue to create valuable software and hardware solutions to be integrated with our enterprise cloud platform. To compete successfully, we must design, develop, market and sell new or enhanced solutions that provide increasingly higher levels of performance, capacity, scalability, security and reliability and meet the cost expectations of our customers. Any failure to anticipate or develop new or enhanced solutions or technologies in a timely manner in response to technological shifts could result in decreased revenue and harm to our business, operating results and financial condition. Any new feature or application that we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve broad market acceptance. If we fail to introduce new or enhanced solutions that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our business, operating results and financial condition will be adversely affected.

Our solution must interoperate with third-party hypervisors and operating systems, software applications and hardware, and if we fail to maintain the compatibility of our solution with such software and hardware, we may lose or fail to increase our market share and may experience reduced demand for our solution.

Our solution must interoperate with our customers’ existing infrastructure, specifically their hypervisors, networks, servers, and other software, which are provided by a wide variety of vendors. For example, our VMstore solutions support hypervisors marketed by Citrix, Microsoft, Open Stack, Red Hat and VMware. When new or updated versions of these hypervisors or software applications are introduced, we must sometimes develop updated versions of our software so that our solution will interoperate properly. These efforts require capital investment and engineering resources and we may not be able to deliver or maintain interoperability quickly, cost-effectively or at all. If we fail to maintain compatibility of our solution with these infrastructure components, our customers may not be able to fully utilize our solution, and we may, among other consequences, lose or fail to increase our market share and experience reduced demand for our solution, which may harm our business, operating results and financial condition.

If we are not able to successfully increase sales of our solution to large organizations and CSPs, our operating results may suffer.

Our growth strategy is dependent in large part upon increasing sales of our solution to large organizations and CSPs. Sales to these customers involve risks that may not be present (or that are present to a lesser extent) with sales to smaller customers. These risks include:

 

    competition from companies that traditionally target larger organizations and CSPs and that may have pre-existing relationships or purchase commitments from such customers;

 

    increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us;

 

    more stringent requirements in our support and maintenance contracts, including demand for faster support response times and penalties for any failure to meet support requirements; and

 

    longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer that elects not to purchase our solution.

In addition, large organizations, including government entities, typically have longer implementation cycles, require greater solutions functionality and scalability, require a broader range of services, demand that vendors

 

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take on a larger share of risks, require acceptance provisions that can lead to a delay in revenue recognition and expect greater payment flexibility. If we fail to realize an expected sale from a large customer in a particular quarter or at all, our business, operating results and financial condition could be adversely affected.

Our sales cycles can be long and unpredictable, and may require considerable time and expense, which may cause our operating results to fluctuate significantly.

The timing of customer sales commitments and our recognition of revenue is difficult to predict because of the length and unpredictability of our solutions’ sales cycles. A sales cycle is the period between initial contact with a prospective customer and any sale of our solution. Our sales cycles typically range from three to six months. Customers, especially large enterprises, CSPs and government entities, often view the purchase of our solution as a significant and strategic decision and require considerable time to evaluate, test and qualify our solution prior to making a purchase decision and placing an order. During our sales cycle, we expend significant time and money on sales and marketing activities, and sometimes make investments in evaluation equipment, all of which lower our operating margins, particularly if no sale occurs.

Even if a customer decides to purchase our solution, there are many factors that affect the timing of the customer’s purchase and our recognition of revenue, including the strategic importance of a particular project to a customer, budgetary constraints and changes in their personnel. Even after a customer makes a purchase, there may be circumstances or terms relating to the purchase that delay our ability to recognize revenue from that purchase. For all of these reasons, it is difficult to predict whether a sale will be completed, the particular period in which a sale will be completed or the period in which revenue from a sale will be recognized. If our sales cycles lengthen, our revenue could be lower than expected, which would have an adverse effect on our business, operating results and financial condition.

If we are unable to attract and retain qualified personnel, our business and operating results could suffer.

Our future success also depends on our ability to continue to attract, integrate and retain highly skilled personnel, especially skilled sales and engineering employees. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area where we are headquartered. We compete with many larger and better funded organizations both inside and outside of the storage industry for skilled personnel, and we may be unable to compete with the compensation and other benefits that these organizations offer to attract candidates and retain existing personnel.

Volatility or declines in our stock price may also affect our ability to attract and retain key employees. Also, many of our employees have become, or will soon become, vested in a substantial amount of equity awards which equates to a substantial amount of personal wealth. This may make it more difficult for us to retain and motivate these employees, and this wealth could affect their decision about whether or not they continue to work for us.

We cannot assure you that we will be able to successfully attract or retain qualified personnel. Any failure to successfully attract, integrate or retain qualified personnel to fulfill our current or future needs may negatively impact our growth and adversely affect our business, operating results and financial condition.

We derive substantially all of our revenue from a single family of products, and a decline in demand for our solution would cause our revenue to grow more slowly or to decline.

Our enterprise cloud platform, which includes our proprietary Tintri OS and our stand-alone software products, accounts for all of our revenue and will continue to comprise a significant portion of our revenue for the foreseeable future. As a result, any of the following events or developments could have a comparatively greater impact on our business than they would if we offered a broader range of solutions:

 

    the failure of our current solutions to achieve broad market acceptance;

 

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    any decline or fluctuation in demand for our current solutions, whether as a result of customer budgetary constraints, introduction of competing products or technologies or other factors; and

 

    our inability to release enhanced versions of our current solutions, including any related software, on a timely basis.

If the market for enterprise cloud infrastructure solutions grows more slowly than anticipated, if demand for our solution declines, or if we fail to deliver new solutions, new features, or new releases that meet customer demand, our business, operating results and financial condition will be adversely affected.

We recognize revenue from support agreements over the term of the relevant support period, and as a result downturns or upturns in sales are not immediately reflected in full in our operating results.

Support and maintenance revenue was 20.2% and 22.2% of our revenue in fiscal 2016 and fiscal 2017, respectively. We recognize support and maintenance revenue ratably over the term of the relevant support period, which ranges from one to five years. As a result, much of the support and maintenance revenue we report each quarter is derived from support agreements that we sold in prior quarters. Consequently, a decline in new or renewed support agreements, or decreases in the relative pricing of new support agreements, in any one quarter will not be fully reflected in revenue in that quarter but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales of support and maintenance is not reflected in full in our operating results until future periods. In addition, because revenue from renewals must be recognized ratably over the applicable service period, it may be difficult for us to rapidly increase our support and maintenance revenue through additional sales in any period. The percentage of our total revenue that we derive from support and maintenance agreements may vary over time if we change the relative pricing of our products or support agreements. Our revenue from support agreements as a percentage of total revenue may decline as a result of changes in the relative pricing of our products and support. Changes in the mix of our product revenue and support and maintenance revenue may adversely affect our business, operating results and the trading price of our common stock.

The sales prices of our products and services may decrease, which would reduce our gross profit and adversely impact our financial condition.

The sales prices for our products or support and maintenance services may decline for a variety of reasons, including competitive pricing pressures, a change in our mix of products and services and the introduction of competing products or services or promotional programs. Competition continues to increase in the markets in which we participate, and we expect competition to further increase in the future, which may lead to increased pricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products or services that compete with ours or may bundle them with other products and services. Our sales prices could also decline due to pricing pressure caused by several factors, including overcapacity in the worldwide supply of competitive storage solutions, increased manufacturing efficiencies and implementation of new manufacturing processes. In addition, although we price our products and services predominantly in U.S. dollars, currency fluctuations in certain countries and regions may negatively impact actual prices that partners and customers are willing to pay in those countries and regions. To the extent we introduce new solutions, we anticipate that the sales prices for our existing solutions will decrease. We cannot assure you that we will be successful in developing and introducing new offerings with enhanced functionality on a timely basis, or that our new product and services offerings, if introduced, will enable us to maintain or improve our gross margins and achieve profitability.

Our ability to successfully market and sell our solution is dependent in part on the quality of our customer support, and any failure to offer high-quality technical support could harm our business.

Once our solution is deployed within our customers’ datacenters, customers depend on our support organization to resolve technical issues relating to our solution. Our ability to provide effective support is largely

 

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dependent on our ability to attract, train and retain qualified personnel, as well as to engage with qualified support partners that provide a similar level of customer support. Furthermore, as we continue to expand our international operations, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English and provisioning and staffing our international customer support field offices. In addition, our sales process is highly dependent on our solution and business reputation and on recommendations from our existing customers. Any failure to maintain, or a market perception that we do not maintain, high-quality technical support, including installation, could harm our reputation and our ability to sell our solution to existing and prospective customers.

We are exposed to the credit risk of some of our channel partners, distributors and direct customers, which could result in losses and negatively impact our operating results.

Some of our channel partners, distributors and direct customers have experienced financial difficulties in the past. A channel partner, distributor or direct customer experiencing such difficulties will generally not purchase or sell as many of our systems as it may have done under normal circumstances and may cancel orders. Our typical payment terms are 30 days from invoice but payment terms may be longer in particular circumstances and markets. In addition, a channel partner, distributor or direct customer experiencing financial difficulties generally increases our exposure to uncollectible receivables. Any concentration of our accounts receivable in one or a limited number of our channel partners, distributors and direct customers may increase our credit risk with respect to those channel partners, distributors and direct customers. If any of our channel partners, distributors or direct customers that represent a significant portion of our revenue becomes insolvent or suffers deterioration in its financial or business condition and is unable to pay for our solution, our business, operating results and financial condition could be adversely affected.

If we do not effectively expand and train our sales force, we may be unable to increase our revenue and our business will be adversely affected.

Although we have a channel sales model, our sales representatives typically engage in direct interaction with our prospective customers. Therefore, we continue to be substantially dependent on our sales force to obtain new customers and sell additional solutions to our existing customers. As such, we have invested and will continue to invest substantially in our sales organization. Competition for sales personnel with the skills and technical knowledge that we require is intense and our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth.

As a result of our recent growth, a large percentage of our sales force is new to our company and therefore less effective than our more seasoned sales personnel. New hires require significant training and may take significant time before they achieve full productivity; we estimate based on past experience that sales team members typically do not fully ramp and are not fully productive during the first several quarters of employment with us. Our recent hires and planned hires may not become productive as quickly as we expect. Furthermore, hiring sales personnel in new countries requires additional set up and upfront costs that we may not recover if the sales personnel fail to achieve full productivity. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business, operating results and financial condition will be adversely affected.

Seasonality may cause fluctuations in our revenue and operating results.

In general, our sales are subject to seasonal trends. Our fourth fiscal quarter, ending January 31, typically has the highest revenue of any of our fiscal quarters, and our first fiscal quarter, ending April 30, typically has the lowest revenue of any of our fiscal quarters. We believe that this seasonality results from a number of factors, including the budgeting, procurement and deployment cycles of many of our customers. Our rapid historical

 

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growth may have reduced the impact of seasonal or cyclical factors that might have influenced our business to date. To the extent our revenue growth slows, seasonal or cyclical variations in our operations may become more pronounced and may affect our business, operating results and financial condition.

Sales to U.S. federal, state and local governments are subject to numerous challenges and risks that may adversely impact our business.

Although sales to U.S. federal, state and local government agencies accounted for less than 10% of our revenue in each of fiscal 2016 and fiscal 2017, we anticipate that our sales to government agencies may increase in the future. Sales to such government entities are subject to a number of risks, including the following:

 

    selling to government agencies can be extensively regulated, highly competitive and time consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale;

 

    government certification requirements applicable to our solution may change and in doing so restrict our ability to sell into the U.S. federal government sector until we have attained the revised certification;

 

    government demand and payment for our products and services may be impacted by public sector budgetary cycles, changes in administration and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services;

 

    government agencies may have statutory, contractual or other legal rights to terminate our sales contracts for convenience or due to a default, and any such termination may adversely impact our future operating results;

 

    governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our solution, which would adversely impact our revenue and operating results, or result in fines, civil or criminal liability or repayment of any overcharges, if any such audit uncovers improper or illegal activities; and

 

    government agencies may require certain products to be manufactured in the United States and other relatively high-cost manufacturing locations, which may require costly changes to our manufacturing practices or otherwise adversely affect our ability to sell these products to such agencies.

If any of the above risks are realized, our business, operating results and financial condition may be adversely affected.

Our solution is highly technical and may contain undetected defects, which could cause data unavailability, loss or corruption that might, in turn, result in liability to our customers and harm to our reputation and business.

Our solution is highly technical and complex and are often used to store information critical to our customers’ business operations. Our solution may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, loss, corruption or other harm to our customers. Some errors in our solution may only be discovered after they have been installed and used by customers. Our solution has experienced temporary outages after they have been deployed. Any outages, errors, defects or security vulnerabilities discovered in our solution after commercial release could result in a loss of revenue, injury to our reputation, a loss of customers or increased service and warranty costs, any of which could adversely affect our business and operating results. In addition, errors or failures in the solutions of third-party technology vendors may be attributed to us and may harm our reputation.

If our solution fails, we could face claims for product liability, tort or breach of warranty. Although our customers are generally required to enter into our standard “click wrap” terms of service, which includes provisions relating to warranty disclaimers and liability limitations, these terms may be difficult to enforce.

 

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Defending a lawsuit, regardless of its merit, would be costly and might divert management’s attention and adversely affect the market’s perception of us and our solution. Our business liability insurance coverage could prove inadequate with respect to a claim and future coverage may be unavailable on acceptable terms or at all. These product-related issues could result in claims against us, and negatively impact our business, operating results and financial condition.

Our international operations expose us to additional risks, and failure to manage those risks could adversely affect our business, operating results and cash flows.

Increasingly, we derive a significant portion of our revenue from channel partners outside the United States. Revenue generated from customers outside of the United States was 29.9% and 30.0% of our total revenue for fiscal 2016 and fiscal 2017, respectively. We are continuing to adapt to and develop strategies to address international markets but there is no guarantee that such efforts will be successful. As of January 31, 2017, 15% of our full-time employees were located outside of the United States. We expect that our international activities will continue to grow over the foreseeable future as we continue to pursue opportunities in international markets, which will require significant management attention and financial resources. We are subject to risks associated with having significant worldwide operations, including:

 

    increased complexity and costs of managing international operations;

 

    geopolitical and economic instability and military conflicts;

 

    limited protection of our intellectual property and other assets;

 

    compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;

 

    trade and foreign exchange restrictions and higher tariffs;

 

    travel restrictions;

 

    timing and availability of import and export licenses and other government approvals, permits and licenses, including export classification requirements;

 

    foreign currency exchange fluctuations relating to our international operating activities;

 

    restrictions imposed by the U.S. government on our ability to do business with certain companies or in certain countries as a result of international political conflicts;

 

    transportation delays and other consequences of limited local infrastructure and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers;

 

    reliance upon third parties to provide solution support services outside of the Unites States;

 

    difficulties in staffing international operations and increased compliance costs and potential liabilities associated with employment laws and practices outside of the United States;

 

    increased costs and risk of loss associated with provisioning local field offices to provide solution support services;

 

    heightened risk of terrorist acts;

 

    local business and cultural factors that differ from our normal standards and practices;

 

    differing employment practices and labor relations;

 

    regional health issues and natural disasters that are endemic to regions which we operate and sell or manufacture our solution;

 

    difficulties in enforcing contracts generally; and

 

    work stoppages.

 

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As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. These factors and other factors could harm our ability to gain future international revenue and, consequently, impact our business, operating results and financial condition.

We rely on a single contract manufacturer to manufacture our products, and any failure to forecast demand for our products or manage our relationship with our contract manufacturer, or if that manufacturer’s business were to become impaired in the future, our ability to sell our products could be impacted.

We contract with an offshore subsidiary of Flex to manufacture all of our products. Our reliance on Flex reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. If we fail to manage our relationship with Flex effectively, or if Flex experiences delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be adversely affected. In addition, any adverse change in Flex’s financial or business condition could disrupt our ability to supply quality products to our customers. If we are required to change our contract manufacturer or assume internal manufacturing operations, we may lose revenue, incur increased costs and damage our customer relationships. In addition, qualifying a new contract manufacturer and commencing production can be an expensive and lengthy process. If we experience increased demand that Flex is unable to fulfill, or if Flex is unable to provide us with adequate supplies of high-quality products for any other reason, we could experience a delay in our order fulfillment, and our business, operating results and financial condition would be adversely affected.

Our agreement with Flex is terminable at any time by us with 90 days’ notice or by Flex with 120 days’ notice and Flex has no obligation to provide services transitioning our manufacturing processes to another manufacturer. Our agreement with Flex does not provide for any specific volume purchase commitments, though we are required to submit a nine month forecast for orders (the first three months of which are binding) and orders are placed on a purchase order basis. Furthermore, because we contract with a subsidiary of Flex, we have limited recourse to assets held by other members of the Flex group of companies in the event of manufacturing problems or other claims. If we are required to change to a new contract manufacturer, qualify an additional contract manufacturer or assume internal manufacturing operations for any reason, including financial problems of our contract manufacturer, reduction of manufacturing output made available to us, or the termination of our contract, we may lose revenue, incur increased costs and damage our customer relationships.

We intend to introduce new products and product enhancements, which could require us to coordinate with Flex and component suppliers in order to achieve volume production rapidly. We may need to increase our component purchases, contract manufacturing capacity and internal test and quality functions if we experience increased demand for our products. Our orders may represent a relatively small percentage of the overall orders received by Flex from its customers. As a result, fulfilling our orders may not be considered a priority in the event Flex is constrained in its ability to fulfill all of its customer obligations in a timely manner. If Flex is unable to provide us with adequate supplies of high-quality products, or if we are, or Flex is unable to obtain adequate quantities of components, it could cause a delay in our order fulfillment, in which case our business, operating results and financial condition could be adversely affected.

We rely on a limited number of suppliers, and in some cases single-source suppliers, and any disruption or termination of these supply arrangements could delay shipments of our products and could harm our relationships with current and prospective customers.

We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key hardware components of our solution. These components are generally purchased on a purchase order basis through Flex, and we generally do not have long-term supply contracts with our suppliers. For example, the chassis used in our hybrid-flash systems is obtained on a purchase order-basis under an agreement with a single-source component supplier that has no fixed term. In addition, the chassis used in our all-flash systems is

 

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obtained under an agreement with a single-source component supplier having an initial term through October 2017, at which point it will automatically renew for successive one-year periods unless either party provides notice of non-renewal.

Our current purchase volumes may be too low for us to be considered a priority customer by certain of our suppliers. Any of the sole-source and limited source suppliers we rely on could stop producing our components, cease operations or be acquired by, or enter into exclusive arrangements with, our competitors. Our reliance on key suppliers exposes us to risks, including:

 

    the inability to obtain an adequate supply of key components;

 

    delays or disruptions of shipments of our products or their components;

 

    price volatility for the components of our products;

 

    failure of a supplier to meet our quality or production requirements;

 

    failure of a supplier of key components to remain in business or adjust to market conditions; and

 

    consolidation among suppliers, resulting in some suppliers exiting the industry or discontinuing the manufacture of components.

As a result of these risks, we cannot assure you that we will be able to obtain enough key components in the future or that the cost of these components will not increase. We generally order our components on a “build to order” basis, and do not maintain any significant inventory of the components used in our products. The technology industry has experienced component shortages and delivery delays in the past, and we may experience shortages or delays of critical components in the future as a result of strong demand in the industry or other factors. If our supply of components is disrupted or delayed, or if we need to replace our existing suppliers, there can be no assurance that additional components will be available when required or on terms that are favorable to us, which could extend our lead times and increase the costs of our components. Switching suppliers may require that we redesign our VMstore products to accommodate new components and to re-qualify our solution, which would be costly and time-consuming.

Any interruption in the supply of our components may adversely affect our ability to meet scheduled product deliveries to our customers and could result in lost revenue or higher expenses, any of which would harm our business, operating results and financial condition.

Insufficient supply and inventory of our products and their components may result in lost sales opportunities or delayed revenue, while excess inventory will harm our gross margins.

Our third-party manufacturer procures components and builds our products based on our forecasts, and we generally do not hold inventory for a prolonged period of time. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and analyses from our sales and marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, from time to time we may issue forecasts for components and products that are non-cancelable and non-returnable. Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to make accurate forecasts and effectively manage the supply of our products and components. We have, in the past, had to write off inventory in connection with transitions to new product models. If we ultimately determine that we have excess supply, we may have to reduce our prices and write down or write off excess or obsolete inventory, which in turn could result in lower gross margins. Alternatively, insufficient supply levels may lead to shortages that result in delayed revenue or loss of sales opportunities altogether as potential customers turn to competitors’ products that may be more readily available. If we are unable to effectively manage our supply and inventory, our business, operating results and financial condition could be adversely affected.

 

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Industry consolidation may lead to increased competition, which could harm our business.

Consolidation among IT infrastructure providers has been common. Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships to offer a more comprehensive solution than they had offered individually. For example, in February 2016, NetApp acquired SolidFire, a developer of all-flash storage systems, in September 2016, Dell acquired EMC, in February 2017, HP Enterprise acquired SimpliVity, a developer of hyperconverged systems, and in April 2017, HP Enterprise acquired Nimble Storage, a storage solutions provider. We expect this trend to continue as companies attempt to strengthen or maintain their market positions through strategic acquisitions.

Consolidation in our industry may result in stronger competitors that may create more compelling offerings, offer greater pricing flexibility and be better able to compete as their customers’ sole-source vendors. Any of these developments would make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs and breadth of technology offerings. In addition, companies with which we have strategic partnerships may acquire or form alliances with our competitors, causing them to reduce their business with us. Continued industry consolidation may adversely affect customers’ and potential customers’ perceptions of the viability of less mature technology companies such as us and, consequently, their willingness to purchase from us. Any such competitive forces resulting from consolidation in our industry could adversely impact our business, operating results and financial condition.

Our research and development efforts may not produce successful solutions that result in significant revenue in the near future, if at all.

Developing new solutions and related enhancements is expensive and time consuming. Our investments in research and development may result in solutions that do not achieve market adoption, are more expensive to develop than anticipated, take longer to generate revenue or generate less revenue than we anticipate. Our future plans include significant investments in research and development for new solutions and related opportunities. We believe that we must continue to dedicate significant resources to our research and development efforts to maintain or expand our competitive position. However, these efforts may not result in significant revenue in the near future, if at all, which could adversely affect our business, operating results and financial condition.

The success of our business depends in part on our ability to protect and enforce our intellectual property rights.

Our success depends to a significant degree on our ability to protect our core technology and intellectual property. We rely on a combination of patent, copyright, service mark, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our technology, intellectual property and proprietary rights, all of which provide only limited protection. We cannot assure you that any patents or trademarks will be issued with respect to our currently pending patent and trademark applications in a manner that gives us adequate defensive protection or competitive advantages, if at all, or that any patents or trademarks issued to us or our other intellectual property rights will not be challenged, invalidated or circumvented. We have filed for patents and trademarks in the United States and in certain international jurisdictions, but such protections may not be available in all countries in which we operate or in which we seek to enforce our intellectual property rights, or may be difficult to enforce in practice. Our currently issued patents and trademarks and any patents or trademarks that may be issued in the future with respect to pending or future applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property rights.

Protecting against the unauthorized use of our intellectual property and technology, and infringement or misappropriation of our intellectual property rights is expensive and difficult, particularly internationally.

 

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Litigation may be necessary in the future to enforce or defend our intellectual property rights or to determine the validity and scope of the intellectual property rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition. If we fail to protect our intellectual property rights adequately, our competitors could offer similar solutions, potentially harming our business. Further, many of our current and potential competitors have the ability to dedicate substantially greater resources to defending intellectual property rights infringement claims and to enforcing their intellectual property rights than we have. Attempts to enforce our rights against third parties could also provoke these third parties to assert their own intellectual property rights or other rights against us, or result in a holding that invalidates or narrows the scope of our intellectual property rights, in whole or in part. If we are unable to adequately protect and enforce our intellectual property, technology and our intellectual property rights, the value of our intellectual property, technology and intellectual property rights, and our business, operating results and financial condition could be adversely affected.

Third-party claims that we are infringing intellectual property rights, whether successful or not, could subject us to costly and time-consuming litigation or expensive licenses, and our business could be adversely affected.

A number of companies, both within and outside of the IT infrastructure industry, hold a large number of patents covering aspects of storage, servers and virtualization solutions. In addition to these patents, participants in this industry typically also protect their technology through copyrights and trade secrets. As a result, there is frequent litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. We have in the past, and may in the future, receive inquiries from other intellectual property rights holders seeking to profit from royalties in connection with grants of licenses and may in the future become subject to claims that we infringe their intellectual property rights, particularly as we expand our presence in the market and face increasing competition. We have in the past and may in the future be required to enter into agreements with such intellectual property rights holders involving the payment of royalties or other fees, or granting a limited license of our intellectual property rights, in order to resolve such inquiries and settle such claims. We cannot assure you that our business or products or services do not violate such rights of such third-party claimants. Regardless of the merit of any such claim, responding to such claims can be time consuming, divert management’s attention and resources and may cause us to incur significant expenses. In addition, parties may claim that the names and branding of our solution infringe their trademark rights in certain countries or territories. If such a claim were to prevail we may have to change the names and branding of our solution in the affected territories and incur other costs.

We currently have a number of agreements in effect pursuant to which we have agreed to defend, indemnify and hold harmless our customers, suppliers and channel and other partners from damages and costs which may arise from the infringement by our solution of third-party intellectual property rights, which may include patents, copyrights, trademarks or trade secrets. The scope of these indemnity obligations varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. Our insurance may not cover all intellectual property rights infringement claims. A claim that our solution infringes a third party’s intellectual property rights, even if untrue, could harm our relationships with our customers, may deter future customers from purchasing our solution and could expose us to costly litigation and settlement expenses. Even if we are not a party to any litigation between a customer and a third party relating to infringement by our solution, an adverse outcome in any such litigation could make it more difficult for us to defend our solution against intellectual property rights infringement claims in any subsequent litigation in which we are a named party. Any of these results could harm our brand and operating results.

Our defense of intellectual property rights claims brought against us or our customers, suppliers and channel partners, with or without merit, could be time-consuming, expensive to litigate or settle, divert management resources and attention and force us to acquire or license intellectual property rights, which may involve substantial royalty or other payments. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. We cannot assure you that we would be successful in defending against any such claims. In addition, patent applications in the United States and most other countries

 

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are confidential for a period of time before being published, so we cannot be certain that we were the first to conceive the inventions covered by our patents or patent applications. An adverse determination also could invalidate our intellectual property rights and prevent us from offering our solution to our customers and may require that we procure or develop substitute solutions that do not infringe, which could require significant effort and expense. We may be unable to replace those technologies with technologies that have the same features or functionality and that are of equal quality and performance standards on commercially reasonable terms, or at all. We may have to seek a license for the technology, which may not be available on acceptable terms or at all, and as a result may significantly increase our operating expenses or require us to restrict our business activities in one or more respects. Any of these events could adversely affect our business, operating results and financial condition.

System security risks, data protection breaches and cyber-attacks on our systems or solutions could compromise our proprietary information (or information of our customers), disrupt our internal operations and harm public perception of our solution, which could cause our business and reputation to suffer, create additional liabilities and adversely affect our financial conditions and stock price.

In the ordinary course of business, we store sensitive data on our internal systems, networks and servers, which may include intellectual property, our proprietary business information and that of our customers, suppliers and business partners and sales data, which may include personally identifiable information. In addition, we design and sell solutions that our customers use to store their data. The security of our own networks and the intrusion protection features of our solution are both critical to our operations and business strategy.

We devote significant resources to network security, data encryption and other security measures to protect our systems and data, but these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities and cannot provide absolute security. Any destructive or intrusive breach of our internal systems could result in the information stored on our networks being accessed, publicly disclosed, lost or stolen. In addition, an effective attack on our solution could disrupt the proper functioning of our solution, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers, disrupt or temporarily interrupt customers’ operations or cause other destructive outcomes, including the theft of information sufficient to engage in fraudulent transactions. The risk that these types of events could seriously harm our business is likely to increase as we expand our network of channel partners, resellers and authorized service providers and as we operate in more countries. The economic costs to us to eliminate or alleviate cyber or other security problems, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure because the damage may differ based on the identity and motive of the programmer or hacker, which is often difficult to identify. If any of these types of security breaches, actual or perceived, were to occur and we were to be unable to protect sensitive data, our relationships with our business partners and customers could be damaged, our reputation and brand could be harmed, use of our solution could decrease and we could be exposed to a risk of loss or litigation and possible liability.

If we are unable to successfully manage our use of “open source” software, our ability to sell our products and services could be harmed, which could result in competitive disadvantages, and subject us to possible litigation.

We incorporate open source software in our products and services. Use of open source software can lead to greater risks than the use of proprietary or third-party commercial software since open source licensors generally do not provide warranties or controls with respect to origin, functionality or other features of the software. Some open source software licenses require users who distribute open source software as part of their solutions to publicly disclose all or part of the source code in their software and make any derivative works of the open source software generally available in source code form for limited fees or at no cost. Although we monitor our use of open source software, open source license terms may be ambiguous, and many of the risks associated with the use of open source software cannot be eliminated. If we were found to have inappropriately used open source

 

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software in our solution, we may be required to release our proprietary source code, re-engineer our software, discontinue the sale of certain solutions in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action. Furthermore, if we fail to comply with applicable open source licenses, we may be subject to costly claims of intellectual property rights infringement or demands for the public release of proprietary source code. Any of the foregoing could harm our business, operating results and financial condition.

We may become subject to claims that our employees have wrongfully disclosed or that we have wrongfully used proprietary information of their former employers, which could adversely affect our business.

Many of our employees were previously employed at current or potential competitors. Although we require our employees to not use the proprietary information or know-how of others in their work for us and we are not currently subject to any claims that they have done so, we have in the past received inquiries from former employers of our employees and we may in the future become subject to claims that these employees have divulged, or we have used, proprietary information of these employees’ former employers. Litigation may be necessary to defend against these claims. If we are unable to successfully defend any such claims, we may be required to pay monetary damages and to discontinue our commercialization of certain solutions. In addition, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our ability to develop new solutions and features for our existing solutions, which could severely harm our business. Even if we are successful in defending against these claims, litigation efforts are costly, time-consuming and a significant distraction to management.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our operating results.

Our sales contracts are denominated in U.S. dollars. As a result, a strengthening of the U.S. dollar could increase the real cost of our solution to our customers outside of the United States, which could adversely affect our international sales. In addition, an increasing portion of our operating expenses is incurred outside the United States, denominated in foreign currencies and subject to fluctuations in foreign currency exchange rates. If we become more exposed to currency fluctuations and are not able to successfully hedge against the risks associated with currency fluctuations, our business, operating results and financial condition could be adversely affected.

We rely on our key technical, sales and management personnel to grow our business, and the loss of one or more key employees could harm our business.

Our success and future growth depends to a significant degree on the skills and continued services of our key technical, sales and management personnel. In particular, we are highly dependent on the services of Ken Klein, our Chairman and Chief Executive Officer, and Kieran Harty, our co-founder and Chief Technical Officer, who are critical to the development of our technology, future vision and strategic direction. We rely on our leadership team in the areas of operations, security, marketing, sales, support and general and administrative functions, and on individual contributors on our research and development team. All of our employees are employed by us on an at-will basis, and we could experience difficulty in retaining members of our senior management team or other key personnel. We do not have “key person” life insurance policies that cover any of our officers or other key employees. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our solution and negatively impact our business, operating results and financial condition.

Our company culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

We believe that a critical contributor to our success has been our company culture, which we believe fosters innovation, creativity, teamwork, passion for customers and focus on execution, as well as facilitating critical

 

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knowledge transfer and knowledge sharing. As we grow and change, we may find it difficult to maintain these important aspects of our company culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute on our business strategy.

Our ability to hire and retain employees may be negatively impacted by changes in immigration laws, regulations and procedures.

Foreign nationals who are not U.S. citizens or permanent residents constitute an important part of our U.S. workforce, particularly in the areas of engineering and product development. Our ability to hire and retain these workers and their ability to remain and work in the United States are impacted by laws and regulations, as well as by procedures and enforcement practices of various government agencies. Changes in immigration laws, regulations or procedures, including those that may be enacted by the new U.S. presidential administration, may adversely affect our ability to hire or retain such workers, increase our operating expenses and negatively impact our ability to deliver our products and services.

We may further expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, resulting in additional dilution to our stockholders and consumption of resources that are necessary to sustain and grow our business.

While we have not consummated any acquisitions to date, we may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, complementary businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses in order to expand our solution, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulatory approvals, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.

These kinds of acquisitions or investments may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired business choose not to work for us. We may have difficulty retaining the customers of any acquired business or the acquired technologies or research and development expectations may prove unsuccessful. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities. In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures and become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or investments could adversely affect our business, operating results and financial condition.

Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also negatively impact our ability to attract and retain customers.

Our business is subject to regulation by various federal, state, local and foreign government agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more

 

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stringent than in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages and civil and criminal penalties or injunctions. If any government sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results and financial condition could be adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.

In addition, we must comply with laws and regulations relating to the formation, administration and performance of contracts with the public sector, including U.S. federal, state and local government organizations, which affect how we and our channel partners do business with government agencies. Selling our solution to the U.S. government, whether directly or through channel partners, also subjects us to certain regulatory and contractual requirements. Failure to comply with these requirements by either us or our channel partners could subject us to investigations, fines and other penalties, which could have an adverse effect on our business, operating results and financial condition. As an example, the U.S. Department of Justice, or DOJ, and the General Services Administration, or GSA, have in the past pursued claims against and financial settlements with IT vendors under the False Claims Act and other statutes related to pricing and discount practices and compliance with certain provisions of GSA contracts for sales to the federal government. The DOJ and GSA continue to actively pursue such claims. Violations of certain regulatory and contractual requirements could also result in us being suspended or barred from future government contracting. Any of these outcomes could have an adverse effect on our business, operating results and financial condition.

These laws and regulations impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, loss of exclusive rights in our intellectual property, and temporary suspension or permanent debarment from government contracting. Any such damages, penalties, disruptions or limitations in our ability to do business with certain customers could have an adverse effect on our business, operating results and financial condition.

We are subject to government export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.

Our solution is subject to U.S. export controls, including the Export Administration Regulations and economic sanctions administered by the Office of Foreign Assets Control, or OFAC, and we incorporate encryption technology into our solution. These encryption products and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license, a license exception or other appropriate government authorizations, including the filing of an encryption registration.

Furthermore, our activities are subject to the U.S. economic sanctions laws and regulations that prohibit the export, re-export and transfer of certain products and services without the required export authorizations, including to countries, governments and persons targeted by U.S. embargoes or sanctions. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities even if the export license ultimately may be granted. While we take precautions to prevent our solution from being exported in violation of these laws, including obtaining authorizations for our encryption products and screening exports against U.S. government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. Violations of U.S. sanctions or export control laws can result in significant fines or penalties, denial of export privileges, and possible incarceration for responsible employees and managers could be imposed for criminal violations of these laws.

We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences,

 

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including government investigations and penalties. No assurance can be given that our channel partners will comply with export requirements.

Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including through import and export licensing requirements, and have enacted laws that could limit our ability to distribute our solution or could limit our customers’ ability to implement our solution in those countries. Changes in our solution or future changes in export and import regulations may create delays in the introduction of our solution in international markets, prevent our customers with international operations from deploying our solution globally or, in some cases, prevent the export or import of our solution to certain countries, governments, or persons altogether. From time to time, various government agencies have proposed additional regulation of encryption technology. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solution by, or in our decreased ability to export or sell our solution to, existing or potential customers with international operations. Any decreased use of our solution or limitation on our ability to export or sell our solution would adversely affect our business, operating results and financial condition.

We are subject to government regulation and other legal obligations related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could adversely affect our business and operating results. Compliance with such laws could also impair our efforts to maintain and expand our customer base and thereby decrease our revenue.

The United States and other jurisdictions where we offer our solution have laws, regulations and standards governing the protection of information privacy, data protection and information security. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the U.S. Federal Trade Commission, or FTC, and various state, local and foreign bodies and agencies. In addition, agreements with our customers and business partners may contain contractual provisions related to the protection of information privacy, data protection and information security.

The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals, including customers and employees. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to the online collection, use and dissemination of data. In addition, many foreign countries and government bodies, including in Australia, the European Union, Japan and numerous other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection and use of personally identifiable information obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Such laws and regulations may require companies to implement privacy and security policies, permit customers to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personally identifiable information for certain purposes. In addition, a foreign government could require that any personally identifiable information collected in a country not be disseminated outside of that country, and we are not currently equipped to comply with such a requirement. We also may find it necessary or desirable to join industry or other self-regulatory bodies or other information security- or data protection-related organizations that require compliance with their rules pertaining to information security and data protection. We also may be bound by additional, more stringent contractual obligations relating to our collection, use and disclosure of personal, financial and other data.

We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. In addition, we expect that existing laws, regulations and standards may be interpreted in new

 

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manners in the future. For example, an October 2015 decision by the Court of Justice for the European Union invalidated the U.S.-EU Safe Harbor Framework, which facilitated personal data transfers to the U.S. in compliance with applicable EU data protection laws. While we did not rely upon the U.S.-EU Safe Harbor Framework for our transfer of EU personal data to the United States, and do not rely upon its replacement framework, the U.S.-EU Privacy Shield, there remains some regulatory uncertainty surrounding the future of data transfers from the European Union to the United States. In addition, European legislators have adopted a general data protection regulation that will, when effective in May 2018, supersede current EU data protection legislation, impose more stringent EU data protection requirements and provide for greater penalties for noncompliance. Future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could impair our or our customers’ ability to collect, use or disclose information relating to individuals, which could decrease demand for our solution, require us to restrict our business operations, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.

Although we are working to comply with those federal, state and foreign laws and regulations, industry standards, contractual obligations and other legal obligations that apply to us, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another, other requirements or legal obligations, our practices or the features of our solution. As such, we cannot assure ongoing compliance with all such laws or regulations, industry standards, contractual obligations and other legal obligations. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personally identifiable information or other data, may result in government enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business, operating results and financial condition.

Changes to laws or regulations affecting privacy could impose additional costs and liabilities on us and could limit our use of such information to add value for customers. If we were required to change our business activities or revise or eliminate services, or to implement burdensome compliance measures, our business and operating results could be harmed. In addition, we may be subject to fines, penalties, and potential litigation if we fail to comply with applicable privacy and/or data security laws, regulations, standards and other requirements. The costs of compliance with and other burdens imposed by privacy-related laws, regulations and standards may limit the use and adoption of our product solutions and reduce overall demand.

Furthermore, concerns regarding data privacy may cause our customers’ customers to resist providing the data and information necessary to allow our customers to use our product solutions effectively. Even the perception that the privacy and/or security of personal information is not satisfactorily protected or does not meet applicable legal, regulatory and other requirements could inhibit sales of our products or services, and could limit adoption of our solution.

Failure to comply with anticorruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.

We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act of 2010 and other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anticorruption laws that prohibit companies and their employees and third-party

 

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intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person or securing any advantage. In addition, we use various third parties to sell our solution and conduct our business abroad. We, our channel partners, and our other third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. We continue to implement our FCPA/anti-corruption compliance program and cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.

Any violation of the FCPA, other applicable anticorruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could have a material and adverse effect on our reputation, business, operating results and financial condition. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and changes in our effective tax rate or changes in tax laws or their application to the operation of our business could adversely impact our operating results and our business.

We conduct operations in multiple jurisdictions, and we are subject to certain taxes, including income, sales and use, value added and other taxes, in the United States and other jurisdictions in which we do business. A change in the tax laws in the jurisdictions in which we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, possibly with retroactive effect, could result in a material increase in the amount of taxes we incur. Recent changes to U.S. tax laws that limit the ability of taxpayers to claim and utilize foreign tax credits and require the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could affect the tax treatment of our foreign earnings, as well as cash and cash equivalent balances we currently maintain outside of the United States In addition, the Organization for Economic Co-operation and Development has initiated a base erosion and profit shifting project which seeks to establish certain international standards for taxing the worldwide income of multinational companies. As a result of these developments, the tax laws of certain countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our cash flows, operating results and financial position. Finally, the amount of taxes we pay in different jurisdictions depends on our ability to operate our business in a manner consistent with our corporate structure and transfer pricing arrangements, as well as any future intercompany transactions we may undertake.

We are subject to periodic audits or other reviews by tax authorities in the jurisdictions in which we do business, and these tax authorities may disagree with our interpretations of applicable tax law or our determinations as to the income and expenses attributable to specific jurisdictions or may challenge our methodologies for pricing intercompany transactions. In addition, authorities in jurisdictions in which we do not file tax returns could assert that we are subject to tax in such jurisdiction. In either case, such authorities could impose additional taxes, interest and penalties, claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries. Any such audit, examination or review requires management’s time, diverts internal resources and, in the event of an unfavorable outcome, may result in additional tax liabilities or other adjustments to our historical results.

We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales. We have previously filed voluntary disclosure agreements with several U.S. states related to past due sales and use

 

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taxes. While we believe that we have properly accrued for sales and use taxes in accordance with GAAP, taxing authorities may assert that we owe additional taxes, interest or penalties, which may impact our historical and future results.

Because we conduct operations in multiple jurisdictions, our effective tax rate is influenced by the amounts of income and expense attributed to each jurisdiction. If such amounts were to change so as to increase the amounts of our net income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could be adversely affected. In addition, we may determine that it is advisable from time to time to repatriate earnings from subsidiaries under circumstances that could give rise to imposition of potentially significant tax liabilities, including withholding taxes by the jurisdictions in which such amounts were earned, without our receiving the benefit of any offsetting tax credits, which could also adversely impact our effective tax rate and operating results.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

As of January 31, 2017, we had $257.9 million of federal and $121.9 million of state net operating loss carryforwards available to reduce future taxable income. These net operating loss carryforwards begin to expire in 2028 for U.S. federal and state income tax purposes. U.S. federal and state income tax laws limit the amount of these carryforwards we can utilize in any given year to offset our taxable income following an “ownership change” (generally defined as a greater than 50% cumulative shift of the stock ownership of certain stockholders over a rolling three-year period), including ownership changes due to the issuance of additional shares of our common stock, or securities convertible into our common stock. Some of our existing carryforwards may be subject to limitations arising from previous ownership changes, and we may experience subsequent ownership changes (including in connection with this offering). Accordingly, there is a risk that our ability to use our existing carryforwards in the future could be limited and that existing carryforwards would be unavailable to offset future income tax liabilities. Furthermore, our ability to utilize the net operating loss carryforwards of companies that we may acquire in the future may be subject to limitations. Limitations imposed on our ability to utilize our net operating loss carryforwards could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such net operating loss carryforwards to expire unused, in each case reducing or eliminating the benefit of such net operating loss carryforwards. Furthermore, we may not be able to generate sufficient taxable income to utilize our net operating loss carryforwards before they expire. Furthermore, our existing net operating loss carryforwards could be limited by legislative or regulatory changes, such as suspensions on the use of net operating carryforwards. If any of these events occur, we may not derive some or all of the expected benefits from our net operating loss carryforwards, which could potentially result in increased future tax liability to us and could adversely affect our business, operating results and financial condition.

Our reported financial results may be adversely affected by changes in accounting principles applicable to us.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission, or the SEC, and other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.

 

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We have incurred indebtedness, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, to protect and enforce our intellectual property and to meet other needs.

We have entered into a $20.0 million revolving line of credit with SVB and a $60.0 million credit facility with TriplePoint Capital LLC, or TriplePoint. These facilities are secured by substantially all of our assets and intellectual property rights. As of January 31, 2017, we had $14.0 million of principal indebtedness outstanding under the SVB line of credit and $35.0 million under the TriplePoint credit facility. In February 2017, we borrowed an additional $5.0 million under the SVB line of credit and an additional $15.0 million under the TriplePoint credit facility. These facilities contain various covenants and specify various events of default, including a “cross default” provision that provides that, if there is an event of default that has not been cured or waived within any applicable grace period under one lender’s debt facility, there is an event of default under the other lender’s debt facility, upon which, at each lender’s option, all amounts outstanding under each lender’s applicable facility would become immediately due and payable and further advances under the facility would not be available to us. Our revolving line of credit with SVB expires in May 2018. $35.0 million of borrowings under the TriplePoint credit facility will become due in August 2018. $15.0 million of borrowings will become due in February 2019. In June 2017, we entered into an agreement in principle with TriplePoint to extend the maturity date of $35.0 million of borrowings from August 2018 to February 2019, at which point approximately $30.0 million of borrowings will amortize over the following 18 months, subject to certain conditions. Any required repayment of our existing indebtedness as a result of an event of default would reduce our cash on hand such that we would not have those funds available for use in our business, which could have a material adverse effect on our business, operating results and financial condition.

Regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our platforms.

As a public company, we will be subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that will require us to investigate, disclose and report whether the hardware components that house our solution contain conflict minerals. The implementation of these requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our solution. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used in or necessary to the production of our hardware components and, if applicable, potential changes to components, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our hardware components contain minerals not determined to be conflict-free or if we are unable to alter our solution, processes or sources of supply to avoid use of such materials.

If we fail to comply with environmental requirements, our business, operating results and reputation could be adversely affected.

We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the EU Restrictions of Hazardous Substances Directive, or RoHS, and the EU Waste Electrical and Electronic Equipment Directive, or WEEE, as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

The EU RoHS and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. Currently, the manufacturer of the hardware components that house our solution and our major component part suppliers

 

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comply with the EU RoHS requirements. However, if there are changes to this or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive or with any similar laws adopted in other jurisdictions may cause us to incur additional costs or have additional regulatory requirements to meet in the future in order to comply.

Our failure to comply with past, present and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions, any of which could harm our business and operating results. We also expect that our products will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our operating results or cash flows, and although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have an adverse effect on our business, operating results and financial condition.

Our business is subject to the risks of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by man-made problems such as terrorism.

A significant natural disaster, such as an earthquake, fire, flood or significant power outage, could have a material adverse impact on our business and operating results. Our corporate headquarters and the location where our products are manufactured are located in a region known for seismic activity. In addition, natural disasters could affect our supply chain, manufacturing vendors, or logistics providers’ ability to provide materials and perform services such as manufacturing products or assisting with shipments on a timely basis. In the event we or our service providers are hindered by any of the events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the businesses of our supply chain, manufacturer, logistics providers, partners or customers, or the economy as a whole. Any disruption in the business of our supply chain, manufacturer, logistics providers, partners or customers that impacts sales at the end of a fiscal quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be further increased if we do not implement a disaster recovery plan or our suppliers’ disaster recovery plans prove to be inadequate. To the extent that any of the above should result in delays or cancellations of customer orders, or delays in the manufacture, deployment or shipment of our products, our business, operating results and financial condition would be adversely affected.

Risks Related to Our Common Stock

An active trading market for our common stock may never develop or be sustained, which may make it difficult for you to sell your shares at an attractive price, if at all.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon the closing of this offering or, if it does develop, it may not be sustainable, which could adversely affect your ability to sell your shares and could depress the market price of our common stock.

 

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Our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

The trading prices of the securities of technology companies, including enterprise cloud companies, have been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    actual or anticipated fluctuations in our revenue and other operating results;

 

    announcements by us or our competitors of significant technical innovations, acquisitions, partnerships, joint ventures or capital commitments;

 

    the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

    failure of securities analysts to initiate or maintain coverage of us, changes in ratings and financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    changes in operating performance and stock market valuations of other technology or comparable companies, or those in our industry in particular;

 

    price and volume fluctuations in the trading of our common stock and in the overall stock market, including as a result of trends in the economy as a whole;

 

    developments or disputes concerning our intellectual property or other proprietary rights;

 

    changes in accounting standards, policies, guidelines, interpretations or principles;

 

    new laws or regulations or new interpretations of existing laws or regulations applicable to our business or our industry;

 

    lawsuits threatened or filed against us;

 

    future sales of shares of our common stock by us or our stockholders;

 

    rumors and market speculation involving us or other companies in our industry;

 

    actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;

 

    changes in key personnel; and

 

    other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs and divert resources and the attention of management from our business and adversely affect our business, operating results and financial condition.

Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly.

The market price for our common stock could decline as a result of the sale of substantial amounts of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. Based on shares outstanding as of January 31, 2017, upon completion of this offering, we will have outstanding approximately             million shares of common stock, approximately              million of which are subject to the 180-day contractual lock-up more fully described in “Underwriters.” Morgan Stanley & Co. LLC, on behalf of the underwriters, will have the discretion to permit our officers, directors, employees and stockholders to sell shares prior to the expiration of the lock-up agreements.

 

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After this offering, holders of an aggregate of             shares of our common stock as of January 31, 2017, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our other stockholders. Substantially all of these shares are subject to the 180-day contractual lock-up referred to above.

In addition, the shares of common stock subject to outstanding options and RSUs under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

If a substantial number of shares are sold, or if it is perceived that they will be sold, in the public market, before or after the expiration of the 180-day contractual lock-up period, the trading price of our common stock could decline.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will incur immediate dilution of $         per share, based on an assumed initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and based on our pro forma as adjusted net tangible book value as of January 31, 2017, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of any warrant, upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans, upon the settlement of any vested RSUs or if we otherwise issue additional shares of our common stock at a price per share below the initial public offering price per share. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

If securities analysts do not publish research or reports about our business, or if they downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. If no or few securities or industry analysts cover our company, the trading price for our common stock would be negatively impacted. If one or more of the analysts who covers us downgrades our common stock or publishes incorrect or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price or trading volume to decline.

The concentration of ownership among our existing directors, executive officers and principal stockholders will provide them, collectively, with substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

We anticipate that our executive officers, directors, current 5% or greater stockholders and affiliated entities will together beneficially own approximately     % of our common stock outstanding after this offering based on shares outstanding as of January 31, 2017. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

 

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We have broad discretion in the use of the net proceeds that we receive in this offering.

We expect to use the net proceeds from this offering for working capital and other general corporate purposes. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or solutions or to obtain the right to use complementary technologies. We have not reserved or allocated specific amounts for these purposes, and we cannot specify with certainty how we will use the net proceeds. Accordingly, management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value.

Our future capital needs are uncertain, and we may need to raise additional funds in the future. In the event we require additional funds in the future, those funds may not be available on acceptable terms, or at all.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds to invest in future growth opportunities. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could seriously harm our business and operating results. Moreover, attempting to secure additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to develop new and enhanced solutions. Our existing and any future debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of any future securities offerings by us reducing the market price of our common stock and diluting their interest.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies might make our common stock less attractive to investors, which would in turn decrease the value of our stock.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We may choose to take advantage of some but not all of these reduced reporting burdens. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than the information you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

The requirements of being a public company will subject us to increased costs and may strain our resources and divert management’s attention.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, and the rules and regulations of the NASDAQ Stock Market. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to manage our growth and to implement internal controls. We will be required to implement and maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of this implementation and maintenance, management’s attention may be diverted from other business concerns, which could adversely affect our business. Furthermore, we rely on third-party software and system providers for ensuring our reporting obligations and effective internal controls, and to the extent these third parties fail to provide adequate service including as a result of any inability to scale to handle our growth and the imposition of these increased reporting and internal controls and procedures, we could incur material costs for upgrading or switching systems and our business could be affected.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

In addition, we expect these laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual

 

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litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the time and resources of our management and adversely affect our business, operating results and financial condition.

As a result of becoming a public company, we will be obligated to further develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting commencing with our annual report covering the fiscal year ending January 31, 2019. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Prior to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. In addition, as a result of our testing of internal controls, we may identify control deficiencies which could result in a material weakness or significant deficiency. For example, in connection with the audit of our financial statements for fiscal 2017, we identified a significant deficiency with respect to our control processes in relation to the approval of non-standard contract terms. In addition, in connection with the audit of our financial statements for fiscal 2016, we identified a significant deficiency related to accounting for the cash flow impact of transferring certain evaluation units from customer evaluation inventory to sales demonstration equipment. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the JOBS Act. If we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

We do not intend to pay dividends following the completion of this offering.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. In addition, our loan and security agreements with SVB and TriplePoint prohibit us

 

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from paying dividends, and future financing or credit agreements that we enter into may contain similar restrictions. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. Investors seeking cash dividends should not purchase our common stock.

Anti-takeover provisions in our certificate of incorporation and bylaws as well as provisions of Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective immediately prior to the completion of this offering, include provisions that:

 

    create a classified board of directors whose members serve staggered three-year terms;

 

    authorize “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

 

    specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of the board, the chief executive officer or the president and that limit the ability of our stockholders to act by written consent;

 

    establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

 

    limit the liability of, and provide indemnification to, our directors;

 

    provide that our directors may be removed only for cause;

 

    provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum, or by a sole remaining director;

 

    do not provide for cumulative voting for members of our board of directors;

 

    authorize our board of directors to modify, alter or repeal our amended and restated bylaws; and

 

    require supermajority votes of the holders of our common stock to amend specified provisions of our charter documents.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated bylaws, which will become effective immediately prior to the completion of this offering, provides that the Court of Chancery of the State of Delaware is the exclusive forum for:

 

    any derivative action or proceeding brought on our behalf;

 

    any action asserting a breach of fiduciary duty;

 

    any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws;

 

    any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our amended and restated bylaws; and

 

    any action asserting a claim against us that is governed by the internal-affairs doctrine.

Our amended and restated bylaws further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find either exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:

 

    our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve, and maintain, future profitability;

 

    our business plan and our ability to effectively manage our growth and associated investments;

 

    the anticipated benefits associated with the use of our solution;

 

    anticipated trends, growth rates and challenges in our business and in the markets in which we operate;

 

    market acceptance of our enterprise cloud solution;

 

    adoption of and developments in the technologies that are integral to our value proposition, including virtualized applications and hybrid cloud data centers;

 

    beliefs and objectives for future operations, including our plans to introduce new products;

 

    our ability to increase sales of our solutions to our existing customers;

 

    our ability to attract and retain customers;

 

    our ability to maintain and expand our customer base and our relationships with our channel partners;

 

    our ability to timely and effectively scale and adapt our existing solutions;

 

    anticipated changes in the price of our solution and our pricing model;

 

    our ability to develop new solutions and bring them to market in a timely manner;

 

    our ability to maintain, protect and enhance our brand and intellectual property;

 

    our ability to continue to expand internationally;

 

    the effects of increased competition in our markets and our ability to compete effectively;

 

    consolidation in our industry;

 

    sufficiency of cash to meet cash needs for at least the next twelve months;

 

    future changes to the terms of our credit facility with TriplePoint;

 

    future acquisitions or investments;

 

    our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

    our compliance with tax laws and the adequacy of our accrual for potential tax liabilities;

 

    economic and industry trends or trend analysis;

 

    the attraction and retention of qualified employees and key personnel;

 

    the estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices; and

 

    the future trading prices of our common stock.

 

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We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

We discuss many of these risks in this prospectus in greater detail in “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statements are made. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity, and market size, is based on information from various sources, including International Data Corporation, or IDC, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our solution and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The IDC Reports described herein represent data, research opinion or viewpoints published as part of a syndicated subscription service, by IDC, and are not representations of fact. The IDC Reports speak as of their original publication dates (and not as of the date of this prospectus) and the opinions expressed in the IDC Reports are subject to change without notice. The IDC Reports consist of:

 

    IDC Survey Spotlight: Based on the Worldwide CloudView Survey, How Will IT Budgets Change Over Time?, January 2016.

 

    IDC Special Study: Market Trends in Virtualization Infrastructure and Software 2016 – Market Share and Forecast Report, December 2016.

 

    IDC FutureScape: Worldwide Cloud 2017 Predictions, November 2016.

 

    IDC Market Forecast: Worldwide Storage for Virtual x86 Environments Forecast, 2016-2020, September 2016.

 

    IDC Market Forecast: Worldwide and U.S. Enterprise Storage Systems Forecast Update, 2016-2020, October 2016.

 

    IDC Market Forecast: Worldwide Disk-Based Data Protection and Recovery Forecast, 2015-2019: Blame the Cloud?, December 2015.

 

    IDC Market Forecast: Worldwide Cloud Systems Management Software Forecast, 2017-2021, February 2017.

 

    IDC Market Forecast: Worldwide Storage for Public and Private Cloud Forecast, 2016-2020, December 2016.

 

    IDC Market Forecast: Worldwide Software Storage Forecast, 2016-2020, June 2016.

 

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USE OF PROCEEDS

We estimate that the net proceeds we receive from this offering will be approximately $         million based upon the assumed initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions. If the underwriters’ exercise their option to purchase additional shares in full, our estimated net proceeds will be approximately $         million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $         million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting estimated underwriting discounts and commissions. Similarly, each increase or decrease of 1.0 million in the number of shares of our common stock offered by us would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions.

We intend to use the net proceeds from this offering for general corporate purposes, including working capital, sales and marketing activities, engineering initiatives, including enhancement of our solution and investment in technology and development, general and administrative expenses and capital expenditures. We also may use a portion of the net proceeds from this offering to acquire or invest in businesses, products, services or technologies that complement our business, as well as to advance various of the strategic initiatives described in “Business—Our Strategy,” although we have no present commitments to complete any such transactions. Furthermore, we may use a portion of the net proceeds from this offering to repay outstanding indebtedness, including indebtedness under our loan and security agreements with SVB and TriplePoint.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends on our capital stock is subject to restrictions under the terms of our loan and security agreements with SVB and TriplePoint. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding our financial condition.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of January 31, 2017 on:

 

    an actual basis;

 

    a pro forma basis, giving effect to the following events, which will occur immediately prior to the completion of this offering: (i) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 107,958,277 shares of common stock and the effectiveness of our amended and restated certificate of incorporation; and (ii) the conversion of all warrants to purchase shares of convertible preferred stock into warrants to purchase an aggregate of 724,500 shares of common stock, as if such conversions had occurred immediately prior to the offering, and the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital; and

 

    a pro forma as adjusted basis, giving effect to the pro forma adjustments and the sale of                 shares of common stock by us in this offering, based on an assumed initial public offering price of $         per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions.

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

 

     January 31, 2017  
         Actual             Pro Forma             Pro Forma as    
Adjusted(1)
 
           (unaudited)        
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 48,048     $ 48,048     $           
  

 

 

   

 

 

   

 

 

 

Long-term debt, current and non-current

   $ 48,914     $ 48,914     $  

Convertible preferred stock, $0.00005 par value; 63,907,437 shares authorized, 63,665,937 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     257,141          
  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity:

      

Preferred stock, par value $0.00005; no shares authorized, issued and outstanding, actual; 100,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

              

Common stock, $0.00005 par value; 128,000,000 shares authorized, 21,768,018 shares issued and outstanding, actual; 1,000,000,000 shares authorized, 129,726,295 shares issued and outstanding, pro forma; 1,000,000,000 shares authorized,                 shares issued and outstanding, pro forma as adjusted

     1       4    

Additional paid-in capital

     41,745       299,451    

Notes receivables from stockholders

     (1,544     (1,544  

Accumulated other comprehensive loss

     (466     (466  

Accumulated deficit

     (338,717     (338,717  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit)

     (298,981     (41,272  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 7,074     $ 7,642     $  
  

 

 

   

 

 

   

 

 

 

 

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(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the offering price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit), and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of 1.0 million in the number of shares of common stock offered by us would increase or decrease, as applicable, cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit), and total capitalization by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions.

The number of shares of our common stock to be outstanding after this offering is based on 133,854,232 shares of our common stock outstanding as of January 31, 2017, and excludes:

 

    22,679,673 shares of common stock issuable upon the exercise of options outstanding as of January 31, 2017, with a weighted-average exercise price of $2.07 per share;

 

    6,497,026 shares of common stock issuable upon the exercise of options granted after January 31, 2017 with a weighted-average exercise price of $2.28 per share;

 

    874,500 shares of common stock issuable upon the exercise of warrants outstanding as of January 31, 2017, with a weighted-average exercise price of $2.22 per share;

 

    510,900 and 10,000,000 shares of common stock issuable upon the exercise of warrants issued after January 31, 2017 with an exercise price of $2.45 per share and $2.74 per share, respectively;

 

    1,716,600 shares of common stock issuable upon the vesting of RSUs outstanding as of January 31, 2017;

 

    8,963,572 shares of common stock issuable upon the vesting of RSUs granted or approved after January 31, 2017;

 

                    shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 6,389,882 shares of common stock reserved for future issuance under our 2008 Stock Plan, (ii)                 shares of common stock reserved for future issuance under our 2017 Equity Incentive Plan, which will become effective one business day prior to the effectiveness of the registration statement of which this prospectus is made a part, and (iii)                 shares of common stock reserved for future issuance under our 2017 Employee Stock Purchase Plan, which will become effective on the day of its adoption by our board of directors. In addition, the shares of common stock that are available under our 2017 Equity Incentive Plan and 2017 Employee Stock Purchase Plan may be increased pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering.

As of January 31, 2017, our pro forma net tangible book value was approximately $         million, or $         per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of January 31, 2017, after giving effect to the pro forma adjustments referenced under “Capitalization,” which will occur immediately prior to the completion of this offering.

After giving effect to our sale in this offering of shares of our common stock at an assumed initial public offering price of $         per share, the midpoint of the estimated offering price range reflected on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of January 31, 2017 would have been approximately $         million, or $         per share of our common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing shares in this offering.

The following table illustrates this per share dilution in net tangible book value to new investors after giving effect to this offering:

 

Assumed initial public offering price per share

      $               

Pro forma net tangible book value per share as of January 31, 2017

   $                  

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma as adjusted net tangible book value per share immediately after this offering

     
     

 

 

 

Dilution per share to new investors in this offering

      $  
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $         million, the pro forma as adjusted net tangible book value per share after this offering by $        , and the dilution per share to new investors by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions.

The following table summarizes, on a pro forma as adjusted basis as of January 31, 2017 after giving effect to: (i) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 107,958,277 shares of common stock and the effectiveness of our amended and restated certificate of incorporation (each of which will occur immediately prior to the completion of this offering); (ii) the conversion of all warrants to purchase shares of convertible preferred stock into warrants to purchase an aggregate of 874,500 shares of common stock, as if such conversions had occurred immediately prior to the completion of this offering, and the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital; and (iii) the completion of this offering at the initial public offering price of $         per share, the midpoint of the estimated offering range set forth on the cover page of this prospectus, the difference between

 

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existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price

Per Share
 
     Number      Percent     Amount      Percent    
     (in thousands, except percentages and per share data)  

Existing stockholders

               $                                    $               

New public investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0   $        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

To the extent that the outstanding warrants are exercised, any of our outstanding options are exercised or any outstanding RSUs are settled, investors will experience further dilution.

Except as otherwise indicated, the above discussion and tables assumes no exercise by the underwriters of their option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the completion of this offering.

The number of shares of our common stock to be outstanding after this offering is based on 133,854,232 shares of our common stock outstanding as of January 31, 2017, and excludes:

 

    22,679,673 shares of common stock issuable upon the exercise of options outstanding as of January 31, 2017, with a weighted-average exercise price of $2.07 per share;

 

    6,497,026 shares of common stock issuable upon the exercise of options granted after January 31, 2017 with a weighted-average exercise price of $2.28 per share;

 

    874,500 shares of common stock issuable upon the exercise of warrants outstanding as of January 31, 2017, with a weighted-average exercise price of $2.22 per share;

 

    510,900 and 10,000,000 shares of common stock issuable upon the exercise of warrants issued after January 31, 2017 with an exercise price of $2.45 per share and $2.74 per share, respectively;

 

    1,716,600 shares of common stock issuable upon the vesting of RSUs outstanding as of January 31, 2017;

 

    8,963,572 shares of common stock issuable upon the vesting of RSUs granted or approved after January 31, 2017;

 

                    shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 6,389,882 shares of common stock reserved for future issuance under our 2008 Stock Plan, which shares will be added to the shares to be reserved under our 2017 Equity Incentive Plan, which will become effective one business day prior to the effectiveness of the registration statement of which this prospectus is made a part, (ii)                 shares of common stock reserved for future issuance under our 2017 Equity Incentive Plan, and (iii)                 shares of common stock reserved for future issuance under our 2017 Employee Stock Purchase Plan, which will become effective on the day of its adoption by our board of directors. In addition, the shares of common stock that are available under our 2017 Equity Incentive Plan and 2017 Employee Stock Purchase Plan may be increased pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial and other data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected consolidated financial and other data in this section is not intended to replace our consolidated financial statements and the related notes. We derived the selected consolidated statements of operations data for fiscal 2015, 2016 and 2017 and the consolidated balance sheet data as of January 31, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

 

     Fiscal Year Ended
January 31,
 
     2015     2016     2017  
     (in thousands, except share and
per share data)
 

Consolidated Statement of Operations Data:

    

Revenue:

      

Product

   $ 41,420     $ 68,652     $ 97,330  

Support and maintenance

     8,379       17,360       27,775  
  

 

 

   

 

 

   

 

 

 

Total revenue

     49,799       86,012       125,105  
  

 

 

   

 

 

   

 

 

 

Cost of revenue:

      

Product(1)

     17,144       25,138       34,738  

Support and maintenance(1)

     4,565       7,110       9,437  
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     21,709       32,248       44,175  
  

 

 

   

 

 

   

 

 

 

Gross profit:

      

Product

     24,276       43,514       62,592  

Support and maintenance

     3,814       10,250       18,338  
  

 

 

   

 

 

   

 

 

 

Total gross profit

     28,090       53,764       80,930  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development(1)

     28,155       43,179       53,445  

Sales and marketing(1)

     55,060       87,993       108,903  

General and administrative(1)

     13,941       18,773       19,364  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     97,156       149,945       181,712  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (69,066     (96,181     (100,782

Other expense, net:

      

Interest expense

     (279     (4,407     (5,231

Other income (expense), net

     (119     254       677  
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (398     (4,153     (4,554
  

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (69,464     (100,334     (105,336

Provision for income taxes

     222       634       465  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (69,686   $ (100,968   $ (105,801
  

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (4.22   $ (5.36   $ (5.12
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted(2)

     16,502,481       18,845,680       20,655,296  
  

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted—unaudited(2)

       $ (0.82
      

 

 

 

Pro forma weighted-average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted—unaudited(2)

         128,613,573  
      

 

 

 

 

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(1) Includes stock-based compensation expense as follows:

 

                                                  
     Fiscal Year Ended
January 31,
 
           2015                  2016                  2017        
     (in thousands)  

Cost of product revenue

   $ 82      $ 181      $ 264  

Cost of support and maintenance revenue

     92        176        323  

Research and development

     1,762        2,906        5,227  

Sales and marketing

     1,658        3,073        4,115  

General and administrative

     1,600        3,419        3,905  
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 5,194      $ 9,755      $ 13,834  
  

 

 

    

 

 

    

 

 

 

 

(2) See Note 12 to our audited consolidated financial statements that are included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per share attributable to common stockholders, and unaudited pro forma net loss per share attributable to common stockholders calculations.

 

     January 31,  
     2015     2016     2017  
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 7,639     $ 50,716     $ 48,048  

Working capital

     9,128       89,683       27,110  

Total assets

     65,924       158,157       104,902  

Deferred revenue, current and non-current

     23,022       41,864       56,445  

Long-term debt, current and non-current

     6,000       41,906       48,914  

Convertible preferred stock

     134,371       257,141       257,141  

Total stockholders’ deficit

     (121,400     (209,557     (298,981

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and operating results together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31. Fiscal 2018, our current fiscal year, ends on January 31, 2018. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

Our mission is to provide large organizations and cloud service providers with an enterprise cloud platform that offers public cloud capabilities inside their own data centers and that can also connect to public cloud services.

Our highly-differentiated and extensible enterprise cloud platform combines cloud management, web services software and a range of all-flash storage systems. Organizations use our platform as a foundation for their own private clouds—to build agile development environments, run mission-critical enterprise applications and connect with public cloud services. We enable users to guarantee the performance of their organizations’ applications, automate common IT tasks to reduce operating expenses, troubleshoot across compute, storage and network, predict their organization’s needs to scale, and provide needed elasticity on demand. Our enterprise cloud platform enables organizations to easily scale to support tens of thousands of virtual machines on a single system across multiple hypervisors and containers and to connect to public cloud environments.

Our solution helps our customers optimize infrastructure by significantly simplifying deployment and operations, which can lead to substantial reductions in capital expenditures and operating expenses. We sell many of our software products separately from our core enterprise cloud solution, enabling our customers to tailor their enterprise cloud infrastructure to their specific needs. Our platform addresses a large variety of use cases, including development operations, disaster recovery and data protection, server virtualization and desktop virtualization. Following our first product launch in March 2011, we continue to be a leader in providing enterprise cloud solutions for virtualized and cloud environments.

LOGO

 

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We have experienced rapid revenue growth resulting from the sales of our products and related support and maintenance offerings. Our product revenue is derived from sales of our enterprise cloud platform products, which consists of our VMstore systems, and stand-alone software licenses, and is generally recognized upon shipment. When customers purchase our products, they also purchase support. While purchasing support is not mandatory, substantially all products shipped have been purchased together with a support contract, which includes software patches, bug fixes, updates, upgrades, hardware repair and replacement parts, and technical support. Support and maintenance revenue is recognized over the term of the support contracts. We believe that, to date, substantially all of our customers have either renewed their support and maintenance subscriptions or have purchased new support and maintenance subscriptions together with replacement products. The average length of our support and maintenance contracts is approximately two years.

We sell our products predominantly through the joint sales efforts of our global sales force and channel partners. Our channel partners are further supported by our distributors, who work together on a non-exclusive basis to market our products, identify and close sales opportunities and provide pre-sales and post-sales services to our customers. Our joint sales approach with our channel partners provides us with expanded and efficient reach. Our channel partners typically place orders with us upon receiving an order from a customer and do not stock inventory. Our typical fulfillment time on an order is approximately three days, and consequently we do not have a meaningful backlog at any point in time. We intend to continue to expand our partner relationships to further extend our distribution coverage and to invest in education, training and programs to increase the ability of our channel partners to sell our products independently.

Since our first product launch in March 2011, our customer base has grown to 1,273 customers as of January 31, 2017. Our customers span a diverse set of industry verticals, such as education, financial services and insurance, healthcare, manufacturing and automotive and technology, and include seven of the top 15 Fortune 100 companies and 21 of the Fortune 100 companies as of January 31, 2017. We focus on selling to large organizations and CSPs. No customer represented more than 5% of revenue, and no distributor represented more than 10% of our revenue, in each case for fiscal 2017.

We continue to invest in growing our business. Our headcount increased from 177 as of January 31, 2014 to 527 as of January 31, 2017. We intend to continue to invest in our research and development organization in order to extend our technology leadership, enhance the functionality of our existing VMstores and introduce new products. We also plan to continue to invest and expand our sales and marketing functions and channel programs, including expanding our global network of channel partners and carrying out associated marketing activities in key geographies. In addition, we intend to further expand our international operations. Revenue generated from customers outside of the United States was 30.0% of our total revenue for fiscal 2017, with all our sales contracts denominated in U.S. dollars. As we continue to invest in growth, we expect to continue to incur operating losses and negative cash flows from operations for at least the near future.

We have experienced significant revenue growth, with revenue increasing from $49.8 million in fiscal 2015 to $86.0 million in fiscal 2016 and to $125.1 million in fiscal 2017, representing year-over-year growth of 73% and 45%, respectively, for our two most recent fiscal years. Our net loss was $69.7 million, $101.0 million, and $105.8 million in fiscal 2015, 2016, and 2017 respectively. We have funded our activities primarily through debt and equity financings. As of January 31, 2017, we had an accumulated deficit of approximately $338.7 million.

Our Business Model

We focus on acquiring large organizations and CSPs as customers and maximizing the lifetime value of a customer through a land-and-expand strategy. Our solution is designed to integrate easily into a customer’s existing infrastructure, which facilitates easier and faster adoption. Once our products have been deployed in a given environment, we are generally able to expand our footprint quickly through sales of additional systems and stand-alone software products. We typically provide our prospective customers with a VMstore for test and evaluation purposes. We have experienced strong success rates converting these prospective customers into customers after they receive a trial VMstore.

 

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We believe our business model supports a financial model that is characterized by the following attributes:

 

    Strong Revenue Growth. Our revenue has grown from $49.8 million in fiscal 2015 to $86.0 million in fiscal 2016 and to $125.1 million in fiscal 2017, representing year-over-year growth of 73% and 45%, respectively, for our two most recent fiscal years. We believe our strong revenue growth has resulted primarily from:

 

  Market Adoption of Our Solution. We have invested considerable resources in promoting market awareness of our solution and we believe these efforts have contributed to the adoption of our solution by large organizations and CSPs.

 

  New Stand-Alone Software Additions. We continue to expand our product suite, and our stand-alone software product portfolio in particular has experienced rapid adoption by customers. Our stand-alone software product attach rate, which is stand-alone software license revenue as a percentage of product revenue, increased from 7.7% in fiscal 2015 to 9.9% in fiscal 2016 to 14.7% in fiscal 2017.

 

  Increased Sales Coverage and Effectiveness. Our sales teams have become more productive. Our ramped teams, which we define as sales teams who have been in their role for more than 180 days, have increased from 34 as of January 31, 2015 to 52 as of January 31, 2016 to 54 as of January 31, 2017. Our average productivity per ramped team, which we define as bookings per ramped team, increased from $633,000 as of January 31, 2015 to $694,000 as of January 31, 2016 to $839,000 as of January 31, 2017, representing year-over-year increase in productivity of 10% and 21% in our two most recent fiscal years. We define bookings as non-cancellable orders received during the fiscal period. 37% of our ramped teams achieved bookings over $875,000 in the quarter ended January 31, 2017. As our sales coverage and effectiveness has increased, our global customer base has grown rapidly from 573 as of January 31, 2015 to 928 as of January 31, 2016 and to 1,273 as of January 31, 2017, representing year-over-year growth of 62% and 38% for our two most recent fiscal years.

 

  Increased Transaction Value. As our customer base has grown, we have also experienced an increase in high value transactions. The number of orders valued at greater than $1 million increased from three in fiscal 2015 to five in fiscal 2016 to 13 in fiscal 2017. Our average order size has grown from $111,000 for the year ended January 31, 2015 to $160,000 for the year ended January 31, 2017.

 

    Expansion Among Existing Customers. Many of our customers purchase from us on a quarterly basis and increase their spend with us over time. For example, our top 25 customers (as measured by their cumulative orders through January 31, 2017) that have been customers for at least twelve months have on average cumulatively ordered more than 19x the amount they ordered from us in their first quarter as a customer. For all customers that have been customers for twelve months or more, this metric is 3x. These metrics are inclusive of amounts contracted for support and maintenance revenue and cumulative order metrics are inclusive of amounts ordered in the applicable customers’ first quarter as customers.

 

    Gross Margin Expansion. Our gross margin has expanded to 65% in fiscal 2017. We believe this expansion is due to the following factors:

 

  Component Cost Reduction. The cost of hardware components, such as flash memory and solid-state drives, has generally decreased over time.

 

  Greater Scale. As we grow, we achieve greater economies of scale. Our revenue growth has exceeded the growth of our fixed and variable costs of revenue. As we continue to grow, we expect to continue to achieve greater economies of scale. We expect this trend to be particularly applicable to the gross margin for our support and maintenance business where revenue volume is driven by new customers and renewals of existing customers, accompanied by generally slower-growing fixed costs and minimal variable costs of revenue.

 

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  Growing Stand-Alone Software Sales. We sell Tintri Global Center and our portfolio of stand-alone software products separately from Tintri OS. The attach rates for our portfolio of stand-alone software products, such as ReplicateVM, SecureVM and SyncVM, have increased over time.

 

  Introduction of New Offerings. We continue to introduce new VMstore offerings, which has allowed us to introduce new, higher price points for our products.

 

  Repeat Purchases from Existing Customers. After their initial purchase, our customers tend to increase their subsequent purchase orders with more systems and higher-margin stand-alone software products.

 

    Operating Leverage. We have experienced improving operating leverage due to our focus on growing revenue significantly faster than our operating expenses. For fiscal 2016, our revenue grew 73% and our operating expenses grew 54% compared to fiscal 2015. For fiscal 2017, our revenue grew 45% and our operating expenses grew 21% compared to fiscal 2016.

Key Financial and Operational Metrics

 

       As of or for the
Fiscal Year Ended January 31,
 
           2015             2016             2017      
       (dollars in thousands)  

Total revenue

     $ 49,799     $ 86,012     $
125,105
 

Period-over-period percentage increase

       92     73     45

Gross margin

       56     63     65

Deferred revenue, current and non-current

     $ 23,022     $ 41,864     $ 56,445  

Net cash used in operating activities

     $ (51,098   $ (62,109   $ (70,366

Net cash provided by (used in) investing activities

     $ (26,437   $ (56,409   $ 58,334  

Net cash provided by (used in) financing activities

     $ (958   $ 161,597     $ 9,425  

Free cash flow as a percentage of total revenue

       (120 )%      (85 )%      (60 )% 

Total customers (unaudited)

       573       928       1,273  

The above key financial and operational metrics:

 

    help us evaluate our growth and operational efficiencies, measure our performance and identify trends in our sales activity;

 

    provide a useful measure for period-to-period comparisons of our core business;

 

    are often used by investors and other parties in understanding and evaluating companies in our industry as a measure of financial performance; and

 

    are used by management to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans, as well as to assess the extent of achievement of goals.

Deferred Revenue

Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue as of the period end. The majority of our deferred revenue balance consists of support and maintenance revenue that is recognized ratably over the contractual service period. These service periods range from one to five years and, as of January 31, 2017, averaged approximately two years.

Free Cash Flow as a Percentage of Total Revenue

Free cash flow as a percentage of total revenue is a non-GAAP financial measure we calculate by dividing free cash flow by total revenue. We define free cash flow, a non-GAAP financial measure, as cash used in

 

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operating activities less purchase of property and equipment. We have included free cash flow as a percentage of total revenue in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our free cash flow in relation to our revenue growth. In addition, we consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the purchases of property and equipment, can be used for investing in our business, making strategic acquisitions and strengthening the balance sheet. A limitation of the utility of free cash flow as a measure of our financial performance and liquidity is that it does not represent the total increase or decrease in our cash balance for the period. In addition, other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow in a different manner than we do, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a comparative measure. A reconciliation of free cash flow to cash flow used in operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:

 

     Fiscal Year Ended
January 31,
 
         2015             2016             2017      
    

(in thousands, except percentages)

 

Cash flow used in operating activities

   $ (51,098   $ (62,109   $
(70,366

Less: purchase of property and equipment

     (8,668     (10,914     (4,337
  

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (59,766   $ (73,023   $ (74,703
  

 

 

   

 

 

   

 

 

 

Total revenue

   $ 49,799     $ 86,012     $ 125,105  

Free cash flow as a percentage of total revenue

     (120 )%      (85 )%      (60 )% 

Net cash provided by (used in) investing activities

   $ (26,437   $ (56,409   $ 58,334  

Net cash provided by (used in) financing activities

   $ (958   $ 161,597     $ 9,425  

Total Customers

We define a customer as an end-user that has purchased one or more of our products either from one of our channel partners or from us directly. In situations where there are purchases by multiple subsidiaries or divisions, universities or governmental organizations affiliated with a single entity, each separate buying unit within an enterprise is counted as representing a separate customer. We do not include our channel partners or distributors in our definition of a customer.

Components of Our Operating Results

Revenue

Product Revenue. We generate product revenue from sales of enterprise cloud platform products, which consists of our VMstore systems, and stand-alone software licenses. Provided that all other revenue recognition criteria have been met, we typically recognize revenue for VMstores and perpetual software licenses upon shipment, as title and risk of loss are transferred to our channel partners or customers at that time, and revenue from time-based licenses ratably over their term. Sales of our VMstore systems represented over half of our revenue for fiscal 2017. Revenue from stand-alone software licenses represents an increasingly significant part of our business. Our product revenue may vary from period to period based on, among other things, the timing, size and mix of orders and the impact of significant transactions.

Support and Maintenance Revenue. We generate our support and maintenance revenue from support contracts related to our product sales as well as renewals of support contracts, and, to a small extent, from installation services and training. Substantially all of our product sales include support contracts. The length of these contracts ranges from one to five years, and as of January 31, 2017, averaged approximately two years. We recognize revenue from support contracts over the contractual service period. We also recognize revenue related to installation services and training upon delivery or completion of performance, although this revenue has been,

 

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and is expected to remain, insignificant. Over time, our revenue from support agreements as a percentage of total revenue may decline as a result of changes in the relative pricing of our products and support. For additional information, please see “Critical Accounting Policies and Estimates—Revenue Recognition.”

Cost of Revenue

Cost of Product Revenue. Cost of product revenue primarily includes costs paid to our third-party contract manufacturer for components, assembly and testing, as well as personnel costs in our operations organization. Personnel costs consist of salaries, benefits, bonuses and stock-based compensation. Our cost of product revenue also includes other inventory related expenses such as inventory write-offs, purchase price variances, standard cost updates, freight and overhead costs. Overhead costs consist of certain facilities, depreciation and IT costs. We expect our cost of product revenue to increase on an absolute basis as our product revenue increases.

Cost of Support and Maintenance Revenue. Cost of support and maintenance revenue primarily includes personnel costs associated with our global customer support organization, overhead costs, operation and administration of our third-party service inventory depots, which are physical warehouse locations that hold service inventory in support of our customer support agreements, and costs to fulfill our service inventory obligations. We expect our cost of support and maintenance revenue to increase on an absolute basis as our installed customer base grows.

Gross Margin

Gross margin is gross profit as a percentage of revenue, and gross profit is revenue less cost of revenue. Gross margin has been and will continue to be affected by a variety of factors, including the average sales price of our products, manufacturing and inventory-related costs, the mix of products sold and the mix of revenue between products and support and maintenance. Our gross margins may fluctuate over time depending on the factors described above. At the beginning of fiscal 2016, we substantially ceased our customer evaluation inventory program and initiated our sales demonstration equipment program. As a result, inventory charges related to customer evaluation inventory, such as write-downs due to excess and obsolete inventory and standard cost changes, began to decrease in fiscal 2016, which has had and may continue to have a positive impact on our gross margin.

Operating Expenses

Research and Development. Research and development expense consists primarily of personnel costs, as well as other direct and overhead costs. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our products. To date, we have expensed all research and development costs as incurred. We expect our research and development expense to continue to increase on an absolute basis as we continue to invest heavily in our research and product development efforts to expand the capabilities of our products and introduce new products and features. We expect our research and development expense to decline as a percentage of revenue over time as our revenue grows.

Sales and Marketing. Sales and marketing expense consists primarily of personnel costs. Sales and marketing expense also includes sales commission costs, costs for promotional activities and other marketing costs, travel costs and overhead costs. We expense sales commission costs as incurred. We expect our sales and marketing expense to continue to increase on an absolute basis as we continue to expand our sales and marketing efforts worldwide and expand our relationships with current and future channel partners and customers. We expect our sales and marketing expenses to decline as a percentage of revenue over time as our revenue grows. At the beginning of fiscal 2016, we substantially ceased our customer evaluation inventory program and initiated our sales demonstration equipment program. As a result, we have incurred and expect to continue to incur additional sales and marketing expense related to depreciation of equipment used in this program.

General and Administrative. General and administrative expense consists primarily of personnel costs. The general and administrative function includes our executive, finance, human resources, IT, facilities and legal

 

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organizations. General and administrative expense also includes outside professional services, which consists primarily of accounting, legal, IT, other consulting costs and overhead costs. We expect our general and administrative expense to continue to increase on an absolute basis to support our growing infrastructure needs and as we assume the reporting requirements and compliance obligations associated with being a public company. We expect our general and administrative expense to decline as a percentage of revenue over time as our revenue grows.

Other Expense, Net

Other expense, net consists of interest expense and other income (expense), net.

Interest expense is associated with interest on our debt obligations, as well as amortization of deferred credit facility fees, debt issuance costs and debt discounts in relation to our credit facility and loan obligation. Other income (expense), net consists primarily of loss on extinguishment of debt, realized gain (loss) on our investment securities, gain (loss) on revaluation of convertible preferred stock warrants and interest income from our cash and cash equivalents.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business, and state income taxes in the United States. We provide a full valuation allowance for U.S. deferred tax assets, which resulted from net operating loss, carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that the assets will not be realized based on our history of losses.

 

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Results of Operations

The following tables summarize our consolidated results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of results is not necessarily indicative of results for future periods.

 

     Fiscal Year Ended
January 31,
 
     2015     2016     2017  
    

(in thousands)

 

Consolidated Statements of Operations Data:

      

Revenue:

      

Product

   $ 41,420     $ 68,652     $ 97,330  

Support and maintenance

     8,379       17,360       27,775  
  

 

 

   

 

 

   

 

 

 

Total revenue

     49,799       86,012       125,105  
  

 

 

   

 

 

   

 

 

 

Cost of revenue:

      

Product(1)

     17,144       25,138       34,738  

Support and maintenance(1)

     4,565       7,110       9,437  
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     21,709       32,248       44,175  
  

 

 

   

 

 

   

 

 

 

Gross profit:

      

Product

     24,276       43,514       62,592  

Support and maintenance

     3,814       10,250       18,338  
  

 

 

   

 

 

   

 

 

 

Total gross profit

     28,090       53,764       80,930  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development(1)

     28,155       43,179       53,445  

Sales and marketing(1)

     55,060       87,993       108,903  

General and administrative(1)

     13,941       18,773       19,364  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     97,156       149,945       181,712  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (69,066     (96,181     (100,782

Other expense, net:

      

Interest expense

     (279     (4,407     (5,231

Other income (expense), net

     (119     254       677  
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (398     (4,153     (4,554
  

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (69,464     (100,334     (105,336

Provision for income taxes

     222       634       465  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (69,686   $ (100,968   $ (105,801
  

 

 

   

 

 

   

 

 

 

 

(1) Includes stock-based compensation expense as follows:

 

                                                  
     Fiscal Year Ended January 31,  
     2015      2016      2017  
    

(in thousands)

 

Cost of product revenue

   $ 82      $ 181      $ 264  

Cost of support and maintenance revenue

     92        176        323  

Research and development

     1,762        2,906        5,227  

Sales and marketing

     1,658        3,073        4,115  

General and administrative

     1,600        3,419        3,905  
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 5,194      $ 9,755      $ 13,834  
  

 

 

    

 

 

    

 

 

 

 

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     Fiscal Year Ended January 31,  
     2015     2016     2017  

Percentage of Revenue Data:

      

Revenue:

      

Product

     83     80     78

Support and maintenance

     17       20       22  
  

 

 

   

 

 

   

 

 

 

Total revenue

     100       100       100  
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     44       37       35  
  

 

 

   

 

 

   

 

 

 

Total gross profit

     56       63       65  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     57       50       43  

Sales and marketing

     111       102       87  

General and administrative

     28       22       16  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     196       174       146  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (140     (111     (81

Other expense, net:

      

Interest expense

     (1     (5     (4

Other income (expense), net

                 1  
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (1     (5     (3
  

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (141     (116     (84

Provision for income taxes

           1       1  
  

 

 

   

 

 

   

 

 

 

Net loss

     (141 )%      (117 )%      (85 )% 
  

 

 

   

 

 

   

 

 

 

Revenue by Geographic Region

 

     Fiscal Year Ended January 31,  
     2015      2016      2017  
    

(in thousands)

 

United States

   $ 34,862      $ 60,300      $ 87,519  

EMEA

     9,907        13,712        18,207  

Rest of the World

     5,030        12,000        19,379  
  

 

 

    

 

 

    

 

 

 

Total

   $ 49,799      $ 86,012      $ 125,105  
  

 

 

    

 

 

    

 

 

 

Comparison of the Fiscal Years Ended January 31, 2016 and 2017

Revenue

 

     Fiscal Year Ended
January 31,
     Change  
     2016      2017      $        %    
     (in thousands, except percentages)  

Revenue:

           

Product

   $ 68,652      $ 97,330      $ 28,678        42

Support and maintenance

     17,360        27,775        10,415        60
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 86,012      $ 125,105      $ 39,093        45
  

 

 

    

 

 

    

 

 

    

Total revenue increased by $39.1 million, or 45%, from $86.0 million fiscal 2016 to $125.1 million in fiscal 2017.

 

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Product revenue increased by $28.6 million, or 42%, from $68.7 million in fiscal 2016 to $97.3 million in fiscal 2017. The increase in product revenue was primarily driven by higher volume of sales of our products. Our customer count grew from 928 as of January 31, 2016 to 1,273 as of January 31, 2017. We sold 23% more VMstores during fiscal 2016 as compared to fiscal 2017. Our stand-alone software license revenue increased by $7.5 million, or 110%, from $6.8 million in fiscal 2016 to $14.3 million in fiscal 2017.

Support and maintenance revenue increased by $10.4 million, or 60%, from $17.4 million in fiscal 2016 to $27.8 million in fiscal 2017. The increase in support and maintenance revenue was driven primarily by an increase in support contracts sold with increased product sales, as well as continuing recognition of deferred support revenue related to product sales made in prior periods.

Cost of Revenue and Gross Margin

 

     Fiscal Year Ended
January 31,
    Change  
     2016     2017     $        %    
     (in thousands, except percentages)  

Cost of revenue:

         

Product

   $ 25,138     $ 34,738     $ 9,600        38

Support and maintenance

     7,110       9,437       2,327        33
  

 

 

   

 

 

   

 

 

    

Total cost of revenue

   $ 32,248     $ 44,175     $ 11,927        37
  

 

 

   

 

 

   

 

 

    

Gross margin

     63     65     

Gross margin, product

     63     64     

Gross margin, support and maintenance

     59     66     

Total cost of revenue increased by $12.0 million, or 37%, from $32.2 million in fiscal 2016 to $44.2 million in fiscal 2017.

Cost of product revenue increased by $9.6 million, or 38%, from $25.1 million in fiscal 2016 to $34.7 million in fiscal 2017. Approximately $8.7 million of the increase in cost of product revenue was driven by higher unit volumes. The increase in cost of product revenue was also partially driven by $0.9 million higher costs in our operations organization, primarily related to a $0.7 million increase in personnel costs driven by an 18% average headcount increase.

Cost of support and maintenance revenue increased by $2.3 million, or 33%, from $7.1 million in fiscal 2016 to $9.4 million in fiscal 2017. The increase in cost of support and maintenance revenue was primarily driven by higher costs in our global customer support organization related to an increase of $1.6 million in personnel costs due to a 22% increase in our average headcount in fiscal 2017 as compared to our average headcount in fiscal 2016, a $0.2 million increase to overhead costs and costs to administer and operate our third-party service inventory depots, and a $0.3 million increase in other costs in support of our customer support agreements. These increases were a result of the increase in our customer base.

Gross margin increased from 63% in fiscal 2016 to 65% in fiscal 2017.

Product gross margin increased from 63% in fiscal 2016 to 64% in fiscal 2017. Improvement in our product gross margin was related to favorable product mix, higher stand-alone software sales, and lower inventory charges due to decreases in writedowns of our customer evaluation inventory. The improvement was partially offset by higher costs in our operations organization as we invested in scaling our operations organization through headcount increases.

Support and maintenance gross margin increased from 59% in fiscal 2016 to 66% in fiscal 2017, as we gained leverage in our customer support organization.

 

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Operating Expenses

Research and Development

 

     Fiscal Year Ended
January 31,
     Change  
     2016      2017             %    
     (in thousands, except percentages)  

Research and development

   $ 43,179      $ 53,445      $ 10,266        24

Research and development expense increased by $10.3 million, or 24%, from $43.2 million in fiscal 2016 to $53.5 million in fiscal 2017. The increase in research and development expense was driven primarily by higher personnel costs of $7.9 million due to a 15% increase in our average headcount for the comparable periods as we hired additional personnel to continue to develop new and enhanced product offerings, and a $1.0 million increase in overhead costs. In addition, prototype expense increased by $1.2 million as we continued to expand our research and development efforts.

Sales and Marketing

 

     Fiscal Year Ended
January 31,
     Change  
     2016      2017      $        %    
     (in thousands, except percentages)  

Sales and marketing

   $ 87,993      $ 108,903      $ 20,910        24

Sales and marketing expense increased by $20.9 million, or 24%, from $88.0 million in fiscal 2016 to $108.9 million in fiscal 2017. The increase in sales and marketing expense was primarily driven by higher personnel costs of $8.5 million due to a 16% average headcount increase. Sales commission and travel expenses increased by $4.8 million due to increased sales, expanded sales and marketing activities, and overhead costs increased by $3.0 million. In addition, as part of our efforts to penetrate and expand in global markets, the cost of our marketing activities, including field events, advertising, tradeshows, brand awareness, demand generation and other expenses, collectively accounted for $3.7 million of the increase.

General and Administrative

 

     Fiscal Year Ended
January 31,
     Change  
     2016      2017             %    
     (in thousands, except percentages)  

General and administrative

   $ 18,773      $ 19,364      $ 591        3

General and administrative expense increased by $0.6 million, or 3%, from $18.8 million in fiscal 2016 to $19.4 million in fiscal 2017. The increase in general and administrative expense was primarily due to a $1.8 million increase in personnel costs, driven by a 14% increase in average headcount to support our growing operations and a $0.4 million increase in outside professional services. The increase was offset by a $1.6 million decrease in allocated overhead costs.

Other Expense, Net

 

     Fiscal Year Ended
January 31,
    Change  
     2016     2017     $       %    
    

(in thousands, except percentages)

 

Other expense, net:

        

Interest expense

   $ (4,407   $ (5,231   $ (824     19

Other income (expense), net

     254       677       423       167

 

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Interest expense increased by $0.8 million, from $4.4 million in fiscal 2016 to $5.2 million in fiscal 2017. The increase in interest expense was primarily due to increased borrowings under our credit facilities during fiscal 2017 as compared to fiscal 2016, partially offset by a decrease in amortization of deferred credit facility fees, debt issuance cost and debt discounts in relation to our loan obligations. Other income (expense), net increased by $0.4 million, from $0.3 million in income in fiscal 2016 to $0.7 million in income in fiscal 2017. The change in other income (expense), net was primarily due to an increase of $0.3 million in investment income together with a $0.1 million gain as a result of favorable changes in foreign exchange rates.

Provision for Income Taxes

     Fiscal Year Ended
January 31,
     Change  
     2016      2017      $       %     
     (in thousands, except percentages)  

Provision for income taxes

   $ 634      $ 465      $ (169     (27 )% 

Provision for income taxes decreased by $0.1 million, or 27%, from $0.6 million in fiscal 2016 to $0.5 million in fiscal 2017. The decrease in provision for income taxes was primarily due to higher tax deductions driven by increased stock option exercises in one of our subsidiaries, in addition to lower corporate tax rates for certain of our subsidiaries.

Comparison of the Fiscal Years Ended January 31, 2015 and 2016

Revenue

 

     Fiscal Year Ended
January 31,
     Change  
     2015      2016      $      %  
     (in thousands, except percentages)  

Revenue:

           

Product

   $ 41,420      $ 68,652      $ 27,232        66

Support and maintenance

     8,379        17,360        8,981        107
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 49,799      $ 86,012      $ 36,213        73
  

 

 

    

 

 

    

 

 

    

Total revenue increased by $36.2 million, or 73%, from $49.8 million in fiscal 2015 to $86.0 million in fiscal 2016.

Product revenue increased by $27.2 million, or 66%, from $41.4 million in fiscal 2015 to $68.7 million in fiscal 2016. The increase in product revenue was primarily driven by higher volume of sales of our products. Our number of customers grew from 573 as of January 31, 2015 to 928 as of January 31, 2016. We sold 42% more VMstores during fiscal 2016 as compared to fiscal 2015. Our stand-alone software license revenue increased by $3.6 million, or 114%, from $3.2 million in fiscal 2015 to $6.8 million in fiscal 2016.

Support and maintenance revenue increased by $9.0 million, or 107%, from $8.4 million in fiscal 2015 to $17.4 million in fiscal 2016. The increase in support and maintenance revenue was driven primarily by an increase in support contracts sold with increased product sales, as well as continuing recognition of deferred support revenue related to product sales made in prior periods.

 

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Cost of Revenue and Gross Margin

 

     Fiscal Year Ended
January 31,
    Change  
     2015     2016     $      %  
     (in thousands, except percentages)  

Cost of revenue:

         

Product

   $ 17,144     $ 25,138     $ 7,994        47

Support and maintenance

     4,565       7,110       2,545        56
  

 

 

   

 

 

   

 

 

    

Total cost of revenue

   $ 21,709     $ 32,248     $ 10,539        49
  

 

 

   

 

 

   

 

 

    

Gross margin

     56     63     

Gross margin, product

     59     63     

Gross margin, support and maintenance

     46     59     

Total cost of revenue increased by $10.5 million, or 49%, from $21.7 million in fiscal 2015 to $32.2 million in fiscal 2016.

Cost of product revenue increased by $8.0 million, or 47%, from $17.1 million in fiscal 2015 to $25.1 million in fiscal 2016. Approximately $6.2 million of the increase in cost of product revenue was driven by higher unit volumes. The increase in cost of product revenue was also partially driven by $1.4 million higher costs in our operations organization, primarily related to a $1.0 million increase in personnel costs driven by a 33% headcount increase, as well as increases to overhead costs and other inventory charges and increases related to standard cost changes. At the beginning of fiscal 2016, we substantially replaced our customer evaluation inventory program with a sales demonstration equipment program. As a result, customer evaluation inventory write-downs due to excess and obsolete inventory began to decrease in fiscal 2016.

Cost of support and maintenance revenue increased by $2.5 million, or 56%, from $4.6 million in fiscal 2015 to $7.1 million in fiscal 2016. The increase in cost of support and maintenance revenue was primarily driven by $1.9 million higher costs in our global customer support organization, related to an increase of $1.2 million in personnel costs due to a 47% headcount increase, as well as increases to overhead costs and cost to administer and operate our third-party service inventory depots. The increase in cost of support and maintenance revenue was also driven by a $0.4 million increase in costs related to our third-party service inventory depots. This increase was as a result of an increase in our customer base.

Gross margin increased from 56% in fiscal 2015 to 63% in fiscal 2016.

Product gross margin increased from 59% in fiscal 2015 to 63% in fiscal 2016. Improvement in our product gross margin was related to a favorable product mix and higher stand-alone software sales, and was offset primarily by higher costs in our operations organization and other inventory charges.

Support and maintenance gross margin increased from 46% in fiscal 2015 to 59% in fiscal 2016, as we gained leverage in our customer support organization.

Operating Expenses

Research and Development

 

     Fiscal Year Ended
January 31,
     Change  
     2015      2016          $              %      
     (in thousands, except percentages)  

Research and development

   $ 28,155      $ 43,179      $ 15,024        53

 

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Research and development expense increased by $15.0 million, or 53%, from $28.2 million in fiscal 2015 to $43.2 million in fiscal 2016. The increase in research and development expense was driven primarily by higher personnel costs of $10.6 million due to a 52% increase in our research and development headcount as we hired additional personnel to continue to develop new and enhanced product offerings, and a $2.5 million increase in overhead costs. In addition, prototype expense increased by $0.8 million as we continued to expand our research and development efforts.

Sales and Marketing

 

     Fiscal Year Ended
January 31,
     Change  
     2015      2016          $              %      
     (in thousands, except percentages)  

Sales and marketing

   $ 55,060      $ 87,993      $ 32,933        60

Sales and marketing expense increased by $32.9 million, or 60%, from $55.1 million in fiscal 2015 to $88.0 million in fiscal 2016. The increase in sales and marketing expense was primarily driven by higher personnel costs of $11.1 million due to a 39% headcount increase. Sales commission and travel expenses increased by $10.0 million due to increased sales, higher sales and marketing activities, and overhead costs increased by $4.7 million, primarily driven by depreciation of equipment in our sales demonstration program that we initiated at the start of fiscal 2016. In addition, as part of our efforts to penetrate and expand in global markets, the cost of our marketing activities, generally including field events, advertising, tradeshows, brand awareness, demand generation and other expenses, collectively accounted for $6.3 million of the increase.

General and Administrative

 

     Fiscal Year
Ended January 31,
     Change  
     2015      2016          $              %      
     (in thousands, except percentages)  

General and administrative

   $ 13,941      $ 18,773      $ 4,832        35

General and administrative expense increased by $4.8 million, or 35%, from $13.9 million in fiscal 2015 to $18.8 million in fiscal 2016. The increase in general and administrative expense was primarily due to a $4.2 million increase in personnel costs, driven primarily by both a 57% increase in headcount to support our growing operations and a $0.6 million increase in stock-based compensation representing a cumulative difference adjustment resulting from our adoption of equity administration software and its approach to applying the estimated forfeiture rate to stock-based compensation. Outside professional fees also increased by $1.7 million. These increases were partially offset by a $1.2 million charge recorded in fiscal 2015, representing our estimate of the cumulative liability related to delinquent state sales taxes as of January 31, 2015, as well as related interest and penalty accruals. There was no such charge in fiscal 2016.

Other Expense, Net

 

     Fiscal Year
Ended January 31,
    Change  
     2015     2016         $             %      
     (in thousands, except percentages)  

Other expense, net:

        

Interest expense

   $ (279   $ (4,407   $ (4,128     NM  

Other income (expense), net

     (119     254       373       NM  

 

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Interest expense increased by $4.1 million, from $0.3 million in fiscal 2015 to $4.4 million in fiscal 2016. The increase in interest expense was primarily due to our increased borrowings under our credit facilities during fiscal 2016, as well as amortization of deferred credit facility fees, note issuance costs and debt discounts in relation to our credit facility and loan obligation.

Other income (expense), net changed by $0.4 million, from $0.1 million in expense in fiscal 2015 to $0.3 million in income in fiscal 2016. The change in other income (expense), net was primarily due to an increase of $0.2 million in interest income driven by higher average balances in our cash and cash equivalents, coupled with a $0.4 million loss from debt extinguishment in fiscal 2015, which was partially offset by increases in the fair value of our convertible preferred stock warrant liability in fiscal 2016.

Provision for Income Taxes

 

     Fiscal Year Ended
January 31,
     Change  
     2015        2016          $                %      
     (in thousands, except percentages)  

Provision for income taxes

   $ 222        $ 634      $ 412          186

Provision for income taxes increased by $0.4 million, or 186%, from $0.2 million in fiscal 2015 to $0.6 million in fiscal 2016. The increase in the provision for income taxes was primarily due to an increase in foreign taxes as we continue to expand globally.

 

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Quarterly Results of Operations

The following table sets forth our unaudited interim consolidated statement of operations data for each of the eight quarters in the period ended January 31, 2017, as well as the percentage that each line item represents of total revenue. The unaudited interim consolidated statement of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of such data. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for any quarter are not necessarily indicative of results to be expected for a full year or any other period. The following quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Three Months Ended  
    Apr. 30,
2015
    Jul. 31,
2015
    Oct. 31,
2015
    Jan. 31,
2016
    Apr. 30,
2016
    Jul. 31,
2016
    Oct. 31,
2016
    Jan 31,
2017
 
    (unaudited)  
    (in thousands)  

Consolidated Statement of Operations Data:

               

Revenue:

               

Product

  $ 12,307     $ 15,878     $ 19,705     $ 20,762     $ 16,677     $ 20,768     $ 26,871     $ 33,014  

Support and maintenance

    3,261       3,943       4,670       5,486       6,199       6,788       7,046       7,742  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    15,568       19,821       24,375       26,248       22,876       27,556       33,917       40,756  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

               

Product(1)

    5,236       6,084       6,483       7,335       5,936       7,160       8,953       12,689  

Support and maintenance(1)

    1,578       1,615       1,887       2,030       2,072       2,568       2,424       2,373  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    6,814       7,699       8,370       9,365       8,008       9,728       11,377       15,062  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

               

Product

    7,071       9,794       13,222       13,427       10,741       13,608       17,918       20,325  

Support and maintenance

    1,683       2,328       2,783       3,456       4,127       4,220       4,622       5,369  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

    8,754       12,122       16,005       16,883       14,868       17,828       22,540       25,694  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Research and development(1)

    9,897       10,248       11,641       11,393       13,659       12,989       13,227       13,570  

Sales and marketing(1)

    17,181       20,302       24,157       26,353       24,996       24,466       27,862       31,579  

General and administrative(1)

    4,432       4,453       4,594       5,294       5,675       4,911       3,955       4,823  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    31,510       35,003       40,392       43,040       44,330       42,366       45,044       49,972  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (22,756     (22,881     (24,387     (26,157     (29,462     (24,538     (22,504     (24,278

Other expense, net:

               

Interest expense

    (725     (1,039     (1,248     (1,395     (1,437     (1,376     (1,231     (1,187

Other income (expense), net

    (45     (79     (16     394       286       395       54       (58
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (770     (1,118     (1,264     (1,001     (1,151     (981     (1,177     (1,245
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (23,526     (23,999     (25,651     (27,158     (30,613     (25,519     (23,681     (25,523

Provision for income taxes

    72       143       134       285       198       153       89       25  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (23,598   $ (24,142   $ (25,785   $ (27,443   $ (30,811   $ (25,672   $ (23,770   $ (25,548
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Includes stock-based compensation expense as follows:

 

    Three Months Ended  
    Apr. 30,
2015
    Jul. 31,
2015
    Oct. 31,
2015
    Jan. 31,
2016
    Apr. 30,
2016
    Jul. 31,
2016
    Oct. 31,
2016
    Jan. 31,
2017
 
    (unaudited)  
    (in thousands)  

Cost of product revenue

  $ 39     $ 48     $ 46     $ 48     $ 62     $ 67     $ 68     $ 67  

Cost of support and maintenance revenue

    37       38       43       58       76       96       71       80  

Research and development

    585       700       827       794       1,476       1,384       1,230       1,137  

Sales and marketing

    798       678       712       885       1,223       1,027       959       906  

General and administrative

    1,103       770       778       768       961       1,069       973       902  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 2,562     $ 2,234     $ 2,406     $ 2,553     $ 3,798     $ 3,643     $ 3,301     $ 3,092  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended  
     Apr. 30,
2015
    Jul. 31,
2015
    Oct. 31,
2015
    Jan. 31,
2016
    Apr. 30,
2016
    Jul. 31,
2016
    Oct. 31,
2016
    Jan 31,
2017
 
     (unaudited)  

Percentage of Revenue Data:

                

Revenue:

                

Product

     79     80     81     79     73     75     79     81

Support and maintenance

     21       20       19       21       27       25       21       19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100       100       100       100       100       100       100       100  

Total cost of revenue

     44       39       35       36       35       35       34      
37
 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     56       61       65       64       65       65       66       63  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                

Research and development

     64       52       48       43       60       47       39       33  

Sales and marketing

     110       102       99       100       109       89       82       77  

General and administrative

     29       23       19       20       25       18       12       12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     203       177       166       163       194       154       133       122  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (147     (116     (101     (99     (129     (89     (67     (59

Other expense, net:

                

Interest expense

     (5     (5     (5     (5     (6     (5     (4     (3

Other income (expense), net

                       2       1       1              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (5     (5     (5     (3     (5     (4     (4     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (152     (121     (106     (102     (134     (93     (71     (62

Provision for income taxes

           1       1       1       1       1              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (152 )%      (122 )%      (107 )%      (103 )%      (135 )%      (94 )%      (71 )%      (62 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenue Trends

Our quarterly revenue increased sequentially over the periods presented due to increases in sales of our products and support and maintenance to new and existing customers. Increases in revenue are generally attributable to an increase in the size of our customer base and mix, an increase in the number of our VMstore products and stand-alone software licenses sold and, to a lesser extent, an increase in the average sales price for certain of our products.

In general, our sales are subject to seasonal trends. Our fourth fiscal quarter, ending January 31, typically has the highest revenue in our fiscal year, and our first fiscal quarter, ending April 30, typically has the lowest revenue in our fiscal year. We believe that our year-over-year growth has reduced the impact of these seasonal trends, and that

 

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seasonal variations in our business may become more pronounced over time. Historical patterns in our business may not be a reliable indicator of our future sales activity or performance.

Quarterly Gross Margin Trends

Our total quarterly gross margins ranged from 56% to 66% during the periods presented. Gross margin has been and will continue to be affected by a variety of factors, including the average sales price of our products, manufacturing and inventory-related costs, the mix of products sold and the mix of product revenue and support and maintenance revenue.

Quarterly Expense Trends

Sales and marketing, research and development and general and administrative expenses generally grew significantly over the quarterly periods presented, primarily due to increases in headcount in connection with the expansion of our business.

Key Financial and Operational Metrics

The following table presents certain key metrics for each of the eight quarters in the period ended January 31, 2017. In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance.

 

     Three Months Ended  
     Apr. 30,
2015
    Jul. 31,
2015
    Oct. 31,
2015
    Jan. 31,
2016
    Apr. 30,
2016
    Jul. 31,
2016
    Oct. 31,
2016
    Jan. 31,
2017
 
     (unaudited)  

Free cash flow as a percentage of total revenue

     (125 )%      (104 )%      (68 )%      (62 )%      (88 )%      (79 )%      (58 )%   

 

(32

)% 

A reconciliation of free cash flow to cash flow used in operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:

 

    Three Months Ended  
    Apr. 30,
2015
    Jul. 31,
2015
    Oct. 31,
2015
    Jan. 31,
2016
    Apr. 30,
2016
    Jul. 31,
2016
    Oct. 31,
2016
    Jan. 31,
2017
 
    (unaudited)  
    (in thousands, except percentages)  

Cash flow used in operating activities

  $ (15,385   $ (16,608   $ (14,064   $ (16,052   $ (19,696   $ (19,816   $ (18,692   $ (12,162

Less: purchase of property and equipment

    (4,124     (3,941     (2,557     (292     (372     (1,959     (1,100     (906
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

  $ (19,509   $ (20,549   $ (16,621   $ (16,344   $ (20,068   $ (21,775   $ (19,792   $ (13,068
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    15,568       19,821       24,375       26,248       22,876       27,556       33,917       40,756  

Free cash flow as a percentage of total revenue

    (125 )%      (104 )%      (68 )%      (62 )%      (88 )%      (79 )%      (58 )%      (32 )% 

Net cash provided by (used in) investing activities

 

 

(307

    9,004       (2,557     (62,549     23,593       6,463       19,398       8,880  

Net cash provided by (used in) financing activities

    14,960       147,296       (1,230     571       485       7,128       731       1,081  

 

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Liquidity and Capital Resources

As of January 31, 2017, we had cash and cash equivalents of $48.0 million. Our cash and cash equivalents primarily consist of bank deposits and money market funds. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit of $338.7 million as of January 31, 2017.

We have experienced negative cash flows from operations since inception and expect negative cash flows from operations to continue for the foreseeable future. Net losses incurred during the past three fiscal years ended January 31, 2015, 2016 and 2017 amounted to $69.7 million, $101.0 million and $105.8 million, respectively. Unless and until we are able to generate sufficient revenue from sales of our products and services to generate positive cash flows from operations, we expect such losses to continue. We are also subject to certain financial covenants related to our debt facilities that, if breached, could result in the debt becoming immediately due and payable in the event the lenders choose to declare an event of default. We may not have sufficient liquidity to repay amounts outstanding under our debt facilities should they become immediately due and payable.

Historically, we have funded a significant portion of our operations through the issuance of equity and debt. In fiscal 2016, we raised $124.6 million in gross proceeds related to the sale of convertible preferred stock. Subsequent to January 31, 2017, we also entered into various amendments to our existing debt agreements and entered into a convertible note facility that increased our committed borrowing capacity by $50.0 million. We expect that this additional financing, combined with our plans for continued revenue growth and our existing cash and cash equivalents, will provide sufficient liquidity for us to meet our obligations and debt financial covenants through at least June 2, 2018.

Until we can generate positive cash flows from operations, we expect to continue to finance our operations with additional debt or equity financing and/or work with our lenders to amend certain financial covenants. Our ability to raise additional liquidity is subject to a number of uncertainties, including, but not limited to, the market demand for our common or preferred stock, the market demand for our products and services, negative economic developments, adverse market conditions, significant delays in the launch of new products and lack of market acceptance of new products. If we are not able to raise additional capital or access our debt facilities in sufficient amounts to fund our operations, it would have a material adverse effect on our business, operating results and financial condition.

Cash Flows

The following table summarizes our cash flows for the periods presented:

 

     Fiscal Year Ended
January 31,
 
           2015                 2016                 2017        
    

(in thousands)

 

Cash used in operating activities

   $ (51,098   $ (62,109   $ (70,366

Cash provided by (used in) investing activities

     (26,437     (56,409     58,334  

Cash provided by (used in) financing activities

     (958     161,597       9,425  

Foreign exchange impact on cash and cash equivalents

     64       (2     (61
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (78,429   $ 43,077     $ (2,668
  

 

 

   

 

 

   

 

 

 

Cash Flows Used In Operating Activities

In fiscal 2017, cash used in operating activities was $70.4 million. The primary factors affecting our cash used in operating activities during this period were our net loss of $105.8 million, partially offset by non-cash charges of $13.8 million for stock-based compensation, $9.3 million for depreciation and amortization of our

 

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property and equipment, $0.8 million for accretion of balloon payment and amortization of debt issuance cost, credit facility fees and discount on debt, and net cash flows of $11.5 million provided by changes in our operating assets and liabilities. The primary driver of the changes in operating assets and liabilities was a $14.6 million increase in deferred revenue. The increase in deferred revenue was due to a greater number of support and maintenance contracts related to the growth in our product sales and increased renewal of existing support and maintenance contracts associated with our larger installed customer base. Changes in our operating assets and liabilities were also significantly affected by a $13.7 million increase in accounts payable and accrued liabilities, offset by a $10.0 million increase in accounts receivable, $3.7 million in prepaid expenses and other assets, and a $3.1 million increase in inventories. The increase in accounts payable and accrued liabilities was primarily attributable to increased activities to support overall business growth. The increase in accounts receivable was primarily due to revenue growth. We expect operating cash flows to continue to be affected by timing of sales and timing of collections. The increase in inventories was primarily attributable to incremental service inventory acquired to support our customer support agreements associated with our larger installed customer base.

In fiscal 2016, cash used in operating activities was $62.1 million. The primary factors affecting our cash used in operating activities during this period were our net loss of $101.0 million, partially offset by non-cash charges of $9.8 million for stock-based compensation, $7.8 million for depreciation and amortization of our property and equipment, $1.6 million for accretion of balloon payment and amortization of debt issuance cost, credit facility fees and discount on debt, and net cash flows of $19.8 million provided by changes in our operating assets and liabilities. The primary driver of the changes in operating assets and liabilities was a $18.8 million increase in deferred revenue. The increase in deferred revenue was due to a greater number of support and maintenance contracts related to the growth in our product sales and increased renewal of existing support and maintenance contracts associated with our larger installed customer base. Changes in our operating assets and liabilities were also significantly affected by a $3.8 million increase in accounts payable and accrued liabilities, and a $1.8 million decrease in inventories, partially offset by a $4.1 million increase in accounts receivable. The increase in accounts payable and accrued liabilities was primarily attributable to increased activities to support overall business growth. The increase in accounts receivable was primarily due to revenue growth. The decrease in inventories was primarily attributable to our transition away from our customer evaluation inventory program.

In fiscal 2015, cash used in operating activities was $51.1 million. The primary factors affecting our cash used in operating activities during this period were our net loss of $69.7 million, partially offset by non-cash charges of $5.2 million for stock-based compensation and $3.5 million for depreciation and amortization of our property and equipment, and net cash flows of $9.8 million provided by changes in our operating assets and liabilities. The primary driver of the changes in operating assets and liabilities was a $13.8 million increase in deferred revenue. The increase in deferred revenue was due to a greater number of support and maintenance contracts related to the growth in our product sales and increased renewal of existing support and maintenance contracts associated with our larger installed customer base. Changes in our operating assets and liabilities were also significantly affected by a $14.4 million increase in accounts payable and accrued liabilities, offset by a $12.6 million increase in accounts receivable, a $2.9 million increase in prepaid expenses and other assets, and a $3.0 million increase in inventories. The increase in accounts payable and accrued liabilities was primarily attributable to increased activities to support overall business growth. The increases in accounts receivable was primarily due to revenue growth. The increase in inventories, prepaid expenses and other assets, accounts payable and accrued liabilities was primarily attributed to increased activities to support overall business growth.

Cash Flows from Investing Activities

In fiscal 2017, net cash provided by investing activities was $58.3 million, which consisted of $76.4 million from maturities of our investments, partially offset by $13.8 million from purchases of investments and $4.3 million of purchases of property and equipment.

 

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In fiscal 2016, net cash used in investing activities was $56.4 million, which consisted of $70.4 million from purchases of investments and $10.9 million of purchases of property and equipment as we continue to invest in the longer term growth of our business, partially offset by $24.9 million from maturities and sales of our investments.

In fiscal 2015, net cash used in investing activities was $26.4 million, which consisted of $37.0 million used in purchases of investments and $8.7 million used in purchases of property and equipment, partially offset by $19.2 million from maturities and sales of our investments.

Cash Flows from Financing Activities

In fiscal 2017, net cash provided by financing activities was $9.4 million, which consisted primarily of $7.0 million from the draw-down of our revolving line of credit and $2.3 million of proceeds from exercises of stock options.

In fiscal 2016, net cash provided by financing activities was $161.6 million, which consisted primarily of $122.8 million of net proceeds from the sale of our Series F convertible preferred stock, $35.0 million from the draw-down from our credit facility, $7.0 million from the draw-down of our revolving line of credit and $3.1 million of proceeds from exercises of stock options, partially offset by $6.0 million of repayment of our revolving line of credit.

In fiscal 2015, net cash used by financing activities was $1.0 million, which consisted primarily of a $10.9 million repayment of our revolving line of credit and an $8.0 million repayment of our credit facility, partially offset by proceeds of $14.0 million from the draw-down of our revolving line of credit, $3.0 million from the draw-down of our credit facility and $1.1 million of proceeds from exercises of stock options.

Debt Obligations

We have a credit facility with TriplePoint which, as of January 31, 2017, provided up to $35.0 million of available funds. This credit facility is secured by a security interest, junior to the SVB facility described below, on substantially all of our assets, including our intellectual property, and contains certain customary non-financial restrictive covenants. As of January 31, 2017, we had $35.0 million outstanding under this facility, all of which bear interest at 10% per year and will become due in August 2017. In February and March 2017, we entered into amendments to our credit facility with TriplePoint which extended the maturity of the $35.0 million outstanding from August 2017 to August 2018. In February 2017, we also borrowed an additional $15.0 million from TriplePoint, which bears interest at 9% per year and becomes due in February 2019. In June 2017, we entered into an agreement with TriplePoint to extend the maturity date of $35.0 million of borrowings from August 2018 to February 2019, at which point approximately $30.0 million of borrowings will amortize over the following 18 months, subject to certain conditions.

We have a revolving line of credit with SVB, from which an amount based on a percentage of qualifying accounts receivable is available for us to borrow, up to a total of $20.0 million. This facility is secured by a security interest, senior to the TriplePoint facility described above, on substantially all of our assets, including our intellectual property, and contains certain customary financial and non-financial restrictive covenants. This facility is scheduled to expire in May 2018. As of January 31, 2017, we had $14.0 million outstanding under this facility, which bears weighted average interest of 4.42% per year. In February 2017, we borrowed an additional $5.0 million under this revolving line of credit.

 

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of January 31, 2017:

 

     Payment Due by Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (in thousands)  

Operating leases

   $ 39,340      $ 7,121      $ 14,146      $ 14,089      $ 3,984  

Capital leases

     389        216        173                

Debt obligation*

     48,962               48,962                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 88,691      $ 7,337      $ 63,281      $ 14,089      $ 3,984  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Subsequent to January 31, 2017, we entered into amendment to our New Facility Agreement with Triplepoint. Under these amendments, we borrowed an additional $15.0 million, which will mature in February 2019. Subsequent to January 31, 2017, we amended our Loan and Security Agreement with SVB, under which we drew down an additional $5.0 million.

We contract with an offshore subsidiary of Flex to manufacture all of our hardware products. Our agreement with Flex does not require us to purchase any minimum volumes of products from Flex, but in the normal course of business we provide rolling nine month forecasts to Flex of our monthly purchase requirements, the first three months of which are purchase commitments that Flex relies upon to procure components used to build finished products. We have commitments to Flex related to inventories on-hand at Flex and non-cancelable purchase orders for our products and related components. We record a charge to cost of product sales for firm, non-cancelable and unconditional purchase commitments with Flex for non-standard components when and if quantities exceed our future demand forecasts. As of January 31, 2016 and 2017, we had $7.2 million and $13.5 million of purchase commitments with Flex, respectively.

Off-Balance Sheet Arrangements

In fiscal years 2015, 2016, and 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates.

Foreign Currency Risk

Our sales contracts are denominated in U.S. dollars, and therefore, substantially all of our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our products to our customers outside of the United States, which could adversely affect our financial condition and operating results. In addition, a portion of our operating expenses is incurred outside the United States, is denominated in foreign currencies such as the Euro, the Pound Sterling, and the Japanese Yen, and is subject to fluctuations due to changes in foreign currency exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative instruments. In the event our foreign sales and expenses increase, our operating results may be more greatly affected by foreign currency exchange rate fluctuations, which can affect our operating income or loss. The effect of a hypothetical 10% change in foreign currency exchanges rates applicable to our business would not have had a material impact on our historical consolidated financial statements. If in the future we become more exposed to currency fluctuations and are not able to successfully hedge against the risks associated with currency fluctuations, our operating results could be adversely affected.

 

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Interest Rate Risk

Our cash and cash equivalents primarily consist of bank deposits and money market funds. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. However, due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio. We therefore do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates, assumptions and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions and judgments on an ongoing basis.

The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

We generate revenue from sales of enterprise cloud platform products and related support and maintenance. We derive revenue primarily from two sources: (i) product revenue, which includes hardware and perpetual software license revenue and (ii) support and maintenance revenue, which includes support, installation services and training. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; the product or service has been delivered; the sales price is fixed or determinable; and collection is reasonably assured.

We define each of the four criteria above as follows:

 

    Persuasive Evidence of an Arrangement Exists. We use stand-alone purchase orders, signed sales quotations or purchase orders pursuant to the terms and conditions of a master sales agreement to support the evidence of an arrangement with channel partners, distributors and customers.

 

    Delivery Has Occurred. We use shipping documentation to verify delivery of products. We typically recognize product revenue upon transfer of title and risk of loss, which is primarily upon shipment to channel partners, distributors and customers. Support and maintenance revenue is recognized over time as the services are delivered. We generally do not have significant obligations for future performance, such as rights of return or pricing credits, associated with sales of our products. It is our practice to identify an end-user prior to shipment to a channel partner or distributor.

 

    The Sales Price Is Fixed or Determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. If the terms are extended beyond our normal payment terms, we will recognize revenue as the payments become due. Payment from partners is not contingent on partner’s receiving payment from customers.

 

    Collection Is Reasonably Assured. We assess probability of collection on a customer-by-customer basis. Our channel partners, distributors and customers are subjected to a credit review process that evaluates their financial condition and ability to pay.

 

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Support and maintenance revenue includes arrangements for software and technical support for our products. While purchasing support and maintenance services is not mandatory, substantially all products shipped have been purchased together with a support contract. Support is offered under renewable, fee based contracts and includes technical support, hardware repair and replacement parts, and software patches, bug fixes, updates, and upgrades. Support and maintenance revenue is initially deferred and recognized ratably over the life of the contract, with the related expenses, including the write down of customer support inventory to its net realizable value, recognized as incurred. Support and maintenance contracts range from one to five years. Unearned support revenue is included in deferred revenue.

Professional service revenue primarily consists of fees we earn related to installation. While installation services are not contractually mandatory, customers occasionally purchase such services. We generally recognize revenue from installation services upon delivery or completion of performance. Installation services are typically short term in nature. To date, revenue arising from installation services has been insignificant.

We report revenue net of sales taxes. Shipping charges billed to customers are included in product revenue and the related shipping and handling costs are included in cost of product revenue.

Our offering consists of hardware products containing software components that function together to provide the essential functionality of the product. Therefore, our hardware products (inclusive of the core software) are considered non-software deliverables and are not subject to industry-specific software revenue recognition guidance.

Our product revenue also includes revenue from the sale of stand-alone software products. Stand-alone software may operate on our hardware product, but is not considered essential to the functionality of the hardware and is subject to the industry-specific software revenue recognition guidance.

Our typical multiple element arrangement includes hardware product (including the essential software) and support. We may also sell stand-alone software as part of our multiple element arrangements. We consider each of these deliverables to be separate units of accounting based on whether the delivered items have stand-alone value. We have determined that each unit of accounting has stand-alone value because they are sold separately by us or, for hardware products, because the customers can resell them to others on a stand-alone basis.

For certain arrangements with multiple deliverables, we allocate the arrangement fee to the non-software element based upon the relative selling price of such element and, if software and software-related elements such as support for the software element are also included in the arrangement, we allocate the arrangement fee to those software and software-related elements as a group. After such allocations are made, the amount of the arrangement fee allocated to the software and software-related elements is accounted for using the residual method. When applying the relative selling price method, we determine the selling price for each element using vendor-specific objective evidence, or VSOE, of selling price, if it exists, or if not, third-party evidence, or TPE, of selling price, if it exists. If neither VSOE nor TPE of selling price exist for an element, we use our best estimated selling price, or BESP, for that element. The revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for that element.

When an arrangement includes stand-alone software products and related support, under the software revenue recognition guidance, we use the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date and VSOE of the fair value of all undelivered elements exists. In the majority of our contracts, the only element that remains undelivered at the time of delivery of the product is support services. Under the residual method, the VSOE of fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized upfront as product revenue. If evidence of the VSOE of fair value of the undelivered elements does not exist, all revenue is deferred and recognized at the earlier of (i) delivery of those elements occurs or (ii) when fair value can be established unless support services is the only undelivered element, in which case, the entire arrangement fee is recognized ratably over the contractual period of the support services.

 

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VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those deliverables when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a deliverable fall within a reasonably narrow pricing range, evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range.

We are not able to determine TPE for our products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

When we are unable to establish the selling price of our deliverables using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine BESP for the purposes of allocating the arrangement by reviewing market factors including, but not limited to, pricing practices including discounting, the geographies in which we offer our products and services, and the type of customer (i.e., channel or end-user). Additionally, we consider historical transactions, including transactions whereby the deliverable was sold on a stand-alone basis.

Deferred revenue consists of billings or payments received in advance of revenue recognition and primarily relate to support and maintenance. Deferred revenue that will be recognized during the twelve-month period following the balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.

Inventories

Inventories consist primarily of raw materials related to component parts and finished goods. Finished goods include both inventory held for sale, service inventory held at third-party service inventory depots in support of customer support agreements, and customer evaluation inventory.

Inventory values are stated at the lower of cost (on a first in, first out method), or market value. A provision is recorded to adjust inventory to its estimated realizable value when inventory is determined to be in excess of anticipated demand or obsolete. Specifically, service inventory is written down to its net realizable value based upon the estimated loss of utility starting from the date the customer support inventory is placed in the third-party service inventory depots; and customer evaluation inventory is reviewed and reserved for excess and obsolescence.

We use significant judgment in establishing our forecasts of future demand within a specific time horizon and obsolete material exposures. These estimates depend on our assessment of current and expected purchases from our customers, product lifecycle and development plans and current sales levels. If actual market conditions are less favorable than those projected by management, which may be caused by factors within and outside of our control, we may be required to increase our inventory write-downs, which could have an adverse impact on our gross margins and profitability.

Income Taxes

Income tax expense is an estimate of current income taxes payable in the current fiscal year based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences and carryforwards that we recognize for financial reporting and income tax purposes.

We recognize income taxes under the asset and liability method. We recognize deferred income tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and

 

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tax bases of assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in income in the period that includes the enactment date.

We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Due to the history of losses we have generated in the past, we believe that it is more likely than not that the deferred tax assets will not be realized as of January 31, 2017. Accordingly, we have recorded a full valuation allowance on our net deferred tax assets.

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. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes includes the effects of any reserves that are considered appropriate, as well as the related net interest and penalties.

We expect to permanently reinvest undistributed earnings in foreign subsidiaries outside of the United States to fund future foreign operations. We project that we will have sufficient cash flow in the United States and will not need to repatriate the foreign earnings to finance our domestic operations. If we were to distribute these earnings to the United States, we would be subject to U.S. income taxes, less any allowable foreign tax credits, and foreign withholding taxes. We have not recorded a deferred tax liability on any portion of our undistributed earnings in foreign subsidiaries. If we were to repatriate these earnings to the United States, any associated income tax liability would be insignificant.

We believe that we have adequately reserved for our uncertain tax positions, although we can provide no assurance that the final tax outcome of these matters will not be materially different. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any reserves that we believe are appropriate, as well as the related net interest and penalties.

Stock-Based Compensation

Stock Options

Stock-based compensation expense is measured and recognized in the financial statements based on the fair value of the awards granted. The fair value of a stock option is estimated on the grant date using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized, net of estimated and actual forfeitures, over the requisite service period of the awards, which is generally four years.

Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, expected term of the option, expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

These assumptions and estimates are as follows:

 

    Fair Value of Common Stock. Because our common stock is not yet publicly traded, we must estimate the fair value of common stock. See further discussion in “Common Stock Valuations” below.

 

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    Expected Term. The expected term of the options is calculated as the midpoint between the average vesting period and the contractual term of the option grants.

 

    Expected Volatility. Since our common stock is currently not publicly traded, and therefore, no historical data on volatility of our stock is available, the expected volatility is based on an average of the historical volatility of a group of comparable publicly traded companies in similar industries over a period equivalent to the expected term of the options.

 

    Risk-Free Interest Rate. The risk-free rate that we use is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options.

 

    Dividends. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future and, therefore, we used an expected dividend yield of zero in the valuation model.

We must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. A higher revised forfeiture rate than previously estimated will result in an adjustment that will decrease the stock-based compensation expense recognized in the consolidated statement of operations. A lower revised forfeiture rate than previously estimated will result in an adjustment that will increase the stock-based compensation expense recognized in the consolidated statement of operations.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to the historic optionee exercise and termination behavior and to our common stock value, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.

We have granted stock awards with a service condition only, which stock-based compensation expense is recognized using straight-line method over the requisite service period of the awards. As of January 31, 2017, we had a total of approximately $24.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock awards with a service condition only, which is expected to be recognized over a weighted-average period of 2.4 years.

Restricted Stock Units

Stock-based compensation expense is measured and recognized in the financial statements based on the fair value of our common stock on the date of the grant. Stock-based compensation expense is recognized, net of estimated and actual forfeitures, over the requisite service period of the award, and upon performance conditions being met. As of January 31, 2017, we had a total of approximately $8.8 million of unrecognized stock-based compensation expense, which is expected to be recognized upon vesting and continue through the final vesting date.

Common Stock Valuations

The fair value of our common stock underlying our stock options was determined by our board of directors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

 

    contemporaneous valuations performed by unrelated third-party valuation firms;

 

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    the prices, rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

    the lack of marketability of our common stock;

 

    our actual operating and financial performance;

 

    current business conditions and projections;

 

    our hiring key personnel and the experience of our management;

 

    our history and the timing of the introduction of new products and services;

 

    our stage of development;

 

    the likelihood of achieving a liquidity event, such as an initial p