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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-37883
 
 
  
NUTANIX, INC.
(Exact name of registrant as specified in its charter)
 
 

Delaware
 
27-0989767
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1740 Technology Drive, Suite 150
San Jose,
CA
95110
(Address of principal executive offices, including zip code)
(408)
216-8360
 
(Registrant's telephone number, including area code)

 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes      No  
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 13(a) of the Exchange Act.
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).    Yes      No  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Class A Common Stock, $0.000025 par value per share
 
NTNX
 
Nasdaq Global Select Market
As of November 30, 2019, the registrant had 175,155,784 shares of Class A common stock, $0.000025 par value per share, and 17,093,493 shares of Class B common stock, $0.000025 par value per share, outstanding.



TABLE OF CONTENTS
 
 
 
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Item 3
 
Item 4
 
Item 5
 
 
 
 
 
 
 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), which statements involve substantial risks and uncertainties. Other than statements of historical fact, all statements contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "plan," "intend," "could," "would," "expect," or words or expressions of similar substance or the negative thereof, that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. Forward-looking statements included in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding:
our future billings, revenue, cost of revenue and operating expenses, as well as changes in the cost of product revenue, component costs, product gross margins and support, entitlements and other services revenue and changes in research and development, sales and marketing and general and administrative expenses;
our business plans, initiatives and objectives, our ability to execute such plans, initiatives and objectives in a timely manner, and the impact of such plans, initiatives and objectives on our business, operations, and financial results;
our plans for, and the timing of, changes to our business model, including our ongoing transition to a subscription-based business model, our ability to manage, complete or realize the benefits of such transitions successfully and in a timely manner, and the short-term and long-term impacts of such transitions on our business, operations and financial results;
the benefits and capabilities of our platform, products, services and technology;
our growth strategy, our ability to effectively achieve and manage our growth, and the amount, timing and impact of any investments to grow our business, including plans to continue to increase demand generation and marketing spending, and continue to invest in our global engineering, research and development and sales and marketing teams;
anticipated trends, growth rates and challenges in our business and in the markets in which we operate, including the segmentation and productivity of our sales team;
our ability to develop new solutions, product features and technology and bring them to market in a timely manner, as well as the impact of including additional solutions in our product portfolio;
market acceptance of new technology and recently introduced solutions;
the interoperability and availability of our solutions with and on third-party hardware platforms;
our ability to increase sales of our solutions, particularly to large enterprise customers;
our ability to attract new end customers and retain and grow sales from our existing end customers;
our ability to maintain and strengthen our relationships with our channel partners and OEMs, and the impact of any changes to such relationships on our business, operations and financial results;
the effects of seasonal trends on our results of operations;
our expectations concerning relationships with third parties, including our ability to compress and stabilize sales cycles;
our ability to maintain, protect and enhance our intellectual property;
our exposure to and ability to guard against cyber attacks and other actual or perceived security breaches;
our ability to continue to expand internationally;
the effects of increased competition in our market and our ability to compete effectively;
anticipated capital expenditures;
future acquisitions or investments in complementary companies, products, services or technologies and the ability to successfully integrate completed acquisitions;

3


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, including recent changes in global tax laws;
macroeconomic and industry trends, projected growth or trend analysis;
our ability to attract and retain qualified employees and key personnel; and
the sufficiency of cash balances to meet cash needs for at least the next 12 months.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs in light of the information currently available to us. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained or implied in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or will occur. The forward-looking statements in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation, and expressly disclaim any obligation, to update, alter or otherwise revise or publicly release the results of any revision to these forward-looking statements to reflect new information or the occurrence of unanticipated or subsequent events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

4


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 
Page
 
 

5


NUTANIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
As of
 
July 31,
2019
 
October 31,
2019
 
 
 
 
 
(in thousands, except per share data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
396,678

 
$
233,820

Short-term investments
512,156

 
655,584

Accounts receivable, net
245,475

 
214,883

Deferred commissions—current
46,238

 
51,966

Prepaid expenses and other current assets
74,665

 
61,654

Total current assets
1,275,212

 
1,217,907

Property and equipment, net
136,962

 
140,470

Operating lease right-of-use assets(1)

 
123,002

Deferred commissions—non-current
107,474

 
120,059

Intangible assets, net
66,773

 
62,428

Goodwill
185,180

 
185,260

Other assets—non-current
14,441

 
17,260

Total assets
$
1,786,042

 
$
1,866,386

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
74,047

 
$
83,381

Accrued compensation and benefits
99,804

 
95,018

Accrued expenses and other current liabilities(1)
28,797

 
17,434

Deferred revenue—current
396,667

 
429,429

Operating lease liabilities—current(1)

 
29,968

Total current liabilities
599,315


655,230

Deferred revenue—non-current
513,377

 
545,845

Operating lease liabilities—non-current(1)

 
118,410

Convertible senior notes, net
458,910

 
466,545

Other liabilities—non-current(1)
27,547

 
16,827

Total liabilities
1,599,149


1,802,857

Commitments and contingencies (Note 7)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value of $0.000025 per share— 200,000 shares authorized as of July 31, 2019 and October 31, 2019; no shares issued and outstanding as of July 31, 2019 and October 31, 2019

 

Common stock, par value of $0.000025 per share—1,200,000 (1,000,000 Class A, 200,000 Class B) shares authorized as of July 31, 2019 and October 31, 2019; 188,595 (168,155 Class A and 20,440 Class B) and 192,174 (175,080 Class A and 17,094 Class B) shares issued and outstanding as of July 31, 2019 and October 31, 2019
5

 
5

Additional paid-in capital
1,835,528

 
1,940,899

Accumulated other comprehensive income
669

 
1,234

Accumulated deficit
(1,649,309
)
 
(1,878,609
)
Total stockholders’ equity
186,893


63,529

Total liabilities and stockholders’ equity
$
1,786,042


$
1,866,386


 
(1)
During the first quarter of fiscal 2020, we adopted Accounting Standards Update ("ASU") No. 2016-02 using the modified retrospective method and elected the transition option that allows us not to restate the comparative periods in our condensed consolidated financial statements in the year of adoption. For additional details, refer to Note 1.
See the accompanying notes to condensed consolidated financial statements.

6


NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
October 31,
 
2018
 
2019
 
 
 
 
 
(in thousands, except per share data)
Revenue:
 
 
 
Product
$
224,346

 
$
192,444

Support, entitlements and other services
88,937

 
122,324

Total revenue
313,283

 
314,768

Cost of revenue:
 
 
 
Product
39,261

 
21,233

Support, entitlements and other services
34,845

 
50,968

Total cost of revenue
74,106

 
72,201

Gross profit
239,177

 
242,567

Operating expenses:
 
 
 
Sales and marketing
196,497

 
291,838

Research and development
110,531

 
138,206

General and administrative
27,339

 
32,860

Total operating expenses
334,367

 
462,904

Loss from operations
(95,190
)
 
(220,337
)
Other expense, net
(2,703
)
 
(5,040
)
Loss before (benefit from) provision for income taxes
(97,893
)
 
(225,377
)
(Benefit from) provision for income taxes
(3,628
)
 
3,923

Net loss
$
(94,265
)
 
$
(229,300
)
Net loss per share attributable to Class A and Class B common stockholders—basic and diluted
$
(0.54
)
 
$
(1.21
)
Weighted average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted
175,446

 
189,671



See the accompanying notes to condensed consolidated financial statements.

7


NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
Three Months Ended
October 31,
 
2018
 
2019
 
 
 
 
 
(in thousands)
Net loss
$
(94,265
)
 
$
(229,300
)
Other comprehensive loss, net of tax:
 
 
 
Change in unrealized (loss) gain on available-for-sale securities, net of tax
(166
)
 
565

Comprehensive loss
$
(94,431
)
 
$
(228,735
)



See the accompanying notes to condensed consolidated financial statements.

8


NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
Three Months Ended October 31, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Stockholders’
 Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Balance - July 31, 2018
172,858

 
$
4

 
$
1,355,907

 
$
(1,002
)
 
$
(1,028,130
)
 
$
326,779

Issuance of common stock through employee equity incentive plans
2,629

 

 
3,680

 

 

 
3,680

Issuance of common stock from ESPP purchase
1,128

 

 
26,318

 

 

 
26,318

Issuance of common stock in connection with an acquisition
2,451

 

 
102,978

 

 

 
102,978

Stock-based compensation

 

 
65,925

 

 

 
65,925

Vesting of early exercised stock options

 

 
70

 

 

 
70

Other comprehensive loss

 

 

 
(166
)
 

 
(166
)
Net loss

 

 

 

 
(94,265
)
 
(94,265
)
Balance - October 31, 2018
179,066

 
$
4

 
$
1,554,878

 
$
(1,168
)
 
$
(1,122,395
)
 
$
431,319

 
Three Months Ended October 31, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Income
 
Accumulated
Deficit
 
Total
Stockholders’
 Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Balance - July 31, 2019
188,595

 
$
5

 
$
1,835,528

 
$
669

 
$
(1,649,309
)
 
$
186,893

Issuance of common stock through employee equity incentive plans
2,620

 

 
2,608

 

 

 
2,608

Issuance of common stock from ESPP purchase
959

 
 
 
21,337

 

 

 
21,337

Stock-based compensation

 

 
81,426

 

 

 
81,426

Other comprehensive income

 

 

 
565

 

 
565

Net loss

 

 

 

 
(229,300
)
 
(229,300
)
Balance - October 31, 2019
192,174

 
$
5

 
$
1,940,899

 
$
1,234

 
$
(1,878,609
)
 
$
63,529


See the accompanying notes to condensed consolidated financial statements.


9



NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
October 31,
 
2018
 
2019
 
 
 
 
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(94,265
)
 
$
(229,300
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
16,183

 
22,462

Stock-based compensation
65,925

 
81,426

Change in fair value of contingent consideration
(799
)
 

Amortization of debt discount and issuance costs
7,148

 
7,635

Operating lease cost, net of accretion

 
6,671

Other
(759
)
 
103

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
23,497

 
30,592

Deferred commissions
(7,728
)
 
(18,313
)
Prepaid expenses and other assets
(3,812
)
 
16,150

Accounts payable
1,292

 
5,208

Accrued compensation and benefits
(19,689
)
 
(4,786
)
Accrued expenses and other liabilities
(7,442
)
 
(5,772
)
Operating leases, net

 
(3,469
)
Deferred revenue
70,273

 
65,230

Net cash provided by (used in) operating activities
49,824

 
(26,163
)
Cash flows from investing activities:
 
 
 
Maturities of investments
143,409

 
171,441

Purchases of investments
(79,766
)
 
(321,474
)
Sales of investments

 
7,870

Purchases of property and equipment
(29,832
)
 
(18,203
)
Payments for business combinations, net of cash and restricted cash acquired
(18,662
)
 

Net cash provided by (used in) investing activities
15,149

 
(160,366
)
Cash flows from financing activities:
 
 
 
Proceeds from sales of shares through employee equity incentive plans, net of repurchases
29,890

 
23,973

Payment of debt in conjunction with business combinations
(991
)
 

Payment of issuance costs related to convertible senior notes
(75
)
 

Net cash provided by financing activities
28,824

 
23,973

Net increase (decrease) in cash, cash equivalents and restricted cash
$
93,797

 
$
(162,556
)
Cash, cash equivalents and restricted cash—beginning of period
307,098

 
399,520

Cash, cash equivalents and restricted cash—end of period
$
400,895

 
$
236,964

Restricted cash (1)
1,109

 
3,144

Cash and cash equivalents—end of period
$
399,786

 
$
233,820

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
3,910

 
$
7,779

Supplemental disclosures of non-cash investing and financing information:
 
 
 
Issuance of common stock in connection with business combinations
$
102,978

 
$

Purchases of property and equipment included in accounts payable and accrued liabilities
$
15,717

 
$
12,200

Vesting of early exercised stock options
$
70

 
$

 

(1)
Included within other assets—non-current in the condensed consolidated balance sheets.

See the accompanying notes to condensed consolidated financial statements.

10


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1.    OVERVIEW AND BASIS OF PRESENTATION
Organization and Description of Business
Nutanix, Inc. was incorporated in the state of Delaware in September 2009. Nutanix, Inc. is headquartered in San Jose, California, and together with its wholly-owned subsidiaries (collectively, "we," "us," "our" or "Nutanix") has operations throughout North America, Europe, Asia Pacific, the Middle East, Latin America and Africa.
We provide a leading enterprise cloud platform that consists of software solutions that power many of the world’s business applications by digitizing the traditional silos of enterprise computing. We seek to provide an enterprise cloud platform that empowers our customers to unify various clouds - private, public, distributed - into one seamless cloud, allowing enterprises to choose the right cloud for each application. Our enterprise cloud platform natively converges compute, virtualization, storage, networking, desktop and security services into one integrated, simple-to-consume solution, which allows enterprises to simplify the complexities of a multi-cloud environment with automation, cost governance and compliance. Our solutions are primarily sold through channel partners, including distributors, resellers and original equipment manufacturers ("OEMs") (collectively, "Partners"), and delivered directly to our end customers.
Principles of Consolidation and Significant Accounting Policies
The accompanying condensed consolidated financial statements, which include the accounts of Nutanix, Inc. and its wholly-owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and are consistent in all material respects with those included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, filed with the Securities and Exchange Commission ("SEC") on September 24, 2019. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements are unaudited, but include all adjustments of a normal recurring nature necessary for a fair presentation of our quarterly results.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019.
Use of Estimates
The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Such management estimates and assumptions include, but are not limited to, the best estimate of selling prices for products and related support; useful lives and recoverability of intangible assets and property and equipment; allowance for doubtful accounts; determination of fair value of stock-based awards; accounting for income taxes, including the valuation allowance on deferred tax assets and uncertain tax positions; warranty liability; purchase commitment liabilities to our contract manufacturers and OEMs; sales commissions expense and the period of benefit for deferred commissions; whether an arrangement is or contains a lease; the incremental borrowing rate to measure the present value of operating right-of-use assets and lease liabilities; and contingencies and litigation. Management evaluates these estimates and assumptions on an ongoing basis using historical experience and other factors and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could materially differ from those estimates and assumptions.
Concentration of Risk
Concentration of revenue and accounts receivable—We sell our products primarily through our Partners and occasionally directly to end customers. For the three months ended October 31, 2018 and 2019, no end customer accounted for more than 10% of total revenue or accounts receivable.

11

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

For each significant Partner, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable, net are as follows:
 
 
Revenue
 
Accounts Receivable
as of
 
 
Three Months Ended
October 31,
 
Partners
 
2018
 
2019
 
July 31,
2019
 
October 31, 2019
Partner A
 
22
%
 
27
%
 
27
%
 
27
%
Partner B
 
12
%
 
12
%
 
(1) 

 
16
%
Partner C
 
12
%
 
12
%
 
18
%
 
11
%
Partner D
 
(1) 

 
(1) 

 
(1) 

 
10
%
Partner E
 
11
%
 
(1) 

 
(1) 

 
(1) 

 
(1)
Less than 10%
Summary of Significant Accounting Policies
Except for the accounting policy related to operating lease right-of-use ("ROU") assets and lease liabilities discussed in the "Recently Adopted Accounting Pronouncements" section below, there have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, filed with the SEC on September 24, 2019, that have had a material impact on our condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases ("ASC 842"), which requires the recognition of ROU assets and lease liabilities on the condensed consolidated balance sheets and additional disclosures around key information about leasing arrangements. We adopted the standard effective August 1, 2019, using a modified retrospective transition method. As a result, our consolidated balance sheet as of July 31, 2019 was not restated and continues to be reported under the previous lease standard ("ASC 840"), and is therefore not comparative. We elected the package of practical expedients permitted under the transition guidance, which allowed us to not reassess whether existing arrangements contain leases, not reassess lease classification and not reassess initial direct costs. The standard had a material impact on our condensed consolidated balance sheet, but did not have an impact on our condensed consolidated statement of operations or cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. We recognized ROU assets and lease liabilities of $120.2 million and $142.1 million, respectively, on our condensed consolidated balance sheet on August 1, 2019, which included reclassifying lease incentives, prepaid rent and deferred rent as components of the ROU asset. Refer to Note 6 for additional details.
We determine if an arrangement is or contains a lease at inception by evaluating various factors, including whether a vendor’s right to substitute an identified asset is substantive. Lease classification is determined at the lease commencement date when the leased assets are made available for our use. Operating leases are included in operating lease right-of-use assets, operating lease liabilities—current and operating lease liabilities—non-current in our condensed consolidated balance sheet as of October 31, 2019. We did not have any material financing leases in the periods presented.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The difference between the total ROU assets and total lease liabilities recorded as of August 1, 2019 is due primarily to the derecognition of deferred rent liabilities that were included in accrued expenses and other current liabilities and other liabilities—non-current in our consolidated balance sheet as of July 31, 2019. The operating lease ROU asset also includes any lease payments made prior to commencement date and excludes lease incentives. Lease payments consist primarily of fixed payments under the arrangement, less any lease incentives, such as rent holidays. Variable lease payments not dependent on an index or a rate are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance, property taxes and utilities. We use an estimate of our incremental borrowing rate ("IBR") based on the information available at the lease commencement date in determining the present value of lease payments, unless the implicit rate is readily determinable.

12

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

In determining the appropriate IBR, we consider information including, but not limited to, our credit rating, the lease term and the currency in which the arrangement is denominated. For leases which commenced prior to our adoption of ASC 842, we used the IBR as of August 1, 2019. Our lease terms may include renewal options, which are not included in the lease terms for calculating our lease liability, as we are not reasonably certain that we will exercise these renewal options at the time of the lease commencement. Lease costs are recognized on a straight-line basis as operating expenses within our condensed consolidated statements of operations. We present lease payments within cash flows from operations within the condensed consolidated statements of cash flows.
For our operating leases, we elected to account for lease and non-lease components as a single lease component. Additionally, we do not record leases on the condensed consolidated balance sheet that have a lease term of 12 months or less at the lease commencement date.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides companies with an option to reclassify stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. We adopted the new standard effective August 1, 2019 and the adoption had no impact on our condensed consolidated financial statements.
Recently Issued and Not Yet Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including interim reporting periods within those fiscal years. ASU 2016-13 is effective for us in the first quarter of fiscal 2021. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including interim reporting periods within those fiscal years. ASU 2018-13 is effective for us in the first quarter of fiscal 2021. We do not expect the adoption of this new standard to have a material impact on our quarterly or annual disclosures.
Note 2.    REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS
Disaggregation of Revenue and Revenue Recognition
We generate revenue primarily from the sale of our enterprise cloud platform, which can be delivered pre-installed on an appliance that is configured to order or delivered separately to be utilized on a variety of certified hardware platforms. Software can be delivered separately or on a configured-to-order appliance. When the software is not portable to other appliances, it generally has a term equal to the life of the associated appliance, while subscription term-based licenses typically have a term of one to five years. Configured-to-order appliances, including our Nutanix-branded NX hardware line, are typically sold through Partners and can be purchased from one of our OEMs or directly from Nutanix. Our enterprise cloud platform is typically purchased with one or more years of support and entitlements, which includes the right to software upgrades and enhancements as well as technical support. A substantial portion of sales are made through channel partners and OEM relationships.

13

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

The following table depicts the disaggregation of revenue by revenue type, consistent with how we evaluate our financial performance:
 
Three Months Ended
October 31,
 
2018
 
2019
 
 
 
 
 
(in thousands)
Subscription
$
126,976

 
$
217,896

Non-portable software
146,570

 
77,571

Hardware
32,547

 
9,724

Professional services
7,190

 
9,577

Total revenue
$
313,283

 
$
314,768


Subscription revenue Subscription revenue includes any performance obligation which has a defined term, and is generated from the sales of software entitlement and support subscriptions, subscription software licenses and cloud-based software as a service ("SaaS") offerings.
Ratable We recognize revenue from software entitlement and support subscriptions and SaaS offerings ratably over the contractual service period, the substantial majority of which relate to software entitlement and support subscriptions. These offerings represented approximately $83.0 million and $114.9 million of our subscription revenue for the three months ended October 31, 2018 and 2019, respectively.
Upfront Revenue from our subscription software licenses is generally recognized upfront upon transfer of control to the customer, which happens when we make the software available to the customer. These subscription software licenses represented approximately $44.0 million and $103.0 million of our subscription revenue for the three months ended October 31, 2018 and 2019, respectively.
Non-portable software revenue — Non-portable software revenue includes sales of our enterprise cloud platform when delivered on a configured-to-order appliance by us or one of our OEM partners. The software licenses associated with these sales are typically non-portable and have a term equal to the life of the appliance on which the software is delivered. Revenue from our non-portable software products is generally recognized upon transfer of control to the customer.
Hardware revenue — In transactions where we deliver the hardware appliance, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer.
Professional services revenue — We also sell professional services with our products. We recognize revenue related to professional services as they are performed.
Contracts with multiple performance obligations — Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price ("SSP") basis. For deliverables that we routinely sell separately, such as software entitlement and support subscriptions on our core offerings, we determine SSP by evaluating the standalone sales over the trailing 12 months. For those that are not sold routinely, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold and geographic locations.
Contract balances — The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services, or when our right to consideration is unconditional. In situations where revenue recognition occurs before invoicing, an unbilled receivable is created, which represents a contract asset. Unbilled accounts receivable, included in accounts receivable, net on the condensed consolidated balance sheets, was not material for any of the periods presented.

14

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of July 31, 2019 and October 31, 2019 is presented in the accompanying condensed consolidated balance sheets.
Costs to obtain and fulfill a contract — We capitalize commissions paid to sales personnel and the related payroll taxes when customer contracts are signed. These costs are recorded as deferred commissions in the condensed consolidated balance sheets, current and non-current. We determine whether costs should be deferred based on our sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract if the commissions expected to be paid upon renewal are not commensurate with that of the original contract. Accordingly, the amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and included in sales and marketing expense in the condensed consolidated statements of operations. We determine the estimated period of benefit by evaluating the expected renewals of customer contracts, the duration of relationships with our customers, customer retention data, our technology development lifecycle and other factors. Deferred costs are periodically reviewed for impairment.
Deferred revenue — Deferred revenue primarily consists of amounts that have been invoiced but not yet recognized as revenue and primarily pertain to software entitlement and support subscriptions and professional services. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the condensed consolidated balance sheet date.
Significant changes in the balance of deferred revenue (contract liability) and deferred commissions (contract asset) for the period presented are as follows:
 
Deferred Revenue
 
Deferred Commissions
 
 
 
 
 
(in thousands)
Balance as of July 31, 2019
$
910,044

 
$
153,712

Additions
187,554

 
57,846

Revenue/commissions recognized
(122,324
)
 
(39,533
)
Balance as of October 31, 2019
$
975,274

 
$
172,025

During the three months ended October 31, 2018, we recognized revenue of approximately $78.8 million pertaining to amounts deferred as of July 31, 2018. During the three months ended October 31, 2019, we recognized revenue of approximately $109.0 million pertaining to amounts deferred as of July 31, 2019.
The majority of our contracted but not invoiced performance obligations are subject to cancellation terms. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not recognized"), which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods and excludes performance obligations that are subject to cancellation terms. Contracted not recognized revenue was approximately $1,005.6 million as of October 31, 2019, of which we expect to recognize approximately 45% over the next 12 months, and the remainder thereafter.

15

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Note 3.    FAIR VALUE MEASUREMENTS
The fair value of our financial assets and liabilities measured on a recurring basis is as follows:
 
As of July 31, 2019
 
Level I
 
Level II
 
Level III
 
Total 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
33,156

 
$

 
$

 
$
33,156

Commercial paper

 
103,029

 

 
103,029

U.S. government securities

 
119,933

 

 
119,933

Corporate bonds

 
9,996

 

 
9,996

Short-term investments:
 
 
 
 
 
 


Corporate bonds

 
354,549

 

 
354,549

Commercial paper

 
92,851

 

 
92,851

U.S. government securities

 
64,756

 

 
64,756

Total measured at fair value
$
33,156


$
745,114


$


$
778,270

Cash
 
 
 
 
 
 
130,564

Total cash, cash equivalents and short-term investments
 
 
 
 
 
 
$
908,834

 
As of October 31, 2019
 
Level I
 
Level II
 
Level III 
 
Total 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
16,204

 
$

 
$

 
$
16,204

Commercial paper

 
24,939

 

 
24,939

Short-term investments:
 
 
 
 
 
 


Corporate bonds

 
402,213

 

 
402,213

Commercial paper

 
147,667

 

 
147,667

U.S. government securities

 
105,704

 

 
105,704

Total measured at fair value
$
16,204

 
$
680,523

 
$

 
$
696,727

Cash
 
 
 
 
 
 
192,677

Total cash, cash equivalents and short-term investments
 
 
 
 
 
 
$
889,404



16

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Financial Instruments Not Recorded at Fair Value on a Recurring Basis
We report our financial instruments at fair value, with the exception of the 0% Convertible Senior Notes, due in January 2023 (the "Notes"). Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying values and estimated fair values of financial instruments not recorded at fair value are as follows:
 
As of July 31, 2019
 
As of October 31, 2019
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
 
 
 
 
 
 
 
 
(in thousands)
Convertible senior notes, net
$
458,910

 
$
527,275

 
$
466,545

 
$
555,013


The carrying value of the Notes as of October 31, 2019 was net of the unamortized debt discount of $102.7 million and unamortized debt issuance costs of $5.7 million.
The total estimated fair value of the Notes was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes to be a Level 2 measurement due to the limited trading activity.
Note 4.    BALANCE SHEET COMPONENTS
Short-Term Investments
The amortized cost of our short-term investments approximates their fair value. As of July 31, 2019 and October 31, 2019, unrealized gains and losses from our short-term investments were not material. As of July 31, 2019 and October 31, 2019, unrealized losses from securities that were in an unrealized loss position for more than 12 months were not material. Unrealized losses related to our short-term investments are due to interest rate fluctuations, as opposed to credit quality. As a result, at July 31, 2019 and October 31, 2019, there were no other-than-temporary impairments for these investments.
The following table summarizes the estimated fair value of our investments in marketable debt securities by their contractual maturity dates:
 
As of
October 31, 2019
 
(in thousands)
Due within one year
$
502,122

Due in one to two years
153,462

Total
$
655,584


Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consists of the following:
 
As of
 
July 31,
2019
 
October 31,
2019
 
 
 
 
 
(in thousands)
Prepaid operating expenses
$
37,864

 
$
33,126

Tenant improvement allowances

 
7,354

VAT receivables
5,068

 
5,644

Prepaid income taxes
19,690

 
1,629

Other current assets
12,043

 
13,901

Total prepaid expenses and other current assets
$
74,665

 
$
61,654



17

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

The decrease in prepaid expenses and other current assets from July 31, 2019 to October 31, 2019 was due primarily to the receipt of an $18.0 million corporate income tax refund in August 2019, partially offset by the addition of $7.4 million of tenant improvement allowances, which are recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet as of October 31, 2019 as a result of our adoption of ASC 842 during the first quarter of fiscal 2020.
Property and Equipment, Net
Property and equipment, net consists of the following:
 
Estimated
Useful Life
 
As of
 
 
July 31,
2019
 
October 31,
2019
 
 
 
 
 
 
 
(in months)
 
(in thousands)
Computer, production, engineering and other equipment
36
 
$
200,762

 
$
213,494

Demonstration units
12
 
59,981

 
62,519

Leasehold improvements
(1) 
 
46,520

 
49,856

Furniture and fixtures
60
 
12,868

 
13,601

Total property and equipment, gross
 
 
320,131


339,470

Less: accumulated depreciation
 
 
(183,169
)
 
(199,000
)
Total property and equipment, net
 
 
$
136,962


$
140,470

 
(1)
Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining lease term.
Depreciation expense related to our property and equipment was $12.5 million and $18.1 million for the three months ended October 31, 2018 and 2019, respectively.
Goodwill and Intangible Assets, Net

The change in the carrying value of goodwill during the three months ended October 31, 2019 was not material.
Intangible assets, net consists of the following:
 
As of
 
July 31,
2019
 
October 31,
2019
 
 
 
 
 
(in thousands)
Developed technology
$
79,300

 
$
79,300

Customer relationships
8,860

 
8,860

Trade name
4,170

 
4,170

Total intangible assets, gross
92,330

 
92,330

Less:
 
 
 
Accumulated amortization of developed technology
(21,210
)
 
(24,904
)
Accumulated amortization of customer relationships
(3,392
)
 
(3,782
)
Accumulated amortization of trade name
(955
)
 
(1,216
)
Total accumulated amortization
(25,557
)
 
(29,902
)
Total intangible assets, net
$
66,773

 
$
62,428


Amortization expense related to our intangible assets is being recognized in the condensed consolidated statements of operations within product cost of revenue for developed technology and sales and marketing expense for customer relationships and trade name.

18

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

The estimated future amortization expense of our intangible assets is as follows:
Fiscal Year Ending July 31:
Amount
 
(in thousands)
2020 (remaining nine months)
$
13,035

2021
17,380

2022
16,183

2023
10,856

2024
3,210

Thereafter
1,764

Total
$
62,428


Accrued Compensation and Benefits
Accrued compensation and benefits consists of the following:
 
As of
 
July 31,
2019
 
October 31,
2019
 
 
 
 
 
(in thousands)
Accrued commissions
$
31,703

 
$
35,862

Accrued vacation
15,475

 
17,429

Payroll taxes payable
8,504

 
10,693

Contributions to ESPP withheld
20,778

 
10,515

Accrued bonus
11,413

 
7,486

Other
11,931

 
13,033

Total accrued compensation and benefits
$
99,804


$
95,018


Note 5.     CONVERTIBLE SENIOR NOTES
In January 2018, we issued Convertible Senior Notes with a 0% interest rate for an aggregate principal amount of $575.0 million, due in 2023 (the "Notes"), in a private placement to qualified institutional buyers pursuant to Rule144A under the Securities Act. This included $75.0 million in aggregate principal amount of the Notes that we issued resulting from initial purchasers fully exercising their option to purchase additional notes. There are no required principal payments prior to the maturity of the Notes. The total net proceeds from the Notes are as follows:
 
Amount
 
(in thousands)
Principal amount
$
575,000

Less: initial purchasers' discount
(10,781
)
Less: cost of the bond hedges
(143,175
)
Add: proceeds from the sale of warrants
87,975

Less: other issuance costs
(707
)
Net proceeds
$
508,312


The Notes do not bear any interest and will mature on January 15, 2023, unless earlier converted or repurchased in accordance with their terms. The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of securities by us.

19

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Each $1,000 of principal of the Notes will initially be convertible into 20.4705 shares of our Class A common stock, which is equivalent to an initial conversion price of approximately $48.85 per share, subject to adjustment upon the occurrence of specified events. Holders of these Notes may convert their Notes at their option at any time prior to the close of the business day immediately preceding October 15, 2022, only under the following circumstances:
1)
during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter, is greater than or equal to 130% of the conversion price on each applicable trading day;
2)
during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class A common stock and the conversion rate for the Notes on each such trading day; or
3)
upon the occurrence of certain specified corporate events.
Based on the closing price of our Class A common stock of $29.22 on October 31, 2019, the if-converted value of the Notes was lower than the principal amount. The price of our Class A common stock was not greater than or equal to 130% of the conversion price for 20 or more trading days during the 30 consecutive trading days ending on the last trading day of the quarter ended October 31, 2019, the Notes are not convertible for the fiscal quarter commencing after October 31, 2019.
On or after October 15, 2022, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing conditions.
Upon conversion of the Notes, we will pay or deliver, as the case may be, cash, shares of our Class A common stock or a combination of cash and shares of Class A common stock, at our election. We intend to settle the principal of the Notes in cash.
The conversion rate will be subject to adjustment in some events, but will not be adjusted for any accrued or unpaid interest. A holder who converts their Notes in connection with certain corporate events that constitute a "make-whole fundamental change" per the indenture governing the Notes are, under certain circumstances, entitled to an increase in the conversion rate. In addition, if we undergo a fundamental change prior to the maturity date, holders may require us to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the repurchased Notes, plus accrued and unpaid interest.
We may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.
In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying amount of the liability component of approximately $423.4 million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component of approximately $151.6 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component (the "debt discount") is amortized to interest expense using the effective interest method over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.
We incurred transaction costs related to the issuance of the Notes of approximately $11.5 million, consisting of an initial purchasers' discount of $10.8 million and other issuance costs of approximately $0.7 million. In accounting for the transaction costs, we allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were approximately $8.5 million, recorded as debt issuance costs (presented as contra debt in the condensed consolidated balance sheets), and are being amortized to interest expense over the term of the Notes. The transaction costs attributable to the equity component were approximately $3.0 million and were net with the equity component within stockholders’ equity.

20

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

The Notes consisted of the following:
 
As of
 
July 31,
2019
 
October 31,
2019
 
 
 
 
 
(in thousands)
Principal amounts:
 
 
 
Principal
$
575,000

 
$
575,000

Unamortized debt discount (1)
(109,956
)
 
(102,724
)
Unamortized debt issuance costs (1)
(6,134
)
 
(5,731
)
Net carrying amount
$
458,910

 
$
466,545

Carrying amount of equity component (2)
$
148,598

 
$
148,598

 
(1)
Included in the condensed consolidated balance sheets within convertible senior notes, net and amortized over the remaining life of the Notes using the effective interest rate method. The effective interest rate is 6.62%.
(2)
Included in the condensed consolidated balance sheets within additional paid-in capital, net of $3.0 million in equity issuance costs.
As of October 31, 2019, the remaining life of the Notes was approximately 38 months.
The following table sets forth the total interest expense recognized related to the Notes:
 
Three Months Ended
October 31,
 
2018
 
2019
 
 
 
 
 
(in thousands)
Interest expense related to amortization of debt discount
$
6,770

 
$
7,232

Interest expense related to amortization of debt issuance costs
378

 
403

Total interest expense
$
7,148


$
7,635


Note Hedges and Warrants
Concurrently with the offering of the Notes in January 2018, we entered into convertible note hedge transactions with certain bank counterparties, whereby we have the initial option to purchase a total of approximately 11.8 million shares of our Class A common stock at a conversion price of approximately $48.85 per share, subject to adjustment for certain specified events. The total cost of the convertible note hedge transactions was approximately $143.2 million. In addition, we sold warrants to certain bank counterparties, whereby the holders of the warrants have the initial option to purchase a total of approximately 11.8 million shares of our Class A common stock at a price of $73.46 per share, subject to adjustment for certain specified events. We received approximately $88.0 million in cash proceeds from the sale of these warrants.
Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to offset any actual dilution from the conversion of the Notes and to effectively increase the overall conversion price from $48.85 to $73.46 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded within stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions of approximately $55.2 million was recorded as a reduction to additional paid-in capital in the condensed consolidated balance sheets as of July 31, 2019 and October 31, 2019. The fair value of the note hedges and warrants are not remeasured each reporting period. The amounts paid for the note hedges were tax deductible expenses, while the proceeds received from the warrants were not taxable.

21

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Impact to Earnings per Share
The Notes will have no impact to diluted earnings per share ("EPS") until they meet the criteria for conversion, as discussed above, as we intend to settle the principal amount of the Notes in cash upon conversion. Under the treasury stock method, in periods when we report net income, we are required to include the effect of additional shares that may be issued under the Notes when the price of our Class A common stock exceeds the conversion price. Under this method, the cumulative dilutive effect of the Notes would be approximately 3.9 million shares if the average price of our Class A common stock was $73.46. However, upon conversion, there will be no economic dilution from the Notes, as exercise of the note hedges eliminate any dilution that would have otherwise occurred. The note hedges are required to be excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.
The warrants will have a dilutive effect when the average share price exceeds the warrant strike price of $73.46 per share. As the price of our Class A common stock continues to increase above the warrant strike price, additional dilution would occur at a declining rate so that a $10 increase from the warrant strike price would yield a cumulative dilution of approximately 4.9 million diluted shares for EPS purposes. However, upon conversion, the note hedges would neutralize the dilution from the Notes so that there would only be dilution from the warrants, which would result in an actual dilution of approximately 1.4 million shares at a common stock price of $83.46.
Note 6. LEASES
We have operating leases for offices, research and development facilities and datacenters. Our leases have remaining lease terms of one year to approximately seven years, some of which include options to renew or terminate. We do not include renewal options in the lease terms for calculating our lease liability, as we are not reasonably certain that we will exercise these renewal options at the time of the lease commencement. Our lease agreements do not contain any residual value guarantees or restrictive covenants.
Total operating lease cost was $8.7 million for the three months ended October 31, 2019, excluding short-term leases and variable lease costs, which are not material. Variable lease costs primarily include common area maintenance charges. Total lease expense recognized prior to our adoption of ASC 842 was $7.2 million for the three months ended October 31, 2018.
Supplemental balance sheet information related to leases is as follows:
 
As of
October 31, 2019
 
(in thousands)
Operating leases:
 
Operating lease right-of-use assets, gross
$
129,673

Accumulated amortization
(6,671
)
Operating lease right-of-use assets, net
$
123,002

 
 
Operating lease liabilities—current
$
29,968

Operating lease liabilities—non-current
118,410

Total operating lease liabilities
$
148,378

 
 
Weighted average remaining lease term (in years):
4.3

Weighted average discount rate:
5.6
%


22

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Supplemental cash flow and other information related to leases is as follows:
 
Three Months Ended October 31, 2019
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
8,750

 
 
Lease liabilities arising from obtaining right-of-use assets:
 
Operating leases
$
12,969


The undiscounted cash flows for our operating lease liabilities as of October 31, 2019 were as follows:
Fiscal Year Ending July 31:
Amount
 
(in thousands)
2020 (remaining nine months)
$
27,473

2021
38,901

2022
37,903

2023
36,083

2024
25,177

Thereafter
3,227

Total lease payments
168,764

Less: imputed interest
(20,386
)
Total lease obligation
148,378

Less: current lease obligations
29,968

Long-term lease obligations
$
118,410


As of October 31, 2019, we have additional operating lease commitments of approximately $32.7 million on an undiscounted basis for certain office leases that have not yet commenced. The majority of these operating leases will commence during the remainder of fiscal 2020, fiscal 2021 and fiscal 2022, with lease terms of two to nine years.
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, the following table summarizes the future minimum payments due under our operating leases as of July 31, 2019, reported under ASC 840:
Fiscal Year Ending July 31:
Amount
 
(in thousands)
2020
$
39,540

2021
41,909

2022
41,332

2023
40,695

2024
30,240

Thereafter
3,511

Total
$
197,227



23

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Note 7.    COMMITMENTS AND CONTINGENCIES
Purchase Commitments
In the normal course of business, we make commitments with our contract manufacturers and OEMs to ensure them a minimum level of financial consideration for their investment in our joint solutions. These commitments are based on revenue targets or on-hand inventory and non-cancelable purchase orders for non-standard components. We record a charge related to these items when we determine that it is probable a loss will be incurred and we are able to estimate the amount of the loss. Our historical charges have not been material. As of October 31, 2019, we had up to approximately $78.6 million of non-cancelable purchase obligations and other commitments pertaining to our daily business operations, and up to approximately $152.7 million in the form of guarantees to certain of our contract manufacturers and OEMs.
Legal Proceedings
Beginning on March 29, 2019, several purported securities class actions were filed in the United States District Court for the Northern District of California against us and two of our officers. The initial complaints generally alleged that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5. In July 2019, the court consolidated the actions into a single action, and appointed a lead plaintiff who, per the court-approved schedule, filed a consolidated amended complaint on September 9, 2019. The action is brought on behalf of those who purchased or otherwise acquired our stock between November 30, 2017 and May 30, 2019, inclusive. The consolidated amended complaint seeks monetary damages in an unspecified amount. On October 24, 2019, the defendants filed a motion to dismiss. This case is in the very early stages and we are not able to determine what, if any, liabilities will attach to these complaints.
Beginning on July 1, 2019, several shareholder derivative complaints were filed in each of the U.S. District Court for the Northern District of California, the Superior Court of California for the County of San Mateo and the Superior Court of California for the County of Santa Clara, naming (i) fourteen of Nutanix’s current and former officer and directors as defendants and (ii) the Company as a nominal defendant. The complaints generally allege claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment, all based on the same general underlying allegations that are contained in the securities class actions described above. The Superior Court complaints additionally allege insider trading and violation of California Corporations Code Section 25402 and the Santa Clara County Superior Court complaints further include additional claims for "abuse of control" and "gross mismanagement." In August 2019, the court consolidated the Santa Clara derivative actions into a single action, and on September 3, 2019, the court appointed a lead plaintiff pursuant to a stipulation filed by the plaintiffs. On September 17, 2019, the San Mateo court granted the plaintiff’s request for voluntary dismissal without prejudice. The defendants have not responded to any of the derivative actions to date. These cases are in the very early stages and we are not able to determine what, if any, liabilities will attach to these complaints.
We are not currently a party to any other legal proceedings that we believe to be material to our business or financial condition. From time to time, we may become party to various litigation matters and subject to claims that arise in the ordinary course of business.
Note 8.     STOCKHOLDERS’ EQUITY
We have two classes of authorized common stock, Class A common stock and Class B common stock. As of October 31, 2019, we had one billion shares of Class A common stock authorized, with a par value of $0.000025