Nutanix, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 92 Consolidated Balance Sheets 97 Consolidated Statements of Operations 98 Consolidated Statements of Comprehensive Loss 99 Consolidated Statements of Stockholders’ Deficit 100 Consolidated Statements of Cash Flows 101 Notes to Consolidated Financial Statements 103 Note 1: Overview and Summary of Significant Accounting Policies 103 Note 2: Revenue, Deferred Revenue and Deferred Commissions 113 Note 3: Fair Value Measurements 115 Note 4: Balance Sheet Components 118 Note 5: Convertible Senior Notes 121 Note 6: Leases 127 Note 7 : Commitments and Contingencies 129 Note 8 : Stockholders' Equity 132 Note 9 : Equity Incentive Plans 133 Note 10: Restructuring Charges 136 Note 1 1 : Net Loss Per Share 137 Note 12 : Income Taxes 138 Note 1 3: Segment Information 141 91 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Nutanix, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Nutanix, Inc. and subsidiaries (the "Company") as of July 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders' deficit, and cash flows, for each of the three years in the period ended July 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of July 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 21, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 92 Table of Contents Revenue Recognition — Refer to Notes 1 and 2 to the financial statements Critical Audit Matter Description The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers an enterprise cloud platform, which can be pre-installed on hardware or delivered separately, as well as related support subscriptions and professional services. Product revenue was $757.6 million and support, entitlements, and other services was $823.2 million for the year ended July 31, 2022. Significant judgment is exercised by the Company in determining revenue recognition for the Company’s customer contracts, and includes the following: • Determination of whether promised goods or services, such as hardware and software licenses, are capable of being distinct and are distinct in the context of the Company’s customer contracts which leads to whether they should be accounted for as individual or combined performance obligations. • Determination of standalone selling prices for each distinct performance obligation and for products and services that are not sold separately. • Determination of the timing of when revenue is recognized for each distinct performance obligation either over time or at a point in time. We identified revenue recognition as a critical audit matter because of these significant judgments required by management. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether revenue was recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s revenue recognition for the Company’s customer contracts included the following, among others: • We tested the effectiveness of controls related to the identification of distinct performance obligations, determination of the standalone selling prices, and the determination of the timing of revenue recognition. • We evaluated management’s significant accounting policies related to revenue recognition for reasonableness. • We selected a sample of recorded revenue transactions and performed the following procedures: – Obtaining and reading customer source documents and the contract for each selection, including master agreements and related amendments to evaluate if relevant contractual terms have been appropriately considered by management. – Evaluating management’s application of their accounting policy and tested revenue recognition for specific performance obligations by comparing management’s conclusions to the underlying contract, master agreement and any related amendments, if applicable. – Testing the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements. 93 Table of Contents • We evaluated the reasonableness of management’s estimate of standalone selling prices for products and services that are not sold separately by performing the following: – Assessing the appropriateness of the Company’s methodology and mathematical accuracy of the determined standalone selling prices. – Testing the completeness and accuracy of the source data utilized in management’s calculations. /s/ DELOITTE & TOUCHE LLP San Jose, California September 21, 2022 We have served as the Company’s auditor since 2013. 94 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Nutanix, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Nutanix, Inc. and subsidiaries (the “Company”) as of July 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended July 31, 2022, of the Company and our report dated September 21, 2022, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 95 Table of Contents /s/ DELOITTE & TOUCHE LLP San Jose, California September 21, 2022 96 Table of Contents NUTANIX, INC. CONSOLIDATE D BALANCE SHEETS As of July 31, 2021 July 31, 2022 (in thousands, except per share data) Assets Current assets: Cash and cash equivalents $ 285,723 $ 402,850 Short-term investments 928,006 921,429 Accounts receivable, net of allowances of $ 892 and $ 644 , respectively 180,781 124,559 Deferred commissions—current 110,935 115,356 Prepaid expenses and other current assets 56,816 93,787 Total current assets 1,562,261 1,657,981 Property and equipment, net 131,621 113,440 Operating lease right-of-use assets 105,903 118,740 Deferred commissions—non-current 232,485 252,234 Intangible assets, net 32,012 15,829 Goodwill 185,260 185,260 Other assets—non-current 27,954 22,265 Total assets $ 2,277,496 $ 2,365,749 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 47,056 $ 44,931 Accrued compensation and benefits 162,337 149,811 Accrued expenses and other current liabilities 39,404 49,232 Deferred revenue—current 636,421 720,993 Operating lease liabilities—current 42,670 39,801 Convertible senior notes, net—current — 145,456 Total current liabilities 927,888 1,150,224 Deferred revenue—non-current 676,502 724,545 Operating lease liabilities—non-current 86,599 89,782 Convertible senior notes, net 1,055,694 1,156,205 Derivative liability 500,175 — Other liabilities—non-current 42,679 35,161 Total liabilities 3,289,537 3,155,917 Commitments and contingencies (Note 7) Stockholders’ deficit: Preferred stock, par value of $ 0.000025 per share— 200,000 shares authorized as of July 31, 2021 and 2022; no shares issued and outstanding as of July 31, 2021 and 2022 — — Common stock, par value of $ 0.000025 per share— 1,200,000 ( 1,000,000 Class A, 200,000 Class B) and 1,042,004 ( 1,000,000 Class A, 42,004 Class B) shares authorized as of July 31, 2021 and 2022, respectively; 214,210 ( 208,579 Class A and 5,631 Class B) and 226,938 ( 226,938 Class A and zero Class B) shares issued and outstanding as of July 31, 2021 and 2022, respectively (1) 5 6 Additional paid-in capital 2,615,317 3,583,928 Accumulated other comprehensive loss ( 8 ) ( 6,076 ) Accumulated deficit ( 3,627,355 ) ( 4,368,026 ) Total stockholders’ deficit ( 1,012,041 ) ( 790,168 ) Total liabilities and stockholders’ deficit $ 2,277,496 $ 2,365,749 (1) Effective January 3, 2022, all of the then outstanding shares of Nutanix, Inc. Class B common stock were automatically converted into the same number of shares of Nutanix, Inc. Class A common stock. See Note 8 for further details. See the accompanying notes to the consolidated financial statements. 97 Table of Contents NUTANIX, INC. CONSOLIDATED STATEME NTS OF OPERATIONS Fiscal Year Ended July 31, 2020 2021 2022 (in thousands, except per share data) Revenue: Product $ 765,822 $ 705,804 $ 757,623 Support, entitlements and other services 541,860 688,560 823,173 Total revenue 1,307,682 1,394,364 1,580,796 Cost of revenue: Product 71,312 55,287 55,602 Support, entitlements and other services 215,377 236,619 265,554 Total cost of revenue 286,689 291,906 321,156 Gross profit 1,020,993 1,102,458 1,259,640 Operating expenses: Sales and marketing 1,160,389 1,052,508 978,704 Research and development 553,978 556,950 571,962 General and administrative 135,547 153,782 166,418 Total operating expenses 1,849,914 1,763,240 1,717,084 Loss from operations ( 828,921 ) ( 660,782 ) ( 457,444 ) Other expense, net ( 26,300 ) ( 354,991 ) ( 320,830 ) Loss before provision for income taxes ( 855,221 ) ( 1,015,773 ) ( 778,274 ) Provision for income taxes 17,662 18,487 19,264 Net loss $ ( 872,883 ) $ ( 1,034,260 ) $ ( 797,538 ) Net loss per share attributable to Class A and Class B common stockholders—basic and diluted (1) $ ( 4.48 ) $ ( 5.01 ) $ ( 3.62 ) Weighted average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted (1) 194,719 206,475 220,529 (1) Effective January 3, 2022, all of the then outstanding shares of Nutanix, Inc. Class B common stock were automatically converted into the same number of shares of Nutanix, Inc. Class A common stock. See Note 8 for further details. See the accompanying notes to the consolidated financial statements. 98 Table of Contents NUTANIX, INC. CONSOLIDATED STATEME NTS OF COMPREHENSIVE LOSS Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Net loss $ ( 872,883 ) $ ( 1,034,260 ) $ ( 797,538 ) Other comprehensive loss, net of tax: Change in unrealized loss on available-for-sale securities, net of tax 1,361 ( 2,038 ) ( 6,068 ) Comprehensive loss $ ( 871,522 ) $ ( 1,036,298 ) $ ( 803,606 ) See the accompanying notes to the consolidated financial statements. 99 Table of Contents NUTANIX, INC. CONSOLIDATED STATE MENTS OF STOCKHOLDERS’ DEFICIT Fiscal Year Ended July 31, 2022 Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Total Stockholders’ Shares Amount Capital Income (Loss) Deficit Deficit (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 10,034 — 7,024 — — 7,024 Issuance of common stock from ESPP purchase 3,320 — 50,630 — — 50,630 Stock-based compensation — — 351,998 — — 351,998 Other comprehensive income — — — 1,361 — 1,361 Net loss — — — — ( 872,883 ) ( 872,883 ) Balance - July 31, 2020 201,949 5 2,245,180 2,030 ( 2,522,192 ) ( 274,977 ) Issuance of common stock through employee equity incentive plans 13,457 — 15,601 — — 15,601 Issuance of common stock from ESPP purchase 3,980 — 50,167 — — 50,167 Repurchase and retirement of common stock ( 5,176 ) — ( 54,176 ) — ( 70,903 ) ( 125,079 ) Stock-based compensation — — 358,545 — — 358,545 Other comprehensive loss — — — ( 2,038 ) — ( 2,038 ) Net loss — — — — ( 1,034,260 ) ( 1,034,260 ) Balance - July 31, 2021 214,210 5 2,615,317 ( 8 ) ( 3,627,355 ) ( 1,012,041 ) Adoption of ASU 2020-06 — — ( 148,598 ) — 100,585 ( 48,013 ) 2026 Notes derivative liability reclassification — — 698,213 — — 698,213 Issuance of common stock through employee equity incentive plans 11,270 1 6,479 — — 6,480 Issuance of common stock from ESPP purchase 2,827 — 62,633 — — 62,633 Repurchase and retirement of common stock ( 1,369 ) — ( 14,852 ) — ( 43,718 ) ( 58,570 ) Unwinding of 2023 Notes hedges — — 39,880 — — 39,880 Unwinding of 2023 Notes warrants — — ( 18,390 ) — — ( 18,390 ) Stock-based compensation — — 343,246 — — 343,246 Other comprehensive loss — — — ( 6,068 ) — ( 6,068 ) Net loss — — — — ( 797,538 ) ( 797,538 ) Balance - July 31, 2022 226,938 $ 6 $ 3,583,928 $ ( 6,076 ) $ ( 4,368,026 ) $ ( 790,168 ) See the accompanying notes to the consolidated financial statements. 100 Table of Contents NUTANIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Cash flows from operating activities: Net loss $ ( 872,883 ) $ ( 1,034,260 ) $ ( 797,538 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 93,773 94,373 87,952 Stock-based compensation 351,998 358,545 343,246 Change in fair value of derivative liability — 269,265 198,038 Loss on debt extinguishment — — 64,910 Amortization of debt discount and issuance costs 31,313 63,859 40,233 Operating lease cost, net of accretion 30,374 34,757 36,905 Impairment and early exit of lease-related assets 3,002 1,420 597 Non-cash interest expense — 16,074 19,270 Other 324 6,380 9,282 Changes in operating assets and liabilities: Accounts receivable, net 4,334 64,483 60,998 Deferred commissions ( 61,816 ) ( 127,891 ) ( 24,170 ) Prepaid expenses and other assets 10,089 4,057 ( 36,166 ) Accounts payable ( 16,574 ) ( 5,762 ) ( 1,461 ) Accrued compensation and benefits 18,765 50,916 ( 19,674 ) Accrued expenses and other liabilities 3,400 14,824 4,049 Operating leases, net ( 28,394 ) ( 37,582 ) ( 46,773 ) Deferred revenue 272,410 126,732 127,845 Net cash (used in) provided by operating activities ( 159,885 ) ( 99,810 ) 67,543 Cash flows from investing activities: Maturities of investments 645,828 784,176 1,058,116 Purchases of investments ( 607,194 ) ( 1,392,737 ) ( 1,081,246 ) Sales of investments 75,413 70,055 17,999 Purchases of property and equipment ( 89,488 ) ( 58,647 ) ( 49,058 ) Net cash provided by (used in) investing activities 24,559 ( 597,153 ) ( 54,189 ) Cash flows from financing activities: Payments of debt extinguishment costs — — ( 14,709 ) Proceeds from unwinding of convertible note hedges — — 39,880 Payments for unwinding of warrants — — ( 18,390 ) Proceeds from sales of shares through employee equity incentive plans 57,797 65,766 67,826 Proceeds from the issuance of convertible notes, net of issuance costs — 723,617 88,687 Repurchases of common stock — ( 125,079 ) ( 58,570 ) Payment of finance lease obligations — ( 459 ) ( 1,089 ) Net cash provided by financing activities 57,797 663,845 103,635 Net (decrease) increase in cash, cash equivalents and restricted cash $ ( 77,529 ) $ ( 33,118 ) $ 116,989 Cash, cash equivalents and restricted cash—beginning of period 399,520 321,991 288,873 Cash, cash equivalents and restricted cash—end of period $ 321,991 $ 288,873 $ 405,862 Restricted cash (1) 3,254 3,150 3,012 Cash and cash equivalents—end of period $ 318,737 $ 285,723 $ 402,850 Supplemental disclosures of cash flow information: Cash paid for income taxes $ 16,625 $ 16,639 $ 20,353 Supplemental disclosures of non-cash investing and financing information: Purchases of property and equipment included in accounts payable and accrued and other liabilities $ 4,630 $ 12,832 $ 17,139 Finance lease liabilities arising from obtaining right-of-use assets $ — $ 8,299 $ 10,491 (1) Included within other assets—non-current in the consolidated balance sheets. 101 Table of Contents See the accompanying notes to the consolidated financial statements. 102 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. OVER VIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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, which we call the Nutanix Cloud Platform, that consists of software solutions and cloud services that power our customers’ enterprise infrastructure. Our solutions deliver a consistent cloud operating model across edge, private-, hybrid- and multicloud environments for all applications and their data. Our solutions allow organizations to simply move their workloads, including enterprise applications, high-performance databases, end-user computing and virtual desktop infrastructure ("VDI") services, container-based modern applications, and analytics applications, between on-premises and public clouds. Our solutions are primarily sold through channel partners and original equipment manufacturers ("OEMs") (collectively, "Partners"), and delivered directly to our end customers. Principles of Consolidation The accompanying 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"). All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our 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 credit losses; 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; 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 right-of-use assets and lease liabilities; the inputs used to determine the fair value of the contingent liability associated with the conversion feature of the 2.50 % convertible senior notes due 2026 (the "2026 Notes"); 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. In response to the ongoing and continuously evolving COVID-19 pandemic, we considered the impact of the economic implications on our critical and significant accounting estimates, including assessment of collectibility of customer contracts, valuation of accounts receivable, provision for purchase commitments to our contract manufacturers and impairment of long-lived assets, right-of-use assets, and deferred commissions. 103 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Concentration of Risk Credit Risk — Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. We invest only in high-quality credit instruments and maintain our cash and cash equivalents and available-for-sale investments in fixed income securities. Management believes that the financial institutions that hold our investments are financially sound and, accordingly, are subject to minimal credit risk. Our deposits are with multiple institutions, however such deposits may exceed federally insured limits. We provide credit, in the normal course of business, to a number of companies and perform credit evaluations of our customers. Concentration of Revenue and Accounts Receivable — We sell our products primarily through our Partners and occasionally directly to end customers. For the fiscal years ended July 31, 2020, 2021 and 2022 , no end customer accounted for more than 10 % of total revenue or accounts receivable. 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 Fiscal Year Ended July 31, July 31, 2021 July 31, 2022 Partners 2020 2021 2022 Partner A 29 % 32 % 33 % 35 % 26 % Partner B 14 % 15 % 15 % 23 % 11 % Partner C (1) 10 % 11 % (1) (1) (1) Less than 10% Summary of Significant Accounting Policies Cash, Cash Equivalents and Short-Term Investments We classify all highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months as marketable securities. We determine the appropriate classification of our marketable securities at the time of purchase and reevaluate such designation as of each balance sheet date. We classify and account for our marketable securities as available-for-sale securities. We classify our marketable securities with stated maturities greater than twelve months as short-term investments due to our intent and ability to use these securities to support our current operations. Our marketable securities are recorded at their estimated fair value. Unrealized gains or losses on available-for-sale securities are reported in other comprehensive income (loss). We periodically review whether our securities may be other-than-temporarily impaired, including whether or not (i) we have the intent to sell the security or (ii) it is more likely than not that we will be required to sell the security before its anticipated recovery. If one of these factors is met, we will record an impairment loss associated with our impaired investment. The impairment loss will be recorded as a write-down of investments in our consolidated balance sheets and a realized loss within other expense in our consolidated statements of operations. 104 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair Value Measurement We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which to transact and the market-based risk. We apply fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in our consolidated financial statements on a recurring basis. The carrying amounts reported in our consolidated financial statements for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature. The fair value of the 0 % convertible senior notes due 2023 (the "2023 Notes") is determined based on the closing trading price per $ 100 of the 2023 Notes as of the last day of trading for the period. The fair value of the 2.50 % convertible senior notes due 2026 is determined based on a binomial model. The fair value of the 0.25 % convertible senior notes due 2027 (the "2027 Notes") is determined based on the closing trading price per $ 100 of the 2027 Notes as of the last day of trading for the period. Convertible Senior Notes Our convertible senior notes, including any embedded conversion features, are accounted for under the traditional convertible debt accounting model and are treated as a liability, net of unamortized issuance costs. The carrying amount of the liability is classified as a current liability if we have committed to settle with current assets; otherwise, it is classified as a long-term liability, as we retain the option to settle conversion requests in shares of our Class A common stock. The embedded conversion features are not remeasured as long as they do not meet the separation requirement of a derivative; otherwise, they are classified as derivative instruments and accounted for as such. Issuance costs are amortized to interest expense using the effective interest rate method over the term of the notes. In accounting for conversions of the notes, the carrying amount of the converted notes is reduced by the total consideration paid or issued for the respective converted notes and the difference is recorded to additional paid-in capital on our consolidated balance sheets. In accounting for extinguishments of the notes, the reacquisition price of the extinguished notes is compared to the carrying amount of the respective extinguished notes and a gain or loss is recorded in other expense, net on our consolidated statements of operations. Derivative Liability We evaluate convertible notes or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification ("ASC") 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity. The result of this accounting guidance could result in the fair value of a financial instrument being classified as a derivative instrument and recorded at fair market value at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded on our consolidated statements of operations as other income or other expense. Once the criteria for conversion is fixed, the derivative instrument is marked to fair value and reclassified to equity. Accounts Receivable and Allowance for Credit Losses Accounts receivable are recorded at the invoiced amount, net of an allowance for credit losses. Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for credit losses. 105 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The allowance for credit losses is based on the best estimate of the amount of probable credit losses in existing accounts receivable. We assess credit losses on accounts receivable by taking into consideration past collection experience, the credit quality of the customer, the age of the receivable balance, current and future economic conditions, and forecasts that may affect the collectibility of the reported amount. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings or substantial downgrading of credit ratings), we record an allowance for credit losses in order to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we record an allowance for credit losses based on the length of time the receivable is past due and our historical experience of collections and write-offs. The changes in the allowance for credit losses are as follows: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Allowance for credit losses—beginning balance $ 379 $ 804 $ 892 Charged to allowance for credit losses 822 655 200 Recoveries ( 22 ) ( 286 ) ( 80 ) Write-offs ( 375 ) ( 281 ) ( 368 ) Allowance for credit losses—ending balance $ 804 $ 892 $ 644 Property and Equipment Property and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. We include the cost to acquire demonstration units and the related accumulated depreciation in property and equipment as such units are generally not available for sale. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets. Leases 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 consolidated balance sheet as of July 31, 2022. Finance leases are included in property and equipment, net, accrued expenses and other current liabilities and other liabilities—non-current in our consolidated balance sheet as of July 31, 2022. 106 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Right-of-use assets ("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. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. 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. 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 Accounting Standards Update ("ASU") 2016-02, Leases ("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 consolidated statements of operations. We present lease payments within cash flows from operations within our consolidated statements of cash flows. For our operating leases, we account for lease and non-lease components as a single lease component. Additionally, we do not record leases on our consolidated balance sheet that have a lease term of 12 months or less at the lease commencement date. Goodwill, Intangible Assets and Other Long-Lived Assets Goodwill represents the future economic benefits arising from other assets acquired in a business combination or an acquisition that are not individually identified and separately recorded. The excess of the purchase price over the estimated fair value of net assets of businesses acquired in a business combination is recognized as goodwill. Intangible assets consist of identifiable intangible assets, including developed technology, customer relationships and trade names, resulting from business combinations. Finite-lived intangible assets are recorded at fair value, net of accumulated amortization. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense is included as a component of cost of product revenue and sales and marketing expense in the accompanying consolidated statements of operations. Amounts included in sales and marketing expense relate to customer relationships. Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually, as of May 1 of each year. Such goodwill and other intangible assets may also be tested for impairment between annual tests in the presence of impairment indicators such as, but not limited to: (i) a significant adverse change in legal factors or in the business climate; (ii) a substantial decline in our market capitalization; (iii) an adverse action or assessment by a regulator; (iv) unanticipated competition; (v) loss of key personnel; (vi) a more likely-than-not expectation of the sale or disposal of a reporting unit or a significant portion thereof; (vii) a realignment of our resources or restructuring of our existing businesses in response to changes to industry and market conditions; (viii) testing for recoverability of a significant asset group within a reporting unit; or (ix) a higher discount rate used in the impairment analysis as impacted by an increase in interest rates. 107 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Goodwill is tested for impairment by comparing the reporting unit's carrying value, including goodwill, to the fair value of the reporting unit. We operate under one reporting unit and for our annual goodwill impairment test, we determine the fair value of our reporting unit based on our enterprise value. We may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. If, after assessing the qualitative factors, we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying value, an impairment analysis will be performed. We compare the fair value of our reporting unit with its carrying amount and if the carrying value of the reporting unit exceeds its fair value, an impairment loss will be recognized. Long-lived assets, such as property and equipment and finite-lived intangible assets subject to depreciation and amortization, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Among the factors and circumstances we consider in determining recoverability are: (i) a significant decrease in the market price of a long-lived asset; (ii) a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisition; and (v) current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. There have been no indicators of impairment of goodwill, intangible assets or other long-lived assets and we did not record any material impairment losses during fiscal 2020, 2021 or 2022 . Revenue Recognition The core principle of ASC 606 is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This principle is achieved by applying the following five-step approach: • Identification of the contract, or contracts, with a customer — A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. 108 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) • Identification of the performance obligations in the contract — Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or services either on their own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. • Determination of the transaction price — The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer. • Allocation of the transaction price to the performance obligations in the contract — If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price ("SSP"). We determine SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, we estimate the SSP, taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. • Recognition of revenue when, or as, performance obligations are satisfied — We satisfy performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied with the transfer of a promised good or service to a customer. For additional details on revenue recognition, refer to Note 2 of Notes to Consolidated Financial Statements. Contracts with multiple performance obligations — The majority 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 credit losses. 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 our consolidated balance sheets, was not material for any of the periods presented. Payment terms on invoiced amounts are typically 30-45 days. We assess credit losses on accounts receivable by taking into consideration past collection experience, the credit quality of the customer, the age of the receivable balance, current and future economic conditions, and forecasts that may affect the collectibility of the reported amount. The balance of accounts receivable, net of allowance for credit losses, as of July 31, 2021 and 2022 is presented in the accompanying consolidated balance sheets. 109 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 our 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 recognized 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 initial contract. Accordingly, deferred costs are recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation over the entire period of benefit and included in sales and marketing expense in our 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. Taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our customers are presented on a net basis in our consolidated statements of operations. 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 consolidated balance sheet date. Cost of Revenue Cost of revenue consists of cost of product revenue and cost of support, entitlements and other services revenue. Personnel costs associated with our operations and global customer support organizations consist of salaries, benefits and stock-based compensation. Allocated costs consist of certain facilities, depreciation and amortization, recruiting and information technology costs allocated based on headcount. Warranties We generally provide a one-year warranty on hardware sold by us and a 90-day warranty on software licenses. The hardware warranty provides for parts replacement for defective components and the software warranty provides for bug fixes. With respect to the hardware warranty obligation, we have a warranty agreement with our contract manufacturers under which the OEMs are generally required to replace defective hardware within three years of shipment. Furthermore, our post-contract customer support ("PCS") agreements provide for the same parts replacement that customers are entitled to under the warranty program, except that replacement parts are delivered according to targeted response times to minimize disruption to the customers’ critical business applications. Substantially all customers purchase PCS agreements. Given the warranty agreement with our OEMs and considering that substantially all products are sold together with PCS agreements, we generally have very limited exposure related to warranty costs and therefore no warranty reserve has been recognized. 110 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Research and Development Our research and development expense consists primarily of product development personnel costs, including salaries and benefits, stock-based compensation and allocated facilities costs. Research and development costs are expensed as incurred. Currently, we expense the software development costs incurred in the research and development of new products and enhancements to existing products as incurred, as from the inception of the product development, our software products are primarily intended to be marketed and sold to customers on-premises, either standalone and/or with other product offerings. Stock-Based Compensation Stock-based compensation expense is measured based on the grant date fair value of share-based awards. The fair value of the purchase rights under our 2016 Employee Stock Purchase Plan ("2016 ESPP") is estimated using the Black-Scholes-Merton ("Black-Scholes") option pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions regarding a number of subjective variables. These variables include the expected common stock price volatility over the term of the awards, the expected term of the awards, risk-free interest rates and expected dividend yield. The fair value of restricted stock units ("RSUs") is determined using the fair value of our common stock on the date of grant. We grant stock awards with service conditions only and with both service and performance or market-based conditions. We recognize stock-based compensation expense for employee stock awards with a service condition only using the straight-line method over the requisite service period of the awards, which is generally the vesting period. We use the graded vesting attribution method to recognize stock-based compensation expense related to employee stock awards that contain both service and performance or market-based conditions. The fair value of the 2016 ESPP purchase rights is recognized as expense on a straight-line basis over the offering period. We account for forfeitures of all share-based awards when they occur. Foreign Currency The functional currency of our foreign subsidiaries is the U.S. dollar. Transactions denominated in currencies other than the functional currency are remeasured at the average exchange rate in effect during the reporting period. At the end of each reporting period all monetary assets and liabilities of our subsidiaries are remeasured at the current U.S. dollar exchange rate at the end of the reporting period. Remeasurement gains and losses are included within other expense, net in the accompanying consolidated statements of operations. During the fiscal years ended July 31, 2020, 2021 and 2022 , we recognized foreign currency losses of $ 9.4 million, $ 8.9 million and $ 3.2 million, respectively. To date, we have not undertaken any hedging transactions related to foreign currency exposure. Segments Our chief operating decision maker is a group which is comprised of our Chief Executive Officer and Chief Financial Officer. This group allocates resources and assesses financial performance based upon discrete financial information at the consolidated level. Accordingly, we have determined that we operate as a single operating and reportable segment. 111 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Income Taxes We account for income taxes using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance on amounts that are more likely than not to be realized. We record a liability for uncertain tax positions if it is not more likely than not to be sustained based solely on its technical merits as of the reporting date. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes. Advertising Costs Advertising costs are charged to sales and marketing expenses as incurred in our consolidated statements of operations. During the fiscal years ended July 31, 2020, 2021 and 2022 , advertising expense was $ 38.7 million, $ 22.1 million and $ 13.7 million, respectively. Recently Adopted Accounting Pronouncements In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the interest rate of convertible debt instruments typically will be closer to the coupon interest rate. ASU 2020-06 also provides for certain disclosures with regard to convertible instruments and associated fair values. We early adopted the new standard using the modified retrospective method effective August 1, 2021 and have not changed any previously disclosed amounts or provided additional disclosures for the comparative periods. The adoption of this new guidance resulted in an increase in the carrying value of the 2023 Notes by approximately $ 48.0 million to reflect the full principal amount of the convertible notes outstanding, net of issuance costs, a decrease in additional paid-in capital of approximately $ 148.6 million to remove the equity component separately recorded for the conversion feature associated with the 2023 Notes, and a cumulative-effect adjustment of approximately $ 100.6 million to the accumulated deficit beginning balance as of August 1, 2021 . The remaining debt issuance costs will continue to be amortized over the term of the 2023 Notes. The new standard had no impact on the 2026 Notes, as the embedded conversion feature on the 2026 Notes was initially accounted for as a derivative liability. 112 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In May 2021, the FASB issued ASU 2021-04, Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, which provides guidance on modifications or exchanges of a freestanding equity-classified written call option (such as warrants). An entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument, and provides further guidance on measuring the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 also provides guidance on the recognition of the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. The new standard is effective for all entities for fiscal years beginning after December 15, 2021, with early adoption permitted, including interim periods within those fiscal years. We early adopted the new standard effective August 1, 2021 and the adoption did not have a material impact on our consolidated financial statements. 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. When the software license is not portable to other appliances, it can be used over 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, can be purchased from one of our OEMs or, in limited cases, directly from Nutanix. Our enterprise cloud platform typically includes one or more years of support and entitlements, which provides customers with 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. The following table depicts the disaggregation of revenue by revenue type, consistent with how we evaluate our financial performance: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Subscription $ 1,030,180 $ 1,243,621 $ 1,433,773 Non-portable software 208,158 71,390 49,694 Hardware 23,455 6,259 5,585 Professional services 45,889 73,094 91,744 Total revenue $ 1,307,682 $ 1,394,364 $ 1,580,796 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 $ 508.8 million, $ 639.3 million and $ 770.4 million of our subscription revenue for fiscal 2020, 2021 and 2022, respectively. 113 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) • 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 $ 521.3 million, $ 604.3 million and $ 663.4 million of our subscription revenue for fiscal 2020, 2021 and 2022, 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 can be used over 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 the hardware appliance is purchased directly from Nutanix, 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. Significant changes in the balance of deferred revenue (contract liability) and deferred commissions (contract asset) for the periods presented are as follows: Deferred Revenue Deferred Commissions (in thousands) Balance as of July 31, 2020 $ 1,183,441 $ 215,528 Additions (1) 1,523,846 310,966 Revenue/commissions recognized ( 1,394,364 ) ( 183,074 ) Balance as of July 31, 2021 1,312,923 343,420 Additions (1) 1,713,411 229,524 Revenue/commissions recognized ( 1,580,796 ) ( 205,354 ) Balance as of July 31, 2022 $ 1,445,538 $ 367,590 (1) Includes both billed and unbilled amounts. During the fiscal year ended July 31, 2021 , we recognized revenue of approximately $ 488.2 million pertaining to amounts deferred as of July 31, 2020. During the fiscal year ended July 31, 2022 , we recognized revenue of approximately $ 592.6 million pertaining to amounts deferred as of July 31, 2021. Many 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 $ 1.6 billion as of July 31, 2022 , of which we expect to recognize approximately 54 % over the next 12 months, and the remainder thereafter. 114 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. FAIR VALUE MEASUREMENTS The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value as follows: • Level I — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; • Level II — Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and • Level III — Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. Assets Measured at Fair Value on a Recurring Basis Cash equivalents and short-term investments Our money market funds are classified within Level I due to the highly liquid nature of these assets and have unadjusted inputs, quoted prices in active markets for these assets at the measurement date from the financial institution that carries these investment securities. Our investments in available-for-sale debt securities such as commercial paper, corporate bonds and U.S. government securities are classified within Level II. The fair value of these securities is priced by using inputs based on non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. The fair value of our financial assets measured on a recurring basis is as follows: As of July 31, 2021 Level I Level II Level III Total (in thousands) Financial Assets: Cash equivalents: Money market funds $ 72,583 $ — $ — $ 72,583 Commercial paper — 29,997 — 29,997 Corporate bonds — 2,002 — 2,002 Short-term investments: Corporate bonds — 513,688 — 513,688 Commercial paper — 347,088 — 347,088 U.S. Government securities — 67,230 — 67,230 Total measured at fair value $ 72,583 $ 960,005 $ — $ 1,032,588 Cash 181,141 Total cash, cash equivalents and short-term investments $ 1,213,729 115 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of July 31, 2022 Level I Level II Level III Total (in thousands) Financial Assets: Cash equivalents: Money market funds $ 227,796 $ — $ — $ 227,796 Commercial paper — 27,927 — 27,927 Short-term investments: Corporate bonds — 409,024 — 409,024 Commercial paper — 317,738 — 317,738 U.S. Government securities — 194,667 — 194,667 Total measured at fair value $ 227,796 $ 949,356 $ — $ 1,177,152 Cash 147,127 Total cash, cash equivalents and short-term investments $ 1,324,279 Financial Instruments Not Recorded at Fair Value on a Recurring Basis We report our financial instruments at fair value, with the exception of the 2023 Notes, the 2026 Notes and the 2027 Notes (collectively, the "Notes"). Financial instruments that are not recorded at fair value on a recurring basis 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, 2021 (1) As of July 31, 2022 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value (in thousands) 2023 Notes $ 523,671 $ 602,272 $ 145,456 $ 143,154 2026 Notes 532,023 1,128,953 589,200 759,086 2027 Notes (2) — — 567,005 400,252 Total $ 1,055,694 $ 1,731,225 $ 1,301,661 $ 1,302,492 (1) Prior period amounts have not been adjusted due to our adoption of ASU 2020-06 under the modified retrospective method. For additional information on our adoption of ASU 2020-06, refer to Note 1 and Note 5. (2) The 2027 Notes were issued in September 2021. The carrying value of the 2023 Notes as of July 31, 2021 was net of an unamortized debt discount of $ 48.6 million and unamortized debt issuance costs of $ 2.7 million, respectively. The carrying value of the 2023 Notes as of July 31, 2022 was net of unamortized debt issuance costs of $ 0.2 million. The carrying value of the 2026 Notes as of July 31, 2021 and 2022 included $ 8.9 million and $ 28.0 million, respectively, of non-cash interest expense that was converted to the principal balance, net of unamortized debt discounts of $ 203.6 million and $ 169.4 million, respectively, and unamortized debt issuance costs of $ 23.3 million and $ 19.4 million, respectively. The carrying value of the 2027 Notes as of July 31, 2022 was net of unamortized debt issuance costs of $ 8.0 million. The total estimated fair value of the 2023 Notes was determined based on the closing trading price per $ 100 of the 2023 Notes as of the last day of trading for the period. We consider the fair value of the 2023 Notes to be a Level 2 valuation due to the limited trading activity. 116 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The total estimated fair value of the 2026 Notes is based on a binomial model. We consider the fair value of the 2026 Notes to be a Level 3 valuation, as the 2026 Notes are not publicly traded. The Level 3 inputs used are the same as those used to determine the estimated fair value of the associated derivative liability, as detailed below. The total estimated fair value of the 2027 Notes was determined based on the closing trading price per $ 100 of the 2027 Notes as of the last day of trading for the period. We consider the fair value of the 2027 Notes to be a Level 2 valuation due to the limited trading activity. Derivative Liability The conversion feature of the 2026 Notes represented an embedded derivative at inception. The 2026 Notes are not considered to be conventional debt and we determined that the embedded conversion feature was required to be bifurcated from the host debt and accounted for as a derivative liability, as the 2026 Notes were convertible into a variable number of shares until the conversion price became fixed in September 2021, based on the level of achievement of the associated financial performance metric. As such, the initial fair value of the derivative instrument was recorded as a liability in our consolidated balance sheet with the corresponding amount recorded as a discount to the 2026 Notes upon issuance. The derivative liability is considered a Level 3 valuation and was recorded at its estimated fair value at the end of each reporting period and as of September 15, 2021, when the conversion price became fixed, with the change in fair value recognized within other expense, net in our consolidated statements of operations. On September 15, 2021, the conversion price of the 2026 Notes became fixed and the bifurcated liability was no longer accounted for as a separate derivative because the conversion features are now considered indexed to our own equity and meet the equity classification conditions. We estimated the fair value of the derivative liability as of September 15, 2021 to be $ 698.2 million, which was reclassified to equity on that date. The following table shows the change in the estimated fair value of the derivative liability through October 31, 2021. There was no change to the estimated fair value of the derivative liability subsequent to October 31, 2021, as it was reclassified to equity. Three Months Ended October 31, 2021 (in thousands) Derivative liability at July 31, 2021 $ 500,175 Change in fair value 198,038 Derivative liability at September 15, 2021 698,213 Reclass to equity upon conversion price becoming fixed ( 698,213 ) Derivative liability at October 31, 2021 $ — We estimated the fair value of the derivative liability using a binomial model, with the following valuation inputs: As of July 31, 2021 September 15, 2021 Conversion ratio (1) Conversion price of $ 27.75 with a 36.036 conversion rate per $1,000 Conversion price of $ 27.75 with a 36.036 conversion rate per $1,000 Risk-free rate 0.7 % 0.8 % Discount rate (2) 6.5 % 6.5 % Volatility 40.0 % 45.0 % Stock price $ 36.02 $ 42.77 (1) The conversion ratio was calculated based on the achievement of the associated financial performance metric. (2) The discount rate was estimated based on the implied rate for the 2023 Notes as well as a credit analysis. 117 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. BALANCE SHEET COMPONENTS Short-Term Investments The amortized cost of our short-term investments approximates their fair value. Unrealized losses related to our short-term investments are generally due to interest rate fluctuations, as opposed to credit quality. However, we review individual securities that are in an unrealized loss position in order to evaluate whether or not they have experienced or are expected to experience credit losses that would result in a decline in fair value. As of July 31, 2021 and 2022, unrealized gains and losses from our short-term investments were not material and were not the result of a decline in credit quality. As a result, at July 31, 2021 and 2022, we did not record any credit losses 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 July 31, 2022 (in thousands) Due within one year $ 770,454 Due in one to two years 150,975 Total $ 921,429 Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consists of the following: As of July 31, 2021 2022 (in thousands) Prepaid operating expenses $ 36,455 $ 48,842 VAT receivables 8,290 7,514 Other current assets 12,071 37,431 Total prepaid expenses and other current assets $ 56,816 $ 93,787 The increase in other current assets from July 31, 2021 to July 31, 2022 was due primarily to the addition of a receivable for the estimated recovery of our settlement offer and certain legal fees and professional expenses payable under our applicable insurance policies related to certain litigation matters, as well as the addition of tenant improvement allowances receivable within the next 12 months. 118 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Property and Equipment, Net Property and equipment, net consists of the following: Estimated As of July 31, Useful Life 2021 2022 (in months) (in thousands) Computer, production, engineering and other equipment 36 $ 300,583 $ 341,536 Demonstration units 12 68,992 61,914 Leasehold improvements (1) 62,676 61,443 Furniture and fixtures 60 16,518 16,508 Total property and equipment, gross 448,769 481,401 Less: accumulated depreciation (2) ( 317,148 ) ( 367,961 ) Total property and equipment, net $ 131,621 $ 113,440 (1) Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining lease term. (2) Includes a $ 0.9 million write-off related to the impairment of certain leasehold improvements during the fiscal year ended July 31, 2021. For additional information on this lease-related impairment, refer to Note 6. Depreciation expense related to our property and equipment was $ 76.4 million, $ 76.5 million and $ 69.3 million for the fiscal years ended July 31, 2020, 2021 and 2022, respectively. Intangible Assets, Net Intangible assets, net consists of the following: As of July 31, 2021 2022 (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 ( 50,764 ) ( 64,344 ) Accumulated amortization of customer relationships ( 6,513 ) ( 8,074 ) Accumulated amortization of trade name ( 3,041 ) ( 4,083 ) Total accumulated amortization ( 60,318 ) ( 76,501 ) Total intangible assets, net $ 32,012 $ 15,829 Amortization expense related to our intangible assets is being recognized in our consolidated statements of operations within product cost of revenue for developed technology and sales and marketing expense for customer relationships and trade name. 119 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The changes in the net book value of intangible assets, net are as follows: As of July 31, 2021 2022 (in thousands) Intangible assets, net—beginning balance $ 49,392 $ 32,012 Amortization of intangible assets (1) ( 17,380 ) ( 16,183 ) Intangible assets, net—ending balance $ 32,012 $ 15,829 (1) Represents amortization expense related to intangible assets recognized during the year in our consolidated statements of operations, within product cost of revenue and sales and marketing expense . The estimated future amortization expense of our intangible assets is as follows: Fiscal Year Ending July 31: Amount (in thousands) 2023 $ 10,856 2024 3,210 2025 1,763 Total $ 15,829 Goodwill There was no change in the carrying amount of goodwill during the fiscal years ended July 31, 2021 or 2022. Accrued Compensation and Benefits Accrued compensation and benefits consists of the following: As of July 31, 2021 2022 (in thousands) Accrued commissions $ 48,321 $ 32,886 Accrued vacation 26,961 23,140 Payroll taxes payable 21,603 21,060 Accrued wages and taxes 1,675 20,807 Contributions to ESPP withheld 26,735 19,174 Accrued benefits 10,243 11,774 Accrued bonus 14,878 9,782 Other 11,921 11,188 Total accrued compensation and benefits $ 162,337 $ 149,811 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consists of the following: As of July 31, 2021 2022 (in thousands) Income taxes payable $ 13,309 $ 13,206 Accrued professional services 3,541 5,499 Other 22,554 30,527 Total accrued expenses and other current liabilities $ 39,404 $ 49,232 120 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5. CONVERTIBLE SENIOR NOTES 2023 Notes In January 2018, we issued the 2023 Notes with a 0 % interest rate for an aggregate principal amount of $ 575.0 million, due in 2023, 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 2023 Notes that we issued resulting from initial purchasers fully exercising their option to purchase additional notes. There are no required principal payments on the 2023 Notes prior to their maturity. The total net proceeds from the issuance of the 2023 Notes were 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 2023 Notes do not bear any interest and will mature on January 15, 2023, unless earlier converted or repurchased in accordance with their terms. The 2023 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. Each $ 1,000 of principal of the 2023 Notes is initially 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 2023 Notes may convert their 2023 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 2023 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 2023 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 $ 15.13 on July 31, 2022 , the if-converted value of the 2023 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 July 31, 2022. As such, the 2023 Notes are not convertible for the fiscal quarter commencing after July 31, 2022. 121 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On or after October 15, 2022, holders may convert all or any portion of their 2023 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 2023 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 2023 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 2023 Notes in connection with certain corporate events that constitute a "make-whole fundamental change" per the indenture governing the 2023 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 2023 Notes at a repurchase price equal to 100 % of the principal amount of the repurchased 2023 Notes, plus accrued and unpaid interest. We may not redeem the 2023 Notes prior to the maturity date, and no sinking fund is provided for the 2023 Notes. On September 22, 2021, we consummated privately negotiated exchanges with certain holders of the outstanding 2023 Notes, pursuant to which such holders exchanged approximately $ 416.5 million in aggregate principal amount of 2023 Notes for $ 477.3 million in aggregate principal amount of 2027 Notes. We also entered into privately negotiated transactions with certain holders of the 2023 Notes pursuant to which we repurchased approximately $ 12.8 million in aggregate principal amount of 2023 Notes for cash. Following the closing of these exchanges and repurchases, approximately $ 145.7 million in aggregate principal amount of 2023 Notes remains outstanding with terms unchanged. The 2023 Notes consisted of the following: As of July 31, 2021 2022 (in thousands) Principal amounts: Principal $ 575,000 $ 145,704 Unamortized debt discount (1) ( 48,616 ) — Unamortized debt issuance costs (1) ( 2,713 ) ( 248 ) Net carrying amount $ 523,671 $ 145,456 Carrying amount of equity component (2) $ 148,598 $ — (1) Included in our consolidated balance sheets within convertible senior notes, net and amortized over the remaining life of the 2023 Notes using the effective interest rate method. As of July 31, 2021, the effective interest rate was 6.62 %. As of July 31, 2022, the effective interest rate was 0.41 %. (2) Included in our consolidated balance sheets as of July 31, 2021 within additional paid-in capital, net of $ 3.0 million in equity issuance costs. As of July 31, 2022 , the remaining life of the 2023 Notes was approximately 5 months . 122 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table sets forth the total interest expense recognized related to the 2023 Notes: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Interest expense related to amortization of debt discount $ 29,658 $ 31,682 $ — Interest expense related to amortization of debt issuance costs 1,654 1,767 844 Total interest expense $ 31,312 $ 33,449 $ 844 Note Hedges and Warrants Concurrently with the offering of the 2023 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 2023 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 our consolidated balance sheets as of July 31, 2021 and 2022. 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. In September 2021, in connection with the exchange and repurchase transactions described above, we terminated portions of the convertible note hedge transactions and warrant transactions previously entered into with certain financial institutions in connection with the issuance of the 2023 Notes. The net effect of these unwind transactions was a $ 21.5 million cash payment received, consisting of an $ 18.4 million payment for the warrant unwind and the receipt of $ 39.9 million from the hedge unwind. The amounts paid and received as part of the unwind transactions were recorded to additional paid-in capital within our consolidated balance sheet. The note hedges are required to be excluded from the calculation of diluted earnings per share ("EPS"), as they would be antidilutive. In periods when we report a net loss, basic net loss per share and diluted net loss per share are the same, as the effect of potential common shares is antidilutive, and the potential impact of the 2023 Notes is therefore excluded. 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 0.4 million diluted shares for EPS purposes. However, upon conversion, the note hedges would neutralize the dilution from the 2023 Notes so that there would only be dilution from the warrants, which would result in an actual dilution of approximately 2.1 million shares at a common stock price of $ 83.46 . 123 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2026 Notes In September 2020, we issued $ 750.0 million in aggregate principal amount of the 2026 Notes to BCPE Nucleon (DE) SVP, LP, an entity affiliated with Bain Capital, LP ("Bain"). The total net proceeds from this offering were approximately $ 723.72 million, after deducting $ 26.3 million of debt issuance costs. The 2026 Notes bear interest at a rate of 2.5 % per annum, with such interest to be paid in kind ("PIK") on the 2026 Notes held by Bain through an increase in the principal amount of the 2026 Notes, and paid in cash on any 2026 Notes transferred to entities that are not affiliated with Bain. Interest on the 2026 Notes has accrued from the date of issuance (September 24, 2020) and is added to the principal amount on a semi-annual basis (on March 15 and September 15 of each year, beginning on March 15, 2021). The 2026 Notes mature on September 15, 2026, subject to earlier conversion, redemption or repurchase. The 2026 Notes are convertible into our shares of Class A common stock based on an initial conversion rate of 36.036 shares of common stock per $ 1,000 principal amount of the 2026 Notes, which is equal to an initial conversion price of $ 27.75 per share, subject to customary anti-dilution and other adjustments, including in connection with any make-whole adjustments as a result of certain extraordinary transactions. In September 2021, the one-year anniversary of the issuance of the 2026 Notes, the conversion price was subject to a one-time adjustment, based on the level of achievement of certain financial milestones and as a result, the conversion price became fixed at $ 27.75 per share. On or after September 15, 2025, the 2026 Notes will be redeemable by us in the event that the closing sale price of our Class A common stock has been at least 150 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide the redemption notice, for cash, at a redemption price of 100 % of the principal amount of such 2026 Notes, plus any accrued and unpaid interest to, but excluding, the redemption date. With certain exceptions, upon a change of control or a fundamental change, the holders of the 2026 Notes may require us to repurchase all or part of the principal amount of the 2026 Notes at a repurchase price equal to 100 % of the principal amount of the 2026 Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date. In addition, we will, in certain circumstances, increase the conversion rate for any 2026 Notes converted in connection with a change of control or a fundamental change. In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with the 2026 Notes from the respective host debt instrument, which is treated as a debt discount, and initially recorded the conversion option of $ 230.9 million as a derivative liability in our consolidated balance sheet, with the corresponding amount recorded as a discount to the 2026 Notes to be amortized over the term of the 2026 Notes using the effective interest method. 124 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The 2026 Notes consisted of the following: As of July 31, 2021 2022 (in thousands) Principal amounts: Principal $ 750,000 $ 750,000 Non-cash interest expense converted to principal 8,906 27,997 Unamortized debt discount (conversion feature) (1) ( 203,619 ) ( 169,438 ) Unamortized debt issuance costs (1) ( 23,264 ) ( 19,359 ) Net carrying amount $ 532,023 $ 589,200 (1) Included in our consolidated balance sheets within convertible senior notes, net and amortized over the remaining life of the 2026 Notes using the effective interest rate method. The effective interest rate is 7.05 % . As of July 31, 2022, the remaining life of the 2026 Notes was approximately 4.1 years . The following table sets forth the total interest expense recognized related to the 2026 Notes: Fiscal Year Ended July 31, 2021 2022 (in thousands) Interest expense related to amortization of debt discount $ 27,291 $ 34,180 Interest expense related to amortization of debt issuance costs 3,119 3,906 Non-cash interest expense 16,074 19,270 Total interest expense $ 46,484 $ 57,356 Non-cash interest expense is related to the 2.5 % PIK interest that we accrued from the issuance of the 2026 Notes through July 31, 2022 and was recognized within other expense, net in our consolidated statement of operations and other liabilities–non-current in our consolidated balance sheet. The accrued PIK interest will be converted to the principal balance of the 2026 Notes at each payment date and will be convertible to shares at maturity or when converted. Upon the conversion price of the 2026 Notes becoming fixed in September 2021, the embedded conversion option for the 2026 Notes no longer required bifurcation because the conversion features are now considered indexed to our own equity and meet the equity classification conditions. The carrying amount of the derivative liability of $ 698.2 million as of that date was reclassified to additional paid-in capital within our consolidated balance sheet. The remaining debt discount that arose from the original bifurcation continues to be amortized over the term of the 2026 Notes. 2027 Notes In September 2021, we issued $ 575 million principal amount of 0.25 % convertible senior notes due 2027 consisting of (i) approximately $ 477.3 million principal amount of 2027 Notes in exchange for approximately $ 416.5 million principal amount of the 2023 Notes (the "Exchange Transactions") and (ii) approximately $ 97.7 million principal amount of 2027 Notes for cash (the "Subscription Transactions"). We did not receive any cash proceeds from the Exchange Transactions. The net cash proceeds from the Subscription Transactions was approximately $ 88.4 million after deducting the offering expenses for both the Exchange Transactions and the Subscription Transactions. We used (i) approximately $ 14.7 million of the net cash proceeds from the Subscription Transactions to repurchase approximately $ 12.8 million principal amount of the 2023 Notes and (ii) approximately $ 58.5 million of the net cash proceeds from the Subscription Transactions to repurchase approximately 1.4 million shares of our Class A common stock. 125 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The 2027 Notes bear interest at a rate of 0.25 % per annum, and pay interest semi-annually in arrears on each April 1 and October 1, commencing on April 1, 2022. The 2027 Notes will mature on October 1, 2027, unless earlier converted, redeemed or repurchased. The 2027 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of Class A common stock, at our election. Each $ 1,000 of principal of the 2027 Notes is initially convertible into 17.3192 shares of our Class A common stock, which is equivalent to an initial conversion price of approximately $ 57.74 per share, subject to customary anti-dilution adjustments. Holders of these 2027 Notes may convert their 2027 Notes at their option at any time prior to the close of the business day immediately preceding July 1, 2027, only under the following circumstances: (1) during any fiscal quarter after January 31, 2022, and only during such fiscal quarter, if the closing price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on, and including, the last trading day of the preceding fiscal quarter is greater than or equal to 130 % of the then applicable conversion price for the Notes per share of common stock; (2) during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $ 1,000 principal amount of 2027 Notes for such trading day was less than 98 % of the product of the closing price of our common stock and the then applicable conversion rate on each such trading day; or (3) upon the occurrence of certain specified corporate events. Upon conversion of the 2027 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 2027 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 2027 Notes in connection with certain corporate events that constitute a "make-whole fundamental change" per the indenture governing the 2027 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 2027 Notes at a repurchase price equal to 100 % of the principal amount of the repurchased 2027 Notes, plus accrued and unpaid interest. In accounting for the exchange of convertible notes, we evaluated whether the transaction should be treated as a modification or extinguishment transaction. The partial exchange of the 2023 Notes and issuance of the 2027 Notes were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange, and consequently, the 2023 Notes partial exchange was accounted for as a debt extinguishment. The $ 64.9 million difference between the total reacquisition price paid and the net carrying amount of the 2023 Notes is recognized as a debt extinguishment loss within other expense, net in our consolidated statement of operations. 126 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The 2027 Notes consisted of the following: As of July 31, 2022 (in thousands) Principal amounts: Principal $ 575,000 Unamortized debt issuance costs (1) ( 7,995 ) Net carrying amount $ 567,005 (1) Included in our consolidated balance sheets within convertible senior notes, net and amortized over the remaining life of the 2027 Notes using the effective interest rate method. The effective interest rate is 0.52 %. As of July 31, 2022, the remaining life of the 2027 Notes was approximately 5.2 years . The following table sets forth the total interest expense recognized related to the 2027 Notes: Fiscal Year Ended July 31, 2022 (in thousands) Contractual interest expense $ 1,229 Interest expense related to amortization of debt issuance costs 1,302 Total interest expense $ 2,531 NOTE 6. LEASES We have operating leases for offices, research and development facilities and datacenters and finance leases for certain datacenter equipment. Our leases have remaining lease terms of one year to approximately eight 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 $ 39.1 million, $ 42.6 million and $ 43.3 million for the fiscal years ended July 31, 2020, 2021 and 2022 , respectively, excluding short-term lease costs, variable lease costs and sublease income, each of which were not material. Variable lease costs primarily include common area maintenance charges. Total finance lease cost was $ 0.7 million and $ 2.4 million for the fiscal years ended July 31, 2021 and 2022, respectively. We had no finance leases during the fiscal year ended July 31, 2020. During fiscal 2020, we ceased using certain office spaces internationally. As the carrying value of the related right-of-use assets exceeded fair value, we recorded a $ 3.0 million impairment in our consolidated statements of operations for the fiscal year ended July 31, 2020. Of the $ 3.0 million impairment, approximately $ 1.8 million relates to the impairment of our operating lease right-of-use assets and approximately $ 1.2 million relates to the impairment of leasehold improvements. During fiscal 2021, we recorded additional impairment charges related to certain international office spaces, as well as an impairment charge related to an office space in the United States. We recorded a $ 1.4 million net impairment in our consolidated statement of operations for the fiscal year ended July 31, 2021. Of the $ 1.4 million impairment, approximately $ 0.5 million relates to the impairment of our operating lease right-of-use assets and approximately $ 0.9 million relates to the impairment of leasehold improvements. Additional charges related to asset impairments may be recorded in the future. 127 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During fiscal 2022, we signed agreements to early exit certain office spaces in the United States. The reduction in the lease term resulted in a decrease to the carrying amount of the operating lease liability and the operating lease right-of-use asset on our consolidated balance sheet as of July 31, 2022. In addition, we recorded $ 0.6 million of expense in our consolidated statement of operations for the fiscal year ended July 31, 2022. Supplemental balance sheet information related to leases is as follows: As of July 31, 2021 2022 (in thousands) Operating leases: Operating lease right-of-use assets, gross $ 170,277 $ 188,060 Accumulated amortization ( 64,374 ) ( 69,320 ) Operating lease right-of-use assets, net $ 105,903 $ 118,740 Operating lease liabilities—current $ 42,670 $ 39,801 Operating lease liabilities—non-current 86,599 89,782 Total operating lease liabilities $ 129,269 $ 129,583 Weighted average remaining lease term (in years): 3.1 5.1 Weighted average discount rate: 5.5 % 5.7 % As of July 31, 2021 2022 (in thousands) Finance leases: Finance lease right-of-use assets, gross (1) $ 8,972 $ 13,501 Accumulated amortization (1) ( 687 ) ( 3,053 ) Finance lease right-of-use assets , net (1) $ 8,285 $ 10,448 Finance lease liabilities—current (2) $ 1,772 $ 2,685 Finance lease liabilities—non-current (3) 6,527 7,806 Total finance lease liabilities $ 8,299 $ 10,491 Weighted average remaining lease term (in years): 4.7 3.9 Weighted average discount rate: 6.7 % 5.9 % (1) Included in our consolidated balance sheets within property and equipment, net. (2) Included in our consolidated balance sheets within accrued expenses and other current liabilities. (3) Included in our consolidated balance sheets within other liabilities—non-current. Supplemental cash flow and other information related to leases is as follows: Fiscal Year Ended July 31, 2021 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 46,216 $ 48,509 Financing cash flows from finance leases $ 459 $ 1,089 Lease liabilities arising from obtaining right-of-use assets: Operating leases $ 16,174 $ 55,797 Finance leases $ 9,622 $ 4,529 128 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The undiscounted cash flows for our lease liabilities as of July 31, 2022 were as follows: Fiscal Year Ending July 31: Operating Leases Finance Leases Total (in thousands) 2023 $ 43,199 $ 2,750 $ 45,949 2024 30,393 2,750 33,143 2025 17,100 2,750 19,850 2026 13,805 2,048 15,853 2027 12,699 337 13,036 Thereafter 36,396 — 36,396 Total lease payments 153,592 10,635 164,227 Less: imputed interest ( 24,009 ) ( 144 ) ( 24,153 ) Total lease obligation 129,583 10,491 140,074 Less: current lease obligations ( 39,801 ) ( 2,685 ) ( 42,486 ) Long-term lease obligations $ 89,782 $ 7,806 $ 97,588 As of July 31, 2022 , we had additional operating lease commitments of approximately $ 7.3 million on an undiscounted basis for certain office leases that have not yet commenced. These operating leases will commence during fiscal 2023, with lease terms of approximately three to eight years . NOTE 7. COMMITMENTS AND CONTINGENCIES Purchase Commitments In the normal course of business, we make commitments with our contract manufacturers to ensure them a minimum level of financial consideration for their investment in our joint solutions. These commitments are based on performance 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 July 31, 2022, we had up to approximately $ 88.7 million of non-cancelable purchase obligations and other commitments pertaining to our daily business operations, and up to approximately $ 82.3 million in the form of guarantees to certain of our contract manufacturers. 129 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Guarantees and Indemnifications We have entered into agreements with some of our Partners and customers that contain indemnification provisions in the event of claims alleging that our products infringe the intellectual property rights of a third party. The scope of such indemnification varies, and may include, in certain cases, the ability to cure the indemnification by modifying or replacing the product at our own expense, requiring the return and refund of the infringing product, procuring the right for the partner and/or customer to continue to use or distribute the product, as applicable, and/or defending the partner or customer against and paying any damages from third-party actions based upon claims of infringement. Other guarantees or indemnification arrangements include guarantees of product and service performance. We have also agreed to indemnify our directors, executive officers and certain other officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as a director or officer of our company or that person’s services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that may enable us to recover a portion of any future amounts paid. The fair value of liabilities related to indemnifications and guarantee provisions are not material and have not had any material impact on our consolidated financial statements to date. 130 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Legal Proceedings Securities Class Actions . 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 then filed a consolidated amended complaint (the "Original Complaint"). The action was brought on behalf of those who purchased or otherwise acquired our stock between November 30, 2017 and May 30, 2019, inclusive. The defendants subsequently filed a motion to dismiss the Original Complaint, which the court granted on March 9, 2020, while providing the lead plaintiff leave to amend. On April 17, 2020, the lead plaintiff filed a second amended complaint (the "Amended Complaint"), again naming us and two of our officers as defendants. The Amended Complaint alleges the same class period, includes many of the same factual allegations as the Original Complaint, and again alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, as well as SEC Rule 10b-5. The Amended Complaint sought monetary damages in an unspecified amount. On September 11, 2020, the court denied the defendants' motion to dismiss the Amended Complaint and held that the lead plaintiff adequately stated a claim with respect to certain statements regarding our new customer growth and sales productivity. On January 27, 2021, lead plaintiff, Shimon Hedvat, filed a motion to (i) withdraw as lead plaintiff and (ii) substitute proposed new lead plaintiffs and approve their appointment of a new co-lead counsel. On March 1, 2021, the court granted the lead plaintiff’s motion to withdraw as lead plaintiff but denied without prejudice his motion to substitute proposed new lead plaintiffs. The court also reopened the lead plaintiff selection process, allowing any putative class member interested in serving as the new lead plaintiff to file a lead plaintiff application. Following the lead plaintiff selection hearing on April 28, 2021, on June 10, 2021 the court appointed California Ironworkers Field Pension Trust as lead plaintiff and approved its appointment of counsel. On May 28, 2021, one of the movants for lead plaintiff, John P. Norton on behalf of the Norton Family Living Trust UAD 11/15/2002, filed a separate class action complaint (the "Options Class Action Complaint") in the Northern District of California on behalf of a class of persons or entities who transacted in publicly traded call options and/or put options on Nutanix stock during the period from November 30, 2017 and May 30, 2019, containing allegations substantively the same as those alleged in the Amended Complaint (the "Options Class Action") and naming the same defendants. On September 8, 2021, the court appointed the John P. Norton on behalf of the Norton Family Living Trust UAD 11/15/2002 as the lead plaintiff in the Options Class Action. On April 26, 2022, the parties met for mediation, which did not result in a settlement. On September 1, 2022, California Ironworkers Field Pension Trust filed a third amended complaint (which amends the Amended Complaint) and John P. Norton on behalf of the Norton Family Living Trust UAD 11/15/2002 filed an amended complaint (which amends the Options Class Action Complaint). We plan to continue to vigorously defend against these actions. We recorded an accrual for estimated loss contingencies associated with this matter in an amount equal to a settlement offer we made at the mediation. The accrual does not reflect our views of the merits of claims in these actions. In addition, we recorded a corresponding receivable for the estimated recovery in respect of our settlement offer and certain legal fees and professional expenses payable under our applicable insurance policies. The accrual and estimated recovery may change in the future due to new developments, and the actual liability and recovery may vary significantly from current estimates. 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. 131 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. STOCKHOLDERS’ EQUITY Effective January 3, 2022, all of our then outstanding shares of Class B common stock, par value $ 0.000025 per share, were automatically converted into the same number of shares of the Company’s Class A common stock, par value $ 0.000025 per share, pursuant to the terms of our Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. As a result, as of July 31, 2022 , we had one class of outstanding common stock consisting of Class A common stock. As of July 31, 2022 , we had 1.0 billion shares of Class A common stock authorized, with a par value of $ 0.000025 per share, and 42.0 million shares of Class B common stock authorized, with a par value of $ 0.000025 per share. As of July 31, 2022 , we had 226.9 million shares of Class A common stock issued and outstanding and no shares of Class B common stock issued and outstanding. Holders of Class A common stock are entitled to one vote for each share of Class A common stock held on all matters submitted to a vote of stockholders. Share Repurchase In August 2020, our Board of Directors authorized the repurchase of up to $ 125.0 million of our Class A common stock. Repurchases were made through open market purchases or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program did not obligate us to acquire any particular amount of our common stock and could have been suspended at any time at our discretion. During the fiscal year ended July 31, 2021, we repurchased 5.2 million shares of Class A common stock in open market transactions at an average price of $ 24.15 per share, for an aggregate purchase price of $ 125.0 million. As of July 31, 2021, there was no remaining authorization and the program had expired. In September 2021, we used approximately $ 58.5 million of the net cash proceeds from the issuance of $ 97.7 million in aggregate principal amount of 2027 Notes to repurchase 1.4 million shares of Class A common stock in open market transactions at an average price of $ 42.77 per share. For additional details on these transactions, refer to Note 5. Common Stock Reserved for Issuance As of July 31, 2022, we had reserved shares of common stock for future issuance as follows: As of July 31, 2022 (in thousands) Shares reserved for future equity grants 15,159 Shares underlying outstanding stock options 1,689 Shares underlying outstanding restricted stock units 22,136 Shares reserved for future employee stock purchase plan awards 2,362 Total 41,346 132 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9. EQUITY INCENTIVE PLANS Stock Plans We have three equity incentive plans, the 2010 Stock Plan ("2010 Plan"), 2011 Stock Plan ("2011 Plan") and 2016 Equity Incentive Plan ("2016 Plan"). Our stockholders approved the 2016 Plan in March 2016 and it became effective in connection with our initial public offering ("IPO"). As a result, at the time of the IPO, we ceased granting additional stock awards under the 2010 Plan and 2011 Plan and both plans were terminated. Any outstanding stock awards under the 2010 Plan and 2011 Plan remain outstanding, subject to the terms of the applicable plan and award agreements, until such shares are issued under those stock awards, by exercise of stock options or settlement of RSUs, or until those stock awards become vested or expired by their terms. Under the 2016 Plan, we may grant incentive stock options, non-statutory stock options, restricted stock, RSUs and stock appreciation rights to employees, directors and consultants. We initially reserved 22.4 million shares of our Class A common stock for issuance under the 2016 Plan. The number of shares of Class A common stock available for issuance under the 2016 Plan will also include an annual increase on the first day of each fiscal year, beginning in fiscal 2018, equal to the lesser of: 18.0 million shares, 5 % of the outstanding shares of all classes of common stock as of the last day of our immediately preceding fiscal year, or such other amount as may be determined by the Board. Accordingly, on August 1, 2020 and 2021, the number of shares of Class A common stock available for issuance under the 2016 Plan increased by 10.1 million and 10.7 million shares, respectively, pursuant to these provisions. As of July 31, 2022 , we had reserved a total of 39.0 million shares for the issuance of equity awards under the Stock Plans, of which 15.2 million shares were still available for grant. On August 1, 2022, the number of shares of Class A common stock available for issuance under the 2016 Plan increased by 11.3 million shares pursuant to the automatic increase provisions. Restricted Stock Units Performance RSUs — We have granted RSUs that have both service and performance conditions to our executives and employees ("Performance RSUs"). Vesting of Performance RSUs is subject to continuous service and the satisfaction of certain performance targets. While we recognize cumulative stock-based compensation expense for the portion of the awards for which both the service condition has been satisfied and it is probable that the performance conditions will be met, the actual vesting and settlement of Performance RSUs are subject to the performance conditions actually being met. Market Stock Units In connection with his hiring, in December 2020, the Compensation Committee of our Board of Directors approved the grant of 703,117 RSUs subject to certain market conditions ("MSUs") to our President and CEO. These MSUs have a weighted average grant date fair value per unit of $ 35.69 and will vest up to 133 % based upon the achievement of certain stock price targets over a performance period of approximately 4.0 years, subject to his continuous service on each vesting date. 133 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In order to align with the MSUs granted to our President and CEO, in December 2020, the Compensation Committee of our Board of Directors modified the vesting conditions for the 75,000 MSUs previously granted to another individual who was then serving as one of our executives. These modified MSUs had a weighted average grant date fair value per unit of $ 27.54 and vested based upon the achievement of a modified stock price target over the original performance period of approximately 3.9 years, subject to continuous service on each vesting date. The incremental compensation cost resulting from this modification was not material. Following the individual's resignation during the second quarter of fiscal 2022, his remaining unvested MSUs were cancelled. In October 2021, the Compensation Committee of our Board of Directors approved the grant of approximately 0.4 million MSUs to certain of our executives. These MSUs have a weighted average grant date fair value per unit of $ 46.20 and will vest up to 200 % of the target number of MSUs based upon our total shareholder return relative to the total shareholder return of companies in the Nasdaq Composite Index over a performance period of approximately 2.8 years, subject to continuous service on each vesting date. Additional MSUs have been granted with similar terms, but were not material. We used Monte Carlo simulations to calculate the fair value of these awards on the grant date, or modification date, as applicable. A Monte Carlo simulation requires the use of various assumptions, including the stock price volatility and risk-free interest rate as of the valuation date corresponding to the length of time remaining in the performance period and expected dividend yield. We recognize stock-based compensation expense related to these MSUs using the graded vesting attribution method over the respective performance periods. As of July 31, 2022 , approximately 1.1 million MSUs remained outstanding. Below is a summary of RSU activity, including MSUs, under the Stock Plans: Fiscal Year Ended July 31, 2021 2022 Number of Shares Weighted Average Grant Date Fair Value per Share Number of Shares Weighted Average Grant Date Fair Value per Share (in thousands) Outstanding at beginning of period 22,632 $ 32.70 21,708 $ 30.98 Granted 13,732 $ 29.60 15,575 $ 30.92 Released ( 9,744 ) $ 32.58 ( 9,626 ) $ 32.68 Forfeited ( 4,912 ) $ 31.87 ( 5,521 ) $ 32.55 Outstanding at end of period 21,708 $ 30.98 22,136 $ 29.81 The aggregate grant date fair value of RSUs, including MSUs, vested was $ 298.2 million, $ 317.4 million and $ 314.6 million for the fiscal years ended July 31, 2020, 2021 and 2022, respectively. Stock Options The Board determines the period over which stock options become exercisable and stock options generally vest over a four-year period. Stock options generally expire 10 year s from the date of grant. The term of an ISO grant to a 10% stockholder will not exceed five year s from the date of the grant. The exercise price of an ISO will not be less than 100 % of the estimated fair value of the shares of common stock underlying the stock option (or 110 % of the estimated fair value in the case of an ISO granted to a 10% stockholder) on the date of grant. The exercise price of an NSO is determined by the Board at the time of grant and is generally not less than 100 % of the estimated fair value of the shares of common stock underlying the stock option on the date of grant. 134 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Below is a summary of stock option activity under the Stock Plans: Fiscal Year Ended July 31, 2021 2022 Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (in thousands) (in years) (in thousands) (in thousands) (in years) (in thousands) Outstanding at beginning of period 7,546 $ 5.10 3.6 $ 129,010 3,334 $ 5.20 2.8 $ 102,740 Options granted — $ — — $ — Options exercised ( 3,712 ) $ 4.07 ( 1,643 ) $ 3.94 Options canceled/forfeited ( 500 ) $ 12.00 ( 2 ) $ 13.04 Outstanding at end of period 3,334 $ 5.20 2.8 $ 102,740 1,689 $ 6.43 1.9 $ 14,707 Exercisable at end of period 3,334 $ 5.20 2.8 $ 102,739 1,689 $ 6.43 1.9 $ 14,707 The aggregate intrinsic value of stock options exercised during the fiscal years ended July 31, 2020, 2021 and 2022 was $ 23.4 million, $ 90.5 million and $ 35.0 million, respectively. Aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of our common stock. Cash received from option exercises was $ 6.9 million, $ 15.1 million and $ 6.5 million for the fiscal years ended July 31, 2020, 2021 and 2022 , respectively. The total grant date fair value of stock options vested was $ 1.0 million and $ 0.2 million for the fiscal years ended July 31, 2020 and 2021 , respectively. The total grant date fair value of stock options vested was not material for the fiscal year ended July 31, 2022. We did no t grant any stock options during the fiscal years ended July 31, 2020, 2021 or 2022. Employee Stock Purchase Plan In December 2015, the Board adopted the 2016 Employee Stock Purchase Plan, which was subsequently amended in January 2016 and September 2016 and approved by our stockholders in March 2016 (the "Original 2016 ESPP"). The Original 2016 ESPP became effective in connection with our IPO. On December 13, 2019, our stockholders approved certain amendments to the Original 2016 ESPP. Under the amended and restated Original 2016 ESPP (the "2016 ESPP"), the maximum number of shares of Class A common stock available for sale is 11.5 million shares, representing an increase of 9.2 million shares. The 2016 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions of up to 15 % of eligible compensation, subject to caps of $ 25,000 in any calendar year and 1,000 shares on any purchase date. The 2016 ESPP provides for 12-month offering periods, generally beginning in March and September of each year, and each offering period consists of two six-month purchase periods. On each purchase date, participating employees will purchase Class A common stock at a price per share equal to 85 % of the lesser of the fair market value of our Class A common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of each purchase period in the applicable offering period. If the stock price of our Class A common stock on any purchase date in an offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period. During the fiscal year ended July 31, 2022 , 2.8 million shares of common stock were purchased under the 2016 ESPP for an aggregate amount of $ 62.6 million. As of July 31, 2022 , 2.4 million shares were available for future issuance under the 2016 ESPP. 135 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We use the Black-Scholes option pricing model to determine the fair value of shares purchased under the 2016 ESPP with the following weighted average assumptions on the date of grant: Fiscal Year Ended July 31, 2020 2021 2022 Expected term (in years) 0.92 0.77 0.81 Risk-free interest rate 0.1 % 0.1 % 1.0 % Volatility 73.4 % 56.9 % 43.3 % Dividend yield — % — % — % Stock-Based Compensation Total stock-based compensation expense recognized in our consolidated statements of operations is as follows: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Cost of revenue: Product $ 5,334 $ 6,023 $ 7,379 Support, entitlements and other services 22,014 24,460 30,846 Sales and marketing 126,015 122,815 104,592 Research and development 153,252 150,856 143,759 General and administrative 45,383 54,391 56,670 Total stock-based compensation expense $ 351,998 $ 358,545 $ 343,246 As of July 31, 2022 , unrecognized stock-based compensation expense related to outstanding stock awards was approximately $ 583.4 million and is expected to be recognized over a weighted average period of approximately 2.5 years. NOTE 10. RESTRUCTURING CHARGES In August 2022, we announced a plan to reduce our global headcount by approximately 270 employees, which represents approximately 4 % of our total employees, following a review of our business structure and after taking other cost-cutting measures to reduce expenses. The headcount reduction is part of our ongoing efforts to drive towards profitable growth. We estimate that we will recognize pre-tax restructuring charges in the range of approximately $ 20.0 million to $ 25.0 million, consisting primarily of one-time severance and other termination benefit costs. During fiscal 2022, we recognized restructuring charges of $ 11.2 million, which consisted primarily of severance and other termination benefit costs directly related to this reduction in force. Of the $11.2 million recognized, $ 0.2 million is included within support, entitlements and other services cost of revenue, $ 10.3 million is included within sales and marketing expense, $ 0.6 million is included within research and development expense, and $ 0.1 million is included within general and administrative expense on our consolidated statement of operations. We expect that the majority of the remaining charges will be recognized during the first quarter of fiscal 2023. As of July 31, 2022, we had not made any cash payments related to this restructuring and the $ 11.2 million of restructuring charges accrued is included within accrued compensation and benefits in our consolidated balance sheet. 136 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 11. NET LOSS PER SHARE We adopted ASU 2020-06 on August 1, 2021 using the modified retrospective method, applicable to our convertible senior notes outstanding as of adoption. We have not changed any previously disclosed amounts or provided additional disclosures for comparative periods. ASU 2020-06 requires the if-converted method to be applied for all convertible instruments when calculating diluted earnings per share. Under the if-converted method, shares related to our convertible senior notes, to the extent dilutive, are assumed to be converted into common stock at the beginning of the period. Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Our Convertible Preferred Stock is considered a participating security. Participating securities do not have a contractual obligation to share in our losses. As such, for the periods we incur net losses, there is no impact on the calculated net loss per share attributable to common stockholders in applying the two-class method. Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by giving effect to potentially dilutive common stock equivalents outstanding during the period, as their effect would be dilutive. Potentially dilutive common shares include participating securities and shares issuable upon the exercise of stock options, the exercise of common stock warrants, the exercise of convertible preferred stock warrants, the vesting of RSUs and each purchase under the 2016 ESPP, under the if-converted method. In loss periods, basic net loss per share and diluted net loss per share are the same, as the effect of potential common shares is antidilutive and therefore excluded. Effective January 3, 2022, all of our then outstanding shares of Class B common stock, par value $ 0.000025 per share, were automatically converted into the same number of shares of the Company’s Class A common stock, par value $ 0.000025 per share, pursuant to the terms of our Amended and Restated Certificate of Incorporation. Prior to this conversion, the rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock were identical, except with respect to voting. As the liquidation and dividend rights were identical, our undistributed earnings or losses were allocated on a proportionate basis among the holders of both Class A and Class B common stock. As a result, the net income (loss) per share attributed to common stockholders was the same for both Class A and Class B common stock on an individual or combined basis. The computation of basic and diluted net loss per share attributable to common stockholders is as follows: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands, except per share data) Numerator: Net loss $ ( 872,883 ) $ ( 1,034,260 ) $ ( 797,538 ) Denominator: Weighted average shares—basic and diluted 194,719 206,475 220,529 Net loss per share attributable to common stockholders— basic and diluted $ ( 4.48 ) $ ( 5.01 ) $ ( 3.62 ) 137 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the fiscal years presented because including them would have been antidilutive are as follows: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Outstanding stock options and RSUs 30,178 25,042 23,825 Employee stock purchase plan 4,368 2,838 2,511 Common stock issuable upon the conversion of the Notes — 1,529 39,968 Contingently issuable shares pursuant to acquisitions 506 253 — Total 35,052 29,662 66,304 Shares that will be issued in connection with our stock awards and shares that will be purchased under the employee stock purchase plan are generally automatically converted into shares of our Class A common stock. Effective as of the January 3, 2022 conversion described above, outstanding options previously denominated in shares of Class B common stock represent the right to acquire the same number of shares of Class A common stock upon exercise. Common stock issuable upon the conversion of convertible debt represents the antidilutive impact of the 2023 Notes, 2026 Notes and 2027 Notes under the if-converted method. NOTE 12. INCOME TAXES Income Taxes Loss before provision for income taxes by fiscal year consisted of the following: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Domestic $ ( 905,840 ) $ ( 1,066,307 ) $ ( 833,507 ) Foreign 50,619 50,534 55,233 Loss before provision for income taxes $ ( 855,221 ) $ ( 1,015,773 ) $ ( 778,274 ) Provision for income taxes by fiscal year consisted of the following: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Current: U.S. federal $ 175 $ 9 $ 13 State and local 79 99 77 Foreign 18,033 21,801 21,578 Total current taxes 18,287 21,909 21,668 Deferred: U.S. federal 80 24 23 State and local — — — Foreign ( 705 ) ( 3,446 ) ( 2,427 ) Total deferred taxes ( 625 ) ( 3,422 ) ( 2,404 ) Provision for income taxes $ 17,662 $ 18,487 $ 19,264 138 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The income tax provision differs from the amount of income tax determined by applying the applicable U.S. federal statutory income tax rate of 21 % to pre-tax loss. The reconciliation of the statutory federal income tax and our effective income tax is as follows: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) U.S. federal income tax at statutory rate $ ( 179,514 ) $ ( 213,391 ) $ ( 163,438 ) Change in valuation allowance 164,453 171,270 117,292 Non-deductible item on fair value remeasurement of derivative liability — 56,546 41,589 Stock-based compensation 30,913 4,663 14,462 Effect of foreign operations 12,676 9,851 11,210 Research and development tax credits ( 19,210 ) ( 14,694 ) ( 9,455 ) Non-deductible expenses 5,393 1,739 6,646 Change in unrecognized tax benefit 1,863 2,631 655 State income taxes 79 99 77 Transfer pricing adjustments 7 — — Other 1,002 ( 227 ) 226 Total $ 17,662 $ 18,487 $ 19,264 During the fiscal years ended July 31, 2020, 2021 and 2022, our provision for income taxes was primarily attributable to foreign tax provisions in certain foreign jurisdictions in which we conduct business. The temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows: As of July 31, 2021 2022 (in thousands) Deferred tax assets: Net operating loss carryforward $ 573,944 $ 665,757 Tax credit carryforward 164,984 184,376 Deferred revenue 168,417 170,243 Leases 40,011 38,843 Interest expense carryforward 15,492 32,692 Intangible assets 28,557 25,403 Accruals and reserves 21,727 23,045 Stock-based compensation 18,957 17,631 Property and equipment 3,385 4,115 Other assets 26,394 23,412 Total deferred tax assets 1,061,868 1,185,517 Deferred tax liabilities: Deferred commission expense ( 83,054 ) ( 86,253 ) Leases ( 38,368 ) ( 39,886 ) Convertible notes ( 246 ) ( 38,925 ) Prepaid expenses ( 2,013 ) ( 2,290 ) Property and equipment ( 3,681 ) ( 1,271 ) Acquisition-related ( 4,633 ) ( 1,224 ) Other ( 2,764 ) ( 3,142 ) Total deferred tax liabilities ( 134,759 ) ( 172,991 ) Valuation allowance ( 918,689 ) ( 1,002,546 ) Net deferred tax assets $ 8,420 $ 9,980 139 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Management believes that based on available evidence, both positive and negative, it is more likely than not that the U.S. deferred tax assets will not be utilized and as such, a full valuation allowance has been recorded. The valuation allowance for deferred tax assets was $ 1.0 billion as of July 31, 2022. The net increase in the total valuation allowance for the fiscal years ended July 31, 2021 and 2022 was $ 206.6 million and $ 83.9 million, respectively. As of July 31, 2022 , we had approximately $ 3.0 billion of federal net operating loss carryforwards and $ 1.8 billion of state net operating loss carryforwards available to reduce future taxable income, which will begin to expire in fiscal 2023. In addition, we had approximately $ 124.0 million of federal research credit carryforwards, $ 96.4 million of state research credit carryforwards and $ 12.1 million of foreign tax credit carryforwards. The federal credits will begin to expire in fiscal 2030 and the state credits can be carried forward indefinitely. The foreign credits will begin to expire in fiscal 2027. Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Any annual limitation may result in the expiration of net operating losses and credits before utilization. If an ownership change occurred, utilization of the net operating loss and tax credit carryforwards could be significantly reduced. As of July 31, 2022 , we held an aggregate of $ 165.9 million in cash and cash equivalents in our foreign subsidiaries, of which $ 73.1 million was denominated in U.S. dollars. We attribute net revenue, costs and expenses to domestic and foreign components based on the terms of our agreements with our subsidiaries. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries, as such earnings are to be reinvested offshore indefinitely. The income tax liability would be insignificant if these earnings were to be repatriated. The income tax benefit and provision for the fiscal year ended July 31, 2022 are based on the assumption that foreign undistributed earnings are indefinitely reinvested. We will continue to evaluate whether or not to continue to assert indefinite reinvestment on part or all of our foreign undistributed earnings. In the event we determine not to continue to assert the permanent reinvestment of part or all of our foreign undistributed earnings, such a determination could result in the accrual and payment of additional foreign, state and local taxes. The 2017 Tax Cuts and Jobs Act requires research and development expenditures incurred for the tax year beginning after December 31, 2021 to be capitalized and amortized ratably over five years for domestic research and 15 years for international research. The mandatory capitalization requirement should have no material impact on our income tax provision for the fiscal year ended July 31, 2023 due to our tax attributes carryover and full valuation allowance position. On August 16, 2022, President Biden signed the Inflation Reduction Act, which includes a new minimum tax on certain large corporations and an excise tax on stock buybacks. We do not anticipate this legislation to have a material impact on our consolidated financial statements. We recognize uncertain tax positions in our financial statements if that position will more likely than not be sustained on audit, based on the technical merits of the position. A reconciliation of our unrecognized tax benefits, excluding accrued interest and penalties, is as follows: 140 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fiscal Year Ended July 31, 2021 2022 (in thousands) Balance at the beginning of the year $ 85,257 $ 89,775 Increases related to current year tax positions 4,335 3,499 Increases related to prior year tax positions 328 604 Decreases related to prior year tax positions — ( 2,263 ) Lapse of statute of limitations/Settlements ( 145 ) ( 942 ) Balance at the end of the year $ 89,775 $ 90,673 During the fiscal year ended July 31, 2022, the net increase in unrecognized tax positions was primarily attributable to federal and state research and development credits and intercompany charges. As of July 31, 2022 , if uncertain tax positions are fully recognized in the future, it would result in a $ 14.4 million impact to our effective tax rate, primarily relating to positions in foreign jurisdictions, and the remaining amount would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. We recognize interest and/or penalties related to income tax matters as a component of income tax expense. As of July 31, 2022 , we had recognized $ 5.3 million of accrued interest and penalties related to uncertain tax positions. We file income tax returns in the U.S. federal jurisdiction as well as various U.S. states and foreign jurisdictions. The tax years 2009 and forward remain open to examination by the major jurisdictions in which we are subject to tax. These fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized. We are subject to the continuous examination of income tax returns by various tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the provision for income taxes. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations. We do not anticipate a significant impact to the gross unrecognized tax benefits within the next 12 months related to these years. NOTE 13. SEGMENT INFORMATION Our chief operating decision maker is a group which is comprised of our Chief Executive Officer and Chief Financial Officer. This group reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, we have a single reportable segment. The following table sets forth revenue by geographic location based on bill-to location: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) U.S. $ 706,110 $ 758,128 $ 887,141 Europe, the Middle East and Africa 277,489 320,837 374,186 Asia Pacific 265,092 260,637 274,373 Other Americas 58,991 54,762 45,096 Total revenue $ 1,307,682 $ 1,394,364 $ 1,580,796 141 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table sets forth long-lived assets, which primarily include property and equipment, net, by geographic location: As of July 31, 2021 2022 (in thousands) United States $ 86,468 $ 74,472 International 45,153 38,968 Total long-lived assets $ 131,621 $ 113,440 142 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.