Nutanix, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 78 Consolidated Balance Sheets 81 Consolidated Statements of Operations 83 Consolidated Statements of Comprehensive Loss 84 Consolidated Statements of Stockholders’ Equity (Deficit) 85 Consolidated Statements of Cash Flows 86 Notes to Consolidated Financial Statements 88 Note 1: Overview and Summary of Significant Accounting Policies 88 Note 2: Business Combinations 96 Note 3: Revenue, Deferred Revenue and Deferred Commissions 97 Note 4: Fair Value Measurements 99 Note 5: Balance Sheet Components 101 Note 6: Convertible Senior Notes 104 Note 7: Leases 107 Note 8 : Commitments and Contingencies 109 Note 9 : Stockholders' Equity 110 Note 10 : Equity Award Plans 111 Note 1 1 : Net Loss Per Share 115 Note 1 2 : Income Taxes 116 Note 1 3 : Segment Information 120 Note 14: Selected Quarterly Financial Data (Unaudited) 121 Note 15: Subsequent Events 122 77 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders 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, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, shareholders' equity (deficit), and cash flows, for each of the three years in the period ended July 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2020, 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, 2020, 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 23, 2020 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. Revenue Recognition — Refer to Notes 1 and 3 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 $765.8 million and support, entitlements, and other services was $541.9 million for the year ended July 31, 2020. 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. 78 Table of Contents • 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 master agreement and any related amendments. – Testing the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements. • For a selection of arrangements with original equipment manufacturers (“OEMs”), we confirmed accounts receivable and total billings as of and for the year ended July 31, 2020, respectively, directly with the OEM. In addition, we confirmed a sample of individual revenue orders for the year ended July 31, 2020, to evaluate the accuracy of management’s records. • 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 23, 2020 We have served as the Company’s auditor since 2013. 79 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders 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, 2020, 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, 2020, 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, 2020, of the Company and our report dated September 23, 2020, 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. /s/ DELOITTE & TOUCHE LLP San Jose, California September 23, 2020 80 Table of Contents NUTANIX, INC. CONSOLIDATED BALANCE SHEETS As of July 31, 2019 2020 (in thousands, except per share data) Assets Current assets: Cash and cash equivalents $ 396,678 $ 318,737 Short-term investments 512,156 401,041 Accounts receivable, net of allowance of $ 379 and $ 804 as of July 31, 2019 and 2020 245,475 242,516 Deferred commissions—current 46,238 68,694 Prepaid expenses and other current assets 74,665 63,032 Total current assets 1,275,212 1,094,020 Property and equipment, net 136,962 143,172 Operating lease right-of-use assets (1) — 127,326 Deferred commissions—non-current 107,474 146,834 Intangible assets, net 66,773 49,392 Goodwill 185,180 185,260 Other assets—non-current 14,441 22,543 Total assets $ 1,786,042 $ 1,768,547 Liabilities and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 74,047 $ 54,029 Accrued compensation and benefits 99,804 109,109 Accrued expenses and other current liabilities (1) 28,797 25,924 Deferred revenue—current 396,667 534,572 Operating lease liabilities—current (1) — 36,569 Total current liabilities 599,315 760,203 Deferred revenue—non-current 513,377 648,869 Operating lease liabilities—non-current (1) — 116,794 Convertible senior notes, net 458,910 490,222 Other liabilities—non-current (1) 27,547 27,436 Total liabilities 1,599,149 2,043,524 Commitments and contingencies (Note 8) 81 Table of Contents NUTANIX, INC. CONSOLIDATED BALANCE SHEETS Stockholders’ equity (deficit): Preferred stock, par value of $ 0.000025 per share— 200,000 shares authorized as of July 31, 2019 and 2020; no shares issued and outstanding as of July 31, 2019 and 2020 — — Common stock, par value of $ 0.000025 per share— 1,200,000 ( 1,000,000 Class A, 200,000 Class B) shares authorized as of July 31, 2019 and 2020; 188,595 ( 168,155 Class A, 20,440 Class B) and 201,949 ( 186,846 Class A, 15,103 Class B) shares issued and outstanding as of July 31, 2019 and 2020 5 5 Additional paid-in capital 1,835,528 2,245,180 Accumulated other comprehensive income 669 2,030 Accumulated deficit ( 1,649,309 ) ( 2,522,192 ) Total stockholders’ equity (deficit) 186,893 ( 274,977 ) Total liabilities and stockholders’ equity (deficit) $ 1,786,042 $ 1,768,547 (1) During the first quarter of fiscal 2020, we adopted Accounting Standards Update ("ASU") No. 2016-02 using the modified retrospective method and elected the transition option that allowed us not to restate the comparative periods in our condensed consolidated financial statements in the year of adoption. For additional details, refer to Note 1. See the accompanying notes to the consolidated financial statements. 82 Table of Contents NUTANIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Year Ended July 31, 2018 2019 2020 (in thousands, except per share data) Revenue: Product $ 887,989 $ 832,419 $ 765,822 Support, entitlements and other services 267,468 403,724 541,860 Total revenue 1,155,457 1,236,143 1,307,682 Cost of revenue: Product 276,127 143,078 71,312 Support, entitlements and other services 109,903 161,050 215,377 Total cost of revenue 386,030 304,128 286,689 Gross profit 769,427 932,015 1,020,993 Operating expenses: Sales and marketing 649,657 909,750 1,160,389 Research and development 313,777 500,719 553,978 General and administrative 86,401 119,587 135,547 Total operating expenses 1,049,835 1,530,056 1,849,914 Loss from operations ( 280,408 ) ( 598,041 ) ( 828,921 ) Other expense, net ( 9,306 ) ( 15,019 ) ( 26,300 ) Loss before provision for income taxes ( 289,714 ) ( 613,060 ) ( 855,221 ) Provision for income taxes 7,447 8,119 17,662 Net loss $ ( 297,161 ) $ ( 621,179 ) $ ( 872,883 ) Net loss per share attributable to Class A and Class B common stockholders—basic and diluted $ ( 1.81 ) $ ( 3.43 ) $ ( 4.48 ) Weighted average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted 164,091 181,031 194,719 See the accompanying notes to the consolidated financial statements. 83 Table of Contents NUTANIX, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Net loss $ ( 297,161 ) $ ( 621,179 ) $ ( 872,883 ) Other comprehensive (loss) income, net of tax: Change in unrealized (loss) gain on available-for-sale securities, net of tax ( 896 ) 1,671 1,361 Comprehensive loss $ ( 298,057 ) $ ( 619,508 ) $ ( 871,522 ) See the accompanying notes to the consolidated financial statements. 84 Table of Contents NUTANIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount (in thousands) Balance - July 31, 2017 154,637 $ 4 $ 948,134 $ ( 106 ) $ ( 730,969 ) $ 217,063 Issuance of common stock through employee equity incentive plans, net of repurchases 14,493 — 33,037 — — 33,037 Issuance of common stock from ESPP purchase 2,418 — 39,009 — — 39,009 Issuance of common stock in connection with business combinations 1,310 — 63,780 — — 63,780 Vesting of early exercised stock options — — 681 — — 681 Stock-based compensation — — 177,868 — — 177,868 Equity component of convertible senior notes, net — — 148,598 — — 148,598 Purchase of bond hedges related to the convertible senior notes — — ( 143,175 ) — — ( 143,175 ) Sale of warrants related to the convertible senior notes — — 87,975 — — 87,975 Other comprehensive loss — — — ( 896 ) — ( 896 ) Net loss — — — — ( 297,161 ) ( 297,161 ) Balance - July 31, 2018 172,858 4 1,355,907 ( 1,002 ) ( 1,028,130 ) 326,779 Issuance of common stock through employee equity incentive plans 11,272 — 12,187 — — 12,187 Issuance of common stock from ESPP purchase 2,008 1 57,217 — — 57,218 Issuance of common stock in connection with a business combination 2,457 — 103,305 — — 103,305 Stock-based compensation — — 306,729 — — 306,729 Vesting of early exercised stock options — — 183 — — 183 Other comprehensive income — — — 1,671 — 1,671 Net loss — — — — ( 621,179 ) ( 621,179 ) 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 ) See the accompanying notes to the consolidated financial statements. 85 Table of Contents NUTANIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Cash flows from operating activities: Net loss $ ( 297,161 ) $ ( 621,179 ) $ ( 872,883 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 50,302 77,612 93,773 Stock-based compensation 177,868 306,729 351,998 Amortization of debt discount and issuance cost 14,685 29,313 31,313 Change in fair value of contingent consideration ( 2,423 ) ( 832 ) — Operating lease cost, net of accretion — — 30,374 Impairment of lease-related assets — — 3,002 Other ( 962 ) ( 2,786 ) 324 Changes in operating assets and liabilities: Accounts receivable, net ( 79,273 ) 15,704 4,334 Deferred commissions ( 40,852 ) ( 39,333 ) ( 61,816 ) Prepaid expenses and other assets (1) ( 37,374 ) ( 12,037 ) 10,089 Accounts payable ( 16,469 ) 13,508 ( 16,574 ) Accrued compensation and benefits 27,877 14,406 18,765 Accrued expenses and other liabilities 34,295 ( 17,454 ) 3,400 Operating leases, net — — ( 28,394 ) Deferred revenue 262,027 278,517 272,410 Net cash provided by (used in) operating activities (1) 92,540 42,168 ( 159,885 ) Cash flows from investing activities: Purchases of investments ( 716,417 ) ( 468,144 ) ( 607,194 ) Maturities of investments 297,461 588,763 645,828 Sales of investments — — 75,413 Purchases of property and equipment ( 62,372 ) ( 118,452 ) ( 89,488 ) Payments for business combinations, net of cash and restricted cash acquired ( 22,227 ) ( 19,017 ) — Net cash (used in) provided by investing activities ( 503,555 ) ( 16,850 ) 24,559 Cash flows from financing activities: Proceeds from sales of shares through employee equity incentive plans, net of repurchases 72,010 69,210 57,797 Payment of contingent consideration associated with a business combination — ( 1,040 ) — Payment of debt in conjunction with business combinations ( 1,696 ) ( 991 ) — Proceeds from issuance of convertible senior notes, net 563,587 ( 75 ) — Payments for convertible note hedges ( 143,175 ) — — Proceeds from issuance of warrants 87,975 — — Payments of offering costs ( 85 ) — — Net cash provided by financing activities 578,616 67,104 57,797 Net increase (decrease) in cash, cash equivalents and restricted cash (1) $ 167,601 $ 92,422 $ ( 77,529 ) 86 Table of Contents NUTANIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Cash, cash equivalents and restricted cash—beginning of period (1) 139,497 307,098 399,520 Cash, cash equivalents and restricted cash—end of period (1) $ 307,098 $ 399,520 $ 321,991 Restricted cash (1)(2) 1,123 2,842 3,254 Cash and cash equivalents—end of period $ 305,975 $ 396,678 $ 318,737 Supplemental disclosures of cash flow information: Cash paid for income taxes $ 10,116 $ 28,999 $ 16,625 Supplemental disclosures of non-cash investing and financing information: Issuance of common stock for business combinations $ 63,780 $ 103,305 $ — Purchases of property and equipment included in accounts payable and accrued liabilities $ 13,444 $ 8,074 $ 4,630 Vesting of early exercised stock options $ 681 $ 183 $ — (1) During the first quarter of fiscal 2019, we adopted Accounting Standards Update ("ASU") No. 2016-18, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash. We adopted the standard retrospectively for the prior period presented. Our adoption of ASU 2016-18 did not have any significant impact on our consolidated statements of cash flows. (2) Included within other assets—non-current in the consolidated balance sheets. See the accompanying notes to the consolidated financial statements. 87 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. OVERVIEW 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’ hybrid cloud and multicloud strategies. We seek to provide an enterprise cloud platform that empowers our customers to unify various clouds - private, public, distributed - into one seamless cloud, allowing enterprises to choose the right cloud for each application. Our enterprise cloud platform allows enterprises to simplify the complexities of a multicloud environment with automation, cost governance and compliance. Our solutions are primarily sold through channel partners, including distributors, resellers and original equipment manufacturers ("OEMs") (collectively, "Partners"), and delivered directly to our end customers. Principles of Consolidation 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. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no impact on the previously reported net loss or accumulated deficit. 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 the consolidated financial statements and accompanying notes. Such management estimates and assumptions include, but are not limited to, the best estimate of selling prices for products and related support; useful lives and recoverability of intangible assets and property and equipment; allowance for doubtful accounts; determination of fair value of stock-based awards; accounting for income taxes, including the valuation allowance on deferred tax assets and uncertain tax positions; warranty liability; purchase commitment liabilities to our OEMs; sales commissions expense and the period of benefit for deferred commissions; whether an arrangement is or contains a lease; the incremental borrowing rate to measure the present value of operating right-of-use assets and lease liabilities; and contingencies and litigation. Management evaluates these estimates and assumptions on an ongoing basis using historical experience and other factors and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could materially differ from those estimates and assumptions. In response to the ongoing and rapidly evolving COVID-19 pandemic, we considered the impact of the estimated 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 OEMs and impairment of long-lived assets, right-of-use assets, and deferred commissions. Concentration 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, 2018, 2019 and 2020, no end customer accounted for more than 10% of total revenue or accounts receivable. 88 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 July 31, Fiscal Year Ended July 31, Partners 2018 2019 2020 2019 2020 Partner A 18 % 24 % 29 % 27 % 33 % Partner B 13 % 13 % 14 % 18 % 16 % Partner C 10 % 10 % (1) (1) (1) Partner D 20 % 10 % ( 1 ) (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 the consolidated balance sheets and a realized loss within other expense in the consolidated statements of operations. 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 the consolidated financial statements on a recurring basis. The carrying amounts reported in the 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 in January 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. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for doubtful accounts. 89 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The allowance for doubtful accounts is based on the best estimate of the amount of probable credit losses in existing accounts receivable. We evaluate the collectability of our accounts receivable based on known collection risks and historical experience. 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 doubtful accounts 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 doubtful accounts 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 doubtful accounts are as follows: Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Allowance for doubtful accounts—beginning balance $ 132 $ 815 $ 379 Charged to allowance for doubtful accounts 815 437 822 Recoveries — ( 290 ) ( 22 ) Write-offs ( 132 ) ( 583 ) ( 375 ) Allowance for doubtful accounts—ending balance $ 815 $ 379 $ 804 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, 2020. We did not have any material financing leases in the periods presented. Operating lease 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. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. 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 the consolidated statements of cash flows. For our operating leases, we elected to account for lease and non-lease components as a single lease component. Additionally, we do not record leases on the consolidated balance sheet that have a lease term of 12 months or less at the lease commencement date. 90 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Business Combinations We account for our acquisitions using the acquisition method. Goodwill is measured at the acquisition date as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. Significant estimates and assumptions are made by management to value such assets and liabilities. Although we believe that those estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement. Additional information related to the acquisition date fair value of acquired assets and assumed liabilities obtained during the measurement period, not to exceed one year, may result in changes to the recorded values of such assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired. Uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. We continue to collect information and reevaluate these estimates and assumptions quarterly. We will record any adjustments to our preliminary estimates to goodwill, provided that it is within the one-year measurement period. Any contingent consideration payable is recognized at fair value at the acquisition date. Liability-classified contingent consideration is remeasured each reporting period, with changes in fair value recognized in earnings until the contingent consideration is settled. Acquisition related costs incurred in connection with a business combination, other than those associated with the issuance of debt or equity securities, are expensed as incurred. 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. 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. 91 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 2018, 2019 or 2020. 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. • 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 3 of Notes to Consolidated Financial Statements. 92 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Contracts with multiple performance obligations — Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price ("SSP") basis. For deliverables that we routinely sell separately, such as software entitlement and support subscriptions on our core offerings, we determine SSP by evaluating the standalone sales over the trailing 12 months. For those that are not sold routinely, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold and geographic locations. Contract balances — The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services, or when our right to consideration is unconditional. In situations where revenue recognition occurs before invoicing, an unbilled receivable is created, which represents a contract asset. Unbilled accounts receivable, included in accounts receivable, net on the consolidated balance sheets, was not material for any of the periods presented. Payment terms on invoiced amounts are typically 30-45 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of July 31, 2019 and 2020 is presented in the accompanying consolidated balance sheets. Costs to obtain and fulfill a contract — We capitalize commissions paid to sales personnel and the related payroll taxes when customer contracts are signed. These costs are recorded as deferred commissions in the consolidated balance sheets, current and non-current. We determine whether costs should be deferred based on our sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract if the commissions expected to be paid upon renewal are not commensurate with that of the original contract. Accordingly, the amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and included in sales and marketing expense in the 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. 93 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. 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. 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 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 accelerated attribution method to recognize stock-based compensation expense related to employee stock awards that contain both service and performance 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, 2018, 2019 and 2020, we recognized foreign currency losses of $ 3.6 million, $ 2.5 million and $ 9.4 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. 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. 94 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Advertising Costs Advertising costs are charged to sales and marketing expenses as incurred in the consolidated statements of operations. During the fiscal years ended July 31, 2018, 2019 and 2020, advertising expense was $ 14.6 million, $ 26.7 million and $ 38.7 million, respectively. Recently Adopted Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASC 842, which requires the recognition of ROU assets and lease liabilities on the consolidated balance sheets and additional disclosures around key information about leasing arrangements. We adopted the standard effective August 1, 2019, using a modified retrospective transition method. As a result, our consolidated balance sheet as of July 31, 2019 was not restated and continued to be reported under the previous lease standard ("ASC 840"), and is therefore not comparative. We elected the package of practical expedients permitted under the transition guidance, which allowed us to not reassess whether existing arrangements contain leases, not reassess lease classification and not reassess initial direct costs. The standard had a material impact on our consolidated balance sheet, but did not have an impact on our consolidated statement of operations or cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. We recognized ROU assets and lease liabilities of $ 120.2 million and $ 142.1 million, respectively, on our consolidated balance sheet on August 1, 2019, which included reclassifying lease incentives, prepaid rent and deferred rent as components of the ROU asset. The difference between the total ROU assets and total lease liabilities recorded as of August 1, 2019 was due primarily to the derecognition of deferred rent liabilities that were included in accrued expenses and other current liabilities and other liabilities—non-current in our consolidated balance sheet as of July 31, 2019. The operating lease ROU asset also includes any lease payments made prior to commencement date and excludes lease incentives. Refer to Note 7 for additional details. In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides companies with an option to reclassify stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. We adopted the new standard effective August 1, 2019 and the adoption had no impact on our consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarify and amend existing guidance. The new standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted, including interim reporting periods within those fiscal years. We early adopted the new standard effective November 1, 2019 and the adoption had no impact in our consolidated financial statements. Recently Issued and Not Yet Adopted Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including interim reporting periods within those fiscal years. ASU 2016-13 is effective for us in the first quarter of fiscal 2021. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements and related disclosures. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including interim reporting periods within those fiscal years. ASU 2018-13 is effective for us in the first quarter of fiscal 2021. We do not expect the adoption of this new standard to have a material impact on our quarterly or annual disclosures. 95 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"). 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 a 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. ASU 2020-06 is effective for us in the first quarter of fiscal 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. As such, we can early adopt this standard beginning in the first quarter of fiscal 2022. We are currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements. NOTE 2. BUSINESS COMBINATIONS We completed one acquisition in fiscal 2019. We did not complete any acquisitions in fiscal 2020. The purchase price allocation for the fiscal 2019 acquisition, discussed in detail below, reflects various fair value estimates and analyses, including certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes and goodwill, which were subject to change within the measurement period as preliminary valuations were finalized. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined. We determined the fair values of the intangible assets with the assistance of a valuation firm. The estimation of the fair value of the intangible assets required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors and estimates of future revenues and costs. Our consolidated financial statements for the fiscal years ended July 31, 2019 and 2020 include the operations of the acquired company from the date the deal closed. Pro forma results of operations have not been presented because they are not material to our consolidated financial statements. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill recognized in this acquisition is primarily attributable to the synergies expected from the expanded market opportunities with our offerings and the knowledgeable and experienced workforce that joined us as part of the acquisition. Goodwill will not be amortized, but will instead be tested for impairment annually, or more frequently if certain indicators of impairment are present. Mainframe2, Inc. On August 24, 2018, we completed the acquisition of Mainframe2, Inc. ("Frame"), a privately held Delaware corporation with its principal offices in San Mateo, California ("Frame Acquisition"). Frame provides a cloud-based Windows desktop and application delivery service. The aggregate purchase price of approximately $ 130.0 million consisted of approximately $ 26.7 million in cash and 1,813,321 shares of our Class A common stock, with an aggregate fair value of approximately $ 103.3 million. The fair value of the shares of common stock issued was determined to be $ 56.97 per share, the closing price of our stock on August 24, 2018. Certain portions of the consideration for the acquisition, both cash and shares of our Class A common stock, were placed in escrow to secure the indemnification obligations of certain Frame security holders. 96 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We also entered into employee holdback or deferred payment arrangements with certain employees of Frame who joined Nutanix after the acquisition, totaling approximately $ 43.3 million, of which $ 6.6 million will be paid in cash ("cash holdback") and $ 36.7 million will be satisfied by issuing shares of our Class A common stock ("share holdback"). As the earning of the share holdback and payment of the cash holdback are contingent upon the continuous service of the employees, they are being accounted for as post-combination compensation expense over the required service period of three years . The 643,746 shares of our Class A common stock related to the $ 36.7 million share holdback have a fair value of $ 56.97 per share, the closing price of our Class A common stock on August 24, 2018, and had been issued at closing and are currently being held in escrow. This holdback is being accounted for as stock-based compensation over the required three-year service period. On September 21, 2018, we filed a Form S-3 registration statement with the SEC for the 2,451,322 shares of our Class A common stock that were issued as partial consideration in the Frame Acquisition. The purchase price allocation primarily included approximately $ 97.3 million of goodwill and $ 38.2 million of intangible assets, including $ 31.8 million related to developed technology and $ 2.2 million related to customer relationships, which are being amortized over an estimated economic life of five years , and $ 4.2 million related to trade name, which is being amortized over an estimated economic life of four years . Goodwill was not deductible for income tax purposes. Acquisition-related costs were expensed as incurred as general and administrative expenses on our consolidated statement of operations. We recognized approximately $ 1.1 million of acquisition-related costs in connection with the Frame Acquisition. The following table presents the aggregate purchase price allocation related to the Frame acquisition: As of July 31, 2019 (in thousands) Goodwill $ 97,328 Amortizable intangible assets 38,180 Tangible assets acquired 10,811 Liabilities assumed ( 16,293 ) Total consideration $ 130,026 NOTE 3. REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS Disaggregation of Revenue and Revenue Recognition We generate revenue primarily from the sale of our enterprise cloud platform, which can be delivered pre-installed on an appliance that is configured to order or delivered separately to be utilized on a variety of certified hardware platforms. Software can be delivered separately or on a configured-to-order appliance. When the software is not portable to other appliances, it generally has a term equal to the life of the associated appliance, while subscription term-based licenses typically have a term of one to five years . Configured-to-order appliances, including our Nutanix-branded NX hardware line, are typically sold through Partners and can be purchased from one of our OEMs or in some cases directly from Nutanix. Our enterprise cloud platform is typically purchased with one or more years of support and entitlements, which includes the right to software upgrades and enhancements as well as technical support. A substantial portion of sales are made through channel partners and OEM relationships. 97 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table depicts the disaggregation of revenue by revenue type, consistent with how we evaluate our financial performance: Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Subscription $ 330,645 $ 648,415 $ 1,030,180 Non-portable software 543,952 449,131 208,158 Hardware 257,314 105,321 23,455 Professional services 23,546 33,276 45,889 Total revenue $ 1,155,457 $ 1,236,143 $ 1,307,682 Prior to the first quarter of fiscal 2019, we disaggregated revenue into the following categories: software revenue, hardware revenue and support, entitlements and other services revenue. Software revenue included non-portable software and term-based software licenses. Under the new disaggregated revenue categories, included in the table above, term-based software licenses are included within subscription revenue and non-portable software is presented separately. Support, entitlements and other services revenue included software entitlement and support subscriptions and professional services. Under the new disaggregated revenue categories, software entitlement and support subscriptions are included within subscription revenue and professional services revenue is presented separately. There was no change to the presentation of hardware revenue. 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 $ 243.9 million, $ 376.4 million and $ 508.8 million of our subscription revenue for fiscal 2018, 2019 and 2020, respectively. • Upfront — Revenue from our subscription software licenses is generally recognized upfront upon transfer of control to the customer, which happens when we make the software available to the customer. These subscription software licenses represented approximately $ 86.7 million, $ 272.0 million and $ 521.3 million of our subscription revenue for fiscal 2018, 2019 and 2020, respectively. Non-portable software revenue — Non-portable software revenue includes sales of our enterprise cloud platform when delivered on a configured-to-order appliance by us or one of our OEM partners. The software licenses associated with these sales are typically non-portable and have a term equal to the life of the appliance on which the software is delivered. Revenue from our non-portable software products is generally recognized upon transfer of control to the customer. Hardware revenue — In transactions where we deliver the hardware appliance, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer. Professional services revenue — We also sell professional services with our products. We recognize revenue related to professional services as they are performed. 98 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 2018 $ 631,207 $ 114,379 Additions 682,241 158,062 Revenue/commissions recognized ( 403,724 ) ( 118,729 ) Assumed in a business combination 320 — Balance as of July 31, 2019 910,044 153,712 Additions 815,257 233,917 Revenue/commissions recognized ( 541,860 ) ( 172,101 ) Balance as of July 31, 2020 $ 1,183,441 $ 215,528 During the fiscal year ended July 31, 2019, we recognized revenue of approximately $ 275.0 million pertaining to amounts deferred as of July 31, 2018. During the fiscal year ended July 31, 2020, we recognized revenue of approximately $ 371.8 million pertaining to amounts deferred as of July 31, 2019. The majority of our contracted but not invoiced performance obligations are subject to cancellation terms. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not recognized"), which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods and excludes performance obligations that are subject to cancellation terms. Contracted not recognized revenue was approximately $ 1.2 billion as of July 31, 2020, of which we expect to recognize approximately 46 % over the next 12 months, and the remainder thereafter. NOTE 4. 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 and Liabilities 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. 99 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The fair value of our financial assets and liabilities measured on a recurring basis is as follows: As of July 31, 2019 Level I Level II Level III Total (in thousands) Financial Assets: Cash equivalents: Money market funds $ 33,156 $ — $ — $ 33,156 Commercial paper — 103,029 — 103,029 U.S. government securities — 119,933 — 119,933 Corporate bonds — 9,996 — 9,996 Short-term investments: Corporate bonds — 354,549 — 354,549 Commercial paper — 92,851 — 92,851 U.S. government securities — 64,756 — 64,756 Total measured at fair value $ 33,156 $ 745,114 $ — $ 778,270 Cash 130,564 Total cash, cash equivalents and short-term investments $ 908,834 As of July 31, 2020 Level I Level II Level III Total (in thousands) Financial Assets: Cash equivalents: Money market funds $ 142,936 $ — $ — $ 142,936 Commercial paper — 8,999 — 8,999 Short-term investments: Corporate bonds — 345,265 — 345,265 Commercial paper — 29,702 — 29,702 U.S. government securities — 26,074 — 26,074 Total measured at fair value $ 142,936 $ 410,040 $ — $ 552,976 Cash 166,802 Total cash, cash equivalents and short-term investments $ 719,778 100 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. 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, 2019 As of July 31, 2020 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value (in thousands) Convertible senior notes, net $ 458,910 $ 527,275 $ 490,222 $ 529,385 The carrying value of the 2023 Notes as of July 31, 2019 and 2020 was net of the unamortized debt discount of $ 110.0 million and $ 80.3 million, respectively, and unamortized debt issuance costs of $ 6.1 million and $ 4.5 million, respectively. 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 measurement due to the limited trading activity. NOTE 5. BALANCE SHEET COMPONENTS Short-Term Investments The amortized cost of our short-term investments approximates their fair value. As of July 31, 2019 and 2020, unrealized gains and losses from our short-term investments were not material. As of July 31, 2019 and 2020, unrealized losses from securities that were in an unrealized loss position for more than 12 months were not material. Unrealized losses related to our short-term investments are due to interest rate fluctuations, as opposed to credit quality. As a result, at July 31, 2019 and 2020, we did not record any other-than-temporary impairments for these investments. The following table summarizes the estimated fair value of our investments in marketable debt securities by their contractual maturity dates: As of July 31, 2020 (in thousands) Due within one year $ 298,074 Due in one to two years 102,967 Total $ 401,041 Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consists of the following: As of July 31, 2019 2020 (in thousands) Prepaid operating expenses $ 37,864 $ 31,690 Tenant improvement allowance receivables — 8,557 VAT receivables 5,068 8,381 Prepaid income taxes 19,690 — Other current assets 12,043 14,404 Total prepaid expenses and other current assets $ 74,665 $ 63,032 101 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The decrease in prepaid expenses and other current assets from July 31, 2019 to July 31, 2020 was due primarily to the receipt of an $ 18.0 million corporate income tax refund in the first quarter of fiscal 2020, partially offset by the addition of $ 8.6 million of tenant improvement allowances, which are recorded within prepaid expenses and other current assets on the consolidated balance sheet as of July 31, 2020 as a result of our adoption of ASC 842 during the first quarter of fiscal 2020. Property and Equipment, Net Property and equipment, net consists of the following: Estimated Useful Life As of July 31, 2019 2020 (in months) (in thousands) Computer, production, engineering and other equipment 36 $ 200,762 $ 245,245 Demonstration units 12 59,981 66,569 Leasehold improvements (1) 46,520 65,557 Furniture and fixtures 60 12,868 17,026 Total property and equipment, gross 320,131 394,397 Less: accumulated depreciation (2) ( 183,169 ) ( 251,225 ) Total property and equipment, net $ 136,962 $ 143,172 (1) Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining lease term. (2) Includes a $ 1.2 million write-off related to the impairment of certain leasehold improvements for the fiscal quarter ended January 31, 2020. For additional information on this lease-related impairment, refer to Note 7. Depreciation expense related to our property and equipment was $ 43.7 million, $ 60.8 million and $ 76.4 million for the fiscal years ended July 31, 2018, 2019 and 2020, respectively. Intangible Assets, Net Intangible assets, net consists of the following: As of July 31, 2019 2020 (in thousands) Developed technology $ 79,300 $ 79,300 Customer relationships 8,860 8,860 Trade name 4,170 4,170 Total intangible assets, gross 92,330 92,330 Less: Accumulated amortization of developed technology ( 21,210 ) ( 35,987 ) Accumulated amortization of customer relationships ( 3,392 ) ( 4,953 ) Accumulated amortization of trade name ( 955 ) ( 1,998 ) Total accumulated amortization ( 25,557 ) ( 42,938 ) Total intangible assets, net $ 66,773 $ 49,392 Amortization expense related to our intangible assets is being recognized in the consolidated statements of operations within product cost of revenue for developed technology and sales and marketing expense for customer relationships and trade name. 102 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, 2019 2020 (in thousands) Intangible assets, net—beginning balance $ 45,366 $ 66,773 Acquired intangible assets 38,180 — Amortization of intangible assets (1) ( 16,773 ) ( 17,381 ) Intangible assets, net—ending balance $ 66,773 $ 49,392 (1) Represents amortization expense related to intangible assets recognized during the year in the 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) 2021 $ 17,380 2022 16,183 2023 10,856 2024 3,210 2025 1,763 Total $ 49,392 Goodwill The changes in the carrying amount of goodwill are as follows: Carrying Amount (in thousands) Balance at July 31, 2018 $ 87,759 Acquired in Frame Acquisition 97,328 Other 93 Balance at July 31, 2019 185,180 Other 80 Balance at July 31, 2020 $ 185,260 103 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accrued Compensation and Benefits Accrued compensation and benefits consists of the following: As of July 31, 2019 2020 (in thousands) Accrued commissions $ 31,703 $ 33,503 Accrued vacation 15,475 24,006 Contributions to ESPP withheld 20,778 16,563 Payroll taxes payable 8,504 10,742 Accrued benefits 6,819 8,426 Accrued bonus 11,413 5,568 Other 5,112 10,301 Total accrued compensation and benefits $ 99,804 $ 109,109 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consists of the following: As of July 31, 2019 2020 (in thousands) Income taxes payable $ 9,651 $ 9,703 Accrued professional services 2,996 3,006 Other 16,150 13,215 Total accrued expenses and other current liabilities $ 28,797 $ 25,924 NOTE 6. CONVERTIBLE SENIOR NOTES In January 2018, we issued Convertible Senior Notes with a 0 % interest rate for an aggregate principal amount of $ 575.0 million, due in 2023, 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 prior to the maturity of the 2023 Notes. The total net proceeds from the 2023 Notes are as follows: Amount (in thousands) Principal amount $ 575,000 Less: initial purchasers' discount ( 10,781 ) Less: cost of the bond hedges ( 143,175 ) Add: proceeds from the sale of warrants 87,975 Less: other issuance costs ( 707 ) Net proceeds $ 508,312 The 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. 104 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Each $1,000 of principal of the 2023 Notes will initially be convertible into 20.4705 shares of our Class A common stock, which is equivalent to an initial conversion price of approximately $ 48.85 per share, subject to adjustment upon the occurrence of specified events. Holders of these Notes may convert their Notes at their option at any time prior to the close of the business day immediately preceding October 15, 2022, only under the following circumstances: 1) during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter, is greater than or equal to 130 % of the conversion price on each applicable trading day; 2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our Class A common stock and the conversion rate for the 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 $ 22.19 on July 31, 2020, 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, 2020. As such, the 2023 Notes are not convertible for the fiscal quarter commencing after July 31, 2020. On or after October 15, 2022, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing conditions. Upon conversion of the 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 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 Notes at a repurchase price equal to 100 % of the principal amount of the repurchased Notes, plus accrued and unpaid interest. We may not redeem the 2023 Notes prior to the maturity date, and no sinking fund is provided for the 2023 Notes. In accounting for the issuance of the 2023 Notes, we separated the 2023 Notes into liability and equity components. The carrying amount of the liability component of approximately $ 423.4 million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component of approximately $ 151.6 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2023 Notes. The difference between the principal amount of the 2023 Notes and the liability component (the "debt discount") is amortized to interest expense using the effective interest method over the term of the 2023 Notes. The equity component of the 2023 Notes is included in additional paid-in capital in the consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification. 105 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We incurred transaction costs related to the issuance of the 2023 Notes of approximately $ 11.5 million, consisting of an initial purchasers' discount of $ 10.8 million and other issuance costs of approximately $ 0.7 million. In accounting for the transaction costs, we allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the 2023 Notes. Transaction costs attributable to the liability component were approximately $ 8.5 million, recorded as debt issuance costs (presented as contra debt in the consolidated balance sheets), and are being amortized to interest expense over the term of the 2023 Notes. The transaction costs attributable to the equity component were approximately $ 3.0 million and were net with the equity component within stockholders’ equity. The 2023 Notes consisted of the following: As of July 31, 2019 2020 (in thousands) Principal amounts: Principal $ 575,000 $ 575,000 Unamortized debt discount (1) ( 109,956 ) ( 80,298 ) Unamortized debt issuance costs (1) ( 6,134 ) ( 4,480 ) Net carrying amount $ 458,910 $ 490,222 Carrying amount of equity component (2) $ 148,598 $ 148,598 (1) Included in the consolidated balance sheets within "convertible senior notes, net" and amortized over the remaining life of the 2023 Notes using the effective interest rate method. The effective interest rate is 6.62 %. (2) Included in the consolidated balance sheets within additional paid-in capital, net of $ 3.0 million in equity issuance costs. As of July 31, 2020, the remaining life of the 2023 Notes was approximately 29 months. The following table sets forth the total interest expense recognized related to the 2023 Notes: Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Interest expense related to amortization of debt discount $ 13,909 $ 27,764 $ 29,658 Interest expense related to amortization of debt issuance costs 776 1,549 1,654 Total interest expense $ 14,685 $ 29,313 $ 31,312 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 the consolidated balance sheets as of July 31, 2019 and 2020. 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. 106 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Impact to Earnings per Share The 2023 Notes will have no impact to diluted earnings per share ("EPS") until they meet the criteria for conversion, as discussed above, as we intend to settle the principal amount of the 2023 Notes in cash upon conversion. Under the treasury stock method, in periods when we report net income, we are required to include the effect of additional shares that may be issued under the 2023 Notes when the price of our Class A common stock exceeds the conversion price. Under this method, the cumulative dilutive effect of the 2023 Notes would be approximately 3.9 million shares if the average price of our Class A common stock was $ 73.46 . However, upon conversion, there will be no economic dilution from the 2023 Notes, as exercise of the note hedges eliminate any dilution that would have otherwise occurred. The note hedges are required to be excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method. The warrants will have a dilutive effect when the average share price exceeds the warrant strike price of $ 73.46 per share. As the price of our Class A common stock continues to increase above the warrant strike price, additional dilution would occur at a declining rate so that a $10 increase from the warrant strike price would yield a cumulative dilution of approximately 4.9 million diluted shares for EPS purposes. However, upon conversion, the note hedges would neutralize the dilution from the 2023 Notes so that there would only be dilution from the warrants, which would result in an actual dilution of approximately 1.4 million shares at a common stock price of $ 83.46 . NOTE 7. LEASES We have operating leases for offices, research and development facilities and datacenters. Our leases have remaining lease terms of one year to approximately nine 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 for the fiscal year ended July 31, 2020, 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 lease expense recognized prior to our adoption of ASC 842 was $ 19.0 million and $ 37.0 million for the fiscal years ended July 31, 2018 and 2019, respectively. During the second quarter of fiscal 2020, we ceased using certain office spaces in Bangalore, India. 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 the operating lease right-of-use assets and approximately $ 1.2 million relates to the impairment of leasehold improvements. Additional charges related to asset impairments may be recorded in the future. 107 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Supplemental balance sheet information related to leases is as follows: As of July 31, 2020 (in thousands) Operating leases: Operating lease right-of-use assets, gross $ 159,292 Accumulated amortization ( 31,966 ) Operating lease right-of-use assets, net $ 127,326 Operating lease liabilities—current $ 36,569 Operating lease liabilities—non-current 116,794 Total operating lease liabilities $ 153,363 Weighted average remaining lease term (in years): 3.7 Weighted average discount rate: 5.3 % Supplemental cash flow and other information related to leases is as follows: Fiscal Year Ended July 31, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 42,231 Lease liabilities arising from obtaining right-of-use assets: Operating leases $ 45,278 The undiscounted cash flows for our operating lease liabilities as of July 31, 2020 were as follows: Fiscal Year Ending July 31: Amount (in thousands) 2021 $ 43,874 2022 44,953 2023 43,313 2024 30,762 2025 5,158 Thereafter 3,414 Total lease payments 171,474 Less: imputed interest ( 18,111 ) Total lease obligation 153,363 Less: current lease obligations ( 36,569 ) Long-term lease obligations $ 116,794 As of July 31, 2020, we have additional operating lease commitments of approximately $ 11.1 million on an undiscounted basis for certain office leases that have not yet commenced. These operating leases will commence during fiscal 2021 and fiscal 2022, with lease terms of two to six years . 108 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, the following table summarizes the future minimum payments due under our operating leases as of July 31, 2019, reported under ASC 840: Fiscal Year Ending July 31: Amount (in thousands) 2020 $ 39,540 2021 41,909 2022 41,332 2023 40,695 2024 30,240 Thereafter 3,511 Total $ 197,227 NOTE 8. COMMITMENTS AND CONTINGENCIES Purchase Commitments In the normal course of business, we make commitments with our OEMs to ensure them a minimum level of financial consideration for their investment in our joint solutions. These commitments are based on revenue targets or on-hand inventory and non-cancelable purchase orders for non-standard components. We record a charge related to these items when we determine that it is probable a loss will be incurred and we are able to estimate the amount of the loss. Our historical charges have not been material. As of July 31, 2020, we had up to approximately $ 62.5 million of non-cancelable purchase obligations and other commitments pertaining to our daily business operations, and up to approximately $ 81.2 million in the form of guarantees to certain of our OEMs. 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 the consolidated financial statements to date. 109 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Legal Proceedings Beginning on March 29, 2019, several purported securities class actions were filed in the United States District Court for the Northern District of California against us and two of our officers. The initial complaints generally alleged that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5. In July 2019, the court consolidated the actions into a single action, and appointed a lead plaintiff, who 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, and the court granted that motion 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 "Current Complaint"), again naming us and two of our officers as defendants. The Current 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 Current Complaint seeks monetary damages in an unspecified amount. On May 22, 2020, the Company and the individual defendants filed a motion to dismiss the Current Complaint, which was denied on September 11, 2020. The litigation is still in early stages, and we plan to continue to vigorously defend against the allegations and we are not able to determine what, if any, liabilities will attach to the Current Complaint. Beginning on July 1, 2019, several shareholder derivative complaints were filed in each of the U.S. District Court for the Northern District of California, the Superior Court of California for the County of San Mateo and the Superior Court of California for the County of Santa Clara, naming (i) fourteen of Nutanix’s current and former officers and directors as defendants and (ii) the Company as a nominal defendant. The complaints generally alleged claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment, all based on the same general underlying allegations that are contained in the securities class actions described above. The Superior Court complaints additionally alleged insider trading and violation of California Corporations Code Section 25402, and the Santa Clara County Superior Court complaints further included additional claims for "abuse of control" and "gross mismanagement." On January 7, 2020, the U.S. District Court for the North District of California consolidated the federal actions and, on March 6, 2020, the plaintiffs filed a stipulation designating a lead plaintiff and deeming the lead plaintiff’s original complaint as the designated complaint in the matter. On April 22, 2020, (i) the individual defendants filed a motion to dismiss the designated complaint on the grounds that it fails to state a claim, and (ii) we filed a motion to dismiss the designated complaint on the grounds that the plaintiffs failed to make a demand on our Board of Directors before filing the designated complaint. In response, the plaintiffs filed an amended complaint on June 17, 2020. The defendants filed motions to dismiss the amended complaint on July 17, 2020. A hearing on the motions to dismiss is scheduled for September 23, 2020. In August 2019, the Superior Court of California for the County of Santa Clara consolidated the Santa Clara derivative actions into a single action and, in January 2020, the court stayed the consolidated Santa Clara action in deference to the federal derivative actions described above. On September 17, 2019, the Superior Court of California for the County of San Mateo granted the plaintiff’s request for voluntary dismissal without prejudice. The remaining derivative cases are in the very early stages and we are not able to determine what, if any, liabilities will attach to those complaints. We are not currently a party to any other legal proceedings that we believe to be material to our business or financial condition. From time to time, we may become party to various litigation matters and subject to claims that arise in the ordinary course of business. NOTE 9. STOCKHOLDERS’ EQUITY We have two classes of authorized common stock, Class A common stock and Class B common stock. As of July 31, 2020, we had one billion shares of Class A common stock authorized, with a par value of $ 0.000025 per share, and 200 million shares of Class B common stock authorized, with a par value of $ 0.000025 per share. As of July 31, 2020, we had 186.8 million shares of Class A common stock issued and outstanding and 15.1 million shares of Class B common stock issued and outstanding. 110 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Holders of Class B common stock are entitled to 10 votes for each share of Class B common stock held on all matters submitted to a vote of stockholders. Except with respect to voting, the rights of the holders of Class A and Class B common stock are identical. Shares of Class B common stock are voluntarily convertible into shares of Class A common stock at the option of the holder and are generally automatically converted into shares of our Class A common stock upon a sale or transfer. Shares issued in connection with exercises of stock options, vesting of restricted stock units, or shares purchased under the employee stock purchase plan are generally automatically converted into shares of our Class A common stock. Shares issued in connection with an exercise of common stock warrants are converted into shares of our Class B common stock. Common Stock Reserved for Issuance As of July 31, 2020, we had reserved shares of common stock for future issuance as follows: As of July 31, 2020 (in thousands) Shares reserved for future equity grants 12,724 Shares underlying outstanding stock options 7,546 Shares underlying outstanding restricted stock units 22,632 Shares reserved for future employee stock purchase plan awards 9,169 Total 52,071 NOTE 10. 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 will 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 restricted stock units ("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, 2018 and 2019, the number of shares of Class A common stock available for issuance under the 2016 Plan increased by 8.6 million and 9.4 million shares, respectively, pursuant to these provisions. As of July 31, 2020, we had reserved a total of 42.9 million shares for the issuance of equity awards under the Stock Plans, of which 12.7 million shares were still available for grant. On August 1, 2020, the number of shares of Class A common stock available for issuance under the 2016 Plan increased by 10.1 million shares pursuant to the automatic increase provisions. 111 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 October 2018, the Compensation Committee of our Board of Directors approved the grant of 100,000 RSUs subject to certain market conditions ("MSUs") to our Chief Executive Officer, with a weighted average grant date fair value per unit of $ 25.16 . The MSUs will vest based upon the achievement of an average stock price of $ 80 over a performance period of approximately 4.5 years (the "Performance Period"), subject to his continuous service on each vesting date. The average stock price is calculated based on the average closing price of one share of our Class A common stock, as reported on the Nasdaq Stock Market during the 180-day period ending on the last trading day prior to each measurement date (as applicable, the "Average Stock Price"). The Average Stock Price is measured once per quarter during the Performance Period, and: • If the Average Stock Price on any given quarterly measurement date does not equal or exceed $ 80 , then none of the MSUs will vest that quarter, and any unvested MSUs will carry over to the next quarter (the "Carryover MSUs"); • If the Average Stock Price on any given quarterly measurement date equals or exceeds $ 80 , then 1/18th of the MSUs plus the applicable Carryover MSUs, if any, would vest; and/or • If the Average Stock Price never equals or exceeds $ 80 during the Performance Period, the MSUs would terminate at the end of the Performance Period. In December 2019, the Compensation Committee of our Board of Directors approved the grant of 200,000 additional MSUs to our Chief Executive Officer, with a weighted average grant date fair value per unit of $ 20.80 . The MSUs will vest based upon the achievement of an average stock price of $ 65 over a performance period of approximately 4.5 years (the "Second Performance Period"), subject to his continuous service on each vesting date. In February 2020, the Compensation Committee of our Board of Directors approved the grant of 75,000 MSUs to our Executive Vice President of Worldwide Sales, with a weighted average grant date fair value per unit of $ 20.80 . The MSUs will vest based upon the achievement of an average stock price of $ 65 over a performance period of approximately 3.9 years (the "Second Performance Period"), subject to his continuous service on each vesting date. The average stock price is calculated based on the average closing price of one share of our Class A common stock, as reported on the Nasdaq Stock Market during the 180-day period ending on the last trading day prior to each measurement date (as applicable, the "Second Average Stock Price"). The Second Average Stock Price is measured once per quarter during the Second Performance Period, and: • If the Second Average Stock Price on any given quarterly measurement date does not equal or exceed $ 65 , then none of the MSUs will vest that quarter, and any unvested MSUs will carry over to the next quarter (the "Carryover MSUs"); • If the Second Average Stock Price on any given quarterly measurement date equals or exceeds $ 65 , then 1/18th of the MSUs plus the applicable Carryover MSUs, if any, would vest; and/or • If the Second Average Stock Price never equals or exceeds $ 65 during the Second Performance Period, the MSUs would terminate at the end of the Second Performance Period. We used Monte Carlo simulations to calculate the fair value of these awards on the grant date. 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 Performance Period or Second Performance Period, as applicable. As of July 31, 2020, 375,000 MSUs remained outstanding. 112 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Below is a summary of RSU activity, including MSUs, under the Stock Plans: Fiscal Year Ended July 31, 2019 2020 Number of Shares Grant Date Fair Value per Share Number of Shares Grant Date Fair Value per Share (in thousands) (in thousands) Outstanding at beginning of period 23,597 $ 31.20 22,136 $ 36.72 Granted 11,204 $ 42.23 13,502 $ 27.31 Released ( 8,717 ) $ 30.15 ( 8,807 ) $ 33.86 Forfeited ( 3,948 ) $ 33.86 ( 4,199 ) $ 34.82 Outstanding at end of period 22,136 $ 36.72 22,632 $ 32.70 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 years from the date of grant. The term of an ISO grant to a 10% stockholder will not exceed five years 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. Below is a summary of stock option activity under the Stock Plans: Fiscal Year Ended July 31, 2019 2020 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 11,333 $ 5.12 5.6 $ 496,022 8,740 $ 5.20 4.6 $ 153,000 Options granted — $ — — $ — Options exercised ( 2,555 ) $ 4.77 ( 1,192 ) $ 5.83 Options canceled/forfeited ( 38 ) $ 10.09 ( 2 ) $ 26.21 Outstanding at end of period 8,740 $ 5.20 4.6 $ 153,000 7,546 $ 5.10 3.6 $ 129,010 Exercisable at end of period 8,721 $ 5.18 4.6 $ 152,837 7,545 $ 5.09 3.7 $ 129,004 Vested and expected to vest at end of period 8,740 $ 5.20 4.6 $ 153,000 7,546 $ 5.10 3.6 $ 129,010 Stock options exercisable as of July 31, 2019 includes 8.0 million vested options and 0.7 million unvested options with an early exercise provision. Stock options exercisable as of July 31, 2020 includes 7.0 million vested options and 0.5 million unvested options with an early exercise provision. There were no options granted during fiscal 2019 or 2020. The aggregate intrinsic value of stock options exercised during the fiscal years ended July 31, 2018, 2019 and 2020 was $ 289.4 million, $ 90.3 million and $ 23.4 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 $ 33.1 million, $ 12.2 million and $ 6.9 million for the fiscal years ended July 31, 2018, 2019 and 2020, respectively. The total grant date fair value of stock options vested was $ 11.5 million, $ 4.4 million and $ 1.0 million for the fiscal years ended July 31, 2018, 2019 and 2020, respectively. 113 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 ("Original 2016 ESPP"). The Original 2016 ESPP became effective in connection with our IPO. On December 13, 2019, during our 2019 Annual Meeting of Stockholders, our stockholders approved certain amendments to the Original 2016 ESPP. Under the amended and restated Original 2016 ESPP ("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, 2020, 3.3 million shares of common stock were purchased under the 2016 ESPP for an aggregate amount of $ 50.6 million. As of July 31, 2020, 9.2 million shares were available for future issuance under the 2016 ESPP. 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, 2018 2019 2020 Expected term (in years) 0.75 0.84 0.92 Risk-free interest rate 1.4 % 2.5 % 0.1 % Volatility 49.8 % 69.0 % 73.4 % Dividend yield — % — % — % Stock-Based Compensation Total stock-based compensation expense recognized in the consolidated statements of operations is as follows: Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Cost of revenue: Product $ 2,580 $ 3,535 $ 5,334 Support, entitlements and other services 8,945 15,326 22,014 Sales and marketing 65,060 107,751 126,015 Research and development 74,389 140,519 153,252 General and administrative 26,894 39,598 45,383 Total stock-based compensation expense $ 177,868 $ 306,729 $ 351,998 As of July 31, 2020, unrecognized stock-based compensation expense related to outstanding stock awards was approximately $ 689.9 million and is expected to be recognized over a weighted average period of approximately 2.5 years. 114 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 11. NET LOSS PER SHARE 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 treasury stock 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. The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. As the liquidation and dividend rights are identical, our undistributed earnings or losses are 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 will, therefore, be 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 Class A and Class B common stockholders is as follows: Fiscal Year Ended July 31, 2018 2019 2020 (in thousands, except per share data) Numerator: Net loss $ ( 297,161 ) $ ( 621,179 ) $ ( 872,883 ) Denominator: Weighted average shares—basic and diluted 164,091 181,031 194,719 Net loss per share attributable to common stockholders—basic and diluted $ ( 1.81 ) $ ( 3.43 ) $ ( 4.48 ) 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: As of July 31, 2018 2019 2020 (in thousands) Outstanding stock options and RSUs 34,930 30,876 30,178 Employee stock purchase plan 1,311 1,659 4,368 Contingently issuable shares pursuant to business combinations 277 749 506 Common stock subject to repurchase 47 — — Common stock warrants 34 34 — Total 36,599 33,318 35,052 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. Shares issued in connection with an exercise of the common stock warrants are converted into shares of our Class B common stock and are voluntarily convertible into shares of Class A common stock at the option of the holder. 115 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 12. INCOME TAXES Income Taxes Loss before provision for income taxes by fiscal year consisted of the following: Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Domestic $ ( 201,666 ) $ ( 658,938 ) $ ( 905,840 ) Foreign ( 88,048 ) 45,878 50,619 Loss before provision for income taxes $ ( 289,714 ) $ ( 613,060 ) $ ( 855,221 ) Provision for income taxes by fiscal year consisted of the following: Fiscal Year Ended July 31, 2018 2019 2020 (in thousands) Current: U.S. federal $ 2,059 $ ( 1,998 ) $ 175 State and local 429 312 79 Foreign 8,541 17,270 18,033 Total current taxes 11,029 15,584 18,287 Deferred: U.S. federal ( 3,387 ) ( 4,949 ) 80 State and local ( 718 ) ( 770 ) — Foreign 523 ( 1,746 ) ( 705 ) Total deferred taxes ( 3,582 ) ( 7,465 ) ( 625 ) Provision for income taxes $ 7,447 $ 8,119 $ 17,662 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, 2018 2019 2020 (in thousands) U.S. federal income tax at statutory rate $ ( 75,779 ) $ ( 128,680 ) $ ( 179,514 ) Change in valuation allowance 25,274 142,273 145,244 Stock-based compensation ( 73,631 ) ( 23,378 ) 30,913 Effect of foreign operations 26,117 14,305 12,676 Non-deductible expenses 2,115 4,651 5,393 Change in unrecognized tax benefit 653 727 1,709 State income taxes ( 290 ) ( 458 ) 79 Transfer pricing adjustments 4,584 ( 3 ) 7 U.S. tax reform impact 93,352 — — Intangible asset migration 4,461 ( 2,027 ) — Other 591 709 1,155 Total $ 7,447 $ 8,119 $ 17,662 116 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During the fiscal year ended July 31, 2018, our provision for income taxes was primarily attributable to the alternative minimum tax in the U.S. related to the migration of certain intangible assets and foreign tax provisions in certain foreign jurisdictions in which we conduct business, partially offset by a partial valuation allowance release in the U.S. due to acquisitions completed during fiscal 2018. During the fiscal year ended July 31, 2019, our provision for income taxes was primarily attributable to foreign tax provisions in certain foreign jurisdictions in which we conduct business, partially offset by a partial valuation release in the U.S. due to an acquisition completed during fiscal 2019 and a tax benefit related to the change in tax law. During the fiscal year ended July 31, 2020, our provision for income taxes was primarily attributable to foreign tax provisions in certain foreign jurisdictions in which we conduct business. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted by the United States government. However, the CARES Act did not have a material impact on our provision for income taxes for the fiscal year ended July 31, 2020. In June 2020, the U.S. Supreme Court denied certiorari in the case of Altera Corp. v. Commissioner ("Altera"). We have concluded that the law remains unsettled and continue to record unrecognized tax benefits as we exclude stock-based compensation costs from our cost sharing arrangements. Any potential impact of a final adverse decision would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. We will continue to monitor developments and the potential effect on our consolidated financial statements and tax filings. 117 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows: As of July 31, 2019 2020 (in thousands) Deferred tax assets: Net operating loss carryforward $ 294,577 $ 412,110 Tax credit carryforward 109,921 152,330 Deferred revenue 71,859 122,236 Leases — 48,270 Intangible assets 35,764 31,119 Stock-based compensation expense 27,493 24,177 Accruals and reserves 14,825 13,401 Property and equipment 633 2,234 Other assets 24,258 29,022 Total deferred tax assets 579,330 834,899 Deferred tax liabilities: Deferred commission expense ( 35,814 ) ( 50,344 ) Leases — ( 44,502 ) Acquisition-related ( 11,515 ) ( 8,003 ) Property and equipment ( 9,174 ) ( 5,629 ) Foreign branch taxes ( 4,607 ) ( 5,175 ) Prepaid expenses ( 2,303 ) ( 2,140 ) Other ( 1,621 ) ( 1,991 ) Total deferred tax liabilities ( 65,034 ) ( 117,784 ) Valuation allowance ( 509,764 ) ( 712,093 ) Net deferred tax assets $ 4,532 $ 5,022 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 $ 712.1 million as of July 31, 2020. The net increase in the total valuation allowance for the fiscal years ended July 31, 2019 and 2020 was $ 282.8 million and $ 202.3 million, respectively. As of July 31, 2020, we had approximately $ 1.9 billion of federal net operating loss carryforwards and $ 1.1 billion of state net operating loss carryforwards available to reduce future taxable income, which will begin to expire in fiscal 2029. In addition, we had approximately $ 97.2 million of federal research credit carryforwards, $ 65.5 million of state research credit carryforwards and $ 26.0 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. 118 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of July 31, 2020, we held an aggregate of $ 173.7 million in cash and cash equivalents in our foreign subsidiaries, of which $ 114.7 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, 2020 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. 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: Fiscal Year Ended July 31, 2019 2020 (in thousands) Balance at the beginning of the year $ 91,716 $ 81,250 Increases related to current year tax positions 13,736 3,897 Increases related to prior year tax positions 301 491 Decreases related to prior year tax positions ( 23,782 ) ( 381 ) Settlements with tax authorities ( 721 ) — Balance at the end of the year $ 81,250 $ 85,257 During the fiscal year ended July 31, 2020, 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, 2020, if uncertain tax positions are fully recognized in the future, it would result in a $ 14.5 million impact to our effective tax rate, 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, 2020, we had recognized $ 3.1 million 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. A final determination of Altera is possible within the next 12 months. If the Altera opinion stands, it would result in a $ 36.2 million reduction of our gross unrecognized tax benefits. There is no impact to our effective tax rate and this would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. Other than Altera, we do not anticipate a significant impact to the unrecognized tax benefits within the next 12 months. 119 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 2018 2019 2020 (in thousands) U.S. $ 648,805 $ 682,340 706,110 Europe, the Middle East and Africa 224,392 238,356 277,489 Asia Pacific 240,247 271,712 265,092 Other Americas 42,013 43,735 58,991 Total revenue $ 1,155,457 $ 1,236,143 $ 1,307,682 As of July 31, 2019 and 2020, $ 161.9 million and $ 136.7 million, respectively, of our long-lived assets, net were located in the United States. 120 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following sets forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period ended July 31, 2020. The information for each of these quarters has been prepared on a basis consistent with our audited annual consolidated financial statements included elsewhere in this report and, in the opinion of management, includes all adjustments of a normal, recurring nature that are necessary for the fair presentation of the results of operations for these periods in accordance with U.S. GAAP. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this report. These historical quarterly operating results are not necessarily indicative of the results that may be expected for a full fiscal year or any future period. Three Months Ended October 31, 2018 January 31, 2019 April 30, 2019 July 31, 2019 October 31, 2019 January 31, 2020 April 30, 2020 July 31, 2020 (unaudited, in thousands, except per share amounts) Revenue: Product $ 224,346 $ 236,932 $ 184,794 $ 186,347 $ 192,444 $ 213,547 $ 180,756 $ 179,075 Support, entitlements and other services 88,937 98,428 102,830 113,529 122,324 133,220 137,517 148,799 Total revenue 313,283 335,360 287,624 299,876 314,768 346,767 318,273 327,874 Cost of revenue: Product (2)(3) 39,261 45,966 29,528 28,323 21,233 20,676 15,990 13,413 Support, entitlements and other services (2) 34,845 40,016 45,549 40,640 50,968 54,547 56,304 53,558 Total cost of revenue 74,106 85,982 75,077 68,963 72,201 75,223 72,294 66,971 Gross profit 239,177 249,378 212,547 230,913 242,567 271,544 245,979 260,903 Operating expenses: Sales and marketing (2)(3) 196,497 213,707 245,703 253,843 291,838 304,936 299,162 264,453 Research and development (2) 110,531 123,037 137,982 129,169 138,206 139,088 141,346 135,338 General and administrative (2) 27,339 28,788 33,040 30,420 32,860 34,579 35,644 32,464 Total operating expenses 334,367 365,532 416,725 413,432 462,904 478,603 476,152 432,255 Loss from operations ( 95,190 ) ( 116,154 ) ( 204,178 ) ( 182,519 ) ( 220,337 ) ( 207,059 ) ( 230,173 ) ( 171,352 ) Other expense, net ( 2,703 ) ( 4,399 ) ( 3,212 ) ( 4,705 ) ( 5,040 ) ( 5,863 ) ( 5,640 ) ( 9,757 ) Loss before (benefit from) provision for income taxes ( 97,893 ) ( 120,553 ) ( 207,390 ) ( 187,224 ) ( 225,377 ) ( 212,922 ) ( 235,813 ) ( 181,109 ) (Benefit from) provision for income taxes ( 3,628 ) 2,210 2,423 7,114 3,923 4,642 4,858 4,239 Net loss $ ( 94,265 ) $ ( 122,763 ) $ ( 209,813 ) $ ( 194,338 ) $ ( 229,300 ) $ ( 217,564 ) $ ( 240,671 ) $ ( 185,348 ) Net loss per share attributable to Class A and Class B common stockholders—basic and diluted (1) $ ( 0.54 ) $ ( 0.68 ) $ ( 1.15 ) $ ( 1.04 ) $ ( 1.21 ) $ ( 1.13 ) $ ( 1.23 ) $ ( 0.93 ) (1) Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share amounts may not equal annual basic and diluted per share amounts. 121 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Includes stock-based compensation as follows: Three Months Ended October 31, 2018 January 31, 2019 April 30, 2019 July 31, 2019 October 31, 2019 January 31, 2020 April 30, 2020 July 31, 2020 (unaudited, in thousands) Product cost of sales $ 698 $ 872 $ 953 $ 1,012 $ 1,112 $ 1,458 $ 1,367 $ 1,397 Support, entitlements and other services cost of sales 3,157 3,373 4,542 4,254 4,751 5,140 5,959 6,164 Sales and marketing 22,606 23,462 35,257 26,426 27,775 31,185 33,177 33,878 Research and development 31,009 34,679 42,265 32,566 37,563 36,459 39,462 39,768 General and administrative 8,455 10,179 11,815 9,149 10,225 11,373 12,131 11,654 Total $ 65,925 $ 72,565 $ 94,832 $ 73,407 $ 81,426 $ 85,615 $ 92,096 $ 92,861 (3) Includes amortization of intangible assets as follows: Three Months Ended October 31, 2018 January 31, 2019 April 30, 2019 July 31, 2019 October 31, 2019 January 31, 2020 April 30, 2020 July 31, 2020 (unaudited, in thousands) Product cost of sales $ 3,168 $ 3,692 $ 3,694 $ 3,694 $ 3,694 $ 3,694 $ 3,694 $ 3,695 Sales and marketing 550 666 661 651 651 651 651 650 Total $ 3,718 $ 4,358 $ 4,355 $ 4,345 $ 4,345 $ 4,345 $ 4,345 $ 4,345 NOTE 15. SUBSEQUENT EVENTS Issuance and Sale of Convertible Senior Notes On August 26, 2020, we entered into an investment agreement (the "Investment Agreement") with BCPE Nucleon (DE) SPV, LP ("Bain") relating to the issuance and sale to Bain of $ 750 million in an initial aggregate principal amount of 2.50 % Convertible Senior Notes due 2026 (the "2026 Notes"). The transactions contemplated by the Investment Agreement (the "Transaction") are expected to close on or prior to September 24, 2020, subject to satisfaction of the customary closing conditions set forth in the Investment Agreement (the date on which the closing occurs, the "Closing"). The 2026 Notes will be governed by an indenture (the "Indenture") between the us and U.S. Bank National Association, as trustee. The 2026 Notes will bear interest at a rate of 2.50 % per annum, with such interest to be paid in kind on the 2026 Notes held by Bain through an increase in the principal amount of the 2026 Notes, and in cash on the 2026 Notes transferred to entities not affiliated with Bain. Interest on the 2026 Notes will accrue from the date of issuance and be added to the principal amount on a semi-annual basis thereafter. The 2026 Notes will mature on September 15, 2026, subject to earlier conversion, redemption or repurchase. The 2026 Notes are convertible at the option of the holder at any time until the close of business on the scheduled trading day immediately preceding the maturity date, subject to all applicable conversion restrictions. The 2026 Notes will be convertible into shares of our Class A Common Stock ("Common Stock") based on an initial conversion rate of 36.0360 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), in each case subject to customary anti-dilution and other adjustments, including in connection with any make-whole adjustment (as described in the Indenture) as a result of certain extraordinary transactions. In addition, at the one-year anniversary of the date of the 2026 Notes, depending on the achievement of financial milestones, the conversion price may be subject to an additional, one-time adjustment, to an amount in the range of $ 25.25 to $ 27.75 per share. 122 Table of Contents NUTANIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On or after September 15, 2025, the 2026 Notes will be redeemable by us, at our option, for cash, shares of Common Stock, or a combination of both at the election of the holder of the 2026 Notes, for all or any portion of the 2026 Notes in the event that the closing sale price per share of our Common Stock has been at least 150 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including at least one of the five trading days immediately preceding the date on which we provide the redemption notice in accordance with the Indenture, 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 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 Fundamental Change (as defined in the Indenture), which includes, among other things, change of control of Nutanix or the failure of our Common Stock to be listed on a certain stock exchange, the holders of the 2026 Notes may require that we repurchase all or part of their 2026 Notes in principal amount of $1,000 or an integral multiple thereof at purchase price equal to 100 % of the principal amount thereof, plus accrued and unpaid interest thereon to, but excluding, the Fundamental Change repurchase date. The Indenture will include customary "events of default," which may result in the acceleration of the maturity of the 2026 Notes under the Indenture. The Indenture will also include customary covenants for convertible notes of this type. Stock Repurchase Program In August 2020, our Board of Directors authorized the repurchase of up to $ 125.0 million of our Class A common stock. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate us to acquire any particular amount of our common stock, and may be suspended at any time at our discretion. CEO Succession Plan On August 27, 2020, our Board of Directors announced that it has initiated a CEO succession plan to identify a candidate to succeed Dheeraj Pandey, given Mr. Pandey’s plans to retire as Chief Executive Officer. Mr. Pandey intends to continue as Chairman of the Board and Chief Executive Officer until his successor has been selected and appointed. 123 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.