Nimble Storage Inc - FORM 10-Q

Nimble Storage Inc - FORM 10-Q - September 9, 2016

Attached files

Attached files

Nimble Storage Inc Reports

file	filename
EX-32.2 - EX-32.2 - Nimble Storage Inc	d223828dex322.htm
EX-32.1 - EX-32.1 - Nimble Storage Inc	d223828dex321.htm
EX-31.2 - EX-31.2 - Nimble Storage Inc	d223828dex312.htm
EX-31.1 - EX-31.1 - Nimble Storage Inc	d223828dex311.htm
EX-10.1 - EX-10.1 - Nimble Storage Inc	d223828dex101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2016

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

001-36233

(Commission File No.)

Nimble Storage, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

26-1418899

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

211 River Oaks Parkway

San Jose, California

95134

(Address of principal executive offices)

(Zip Code)

(408) 432-9600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, par value $0.001 per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of August 31, 2016, there were approximately 85.1 million shares of the Registrant’s Common Stock outstanding.

TABLE OF CONTENTS


		Page
	Part I. FINANCIAL INFORMATION		1
Item 1.	Financial Statements (Unaudited)		1
	Consolidated Balance Sheets		1
	Consolidated Statements of Operations		2
	Consolidated Statements of Comprehensive Loss		3
	Consolidated Statements of Cash Flows		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		21
Item 4.	Controls and Procedures		21

	Part II. OTHER INFORMATION		22
Item 1.	Legal Proceedings		22
Item 1A.	Risk Factors		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3.	Defaults Upon Senior Securities		39
Item 4.	Mine Safety Disclosures		39
Item 5.	Other Information		39
Item 6.	Exhibits		39

PART I

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Nimble Storage, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)


	As of
	July 31,			January 31,
	2016			2016
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	194,218		$	211,160
Restricted cash, current		488			793
Accounts receivable, net of allowance for doubtful accounts of $41 as of July 31, 2016 and $25 as of January 31, 2016		49,115			50,432
Inventories		18,129			15,994
Prepaid expenses and other current assets		7,440			5,212

Total current assets		269,390			283,591
Property and equipment, net		50,041			47,404
Intangible asset, net		1,215			—
Other long-term assets		898			754

Total assets	$	321,544		$	331,749

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	28,711		$	24,330
Accrued compensation and benefits		20,943			19,325
Deferred revenue, current portion		62,018			54,580
Other current liabilities		10,333			8,933

Total current liabilities		122,005			107,168
Deferred revenue, non-current portion		65,036			60,265
Other long-term liabilities		7,885			8,708

Total liabilities		194,926			176,141

Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, par value of $0.001 per share; 5,000 shares authorized, no shares issued and outstanding as of July 31, 2016 and January 31, 2016		—			—
Common stock, par value of $0.001 per share; 750,000 shares authorized as of July 31, 2016 and January 31, 2016; 84,919 and 82,120 shares issued and outstanding as of July 31, 2016 and January 31, 2016, respectively		77			75
Additional paid-in capital		529,875			476,271
Accumulated other comprehensive loss		(695	)		(731	)
Accumulated deficit		(402,639	)		(320,007	)

Total stockholders’ equity		126,618			155,608

Total liabilities and stockholders’ equity	$	321,544		$	331,749

See Notes to Consolidated Financial Statements.

Nimble Storage, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)


	Three Months Ended						Six Months Ended
	July 31,						July 31,
	2016			2015			2016			2015
Revenue:
Product	$	77,615		$	66,752		$	146,000		$	126,945
Support and service		19,496			13,357			37,528			24,452

Total revenue		97,111			80,109			183,528			151,397
Cost of revenue:
Product		25,815			21,127			49,606			40,268
Support and service		8,553			6,637			16,360			12,289

Total cost of revenue		34,368			27,764			65,966			52,557
Gross profit		62,743			52,345			117,562			98,840
Operating expenses:
Research and development		29,593			24,539			55,740			46,248
Sales and marketing		61,678			47,860			122,122			92,303
General and administrative		10,792			9,449			21,234			18,710

Total operating expenses		102,063			81,848			199,096			157,261

Loss from operations		(39,320	)		(29,503	)		(81,534	)		(58,421	)
Interest income, net		47			61			120			129
Other expense, net		(339	)		(379	)		(563	)		(303	)

Loss before provision for income taxes		(39,612	)		(29,821	)		(81,977	)		(58,595	)
Provision for income taxes		338			288			655			500

Net loss	$	(39,950	)	$	(30,109	)	$	(82,632	)	$	(59,095	)

Net loss per share, basic and diluted	$	(0.47	)	$	(0.38	)	$	(0.99	)	$	(0.76	)

Weighted-average shares used to compute net loss per share, basic and diluted		84,482			78,228			83,823			77,381

See Notes to Consolidated Financial Statements.

Nimble Storage, Inc.

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)


	Three Months Ended						Six Months Ended
	July 31,						July 31,
	2016			2015			2016			2015
Net loss	$	(39,950	)	$	(30,109	)	$	(82,632	)	$	(59,095	)
Other comprehensive income (loss), net of taxes:
Change in cumulative translation adjustment		(457	)		(113	)		36			(119	)

Comprehensive loss	$	(40,407	)	$	(30,222	)	$	(82,596	)	$	(59,214	)

See Notes to Consolidated Financial Statements.

Nimble Storage, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended July 31,
	2016			2015
Cash flows from operating activities:
Net loss	$	(82,632	)	$	(59,095	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		10,578			6,938
Stock-based compensation expense		46,410			43,306
Loss on disposal of property and equipment		89			109
Provision for allowance for doubtful accounts		19			54
Allowance for inventory reserves		288			76
Changes in operating assets and liabilities:
Accounts receivable		1,298			(7,900	)
Inventories		(4,002	)		(1,639	)
Prepaid expenses and other assets		(2,497	)		58
Short term restricted cash		305			—
Accounts payable		1,770			3,308
Deferred revenue		12,209			23,458
Accrued and other liabilities		3,798			(2,104	)

Net cash provided by (used in) operating activities		(12,367	)		6,569
Cash flows from investing activities:
Purchase of property and equipment		(11,778	)		(13,958	)
Change in restricted cash		(6	)		4

Net cash used in investing activities		(11,784	)		(13,954	)
Cash flows from financing activities:
Proceeds from exercise of stock options, net of repurchases		1,601			5,243
Proceeds from issuance of stock under employee stock purchase plan		5,568			7,201
Excess tax benefit from employee stock plans		—			226

Net cash provided by financing activities		7,169			12,670
Foreign exchange impact on cash and cash equivalents		40			(125	)

Net increase (decrease) in cash and cash equivalents		(16,942	)		5,160
Cash and cash equivalents, beginning of period		211,160			208,394

Cash and cash equivalents, end of period	$	194,218		$	213,554

Supplemental disclosure of cash flow information:
Cash paid for income taxes		349			207
Cash paid for interest		17			18
Supplemental disclosure of noncash investing and financing activities:
Purchase of property and equipment not yet paid		3,421			6,367
Transfers of evaluation units from inventory to property and equipment		1,813			381
Purchase of intangible assets not yet paid		1,250			—
Vesting of early exercised stock options		362			720

See Notes to Consolidated Financial Statements.

Nimble Storage, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Description of Business and Basis of Presentation

Description of Business

Nimble Storage, Inc., or the Company, was incorporated in the state of Delaware in November 2007. The Company’s enduring mission is to engineer and deliver the industry’s most efficient flash storage platform. The Company’s Predictive Flash platform is comprised of a Unified Flash Fabric that provides a single consolidation architecture with common data services across a portfolio of All Flash and Adaptive Flash arrays and InfoSight predictive analytics with integrated support and service offerings. The Company is headquartered in San Jose, California, with employees in several international locations, including the United Kingdom, Australia, Canada, Germany, and Singapore.

Basis of Presentation and Consolidation

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and include the consolidated accounts of the Company and its subsidiaries. Inter-company accounts and transactions have been eliminated in consolidation.

These interim consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of the Company, the Consolidated Statements of Operations, the Consolidated Statements of Comprehensive Loss and the Consolidated Statements of Cash Flows. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the Securities and Exchange Commission, or SEC, rules and regulations relating to interim financial statements. The accompanying consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, or Annual Report, for the year ended January 31, 2016 filed with the SEC on March 31, 2016. The results of operations for the three and six months ended July 31, 2016 are not necessarily indicative of the results to be expected for the full fiscal year.

2. Summary of Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies for the three and six months ended July 31, 2016, as compared to the significant accounting policies described in the Company’s Annual Report for the fiscal year ended January 31, 2016.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, the determination of the best estimated selling prices of deliverables included in multiple-deliverable revenue arrangements; the allowance for doubtful accounts; provision for excess or obsolete inventory; the useful lives of property and equipment and intangible asset; the determination of the best estimated achievement of financial performance metrics related to the Company’s performance-based stock awards, and the fair value of the Company’s market-based stock awards. Actual results could differ from these estimates.

Concentrations

The Company’s financial instruments that are exposed to concentrations of credit risk are primarily cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are maintained primarily at one financial institution, and deposits may exceed the amount of insurance provided on such deposits. Risks associated with cash and cash equivalents are mitigated by banking with a creditworthy institution. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The Company performs ongoing credit evaluations of its end-customers’ financial condition whenever deemed necessary and generally does not require collateral. The Company’s policy is to maintain an allowance for doubtful accounts based upon the expected collectability of its accounts receivable, which takes into consideration specific end-customer creditworthiness and current economic trends. Of all the Company’s customers, which include direct end-customers and channel partners, including value added

resellers, or VARs, and distributors, the following distributors individually accounted for more than 10% of the Company’s accounts receivable and revenue at the end of and for each period presented:


	% of Accounts Receivable						% of Revenue
	As of						Six Months Ended July 31,
	July 31, 2016			January 31, 2016			2016			2015
Customer A		32	%		41	%		37	%		41	%
Customer B		34	%		26	%		30	%		20	%
Customer C		10	%		*			14	%		18	%

*	Represents less than 10%.

There are no concentrations of business transacted with a particular market that would severely impact the Company’s business in the near term. However, the Company currently relies on one key contract manufacturer and supplier to produce most of its products; any disruption or termination of these arrangements could materially adversely affect the Company’s operating results.

Warranties

The Company provides a standard one-year warranty for hardware components covering material defects in materials and workmanship. In addition, the Company provides a 90-day warranty on the embedded software in its products for non-conformance with documented specifications. The Company accrues for estimated warranty costs based upon historical experience, and periodically assesses the adequacy of its recorded warranty liability at the end of each period. These costs are expensed as incurred and included in the cost of product revenue in the Company’s consolidated statements of operations. In addition, failed parts recovered from customers are submitted to the Company’s suppliers for repair or replacement. These cost recoveries are offset against the Company’s warranty costs. The Company records warranty liability in other current liabilities in its consolidated balance sheet. As of July 31, 2016, the Company’s warranty liability was not material.

Stock-Based Compensation

The Company estimates fair value for its stock-based awards, including employee and non-employee director stock options, and purchases under its employee stock purchase plan, or ESPP, using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires the input of expected volatility of the price of the Company’s common stock. In prior periods, the expected volatility was based on the historical volatilities of the Company’s publicly traded peer group as the Company did not have a sufficient trading history for its common stock. In the first quarter of fiscal 2017, the Company had over two years of trading history for its common stock and call options. As a result, the Company determined the expected volatility based on a combination of its historical volatility of its common stock price and implied volatility of its call options.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board, or FASB, released an Accounting Standard Update, or ASU, related to how stock-based payments are accounted for and presented in the financial statements, including income taxes, forfeitures and statutory tax withholding requirements. This standard is effective for the Company for its first quarter of fiscal 2018, although early adoption is permitted. The Company is currently evaluating adoption methods and whether this standard will have a material impact on its consolidated financial statements and related disclosures.

In February 2016, the FASB released an ASU that requires the recognition of lease assets and lease liabilities by lessees for operating leases. The standard is effective for the Company for its first quarter of fiscal 2020, although early adoption is permitted. The Company is currently evaluating adoption methods and whether this standard will have a material impact on its consolidated financial statements and related disclosures.

In November 2015, the FASB released an ASU, Balance Sheet Classification of Deferred Taxes, which is intended to simplify and improve how deferred taxes are classified on the balance sheet. The guidance in this ASU eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires entities to classify all deferred tax assets and liabilities as noncurrent. The standard is effective for the Company for its first quarter of fiscal 2018, although early adoption is permitted. The standard is a change in balance sheet presentation only. The Company early adopted this ASU prospectively in fiscal 2016, and prior periods were not retrospectively adjusted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In July 2015, the FASB issued amendments to simplify the measurement of inventory. Under the amendments, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The guidance defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” No other changes were made to the current guidance on inventory measurement. The amendments are effective for the Company for its first quarter of fiscal 2018, although early adoption is permitted. The Company is currently evaluating the effect of the updated standard on its consolidated financial statements and related disclosures.

In May 2014, the FASB released an ASU, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition and permits the use of either the retrospective or cumulative effect transition method. In March 2016, the FASB issued an ASU, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the principal versus agent guidance in the new revenue recognition standard. In April 2016, the FASB issued an ASU, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance on accounting for licenses of intellectual property and identifying performance obligations in the new revenue recognition standard. In May 2016, the FASB issued an ASU, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedient, which clarifies the transition, collectability, noncash consideration and the presentation of sales and other similar taxes in the new revenue recognition standard. These standards are effective for the Company for its first quarter of fiscal 2019. Early adoption to the original public company adoption timelines is permitted. The Company has not yet selected a transition method and is currently in the process of determining the impact on its consolidated financial statements and related disclosures.

3. Net Loss Per Share

The following potentially dilutive securities were excluded (as common stock equivalents) from the computation of diluted net loss per share for the periods presented as their effect would have been antidilutive (in thousands):


	As of July 31,
	2016		2015
Unvested restricted stock units		13,535		7,823
Shares subject to options to purchase common stock		7,905		10,033
Employee stock purchase plan		717		341
Unvested early exercised common shares		81		411

4. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, to measure the fair value:

•

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

•

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

•

Level 3—Inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

Beginning in November 2014, the Company entered into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and inter-company receivables and payables. These are not designated hedge instruments. These instruments are marked to market through earnings every period and generally have an original maturity period of one month. These instruments are classified within level 2 of the fair value hierarchy. The Company’s derivative assets and derivative liabilities as of July 31, 2016 and January 31, 2016 are as follows (in thousands):


	As of July 31, 2016					As of January 31, 2016
	Nominal Amount		Fair Value Gain (Loss)			Nominal Amount		Fair Value Gain (Loss)
Forward Contracts:
Purchased	$	—	$	—		$	—	$	—
Sold	$	11,602	$	(111	)	$	14,535	$	58

5. Balance Sheet Components

Inventory

Inventories consist primarily of raw materials related to component parts, finished goods, which include both inventory held for sale and service inventory held at service depots in support of end-customer service agreements, and end-customer evaluation inventory. Service inventory held at service depots was $6.8 million and $5.6 million as of July 31, 2016 and January 31, 2016, respectively.

The following is a summary of the Company’s inventories, net of inventory provisions recorded to adjust inventory to its estimated realizable value, by major category (in thousands):


	As of
	July 31, 2016		January 31, 2016
Raw materials	$	2,715	$	2,296
Finished goods		9,325		9,005
Evaluation inventory		6,089		4,693

	$	18,129	$	15,994

Property and Equipment

Property and equipment, net consisted of the following (in thousands):


	As of
	July 31, 2016			January 31, 2016
Computer equipment	$	15,840		$	14,012
Lab equipment		36,730			28,734
Software		7,085			5,470
Furniture and fixtures		4,995			4,497
Leasehold improvements		18,279			17,514
Construction in progress		3,640			3,692
Demonstration equipment		3,054			2,287

Total property and equipment		89,623			76,206
Less: accumulated depreciation		(39,582	)		(28,802	)

Total property and equipment, net	$	50,041		$	47,404

Depreciation expense related to property and equipment was $5.4 million and $3.6 million for the three months ended July 31, 2016 and 2015, respectively, and $10.5 million and $6.9 million for the six months ended July 31, 2016 and 2015, respectively.

Intangible Asset

Intangible asset is stated at cost, net of accumulated amortization. During the three months ended July 31, 2016, the Company purchased the intellectual property rights of software to be used internally for $1.25 million. The Company estimated the useful life of this intangible asset to be three years. As of July 31, 2016, the net book value of this intangible asset was $1.22 million, which was net of $35,000 accumulated amortization.

6. Commitments and Contingencies

Leases

The Company leases its facilities under various noncancelable operating leases with fixed rental payments. Rent expense totaled $1.9 million and $1.5 million for the three months ended July 31, 2016 and 2015, respectively, and $3.9 million and $3.0 million for the six months ended July 31, 2016 and 2015, respectively.

Future minimum commitments under these operating leases as of July 31, 2016 were as follows (in thousands):


Years ending January 31:
2017 (remaining six months)	$	4,240
2018		7,501
2019		6,977
2020		6,979
2021		7,149
Thereafter		6,545

	$	39,391

In July 2014, the Company entered into a facility lease agreement for its North Carolina office. The 84-month lease commenced on August 1, 2014. Total rent, including common area maintenance expense and fixed operating expense, payable over the lease period is $5.0 million. As part of the lease agreement, the Company received an allowance of $1.4 million for tenant improvement during the year ended January 31, 2016. This allowance was included in the calculation of rent expense and related deferred rent balances. In December 2014, the Company amended the lease agreement for its North Carolina office giving the Company access to additional space on February 1, 2016 through the same term as the original facility lease. As part of the lease amendment, the Company will receive an additional allowance of $1.0 million for tenant improvement.

In April 2013, the Company entered into a facility lease agreement for its headquarters in San Jose, California. The 96-month lease commenced on November 1, 2013. Total rent, including operating expenses, payable over the lease period is $35.5 million. As part of the lease agreement, the Company received an allowance of $4.9 million for tenant improvement during the year ended January 31, 2014. This allowance was included in the calculation of rent expense and related deferred rent balances. As a condition of the lease agreement, the Company is required to maintain a letter of credit of $3.9 million, with the landlord named as the beneficiary. The Company has the option to extend the term of the lease for an additional period of 60 months.

Contingencies

From time to time, the Company is party to litigation and subject to claims that arise in the ordinary course of business, including actions with respect to employment claims and other matters. Although the results of litigation and claims are inherently unpredictable, the Company believes that the final outcome of such matters will not have a material adverse effect on the business, consolidated financial position, results of operations or cash flows.

On December 17, 2015, a purported securities class action entitled Vikramkumar v. Nimble Storage, Inc., et al. was filed in the United States District Court for the Northern District of California, against the Company and certain of its officers and directors. A second purported securities class action entitled Guardino v. Nimble Storage, Inc., et al. was filed on December 23, 2015, and a third purported class action entitled Madhani v. Nimble Storage, Inc., et al. was filed on February 5, 2016, also in the Northern District of California against the same parties. The complaints in the three actions allege claims under Sections 10(b) and 20(a) of the Exchange Act based on allegedly misleading statements regarding the Company’s business and financial results. On March 28, 2016, the Court ordered that the three actions be consolidated under the caption In re Nimble Storage, Inc. Securities Litigation, or In re Nimble Sec. Lit. A consolidated amended complaint was filed in the In re Nimble Sec. Lit. matter on June 10, 2016. The Company filed a motion to dismiss the consolidated amended complaint on July 25, 2016. Given the early stage in the litigation, the Company is unable to estimate a possible loss or range of possible loss.

On February 23, 2016, a purported shareholder derivative action entitled Schwartz v. Vasudevan, et al., or Schwartz, was filed in the United States District Court for the Northern District of California, against certain of the Company’s officers and directors. The complaint alleges that defendants breached their fiduciary duties by allowing the Company to make allegedly misleading statements regarding the Company’s business and financial results, and by selling stock while in possession of material non-public information. On April 20, 2016, the Court entered an order pursuant to a stipulation by the parties to stay the Schwartz matter until the In re Nimble Sec. Lit. matter is dismissed with prejudice, or defendants file an answer in the In re Nimble Sec. Lit. matter. On April 26, 2016, a purported shareholder derivative action entitled Goldstein v. Vasudevan, et al., or Goldstein, was filed in the United States District Court for the Northern District of California, against certain of the Company’s officers and directors. The complaint makes substantially the same allegations as in the Schwartz matter, alleging causes of action for breach of fiduciary duty, unjust enrichment, waste, and violation of Section 14(a) of the Exchange Act. On June 14, 2016, the Court entered an order pursuant to a stipulation by the parties to consolidate the Schwartz and Goldstein matters under the caption In re Nimble Storage, Inc. Derivative Litigation, or In re Nimble Deriv. Lit., and to stay the consolidated matter until the In re Nimble Sec. Lit. matter is dismissed with prejudice, or defendants file an answer in the In re Nimble Sec. Lit. matter. Given the early stage in the litigation, the Company is unable to estimate a possible loss or range of possible loss.

On May 19, 2016, a purported shareholder derivative action entitled Chua v. Vasudevan, et al., or Chua, was filed in the Superior Court of California, County of Santa Clara, against certain of the Company’s officers and directors. The complaint makes substantially the same allegations as the Schwartz and Goldstein matters, alleging causes of action for breach of fiduciary duty, abuse of control, gross mismanagement, and unjust enrichment. Defendants have not yet responded to the Chua complaint. Given the early stage in the litigation, the Company is unable to estimate a possible loss or range of possible loss.

Indemnification

Some of the Company’s sales contracts require the Company to indemnify its end-customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. The Company’s exposure under these indemnification provisions is generally limited to the total amount paid by the end-customer under the contract. However, certain contracts include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the contract. In addition, the Company indemnifies its officers, directors, and certain key employees while they are serving in good faith in their respective capacities. To date, there have been no claims under any indemnification provisions.

7. Stock-Based Compensation

The following table summarizes the components of stock-based compensation expense related to stock options, restricted stock units, or RSUs, and the ESPP (in thousands):


	Three Months Ended July 31,				Six Months Ended July 31,
	2016		2015		2016		2015
Cost of product revenue	$	728	$	660	$	1,343	$	1,205
Cost of support and service revenue		1,568		1,304		2,953		2,461
Research and development		7,773		6,638		13,919		12,069
Sales and marketing		9,727		9,389		20,340		19,500
General and administrative		4,067		4,330		7,855		8,071

Total stock-based compensation expense	$	23,863	$	22,321	$	46,410	$	43,306

The Company grants RSUs to certain employees based on the Company meeting certain performance thresholds. The estimated probability of the number of these RSUs expected to vest is assessed for each reporting period until the total shares granted are determined. The stock-based compensation expense related to these RSUs totaled $1.2 million and $4.1 million for the three months ended July 31, 2016 and 2015, respectively, and $2.7 million and $7.2 million for the six months ended July 31, 2016 and 2015, respectively. The reduction of expense related to these RSUs in the three and six months ended July 31, 2016 is due to a reduction in the performance achieved in fiscal year 2016 as compared to the previously forecasted fiscal year 2016 performance as of the three and six months ended July 31, 2015.

Beginning in March 2016, the Company granted RSUs to certain employees, contingent on the achievement of the Company’s comparative market-based returns which is based on the Company’s stock price compared against a market index. The fair value of these market-based RSUs is estimated using the Monte Carlo option-price model on the date of grant as the RSUs contain both service and market conditions. The stock-based compensation expense related to these RSUs was $0.1 million and $0.2 million for the three and six months ended July 31, 2016, respectively.

8. Income Taxes

The Company’s provision for income taxes of $0.3 million and $0.7 million for the three and six months ended July 31, 2016, respectively, consisted of current foreign taxes and current state taxes. The Company’s provision for income taxes of $0.3 million and $0.5 million for the three and six months ended July 31, 2015, respectively, consisted of current foreign taxes and current state taxes.

9. Segments

The Company’s chief operating decision maker is its chief executive officer. The chief executive officer reviews consolidated financial information accompanied by information about revenue by product line for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, or operating results for levels or components. In addition, the majority of the Company’s operations and end-customers are located in the United States. As such, the Company has a single reporting segment and a single operating unit structure.

Revenue by region, based on the bill to mailing address of the end-customer, for the periods presented was as follows (in thousands):


	Three Months Ended July 31,				Six Months Ended July 31,
	2016		2015		2016		2015
North America	$	74,298	$	64,107	$	143,479	$	122,010
EMEA		13,109		10,201		24,875		19,452
APAC		9,704		5,801		15,174		9,935

Total revenue	$	97,111	$	80,109	$	183,528	$	151,397

Long-lived assets located in the following countries and regions as of each period end were as follows (in thousands):


	As of
	July 31, 2016		January 31, 2016
North America	$	51,289	$	47,277
Other		865		881

Total long-lived assets	$	52,154	$	48,158

10. Line of Credit

In February 2016, there was a $0.5 million reduction of the available line of credit related to a letter of credit issued as collateral to secure various business operating activities. As of July 31, 2016, the remaining credit facility available for borrowings was $9.5 million. In July 2016, the Company extended the term of the credit facility, which now expires in

August 2018. Under this renewal, amounts outstanding under the credit facility bear interest at 2.25% above LIBOR with accrued interest payable on a monthly basis. In addition, the Company is obligated to pay a commitment fee of 0.20% per annum on the unused portion of the credit facility, with such fee payable on a quarterly basis. As of July 31, 2016, the commitment fee was capitalized and being amortized on the Company’s consolidated balance sheet. Under this renewal, the Company granted Wells Fargo a first priority lien in its accounts receivable and other corporate assets, agreed to not pledge its intellectual property to other parties and became subject to certain reporting and financial covenants, as follows: (i) maintain minimum tangible net worth, defined as the aggregate of total stockholders’ equity plus subordinated debt less any intangible assets and less any loans or advances to, or investments in, any related entities or individuals, of $65 million; and (ii) maintain a monthly ratio of not less than 1.25 to 1.00, based on the aggregate of its cash and net accounts receivable divided by total current liabilities minus current deferred revenue. As of July 31, 2016, no amounts had been drawn against the credit facility.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q, or the Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this Form 10-Q.

Overview

Our enduring mission is to engineer and deliver the industry’s most efficient flash storage platform. Our Predictive Flash platform is comprised of a Unified Flash Fabric that provides a single consolidation architecture with common data services across a portfolio of All Flash and Adaptive Flash arrays and InfoSight predictive analytics with integrated support and service offerings. It enables IT organizations to optimize performance, capacity, and cost for all applications running across the data center and maintain a 99.9997% measured uptime with InfoSight cloud-based management software.

In February 2016, we introduced our AF-Series All Flash arrays, which combine the high performance of flash with the predictive analytics of InfoSight to deliver the performance, scalability and availability required to optimize high-performance applications with deterministic latency requirements. In addition, for All Flash arrays introduced in February 2016, our end-customers that opt to renew three-year support contracts have an option to receive a free controller upgrade that is guaranteed to be faster. In August 2016, we started shipping our AF1000, which is a full-featured entry level All-Flash array. In addition, we also introduced a new family of Adaptive Flash arrays with up to double the performance and up to 40% lower cost of capacity.

We typically recognize product revenue upon the shipment of these products. We also offer support and maintenance services including InfoSight, for periods ranging from one to five years, and recognize revenue over the term of the related support and maintenance agreement. In addition, we recognize revenue for our Storage on Demand, or SoD, business as services are performed.

We sell our products through our network of channel partners and also engage our end-customers through our global sales force. Our channel partners act as an extension of our sales force to market our solutions directly to end-customers and do not hold inventory. For certain end-customer orders, products are shipped to resellers, distributors and third-party systems integrators for various reasons including importing of products to non-U.S. countries and systems integration (e.g. SmartStack integrations) prior to shipment to the end-customer or the end-customer specified location(s). We have sales offices located in several international locations, including Australia, England, Germany and Singapore. Our revenue outside North America was 23% and 20% of our total revenue for the three months ended July 31, 2016 and 2015, respectively, and 22% and 19% of our total revenue for the six months ended July 31, 2016 and 2015, respectively.

We outsource the manufacturing of our hardware products to our contract manufacturer, Flextronics International Ltd., or Flextronics, which assembles and tests our products. Our contract manufacturer generally procures the components used in our products directly from third-party suppliers. Inventory and shipment are handled by our third-party logistics partners. Distributors generally handle fulfillment and, in some situations, shipment for our domestic and international end-customers, but do not hold inventory.

We have experienced significant growth in recent periods with total revenue of $97.1 million and $80.1 million in the three months ended July 31, 2016 and 2015, respectively, and $183.5 million and $151.4 million in the six months ended July 31, 2016 and 2015, respectively. Our net loss was $40.0 million and $30.1 million in the three months ended July 31, 2016 and 2015, respectively, and $82.6 million and $59.1 million in the six months ended July 31, 2016 and 2015, respectively. As our sales and end-customer base have grown, we have also experienced growth in our deferred revenue

from $114.8 million as of January 31, 2016 to $127.1 million as of July 31, 2016. Our gross margin has declined from approximately 65.3% for the three and six months ended July 31, 2015, respectively, to 64.6% and 64.1% for the three and six months ended July 31, 2016, respectively. As a percentage of total revenue, our operating expenses have increased from 102% and 104% for the three and six months ended July 31, 2015, respectively, to 105% and 108% for the three and six months ended July 31, 2016, respectively. As a percentage of total revenue, our loss from operations has increased from (37%) and (39%) for the three and six months ended July 31, 2015, respectively, to (40%) and (44%) for the three and six months ended July 31, 2016, respectively. As a percentage of total revenue, our non-GAAP operating loss has increased from (9%) and (10%) for the three and six months ended July 31, 2015, respectively, to (16%) and (19%) for the three and six months ended July 31, 2016, respectively. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is provided under “—Key Business Metrics”.

As a consequence of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of revenue and other operating results, including gross margin, operating expenses, loss from operations and non-GAAP operating loss as a percentage of our total revenue, are not necessarily meaningful and should not be relied upon as indications of future performance. Although we have experienced significant percentage growth in our total revenue, we do not believe that our historical growth rates are likely to be sustainable or indicative of future growth.

Since our founding, we have invested heavily in growing our business, particularly in research and development and sales and marketing. We intend to continue to invest in development of our solutions and sales and marketing programs to drive sustainable long-term growth.

The successful growth of our business will depend on our ability to continue to expand our end-customer base by gaining new end-customers and in turn grow revenues from our existing end-customer base. As a result, we intend to hire additional sales and marketing personnel. While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. For example, our investments in these areas might not result in a significant increase in productive sales personnel or channel partners. If this were to occur, we might not be able to expand our base of new end-customers or succeed in selling additional products to existing end-customers, which would affect our ability to continue to grow our revenues.

Our future performance will also depend on our ability to continue to innovate, improve functionality in our products and adapt to new technologies or changes to existing technologies. Accordingly, we also intend to continue to invest in our research and development activities. It is difficult for us to predict the timing and impact that these investments will have on future revenue. Additionally, we face significant competition in the storage market, which makes it more important that the investments we make in our business are successful. Potential weak global economic conditions, particularly market and financial uncertainty in the United States, Europe, and Asia or a reduction in spending even if economic conditions improve, could adversely impact our business, financial condition and operating results. If we are unable to address these challenges, our business could be adversely affected.

Key Business Metrics

We monitor the key business metrics set forth below in managing our business. We discuss revenue and gross margin below under “—Components of Operating Results.” Deferred revenue, cash flow from operating activities, free cash flow, non-GAAP net loss, non-GAAP operating loss and adjusted EBITDA are discussed immediately below the following table, with a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.


	Three Months Ended July 31,						Six Months Ended July 31,
	2016			2015			2016			2015
	(dollars in thousands)
Total revenue	$	97,111		$	80,109		$	183,528		$	151,397
Year-over-year percentage increase		21	%		49	%		21	%		51	%
Gross margin		64.6	%		65.3	%		64.1	%		65.3	%
Deferred revenue, current and non-current		127,054			97,904			127,054			97,904
Net cash provided by (used in) operating activities		(4,069	)		14,876			(12,367	)		6,569
Net loss		(39,950	)		(30,109	)		(82,632	)		(59,095	)
Non-GAAP net loss		(16,087	)		(7,788	)		(36,222	)		(15,789	)
Loss from operations		(39,320	)		(29,503	)		(81,534	)		(58,421	)
Non-GAAP operating loss		(15,457	)		(7,182	)		(35,124	)		(15,115	)
Loss from operations as a percentage of total revenue		-40	%		-37	%		-44	%		-39	%
Non-GAAP operating loss as a percentage of total revenue		-16	%		-9	%		-19	%		-10	%
Adjusted EBITDA		(10,359	)		(3,935	)		(25,109	)		(8,480	)
Free cash flow		(9,071	)		8,975			(24,145	)		(7,389	)

Deferred Revenue

Our deferred revenue consists of amounts that have been either invoiced or prepaid but have not yet been recognized as revenue as of the period end. The majority of our deferred revenue consists of the unrecognized portion of revenue from sales of our support and service contracts. We monitor our deferred revenue balance because it represents a portion of revenue to be recognized in future periods.

Cash Flow from Operating Activities

We monitor cash flow from operating activities as a measure of our overall business performance. Our cash flow from operating activities is driven in large part by our net losses. Monitoring cash flow from operating activities enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation and amortization and stock-based compensation costs, thereby allowing us to better understand and manage the cash needs of our business.

Free Cash Flow

We monitor free cash flow as a measure of our overall business performance. We define free cash flow as our net cash provided by (used in) operating activities, less the cash outflow used to purchase property and equipment. Monitoring free cash flow enables us to analyze our ability to generate cash after accounting for capital expenditures, thereby allowing us to better understand and manage the cash needs of our business. We have provided reconciliations below of free cash flow to net cash provided by (used in) operating activities, the most directly comparable U.S. GAAP financial measure.

Non-GAAP Net Loss and Non-GAAP Operating Loss

To provide investors with additional information regarding our financial results, we have disclosed in this Form 10-Q non-GAAP net loss and non-GAAP operating loss. We define non-GAAP net loss as our net loss adjusted to exclude stock-based compensation. We define non-GAAP operating loss as our operating loss adjusted to exclude stock-based compensation. We have provided reconciliations below of non-GAAP net loss to net loss and non-GAAP operating loss to operating loss, the most directly comparable U.S. GAAP financial measures.

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed in this Form 10-Q adjusted EBITDA, a non-GAAP financial measure. We define adjusted EBITDA as our net loss, adjusted to exclude stock-based compensation, interest income, provision for income taxes and depreciation and amortization. We have provided a reconciliation below of adjusted EBITDA to net loss, the most directly comparable U.S. GAAP financial measure.

We have also included non-GAAP net loss, non-GAAP operating loss and adjusted EBITDA in this Form 10-Q because they are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans. In particular, the exclusion of certain expenses in calculating non-GAAP net loss, non-GAAP operating loss and adjusted EBITDA can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that non-GAAP net loss, non-GAAP operating loss and adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Our use of non-GAAP net loss, non-GAAP operating loss, adjusted EBITDA and free cash flow has limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

•

Non-GAAP net loss, non-GAAP operating loss and adjusted EBITDA do not consider the potentially dilutive impact of equity-based compensation, which is an ongoing expense for us;

•

Adjusted EBITDA does not reflect cash capital expenditure requirements for additional capital expenditures;

•

Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

•

Free cash flow excludes cash provided by financing and investing activities, except for cash used for purchase of property and equipment; and

•

Other companies, including companies in our industry, may calculate non-GAAP net loss, non-GAAP operating loss, adjusted EBITDA and free cash flow differently, which reduces their usefulness as comparative measures.

Because of these limitations, you should consider non-GAAP net loss, non-GAAP operating loss, adjusted EBITDA and free cash flow alongside other financial performance measures, including various cash flow metrics, net loss and our other U.S. GAAP results.

Reconciliations of non-GAAP net loss and adjusted EBITDA to net loss, non-GAAP operating loss to loss from operations and free cash flow to net cash provided by (used in) operating activities are provided below:


	Three Months Ended July 31,						Six Months Ended July 31,
	2016			2015			2016			2015
	(in thousands)
Net loss	$	(39,950	)	$	(30,109	)	$	(82,632	)	$	(59,095	)
Stock-based compensation expense		23,863			22,321			46,410			43,306

Non-GAAP net loss	$	(16,087	)	$	(7,788	)	$	(36,222	)	$	(15,789	)

Interest income, net		(47	)		(61	)		(120	)		(129	)
Provision for income taxes		338			288			655			500
Depreciation and amortization		5,437			3,626			10,578			6,938

Adjusted EBITDA	$	(10,359	)	$	(3,935	)	$	(25,109	)	$	(8,480	)

Loss from operations	$	(39,320	)	$	(29,503	)	$	(81,534	)	$	(58,421	)
Stock-based compensation expense		23,863			22,321			46,410			43,306

Non-GAAP operating loss	$	(15,457	)	$	(7,182	)	$	(35,124	)	$	(15,115	)

Net cash provided by (used in) operating activities	$	(4,069	)	$	14,876		$	(12,367	)	$	6,569
Purchase of property and equipment		(5,002	)		(5,901	)		(11,778	)		(13,958	)

Free cash flow	$	(9,071	)	$	8,975		$	(24,145	)	$	(7,389	)

Components of Operating Results

Revenue

Our total revenue is comprised of the following:

Product Revenue. We generate the substantial majority of our product revenue from the sales of our storage products. It is our practice to identify an end-customer from our distributors prior to shipment. In the majority of instances, products are shipped directly to the end-customers. For certain end-customer orders, products are shipped to resellers, distributors and third-party systems integrators for various reasons including importing of products to non-U.S. countries and systems integration (e.g. SmartStack integrations) prior to shipment to the end-customer or the end-customer specified location. Assuming all other revenue recognition criteria have been met, we generally recognize revenue upon shipment from our origin location in California, as title and risk of loss are transferred at that time. For certain distributors, title and risk of loss are transferred upon delivery to the end-customers and revenue is recognized after delivery has been completed. Our arrangements with distributors do not contain rights of return, subsequent price discounts, price protection or other allowances for shipments completed.

Support and Service Revenue. We generate our support and service revenue primarily from support and service contracts, which include our InfoSight cloud-based management service. The majority of our product sales are bundled with support and service contracts with terms ranging from one to five years. We recognize revenue from support and service contracts over the contractual service period. Our support and service revenue also includes our SoD service offering. Under this pay-as-you-go subscription model, end-customers are generally billed on a monthly basis based on the amount of data consumed during the month. The SoD service offering includes all support services including InfoSight. Revenue is recognized as services are performed. As a percentage of total revenue, we expect our support and service revenue to increase as we add new end-customers and renew existing support and service contracts, and our end-customers use more of our SoD service.

Cost of Revenue

Our total cost of revenue is comprised of the following:

Cost of Product Revenue. Cost of product revenue primarily includes costs paid to our third-party contract manufacturer, which includes the costs of our components, and personnel costs associated with our manufacturing operations. Personnel costs consist of salaries, benefits, bonuses and stock-based compensation. Our cost of product revenue also includes inventory related expenses, freight and allocated overhead costs. Overhead costs consist of certain facilities, depreciation, benefits and IT costs. We expect our cost of product revenue to increase as our product revenue increases.

Cost of Support and Service Revenue. Cost of support and service revenue includes personnel costs associated with our global end-customer support organization, operation and administration of our service depots, cost from service inventory reserves and allocated overhead costs. Personnel costs consist of salaries, benefits, bonuses and stock-based compensation. Overhead costs consist of certain facilities, depreciation, benefits and IT costs. We expect our cost of support and service revenue to increase as our installed end-customer base grows.

Gross Margin

Gross margin, or gross profit as a percentage of total revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our storage products and related support and service contracts, manufacturing and overhead costs including personnel costs, component costs, the mix of products sold, sales incentive payments paid to our channel partners, and our ability to leverage our existing infrastructure as we continue to grow. We expect our gross margins to fluctuate over time depending on the factors described above.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expense. Personnel costs are the most significant component of our operating expenses.

Research and Development. Research and development expense consists primarily of personnel costs and allocated overhead and also includes depreciation expense from property and equipment purchases, and consulting and other costs to support our development activities. We have expensed all research and development costs as incurred. We expect research and development expense to continue to increase in absolute dollars as we continue to invest in our research and product development efforts to enhance our product capabilities, expand our product offerings and access new end-customer markets, although such expense may fluctuate as a percentage of total revenue.

Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, sales commission costs and allocated overhead. We expense sales commission costs as incurred. Sales and marketing expense also includes costs for recruiting and training channel partners, market development programs, promotional and other marketing activities, travel, office equipment, depreciation of proof-of-concept evaluation units, amortization of intangible asset and outside consulting costs. We expect sales and marketing expense to continue to increase in absolute dollars as we expand our sales and marketing headcount in all markets and expand our international operations, although such expense may fluctuate as a percentage of total revenue.

General and Administrative. General and administrative expense consists of personnel costs, professional services and allocated overhead. General and administrative personnel include our executive, finance, human resources, investor relations, compliance, administrative, IT, facilities and legal departments. Professional services consist primarily of legal, auditing, accounting and other consulting costs. We expect general and administrative expense to continue to increase in absolute dollars as we have recently incurred, and expect to continue to incur, additional general and administrative expense as we grow our operations and operate as a public company, including higher legal, corporate insurance and accounting expenses.

Interest Income and Other Expense, Net

Interest income consists of interest earned on our cash and cash equivalent balances. We have historically invested our cash in money-market funds. We expect interest income, which has not been historically significant to our operations, to vary each reporting period depending on our average investment balances during the period, types and mix of investments and market interest rates.

Other expense, net consists primarily of gains and losses from foreign currency transactions and revaluation of non-U.S. dollar denominated assets and liabilities.

Provision for Income Taxes

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

Results of Operations

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


	Three Months Ended July 31,						Six Months Ended July 31,
	2016			2015			2016			2015
	(in thousands)
Consolidated Statements of Operations Data:
Revenue:
Product	$	77,615		$	66,752		$	146,000		$	126,945
Support and service		19,496			13,357			37,528			24,452

Total revenue		97,111			80,109			183,528			151,397
Cost of revenue:
Product(1)		25,815			21,127			49,606			40,268
Support and service(1)		8,553			6,637			16,360			12,289

Total cost of revenue		34,368			27,764			65,966			52,557
Total gross profit		62,743			52,345			117,562			98,840
Operating expenses:
Research and development(1)		29,593			24,539			55,740			46,248
Sales and marketing(1)		61,678			47,860			122,122			92,303
General and administrative(1)		10,792			9,449			21,234			18,710

Total operating expenses		102,063			81,848			199,096			157,261

Loss from operations		(39,320	)		(29,503	)		(81,534	)		(58,421	)
Interest income, net		47			61			120			129
Other expense, net		(339	)		(379	)		(563	)		(303	)

Loss before provision for income taxes		(39,612	)		(29,821	)		(81,977	)		(58,595	)
Provision for income taxes		338			288			655			500

Net loss	$	(39,950	)	$	(30,109	)	$	(82,632	)	$	(59,095	)

(1) Includes stock-based compensation expense as follows:
Cost of product revenue	$	728		$	660		$	1,343		$	1,205
Cost of support and service revenue		1,568			1,304			2,953			2,461
Research and development		7,773			6,638			13,919			12,069
Sales and marketing		9,727			9,389			20,340			19,500
General and administrative		4,067			4,330			7,855			8,071

Total stock-based compensation expense	$	23,863		$	22,321		$	46,410		$	43,306

Comparison of the Three and Six Months Ended July 31, 2016 and 2015

Revenue


	Three Months Ended July 31,									Six Months Ended July 31,
	2016		2015		Change					2016		2015		Change
	Amount		Amount		Amount		%			Amount		Amount		Amount		%
	(dollars in thousands)
Revenue:
Product	$	77,615	$	66,752	$	10,863		16	%	$	146,000	$	126,945	$	19,055		15	%
Support and service		19,496		13,357		6,139		46			37,528		24,452		13,076		53

Total revenue	$	97,111	$	80,109	$	17,002		21	%	$	183,528	$	151,397	$	32,131		21	%

Total revenue increased by $17.0 million, or 21%, during the three months ended July 31, 2016 compared to the three months ended July 31, 2015. Total revenue increased by $32.1 million, or 21%, during the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The revenue growth reflects increased demand for our storage products and related support and service. The increase in product revenue was driven by higher sales of our storage products, including sales of our newly launched All Flash arrays, to existing and new end-customers, faster growth from enterprises and cloud service providers, larger deployments, and international expansion. We acquired over 2,600 new end-customers from July 31, 2015 to July 31, 2016. The increase in support and service revenue, which includes our maintenance and InfoSight cloud-based predictive analytics service, was driven by higher product sales and the resulting expansion of our installed base of end-customers.

Cost of Revenue and Gross Margin


	Three Months Ended July 31,											Six Months Ended July 31,
	2016			2015			Change					2016			2015			Change
	Amount			Amount			Amount		%			Amount			Amount			Amount		%
	(dollars in thousands)
Cost of revenue:
Product	$	25,815		$	21,127		$	4,688		22	%	$	49,606		$	40,268		$	9,338		23	%
Support and service		8,553			6,637			1,916		29			16,360			12,289			4,071		33

Total cost of revenue	$	34,368		$	27,764		$	6,604		24	%	$	65,966		$	52,557		$	13,409		26	%

Gross margin		64.6	%		65.3	%							64.1	%		65.3	%

Cost of revenue increased by $6.6 million, or 24%, during the three months ended July 31, 2016 compared to the three months ended July 31, 2015. The increase in cost of product revenue was driven primarily by higher product sales. The increase in cost of product revenue was also impacted by higher costs of $0.3 million in our manufacturing operations, primarily driven by personnel costs associated with increased headcount. The increase in cost of support and service revenue was primarily attributable to higher costs of $1.6 million in our global end-customer support organization, primarily driven by personnel costs associated with increased headcount.

Cost of revenue increased by $13.4 million, or 26%, during the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The increase in cost of product revenue was driven primarily by higher product sales. The increase in cost of product revenue was also impacted by higher costs of $0.7 million in our manufacturing operations, primarily driven by personnel costs associated with increased headcount. The increase in cost of support and service revenue was primarily attributable to higher costs of $3.3 million in our global end-customer support organization, primarily driven by personnel costs associated with increased headcount.

Gross margin decreased from 65.3% during the three months ended July 31, 2015 to 64.6% during the three months ended July 31, 2016, mainly due to lower product gross margin, partially offset by higher support and service gross margin. Product gross margin decreased by 1.7 percentage points from 68.4% to 66.7% during the three months ended July 31, 2016 compared to the three months ended July 31, 2015. The decrease in product gross margin from the prior year was mainly driven by changes in pricing and product mix. Support and service gross margin increased by 5.8 percentage points from 50.3% to 56.1% during the three months ended July 31, 2016 compared to the three months ended July 31, 2015. The improvements in support and service gross margin from the prior year were driven by increased revenue from our larger base of end-customers and economies of scale from our support organization, enabled by the automation capabilities of InfoSight.

Gross margin decreased from 65.3% during the six months ended July 31, 2015 to 64.1% during the six months ended July 31, 2016, mainly due to lower product gross margin, partially offset by higher support and service gross margin. Product gross margin decreased by 2.3 percentage points from 68.3% to 66.0% during the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The decrease in product gross margin from the prior year was mainly driven by changes in pricing and product mix. Support and service gross margin increased by 6.7 percentage

points from 49.7% to 56.4% during the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The improvements in support and service gross margin from the prior year were driven by increased revenue from our larger base of end-customers and economies of scale from our support organization, enabled by the automation capabilities of InfoSight.

Operating Expenses


	Three Months Ended July 31,										Six Months Ended July 31,
	2016		2015		Change						2016		2015		Change
	Amount		Amount		Amount			%			Amount		Amount		Amount			%
	(dollars in thousands)
Operating expenses:
Research and development	$	29,593	$	24,539	$	5,054			21	%	$	55,740	$	46,248	$	9,492			21	%
Sales and marketing		61,678		47,860		13,818			29			122,122		92,303		29,819			32
General and administrative		10,792		9,449		1,343			14			21,234		18,710		2,524			13

Total operating expenses	$	102,063	$	81,848	$	20,215			25	%	$	199,096	$	157,261	$	41,835			27	%

Includes stock-based compensation expense of:
Research and development	$	7,773	$	6,638	$	1,135			17	%	$	13,919	$	12,069	$	1,850			15	%
Sales and marketing		9,727		9,389		338			4			20,340		19,500		840			4
General and administrative		4,067		4,330		(263	)		(6	)		7,855		8,071		(216	)		(3	)

Total	$	21,567	$	20,357	$	1,210			6	%	$	42,114	$	39,640	$	2,474			6	%

Research and Development

Research and development expense increased by $5.1 million, or 21%, during the three months ended July 31, 2016 compared to the three months ended July 31, 2015. The increase was primarily due to a $3.2 million increase in personnel costs, including stock-based compensation, resulting from headcount growth to support further development of our storage products, and a $0.8 million increase in depreciation expense from property and equipment purchases as we further invested in our laboratory and test infrastructure.

Research and development expense increased by $9.5 million, or 21%, during the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The increase was primarily due to a $6.4 million increase in personnel costs, including stock-based compensation, resulting from headcount growth to support further development of our storage products, a $1.7 million increase in depreciation expense from property and equipment purchases as we further invested in our laboratory and test infrastructure, and a $0.7 million increase in allocated overhead resulting from higher facilities utilization.

Sales and Marketing

Sales and marketing expense increased by $13.8 million, or 29%, during the three months ended July 31, 2016 compared to the three months ended July 31, 2015. The increase was primarily due to a $6.7 million increase in personnel costs, including stock-based compensation, resulting from headcount growth, a $3.2 million increase in commission expense related to higher sales, a $0.9 million increase in travel and entertainment expenses, and a $0.9 million increase in advertising and tradeshow expenses.

Sales and marketing expense increased by $29.8 million, or 32%, during the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The increase was primarily due to a $13.2 million increase in personnel costs, including stock-based compensation, resulting from headcount growth, a $7.3 million increase in commission expense related to higher sales, a $3.2 million increase in advertising and tradeshow expenses, a $1.8 million increase in travel and entertainment expenses, and a $1.7 million increase in allocated overhead resulting from higher facilities utilization.

General and Administrative

General and administrative expense increased by $1.3 million, or 14%, during the three months ended July 31, 2016 compared to the three months ended July 31, 2015. The increase was primarily due to a $0.8 million increase in personnel costs, including stock-based compensation expense, resulting from headcount growth.

General and administrative expense increased by $2.5 million, or 13%, during the six months ended July 31, 2016 compared to the six months ended July 31, 2015. The increase was primarily due to a $2.1 million increase in personnel costs, including stock-based compensation expense, resulting from headcount growth.

Interest Income and Other Expense, Net


	Three Months Ended July 31,												Six Months Ended July 31,
	2016			2015			Change						2016			2015			Change
	Amount			Amount			Amount			%			Amount			Amount			Amount			%
	(dollars in thousands)
Interest income, net	$	47		$	61		$	(14	)		(23	)%	$	120		$	129		$	(9	)		(7	)%
Other expense, net		(339	)		(379	)		40			(11	)%		(563	)		(303	)		(260	)		86	%

Other expense, net consisted primarily of gains (losses) from the remeasurement of our foreign currency denominated assets. The decrease in the losses from the remeasurement of our foreign currency denominated assets during the three months ended July 31, 2016 compared to the three months ended July 31, 2015 resulted from realized gains from our foreign currency forward contracts, partially offset by the net remeasurement losses from the depreciation of the U.S. dollar against foreign currencies. The increase in the losses from the remeasurement of our foreign currency denominated assets during the six months ended July 31, 2016 compared to the six months ended July 31, 2015 resulted from the net remeasurement losses from the depreciation of the U.S. dollar against foreign currencies, and the realized losses from our foreign currency forward contracts. We enter into foreign currency forward contracts that generally mature within 30 days to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and inter-company receivables and payables. For the three months ended July 31, 2016 and 2015, we recognized $0.5 million and $0.2 million in realized gains related to foreign currency forward contracts, respectively. For the six months ended July 31, 2016 and 2015, we recognized $0.1 million and $0.1 million in realized losses related to foreign currency forward contracts, respectively.

Provision for Income Taxes


	Three Months Ended July 31,									Six Months Ended July 31,
	2016		2015		Change					2016		2015		Change
	Amount		Amount		Amount		%			Amount		Amount		Amount		%
	(dollars in thousands)
Provision for income taxes	$	338	$	288	$	50		17	%	$	655	$	500	$	155		31	%

The increase in the provision for income taxes during the three and six months ended July 31, 2016 compared to the three and six months ended July 31, 2015 was primarily due to an increase in foreign taxes related to inter-company cost plus agreements with our international subsidiaries.

Liquidity and Capital Resources


	As of
	July 31, 2016			January 31, 2016
	(in thousands)
Cash and cash equivalents	$	194,218		$	211,160

	Six Months Ended July 31,
	2016			2015
	(dollars in thousands)
Cash provided by (used in) operating activities	$	(12,367	)	$	6,569
Cash used in investing activities		(11,784	)		(13,954	)
Cash provided by financing activities		7,169			12,670
Foreign exchange impact on cash and cash equivalents		40			(125	)

Net increase (decrease) in cash and cash equivalents	$	(16,942	)	$	5,160

Other Financial and Operational Metrics:
Days Sales Outstanding (1)		46			41
Days Sales Inventory (2)		50			48

(1)	Average days sales outstanding. This is calculated by taking the average beginning and ending accounts receivable divided by billings for the periods presented.

(2)	Average number of days we hold our inventory before sale. This is calculated by taking the average beginning and ending inventory divided by total cost of revenue excluding stock-based compensation for the periods presented.

At July 31, 2016, our cash and cash equivalents were $194.2 million, of which approximately $5.5 million was held outside of the United States and not immediately available to fund domestic operations and obligations. We do not enter into investments for trading or speculative purposes.

We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product and service offerings, and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

Operating Activities

During the six months ended July 31, 2016, cash used in operating activities was $12.4 million. The primary factors affecting our cash flows from operations during this period were our net loss of $82.6 million, partially offset by non-cash charges of $46.4 million for stock-based compensation, $10.6 million for depreciation and amortization of our property and equipment and intangible asset, and net cash flows of $12.9 million provided by changes in our operating assets and liabilities. The primary driver of the changes in operating assets and liabilities was a $12.2 million increase in deferred revenue due to higher sales of support and service contracts, a $5.6 million increase in accounts payable and accrued liabilities as a result of timing of payments, and a $1.3 million decrease in accounts receivable. This was partially offset by a $4.0 million increase in inventory and a $2.5 million increase in prepaid expenses. We expect operating cash flows to continue to be affected by our net loss as well as the timing of sales and collections.

During the six months ended July 31, 2015, cash provided by operating activities was $6.6 million. The primary factors affecting our cash flows from operations during this period were our net loss of $59.1 million, partially offset by non-cash charges of $43.3 million for stock-based compensation, $6.9 million for depreciation of our property and equipment, and net cash flows of $15.2 million provided by changes in our operating assets and liabilities. The primary driver of the changes in operating assets and liabilities was a $23.5 million increase in deferred revenue due to higher sales of support and service contracts and a $1.2 million increase in accounts payable and accrued liabilities as a result of increase in inventory purchases and timing of payments. This was partially offset by an increase of $7.9 million in accounts receivable which was attributable to increased sales, and a $1.6 million increase in inventories.

Investing Activities

Cash used in investing activities during the six months ended July 31, 2016 was $11.8 million, primarily resulting from the purchase of property and equipment due to an increase in expansion of our research and development for our new products, including our new All Flash arrays, and overall infrastructure. We expect to continue to make such purchases of property and equipment to support the continued growth of our business.

Cash used in investing activities during the six months ended July 31, 2015 was $14.0 million, primarily resulting from the purchase of property and equipment due to an increase in expansion of our research and development and overall infrastructure.

Financing Activities

Cash provided by financing activities for the six months ended July 31, 2016 was $7.2 million, primarily resulting from $5.6 million of proceeds from issuance of common stock under our ESPP, and $1.6 million of proceeds from the exercise of stock options, net of repurchases of unvested early exercised shares.

Cash provided by financing activities for the six months ended July 31, 2015 was $12.7 million, primarily resulting from $7.2 million of proceeds from issuance of common stock under our ESPP, and $5.2 million of proceeds from the exercise of stock options, net of repurchases of unvested early exercised shares.

Contractual Obligations and Commitments

There have been no material changes in our contractual obligations and commitments for the six months ended July 31, 2016, as compared to the contractual obligations and commitments described in our Annual Report for the fiscal year ended January 31, 2016.

Off-Balance Sheet Arrangements

As of July 31, 2016 and January 31, 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.

Segment and Geographic Information

We have one primary business activity and operate in one reportable segment. See Note 9. Segments in the “Notes to Consolidated Financial Statements” in Item 1 of Part I of this Form 10-Q for a full description.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Our sales contracts are primarily denominated in U.S. dollars with a number of contracts denominated in foreign currencies. A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound sterling, Australian dollar, Canadian dollar and Euro.

The combination of our higher non-U.S. dollar denominated net asset balances from increased international expansion, primarily in our U.S. entity, and the foreign currency fluctuations, net of hedging, caused us to recognize transaction losses of $0.3 million and $0.4 million during the three months ended July 31, 2016 and 2015, respectively, and transaction losses of $0.6 million and $0.3 million during the six months ended July 31, 2016 and 2015, respectively, in other expense, net, in the consolidated statements of operations. The $0.3 million in foreign exchange transaction losses recognized for the three months ended July 31, 2016 was net of $0.5 million in gains from foreign currency forward contracts which we entered into during the three months ended July 31, 2016. The $0.6 million in foreign exchange transaction losses recognized for the six months ended July 31, 2016 included $0.1 million losses from foreign currency forward contracts which we entered into during the six months ended July 31, 2016. In November 2014, we entered into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and inter-company receivables and payables. These contracts reduce the exposure to fluctuations in foreign currency exchange rate movements as the gains and losses associated with foreign currency balances are offset with the gains and losses on the forward contracts. These instruments are marked to market through earnings every period and generally have an original maturity term of one month. We do not enter into foreign currency forward contracts for trading or speculative purposes. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. It is difficult to predict the impact hedging activities could have on our results of operations. The fair value of foreign currency forward contracts outstanding as of July 31, 2016 was a loss of $0.1 million.

Interest Rate Risk

We had cash and cash equivalents of $194.2 million as of July 31, 2016, consisting of bank deposits. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

There have been no material changes to our critical accounting policies and estimates during the six months ended July 31, 2016 from those disclosed in Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our Annual Report for the year ended January 31, 2016.

Recent Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies contained in the “Notes to Consolidated Financial Statements” in Item 1 of Part I of this Form 10-Q for a full description of the recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial conditions.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision of, and with the participation of, our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of July 31, 2016.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

On December 17, 2015, a purported securities class action entitled Vikramkumar v. Nimble Storage, Inc., et al. was filed in the United States District Court for the Northern District of California, against the Company and certain of its officers and directors. A second purported securities class action entitled Guardino v. Nimble Storage, Inc., et al. was filed on December 23, 2015, and a third purported class action entitled Madhani v. Nimble Storage, Inc., et al. was filed on February 5, 2016, also in the Northern District of California against the same parties. The complaints in the three actions allege claims under Sections 10(b) and 20(a) of the Exchange Act based on allegedly misleading statements regarding the Company’s business and financial results. On March 28, 2016, the Court ordered that the three actions be consolidated under the caption In re Nimble Storage, Inc. Securities Litigation, or In re Nimble Sec. Lit. A consolidated amended complaint was filed in the In re Nimble Sec. Lit. matter on June 10, 2016. The Company filed a motion to dismiss the consolidated amended complaint on July 25, 2016.

In addition, from time to time, the Company may become involved in legal proceedings arising in the ordinary course of business.

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business and Our Industry

We have a history of losses, anticipate increasing our operating expenses in the future, and may not be able to achieve or maintain profitability. If we cannot become profitable or maintain our profitability in the future, our business and operating results may suffer.

We have incurred net losses in all fiscal years since our inception, including net losses of $43.1 million, $98.8 million, $120.1 million and $82.6 million in the years ended January 31, 2014, 2015 and 2016 and the six months ended July 31, 2016, respectively. As of July 31, 2016, we had an accumulated deficit of $402.6 million. We anticipate that we will continue to operate in a net loss position for the foreseeable future as we continue to develop our technology, enhance our product and service offerings, expand our sales channels, expand our operations and hire additional employees, particularly in sales, marketing and research and development. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently, or at all, to offset these higher expenses. In future periods, our profitability could be adversely affected for a number of possible reasons, including slowing demand for our products or services, increasing competition, returns on investments we make in our business that are less than expected, changes in the way storage services are consumed, a decrease in the growth of the storage market or general economic conditions. If we are unable to meet these risks and challenges as we encounter them, our business and operating results may suffer.

Our limited operating history makes it difficult to evaluate our current business and future prospects.

We were incorporated in November 2007 and shipped our first products in August 2010. The majority of our revenue growth has occurred in the years ended January 31, 2012 and later. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth and profitability. We have encountered and will continue to encounter risks and difficulties frequently experienced by rapidly growing companies in constantly evolving industries, including the risks described in this report. If we do not address these risks successfully, our business and operating results will be adversely affected, and our stock price could decline. Further, we have limited historical financial data. As such, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.

If the market for our storage products does not grow as we anticipate, our revenue may not grow and our operating results would be harmed.

We are vulnerable to fluctuations in overall demand for storage products. Our business plan assumes that the demand for storage products will increase as organizations collect, process and store an increasing amount of data. However, if storage markets in general or markets for captive storage experience downturns or grow more slowly than anticipated, or if demand for our products does not grow as quickly as we anticipate, whether as a result of competition, product obsolescence, budgetary constraints of our end-customers, technological changes, unfavorable economic conditions, uncertain geopolitical environments or other factors, we may not be able to increase our revenue sufficiently to ever achieve profitability and our stock price would decline. For example, the emergence of cloud computing and storage-as-a-service may impact both short-term and long-term growth patterns in the markets in which we compete.

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

You should not consider our revenue growth rate in recent periods as indicative of our future performance. While we have recently experienced significant revenue growth rates, we may not achieve similar revenue growth rates in future periods. You should not rely on our past revenue growth rates for any prior periods as any indication of our future revenue or revenue growth rates.

Our quarterly operating results may fluctuate significantly, which could cause the trading price of our common stock to decline.

Our operating results have historically fluctuated and may continue to fluctuate from quarter to quarter, and we expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:

•

the budgeting cycles and purchasing practices of end-customers;

•

increasing number and size of orders from Global 5000 companies and other large enterprises and cloud service providers that may require longer sales cycles;

•

price competition;

•

our ability to attract and retain new channel partners and end-customers;

•

the timing and success of new product and service introductions by us or our competitors, including the success of our AF-Series All Flash arrays;

•

the increasing use of cloud computing and storage-as-a-service by our end-customers;

•

deferral of orders in anticipation of new products or product enhancements announced by us or our competitors;

•

our ability to sell additional products to existing channel partners and end-customers;

•

changes in end-customer requirements or market needs and our inability to make corresponding changes to our business;

•

any potential disruption in our sales channels or termination of our relationship with important channel partners;

•

changes in the competitive landscape, including consolidation among our competitors or end-customers;

•

potential seasonality in the markets we serve;

•

general economic conditions, both domestically and in our foreign markets;

•

material changes in end-customer adoption of our product or service offerings, such as our Storage on Demand, or SoD, offering, that may change the timing of revenue recognition;

•

our inability to provide adequate support to our end-customers;

•

our inability to control the costs of manufacturing our products, including the cost of components;

•

our inability to fulfill our end-customers’ orders due to supply chain delays or events that impact our manufacturers or their suppliers;

•

our inability to adjust certain fixed costs and expenses, particularly in research and development, for changes in demand;

•

the timing of certain payments and related expenses, such as sales commissions;

•

increases or decreases in our revenue and expenses caused by fluctuations in foreign currency exchange rates, as an increasing portion of our revenue is collected and expenses are incurred and paid in currencies other than the U.S. dollar;

•

the cost of and potential outcomes of existing and future claims or litigation, which could have a material adverse effect on our business;

•

future accounting pronouncements and changes in our accounting policies; and

•

changes in tax laws or tax regulations.

Any one of the factors above or the cumulative effect of some of the factors above may result in significant fluctuations in our operating results. In particular, because we have historically received a substantial portion of sales orders during the last few weeks of each fiscal quarter, we are particularly vulnerable to any delay in order fulfillment, failure to close anticipated orders or any other problems encountered during the last few weeks of each fiscal quarter. This variability and unpredictability could result in our failure to meet our revenue or other operating result expectations or those of investors for a particular period. The failure to meet or exceed such expectations could have a material adverse effect on our business, results of operations and financial condition that could ultimately adversely affect our stock price.

We have limited visibility into future sales, which makes it difficult to forecast our future operating results.

Because of our limited visibility into end-customer demand, our ability to accurately forecast our future revenue is limited. We sell our products primarily through our network of channel partners that accounted for 92%, 98%, 99% and 98% of our total revenue in the years ended January 31, 2014, 2015 and 2016 and the six months ended July 31, 2016, respectively. We place orders with our third-party manufacturer based on our forecasts of our end-customers’ requirements and forecasts provided by our channel partners. These forecasts are based on multiple assumptions, each of which might cause our estimates to be inaccurate, thereby affecting our ability to provide products to our end-customers. When demand for our products increases significantly, we may not be able to meet it on a timely basis, and we may need to expend a significant amount of time working with our end-customers to allocate limited supply and maintain positive end-customer relationships, or we may incur additional costs to accelerate the manufacture and delivery of additional products. If we or our channel partners underestimate end-customer demand, we may forego revenue opportunities, lose market share and damage our end-customer relationships. Conversely, if we overestimate demand for our products and consequently purchase significant amounts of components or hold inventory, we could incur additional costs and potentially incur related charges, which could adversely affect our operating results.

Adverse economic conditions or reduced IT spending may adversely impact our business.

Our business depends on the overall demand for IT and on the economic health of our current and prospective end-customers. In general, worldwide economic conditions remain unstable, and these conditions make it difficult for our current and prospective end-customers and us to forecast and plan future business activities accurately, and they could

cause our end-customers or prospective end-customers to reevaluate their decision to purchase our products or services. Weak global economic conditions, or a reduction in IT spending even if economic conditions improve, could adversely impact our business and operating results in a number of ways, including longer sales cycles, lower prices for our products or services, reduced bookings and lower or no growth.

We are dependent on a small number of product lines, and the lack of continued market acceptance of these product lines would result in lower revenue.

Our CS Series of storage products accounted for a majority of our total revenue in the year ended January 31, 2016. In February 2016, we introduced our new AF-Series of storage products. We anticipate that our AF products and our CS products will account for a majority of our revenue for the foreseeable future. As a result, our revenue could be reduced as a result of:

•

any decline in demand for these products;

•

the introduction of products and technologies by us or our competitors that serve as a replacement or substitute for, or represent an improvement over, these products;

•

technological innovations or new communications standards that our products do not address;

•

our failure or inability to predict changes in our industry or end-customers’ demands or to design products or enhancements that meet end-customers’ increasing demands; and

•

our inability to release enhanced versions of our current products or new product lines on a timely basis.

We rely on third-party channel partners to sell substantially all of our products, and if our partners fail to perform, our ability to sell and distribute our products and services will be limited, and our operating results will be harmed.

We depend on our channel partners to sell our products. Our contracts with channel partners typically are terminable without cause upon written notice to the other party. Our channel partner agreements do not prohibit them from offering competitive products or services and do not contain any purchase commitments. Many of our channel partners also sell our competitors’ products. If our channel partners give higher priority to our competitors, we may be unable to grow our revenue and our net loss could increase. Further, in order to develop and expand our channels, we must continue to scale and improve our processes and procedures that support our channel partners, including investments in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. If we fail to maintain existing channel partners or develop relationships with new channel partners, our revenue opportunities will be reduced.

We receive a substantial portion of our total revenue from a limited number of channel partners and the loss of, or a significant reduction in, orders from one or more of our major channel partners would harm our business.

We receive a substantial portion of our total revenue from a limited number of channel partners. For the years ended January 31, 2014, 2015 and 2016 our top ten channel partners accounted for 47%, 90% and 94%, respectively, of our total revenue. We have transitioned order fulfillment in North America largely to three distributors. The majority of our existing VARs now contract directly with one or all of these three distributors, Avnet, Inc., Ingram Micro Inc. and Carahsoft Technology Corp. Avnet accounted for more than 10% of our revenue for the years ended January 31, 2014, 2015 and 2016. Carahsoft accounted for more than 10% of our revenue for the years ended January 31, 2015 and 2016, but less than 10% of our revenue for the year ended January 31, 2014. Ingram Micro started to account for more than 10% of our revenue beginning in the year ended January 31, 2016. During the year ended January 31, 2016, these three distributors accounted for, in the aggregate, approximately 79% of our total revenue. We anticipate that we will continue to depend upon a limited number of channel partners for a substantial portion of our total revenue for the foreseeable future and, in some cases, the portion of our revenue attributable to individual channel partners may increase in the future. The loss of one or more key channel partners or a reduction in sales through any major channel partner would reduce our revenue.

We face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

A number of very large corporations have historically dominated the storage market. We consider our primary competitors to be companies that provide enterprise storage products, including Dell, Inc., EMC Corporation (acquired by Dell), Hewlett-Packard Company, NetApp, Inc. and Pure Storage, Inc. We also compete to a lesser extent with a number of other private companies and certain well-established companies. Some of our competitors have made acquisitions of businesses that allow them to offer more directly competitive and comprehensive solutions than they had previously offered. In addition, the emergence of cloud computing and storage-as-a-service may impact both short-term and long-term growth patterns in the markets in which we compete. We expect to encounter new competitors domestically and internationally as other companies enter our market or if we enter new markets.

Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages such as:

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potential for broader market acceptance of their storage architectures and solutions;

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greater name recognition and longer operating histories;

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larger sales and marketing and end-customer support budgets and resources;

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broader distribution and established relationships with distribution partners and end-customers;

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the ability to bundle storage products with other technology products and services, or offer a broader range of storage solutions to better fit certain end-customers’ needs;

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lower labor and development costs;

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larger and more mature intellectual property portfolios;

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substantially greater financial, technical and other resources; and

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greater resources to make acquisitions.

If we are not successful in executing our strategy to increase sales of our products to larger enterprise end-customers, our operating results may suffer.

Our growth strategy is dependent, in part, upon continuing to increase sales of our products to larger enterprises. Sales to these types of end-customers involve risks that may not be present or that are present to a lesser extent with sales to smaller entities. These risks include:

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competition from larger competitors that traditionally target larger enterprises and that may have pre-existing relationships or purchase commitments from those end-customers;

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successfully selling and supporting our AF-Series All Flash arrays;

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successfully supporting fibre channel products, as many large enterprises often require products that support this technology;

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successfully introducing and supporting other new products in the future that are either required or preferred by large enterprises;

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increased purchasing power and leverage held by large end-customers in negotiating price and other contractual arrangements;

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more stringent support requirements;

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longer sales cycles and the associated risk that substantial time and resources may be spent on potential end-customers that elect not to purchase our products; and

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certain end-customers may have already adopted modern competitive storage system architectures in some of their operations, thereby making adoption of our architecture a more difficult value proposition for our sales force to make.

Large enterprises often undertake a significant evaluation process that results in a lengthy sales cycle. Although we have a channel sales model, our sales representatives may invest substantial time and resources in engaging with sales to larger end-customers without being successful in generating any sales. In addition, product purchases by large enterprises are frequently subject to bidding processes involving multiple competing suppliers, budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Finally, large enterprises typically have longer implementation cycles, require greater product functionality and scalability (including, for example, fibre channel products and all flash array products) and a broader range of services, demand that vendors take on a larger share of risks, sometimes require acceptance provisions that can potentially lead to a delay in revenue recognition, and expect greater payment flexibility from vendors. All of these factors can add risk to business conducted with these end-customers. If we fail to realize an expected sale from a large end-customer in a particular quarter or at all, our business, operating results and financial condition could be adversely affected.

Our sales cycle is unpredictable, which makes it difficult to predict our results even in the near term.

A substantial portion of our quarterly sales typically occurs during the last month of the quarter, which we believe largely reflects sales cycles of storage products and other products in the technology industry generally. We have little visibility at the start of any quarter as to which existing end-customers, if any, will make additional purchases and when any additional purchases may occur, if at all.

Our sales cycles vary based on factors such as customer size, customer type, order size, competition, industry trends, and customer anticipation of new or updated products. For example, potential end-customers (including large enterprises) may undertake a longer evaluation process with multiple competing storage providers that has, in the past, resulted in a longer sales cycle. Customers also may delay their purchases of our current products after the introduction of new products that are not yet shipping in volume. In addition, our sales cycle may be extended if potential end-customers decide to re-evaluate other aspects of their storage infrastructure at the same time they are considering a purchase of our products. As a result, our quarterly operating results are difficult to predict even in the near term.

If we do not successfully anticipate market needs and develop products and product enhancements that meet those needs, or if those products do not gain market acceptance, our business will suffer.

The storage market is characterized by rapidly evolving technology, end-customer needs and industry standards. We might not be able to anticipate future market needs or changes in existing technologies, and we might not be able to develop new products or product enhancements to meet such needs, either in a timely manner or at all. For example, if changes in technology result in a significant reduction in the price for flash memory, enterprises may not need to utilize flash-optimized storage in order to cost effectively protect their data. Also, one or more new technologies could be introduced that compete favorably with our storage products or that cause our storage products to no longer be of significant benefit to our end-customers.

The process of developing new technology is complex and uncertain, and we may not be able to develop our products in a manner that enables us to successfully address the changing needs of our end-customers. For example, in February 2016, we introduced our new AF-Series of storage products in order to address the demands of our end-customers for an all flash product. If our new AF-Series product line does not perform to expectations, appropriately address the needs of our end-customers or otherwise fails to achieve market acceptance, our business and operating results will be harmed.

Moreover, slow market acceptance of new products and product enhancements will delay or eliminate our ability to recover our investment in these products and product enhancements. We must commit significant resources to developing new products and product enhancements before knowing whether our investments will result in products the market will accept. Additionally, we may not achieve the cost savings or the anticipated performance improvements we expect, and we may take longer to generate revenue, or generate less revenue, than we anticipate. If we are not able to successfully identify new product and product enhancement opportunities, develop and bring new products and product enhancements to market in a timely manner, or achieve market acceptance of our products and product enhancements, our business and operating results will be harmed.

Failure to adequately expand our sales force will impede our growth.

We will need to continue to expand and optimize our sales infrastructure in order to grow our end-customer base and our business. In particular, our ability to increase our business with both large enterprises as well as international end-customers will require qualified personnel with experience selling into these types of end-customers. We plan to continue to expand our sales force globally. Identifying, recruiting and training qualified personnel require significant time, expense and attention. It can take time before our sales representatives are fully-trained and productive. Moreover, strategies that may be successful in one region may not be relevant for another region. Our business may be adversely affected if our efforts to expand and train our sales force do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain talented sales personnel globally or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue.

Our growth depends in part on the success of our strategic relationships with third parties.

Our future growth will depend on our ability to enter into successful strategic relationships with third parties. For example, our alliance activity with Citrix Systems, Inc., Commvault Systems, Inc. Microsoft Corporation, Oracle Corporation, SAP, Splunk Inc., Veeam Software, and VMware, Inc. as well as our SmartStack initiative with Cisco Systems, Inc. are intended to create a broader integrated technology solution to address our end-customers’ needs. In addition, we work with global distributors to streamline and grow our sales channel. These relationships may not result in additional end-customers or enable us to generate significant revenue. These relationships are typically non-exclusive and do not prohibit the other party from working with our competitors or from offering competing services. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results could suffer.

Our products handle mission-critical data for our end-customers and are highly technical in nature. If our products have defects, failures occur or end-customer data is lost or corrupted, our reputation and business could be harmed.

Our products are highly technical and complex and are involved in storing and replicating mission-critical data for our end-customers. Our products may contain undetected defects, failures or vulnerabilities when they are first introduced or as new versions are released. We have in the past and may in the future discover software errors in new versions of our existing

products, new products or product enhancements after their release or introduction, which could result in lost revenue. Despite testing by us and by current and potential end-customers, errors might not be found in new releases or products until after commencement of commercial shipments, resulting in loss of or delay in market acceptance. Our products may also have security vulnerabilities and be subject to intentional attacks by viruses that seek to take advantage of these bugs, errors or other weaknesses. If defects, failures or vulnerabilities occur in our products, a number of negative effects to our business could result, including:

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lost revenue or lost end-customers;

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increased costs, including warranty expense and costs associated with end-customer support;

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delays, cancellations, reductions or rescheduling of orders or shipments;

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product returns or discounts;

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diversion of management resources;

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legal claims for breach of contract, product liability, tort or breach of warranty; and

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damage to our reputation and brand.

Because our end-customers use our products to manage and protect their data, we could face claims resulting from any loss or corruption of our end-customers’ data due to a product defect, failure or vulnerability. While our sales contracts contain provisions relating to warranty disclaimers and liability limitations, these provisions might not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention from our business and could result in public perception that our products are not effective, even if the occurrence is unrelated to the use of our products. In addition, our business liability insurance coverage might not be adequate to cover such claims. If any data is lost or corrupted in connection with the use or support of our products, our reputation could be harmed and market acceptance of our products could suffer.

We rely on a limited number of suppliers, and in some cases single-source suppliers, and any disruption or termination of these supply arrangements, failure to successfully manage our relationships with our key suppliers or component quality problems could delay shipments of our products and damage our channel partner or end-customer relationships.

We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key components of our products. We generally purchase components on a purchase order basis and do not have long-term supply contracts with our suppliers. Our reliance on key suppliers reduces our control over the manufacturing process and exposes us to risks, including reduced control over product quality, production costs, timely delivery and capacity. It also exposes us to the potential inability to obtain an adequate supply of required components because we do not have long-term supply commitments. In particular, replacing the single-source suppliers of our solid state drives and chassis would require a product re-design that could take months to implement.

We generally maintain minimal inventory for repairs, evaluation and demonstration units and acquire components only as needed. We do not enter into long-term supply contracts for these components. As a result, our ability to respond to channel partner or end-customer orders efficiently may be constrained by the then-current availability, terms and pricing of these components. Our industry has experienced component shortages and delivery delays in the past, and we may experience shortages or delays of critical components in the future as a result of strong demand in the industry or other factors. If we or our suppliers inaccurately forecast demand for our products or we ineffectively manage our enterprise resource planning processes, our suppliers may have inadequate inventory, which could increase the prices we must pay for substitute components or result in our inability to meet demand for our products, as well as damage our channel partner or end-customer relationships.

Component quality is particularly important with respect to disk drives. We have in the past and may in the future experience disk drive failures, which could cause our reputation to suffer, our competitive position to be impaired and our end-customers to select other vendors. To meet our product performance requirements, we must obtain disk drives of extremely high quality and capacity. In addition, there are periodic supply-and-demand issues for disk drives and flash memory that could result in component shortages, selective supply allocations and increased prices of such components. We may not be able to obtain our full requirements of components, including disk drives, that we need for our storage products or the prices of such components may increase.

If we fail to effectively manage our relationships with our key suppliers, or if our key suppliers increase prices of components, experience delays, disruptions, capacity constraints, quality control problems in their manufacturing operations or adverse changes to their financial condition, our ability to ship products to our channel partners or end-customers could be impaired and our competitive position and reputation could be adversely affected. Qualifying a new key supplier is expensive and time-consuming. If we are required to change key suppliers or assume internal manufacturing operations, we may lose revenue and damage our channel partner or end-customer relationships.

Because we depend on a single third-party manufacturer to build our products, we are susceptible to manufacturing delays and pricing fluctuations that could prevent us from shipping orders on time, if at all, or on a cost-effective basis, which would cause our business to suffer.

In the first quarter of the year ended January 31, 2015, we completed the transition of our manufacturing activities from two third-party manufacturers to one, Flextronics International Ltd., or Flextronics. Our reliance on this third-party manufacturer reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs and product supply and timing. Any manufacturing disruption by Flextronics could severely impair our ability to fulfill orders. Our current agreement with Flextronics, which is terminable at will or upon short notice by Flextronics, does not contain any minimum commitment to manufacture our products, and any orders are fulfilled only after a purchase order has been delivered and accepted. As a result, Flextronics may stop taking new orders or fulfilling our orders on short notice or limit our allocations of products. Moreover, our orders represent a relatively small percentage of the overall orders received by Flextronics from its end-customers; therefore, fulfilling our orders may not be a priority in the event Flextronics is constrained in its ability to fulfill all of its end-customer obligations. If we are unable to manage our relationship with Flextronics effectively, or if Flextronics suffers delays or disruptions for any reason, experiences increased manufacturing lead-times, capacity constraints or quality control problems in its manufacturing operations, limits our allocations of products, stops taking new orders or fulfilling our orders on short notice, or otherwise fails to meet our future requirements for timely delivery, our ability to ship products to our end-customers would be impaired, and our business and operating results would be harmed.

Our business and operations have experienced rapid growth in recent periods. If we do not effectively manage any future growth or are unable to improve our systems and processes, our operating results could be harmed.

We have experienced rapid growth over the last few years. Our employee headcount and number of end-customers have increased significantly, and we expect to continue to grow our headcount significantly over the next 12 months. Since we initially launched our products in August 2010, our number of end-customers has grown to over 8,850 as of July 31, 2016. The growth and expansion of our business and product and service offerings places a continuous significant strain on our management, operational and financial resources.

To manage any future growth effectively, we must continue to improve and expand our IT and financial infrastructure, our operating and administrative systems and controls, our enterprise resource planning systems and processes and our ability to manage headcount, capital and processes in an efficient manner. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenue and expenses, or to prevent losses. Our productivity and the quality of our products and services may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Failure to manage any future growth effectively could result in increased costs, negatively impact our end-customers’ satisfaction and harm our operating results.

Our ability to sell our products is dependent on the quality of our technical support services, and our failure to offer high quality technical support services could have a material adverse effect on our sales, operating results and end-customers’ satisfaction with our products and services.

Once our products are deployed within our end-customers’ networks, our end-customers depend on our technical support services to resolve any issues relating to our products. We may be unable to respond quickly enough to accommodate short-term increases in end-customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. Increased end-customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results. Any failure by us to effectively help our end-customers quickly resolve post-deployment issues or provide high-quality technical support, or a market perception that we do not maintain high-quality support, could harm our reputation and adversely affect our ability to sell our solutions to existing and prospective end-customers.

Our future growth plan depends in part on expanding outside of the United States, and we are therefore subject to a number of risks associated with international sales and operations.

As part of our growth plan, we intend to expand our operations globally. We have a limited history of marketing, selling and supporting our products and services internationally. International sales and operations are subject to a number of risks, including the following:

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greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;

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increased expenses incurred in establishing and maintaining office space and equipment for our international operations;

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fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;

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management communication and integration problems resulting from cultural and geographic dispersion;

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difficulties in attracting and retaining personnel with experience in international operations;

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risks associated with trade restrictions and foreign legal requirements, including the importation, certification and localization of our products required in foreign countries;

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greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;

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the uncertainty of protection for intellectual property rights in some countries;

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greater risk of a failure of foreign employees to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act and any trade regulations ensuring fair trade practices; and

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general economic and political conditions in these foreign markets.

These factors and other factors could harm our ability to generate future international revenue and, consequently, materially impact our business and operating results. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our failure to successfully manage our international operations and the associated risks effectively could limit the future growth of our business.

Interruptions to and failures of our IT infrastructure could disrupt our operations and services.

We depend on our IT infrastructure, which includes our data centers and networks, to operate our business and to provide services to our end-customers through our InfoSight platform. This infrastructure, including our back-up systems, resides in two locations. Currently we do not have a complete disaster recovery program, but we are in the process of implementing such a program in the upcoming quarters. Any interruptions to failures of, or attacks on, our IT infrastructure, whether due to natural disasters, system failures, computer viruses, security breaches, computer hacking attacks or other causes, whether through third party action or employee error or malfeasance, would affect our ability to operate our business and to also provide services through our InfoSight platform. As a result, it could be difficult to operate our business and we could also face liability with respect to any diminished performance of our InfoSight platform or support services generally during the periods when our IT infrastructure is compromised and any subsequent periods required to repair such interruptions or failures. Moreover, we would likely suffer reputational damage, and our ability to sell our solutions to existing and prospective end-customers could be harmed.

The inability of our products to interoperate with leading business software applications, hypervisors and data management tools would cause our business to suffer.

Our products are also designed to interoperate with virtualization solutions in the market. Virtual environment solutions require a fast and flexible network storage foundation. If our products are not compatible with leading business software applications, hypervisors and data management tools, demand for our products will decline. We must devote significant resources to enhancing our products to continue to interoperate with these software applications, hypervisors and data management tools. Any current or future providers of software applications, hypervisors or data management tools could make future changes that would diminish the ability of our products to interoperate with them, and we might need to spend significant additional time and effort to ensure the continued compatibility of our products, which might not be possible at all. Any of these developments could harm our business.

If our products do not interoperate with our end-customers’ infrastructure, sales of our products could be negatively affected, which would harm our business.

Our products must interoperate with our end-customers’ existing infrastructure, which often have different specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. If we find errors in the existing software or defects in the hardware used in our end-customers’ infrastructure or problematic network configurations or settings, we may have to modify our software or hardware so that our products will interoperate with our end-customers’ infrastructure. In such cases, our products may be unable to provide significant performance improvements for applications deployed in our end-customers’ infrastructure. In addition, government and other end-customers may require our products to comply with certain security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, we may be disqualified from, or disadvantaged in, selling our products to such end-customers, which could harm our business and operating results.

If our industry experiences declines in average sales prices, our revenue and gross profit may also decline.

The data storage products industry is highly competitive and has historically been characterized by declines in average sales prices. It is possible that the market for our storage products could experience similar trends in equal or greater degree than the rest of the industry. Our average sales prices could decline due to pricing pressure caused by

several factors, including competition, the introduction of competing technologies, overcapacity in the worldwide supply of flash memory or disk drive components, increased manufacturing efficiencies, implementation of new manufacturing processes and expansion of manufacturing capacity by component suppliers. If we are required to decrease our prices to be competitive and are not able to offset this decrease by increases in the volume of sales or the sales of new products with higher margins, our gross margins and operating results could be adversely affected.

Governmental regulations affecting the export of certain of our solutions could negatively affect our business.

Our products, technology and software are subject to U.S. export control laws and economic sanctions, and we incorporate encryption technology into certain of our products. These encryption products and the underlying technology may be exported outside the United States only with the required export authorizations, including by license, a license exception or other appropriate government authorizations, including the filing of an encryption registration. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments and persons and for certain end-uses. Governmental regulation of encryption technology and regulation of imports or exports, or our failure, or inability due to governmental action or inaction, to obtain required import or export approval for our products could harm our international sales and adversely affect our revenue. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities even if the export license ultimately may be granted. Even though we take precautions to ensure that our channel partners comply with all relevant regulations, any failure by our channel partners to comply with such regulations could have negative consequences, including reputational harm, government investigations and penalties.

We have in the past had to make a voluntary disclosure to the Office of Export Enforcement of the U.S. Commerce Department to report a failure to obtain an encryption registration number prior to shipment of a particular hardware appliance product to a limited number of international end-customers. In the future, failure to comply with export regulations could result in penalties, costs, and restrictions on export privileges, which could also harm our operating results, as well as our inability to service certain products already in the hands of our end-customers, which could have negative consequences, including reputational harm. The U.S. Commerce Department’s Bureau of Industry and Security has granted the service authorization and closed the enforcement matter by issuing us a warning letter, rather than assessing a civil penalty.

A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.

We may in the future increase sales to government entities. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that these efforts will result in a sale. Government certification requirements for products like ours may change and in doing so restrict our ability to sell into certain government sectors until we have attained the revised certification. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services. Government entities may have statutory, contractual or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and any such termination may adversely impact our future operating results. Government entities may require contract terms that differ from standard arrangements and may impose compliance requirements that are complicated, require preferential pricing or “most favored nation” terms and conditions, or are otherwise time consuming and expensive to satisfy. Government entities routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government entity refusing to continue buying our products and services, a reduction of revenue, fines or civil or criminal liability if the audit uncovers improper or illegal activities, which could adversely impact our operating results.

We may be subject to claims that our employees have wrongfully disclosed or we have wrongfully used proprietary information of our employees’ former employers. These claims may be costly to defend and if we do not successfully do so, our business could be harmed.

Many of our employees were previously employed at current or potential competitors. We may be subject to claims that these employees have divulged or we have used proprietary information of these employees’ former employers. For example, in 2013 and 2014, NetApp filed lawsuits against us alleging that we and certain of our employees violated NetApp’s proprietary rights. Although we have settled the NetApp lawsuits and both matters have been dismissed with prejudice, litigation may be necessary to defend against other similar future claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our ability to develop new products and features for existing products, which could severely harm our business. Even if we are successful in defending against future claims, litigation could result in substantial costs and be a distraction to management.

Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products without compensating us.

We rely and expect to continue to rely on a combination of confidentiality agreements, as well as trademark, copyright, patent and trade secret protection laws, to protect our proprietary rights with our employees, consultants and third parties with whom we have relationships. We have filed various applications for certain aspects of our intellectual property. Valid patents may not issue from our pending applications, and the claims eventually allowed on any patents may not be sufficiently broad to protect our technology or products. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to misappropriate, copy aspects of our products or obtain and use information that we regard as proprietary. We generally enter into confidentiality or license agreements with our employees, consultants, vendors and end-customers, and generally limit access to and distribution of our proprietary information. However, we cannot assure you that the agreements we have entered into will not be breached. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.

From time to time, we may need to take legal action to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business and operating results. Attempts to enforce our rights against third parties could also provoke these third parties to assert their own intellectual property or other rights against us, or result in a holding that invalidates or narrows the scope of our rights, in whole or in part. Any of these events would have a material adverse effect on our business and operating results.

Claims by others that we infringe their proprietary technology or other rights could harm our business.

Companies in the storage industry own large numbers of patents, copyrights, trademarks, domain names and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. Third parties have asserted and may in the future assert claims of infringement of intellectual property rights against us or our end-customers and channel partners. Our standard license and other agreements obligate us to indemnify our end-customers and channel partners against claims that our products infringe the intellectual property rights of third parties, and in some cases this indemnification obligation is uncapped as to the amount of the liability. As the number of products and competitors in our market increases and overlaps occur, and our profile within this market grows, infringement claims may increase. While we intend to increase the size of our patent portfolio, our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that requires us to pay substantial damages, royalties or other fees. Any of these events could harm our business and operating results.

Although third parties may offer a license to their technology or other intellectual property, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could materially and adversely affect our business and operating results. If a third party does not offer us a license to its technology or other intellectual property on reasonable terms, or at all, we could be enjoined from continued use of such intellectual property. As a result, we may be required to develop alternative, non-infringing technology, which could require significant time (during which we would be unable to continue to offer our affected products or services), effort and expense, and may ultimately not be successful.

If we are unable to hire, retain, train and motivate qualified personnel and senior management, our business could be harmed.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. In particular, we are highly dependent on the contributions of our executive team as well as members of our research and development organization. The loss of any key personnel could make it more difficult to manage our operations and research and development activities, reduce our employee retention and revenue and impair our ability to compete. Although we have entered into employment offer letters with our key personnel, these agreements have no specific duration and constitute at-will employment.

Competition for highly skilled personnel is often intense, especially in the San Francisco Bay Area where we have a substantial presence and need for highly skilled personnel. We may not be successful in attracting, integrating or retaining qualified personnel to fulfill our current or future needs. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our stock declines, it may adversely affect our ability to hire or retain highly skilled employees. In addition, since we expense all stock-based compensation, we may periodically change our equity compensation practices, which may include reducing the number of employees eligible for equity awards or reducing the size of equity awards granted per employee. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.

If we or our channel partners fail to timely and correctly install our storage products, or if our channel partners face disruptions in their business, our reputation will suffer, our competitive position could be impaired and we could lose end-customers.

In addition to our small team of installation personnel, we rely upon some of our channel partners to install our storage products at our end-customer locations. Although we train and certify our channel partners on the installation of our products, end-customers have in the past encountered installation difficulties with our channel partners. In addition, if one or more of our channel partners suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its operations, our revenue could be reduced and our ability to compete could be impaired. As a significant portion of our sales occur in the last month of a quarter, our end-customers may also experience installation delays following a purchase if we or our channel partners have too many installations in a short period of time. If we or our channel partners fail to timely and correctly install our products, end-customers may not purchase additional products and services from us, our reputation could suffer and our revenue could be reduced. In addition, if our channel partners are unable to correctly install our products, we might incur additional expenses to correctly install our products.

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

Some of our channel partners and direct end-customers have experienced financial difficulties in the past. A channel partner or direct end-customer experiencing such difficulties will generally not purchase or sell as many of our products as it would under normal circumstances and may cancel orders. Our typical payment terms are 30 days from invoice. Because of local customs or conditions, payment terms may be longer in some circumstances and markets. In addition, a channel partner or direct end-customer experiencing financial difficulties generally increases our exposure to uncollectible receivables. If any of our channel partners or direct end-customers that represent a significant portion of our total revenue becomes insolvent or suffers a deterioration in its financial or business condition and is unable to pay for our products, our results of operations could be harmed.

Changes in laws, regulations and standards related to data privacy and the Internet could harm our business.

Federal, state or foreign government bodies or agencies have in the past adopted, and could in the future adopt, laws and regulations affecting data privacy and the use of the Internet as a commercial medium. Changing laws, regulations and standards applying to the solicitation, collection, processing or use of various information could affect our end-customers’ ability to use and share data, potentially restricting our ability to store, process and share data with our end-customers through our InfoSight platform, and in turn limit our ability to provide real-time and predictive end-customer support. For example, in Europe, the Court of Justice of the European Union has invalidated the “US-EU Safe Harbor framework,” (which created a safe harbor under the European Data Protection Directive for certain European data transfers to the U.S.) and the European Commission and U.S. Department of Commerce have replaced this with the “Privacy Shield” framework. However, the Privacy Shield has been the subject of much criticism from European regulators and it is unclear whether it will be subject to further challenge in European courts. In addition, text of a new EU General Data Protection Regulation has been agreed which will be implemented by May 2018, creating a new data privacy regime in Europe. As such, the privacy landscape in Europe is in a state of flux and any stricter regulation with regards to the solicitation, collection, processing or use of various information (including European data transfers to the U.S.) in the future may impact our end-customers and our business. If we are not able to adjust to changing laws, regulations and standards related to the Internet, our business could be harmed.

Some of our products use “open source” software, which may restrict how we use or distribute our products or require that we release the source code of certain software subject to open source licenses.

Some of our products may incorporate software licensed under so-called “free,” “open source” or other similar licenses where the licensed software is made available to the general public under the terms of a specific non-negotiable license. Some open source licenses require that software subject to the license be made available to the public and that any modifications or derivative works based on open source software be licensed in source code form under the same

open source licenses. Few courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We rely on multiple software programmers to design our proprietary technologies, we are not able to exercise complete control over the development methods and efforts of our programmers, and we cannot be certain that our programmers have not incorporated open source software into our products without our knowledge or that they will not do so in the future. Some of our products incorporate third-party software under commercial licenses. We cannot be certain whether such third-party software incorporates open-source software without our knowledge. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our products, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our products and materially and adversely affect our ability to sustain and grow our business. Many open source licenses include additional obligations and restrictions, such as providing attribution to the authors of the open source software or providing a copy of the applicable open source license to recipients of the open source software. If we distribute products outside the terms of applicable open source licenses, we could be exposed to claims of breach of contract or intellectual property infringement.

Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and could harm our business.

We expect that our existing cash and cash equivalents will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. In the future, we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness. We may also be required to take other actions that would otherwise be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business and operating results. If we need additional capital and cannot raise it on acceptable terms, we might not be able to, among other things:

•

develop or enhance our products;

•

continue to expand our sales and marketing and research and development organizations;

•

acquire complementary technologies, products or businesses;

•

expand operations in the United States or internationally;

•

hire, train and retain employees; or

•

respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could harm our business and operating results.

If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the New York Stock Exchange. We expect the requirements of these rules and regulations will increase our legal, accounting, financial compliance and audit costs, make some activities more challenging, time consuming and costly, and place strain on our personnel, systems and resources. For example, to comply with the requirements, we have taken various actions, such as implementing new internal controls and procedures and hiring accounting and internal audit staff.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. We are continuing to enhance and refine our disclosure controls and other procedures designed to ensure information required to be disclosed in the reports filed with the SEC, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.

Our current controls, and any new controls developed, may become inadequate because of changes in external conditions and in our business. Any failure to update, implement and maintain effective internal controls could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting required in periodic reports filed with the SEC under Section 404 of the Sarbanes-Oxley Act. Further, weaknesses in our internal controls may be discovered in the future and result in a restatement of our financial statements for prior periods. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results, or cause us to fail to meet our reporting obligations.

To maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended and will continue to expend significant resources, including accounting and professional services fees related costs and in providing diligent management oversight. Any failure to maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could impair our ability to operate our business. In the event that our disclosure controls and procedures and/or our internal controls are assessed or perceived as inadequate, we are unable to produce timely and accurate financial statements, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, investors may lose confidence in our reported financial results and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange and we may be subject to investigation or sanctions by the SEC.

We have performed system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Commencing with the audit of our fiscal year ended January 31, 2016, we have complied with the attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and our independent registered public accounting firm has formally attested to the effectiveness of our internal control over financial reporting.

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

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

The EU RoHS and similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. Currently, the manufacturer of our hardware appliances and our major component part suppliers comply with the EU RoHS requirements. However, if there are changes to this or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to re-engineer our products to use components compatible with these regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The WEEE requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive may increase the burden associated with complying with the directive.

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

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

Our sales contracts are primarily denominated in U.S. dollars. In addition, we also invoice in British pound sterling, Australian dollar, Canadian dollar and Euro. A strengthening of the U.S. dollar could increase the real cost of our products to our end-customers outside of the United States, which could adversely affect our operating results. In addition, an increasing portion of our operating expenses is incurred and an increasing portion of our assets is held outside the United States. These operating expenses and assets are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates. If we are not able to successfully hedge against the risks associated with currency fluctuations, our operating results could be adversely affected.

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

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

The SEC’s conflict minerals rule has caused us to incur additional costs, could limit the supply and increase the cost of certain minerals used in manufacturing our products, and could make us less competitive in our target markets.

The SEC’s conflict minerals rule requires disclosure by public companies of the origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to obtain sourcing data from suppliers, engage in supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar year. The rule could limit our ability to source at competitive prices and to secure sufficient quantities of certain minerals (or derivatives thereof) used in the manufacture of our products, specifically tantalum, tin, gold and tungsten, as the number of suppliers that provide conflict-free minerals may be limited. We have and will continue to incur costs associated with complying with the rule, such as costs related to the determination of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance policies, processes and controls, and possible changes to products or sources of supply as a result of such activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data collection and due diligence procedures that we implement, which may harm our reputation. Furthermore, we may encounter challenges in satisfying those end-customers that require that all of the components of our products be certified as conflict free, and if we cannot satisfy these end-customers, they may choose a competitor’s products. We filed our Conflict Minerals Report with the SEC on May 31, 2016.

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

As of January 31, 2016, we had federal and state net operating loss, or NOL, carryforwards of $262.8 million and $188.8 million due to prior period losses, which if not utilized, will begin to expire in 2036. If these NOLs expire unused and are unavailable to offset future income tax liabilities, our profitability may be adversely affected. In addition, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes and, if we undergo an ownership change in the future, our ability to utilize our NOLs could be further limited by Section 382. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Section 382. Regulatory changes, such as suspension of the use of NOLs, could result in the expiration of our NOLs or otherwise cause them to be unavailable to offset future income tax liabilities. Our NOLs could also be impaired under state law. As a result, we might not be able to utilize a material portion of our NOLs.

We may acquire other businesses which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.

As part of our business strategy, we may make investments in complementary companies, products or technologies. However, we have not made any material acquisitions to date, and as a result, our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner is unproven. We may not be able to find suitable acquisition candidates, or we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our end-customers, investors or securities analysts. In addition, if we are unsuccessful at integrating such acquisitions, or the technologies associated with such acquisitions, into our Company, our operating results could be adversely affected. We may also incur unforeseen liabilities which could

materially and adversely affect our operating results. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that impede our ability to manage our operations.

Risks Related to Ownership of Our Common Stock

The price of our common stock has been, and is likely to continue to be, volatile and may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price at which you purchased your shares.

The trading price of our common stock has been volatile, and could be subject to wide fluctuations in response to various factors, many of which are beyond our control, including:

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overall performance of the equity markets;

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our operating performance and the performance of other similar companies;

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changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;

•

announcements of technological innovations, new applications or enhancements to services, acquisitions, strategic alliances or significant agreements by us or by our competitors;

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announcements of end-customer additions and end-customer cancellations or delays in end-customer purchases;

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recruitment or departure of key personnel;

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the economy as a whole, market conditions in our industry, and the industries of our end-customers;

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the size of our market float; and

•

any other factors discussed in this report.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. We are the target of this type of litigation as described in Note 6. Commitments and Contingencies in the “Notes to the Consolidated Financial Statements” included elsewhere in this report. Securities litigation against us could result in substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

If securities or industry analysts choose to publish or refrain from publishing research, publish inaccurate or unfavorable research, or discontinue publishing research, about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If industry analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price could decline.

Our directors, executive officers and their affiliates have significant influence over us.

Our directors and executive officers, together with their affiliates, beneficially own, in the aggregate, 21% of our outstanding common stock as of August 31, 2016. As a result, these stockholders, acting together, have the ability to significantly influence the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. Accordingly, this concentration of ownership could harm the market price of our common stock by:

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delaying, deferring or preventing a change in control of us;

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impeding a merger, consolidation, takeover or other business combination involving us; or

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discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.

We do not intend to pay dividends for the foreseeable future.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Delaware law and provisions in our restated certificate of incorporation and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our Company more difficult, including the following:

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our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause;

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only our board of directors has the right to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

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only our chairman of the board, our chief executive officer, our president or a majority of our board of directors are authorized to call a special meeting of stockholders;

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certain litigation against us can only be brought in Delaware;

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our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without the approval of the holders of common stock; and

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advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sale of Unregistered Securities and Use of Proceeds

Recent Sale of Unregistered Securities

None.

Use of Proceeds

On December 12, 2013, the SEC declared our registration statement on Form S-1 (File No. 333-191789) effective for our initial public offering, pursuant to which we sold an aggregate of 9.2 million shares of our common stock at a price to the public of $21.00 per share. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on December 13, 2013 pursuant to Rule 424(b).

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the second quarter of the year ending January 31, 2017, we repurchased the following shares of common stock from former employees by exercising our right to repurchase unvested shares upon termination of employment at a price equal to the lower of the fair market value on the repurchase date or the original exercise price paid for such shares:

Period

Total
Number of
Shares
Purchased

Average
Price
Paid per
Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under
the Plans or
Programs

May 1, 2016 to May 31, 2016

3,000

4.71

N/A

June 1, 2016 to June 30, 2016

—

N/A

July 1, 2016 to July 31, 2016

—

N/A

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit Number		Exhibit Description

10.1		Sixth Amendment to Credit Agreement, dated July 29, 2016, by and between the Company and Wells Fargo Bank, National Association.

31.1		Certification of Periodic Report by Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Periodic Report by Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in San Jose, California, on the 9th day of September, 2016.


NIMBLE STORAGE, INC.

By:		/s/ Anup Singh
		Anup Singh Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

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