| Organization and Summary of Significant Accounting Policies | 1. Organization and Summary of Significant Accounting
Policies
Description of Business
Violin Memory, Inc. (the “Company”) was
incorporated in the State of Delaware on March 9, 2005 under
the name Violin Technologies, Inc. The Company re-incorporated as
Violin Memory, Inc. in the State of Delaware on April 11,
2007. The Company is a developer and supplier of persistent
memory-based storage systems that are designed to bring storage
performance in line with high-speed applications, servers and
networks. These All Flash Arrays are specifically designed at each
level of the system architecture, starting with memory and
optimized through the array, to leverage the inherent capabilities
of flash memory. The Company also recently introduced the Flash
Storage Platform, a vertically integrated design of software,
firmware and hardware that delivers performance, resiliency and
availability at the same cost as legacy enterprise-class primary
storage. The Flash Storage Platform runs the Company’s
Concerto OS 7, a single operating system with integrated data
protection, in-line block de-duplication and compression, stretch
metro cluster and LUN mirroring as well as its suite of other
Enterprise Data Services. The Company sells its products through
its global direct sales force, systems vendors, resellers and other
channel partners. The Company operates as a single operating
segment.
The Company has incurred significant operating losses and negative
cash flows from operations since its inception and believes that it
will continue to incur losses and negative cash flows from
operations in fiscal year 2017. As of January 31, 2016, the Company
had an accumulated deficit of approximately $560.6 million and
cash, cash equivalents and short-term investments of $66.0 million.
During the year ended January 31, 2016, the Company incurred a
net loss of $99.1 million and negative cash flows from operations
of $78.6 million.
Management’s plans include reducing expenditures, expanding
the Company’s customer base and increasing revenues,
improving gross margins and seeking additional debt or equity
financing. In March 2016, the Company announced a restructuring
plan focused on aligning its expense structure with revenue
expectations. In connection with the restructuring plan, the
Company reduced headcount by approximately 25% from that as of
October 31, 2015. The Company anticipates these actions to result
in a significant reduction of its quarterly operating expenses and
cash burn rate. As a result, the Company believes that its
available cash, cash equivalents and short-term investments will be
sufficient to fund its operations and capital expenditures for at
least the next twelve months.
There is no assurance that the Company will be successful in
generating sufficient revenues, increasing gross margins or
reducing operating costs. In addition, further capital may not
be available on terms acceptable to the Company, if at
all. Failure to generate sufficient revenues, increase gross
margins, control or reduce operating costs or to raise sufficient
funds may require the Company to modify, delay or abandon some of
its plans and investments, which could have a material adverse
effect on the Company’s business, operating results and
financial condition and the Company’s ability to achieve its
intended business objectives.
Basis of Presentation and Consolidation
We prepared the consolidated financial statements in accordance
with U.S. generally accepted accounting principles (GAAP). The
consolidated financial statements include the accounts of Violin
Memory, Inc. and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified for consistency
with the current period presentation. These reclassifications had
no effect on the previously reported financial position, results of
operations or cash flows.
Foreign Currency Translations and Remeasurement
The local currency is the functional currency for each of the
Company’s subsidiaries. Assets and liabilities are translated
into U.S. dollars at exchange rates in effect at the balance sheet
date. Income and expense items are translated at average exchange
rates for the respective period.
Foreign currency translation adjustments are included in other
comprehensive loss. Gains and losses from foreign currency
transactions are included in other expense, net and have not been
material for all periods presented.
Use of Estimates
The preparation of consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, the Company evaluates
its significant estimates, including those related to estimated
selling prices for elements sold in multiple-element revenue
arrangements, product warranty, determination of the fair value of
stock options, carrying values of inventories, liabilities for
unrecognized tax benefits and deferred income tax asset valuation
allowances. The Company also uses estimates in determining the
useful lives of property and equipment and in its provision for
doubtful accounts. Actual results could differ from those
estimates.
Concentrations of Market, Credit Risk, Significant Customers
and Manufacturing
The Company participates in the business of developing and
manufacturing scalable all flash arrays and believes that changes
in any of the following areas could have a material adverse effect
on the Company’s future financial position, results of
operations or cash flows: advances and trends in new technologies
and industry standards; competitive pressures in the form of new
products or price reduction on current products; changes in the
overall demand for products offered by the Company; changes in
certain strategic relationships or customer relationships;
litigation or claims against the Company based on intellectual
property, patent, product, regulatory or other factors; and risks
associated with changes in domestic and international economic and
international and/or political conditions or regulations.
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash, cash
equivalents, investments and accounts receivable. The Company
places its cash and cash equivalents and investments with high
credit quality financial institutions, which the Company believes
are creditworthy. Deposits may exceed the insured limits provided
on them.
The Company generally requires no collateral from its customers.
The Company mitigates its credit risk associated with its accounts
receivable by performing ongoing credit evaluations of its
customers and establishes an allowance for doubtful accounts for
estimated losses based on management’s assessment of the
collectability of customer accounts.
Customers that represented more than 10% of total revenue and gross
accounts receivable are as follows:
Year Ended January 31,
2016 2015 2014
Percent of revenue:
Enterprise Vision Technology 14 % 10 % *
Toshiba (Note 10) * * 12 %
* Less than 10%
January 31,
2016 2015
Percent of gross accounts receivable:
Isolin Trade & Investment Limited 20 % *
ITS Overlap 20 % *
Dasher Technologies 10 % *
Arrow ECS * 19 %
* Less than 10%
The Company sells to a limited number of large systems vendors,
resellers and end-customers and, as a result, maintains
individually significant receivable balances with such customers.
The Company’s systems vendor customers and certain large
resellers tend to be well-capitalized, multi-national companies,
while other customers may not be as well capitalized. Sales of
products to large systems vendors and resellers are expected to
account for a majority of the Company’s revenues in the
foreseeable future, and the Company’s financial results will
depend in part upon the success of these customers. The composition
of the Company’s major customer base may change as the market
demand for its products changes, and the Company expects this
variability will continue in the future. The loss of, or a
significant reduction in purchases by, any of the major customers
may harm the Company’s business, financial condition and
results of operations.
The Company relies on a limited number of suppliers for its
contract manufacturing and certain raw material components. The
Company believes that other vendors would be able to provide
similar products and services; however, the qualification of such
vendors may require substantial start-up time. In order to mitigate
any adverse impacts from disruption of supply, the Company attempts
to maintain an adequate supply of critical single-sourced raw
materials.
Cash and Cash Equivalents
Cash consists of deposits with financial institutions. The Company
considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Cash equivalents consist of money market funds, which are readily
convertible into cash and are stated at cost, which approximates
fair value. Cash and cash equivalents were $23.9 million and
$93.4 million as of January 31, 2016 and 2015,
respectively.
Restricted Cash
The Company maintains a $20.0 million line of credit with Silicon
Valley Bank (“SVB”) from which it had borrowed $13.4
million as of January 31, 2016. The line is secured by the
Company’s account receivable and the proceeds therefrom as
well as a secured account with the same bank. The Company has
recorded the cash held in this secured account as restricted cash
on the consolidated balance sheet as of January 31, 2016.
In connection with the sale of its PCIe product line in the second
quarter of fiscal year 2015, the Company was obligated to maintain
a balance of $2.3 million with an escrow agent for one year. The
escrow expired on July 24, 2015 after which the Company
received $2.3 million.
Investments
The Company classifies its investments as available-for-sale at the
time of purchase since it is the Company’s intent that these
investments are available for current operations and includes these
investments on the consolidated balance sheet as short-term or
long-term investments depending on their maturity and
management’s intention with regard to the utilization of
these investments, as needed, to fund current operations. As of
January 31, 2016, all investments have been classified as
short-term.
Investments are considered impaired when a decline in fair value is
judged to be other-than-temporary. The Company consults with its
investment managers and considers available quantitative and
qualitative evidence in evaluating potential impairment of its
investments on a quarterly basis. If the cost of an individual
investment exceeds its fair value, the Company evaluates, among
other factors, general market conditions, the duration and extent
to which the fair value is less than cost, and its intent and
ability to hold the investment. Once a decline in fair value is
determined to be other-than-temporary, an impairment charge is
recorded and a new cost basis in the investment is established.
Fair Value Measurements and Disclosures
The Company records its financial assets and liabilities at fair
value. The accounting guidance for fair value provides a framework
for measuring fair value, clarifies the definition of fair value
and expands disclosures regarding fair value measurements. Fair
value is defined as the price that would be received to sell an
asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants at the reporting date. The
accounting guidance establishes a three-tiered hierarchy, which
prioritizes the inputs used in the valuation methodologies in
measuring fair value:
Level 1 – Quoted prices in active markets for identical
assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices in markets
that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of
the assets or liabilities.
The Company recognizes transfers among Level 1, Level 2 and Level 3
classifications as of the actual date of the events or change in
circumstances that caused the transfers.
The Company’s financial instruments, including cash
equivalents, accounts receivable, accounts payable and accrued
liabilities have carrying amounts which approximate fair value due
to the short-term maturity of these instruments.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and
do not bear interest. The Company maintains an allowance for
doubtful accounts for estimated losses inherent in its accounts
receivable portfolio. In establishing the required allowance,
management considers expected losses after taking into account
current market conditions, customers’ financial condition,
current receivable aging and current payment patterns. Account
balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. As of January 31, 2016 and 2015, the
Company’s allowance for doubtful accounts was
insignificant.
Inventory
Inventory consists of raw materials and finished goods and is
stated at the lower of cost, determined on a first-in, first-out
(“FIFO”) basis, or market. The Company periodically
assesses the recoverability of all inventory, including raw
materials and finished goods to determine whether adjustments are
required to record inventory at the lower of cost or market.
Inventory that the Company determines to be obsolete or in excess
of forecasted usage is reduced to its estimated realizable value
based on assumptions about future and current market conditions. In
the case of inventory, which has been written down below cost
through the use of a reserve, such reduced amount is considered the
cost for subsequent accounting purposes.
Revenue Recognition
The Company derives revenue primarily from sales of its All Flash
Arrays, software and related support and professional services.
Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectability is reasonably
assured. Evidence of an arrangement exists when there is a customer
contract or purchase order. The Company considers delivery complete
when title and risk of loss transfer to the customer, which is
generally upon shipment, but no later than physical receipt by the
customer.
The Company sells its products and support services directly to
end-customers, systems vendors and resellers. The Company currently
does not provide price protection, rebates or other sales
incentives to customers. The Company generally does not allow a
right of return to its customers, including resellers.
The Company’s multiple-element arrangements typically include
two elements: hardware, which includes embedded software, and
support services. Beginning in the second quarter of fiscal year
2014, following introduction of the Violin Symphony Management
Software Suite, the Company’s multiple-element arrangements
also may include software elements. The Company has determined that
its hardware and the embedded software are considered a single unit
of accounting, because the hardware and software individually do
not have standalone value and are not sold separately. Standalone
software, professional services and support services are each
considered a separate unit of accounting as they can be sold
separately and have standalone value.
When more than one element, such as hardware, software and
services, are contained in a single arrangement, the Company first
allocates consideration to the software deliverables as a group and
non-software deliverables based on the relative selling price
method. The Company’s appliance products, embedded software
and certain other services are considered to be non-software
deliverables in such arrangements. The Company allocates revenue
within the software group based upon fair value using
vendor-specific objective evidence, or VSOE, with the residual
revenue allocated to the delivered element. If VSOE of fair value
cannot be objectivity determined for any undelivered software
elements, we defer revenue until all elements are delivered and
services have been performed, or until fair value can objectively
be determined for any remaining undelivered elements. The Company
allocates revenue within the non-software group to each element
based upon its relative selling price in accordance with the
selling price hierarchy, which includes: (1) VSOE, if
available; (2) third-party evidence, or TPE, if VSOE is not
available; and (3) best estimate of selling price, or BESP, if
neither VSOE nor TPE is available. The Company establishes BESP
considering multiple factors including, but not limited to,
historical prices of products sold on a stand-alone basis, cost and
gross margin objectives, competitive pricing practices and customer
and market specific considerations.
The Company then recognizes revenue on each deliverable in
accordance with its policies for product and service revenue
recognition. Revenue allocated to the Company’s products is
recognized upon shipment or delivery. Revenue allocated to support
services is recognized over the term, which is generally one or
three years.
The Company’s policy is to record revenue net of any
applicable sales, use or excise tax.
Property and Equipment
Property and equipment consist primarily of capitalized equipment
and computer hardware and software, which are stated at cost and
depreciated using the straight-line method over the estimated
useful lives of two years and three years, respectively.
Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful life of
the asset. Costs of maintenance and repairs that do not improve or
extend the lives of the respective assets are expensed as incurred.
Upon retirement or sale, the cost and related accumulated
depreciation are removed from the balance sheet and the resulting
gain or loss is reflected in operating expenses.
Research and Development
Research and development costs are expensed as incurred. Research
and development costs consist primarily of personnel costs,
prototype expenses, software tools, consulting services and
allocated facilities costs.
Software Development Costs
The Company expenses software development costs as incurred until
technological feasibility is attained, including research and
development costs associated with stand-alone software products and
software embedded in hardware products. Technological feasibility
is attained when the Company has completed the planning, design and
testing phase of development of its software and the software has
been determined viable for its intended use, which typically occurs
when beta testing commences. The period of time between when beta
testing commences and when the software is available for general
release to customers has historically been short with immaterial
amounts of software development costs incurred during this period.
Accordingly, the Company has not capitalized any internal software
development costs to date.
Advertising Expenses
All advertising costs are expensed as incurred. The Company
recognized advertising expenses of $2.6 million, $1.6 million
and $0.6 million for the years ended January 31, 2016,
2015 and 2014, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income (or loss) in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation
allowances are established for deferred tax assets to the extent it
is more likely than not that the deferred tax assets may not be
realized.
The Company evaluates uncertain tax positions taken or expected to
be taken in the course of preparing an enterprise’s tax
return to determine whether the tax positions are more likely than
not of being sustained upon challenge by the applicable tax
authority. Tax positions with respect to any potential income tax
for the Company not deemed to meet the more likely than not
threshold would be recorded as a tax expense in the current
year.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by
the weighted-average number of shares of common stock outstanding
for each fiscal period presented.
Diluted net loss per share is computed by giving effect to all
potential shares of common stock, including stock options, warrants
and convertible preferred stock, to the extent dilutive. Basic and
diluted net loss per share was the same for each period presented
as the inclusion of all potential shares of common stock
outstanding would have been anti-dilutive.
Stock-Based Compensation
The Company records stock-based compensation expense related to
employee stock-based awards on a straight-line basis based on the
estimated fair value of the awards as determined on the date of
grant. The Company utilizes the Black-Scholes option pricing model
to estimate the fair value of employee stock options and Employee
Stock Purchase Plan (ESPP). The Black-Scholes model requires the
input of highly subjective and complex assumptions, including the
expected term of the stock option, the expected volatility of the
Company’s common stock over the period equal to the expected
term of the grant and forfeitures. The Company estimates
forfeitures at the date of grant and revises the estimates, if
necessary, in subsequent periods if actual forfeitures differ from
those estimates.
The Company accounts for stock options that are issued to
non-employees based on the estimated fair value of such awards
using the Black-Scholes option pricing model. The measurement of
stock-based compensation expense for these awards is variable and
subject to periodic adjustments to the estimated fair value until
the awards vest and the resulting change in the estimated fair
value is recognized in the Company’s consolidated statements
of operations during the period in which the related services are
rendered.
The Company grants restricted stock units (RSUs) to employees.
Stock-based compensation expense related to these grants is based
on the grant date fair value of the RSUs and is recognized on a
straight-line basis over the applicable service period, which is
generally four years.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset or asset group be tested
for possible impairment, the Company first compares undiscounted
cash flows expected to be generated by that asset or asset group to
its carrying value. If the carrying value of the long-lived asset
or asset group is not recoverable on an undiscounted cash flow
basis, an impairment charge is recognized to the extent that the
carrying value exceeds its fair value. Fair value is determined
through various valuation techniques including discounted cash flow
models, quoted market values and third-party independent
appraisals, as considered necessary.
Investment in Privately-held Companies
The Company analyzes equity investments in privately held companies
to determine if it should be accounted for under the cost or equity
method of accounting based on such factors as the percentage
ownership of the voting stock outstanding and our ability to exert
significant influence over these companies. For the cost method
investments, the Company determines at each reporting period
whether a decline in fair value has occurred and whether such
decline is considered to be an other-than-temporary impairment. If
a decline in fair value is determined to be other-than-temporary,
the Company would recognize an impairment to reduce the investment
to the lower of cost or fair value.
For the years ended January 31, 2015 and 2014, the Company
recorded impairments on its two investments in the amount of
$3.5 million and $0.7 million, respectively. The charge is
recorded in other expense, net in the consolidated statements of
operations. In fiscal year 2016, the Company sold one of its
investments for $0.4 million. As of January 31, 2016, the net
carrying value of the Company’s remaining cost-method
investment was nil.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties and other sources are
recorded when it is probable that a liability has been incurred and
the amount can be reasonably estimated. Legal costs incurred in
connection with loss contingencies are expensed as incurred.
Product Warranties
The Company generally provides a three-year warranty on all of its
products. The Company accrues for potential liability claims as a
component of cost of revenue based upon performance of equipment in
the Company’s test and support labs, historical data and
trends of product reliability and costs of repairing and replacing
defective products. The accrued warranty balance is reviewed
periodically for adequacy and is included in accrued liabilities in
the consolidated balance sheets.
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standard Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2015-17, Balance Sheet Classification of
Deferred Taxes
In August 2015, the FASB issued ASU No. 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs
Associated with Line-of-Credit Arrangements Interest – Imputation of Interest
In July 2015, the FASB issued ASU No. 2015-11, Simplifying
the Measurement of Inventory
In April 2015, the FASB issued ASU No. 2015-03 –
Simplifying the Presentation of Debt Issuance Costs
In February 2015, the FASB issued ASU No. 2015-02 –
Amendments to the Consolidation Analysis
In August 2014, the FASB issued ASU No. 2014-15, Disclosure
of Uncertainties about an Entity’s Ability to Continue as a
Going Concern,
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers |
