DataDirect Networks Inc. — Chapter 11 Bankruptcy Cases

Tintri Inc.

7/10/18

On June 23 in "#BustedTech (Short Busted IPOs…cough…DOMO), we wrote the following:

Tintri Inc., a publicly-traded ($TNTR) Delaware-incorporated and Mountain View California based provider of enterprise cloud and all-flash and hybrid storage systems appears to be on the brink of bankruptcy. There's no way any strategic buyer agrees to buy this thing without a 363 comfort order.

In an SEC filing filed on Friday, the company noted:

"The company is currently in breach of certain covenants under its credit facilities and likely does not have sufficient liquidity to continue its operations beyond June 30, 2018."

Furthermore,

"Based on the company’s current cash projections, and regardless of whether its lenders were to choose to accelerate the repayment of the company’s indebtedness under its credit facilities, the company likely does not have sufficient liquidity to continue its operations beyond June 30, 2018. The company continues to evaluate its strategic options, including a sale of the company. Even if the company is able to secure a strategic transaction, there is a significant possibility that the company may file for bankruptcy protection, which could result in a complete loss of shareholders’ investment."

And yesterday the company's CEO resigned from the company. All of this an ignominious end for a company that IPO'd almost exactly a year ago. Check out this chart:

Nothing like a $7 launch, a slight post-IPO uptick, and then a crash and burn. This should be a warning sign for anyone taking a look at Domo — another company that looks like it is exploring an IPO for liquidity to stay afloat. But we digress.

The company's capital structure consists of a $15.4mm '19 revolving credit facility with Silicon Valley Bank, a $50mm '19 facility with TriplePoint Capital LLC, and $25mm of 8% convertible notes. Revenues increased YOY from $86mm in fiscal 2016 to $125.1mm in fiscal 2017 to $125.9mm in fiscal 2018. The net loss, however, also moved up and right: from $101mm to $105.8mm to $157.7mm. The company clearly has a liquidity ("net cash") covenant issue (remember those?). Accordingly, the company fired 20% of its global workforce (~90 people) in March (a follow-on to a 10% reduction in Q3 '17). The venture capital firms that funded the company — Lightspeed Venture Partners among them — appear to be long gone. Silver Lake Group LLC and NEA Management Company LLC, unfortunately, are not; they still own a good amount of the company.

"Isn't cloud storage supposed to be all the rage," you ask? Yeah, sure, but these guys seem to generate product revenue largely from sales of all-flash and hybrid storage systems (and stand-alone software licenses). They're mainly in the "intensely competitive IT infrastructure market," sparring with the likes of Dell EMC, IBM and VMware. So, yeah, good luck with that.

*****

Alas, the company has filed for bankruptcy. This bit about the company's financial position offers up an explanation why -- in turn serving as a cautionary tale for investors in IPOs of companies that have massive burn rates:

"The company's revenue increased from $86 million in fisca1 2016 to $125.1 million in fiscal 2017, and to $125.9 million in fiscal 2018, representing year-over-year growth of 45% and 1 %, respectively. The company's net loss was $101.0 million, $105.8 million, and $157.7 million in fiscal 2016, 2017, and 2018, respectively. Total assets decreased from $158.1 million as of the end of fiscal 2016 to $104.9 million as of the end of fiscal 2017, and to $76.2 million as of the end of fiscal 2018, representing year-over-year change of 34% and 27%, respectively. The company attributed flat revenue growth in fiscal 2018 in part due to delayed and reduced purchases of products as a result of customer concerns about Tintri's financial condition, as well as a shift in its product mix toward lower-priced products, offset somewhat by increased support and maintenance revenue from its growing installed customer base. Ultimately, the company's sales levels have not experienced a level of growth sufficient to address its cash burn rate and sustain its business."

With trends like those, it's no surprise that the IPO generated less capital than the company expected. More from the company:

"Tintri's orders for new products declined, it lost a few key customers and, consequently, its declining revenues led to the company's difficulties in meeting day-to-day expenses, as well as long-term debt obligations. A few months after its IPO, in December 2017, Tintri announced that it was in the process of considering strategic options and had retained investment bank advisors to assist it in this process."

As we previously noted, "[t]here's no way any strategic buyer agrees to buy this thing without a 363 comfort order." And that is precisely the path that the company seeks to take. In its filing, the company indicated that it plans to file a motion seeking approval of the sale of its assets and bid procedures shortly. The filing is meant to provide the company with a chance to continue its efforts to sell the company as a going concern. Alternatively, it will look to sell its IP and liquidate. Triplepoint has agreed to provide a $5.4mm DIP credit facility to fund the process. Savage.

Meanwhile, today's chart (at time of publication):

Jurisdiction: D. of Delaware (Judge Carey)
Capital Structure: $4.7mm RCF (Silicon Valley Bank), $56mm term loan (TriplePoint Capital LLC), $25mm '19 convertible notes.
Company Professionals:
- Legal: Pachulski Stang Ziehl & Jones LLP (Henry Kevane, John Fiero, John Lucas, Colin Robinson)
- Financial Advisor: Berkeley Research Group LLC (Robert Duffy)
- Claims Agent: KCC (*click on company name above for free docket access)
Other Parties in Interest:
- First Lien Lender: Silicon Valley Bank
  - Legal: Riemer & Brownstein LLP (Donald Rothman, Paul Samson, Alexander Rheaume, Steven Fox) & (local) Ashby & Geddes PA (Gregory Taylor)
- Second Lien Lender: TriplePoint Capital LLC
  - Legal: McDermott Will & Emery LLP (TImothy Walsh, Riley Orloff, Gary Rosenbaum) & (local) Polsinelli PC (Christopher Ward, Jeremy Johnson, Stephen Astringer)
- Proposed Purchaser: DataDirect Networks Inc.
  - Legal: Manatt Phelps & Phillips LLP (Blase Dillingham, Alan Noskow) & (local) Richards Layton & Finger PA (John Knight)

Updated 7/12/18 at 2:09 CT