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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended January 31, 2018

OR

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

Commission File Number 001-38117

 

Tintri, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

26-2906978

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

303 Ravendale Drive

Mountain View, CA 94043

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (650) 810-8200

 

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 $0.00005 per share

 

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  NO 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES  NO 

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 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  NO 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, 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  NO 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on July 31, 2017, was $49.5 million. Shares of the registrant’s common stock held by each executive officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.

The number of shares of Registrant’s Common Stock outstanding as of April 6, 2018, was 33,589,244.

Portions of the Registrant’s Definitive Proxy Statement relating to its 2018 annual meeting of stockholders (2018 Proxy Statement) are incorporated by reference into Part III of this Annual Report on Form 10-K. The 2018 Proxy Statement will be filed not later than 120 days after the end of our fiscal year ended January 31, 2018.

 

 

 

 

 


 

Table of Contents

 

 

 

Page

Special Note Regarding Forward Looking Statements

1

 

 

 

PART I

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

45

Item 2.

Properties

45

Item 3.

Legal Proceedings

46

Item 4.

Mine Safety Disclosures

46

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

47

Item 6.

Selected Financial Data

49

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

51

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

77

Item 8.

Financial Statements and Supplementary Data

78

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

113

Item 9A.

Controls and Procedures

113

Item 9B.

Other Information

113

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

114

Item 11.

Executive Compensation

114

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

114

Item 13.

Certain Relationships and Related Transactions, and Director Independence

114

Item 14.

Principal Accounting Fees and Services

114

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

115

Item 16.

10-K Summary

115

Exhibit Index

116

Signatures

119

 

 

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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which statements involve substantial risks and uncertainties. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:

 

future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve, and maintain, future profitability;

 

the sufficiency of our cash resources to meet our cash needs;

 

our ability to raise additional capital;

 

our ability to comply with the financial or other covenants and other terms contained in our credit agreements;

 

our ability to continue as a going concern;

 

our ability to continue to operate;

 

our process of considering strategic alternatives;

 

our plans to seek to drive efficiencies in our sales organization and other business units;

 

the impact of recent changes in our executive management team and restructuring actions on our business;

 

our ability to retain and attract qualified employees and key personnel;

 

our business plan and our ability to effectively manage our growth and associated investments;

 

the anticipated benefits associated with the use of our solution;

 

anticipated trends, growth rates and challenges in our business and in the markets in which we operate;

 

market acceptance of our enterprise cloud solution;

 

adoption of and developments in the technologies that are integral to our value proposition, including virtualized applications and enterprise cloud data centers;

 

beliefs and objectives for future operations, including our plans to introduce new products;

 

our ability to increase sales of our solutions to our existing customers;

 

our ability to attract and retain customers;

 

our ability to maintain and expand our customer base and our relationships with our channel partners;

 

our ability to timely and effectively scale and adapt our existing solutions;

 

anticipated changes in the price of our solution and our pricing model;

 

our ability to develop new solutions and bring them to market in a timely manner;

 

our ability to maintain, protect and enhance our brand and intellectual property;

 

our ability to expand internationally;

 

the effects of increased competition in our markets and our ability to compete effectively;

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consolidation in our industry;

 

future acquisitions or investments;

 

our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

changes in law and trade policies in the U.S. and other jurisdictions where we do business;

 

our compliance with tax laws and the adequacy of our accrual for potential tax liabilities;

 

economic and industry trends or trend analysis;

 

our plans regarding employee retention programs;

 

the effects of recent changes to the structure of our sales organization;

 

the estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices; and

 

the future trading prices of our common stock.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.

We discuss many of these risks in greater detail in “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report on Form 10-K. Unless required by federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statements are made. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

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PART I

Item 1. Business.

Overview

Our mission is to provide large organizations and cloud service providers with an enterprise cloud platform that offers public cloud capabilities inside their own data centers and that can also connect to public cloud services.  

Our highly-differentiated and extensible enterprise cloud platform combines data management software, web services and a range of all-flash and hybrid storage systems. Our enterprise cloud platform not only delivers many of the benefits of public cloud infrastructure, but also gives organizations the control and functionality they need to run both enterprise and cloud-native application in their own private cloud.

Enterprise cloud technology provides customers with the flexibility to easily scale workloads up and down, automation and resource pooling.  Our customers use our enterprise cloud platform for a variety of workloads and use cases, including virtualized desktop infrastructure, or VDI, development and test environments, or DevOps, which are sometimes referred to as Continuous Integration Continuous Delivery, or CI/CD, and other virtualized workloads, including virtualized servers, databases, and mixed workloads. Organizations use our platform to build agile development environments, run mission-critical enterprise applications and connect with public cloud services. We enable users to guarantee the performance of their organization’s applications, automate common IT tasks to reduce operating expenses, troubleshoot across compute, storage and network, predict their organization’s needs to scale, and provide needed elasticity on demand. Our platform enables organizations to easily scale to support tens of thousands of virtual machines on a single system across multiple hypervisors and containers and to connect to public cloud environments.

Our solution helps our customers optimize infrastructure by significantly simplifying deployment and operations, which can lead to substantial reductions in capital expenditures and operating expenses. We sell many of our software products separately from our core enterprise cloud platform solution, enabling our customers to tailor their infrastructure to their specific needs.

We have historically generated revenue from the sale of our products and related support and maintenance offerings. Our product revenue, which is generally recognized upon shipment, is derived from sales of our all-flash and hybrid storage systems and stand-alone software licenses for use in connection with our systems. While purchasing support is not mandatory, substantially all products shipped have been purchased together with a support contract, which includes software patches, bug fixes, updates, upgrades, hardware repair and replacement parts, and technical support. Support and maintenance revenue is recognized over the term of the support contracts. To date, substantially all of our customers have either renewed their support and maintenance subscriptions or have purchased new support and maintenance subscriptions together with replacement products. The average length of our support and maintenance contracts is approximately two years.

Revenue increased from $86.0 million in fiscal 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. Revenue increased $14.8 million in the first half of fiscal 2018 compared to the first half of fiscal 2017, which was offset by a $14.0 million decrease in revenue in the second half of fiscal 2018 compared to the second half of fiscal 2017. Our 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.

In December 2017, we announced that we were in the process of considering strategic options to deliver value to our stockholders and had retained investment bank advisors to assist us in this process.

In March 2018, our board of directors, or the Board, approved a restructuring and reduction in force plan of approximately 20% of our global workforce. We expect to substantially complete the restructuring in our first quarter of fiscal 2019, which ended on April 30, 2018.

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In March 2018, we announced that the Board had named Tom Barton as Chief Executive Officer and as a member of the Board, and his appointment became effective on April 2, 2018. Ken Klein transitioned from his role as our Chief Executive Officer and as a member of the Board in connection with Tom Barton joining the Company.

On May 15, 2018, we appointed Tom Barton as interim Chief Financial Officer, in addition to his existing roles with the Company.

Our Products and Technologies

Tintri Enterprise Cloud Platform

The Tintri enterprise cloud platform consists of our proprietary Tintri CONNECT architecture, Tintri software and Tintri storage systems. Customers combine the Tintri platform with their choice of server, network hardware and virtualization or cloud infrastructure software to build enterprise clouds within their own data centers and support other virtualized workloads.

Tintri CONNECT Architecture

Tintri CONNECT is a proprietary software architecture purpose-built for virtualized and cloud applications. The Tintri CONNECT architecture powers our complete range of Tintri systems and is the platform on which we offer a diverse set of Tintri software solutions. Specifically, Tintri CONNECT architecture uses the virtual machine or the container as the basis for all storage services down to the lowest levels of the hardware. This allows for all storage actions and analytics to operate at the VM and container level, including quality of service, or QoS, replication, cloning, snapshots and other key policies. Each Tintri array appears as a single pool of storage called a datastore, rather than as a collection of LUNs and volumes. Even our largest capacity array appears as a single large datastore to virtualization and cloud management tools, and can support multiple concurrent virtualization or cloud environments without partitioning. Through its VM and container level visibility, the Tintri platform can greatly simplify the interaction between the virtualized infrastructure, the applications running on that infrastructure, and the underlying storage serving that infrastructure.

Tintri Software

Tintri OS

Tintri OS, through its VM-level visibility capabilities, can greatly simplify the interaction between the virtualized infrastructure and the VM running on top of it, and the underlying storage serving that infrastructure. Rather than aggregating virtualized applications with various QoS requirements into a shared LUN, Tintri OS can assign each application its own I/O lane using algorithms and eliminate the competition between virtualized applications for resources. A storage administrator can also set minimum and maximum thresholds at the virtualized-application level to define specific QoS levels. Tintri OS incorporates a number of data protection and high availability features, including protection against double-drive failures, failed drive rebuild even under data read-error scenarios and real-time error correction.

Tintri Global Center

Tintri Global Center is an intelligent data and system management product that assists administrators in policing their infrastructure, simplifying capacity planning, visualizing resource utilization, reducing bottlenecks in the IT network outside of the storage system, and simplifying policy management and enforcement.

VM Scale-out

Tintri Global Center Advanced product adds our VM Scale-out software which creates resource pools of Tintri storage systems and intelligently optimizes the location of every application across those pools.

Tintri Analytics: Predictive Analytics

In addition to our real-time and historical analytics capabilities, which are integrated into the Tintri CONNECT architecture and available to all customers on-premises, we also offer predictive analytics that uses in-

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memory big data technologies, such as ElasticSearch, to help customers model their current and future storage requirements.

ReplicateVM: Replication for Data Protection and Disaster Recovery

We offer support for array-level replication, including asynchronous and synchronous modes. Asynchronous replication supports one-to-one, many-to-one and one-to-many with recovery point objectives, or RPO, as low as 15 minutes. Synchronous replication offers zero RPO. Traditional replication operates at the LUN level, leading to “hitchhikers,” which are VMs that are unintentionally replicated because they share a LUN with an application that is targeted for replication, wasting overall storage capacity. ReplicateVM allows our customers to replicate only the intended VMs. ReplicateVM also allows each VM to have a unique replication policy, and customers can set standard policies for VMs that are preserved even when they migrate between VMstores. In addition, by operating at the VM level and offering compression and deduplication of data, ReplicateVM reduces WAN bandwidth and other data transfer requirements.

SyncVM: Copy Data Management

We allow the flexible use of fast and storage-efficient VM snapshots. Storage administration teams can recover point-in-time snapshots of individual VMs and rapidly restore files based on those snapshots. Application development teams can update multiple child-clones of applications from a master application image, reducing time required to set up a new application environment. We also offer advanced snapshot management for copy data management, allowing flexible point-in-time recovery for applications, file level restore from snaps and update of child applications from a master application snapshot for testing and development, or test/dev, and DevOps use cases.

SecureVM: Encryption of data-at-rest

We offer built-in encryption for data-at-rest, and support manual key rotation and SafeNet enterprise key management (a separate product sold by a third-party vendor). With SecureVM, the encryption key can be rotated by the customer, assuring that data on physical drives is unrecoverable if a key or physical drive is compromised. This capability allows many of our customers in finance, health care, government and other industries to meet data protection and regulatory requirements.

Tintri Cloud Connector

Tintri Cloud Connector allows customers to use either public cloud storage such as Amazon S3 or an on-premises object storage such as IBM Cloud Object Storage (formerly CleverSafe) for storing snapshots to extend retention periods and provide another tier of data protection and locality.

Tintri Software Suite

This suite includes Tintri Global Center Advanced (delivering Tintri VM Scale-out software), ReplicateVM, SyncVM, SecureVM, Tintri Cloud Connector, plus all the tool kits and plug-ins to a diverse set of third-party ecosystems including VMware, Microsoft, RedHat and OpenStack. It also includes Tintri API support for PowerShell, Python and REST API.

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Tintri Ecosystem

Our ecosystem partners and integration points extend the value of the Tintri platform for our customers, and include:

 

VMware. Our products include support for vSphere, Horizon with View, PowerCLI, vRealize Orchestrator, vRealize Operations, vRealize Automation, vCloud Director and vSphere Integrated Containers, and deep integration with many other VMware solutions;

 

Microsoft. Our products include support for Hyper-V, System Center Virtual Machine Manager (SCVMM), System Center Operations Manager (SCOM), PowerShell, Microsoft Applications (Exchange, SQL Server, SharePoint, etc.) and Server Message Block 3 (SMB3);

 

Red Hat. Our products include support for Red Hat OpenStack and Red Hat Virtualization;

 

Citrix. Our products include support for XenDesktop, Unidesk and XenServer;

 

Cisco. Our products include support for UCS Director; and

 

OpenStack. Our products include support for commercial OpenStack distributions as well as open-source OpenStack beginning with the “Liberty” release.

Other ecosystem partners include Brocade, Cohesity, Commvault, Docker, IBM, Mirantis, Rubrik, and Veeam. Scripting support includes PowerShell, PowerCLI, Python SDK and APIs.

Tintri Storage Systems

We market a range of enterprise-grade storage systems, including our Tintri EC6000 all-flash systems, our T800 hybrid-flash systems, and our T1000 all-flash system.

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Our Customers

Our customers include leading enterprises across a broad range of industry segments, including education, financial services and insurance, healthcare, manufacturing and automotive technology, as well as cloud service providers (CSPs). As of January 31, 2018, our customer base consisted of more than 1,500 customers, including 7 of the top 15 Fortune 100 companies and 21 of the Fortune 100 companies.

Customer Use Cases

Our customers use our enterprise cloud platform for a variety of workloads and use cases.

Enterprise Cloud.  Tintri’s architecture and RESTful APIs allow for tight integration into a customer’s broader enterprise cloud ecosystem—including hypervisor, compute, network, cloud management software and even public cloud (via Tintri Cloud Connector).  For customers, Tintri serves as a foundational element used to realize the potential of enterprise cloud agility and scale.

Virtualized Desktop Infrastructure (VDI). Since the Tintri OS uses VMs and containers as units of management, Tintri is able to isolate each virtual desktop in its own “lane”. That prevents conflict over resources and eliminates latency associated with boot storms and anti-virus scans (typical of conventional storage). Tintri’s density also allows organizations to manage up to 7,500 virtual desktops in just two rack units, using less power, cooling and other resources than other solutions.

Virtualized Servers and Databases. Tintri auto-quality of service, or QoS, capabilities allow customers to ensure that servers and databases receive the resources they need for predictable performance. And Tintri Analytics makes it possible for customers to identify the root cause of performance issues in real-time, across storage, compute and network. Predictive analytics allow customers to model the impact and resource requirements of adding server and database virtual machines to their environment.

DevOps. In most DevOps workloads, there is pressure to speed development cycles. Tintri’s RESTful APIs allow for integration into the broader DevOps stack, and automation makes it possible to spin up and tear down test environments comprised of thousands of virtual machines in minutes. This allows DevOps organizations to enable continuous testing and delivery, shortening development cycles.

Customer Support

We offer product support for all of our customers, including those customers who purchase our products through our channel partners. Customers may choose to purchase support plan upgrades, which provide them with accelerated shipment and installation of replacement parts. We also provide proactive support services that alert customers to potential product failures before they occur. Our support and services contracts are offered for periods of one to five years. We subcontract with third-party service providers to provide onsite hardware repair and replacement for our customers.

Sales and Marketing

Sales. We sell our products predominantly through joint sales efforts made in conjunction with our channel partners. Our sales organization is responsible for large-account acquisition and overall market development, which includes managing our relationships with our channel partners, working with our channel partners in acquiring and supporting customers, and acting as the liaison between our customers and our marketing and product development teams.

As of January 31, 2018, we had direct sales teams located in nine countries. Our sales representatives typically become increasingly productive over several quarters as they are trained and learn to sell our products.

Our sales organization is supported by sales enablement engineers, specialist system architects and technical marketing personnel. These personnel have deep technical expertise and responsibility for pre-sales technical support, solutions engineering for our customers and technical training for our channel partners.

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Distribution Channel Partners. We work with channel partners who help us market and sell our products to customers. This joint sales approach provides us with the benefit of direct relationships with substantially all of our customers and expands our reach through the relationships of our channel partners. Our channel partners are further supported by our distributors, who work together on a non-exclusive basis to market our products, identify and close sales opportunities, and provide pre-sales and post-sales services to our customers.

As of January 31, 2018, we had 447 channel partners. This distributed partner community includes both national and regional partners in the Americas and partners in EMEA, Japan and APAC. To promote channel productivity, we operate a formal accreditation program for the sales and technical professionals of our channel partners. Our channel partners include Ahead, Arrow, Avnet, CarahSoft, CDW, Champion, Fujitsu, Nuvias, Promark and SHI.

Approximately 90% of our revenue in fiscal 2018 was derived from sales to our channel partners.  One of our channel partners represented 26% of our revenue in fiscal 2018. Approximately 89% and 85% of our revenue in fiscal 2016 and 2017, respectively was derived from sales to our channel partners, and no single channel partner represented more than 10% of our revenue in fiscal 2016 and 2017.

Marketing. Our marketing is focused on building our brand reputation and market awareness, communicating product and service advantages, driving customer demand and generating leads for our sales force and channel partners. Our marketing team designs and implements a wide range of activities and initiatives, including social media, digital marketing, community events, partner co-marketing and integrated marketing campaigns. In addition, we manage “Tintricity Hub,” an online community of customers that share best practices, trade ideas and provide referrals. Over 50% of our advocates are active in any given month. As of January 31, 2018, there were more than 1,600 Tintricity Hub members from approximately 750 companies.

Technology Partners

As a storage and data management platform company, we work with a rich ecosystem of technology partners to deliver world-class solutions to our mutual customers. Our technology partners include software and infrastructure partners such as Brocade, Cisco, Citrix, Cohesity, Commvault, Docker, IBM, Microsoft, Mirantis, OpenStack, Red Hat, Rubrik, Veeam, and VMware. In addition, we work closely with our technology partners through co-marketing and lead-generation activities in an effort to broaden our marketing reach. We also sell our solutions under an original equipment manufacturer arrangement with Fujitsu, who distributes our solutions on a non-exclusive basis in Japan.

We have and expect to continue to work closely with many of our technology partners through joint marketing and demand generation activities in an effort to broaden our marketing reach and help us win new and retain existing customers. We also jointly validate solutions, often with the expert help of our channel partners, to deliver qualified complete solutions to our customers.

Research and Development

Our research and development efforts are focused primarily on improving existing products and developing new products. Our products integrate both software and hardware innovations, and accordingly, our research and development teams employ both software and hardware engineers in the design, development, testing, certification and support of our products. As of January 31, 2018, and before giving effect to the restructuring plan that we announced in March 2018, we employed 139 software and hardware engineers with expertise in storage and IT infrastructure. A majority of our research and development team members are based in Mountain View, California. We also design, and certify our products to ensure interoperability with a variety of third-party software, hypervisor and networking components.

We believe that innovation and timely development of new features and products is essential to meeting the needs of our customers and improving our competitive position. We plan to dedicate significant resources to our continued research and development efforts.

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Manufacturing

We contract with an offshore subsidiary of Flex to manufacture all of our storage products. Flex purchases components from our approved list of suppliers and builds our hardware appliances according to our specifications. The outsourcing of our hardware manufacturing extends from prototypes to full production and includes activities such as material procurement, software implementation and final assembly and testing. Once the completed products are manufactured and tested, Flex arranges the shipment of our products directly to our customers.

Our contract manufacturer generally manages the procurement of the components and parts used in our products. We also engage in direct sourcing of certain strategic components. While our preference is to select components and materials that are available from multiple sources, we utilize a number of components that are available from only one source. Generally, neither we nor our contract manufacturer have written agreements with these sole-source component providers to guarantee the supply of the key components used in our hardware products. We generally do not have long-term supply commitments from our suppliers. We generally order our components on a “build to order” basis, and do not maintain any significant inventory of the components used in our products. However, we regularly monitor the supply of components and the availability of qualified and approved alternative sources. We provide nine-month forecasts to Flex (the first three months of which are binding) so that they can purchase key components in advance of their anticipated use, with the objective of maintaining an adequate supply of those components.

Except for the binding portion of forecasts mentioned above, our manufacturing services agreement with Flex does not provide for any specific volume purchase commitments and orders are placed on a purchase order basis. We work closely with Flex to meet our product delivery requirements and to manage the manufacturing process and quality control.

Our agreement with Flex is terminable at any time by us with 90 days’ notice or by Flex with 120 days’ notice and Flex has no obligation to provide services transitioning our manufacturing processes to another manufacturer. Although the contract manufacturing services required to manufacture and assemble our products may be readily available from a number of established manufacturers, it is time consuming and costly to qualify and implement contract manufacturer relationships. As a result, if Flex or our sole-source component suppliers suffer an interruption in their businesses, or experience delays, disruptions or quality control problems in their manufacturing operations, or we have to change or add additional contract manufacturers or suppliers of our sole-sourced components, our ability to ship our products to our customers could be delayed, and our business, operating results and financial condition could be adversely affected.

Competition

We operate in the intensely competitive IT infrastructure market that is characterized by constant change and innovation. Changes in application requirements, IT infrastructure trends and the broader technology landscape result in evolving customer requirements for architecture, performance, manageability and scalability, and organizations may require new features from enterprise cloud platforms and storage systems. Our main competitors fall into two categories:

 

large IT infrastructure vendors consisting primarily of Dell EMC and NetApp, and also Hitachi Data Systems, HP Enterprise, IBM and VMware who each offer a broad range of storage systems targeting various use cases and end markets; and

 

smaller specialized IT infrastructure companies, including companies that offer solutions powered entirely or partially by flash memory technology, such as Nimble Storage, a Hewlett Packard Enterprise company, Nutanix and Pure Storage.

As our market grows, we expect that the market will attract new startups and more highly specialized vendors, as well as larger vendors that may continue to acquire or bundle their products more effectively.

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We believe the principal competitive factors in the storage market are as follows:

 

product features, enhancements and capabilities, including ease of use, performance, manageability, reliability and ability to store and process physical and/or virtualized workloads;

 

business impact, including application time to market and rapid scalability;

 

product economics and value to customer, including cost of acquisition (capital expenses) and ongoing management and maintenance costs (operating expenses);

 

customer experience, from marketing and pre-sales through sales engagement, purchase and shipment, support and customer community;

 

product interoperability with broader third-party ecosystem, including hypervisor, cloud and networking vendors; and

 

global sales and distribution capability.

We believe we compete favorably with our competitors on the basis of these factors. Our competitive strengths include the simplicity and performance of our advanced stand-alone software products packaged within enterprise-grade hardware, which leads to operating efficiencies and an improved customer experience; our high-quality, referenceable customer base; and our open architecture and ecosystem integration, which provides greater flexibility to operate a variety of storage platforms, form factors and hypervisors.

Intellectual Property

Our success depends in part upon our ability to protect our core technology and intellectual property. To establish and protect our technology, intellectual property and proprietary rights, we rely on a combination of intellectual property rights, including patent, copyright, service mark, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions.

As of January 31, 2018, we had eleven issued patents and 56 pending patent applications in the United States and internationally. Our issued patents have expiration dates ranging from 2030 to 2035.

We generally control access to and use of our proprietary hardware, software and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers and partners, and our software is protected by U.S. and international copyright laws.

The steps we have taken to protect our core technology, intellectual property and intellectual property rights may not be adequate. Any of our issued patents or trademarks or other intellectual property rights may be challenged, invalidated or circumvented, and we may not be able to prevent third parties from infringing them. Despite our efforts to protect our trade secrets and other technology and intellectual property through intellectual property rights, licenses, and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our technology and intellectual property, including our software. In addition, we intend to expand our international operations, and effective patent, copyright, trademark, and trade secret protection may not be available or may be limited in foreign countries.

The IT infrastructure industry is characterized by the existence of a large number of patents, trademarks, copyrights and other intellectual property rights, and by frequent litigation based on allegations of infringement or other misappropriation of intellectual property rights. From time to time, third parties, including our competitors and non-practicing entities, have claimed and may in the future claim that our products or technologies may infringe their intellectual property rights and may assert patent, copyright, trade secret and other claims based on intellectual property rights against us and our customers, suppliers and channel partners. We cannot assure you that our products, services or business do not infringe or misappropriate such rights of such third-party claimants. Although we generally attempt to limit our liability to indemnify third parties against intellectual property infringement claims, we are party to a number of agreements pursuant to which we are obligated to indemnify certain third parties. We expect that intellectual property rights infringement or misappropriation claims may increase as the number of products and competitors in our market increase. In addition, to the extent that we gain greater visibility

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and market exposure as a public company, we face a higher risk of being the subject of intellectual property rights infringement or misappropriation claims from third parties. Any third-party intellectual property rights claims against us could significantly increase our expenses and could have a significant and negative impact on our business, operating results and financial condition. See “Risk Factors” for additional information.

Employees

We believe that the expertise of our people and our corporate culture are important to our success as a technology leader. As of January 31, 2018, we had 445 employees in the United States and internationally, of which 277 employees were based in our corporate headquarters in Mountain View, California. None of our employees are represented by a labor organization or are a party to any collective bargaining agreement. We consider our relationship with our employees to be good.

In March 2018, the Board approved a restructuring and reduction in force plan of approximately 20% of our global workforce. We expect to substantially complete the restructuring in our first quarter of fiscal 2019, which ended on April 30, 2018. We believe that further such reductions are likely to be required in the near term dependent on developments in our financial condition.

Backlog

Our typical fulfillment time on an order is approximately three days, and consequently we do not have a meaningful backlog at any point in time.

We typically accept and ship orders within a short time frame. In general, customers may cancel or reschedule orders without penalty, and delivery schedules requested by customers in their purchase orders vary based upon each customer’s particular needs. As a result, we do not believe that our backlog at any particular time is a reliable indicator of future revenue.

Seasonality

In general, our sales are subject to seasonal trends. Our fourth fiscal quarter, ending January 31, typically has the highest revenue of any of our fiscal quarters, and our first fiscal quarter, ending April 30, typically has the lowest revenue of any of our fiscal quarters. We believe that this seasonality results from a number of factors, including the budgeting, procurement and deployment cycles of many of our customers. Our rapid historical growth may have reduced the impact of seasonal or cyclical factors that might have influenced our business to date. To the extent our revenue growth slows, seasonal or cyclical variations in our operations may become more pronounced and may affect our business, operating results and financial condition.

Corporate Information

We were incorporated in Delaware in June 2008. Our principal executive offices are located at 303 Ravendale Drive, Mountain View, California 94043. Our telephone number at that location is (650) 810-8200. Our website address is www.tintri.com. Information on our website is not part of this report and should not be relied upon in determining whether to make an investment decision.

The Tintri design logo and the marks “Tintri,” “VMstore,” “Tintri OS,” “Tintri Global Center,” “ReplicateVM,” “SecureVM,” “SyncVM” and “VM Scale-out” are the property of Tintri. This Annual Report on Form 10-K contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as

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amended (the Exchange Act), are filed with the Securities and Exchange Commission (the SEC). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Company’s website at ir.tintri.com as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC.

You may obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.

The information contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.

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 contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes thereto, before making a decision to invest 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, financial condition, operating results and prospects could be materially and adversely affected. 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 Financial Condition

We have limited working capital and a history of losses that raise substantial doubts as to whether we will be able to continue as a going concern.

We have prepared our consolidated financial statements and the entirety of this Annual Report on Form 10-K on the basis that we would continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, we have incurred losses in each fiscal year since our inception and there is substantial doubt about our ability to continue as a going concern.  The Report of Independent Registered Public Accounting Firm issued by KPMG LLP, or KPMG, with respect to the accompanying financial statements includes an explanatory note concerning our ability to continue as a going concern.  We do not currently have any borrowing capacity available under our credit facility with TriplePoint Capital LLC, or TriplePoint, or our revolving line of credit with Silicon Valley Bank, or SVB. If we are unable to generate positive cash flows from operations or if we have insufficient liquidity to meet our obligations, we may have to seek additional capital, restructure or refinance our indebtedness, undertake additional restructuring plans, reduce or delay capital expenditures, file for bankruptcy protection, wind down our or sell our business or sell certain of our assets or operations.

We need to raise additional financing to continue our operations and to remain in compliance with financial covenants under our credit facilities.  

Since the amendment to the terms of our credit agreements with our lenders, we have revised our forecasts of our cash flows and liquidity position for forward periods, casting additional doubt around our ability to meet our debt covenants. There can be no assurance that our lenders will not seek to demand immediate payment of amounts due under the relevant agreements as a result of the revisions to our forecasts. Based on our current forecasts, we will likely fail to satisfy the minimum liquidity covenants of our credit facilities as early as the end of May 2018, which would constitute an event of default under those facilities and enable our lenders to demand immediate payment of all amounts due under those facilities. Therefore, we will need to raise additional debt or equity financing in the immediate term in order to continue our operations and to remain in compliance with the financial covenants under our credit facilities or to obtain relief from our lenders.  Our inability to satisfy the minimum liquidity covenants of our credit facilities would constitute an event of default under those facilities and enable our lenders to demand immediate payment of all amounts due under those facilities.  We do not currently have the

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ability to repay these amounts. Further, regardless of whether these amounts become immediately due and payable, we likely do not have sufficient liquidity to continue our operations beyond June 30, 2018.  

Our management team’s efforts to secure additional financing may divert their attention from our day-to-day activities, which may adversely affect our ability to sell and market our products or to develop new and enhanced solutions. Our existing and any future debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of any future securities offerings by us reducing the market price of our common stock and diluting their interest.  In the meantime, the prospect that we may have to cease or significantly curtail our operations will adversely impact our sales, operations, ability to retain employees and other aspects of our business. We are currently actively seeking additional sources of financing and considering various alternatives for the company including the potential sale of the company, but cannot assure you that we will be able to obtain such financing on acceptable terms, if at all, or sell the company at a price that will provide any meaningful proceeds to our stockholders, if at all.  If we cannot raise additional financing we will need to reduce or curtail our operations and may need to wind down the company, potentially through bankruptcy.  In the event of a bankruptcy, common stockholders are unlikely to receive any recovery of their interest in the company.

We will likely not be able to generate sufficient cash to service our indebtedness.

Our ability to make scheduled payments or to refinance our debt obligations to TriplePoint and SVB depends on numerous factors, including the amount of our cash reserves and our actual and projected financial and operating performance. These amounts and our performance are subject to certain financial and business factors, as well as prevailing economic and competitive conditions, some of which may be beyond our control. We cannot assure you that we will maintain a level of cash reserves or cash flows from operating activities sufficient to permit us to pay the principal, interest, and other fees on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may have to seek additional capital, restructure or refinance our indebtedness, undertake additional restructuring plans, reduce or delay capital expenditures, file for bankruptcy protection, wind down our business, or sell our business or our certain of our assets or operations. We cannot assure you which course or courses we will pursue, whether we will be able to take certain of these actions, or whether these actions will enable us to meet our scheduled debt service obligations. In addition, in the event of our breach of revolving line of credit with SVB or our credit facility with TriplePoint, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interest in our assets. Any failure to satisfy our commitments under our indebtedness could cause our business, operating results and financial condition to be materially adversely affected.

We have a history of losses and may not be able to achieve or maintain profitability.

We have incurred losses in all fiscal years since our inception, and we expect that we will continue to incur net losses for the foreseeable future. We experienced net losses of $101.0 million, $105.8 million, and $157.7 million in fiscal 2016, 2017, and 2018, respectively. As of January 31, 2018, we had an accumulated deficit of $476.6 million. While currently uncertain, if we were to continue to grow, it is possible our operating expenses could increase over time, particularly in the medium to long term, for example in the event we were to hire additional employees, develop our technology and enhance our product and service offerings, expand our sales and marketing teams, make investments in our distribution channels and expand our operations. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset higher expenses, or at all. Revenue growth is likely to continue to slow or may decline for a number of possible reasons, including slowing demand for our products or services, concerns of existing and potential customers and suppliers regarding our financial condition, increasing competition, a decrease in the growth of our overall market or a failure to capitalize on growth opportunities. Furthermore, it is likely we will be unable to generate or obtain sufficient cash from operations or other sources to adequately fund our business plan, which would negatively impact our revenue levels. As a result, and because of the numerous risks and uncertainties facing us, it is difficult to predict the extent of any future losses or the time required to achieve profitability, if at all. Any failure to become and remain profitable may require us to undertake a review of the potential business alternatives discussed above.

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We have incurred indebtedness, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, to protect and enforce our intellectual property and to meet other needs.

We have entered into a revolving line of credit with Silicon Valley Bank, or SVB, and a $50.0 million credit facility with TriplePoint Capital LLC, or TriplePoint. These facilities are secured by substantially all of our assets and intellectual property rights. As of January 31, 2018, we had $19.0 million of principal indebtedness outstanding under the SVB line of credit and $50.0 million under the TriplePoint credit facility. These facilities contain various covenants and specify various events of default, including a “cross default” provision that provides that, if there is an event of default that has not been cured or waived within any applicable grace period under one lender’s debt facility, there is an event of default under the other lender’s debt facility, upon which, at each lender’s option, all amounts outstanding under each lender’s applicable facility would become immediately due and payable and further advances under the facility would not be available to us.

In April 2018, we entered into agreements with each of SVB and TriplePoint to amend the terms of our credit agreements with these lenders. After giving effect to this amendment with SVB, our agreement with SVB allows us to borrow, through May 2, 2019, up to $12.5 million dependent upon our qualifying monthly accounts receivables balances. Our revolving line of credit with SVB contains certain financial covenants, including a covenant that we achieve total revenues of at least $20.5 million, $23.4 million, $26.3 million and $29.4 million for our fiscal quarters ending April 30, 2018, July 31, 2018, October 31, 2018 and January 31, 2019, respectively, and a covenant that we maintain a minimum level of cash and availability under the SVB line of credit of at least $15.0 million through July 31, 2018 and at least $10.0 million thereafter. After giving effect to this amendment with TriplePoint, $50.0 million of borrowings under the TriplePoint credit facility will become due in August 2019. However, we may extend the maturity date of $25.0 million of such indebtedness to February 2021, subject to certain conditions, including us making equal monthly amortizing payments of principal and interest through the extended maturity date.

If we were to fail to comply with any of the financial or other covenants contained in our agreements with SVB or TriplePoint and either lender chose to declare an event of default, the debt outstanding under the relevant agreements would become immediately due and payable. We do not at present, and may not in the future, have sufficient liquidity to repay amounts outstanding under its debt facilities should they become immediately due and payable. Moreover, any required repayment of our existing indebtedness as a result of an event of default would reduce our cash on hand such that we would not have those funds available for use in our business, which could have a material adverse effect on our business, operating results and financial condition. Based on our assessment, it is probable that we will be unable to comply with our financial covenants through May 17, 2019, and we will likely fail to comply with our minimum liquidity covenants as early as May 31, 2018. Although we are seeking to raise additional debt or equity financing in order to remain in compliance with the financial covenants under our credit facilities, we may be unable to do so. As a result, we are currently undertaking a review of the potential business alternatives in addition to seeking additional capital, which may include restructuring or refinancing our indebtedness, undertaking additional restructuring plans, reducing or delaying capital expenditures, filing for bankruptcy protection, winding down our business, or selling our business or certain of our assets or operations.

In March 2018, we entered into a Waiver and Tenth Amendment to Loan and Security Agreement, or the Tenth Amendment, with SVB, pursuant to which the parties agreed to certain amendments and modifications to our line of credit with SVB. The Tenth Amendment provides that the interest rate on amounts outstanding under the revolving line of credit with SVB shall be equal to the prime rate plus 1.85% per annum through March 31, 2018, after which the interest rate returns to the prime rate plus 0.35% when we are borrowing base eligible and the prime rate plus 1.75% at all other times, and for the waiver by SVB with respect to certain prior breaches of financial covenants and related defaults, in each case subject to the terms and conditions set forth in the Tenth Amendment.

In May 2017, we entered into a Note Purchase Agreement with certain of our preferred stockholders pursuant to which such stockholders agreed to purchase from us, at our election, one or more subordinated convertible promissory notes, or Notes, having an aggregate maximum principal amount of $25.0 million. In June 2017, we entered into an amendment to the Note Purchase Agreement. As of January 31, 2018, no Notes were issued and sold under the Note Purchase Agreement. In February and March 2018, we issued an aggregate of $25.0 million of convertible promissory notes under the Note Purchase Agreement. The notes bear interest at the rate of 8% per annum and mature in August 2019.

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We have a limited operating history, which makes our future operating results difficult to predict and exposes our business to a number of risks and uncertainties.

We were founded in June 2008 and began selling our solution and generating revenue in 2011. We have a limited operating history in an industry characterized by rapid technological change, changing customer needs, intense competition, evolving industry standards and frequent introductions of new products and services. 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. All of these factors, as well as the other risks described in this Annual Report on Form 10-K, make our future operating results difficult to predict, which may impair our ability to manage our business and reduce your ability to assess our prospects.

We have encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in rapidly changing industries. Our limited operating history makes it more difficult for us to predict these risks and uncertainties. If our assumptions regarding these risks and uncertainties (which we use to plan our business) are incorrect or change, or if we do not address these risks and uncertainties successfully, our operating and financial results could differ from our expectations, and our business and prospects could suffer.

Our historic revenue growth rates may not be indicative of our future performance and have declined significantly in recent periods.

We experienced significant growth in prior periods. Revenue increased from $86.0 million in fiscal 2016 to $125.1 million in fiscal 2017, representing period-over-period growth of 45%. Revenue increased from $125.1 million in fiscal 2017 to $125.9 million in fiscal 2018, representing period-over-period growth of 1% and a significant reduction in our growth-rate compared to prior periods. Revenue increased $14.8 million in the first half of fiscal 2018 compared to the first half of fiscal 2017, which was offset by a $14.0 million decrease in revenue in the second half of fiscal 2018 compared to the second half of fiscal 2017. If we are able to achieve greater revenue scale, we may not be able to maintain revenue growth rates consistent with historical growth rates. You should not rely on our revenue for any prior quarterly or annual periods as any indication of our revenue or revenue growth for any future period.

Our operating results may fluctuate significantly on a quarterly basis, which could make our future results difficult to predict and could cause our operating results to fall below expectations.

Our operating results may fluctuate on a quarterly basis due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. If our revenue or operating results in any particular period fall below investor expectations, the price of our common stock would likely decline. Factors that are difficult to predict and that could cause our quarterly operating results to fluctuate include:

 

the timing and magnitude of orders and shipments of our products in any quarter;

 

our ability to attract new and retain existing customers;

 

our ability to increase and maintain sales coverage and effectiveness, including to retain and attract sales, marketing, engineering and other employees;

 

changes in our executive management team, sales organization and other business units;

 

the impact of recent changes in our executive management team and restructuring actions on our business;

 

our ability to comply with the financial covenants and other terms contained in our credit agreements;

 

our ability to sell additional products to our existing customers;

 

disruptions in our sales channels or termination of our relationship with important distributors, channel partners, OEMs, contract manufacturers and suppliers;

 

our seasonal sales cycles;

 

reductions in customers’ budgets for information technology purchases;

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fluctuations in demand for our solution;

 

the mix of solutions sold and the mix between product revenue and support and maintenance revenue;

 

the timing of introductions of plans of new products and our ability to manufacture and sell new products;

 

the amount and timing of expenses to grow our business;

 

the timing of revenue recognition for our sales;

 

regulatory, tax, accounting and other changes in requirements or policies applicable to us;

 

volatility in our share price, which may lead to higher stock-based compensation expense; and

 

general socioeconomic and political conditions in the countries where we operate or where our solution is sold or used.

Any one of the factors above or the cumulative effect of the factors above may result in significant fluctuations in our operating results from period to period. This variability and unpredictability could result in our failure to meet our internal operating plan or the expectations of securities analysts or investors for any period. If we fail to meet such expectations, the market price of our common stock could decline and we could face costly lawsuits, including securities class action litigation.

Risks Related to Our Business

Our growth depends in part on our ability to attract new customers and sell additional solutions and renewals to existing customers.

Our future success depends in part on our ability to increase sales of our solution to new customers domestically and internationally, as well as to increase sales of additional solutions and renewals to our existing customers. The rate at which new and existing customers purchase solutions depends on a number of factors, including customers’ perceived need for enterprise cloud infrastructure solutions, general economic conditions, our ability to compete effectively with our competitors, spending levels on IT infrastructure solutions and other factors outside of our control. We may also be forced to engage in sophisticated and costly sales efforts, which may not result in additional sales.

Furthermore, the rate at which our customers purchase enterprise cloud infrastructure solutions may be impacted by customers’ concerns about the ongoing viability of our business. Following our IPO during fiscal 2018, we observed that some customers reduced or delayed purchases of our systems due to concerns about our financial condition and prospects.

The Report of Independent Registered Public Accounting Firm issued by KPMG with respect to the accompanying financial statements includes an explanatory note concerning our ability to continue as a going concern, which we believe could create further concerns among our customers and suppliers and potential customers or suppliers concerning our financial condition and prospects, and could impact future order rates and levels.

We provide our support services under limited term contracts, which range from one to five years. Our customer renewal rate may decline or fluctuate as a result of a number of factors, including our customers’ level of satisfaction with our solution, our customer support and increased competition and the pricing of our, or competing, services. Even if our customers choose to renew their support contracts, they may renew for shorter contract periods or on other terms that are less beneficial to us. We have limited historical data with respect to rates of customer renewals, so we may not accurately predict future renewal trends.

We cannot ensure that our customers will purchase our solution or will renew their support contracts, and their failure to make such purchases or renewals may adversely affect our business, operating results and financial condition.

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We face intense competition from numerous established companies and new entrants.

We face intense competition from numerous established companies that sell competitive enterprise cloud infrastructure systems or storage solutions. These competitors include large system vendors, consisting primarily of Dell EMC and NetApp, and also Hitachi Data Systems, HP Enterprise, IBM and VMware, which each offer a broad range of data center systems targeting various use cases and end markets. We also face competition from other companies, including companies that offer solutions powered entirely or partially by flash memory technology, such as Nimble Storage, a Hewlett Packard Enterprise company, Nutanix and Pure Storage. These competitors, as well as other potential competitors, when compared to us may have:

 

greater name recognition and longer operating histories;

 

larger sales and marketing and customer support budgets and resources;

 

the ability to bundle enterprise cloud infrastructure systems or storage solutions with other products and services to address customers’ needs;

 

more comprehensive enterprise cloud infrastructure systems or storage solutions;

 

greater resources to make acquisitions and develop new solutions;

 

infrastructure solutions that are, or that are perceived to be, simpler and faster to deploy, or able to store and process data more effectively;

 

infrastructure solutions that store and process both physical and virtualized workloads;

 

larger and more mature intellectual property portfolios; and

 

substantially greater financial, technical and other resources.

Furthermore, many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at many of our current and prospective customers. We expect that our competitors will seek to leverage these existing relationships to discourage customers from purchasing our solution. If we are unsuccessful in establishing or maintaining relationships with customers, or if customers are reluctant or unwilling to try our solution, our ability to compete in the marketplace or to grow our revenue could be impaired.

Our competitors utilize a broad range of competitive strategies. For example, some of our competitors have offered bundled products and services in order to reduce the initial cost of their storage solutions, or seek to exploit concerns of existing and potential customers regarding our financial condition. Our competitors may also compete on purchase price and total cost of ownership, and may choose to adopt more aggressive pricing policies than we choose to adopt in the future.

Certain of our competitors may have developed, claim to have developed or have indicated that they intend to develop enterprise cloud technologies that may compete with our solution. We expect our competitors to continue to improve the performance of their solutions, reduce their prices and introduce new services and technologies that may, or that they may claim to, offer greater performance and improved total cost of ownership as compared to our solution. These and other competitive pressures may prevent us from competing successfully against current or future competitors. If we are unable to acquire customers, or if we are forced to reduce prices in order to do so, our business, operating results and financial condition may be adversely affected.

If the enterprise cloud market does not evolve as we anticipate or our target customers do not adopt our solution or lose confidence in our company, we may not be able to compete effectively, and our ability to generate revenue will suffer.

We compete in the new enterprise cloud category with our Tintri VMstore solutions, and the market for enterprise cloud solutions is still in an early stage. Our success depends upon our ability to provide enterprise cloud infrastructure solutions that address the needs of customers more effectively and economically than those of other competitors or existing technologies. Many of our target customers have never purchased enterprise cloud infrastructure solutions and may not have the desire or available budget to invest in new technologies such as ours or the confidence in our financial conditions and prospects to make investments in our products, particularly large or

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long-term investments.  Following our initial public offering, or IPO, during fiscal 2018, we observed that some customers reduced or delayed purchases of our systems due to concerns about our financial condition and prospects. Market awareness of our value proposition will be essential to our growth and our success, particularly for the enterprise and CSP markets. It is difficult to predict with any precision customer adoption rates, customer demand for our solution or the future growth rate and size of our market.

Changes or advances in alternative technologies or adoption of alternative enterprise cloud infrastructure offerings could adversely affect the demand for our solution. If the enterprise cloud infrastructure market does not develop in the way we anticipate, if our solution does not offer benefits compared to competing solutions or if customers do not recognize the benefits that our solution provides, then our business, operating results and financial condition could be adversely affected.

If we are unable to attract and retain qualified personnel, our business and operating results could suffer.

Our future success also depends on our ability to continue to attract, integrate and retain highly skilled personnel, especially skilled sales and engineering employees. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area where we are headquartered. We compete with many larger and better funded organizations both inside and outside of the storage industry for skilled personnel, and we may be unable to compete with the compensation and other benefits that these organizations offer to attract candidates and retain existing personnel.

We have recently undertaken substantial reductions in our workforce, which may significantly affect our ability to retain our remaining employees or to attract new employees. See “Our recent restructuring actions could adversely affect sales or products and services and other business operations” below.

Volatility or declines in our stock price may also affect our ability to attract and retain key employees. Also, many of our employees have become, or will soon become, vested in a substantial amount of equity awards which may, in some cases, equate to a substantial amount of personal wealth. In addition, certain of our employees hold options to purchase shares of our common stock with exercise prices in excess of recent trading price of our common stock on the Nasdaq Stock Market, which may lessen the incentive these stock options represent for these employees to remain in our employment. These circumstances may make it more difficult for us to retain and motivate these employees. Conversely, recent declines in the trading price of our common stock on the Nasdaq Stock Market could reduce, or be perceived by employees to reduce, the value of their outstanding equity awards, which could affect their decision about whether or not they continue to work for us. We have experienced some of these effects since the completion of our IPO, in July 2017, and may continue to see similar recruitment and retention challenges in the future. In the future, we expect to implement employee retention programs from time to time, including through the grant of additional equity awards to existing employees, or the exchange or amendment to the terms of existing employee equity awards.  Such programs may not be effective in improving employee retention and may be dilutive to our existing equity holders.

In March 2018, we announced that Ken Klein will transition from his role as our Chief Executive Officer and Ian Halifax will transition from his role as our Chief Financial Officer. In March 2018, we also announced that the Board had named Tom Barton as Chief Executive Officer and as a Board member. Mr. Barton subsequently joined the Company, and Mr. Klein and Mr. Halifax left the Company in April 2018. On May 15, 2018, we also appointed Tom Barton as interim Chief Financial Officer. We may experience increased employee turnover as a result of these and other changes in our management team. We cannot assure you that we will be able to successfully attract or retain qualified personnel. Any failure to successfully attract, integrate or retain qualified personnel to fulfill our current or future needs may negatively impact our growth and adversely affect our business, operating results and financial condition.

Our recent restructuring actions could adversely affect sales of products and services and other business operations.

We have recently undertaken substantial reductions in our workforce in an effort to drive efficiencies in our sales organization and other business units.  In September 2017, we announced a restructuring and reduction in force plan of a little more than 10% of our global workforce. In March 2018, we announced a restructuring and reduction

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in force plan of approximately 20% of our global workforce. These reductions have impacted all of our business units, including our sales and engineering functions.  The reduction in the size of our sales team and related support functions may impact our ability to maintain and grow our product sales and to adequately support our post-sales commitments. If we are unable to achieve correspondingly greater efficiency from our sales and related support teams, our bookings may fail to achieve historic growth rates or may decline. In addition, reductions in our engineering and product development teams could negatively impact our ability to generate new products or deliver our current pipeline of products on a timely basis. Furthermore, we believe that further such reductions are likely to be required in the near term dependent on developments in our financial condition. Any of these changes would adversely impact our business, operating results and financial condition.

Our process of considering strategic options could adversely affect our business, financial condition, and results of operations.

In December 2017, we announced that we were in the process of considering strategic options to deliver value to our stockholders, and had retained investment bank advisors to assist us in this process. This process could disrupt and create uncertainty concerning our business, regardless of whether the strategic process is completed, and poses other risks to our business, including:

 

potential uncertainty in the marketplace concerning our ongoing viability as a business, which could lead current and prospective customers to purchase from other vendors or delay purchasing from us;

 

the possibility of disruption to our business and operations, including diversion of significant management time and resources towards the completion of the strategic process;

 

impairment of our ability to attract and retain key personnel;

 

difficulties maintaining relationships with employees, customers, suppliers and other business partners;

 

restrictions on our business operations and ability to explore strategic alternatives under any definitive agreement we may enter into as a result of this process; and

 

potential future stockholder litigation relating to the strategic process that could prevent or delay the strategic process, and the related costs.

If any of the foregoing risks were realized, our business, financial condition and results of operations could be adversely affected.

We historically experienced rapid growth, and if we do not effectively manage any future growth or are unable to improve our systems, processes and controls, our business may be adversely affected.

We historically experienced rapid growth and increased demand for our solution, although our growth rate has reduced significantly in recent periods. Our employee headcount and number of customers have increased significantly during certain prior periods, and we intend to continue to grow our customer base in the future.

Furthermore, we have increasingly managed more complex deployments of our products and services with larger customers. The growth of our business and our offerings creates an ongoing strain on our management, operational and financial resources. To manage our growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and our ability to manage headcount, capital and processes in an efficient manner. The increased operational complexity and higher costs of international product deployments and infrastructure expansion makes managing our growth outside of the United States uniquely challenging. Our failure to scale or manage improvements in these functions, processes and controls could disrupt existing customer relationships, limit the deployments of our solution, reduce the quality of our products and services, increase our technical support costs and impair our ability to operate our business and protect our assets. Failure to manage any future growth effectively could result in increased costs and harm our business, operating results and financial condition.

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If our third-party channel partners fail to perform, our ability to sell and distribute our solution will be limited, and our operating results will be adversely affected.

We depend on channel partners and distributors for a substantial majority of our sales. Approximately 89%, 85%, and 90% of our revenue in fiscal 2016, 2017, and 2018, respectively, was derived from sales to our channel partners and distributors. We also depend upon our channel partners to manage the customer sales process and to generate sales opportunities. To the extent our channel partners are unsuccessful in fulfilling our sales, managing the sales process or selling our solution, or we are unable to enter into arrangements with, and retain a sufficient number of high-quality, motivated partners in each of our sales regions, our ability to sell our solution will be adversely affected.

Our contracts with channel partners are typically terminable without cause by either party after an initial term of one year. 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’ solutions. If our channel partners give higher priority to our competitors’ storage solutions, 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 business, operating results and financial condition may be adversely affected.

Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels.

As a result of customer buying patterns and related sales efforts, we have historically received a substantial portion of sales orders and generated a substantial portion of revenue during the last few weeks of each fiscal quarter. If expected revenue at the end of any fiscal quarter is delayed for any reason, including any failure of anticipated sales transactions to materialize, any inability on our part to ship products prior to fiscal quarter-end to fulfill sales orders received near the end of the fiscal quarter, any failure on our part to manage inventory to meet demand, any inability on our part to release new solutions on schedule, any failure of our systems related to order review and processing and other terms that may delay the recognition of revenue or any unexpected sales cancellations, our revenue for that quarter could fall below our expectations and the estimates of analysts, which could adversely impact our business, operating results and financial condition.

The markets for enterprise cloud infrastructure systems and storage solutions are rapidly evolving and, if we fail to correctly anticipate and respond to developing industry trends, demand for our solution may decline.

The IT infrastructure and storage industries are characterized by rapidly evolving technology, customer needs and industry standards. To remain competitive, we must correctly anticipate and invest in the adoption of new and emerging technologies, and continue to innovate our solution to provide superior benefits to our customers. The process of developing or adapting our solution to new technologies is complex and uncertain, and our product development efforts may fail to successfully address our customers’ changing needs. 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. If we fail to implement or respond to a technology that gains widespread market acceptance, demand for our solution may decline. Conversely, if we adopt a technology for which market demand fails to materialize, then we may incur significant development and marketing expense for which we fail to realize an adequate return. In September 2017, we announced the introduction of a new series of enterprise cloud products, and the extent of market acceptance and demand for these and other new products will affect our future financial results. In addition, one or more new technologies could be introduced that compete favorably with our products or that cause our solution to no longer be able to compete successfully.

The success of our products also depends in large part on our ability to successfully adapt our solution to emerging industry standards. The servers, network, software and other components and systems within a datacenter must comply with industry standards in order to interoperate and function efficiently together. If larger companies that are more influential in driving industry standards do not support the same standards we use, market acceptance of our solution could be adversely affected, or we may be required to spend significant time and resources duplicating efforts to adapt to different standards.

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Our failure to successfully identify new product opportunities, develop and bring new products to market in a timely manner or respond to changing industry standards would result in a lower revenue growth rate or decreased revenue, either of which would negatively impact our business, operating results and financial condition.

If we fail to develop or introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be adversely affected.

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. We will need to continue to create valuable software and hardware solutions to be integrated with our enterprise cloud platform. To compete successfully, we must design, develop, market and sell new or enhanced solutions that provide increasingly higher levels of performance, capacity, scalability, security and reliability and meet the cost expectations of our customers. In September 2017, we announced the introduction of a new series of enterprise cloud products. The extent of market acceptance and demand for these and other new products are expected to affect our future financial results. Any failure to anticipate or develop new or enhanced solutions or technologies in a timely manner in response to technological shifts could result in decreased revenue and harm to our business, operating results and financial condition. Any new feature or application that we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve broad market acceptance. If we fail to introduce new or enhanced solutions that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our business, operating results and financial condition will be adversely affected.

Our solution must interoperate with third-party hypervisors and operating systems, software applications and hardware, and if we fail to maintain the compatibility of our solution with such software and hardware, we may lose or fail to increase our market share and may experience reduced demand for our solution.

Our solution must interoperate with our customers’ existing infrastructure, specifically their hypervisors, networks, servers, and other software, which are provided by a wide variety of vendors. For example, our VMstore solutions support hypervisors marketed by Citrix, Microsoft, Open Stack, Red Hat, and VMware. When new or updated versions of these hypervisors or software applications are introduced, we must sometimes develop updated versions of our software so that our solution will interoperate properly. These efforts require capital investment and engineering resources and we may not be able to deliver or maintain interoperability quickly, cost-effectively or at all. If we fail to maintain compatibility of our solution with these infrastructure components, our customers may not be able to fully utilize our solution, and we may, among other consequences, lose or fail to increase our market share and experience reduced demand for our solution, which may harm our business, operating results and financial condition.

If we are not able to successfully increase sales of our solution to large organizations and CSPs, our operating results may suffer.

Our growth strategy is dependent in large part upon increasing sales of our solution to large organizations and CSPs. Sales to these customers involve risks that may not be present (or that are present to a lesser extent) with sales to smaller customers. These risks include:

 

competition from companies that traditionally target larger organizations and CSPs and that may have pre-existing relationships or purchase commitments from such customers;

 

increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us;

 

more stringent requirements in our support and maintenance contracts, including demand for faster support response times and penalties for any failure to meet support requirements; and

 

longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer that elects not to purchase our solution.

In addition, large organizations, including government entities, typically have longer implementation cycles, require greater solutions functionality and scalability, require a broader range of services, demand that vendors take on a larger share of risks, require acceptance provisions that can lead to a delay in revenue recognition and expect

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greater payment flexibility. If we fail to realize an expected sale from a large customer in a particular quarter or at all, our business, operating results and financial condition could be adversely affected. Following our IPO during fiscal 2018, we observed that some customers reduced or delayed purchases of our systems due to concerns about our financial condition and prospects.

Our sales cycles can be long and unpredictable, and may require considerable time and expense, which may cause our operating results to fluctuate significantly.

The timing of customer sales commitments and our recognition of revenue is difficult to predict because of the length and unpredictability of our solutions’ sales cycles. A sales cycle is the period between initial contact with a prospective customer and any sale of our solution. Our sales cycles typically range from three to six months. Customers, especially large enterprises, CSPs and government entities, often view the purchase of our solution as a significant and strategic decision and require considerable time to evaluate, test and qualify our solution prior to making a purchase decision and placing an order. During our sales cycle, we expend significant time and money on sales and marketing activities, and sometimes make investments in evaluation equipment, all of which lower our operating margins, particularly if no sale occurs.

Even if a customer decides to purchase our solution, there are many factors that affect the timing of the customer’s purchase and our recognition of revenue, including the strategic importance of a particular project to a customer, budgetary constraints and changes in their personnel. Even after a customer makes a purchase, there may be circumstances or terms relating to the purchase that delay our ability to recognize revenue from that purchase. For all of these reasons, it is difficult to predict whether a sale will be completed, the particular period in which a sale will be completed or the period in which revenue from a sale will be recognized. If our sales cycles lengthen, our revenue could be lower than expected, which would have an adverse effect on our business, operating results and financial condition.

We derive substantially all of our revenue from a single family of products, and a decline in demand for our solution would cause our revenue to grow more slowly or to decline.

Our enterprise cloud platform, which includes our proprietary Tintri OS and our stand-alone software products, accounts for all of our product revenue and will continue to comprise a significant portion of our revenue for the foreseeable future. As a result, any of the following events or developments could have a comparatively greater impact on our business than they would if we offered a broader range of solutions:

 

the failure of our current solutions to achieve broad market acceptance;

 

any decline or fluctuation in demand for our current solutions, whether as a result of customer budgetary constraints, introduction of competing products or technologies or other factors; and

 

our inability to release enhanced versions of our current solutions, including any related software, on a timely basis.

If the market for enterprise cloud infrastructure solutions grows more slowly than anticipated, if demand for our solution declines, or if we fail to deliver new solutions, new features, or new releases that meet customer demand, our business, operating results and financial condition will be adversely affected.

We recognize revenue from support agreements over the term of the relevant support period, and as a result downturns or upturns in sales are not immediately reflected in full in our operating results.

Support and maintenance revenue was 20%, 22%, and 28% of our revenue in fiscal 2016, 2017, and 2018, respectively. We recognize support and maintenance revenue ratably over the term of the relevant support period, which ranges from one to five years. As a result, much of the support and maintenance revenue we report each quarter is derived from support agreements that we sold in prior quarters. Consequently, a decline in new or renewed support agreements, or decreases in the relative pricing of new support agreements, in any one quarter will not be fully reflected in revenue in that quarter but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales of support and maintenance is not reflected in full in our operating results until future periods. In addition, because revenue from renewals must be recognized ratably over the applicable

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service period, it may be difficult for us to rapidly increase our support and maintenance revenue through additional sales in any period. The percentage of our total revenue that we derive from support and maintenance agreements may vary over time if we change the relative pricing of our products or support agreements. Our revenue from support agreements as a percentage of total revenue may decline as a result of changes in the relative pricing of our products and support. Changes in the mix of our product revenue and support and maintenance revenue may adversely affect our business, operating results and the trading price of our common stock.

The sales prices of our products and services may decrease, which would reduce our gross profit and adversely impact our financial condition.

The sales prices for our products or support and maintenance services may decline for a variety of reasons, including competitive pricing pressures, a change in our mix of products and services and the introduction of competing products or services or promotional programs. Competition continues to increase in the markets in which we participate, and we expect competition to further increase in the future, which may lead to increased pricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products or services that compete with ours or may bundle them with other products and services. Our sales prices could also decline due to pricing pressure caused by several factors, including overcapacity in the worldwide supply of competitive storage solutions, increased manufacturing efficiencies and implementation of new manufacturing processes. In addition, although we price our products and services predominantly in U.S. dollars, currency fluctuations in certain countries and regions may negatively impact actual prices that partners and customers are willing to pay in those countries and regions. To the extent we introduce new solutions, we anticipate that the sales prices for our existing solutions will decrease. We cannot assure you that we will be successful in developing and introducing new offerings with enhanced functionality on a timely basis, or that our new product and services offerings, if introduced, will enable us to maintain or improve our gross margins and achieve profitability. Furthermore, future cash requirements could require us to introduce additional discounting in order to generate increased sales. Any such decline in our sales prices could adversely impact our business, operating results and financial condition.

Our ability to successfully market and sell our solution is dependent in part on the quality of our customer support, and any failure to offer high-quality technical support could harm our business.

Once our solution is deployed within our customers’ datacenters, customers depend on our support organization to resolve technical issues relating to our solution. Our ability to provide effective support is largely dependent on our ability to attract, train and retain qualified personnel, as well as to engage with qualified support partners that provide a similar level of customer support. Furthermore, as we continue to expand our international operations, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English and provisioning and staffing our international customer support field offices. In addition, our sales process is highly dependent on our solution and business reputation and on recommendations from our existing customers. Any failure to maintain, or a market perception that we do not maintain, high-quality technical support, including installation, could harm our reputation and our ability to sell our solution to existing and prospective customers.

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

Some of our channel partners, distributors and direct customers have experienced financial difficulties in the past. A channel partner, distributor or direct customer experiencing such difficulties will generally not purchase or sell as many of our systems as it may have done under normal circumstances and may cancel orders. Our typical payment terms are 30 days from invoice but payment terms may be longer in particular circumstances and markets. In addition, a channel partner, distributor or direct customer experiencing financial difficulties generally increases our exposure to uncollectible receivables. Any concentration of our accounts receivable in one or a limited number of our channel partners, distributors and direct customers may increase our credit risk with respect to those channel partners, distributors and direct customers. If any of our channel partners, distributors or direct customers that represent a significant portion of our revenue becomes insolvent or suffers deterioration in its financial or business condition and is unable to pay for our solution, our business, operating results and financial condition could be adversely affected.

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If we do not effectively expand and train our sales force, we may be unable to increase our revenue and our business will be adversely affected.

Although we have a channel sales model, our sales representatives typically engage in direct interaction with our prospective customers. Therefore, we continue to be substantially dependent on our sales force to obtain new customers and sell additional solutions to our existing customers. As such, we have invested and expect to continue to invest substantially in our sales organization. Competition for sales personnel with the skills and technical knowledge that we require is intense and our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth.

In August 2017, we announced changes to the structure of our sales organization, including the departure of our former Chief Sales Officer, and Ken Klein, our former Chief Executive Officer, assuming more direct involvement with our sales organization. In March 2018, we announced the promotion of Tom Cashman to Executive Vice President, Worldwide Sales and Alliances.  In March 2018, we also announced that the Board had named Tom Barton as our new Chief Executive Officer, who began his employment in April 2018. On May 15, 2018, we also appointed Tom Barton as interim Chief Financial Officer. These changes and other changes may impact our ability to attract and retain sales personnel.

A significant percentage of our sales force is new to our company and therefore less effective than our more seasoned sales personnel. New hires require significant training and may take significant time before they achieve full productivity; we estimate based on past experience that sales team members typically do not fully ramp and are not fully productive during the first several quarters of employment with us. Our recent hires and planned hires may not become productive as quickly as we expect. Furthermore, hiring sales personnel in new countries requires additional set up and upfront costs that we may not recover if the sales personnel fail to achieve full productivity. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business, operating results and financial condition will be adversely affected.

Seasonality may cause fluctuations in our revenue and operating results.

In general, our sales are subject to seasonal trends. Our fourth fiscal quarter, ending January 31, typically has the highest revenue of any of our fiscal quarters, and our first fiscal quarter, ending April 30, typically has the lowest revenue of any of our fiscal quarters. We believe that this seasonality results from a number of factors, including the budgeting, procurement and deployment cycles of many of our customers. Our rapid historical growth may have reduced the impact of seasonal or cyclical factors that might have influenced our business to date. To the extent our revenue growth slows, seasonal or cyclical variations in our operations may become more pronounced and may affect our business, operating results and financial condition.

Sales to U.S. federal, state and local governments are subject to numerous challenges and risks that may adversely impact our business.

Although sales to U.S. federal, state and local government agencies accounted for less than 10% of our revenue in fiscal 2016, 2017, and 2018, our sales to government agencies may increase in the future. Sales to such government entities are subject to a number of risks, including the following:

 

selling to government agencies can be extensively regulated, highly competitive and time consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale;

 

government certification requirements applicable to our solution may change and in doing so restrict our ability to sell into the U.S. federal government sector until we have attained the revised certification;

 

government demand and payment for our products and services may be impacted by public sector budgetary cycles, changes in administration and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services;

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government agencies may have statutory, contractual or other legal rights to terminate our sales contracts for convenience or due to a default, and any such termination may adversely impact our future operating results;

 

governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our solution, which would adversely impact our revenue and operating results, or result in fines, civil or criminal liability or repayment of any overcharges, if any such audit uncovers improper or illegal activities; and

 

government agencies may require certain products to be manufactured in the United States and other relatively high-cost manufacturing locations, which may require costly changes to our manufacturing practices or otherwise adversely affect our ability to sell these products to such agencies.

If any of the above risks are realized, our business, operating results and financial condition may be adversely affected.

Our solution is highly technical and may contain undetected defects, which could cause data unavailability, loss or corruption that might, in turn, result in liability to our customers and harm to our reputation and business.

Our solution is highly technical and complex and is often used to store information critical to our customers’ business operations. Our solution, particularly with respect to newly introduced or redesigned products, may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, loss, corruption or other harm to our customers. Some errors in our solution may only be discovered after they have been installed and used by customers. Our solution has experienced temporary outages after they have been deployed. Any outages, errors, defects or security vulnerabilities discovered in our solution after commercial release could result in a loss of revenue, injury to our reputation, a loss of customers or increased service and warranty costs, any of which could adversely affect our business and operating results. In addition, errors or failures in the solutions of third-party technology vendors may be attributed to us and may harm our reputation.

If our solution fails, we could face claims for product liability, tort or breach of warranty. Although our customers are generally required to enter into our standard “click wrap” terms of service, which includes provisions relating to warranty disclaimers and liability limitations, these terms may be difficult to enforce. Defending a lawsuit, regardless of its merit, would be costly and might divert management’s attention and adversely affect the market’s perception of us and our solution. Our business liability insurance coverage could prove inadequate with respect to a claim and future coverage may be unavailable on acceptable terms or at all. These product-related issues could result in claims against us, and negatively impact our business, operating results and financial condition.

Our international operations expose us to additional risks, and failure to manage those risks could adversely affect our business, operating results and cash flows.

We derive a significant portion of our revenue from channel partners outside the United States. Revenue generated from customers outside of the United States was 30%, 30%, and 27% of our total revenue in fiscal 2016, 2017, and 2018, respectively. We are continuing to adapt to and develop strategies to address international markets but there is no guarantee that such efforts will be successful. As of January 31, 2018, 14% of our full-time employees were located outside of the United States. We expect that our international activities will continue to grow over the foreseeable future as we continue to pursue opportunities in international markets, which will require significant management attention and financial resources. We are subject to risks associated with having significant worldwide operations, including:

 

increased complexity and costs of managing international operations;

 

geopolitical and economic instability and military conflicts;

 

limited protection of our intellectual property and other assets;

 

compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;

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trade and foreign exchange restrictions and higher tariffs;

 

travel restrictions;

 

timing and availability of import and export licenses and other government approvals, permits and licenses, including export classification requirements;

 

foreign currency exchange fluctuations relating to our international operating activities;

 

restrictions imposed by the U.S. government on our ability to do business with certain companies or in certain countries as a result of international political conflicts;

 

transportation delays and other consequences of limited local infrastructure and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers;

 

reliance upon third parties to provide solution support services outside of the Unites States;

 

difficulties in staffing international operations and increased compliance costs and potential liabilities associated with employment laws and practices outside of the United States;

 

increased costs and risk of loss associated with provisioning local field offices to provide solution support services;

 

heightened risk of terrorist acts;

 

local business and cultural factors that differ from our normal standards and practices;

 

differing employment practices and labor relations;

 

regional health issues and natural disasters that are endemic to regions which we operate and sell or manufacture our solution;

 

difficulties in enforcing contracts generally; and

 

work stoppages.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. These factors and other factors could harm our ability to gain future international revenue and, consequently, impact our business, operating results and financial condition.

We rely on a single contract manufacturer to manufacture our products, and any failure to forecast demand for our products or manage our relationship with our contract manufacturer, or if that manufacturer’s business were to become impaired in the future, our ability to sell our products could be impacted.

We contract with an offshore subsidiary of Flex to manufacture all of our products. Our reliance on Flex reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. If we fail to manage our relationship with Flex effectively, or if Flex experiences delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be adversely affected. In addition, any adverse change in Flex’s financial or business condition could disrupt our ability to supply quality products to our customers. If we are required to change our contract manufacturer or assume internal manufacturing operations, we may lose revenue, incur increased costs and damage our customer relationships. In addition, qualifying a new contract manufacturer and commencing production can be an expensive and lengthy process. If we experience increased demand that Flex is unable to fulfill, or if Flex is unable or unwilling to provide us with adequate supplies of high-quality products for any other reason, we could experience a delay in our order fulfillment, and our business, operating results and financial condition would be adversely affected.

Our agreement with Flex is terminable at any time by us with 90 days’ notice or by Flex with 120 days’ notice and Flex has no obligation to provide services transitioning our manufacturing processes to another manufacturer. Our agreement with Flex does not provide for any specific volume purchase commitments, though we are required to submit a nine month forecast for orders (the first three months of which are binding) and orders are placed on a purchase order basis. Furthermore, because we contract with a subsidiary of Flex, we have limited recourse to assets held by other members of the Flex group of companies in the event of manufacturing problems or other claims. If we are required to change to a new contract manufacturer, qualify an additional contract manufacturer or assume

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internal manufacturing operations for any reason, including financial problems of our contract manufacturer, reduction of manufacturing output made available to us, or the termination of our contract, we may lose revenue, incur increased costs and damage our customer relationships.

We intend to introduce new products and product enhancements, which could require us to coordinate with Flex and component suppliers in order to achieve volume production rapidly. We may need to increase our component purchases, contract manufacturing capacity and internal test and quality functions if we experience increased demand for our products. Our orders may represent a relatively small percentage of the overall orders received by Flex from its customers. As a result, fulfilling our orders may not be considered a priority in the event Flex is constrained in its ability to fulfill all of its customer obligations in a timely manner. If Flex is unable to provide us with adequate supplies of high-quality products, or if we are, or Flex is unable to obtain adequate quantities of components, it could cause a delay in our order fulfillment, in which case our business, operating results and financial condition could be adversely affected.

We rely on a limited number of suppliers, and in some cases single-source suppliers, and any disruption or termination of these supply arrangements could delay shipments of our products and could harm our relationships with current and prospective customers.

We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key hardware components of our solution. These components are generally purchased on a purchase order basis through Flex, and we generally do not have long-term supply contracts with our suppliers. For example, the chassis used in our hybrid-flash systems and our new all-flash systems are obtained on a purchase order-basis under an agreement with a single-source component supplier that has no fixed term.

Our current purchase volumes may be too low for us to be considered a priority customer by certain of our suppliers. Any of the sole-source and limited source suppliers we rely on could stop producing our components, cease operations or be acquired by, or enter into exclusive arrangements with, our competitors. Our reliance on key suppliers exposes us to risks, including:

 

the inability to obtain an adequate supply of key components;

 

delays or disruptions of shipments of our products or their components;

 

price volatility for the components of our products;

 

failure of a supplier to meet our quality or production requirements;

 

failure of a supplier of key components to remain in business or adjust to market conditions; and

 

consolidation among suppliers, resulting in some suppliers exiting the industry or discontinuing the manufacture of components.

In addition, many of our products are sourced from suppliers based outside of the United States, primarily in Asia. Uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the United States and other countries has recently increased. Major developments in tax policy or trade relations, such as the imposition of tariffs on imported products, could increase our product and product-related costs or require us to seek alternative suppliers, either of which could result in decreased sales or increases product and product-related costs.

As a result of these risks, we cannot assure you that we will be able to obtain enough key components in the future or that the cost of these components will not increase. We generally order our components on a “build to order” basis, and do not maintain any significant inventory of the components used in our products. The technology 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 our supply of components is disrupted or delayed, or if we need to replace our existing suppliers, there can be no assurance that additional components will be available when required or on terms that are favorable to us, which could extend our lead times and increase the costs of our components. Switching suppliers may require that we redesign our products to accommodate new components and to re-qualify our solution, which would be costly and time-consuming.

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Any interruption in the supply of our components may adversely affect our ability to meet scheduled product deliveries to our customers and could result in lost revenue or higher expenses, any of which would harm our business, operating results and financial condition.

Insufficient supply and inventory of our products and their components may result in lost sales opportunities or delayed revenue, while excess inventory will harm our gross margins.

Our third-party manufacturer procures components and builds our products based on our forecasts, and we generally do not hold inventory for a prolonged period of time. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and analyses from our sales and marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, from time to time we may issue forecasts for components and products that are non-cancelable and non-returnable. Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to make accurate forecasts and effectively manage the supply of our products and components. We have, in the past, had to write off inventory in connection with transitions to new product models. If we ultimately determine that we have excess supply, we may have to reduce our prices and write down or write off excess or obsolete inventory, which in turn could result in lower gross margins. Alternatively, insufficient supply levels may lead to shortages that result in delayed revenue or loss of sales opportunities altogether as potential customers turn to competitors’ products that may be more readily available. If we are unable to effectively manage our supply and inventory, our business, operating results and financial condition could be adversely affected.

Industry consolidation may lead to increased competition, which could harm our business.

Consolidation among IT infrastructure providers has been common. Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships to offer a more comprehensive solution than they had offered individually. For example, in February 2016, NetApp acquired SolidFire, a developer of all-flash storage systems, in September 2016, Dell acquired EMC, in February 2017, HP Enterprise acquired SimpliVity, a developer of hyperconverged systems, in April 2017, HP Enterprise acquired Nimble Storage, a storage solutions provider, and in September 2017, Cisco acquired Springpath, a developer of hyperconverged systems. We expect this trend to continue as companies attempt to strengthen or maintain their market positions through strategic acquisitions.

Consolidation in our industry may result in stronger competitors that may create more compelling offerings, offer greater pricing flexibility and be better able to compete as their customers’ sole-source vendors. Any of these developments would make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs and breadth of technology offerings. In addition, companies with which we have strategic partnerships may acquire or form alliances with our competitors, causing them to reduce their business with us. Continued industry consolidation may adversely affect customers’ and potential customers’ perceptions of the viability of less mature technology companies such as us and, consequently, their willingness to purchase from us. Any such competitive forces resulting from consolidation in our industry could adversely impact our business, operating results and financial condition.

Our research and development efforts may not produce successful solutions that result in significant revenue in the near future, if at all.

Developing new solutions and related enhancements is expensive and time consuming. Our investments in research and development may result in solutions that do not achieve market adoption, are more expensive to develop than anticipated, take longer to generate revenue or generate less revenue than we anticipate. Our future plans include significant investments in research and development for new solutions and related opportunities. We believe that we must continue to dedicate significant resources to our research and development efforts to maintain or expand our competitive position. However, these efforts may not result in significant revenue in the near future, if at all, which could adversely affect our business, operating results and financial condition.

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The success of our business depends in part on our ability to protect and enforce our intellectual property rights.

Our success depends to a significant degree on our ability to protect our core technology and intellectual property. We rely on a combination of patent, copyright, service mark, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our technology, intellectual property and proprietary rights, all of which provide only limited protection. We cannot assure you that any patents or trademarks will be issued with respect to any pending patent or trademark applications in a manner that gives us adequate defensive protection or competitive advantages, if at all, or that any patents or trademarks issued to us or our other intellectual property rights will not be challenged, invalidated or circumvented. We have filed for patents and trademarks in the United States and in certain international jurisdictions, but such protections may not be available in all countries in which we operate or in which we seek to enforce our intellectual property rights, or may be difficult to enforce in practice. Our currently issued patents and trademarks and any patents or trademarks that may be issued in the future with respect to pending or future applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property rights.

Protecting against the unauthorized use of our intellectual property and technology, and infringement or misappropriation of our intellectual property rights is expensive and difficult, particularly internationally. Litigation may be necessary in the future to enforce or defend our intellectual property rights or to determine the validity and scope of the intellectual property rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition. If we fail to protect our intellectual property rights adequately, our competitors could offer similar solutions, potentially harming our business. Further, many of our current and potential competitors have the ability to dedicate substantially greater resources to defending intellectual property rights infringement claims and to enforcing their intellectual property rights than we have. Attempts to enforce our rights against third parties could also provoke these third parties to assert their own intellectual property rights or other rights against us, or result in a holding that invalidates or narrows the scope of our intellectual property rights, in whole or in part. If we are unable to adequately protect and enforce our intellectual property, technology and our intellectual property rights, the value of our intellectual property, technology and intellectual property rights, and our business, operating results and financial condition could be adversely affected.

Third-party claims that we are infringing intellectual property rights, whether successful or not, could subject us to costly and time-consuming litigation or expensive licenses, and our business could be adversely affected.

A number of companies, both within and outside of the IT infrastructure industry, hold a large number of patents covering aspects of storage, servers and virtualization solutions. In addition to these patents, participants in this industry typically also protect their technology through copyrights and trade secrets. As a result, there is frequent litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. We have in the past, and may in the future, receive inquiries from other intellectual property rights holders seeking to profit from royalties in connection with grants of licenses and may in the future become subject to claims that we infringe their intellectual property rights, particularly as we expand our presence in the market and face increasing competition. We have in the past and may in the future be required to enter into agreements with such intellectual property rights holders involving the payment of royalties or other fees, or granting a limited license of our intellectual property rights, in order to resolve such inquiries and settle such claims. We cannot assure you that our business or products or services do not violate such rights of such third-party claimants. Regardless of the merit of any such claim, responding to such claims can be time consuming, divert management’s attention and resources and may cause us to incur significant expenses. In addition, parties may claim that the names and branding of our solution infringe their trademark rights in certain countries or territories. If such a claim were to prevail we may have to change the names and branding of our solution in the affected territories and incur other costs.

We currently have a number of agreements in effect pursuant to which we have agreed to defend, indemnify and hold harmless our customers, suppliers and channel and other partners from damages and costs which may arise from the infringement by our solution of third-party intellectual property rights, which may include patents, copyrights, trademarks or trade secrets. The scope of these indemnity obligations varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. Our insurance may not cover all

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intellectual property rights infringement claims. A claim that our solution infringes a third party’s intellectual property rights, even if untrue, could harm our relationships with our customers, may deter future customers from purchasing our solution and could expose us to costly litigation and settlement expenses. Even if we are not a party to any litigation between a customer and a third party relating to infringement by our solution, an adverse outcome in any such litigation could make it more difficult for us to defend our solution against intellectual property rights infringement claims in any subsequent litigation in which we are a named party. Any of these results could harm our brand and operating results.

Our defense of intellectual property rights claims brought against us or our customers, suppliers and channel partners, with or without merit, could be time-consuming, expensive to litigate or settle, divert management resources and attention and force us to acquire or license intellectual property rights, which may involve substantial royalty or other payments. We cannot assure you that we would be successful in defending against any such claims. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. In addition, patent applications in the United States and most other countries are confidential for a period of time before being published, so we cannot be certain that we were the first to conceive the inventions covered by our patents or patent applications. An adverse determination also could invalidate our intellectual property rights and prevent us from offering our solution to our customers and may require that we procure or develop substitute solutions that do not infringe, which could require significant effort and expense. We may be unable to replace those technologies with technologies that have the same features or functionality and that are of equal quality and performance standards on commercially reasonable terms, or at all. We may have to seek a license for the technology, which may not be available on acceptable terms or at all, and as a result may significantly increase our operating expenses or require us to restrict our business activities in one or more respects. Any of these events could adversely affect our business, operating results and financial condition.

System security risks, data protection breaches and cyber-attacks on our systems or solutions could compromise our proprietary information (or information of our customers), disrupt our internal operations and harm public perception of our solution, which could cause our business and reputation to suffer, create additional liabilities and adversely affect our financial conditions and stock price.

In the ordinary course of business, we store sensitive data on our internal systems, networks and servers, which may include intellectual property, our proprietary business information and that of our customers, suppliers and business partners and sales data, which may include personally identifiable information. In addition, we design and sell solutions that our customers use to store their data. The security of our own networks and the intrusion protection features of our solution are both critical to our operations and business strategy.

We devote significant resources to network security, data encryption and other security measures to protect our systems and data, but these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities and cannot provide absolute security. Any destructive or intrusive breach of our internal systems could result in the information stored on our networks being accessed, publicly disclosed, lost or stolen. In addition, an effective attack on our solution could disrupt the proper functioning of our solution, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers, disrupt or temporarily interrupt customers’ operations or cause other destructive outcomes, including the theft of information sufficient to engage in fraudulent transactions. The risk that these types of events could seriously harm our business is likely to increase as we expand our network of channel partners, resellers and authorized service providers and as we operate in more countries. The economic costs to us to eliminate or alleviate cyber or other security problems, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure because the damage may differ based on the identity and motive of the programmer or hacker, which is often difficult to identify. If any of these types of security breaches, actual or perceived, were to occur and we were to be unable to protect sensitive data, our relationships with our business partners and customers could be damaged, our reputation and brand could be harmed, use of our solution could decrease and we could be exposed to a risk of loss or litigation and possible liability.

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If we are unable to successfully manage our use of “open source” software, our ability to sell our products and services could be harmed, which could result in competitive disadvantages, and subject us to possible litigation.

We incorporate open source software in our products and services. Use of open source software can lead to greater risks than the use of proprietary or third-party commercial software since open source licensors generally do not provide warranties or controls with respect to origin, functionality or other features of the software. Some open source software licenses require users who distribute open source software as part of their solutions to publicly disclose all or part of the source code in their software and make any derivative works of the open source software generally available in source code form for limited fees or at no cost. Although we monitor our use of open source software, open source license terms may be ambiguous, and many of the risks associated with the use of open source software cannot be eliminated. If we were found to have inappropriately used open source software in our solution, we may be required to release our proprietary source code, re-engineer our software, discontinue the sale of certain solutions in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action. Furthermore, if we fail to comply with applicable open source licenses, we may be subject to costly claims of intellectual property rights infringement or demands for the public release of proprietary source code. Any of the foregoing could harm our business, operating results and financial condition.

We may become subject to claims that our employees have wrongfully disclosed or that we have wrongfully used proprietary information of their former employers, which could adversely affect our business.

Many of our employees were previously employed at current or potential competitors. Although we require our employees to not use the proprietary information or know-how of others in their work for us and we are not currently subject to any claims that they have done so, we have in the past received inquiries from former employers of our employees and we may in the future become subject to claims that these employees have divulged, or we have used, proprietary information of these employees’ former employers. Litigation may be necessary to defend against these claims. If we are unable to successfully defend any such claims, we may be required to pay monetary damages and to discontinue our commercialization of certain solutions. In addition, 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 solutions and features for our existing solutions, which could severely harm our business. Even if we are successful in defending against these claims, litigation efforts are costly, time-consuming and a significant distraction to management.

We may face risks related to shareholder litigation that could result in significant legal expenses and settlement or damage awards.

We are currently and may in the future become subject to claims and litigation alleging violations of securities laws or other related claims, including shareholder derivative litigation, which could harm our business, divert management attention and require us to incur significant costs. For example, following our initial public offering in July 2017, four class action lawsuits were filed against us, as described in Item 1, Legal Proceedings. Each lawsuit is purportedly brought on behalf of a putative class of all persons who purchased shares of common stock pursuant or traceable to our initial public offering, and seeks, among other things, compensatory damages and attorney’s fees and costs on behalf of the putative class.

 

We are generally required, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these types of lawsuits. We also have certain contractual obligations to the underwriters regarding such lawsuits. While a certain amount of insurance coverage may be available for expenses or losses associated with these lawsuits, this coverage may not be sufficient. Based on information currently available, we are unable to reasonably estimate a possible loss or range of possible loss, if any, with regards to these lawsuits; therefore, no litigation reserve has been recorded in the accompanying financial statements. Although we plan to defend against these lawsuits vigorously, there can be no assurances that a favorable final outcome will be obtained. These lawsuits or future litigation may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations and cash flows.

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

Our sales contracts are denominated in U.S. dollars. As a result, a strengthening of the U.S. dollar could increase the real cost of our solution to our customers outside of the United States, which could adversely affect our international sales. In addition, a significant portion of our operating expenses is incurred outside the United States, denominated in foreign currencies and subject to fluctuations in foreign currency exchange rates. If we become more exposed to currency fluctuations and are not able to successfully hedge against the risks associated with currency fluctuations, our business, operating results and financial condition could be adversely affected.

We rely on our key technical, sales and management personnel to grow our business, and the loss of one or more key employees could harm our business.

Our success and future growth depends to a significant degree on the skills and continued services of our key technical, sales and management personnel. In particular, we are highly dependent on the services of Tom Barton, our incoming Chief Executive Officer, and Kieran Harty, our co-founder and Chief Technical Officer, who are each critical to the development of our technology, future vision and strategic direction. We rely on our leadership team in the areas of operations, security, marketing, sales, support and general and administrative functions, and on individual contributors on our research and development team, and changes to our senior managerial or other key employee could have a negative impact on our business. For example, in August 2017, we announced the departure of our former Chief Sales Officer and changes to the structure of our sales organization. In March 2018, we announced the departure of Ken Klein, our then-Chief Executive Officer, and Ian Halifax, our Chief Financial Officer. Mr. Klein’s and Mr. Halifax’s departures became effective in April 2018. All of our employees are employed by us on an at-will basis, and we could experience difficulty in retaining members of our senior management team or other key personnel, including as a result of layoffs, concerns by employees regarding our financial condition and the future of our business, and the loss of retention value of employee equity awards due to declines in the trading price of our common stock. We do not have “key person” life insurance policies that cover any of our officers or other key employees. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our solution and negatively impact our business, operating results and financial condition.

Our company culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

We believe that a critical contributor to our success has been our company culture, which we believe fosters innovation, creativity, teamwork, passion for customers and focus on execution, as well as facilitating critical knowledge transfer and knowledge sharing. As we grow and change, we may find it difficult to maintain these important aspects of our company culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute on our business strategy.

Our ability to hire and retain employees may be negatively impacted by changes in immigration laws, regulations and procedures.

Foreign nationals who are not U.S. citizens or permanent residents constitute an important part of our U.S. workforce, particularly in the areas of engineering and product development. Our ability to hire and retain these workers and their ability to remain and work in the United States are impacted by laws and regulations, as well as by procedures and enforcement practices of various government agencies. Changes in immigration laws, regulations or procedures, including those that may be enacted by the current U.S. presidential administration, may adversely affect our ability to hire or retain such workers, increase our operating expenses and negatively impact our ability to deliver our products and services.

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We may further expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, resulting in additional dilution to our stockholders and consumption of resources that are necessary to sustain and grow our business.

While we have not consummated any acquisitions to date, we may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, complementary businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses in order to expand our solution, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulatory approvals, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.

These kinds of acquisitions or investments may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired business choose not to work for us. We may have difficulty retaining the customers of any acquired business or the acquired technologies or research and development expectations may prove unsuccessful. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities. In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures and become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or investments could adversely affect our business, operating results and financial condition.

Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also negatively impact our ability to attract and retain customers.

Our business is subject to regulation by various federal, state, local and foreign government agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages and civil and criminal penalties or injunctions. If any government sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results and financial condition could be adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.

In addition, we must comply with laws and regulations relating to the formation, administration and performance of contracts with the public sector, including U.S. federal, state and local government organizations, which affect how we and our channel partners do business with government agencies. Selling our solution to the U.S. government, whether directly or through channel partners, also subjects us to certain regulatory and contractual requirements. Failure to comply with these requirements by either us or our channel partners could subject us to investigations, fines and other penalties, which could have an adverse effect on our business, operating results and financial condition. As an example, the U.S. Department of Justice, or DOJ, and the General Services Administration, or GSA, have in the past pursued claims against and financial settlements with IT vendors under the False Claims Act and other statutes related to pricing and discount practices and compliance with certain provisions of GSA contracts for sales to the federal government. The DOJ and GSA continue to actively pursue such claims. Violations of certain regulatory and contractual requirements could also result in us being suspended or barred from future government contracting. Any of these outcomes could have an adverse effect on our business, operating results and financial condition.

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These laws and regulations impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, loss of exclusive rights in our intellectual property, and temporary suspension or permanent debarment from government contracting. Any such damages, penalties, disruptions or limitations in our ability to do business with certain customers could have an adverse effect on our business, operating results and financial condition.

Our failure to prepare and timely file our periodic reports with the SEC may limit our access to the public markets to raise debt or equity capital, and could have negative consequences related to our financing agreements.

We did not file this Annual Report on Form 10-K within the timeframe required by the SEC. As a result of this late filing, we may be limited in our ability to access the public markets to raise debt or equity capital, which could prevent us from pursuing transactions or implementing business strategies that we believe would be beneficial to our business. We are ineligible to use shorter and less costly filings, such as Form S-3, to register our securities for sale for a period of 12 months following the month in which we regain compliance with our SEC reporting obligations. While we may be able to use Form S-1 to register a sale of our stock to raise capital or complete acquisitions, doing so would likely increase transaction costs and adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.  

We are subject to government export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.

Our solution is subject to U.S. export controls, including the Export Administration Regulations and economic sanctions administered by the Office of Foreign Assets Control, or OFAC, and we incorporate encryption technology into our solution. These encryption products and the underlying technology may be exported outside of 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, our activities are subject to the U.S. economic sanctions laws and regulations that prohibit the export, re-export and transfer of certain products and services without the required export authorizations, including to countries, governments and persons targeted by U.S. embargoes or sanctions. 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. While we take precautions to prevent our solution from being exported in violation of these laws, including obtaining authorizations for our encryption products and screening exports against U.S. government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. Violations of U.S. sanctions or export control laws can result in significant fines or penalties, denial of export privileges, and possible incarceration for responsible employees and managers could be imposed for criminal violations of these laws.

We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences, including government investigations and penalties. No assurance can be given that our channel partners will comply with export requirements.

Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including through import and export licensing requirements, and have enacted laws that could limit our ability to distribute our solution or could limit our customers’ ability to implement our solution in those countries. Changes in our solution or future changes in export and import regulations may create delays in the introduction of our solution in international markets, prevent our customers with international operations from deploying our solution globally or, in some cases, prevent the export or import of our solution to certain countries, governments, or persons altogether. From time to time, various government agencies have proposed additional regulation of encryption technology. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could

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result in decreased use of our solution by, or in our decreased ability to export or sell our solution to, existing or potential customers with international operations. Any decreased use of our solution or limitation on our ability to export or sell our solution would adversely affect our business, operating results and financial condition.

Changes in tariffs, sanctions, international treaties, and export/import laws may delay the introduction and sale of our products in international markets, prevent our customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries, governments, persons or entities altogether. Any change in export or import regulations, economic sanctions or related laws, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased demand for our products, or in our decreased ability to export or sell our products to existing or potential customers with international operations. Any decrease in demand for our products or limitation on our ability to export or sell our products would likely adversely affect our business, operating results and financial condition.

We are subject to government regulation and other legal obligations related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could adversely affect our business and operating results. Compliance with such laws could also impair our efforts to maintain and expand our customer base and thereby decrease our revenue.

The United States and other jurisdictions where we offer our solution have laws, regulations and standards governing the protection of information privacy, data protection and information security. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the U.S. Federal Trade Commission, or FTC, and various state, local and foreign bodies and agencies. In addition, agreements with our customers and business partners may contain contractual provisions related to the protection of information privacy, data protection and information security.

The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals, including customers and employees. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to the online collection, use and dissemination of data. In addition, many foreign countries and government bodies, including in Australia, the European Union, Japan and numerous other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection and use of personally identifiable information obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Such laws and regulations may require companies to implement privacy and security policies, permit customers to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personally identifiable information for certain purposes. In addition, a foreign government could require that any personally identifiable information collected in a country not be disseminated outside of that country, and we are not currently equipped to comply with such a requirement. We also may find it necessary or desirable to join industry or other self-regulatory bodies or other information security- or data protection-related organizations that require compliance with their rules pertaining to information security and data protection. We also may be bound by additional, more stringent contractual obligations relating to our collection, use and disclosure of personal, financial and other data.

We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. In addition, we expect that existing laws, regulations and standards may be interpreted in new manners in the future. For example, an October 2015 decision by the Court of Justice for the European Union invalidated the U.S.-EU Safe Harbor Framework, which facilitated personal data transfers to the U.S. in compliance with applicable EU data protection laws. While we did not rely upon the U.S.-EU Safe Harbor Framework for our transfer of EU personal data to the United States, and do not rely upon its replacement framework, the U.S.-EU Privacy Shield, there remains some regulatory uncertainty surrounding the future of data transfers from the European Union to the United States. In addition, European legislators have adopted a general data protection regulation that will, when effective in May 2018, supersede current EU data protection legislation, impose more stringent EU data protection requirements and provide for greater penalties for noncompliance. Future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could

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impair our or our customers’ ability to collect, use or disclose information relating to individuals, which could decrease demand for our solution, require us to restrict our business operations, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.

Although we are working to comply with those federal, state and foreign laws and regulations, industry standards, contractual obligations and other legal obligations that apply to us, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another, other requirements or legal obligations, our practices or the features of our solution. As such, we cannot assure ongoing compliance with all such laws or regulations, industry standards, contractual obligations and other legal obligations. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations or other legal obligations, or any actual or suspected cybersecurity breach, ransomware attack or other security incident, whether or not resulting in unauthorized access to, or acquisition, release or use or transfer of personally identifiable information or other data, may result in government enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business, operating results and financial condition.

Changes to laws or regulations affecting privacy could impose additional costs and liabilities on us and could limit our use of such information to add value for customers. If we were required to change our business activities or revise or eliminate services, or to implement burdensome compliance measures, our business and operating results could be harmed. In addition, we may be subject to fines, penalties, and potential litigation if we fail to comply with applicable privacy and/or data security laws, regulations, standards and other requirements. The costs of compliance with and other burdens imposed by privacy-related laws, regulations and standards may limit the use and adoption of our product solutions and reduce overall demand.

Furthermore, concerns regarding data privacy may cause our customers’ customers to resist providing the data and information necessary to allow our customers to use our product solutions effectively. Even the perception that the privacy and/or security of personal information is not satisfactorily protected or does not meet applicable legal, regulatory and other requirements could inhibit sales of our products or services, and could limit adoption of our solution.

Failure to comply with anticorruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.

We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act of 2010 and other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anticorruption laws that prohibit companies and their employees and third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person or securing any advantage. In addition, we use various third parties to sell our solution and conduct our business abroad. We, our channel partners, and our other third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. We continue to implement our FCPA/anti-corruption compliance program and cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.

Any violation of the FCPA, other applicable anticorruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could have a material and

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adverse effect on our reputation, business, operating results and financial condition. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and changes in our effective tax rate or changes in tax laws or their application to the operation of our business could adversely impact our operating results and our business.

We conduct operations in multiple jurisdictions, and we are subject to certain taxes, including income, sales and use, value added and other taxes, in the United States and other jurisdictions in which we do business. A change in the tax laws in the jurisdictions in which we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, possibly with retroactive effect, could result in a material increase in the amount of taxes we incur. Recent changes to U.S. tax laws that limit the ability of taxpayers to claim and utilize foreign tax credits and require the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could affect the tax treatment of our foreign earnings, as well as cash and cash equivalent balances we currently maintain outside of the United States. In addition, the Organization for Economic Co-operation and Development has initiated a base erosion and profit shifting project which seeks to establish certain international standards for taxing the worldwide income of multinational companies. As a result of these developments, the tax laws of certain countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our cash flows, operating results and financial position. Finally, the amount of taxes we pay in different jurisdictions depends on our ability to operate our business in a manner consistent with our corporate structure and transfer pricing arrangements, as well as any future intercompany transactions we may undertake.

In the United States, a number of proposals for broad reform of the corporate tax system are under evaluation by various legislative and administrative bodies. It is not possible to accurately determine the overall impact of such proposals on our effective tax rate or balance sheet at this time. Proposed changes in corporate tax rates, the taxation of foreign earnings and the deductibility of expenses could have a material impact on the recoverability of our deferred tax assets, could result in significant one-time charges in the period in which tax reform is enacted, or could result in increases to our future United States tax expense. Furthermore, proposed changes to the taxation of undistributed foreign earnings could change our future intentions regarding reinvestment of such earnings.

We are subject to periodic audits or other reviews by tax authorities in the jurisdictions in which we do business, and these tax authorities may disagree with our interpretations of applicable tax law or our determinations as to the income and expenses attributable to specific jurisdictions or may challenge our methodologies for pricing intercompany transactions. In addition, authorities in jurisdictions in which we do not file tax returns could assert that we are subject to tax in such jurisdiction. In either case, such authorities could impose additional taxes, interest and penalties, claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries. Any such audit, examination or review requires management’s time, diverts internal resources and, in the event of an unfavorable outcome, may result in additional tax liabilities or other adjustments to our historical results.

We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales. We have previously filed voluntary disclosure agreements with several U.S. states related to past due sales and use taxes. While we believe that we have properly accrued for sales and use taxes in accordance with U.S. GAAP, taxing authorities may assert that we owe additional taxes, interest or penalties, which may impact our historical and future results.

Because we conduct operations in multiple jurisdictions, our effective tax rate is influenced by the amounts of income and expense attributed to each jurisdiction. If such amounts were to change so as to increase the amounts of our net income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could be adversely affected. In addition, we may determine that it is advisable from time to time to repatriate earnings from subsidiaries under circumstances that could give rise to imposition of potentially significant tax liabilities, including withholding taxes by the jurisdictions

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in which such amounts were earned, without our receiving the benefit of any offsetting tax credits, which could also adversely impact our effective tax rate and operating results.

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

As of January 31, 2018, we had $348.2 million of federal and $153.8 million of state net operating loss carryforwards available to reduce future taxable income. These net operating loss carryforwards begin to expire in 2028 for U.S. federal and state income tax purposes. U.S. federal and state income tax laws limit the amount of these carryforwards we can utilize in any given year to offset our taxable income following an “ownership change” (generally defined as a greater than 50% cumulative shift of the stock ownership of certain stockholders over a rolling three-year period), including ownership changes due to the issuance of additional shares of our common stock, or securities convertible into our common stock. Some of our existing carryforwards may be subject to limitations arising from previous ownership changes, and we may experience subsequent ownership changes. Accordingly, there is a risk that our ability to use our existing carryforwards in the future could be limited and that existing carryforwards would be unavailable to offset future income tax liabilities. Furthermore, our ability to utilize the net operating loss carryforwards of companies that we may acquire in the future may be subject to limitations. Limitations imposed on our ability to utilize our net operating loss carryforwards could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause some of our net operating loss carryforwards to expire unused, in each case reducing or eliminating the benefit of such net operating loss carryforwards. In addition, we may not be able to generate sufficient taxable income to utilize our net operating loss carryforwards before they expire and our existing net operating loss carryforwards could be limited by legislative or regulatory changes, such as suspensions on the use of net operating carryforwards. If any of these events occur, we may not derive some or all of the expected benefits from our net operating loss carryforwards, which could potentially result in increased future tax liability to us and could adversely affect our business, operating results and financial condition.

Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations or financial conditions.

Legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December 2017, and contains many significant changes to the U.S. federal income tax laws, the consequences of which have not yet been determined. Changes in corporate tax rates, the realizability of the net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Act or other tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense. The foregoing items could have a material adverse effect on our business, cash flow, results of operations or financial conditions.  In accordance with Staff Accounting Bulletin 118, a company generally has up to one year from the Tax Act enactment date to complete the accounting under ASC 740 to reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.  The Deemed Repatriation Transition Tax, or the Transition Tax, is a tax on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries at reduced tax rates.  We have made a reasonable estimate of the Transition Tax and expect to utilize U.S. net operating losses to reduce the tax. However, we have not collected all of the necessary data to complete our analysis of the effect of the Tax Act on our underlying deferred taxes and as such, the amounts recorded in our financial statements as of January 31, 2018, are provisional.

Our reported financial results may be adversely affected by changes in accounting principles applicable to us.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission, or the SEC, and other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.

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Regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our platforms.

We are subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that will require us to investigate, disclose and report whether the hardware components that house our solution contain conflict minerals. The implementation of these requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our solution. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used in or necessary to the production of our hardware components and, if applicable, potential changes to components, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our hardware components contain minerals not determined to be conflict-free or if we are unable to alter our solution, processes or sources of supply to avoid use of such materials.

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 EU Restrictions 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 the 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 the hardware components that house our solution 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 reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive or with any similar laws adopted in other jurisdictions may cause us to incur additional costs or have additional regulatory requirements to meet in the future in order to comply.

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 operating results 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 an adverse effect on our business, operating results and financial condition.

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 and operating results. Our corporate headquarters and the location where our products are manufactured are located in 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

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other geo-political unrest could cause disruptions in our business or the businesses of our supply chain, manufacturer, logistics providers, partners or customers, or the economy as a whole. Any disruption in the business of our supply chain, manufacturer, logistics providers, partners or 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 customer orders, or delays in the manufacture, deployment or shipment of our products, our business, operating results and financial condition would be adversely affected.

Risks Related to Our Common Stock

Our share price may be volatile, and may decline and could subject us to litigation.

The trading prices of the securities of technology companies, including enterprise cloud companies, have been highly volatile. The market price of our common stock has fluctuated and may continue to fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

actual or anticipated fluctuations in our revenue and other operating results;

 

announcements by us or our competitors of significant technical innovations, acquisitions, partnerships, joint ventures or capital commitments;

 

the financial projections we may provide to the public or any decision to cease providing financial projections to the public, any changes in these projections or our failure to meet these projections;

 

failure of securities analysts to maintain coverage of us, changes in ratings and financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

changes in operating performance and stock market valuations of other technology or comparable companies, or those in our industry in particular;

 

price and volume fluctuations in the trading of our common stock and in the overall stock market, including as a result of trends in the economy as a whole;

 

changes in our executive management team or departures of key employees;

 

our failure to comply with the financial covenants and other terms contained in our credit agreements;

 

developments or disputes concerning our intellectual property or other proprietary rights;

 

changes in accounting standards, policies, guidelines, interpretations or principles;

 

new laws or regulations or new interpretations of existing laws or regulations applicable to our business or our industry;

 

lawsuits threatened or filed against us;

 

future sales of shares of our common stock by us or our stockholders;

 

rumors and market speculation involving us or other companies in our industry;

 

actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally; and

 

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

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 instituted securities class action litigation following periods of market volatility and class action lawsuits have been filed against us. See “Item 3. Legal Proceedings” below.  Such litigation could subject us to substantial costs and divert resources and the attention of management from our business and adversely affect our business, operating results and financial condition.

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Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly.

The market price for our common stock could decline as a result of the sale of substantial amounts of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. As of January 31, 2018, we had approximately 31.3 million shares of common stock outstanding.

In addition, we have granted stock option, RSU and other equity-based awards to our service providers from time to time, and anticipate continuing to do so in the future. In order to attract and retain qualified personnel, we may be required to increase the aggregate size of these grants, or modify the standard vesting conditions we have utilized in the past with these grants, as compared with our historical equity award practices. Any of these practices may have the effect of increasing the number of shares of our common stock that are available for sale and negatively impact the market price for our common stock.

Holders of an aggregate of 19,790,378 shares of our common stock as of January 31, 2018, have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our other stockholders.

In addition, the shares of common stock subject to outstanding options and RSUs under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations.

If a substantial number of shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

If securities analysts do not publish research or reports about our business, or if they downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. If no or few securities or industry analysts cover our company, the trading price for our common stock would be negatively impacted. If one or more of the analysts who covers us downgrades our common stock or publishes incorrect or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price or trading volume to decline.

The concentration of ownership among our existing directors, executive officers and principal stockholders provides them, collectively, with substantial control over us, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our executive officers, directors, current 5% or greater stockholders and affiliated entities together beneficially own a significant portion of our outstanding common stock. As a result, these stockholders, acting together, have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies might make our common stock less attractive to investors, which would in turn decrease the value of our stock.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation

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requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We will cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We may choose to take advantage of some but not all of these reduced reporting burdens. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than the information you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

The requirements of being a public company subject us to increased costs as compared to prior periods and may strain our resources and divert management’s attention.

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, and the rules and regulations of the NASDAQ Stock Market. The requirements of these rules and regulations have resulted in an increase in our legal, accounting and financial compliance costs as compared to prior periods, make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to manage our growth and to implement internal controls. We have been and will be required to implement and maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of this implementation and maintenance, management’s attention may be diverted from other business concerns, which could adversely affect our business. Furthermore, we rely on third-party software and system providers for ensuring our reporting obligations and effective internal controls, and to the extent these third parties fail to provide adequate service including as a result of any inability to scale to handle our growth and the imposition of these increased reporting and internal controls and procedures, we could incur material costs for upgrading or switching systems and our business could be affected.

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In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

In addition, we expect these laws, rules and regulations to make it more difficult and more expensive for us to maintain director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified members of the Board, particularly to serve on our audit committee, and qualified executive officers.

As a result of disclosure of information in filings required of a public company, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the time and resources of our management and adversely affect our business, operating results and financial condition.

As a result of becoming a public company, we are obligated to further develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting commencing with our annual report covering the fiscal year ending January 31, 2019. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Prior to our initial public offering, we had never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. In addition, as a result of our testing of internal controls, we may identify control deficiencies which could result in a material weakness or significant deficiency. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the JOBS Act. If we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources.

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. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and

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take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, 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 we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

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

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. In addition, our loan and security agreements with SVB and TriplePoint prohibit us from paying dividends, and future financing or credit agreements that we enter into may contain similar restrictions. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. Investors seeking cash dividends should not purchase our common stock.

Anti-takeover provisions in our certificate of incorporation and bylaws as well as provisions of Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, may depress the trading price of our common stock.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

 

create a classified board of directors whose members serve staggered three-year terms;

 

authorize “blank check” preferred stock, which could be issued by the Board without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

 

specify that special meetings of our stockholders can be called only by the Board, the chairperson of the board, the chief executive officer or the president and that limit the ability of our stockholders to act by written consent;

 

establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the Board;

 

limit the liability of, and provide indemnification to, our directors;

 

provide that our directors may be removed only for cause;

 

provide that vacancies on the Board may be filled only by a majority of directors then in office, even though less than a quorum, or by a sole remaining director;

 

do not provide for cumulative voting for members of the Board;

 

authorize the Board to modify, alter or repeal our amended and restated bylaws; and

 

require supermajority votes of the holders of our common stock to amend specified provisions of our charter documents.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

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In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for:

 

any derivative action or proceeding brought on our behalf;

 

any action asserting a breach of fiduciary duty;

 

any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws;

 

any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our amended and restated bylaws; and

 

any action asserting a claim against us that is governed by the internal-affairs doctrine.

Our amended and restated bylaws further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find either exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Our corporate headquarters are located in Mountain View, California, where we lease a total of, as of January 31, 2018, approximately 127,000 square feet, of which approximately 29,000 square feet are currently sublet to a third-party. The lease agreement for our Mountain View, California headquarters expires in 2022. We also lease offices in other locations in the United States and internationally in the United Kingdom, Germany, Ireland, Japan, and Singapore. We lease all of our facilities and do not own any real property. We believe that our facilities are sufficient for our current needs.

In February 2018, we terminated a lease agreement for approximately 31,000 square feet of office space located in Mountain View, California.

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Item 3. Legal Proceedings.

Following our initial public offering in July 2017, four class action lawsuits were filed against us. In September 2017, a class action lawsuit was filed against us and is now pending in the United States District Court for the Northern District of California under the caption Tuller v. Tintri, Inc. et al., No. 4:17-CV-05714-YGR (filed Sept. 18, 2017). A consolidated complaint has been filed in the Tuller action, which, in addition to the Company, names as defendants our then-Chief Executive Officer, our then-Chief Financial Officer, and our Chief Technology Officer, and alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.  We filed a motion to dismiss on March 30, 2018.  Three substantially similar lawsuits were subsequently filed in California state court in the County of San Mateo against the same parties, as well as the then-serving members of the Board, the underwriters of our initial public offering, and entities associated with several institutional investors that invested in the Company prior to the initial public offering. These suits also allege violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and are captioned Clayton v. Tintri, Inc. et al., No. 17CIV04312 (filed Sept. 20, 2017), Nurlybayev v. Tintri, Inc. et al., No. 17CIV04321 (filed Sept. 21, 2017), and Golosiy v. Tintri, Inc. et al., No. 17CIV04618 (filed Oct. 6, 2017).  The actions have yet to be consolidated and a consolidated complaint has yet to be filed. All four class action lawsuits are in their initial stages and are based on similar allegations that we made false and misleading statements in the registration statement and prospectus filed with the SEC in connection with our initial public offering. Each lawsuit is purportedly brought on behalf of a putative class of all persons who purchased shares of common stock pursuant or traceable to our initial public offering, and seeks, among other things, compensatory damages and attorney’s fees and costs on behalf of the putative class.  

We are generally required, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these types of lawsuits. We also have certain contractual obligations to the underwriters regarding such lawsuits. While a certain amount of insurance coverage may be available for expenses or losses associated with these lawsuits, this coverage may not be sufficient. Based on information currently available, we are unable to reasonably estimate a possible loss or range of possible loss, if any, with regards to these lawsuits; therefore, no litigation reserve has been recorded in the accompanying financial statements. Although we plan to defend against these lawsuits vigorously, there can be no assurances that a favorable final outcome will be obtained. These lawsuits or future litigation may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations and cash flows.

In addition, we may, from time to time, become party to various litigation matters that arise in the ordinary course of business.

Item 4. Mine Safety Disclosures.

Not applicable.

 

46


 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information for Common Stock

Our common stock began trading publicly on the NASDAQ Global Market under the ticker symbol “TNTR” on June 30, 2017. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as reported on the NASDAQ Global Market since our initial public offering, or IPO.

 

 

 

High

 

 

Low

 

Fiscal Year Ended January 31, 2018

 

 

 

 

 

 

 

 

Second Quarter (from June 30, 2017)

 

$

7.27

 

 

$

6.72

 

Third Quarter

 

$

6.79

 

 

$

2.85

 

Fourth Quarter

 

$

6.98

 

 

$

3.68

 

 

Holders of Record

As of January 31, 2018, there were 101 holders of record of our common stock. This figure does not include a substantially greater number of “street name” holders or beneficial holders of our common stock whose shares are held of record by banks, brokers and other financial institutions.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Any future determination to declare dividends will be made at the discretion of the Board, subject to applicable laws, and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that the Board may deem relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

The information required by this item is incorporated herein by reference to our definitive proxy statement for our 2018 annual meeting of stockholders, which will be filed not later than 120 days after the end of our fiscal year ended January 31, 2018.

47


 

Stock Performance Graph

The following graph shows a comparison from June 30, 2017, (the date our common stock commenced trading on the NASDAQ Global Select Market) through January 31, 2018, of the cumulative total return for our common stock, the NASDAQ Composite Index, and the NASDAQ Computer Index. The graph assumes that $100 was invested on June 30, 2017, in the common stock of Tintri, Inc., the NASDAQ Composite Index and NASDAQ Computer Index, and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

 

Recent Sales of Unregistered Securities and Use of Proceeds

 

(a)

Unregistered Sales of Equity Securities

None

 

(b)

Use of Proceeds

Our IPO of common stock was effected through Registration Statements on Form S-1 (File No. 333-218429), which was declared or became effective on June 29, 2017. There has been no material change in the use of proceeds from our IPO as described in our final prospectus filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b) of the Securities Act of 1933, as amended, or the Securities Act, and other periodic reports previously filed with the SEC.

Issuer Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

 

48


 

Item 6. Selected Financial Data.

The following selected consolidated financial and other data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial and other data in this section is not intended to replace our consolidated financial statements and the related notes. We derived the selected consolidated statements of operations data for fiscal 2016, 2017, and 2018 and the consolidated balance sheet data as of January 31, 2017 and 2018, from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of operations data for fiscal 2015 and the consolidated balance sheet data as of January 31, 2015 and 2016, are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

 

 

 

Year Ended January 31,

 

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

 

(in thousands)

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

41,420

 

 

$

68,652

 

 

$

97,330

 

 

$

90,793

 

Support and maintenance

 

 

8,379

 

 

 

17,360

 

 

 

27,775

 

 

 

35,111

 

Total revenue

 

 

49,799

 

 

 

86,012

 

 

 

125,105

 

 

 

125,904

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product(1)

 

 

17,144

 

 

 

25,138

 

 

 

34,738

 

 

 

38,959

 

Support and maintenance(1)

 

 

4,565

 

 

 

7,110

 

 

 

9,437

 

 

 

13,907

 

Total cost of revenue

 

 

21,709

 

 

 

32,248

 

 

 

44,175

 

 

 

52,866

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

24,276

 

 

 

43,514

 

 

 

62,592

 

 

 

51,834

 

Support and maintenance

 

 

3,814

 

 

 

10,250

 

 

 

18,338

 

 

 

21,204

 

Total gross profit

 

 

28,090

 

 

 

53,764

 

 

 

80,930

 

 

 

73,038

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

28,155

 

 

 

43,179

 

 

 

53,445

 

 

 

74,120

 

Sales and marketing(1)

 

 

55,060

 

 

 

87,993

 

 

 

108,903

 

 

 

112,685

 

General and administrative(1)

 

 

13,941

 

 

 

18,773

 

 

 

19,364

 

 

 

34,800

 

Restructuring charges

 

 

 

 

 

 

 

 

 

 

 

899

 

Total operating expenses

 

 

97,156

 

 

 

149,945

 

 

 

181,712

 

 

 

222,504

 

Loss from operations

 

 

(69,066

)

 

 

(96,181

)

 

 

(100,782

)

 

 

(149,466

)

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(279

)

 

 

(4,407

)

 

 

(5,231

)

 

 

(8,448

)

Other income, net

 

 

(119

)

 

 

254

 

 

 

677

 

 

 

733

 

Total other expense, net

 

 

(398

)

 

 

(4,153

)

 

 

(4,554

)

 

 

(7,715

)

Loss before provision for income taxes

 

 

(69,464

)

 

 

(100,334

)

 

 

(105,336

)

 

 

(157,181

)

Provision for income taxes

 

 

222

 

 

 

634

 

 

 

465

 

 

 

478

 

Net loss

 

$

(69,686

)

 

$

(100,968

)

 

$

(105,801

)

 

$

(157,659

)

Deemed dividend to Series E and E-1

   Convertible Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

(6,588

)

Impact of adjustment to Series E, E-1 and F

   Convertible Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

26,336

 

Net loss attributable to common

   stockholders

 

$

(69,686

)

 

$

(100,968

)

 

$

(105,801

)

 

$

(137,911

)

Net loss per share attributable to common

   stockholders—basic and diluted

 

$

(25.34

)

 

$

(32.15

)

 

$

(30.73

)

 

$

(6.98

)

Weighted-average shares used in computing net

   loss per share attributable to common

   stockholders—basic and diluted

 

 

2,750,413

 

 

 

3,140,947

 

 

 

3,442,549

 

 

 

19,763,684

 

 

(1)

Includes stock-based compensation expense as follows:

49


 

 

 

 

Year Ended January 31,

 

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

 

(in thousands)

 

Cost of product revenue

 

$

82

 

 

$

181

 

 

$

264

 

 

$

1,612

 

Cost of support and maintenance revenue

 

 

92

 

 

 

176

 

 

 

323

 

 

 

1,579

 

Research and development

 

 

1,762

 

 

 

2,906

 

 

 

5,227

 

 

 

21,608

 

Sales and marketing

 

 

1,658

 

 

 

3,073

 

 

 

4,115

 

 

 

10,432

 

General and administrative

 

 

1,600

 

 

 

3,419

 

 

 

3,905

 

 

 

16,587

 

Total stock-based compensation expense(2)

 

$

5,194

 

 

$

9,755

 

 

$

13,834

 

 

$

51,818

 

 

(2)

In September 2017, the Company’s board of directors approved a restructuring plan, which resulted in a $0.7 million non-cash adjustment to restructuring charges for previously recognized stock-based compensation expense related to awards that will not vest as a result of the restructuring plan.

 

 

 

Year Ended January 31,

 

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

 

(in thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

7,639

 

 

 

50,716

 

 

 

48,048

 

 

 

32,281

 

Working capital

 

 

9,128

 

 

 

89,683

 

 

 

27,110

 

 

 

(74,396

)

Total assets

 

 

65,924

 

 

 

158,157

 

 

 

104,902

 

 

 

76,247

 

Deferred revenue, current and non-current

 

 

23,022

 

 

 

41,864

 

 

 

56,445

 

 

 

61,661

 

Long-term debt, current and non-current

 

 

6,000

 

 

 

41,906

 

 

 

48,914

 

 

 

68,638

 

Convertible preferred stock

 

 

134,371

 

 

 

257,141

 

 

 

257,141

 

 

 

 

Total stockholders’ deficit

 

 

(121,400

)

 

 

(209,557

)

 

 

(298,981

)

 

 

(91,710

)

 

50


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31. This discussion contains forward-looking statements based upon current expectations 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”, set forth in Part I, Item 1A of this Annual Report on Form 10-K. See also the section titled “Special Note Regarding Forward-Looking Statements” in this Form 10-K.

Overview

Our mission is to provide large organizations and cloud service providers with an enterprise cloud platform that offers public cloud capabilities inside their own data centers and that can also connect to public cloud services.

Enterprise cloud technology provides customers with the flexibility to easily scale workloads up and down, automation and resource pooling.  Our customers use our enterprise cloud platform for a variety of workloads and use cases, including virtualized desktop infrastructure, or VDI, development and test environments, or DevOps, which are sometimes referred to as Continuous Integration Continuous Delivery, or CI/CD, and other virtualized workloads, including virtualized servers, databases, and mixed workloads. Organizations use our platform to build agile development environments, run mission-critical enterprise applications and connect with public cloud services. We enable users to guarantee the performance of their organization’s applications, automate common IT tasks to reduce operating expenses, troubleshoot across compute, storage and network, predict their organization’s needs to scale, and provide needed elasticity on demand. Our platform enables organizations to easily scale to support tens of thousands of virtual machines on a single system across multiple hypervisors and containers and to connect to public cloud environments.

Our solution helps our customers optimize infrastructure by significantly simplifying deployment and operations, which can lead to substantial reductions in capital expenditures and operating expenses. We sell many of our software products separately from our core enterprise cloud platform solution, enabling our customers to tailor their infrastructure to their specific needs.

Our product revenue, which is generally recognized upon shipment, is derived from sales of our all-flash and hybrid storage systems and stand-alone software licenses for use in connection with our systems. While purchasing support is not mandatory, substantially all products shipped have been purchased together with a support contract, which includes software patches, bug fixes, updates, upgrades, hardware repair and replacement parts, and technical support. Support and maintenance revenue is recognized over the term of the support contracts. To date, substantially all of our customers have either renewed their support and maintenance subscriptions or have purchased new support and maintenance subscriptions together with replacement products. The average length of our support and maintenance contracts is approximately two years.

We sell our products predominantly through the joint sales efforts of our global sales force and channel partners. Our channel partners are further supported by our distributors, who work together on a non-exclusive basis to market our products, identify and close sales opportunities and provide pre-sales and post-sales services to our customers. Our joint sales approach with our channel partners provides us with expanded and efficient reach. Our channel partners typically place orders with us upon receiving an order from a customer and do not stock inventory. Our typical fulfillment time on an order is approximately three days, and consequently we do not have a meaningful backlog at any point in time.

We focus on acquiring large organizations and CSPs as customers and maximizing the lifetime value of a customer through a land-and-expand strategy. Our solution is designed to integrate easily into a customer’s existing infrastructure, which facilitates easier and faster adoption. Once our products have been deployed in a given environment, we are generally able to expand our footprint quickly through sales of additional systems and stand-alone software products.

51


 

Revenue increased from $86.0 million in fiscal 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. Revenue increased $14.8 million in the first half of fiscal 2018 compared to the first half of fiscal 2017, which was offset by a $14.0 million decrease in revenue in the second half of fiscal 2018 compared to the second half of fiscal 2017. Revenue remained substantially unchanged in fiscal 2018 in part due to delayed and reduced purchases of our products as a result of customer concerns about our financial condition, as well as a shift in our product mix toward lower-priced products, offset by increased support and maintenance revenue from our growing installed customer base. Our 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 changes of 34% and 27%, respectively.

In July 2017, we completed our IPO of common stock, in which we sold 8,572,000 shares of common stock. The shares were sold at the IPO price of $7.00 per share for net proceeds of $55.8 million, after deducting underwriting discounts and commissions of $4.2 million. Following the completion of the IPO, our IPO underwriters exercised an over-allotment option to purchase an additional 1,000,000 shares of common stock from us in August 2017. The additional shares were sold at the IPO price of $7.00 per share for net proceeds of $6.5 million, after deducting underwriting discounts and commissions of $0.5 million.

In February and March 2018, we issued an aggregate of $25.0 million of convertible promissory notes under the Note Purchase Agreement, which have an interest rate of 8% per annum and will mature 18 months from the date of issuance.

As of January 31, 2018, we were not in compliance with certain covenants contained in our credit facility with SVB. In March 2018, we entered into a Waiver and Tenth Amendment to Loan and Security Agreement, or Tenth Amendment, with SVB, pursuant to which the parties agreed to certain amendments and modifications to our line of credit. The Tenth Amendment provides that the interest rate on amounts outstanding under the Loan Agreement shall be equal to the prime rate plus 1.85% per annum through March 31, 2018, in exchange for the waiver by SVB with respect to certain prior events of default, in each case subject to the terms and conditions set forth in the Tenth Amendment.

In April 2018, we entered into an amended and restated loan agreement with SVB to, among other things, extend the maturity date of our credit facility. Under the amended agreement, we may borrow, through May 2, 2019, up to $12.5 million dependent upon our monthly accounts receivables balances, subject to the terms and conditions of the agreement. The $5.0 million non-formula facility previously included in our SVB revolving line of credit terminated in May 2018. Our revolving line of credit with SVB contains certain financial covenants, including a covenant that we achieve total revenues of at least $20.5 million, $23.4 million, $26.3 million and $29.4 million for our fiscal quarters ending April 30, 2018, July 31, 2018, October 31, 2018 and January 31, 2019, respectively, and a covenant that we maintain a minimum level of cash and availability under the SVB line of credit of at least $15.0 million through July 31, 2018 and at least $10.0 million thereafter.

In April 2018, we also entered into an amendment with TriplePoint to extend the maturity date of our credit facility to August 2019.  Pursuant to the amended terms, of the $50.0 million outstanding under this facility, $15.0 million will bear interest at 10.5% per year and $35.0 million will bear interest at 12.75% per year. The $50.0 million principal amount will become due in August 2019; provided, however, that if we, on or before August 2019, prepay a minimum of $25.0 million of the total amount outstanding under this facility, the maturity date for the then remaining principal balance will be extended to February 2021, subject to us making equal monthly amortizing payments of principal and interest through the extended maturity date.  Certain end-of-term payments will become payable upon the maturity of this indebtedness and certain other fees will become payable in connection with this indebtedness upon the occurrence of a change of control of the company.

Based on our current forecasts, it is probable that we will be unable to comply with our financial covenants through January 31, 2019, and will likely fail to comply with our minimum liquidity covenants as early as May 31, 2018. Although we are seeking to raise additional debt or equity financing in order to remain in compliance with the financial covenants under our credit facilities, we may be unable to do so. As a result, we are currently undertaking a review of the potential business alternatives in addition to seeking additional capital, which many include restructuring or refinancing our indebtedness, undertaking additional restructuring plans, reducing or delaying capital expenditures, filing for bankruptcy protection, winding down our business, or selling our business or certain of our assets or operations.

52


 

In September 2017, we announced a restructuring and reduction in force plan of a little more than 10% of our global workforce and was substantially completed in the third quarter of fiscal 2018, which ended on October 31, 2017. In February 2018, we terminated our lease of certain office space located at 205 Ravendale Drive, Mountain View, California. In March 2018, we announced a restructuring and reduction in force plan of approximately 20% of our global workforce. We expect to substantially complete the restructuring in our first quarter of fiscal 2019, which ended on April 30, 2018. These restructuring plans are part of an overall plan to seek to drive efficiencies in our sales organization and other business units. We believe that further such reductions are likely to be required in the near term dependent on developments in our financial condition.

In December 2017, we announced that we were in the process of considering strategic options to deliver value to our stockholders, and had retained investment bank advisors to assist us in this process.

In March 2018, we announced that the Board had named Tom Barton as Chief Executive Officer and as a member of the Board, and his appointment became effective on April 2, 2018.  Ken Klein transitioned from his role as our Chief Executive Officer and as a member of the Board in connection with Mr. Barton’s joining the Company. On May 15, 2018, we also appointed Tom Barton as interim Chief Financial Officer.

Key Financial and Operational Metrics

 

 

 

Year Ended January 31,

 

 

 

2016

 

 

2017

 

 

2018

 

 

 

(in thousands, except percentages)

 

Total revenue

 

$

86,012

 

 

$

125,105

 

 

$

125,904

 

Period-over-period percentage increase

 

 

73

%

 

 

45

%

 

 

1

%

Gross margin

 

 

63

%

 

 

65

%

 

 

58

%

Deferred revenue, current and non-current

 

$

41,864

 

 

$

56,445

 

 

$

61,661

 

Net cash used in operating activities

 

$

(62,109

)

 

$

(70,366

)

 

$

(91,860

)

Net cash provided by (used in) investing activities

 

$

(56,409

)

 

$

58,334

 

 

$

(6,415

)

Net cash provided by (used in) financing activities

 

$

161,597

 

 

$

9,425

 

 

$

82,550

 

Free cash flow as a percentage of total revenue

 

 

(85

)%

 

 

(60

)%

 

 

(78

)%

Total customers

 

 

928

 

 

 

1,273

 

 

 

1,543

 

The above key financial and operational metrics:

 

help us evaluate our growth and operational efficiencies, measure our performance and identify trends in our sales activity;

 

provide a useful measure for period-to-period comparisons of our core business;