10-Q

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

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

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

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 ☒

There were 101,146,144 shares of Common Stock, par value $0.0001 per share, outstanding as of June 14, 2022.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

(1) The shares of the Company’s Class A Common Stock, prior to the Merger, have been recast as shares of Common Stock reflecting the exchange ratio established in the Merger of approximately 0.8141070 as further discussed in Footnote 1.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Organization and Summary of Changes in Significant Accounting Policies

IronNet, Inc., formerly known as LGL Systems Acquisition Corporation (“Legacy LGL”), was incorporated in the state of Delaware on April 30, 2019 for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities.

On March 15, 2021, Legacy LGL entered into an Agreement and Plan of Reorganization and Merger (“Merger Agreement”), as amended on August 6, 2021, by and among Legacy LGL, LGL Systems Merger Sub Inc. (the “Merger Sub”) and IronNet Cybersecurity, Inc. (“Legacy IronNet”). On August 26, 2021, the Merger Agreement was consummated and the Merger was completed (the “Merger”). In connection with the Merger, Legacy LGL changed its name to IronNet, Inc., and the New York Stock Exchange (“NYSE”) ticker symbols for its Class A common stock and warrants were changed to “IRNT” and “IRNT.WS” respectively.

The Merger was accounted for as a reverse recapitalization. Under this method of accounting, Legacy LGL has been treated as the acquired company for financial reporting purposes. This determination was primarily based on Legacy IronNet's existing stockholders being the majority stockholders and holding majority voting power in the combined company, Legacy IronNet's senior management comprising the majority of the senior management of the combined company, and Legacy IronNet's ongoing operations comprising the ongoing operations of the combined company. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Legacy IronNet issuing shares for the net assets of Legacy LGL, accompanied by a recapitalization. The net assets of Legacy LGL were recognized at fair value (which was consistent with carrying value), with no goodwill or other intangible assets recorded. As a result of Legacy IronNet being the accounting acquirer in the Merger, the financial reports filed with the SEC by the Company subsequent to the Merger are prepared as if Legacy IronNet is the accounting predecessor of the Company. The historical operations of Legacy IronNet are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Legacy IronNet prior to the Merger; (ii) the consolidated results of the Company, following the Merger on August 26, 2021; (iii) the assets and liabilities of Legacy IronNet at their historical cost; and (iv) the Company’s equity structure for all periods presented. The recapitalization of the number of shares of common stock is reflected retroactively to the earliest period presented based on the exchange ratio established in the Merger and will be utilized for calculating loss per share in all prior periods presented. The exchange ratio in the Merger was 0.8141070 of a share of Company common stock per fully-diluted share of Legacy IronNet common stock.

Throughout the notes to the consolidated financial statements, unless otherwise noted, "we," "us," "our," "IronNet," the "Company," and similar terms refer to Legacy IronNet and its subsidiaries prior to the consummation of the Merger, and IronNet, Inc. and our subsidiaries after the Merger.

Basis of Presentation and Principles of Consolidation

The interim condensed consolidated financial statements and accompanying notes are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting. The Company’s condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements of IronNet, Inc. and accompanying notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 2022. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The Company’s fiscal year ends on January 31. References to fiscal 2023, for example, refer to the fiscal year ending January 31, 2023. The results of operations for the three months ended April 30, 2022 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending January 31, 2023 or any future period.

The accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments (except as otherwise noted), necessary for a fair statement of the Company’s financial position as of April 30, 2022, its results of operations for the three months ended April 30, 2022 and 2021, changes in stockholders’ equity for the three months ended April 30, 2022 and 2021, and cash flows for the three months ended April 30, 2022 and 2021.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions include, but are not limited to, the period of benefit for deferred commissions, the useful life of property and equipment, stock-based compensation expense, fair value of warrants, and income taxes. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, actual amounts may differ from those included in the accompanying condensed consolidated financial statements.

Liquidity

As of April 30, 2022, the Company had cash and cash equivalents of $31,390 and collectable receivables of $14,644 and no debt. The Company has also secured an equity line with Tumim Stone Capital, LLC, under which the Company may sell shares of its common stock for proceeds of up to $175,000, subject to various conditions and limitations set forth in the purchase agreement with Tumim, which amounts may be available to the Company to fund future operations in the absence of any material adverse conditions. The Company, based on its cash on hand and its financial forecast, as well as plans which could be executed to moderate internal and external expenditures as needed, has concluded that it has sufficient liquidity to fund its planned operations for a period of at least 12 months from the issuance of these financial statements. The Company’s future capital requirements will depend on many factors, including, but not limited to the rate of our growth, its ability to attract and retain customers and their willingness and ability to pay for the Company's products and services, and the timing and extent of spending to support its multiple and ongoing efforts to market and continue to develop its products. Further, the Company may enter into future arrangements to acquire or invest in businesses, products, services, strategic partnerships, and technologies. As such, the Company may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, the Company may not be able to raise it on terms acceptable to it or at all. If additional funds are not available to the Company on acceptable terms, or at all, our business, financial condition, and results of operations could be adversely affected. The financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

Recent Accounting Pronouncements not Yet Adopted

In June 2016, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). This standard requires a new method for recognizing credit losses that is referred to as the current expected credit loss

(“CECL”) method. The CECL method requires the recognition of all losses expected over the life of a financial instrument upon origination or purchase of the instrument, unless the Company elects to recognize such instruments at fair value with changes in profit and loss (the fair value option). This standard is effective for the Company for the earlier of the fiscal years beginning after December 15, 2022 or the time at which the Company no longer qualifies as an emerging growth company ("EGC") under SEC rules. Management is currently evaluating the potential impact of this guidance on its financial statements.

New Accounting Pronouncement Adopted in Fiscal 2023

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“Topic 842”), which outlines a comprehensive lease accounting model that supersedes the previous lease guidance. The guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provides the option of an additional transition method that allows entities to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the standard on February 1, 2022 using the modified retrospective basis. Using the modified retrospective approach, the Company determined an incremental borrowing rate at the date of adoption based on the total lease term and total minimum rental payments.

The modified retrospective approach provides a method for recording existing leases at adoption with a cumulative adjustment to retained earnings. The Company elected the package of practical expedients which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any expired or existing leases as of the effective date. The Company also elected the practical expedient to use hindsight when determining the lease term, and the practical expedient lease considerations to not allocate lease considerations between lease and non-lease components for real estate leases. As such, real estate lease considerations are treated as a single lease-component and accounted for accordingly. The Company excludes leases with an initial term of 12 months or less from the application of Topic 842.

Adoption of the new standard resulted in the recording of $974 and $2,654 of current operating lease liabilities and long-term operating lease liabilities, respectively, and $2,685 in corresponding right-of-use (“ROU”) lease assets on that date. The difference between the approximate value of the ROU lease assets and lease liabilities is attributable to deferred rent, which is comprised of tenant improvement allowance and rent abatement. The adoption of the new standard also resulted in recording $187 in current finance lease liabilities and $182 in corresponding ROU assets for finance leases as of the adoption date. The difference between the finance lease ROU lease assets and lease liabilities is not significant. The cumulative change in the beginning accumulated deficit was $0.02 million due to the adoption of Topic 842 and there was no material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows. The Company’s comparative periods continue to be presented and disclosed in accordance with legacy guidance in Topic 840. Refer to Note 8 for additional information.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2023 or the time at which the Company no longer qualifies as an EGC, with early adoption permitted. The Company has elected to early adopt this ASU as of February 1, 2022 using the modified retrospective method. The adoption of ASU 2020-06 had an immaterial impact on the Company’s condensed consolidated financial statements and related disclosures for the three-month period ended April 30, 2022.

Segment and Geographic Information

Segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”), in deciding how to allocate resources and assess performance. The CODM reviews financial information presented on a consolidated basis for the purposes of allocating resources and evaluating financial performance. Accordingly, management has determined that the Company operates as one operating segment.

The following table presents revenue by geographic location:


	Three Months Ended April 30,
	2022		2021
United States	$	6,109	$	5,462
International		579		915
Total	$	6,688	$	6,377

Substantially all of the Company’s long-lived assets are located in the United States.

The Company sells a collective defense software solution that provides a near real time collective defense infrastructure that is comprised of two product offerings, IronDefense and IronDome. The software platform is delivered through both on-premises licenses bundled with on-premises hardware and through subscription software.

Our security appliance deliverables include proprietary operating system software and hardware together with regular threat intelligence updates and support, maintenance, and warranty. We combine intelligence dependent hardware and software licenses with the related threat intelligence and support and maintenance as a single performance obligation, as it delivers the essential functionality of our cybersecurity solution. As a result, we recognize revenue for this single performance obligation ratably over the expected term with the customer. Judgment is required for the assessment of material rights relating to renewal options associated with our contracts.

Revenue from subscriptions, which allow customers to use our security software over a contracted period without taking possession of the software, and managed services, where we provide managed detection and response services for customers, is recognized over the contractual term. The cloud- based subscription revenue, where we also provide hosting, recognized for the three months ended April 30, 2022 and 2021 was $5,215 and $4,014, respectively. Overall software, subscription, and support revenue recognized for the three months ended April 30, 2022 and 2021, were $6,443 and $6,137, respectively.

The Company sells professional services, including cyber operations monitoring, security, training and tailored maturity assessments. Revenue derived from these services is recognized as the services are delivered.

For the three months ended April 30, 2022, two customers accounted for 22% or $1,463 of the Company's revenue, and for the three months ended April 30, 2021, three customers accounted for 32%, or $2,045, of the Company’s revenue. Two customers represented 48% and 49% of the total accounts receivable balance as of April 30, 2022 and January 31, 2022, respectively.

Significant customers are those which represent at least 10% of the Company’s total revenue for a period. The following table presents customers that represented 10% or more of the Company’s total revenue in the respective periods:

Deferred costs consists of deferred contract fulfillment costs and deferred commissions. The Company defers contract fulfillment costs that include appliance hardware. The balances in deferred costs are as follows:

The balance of deferred commissions at April 30, 2022 and January 31, 2022 were $2,093 and $1,238, respectively. Deferred commissions are included in the deferred costs on the condensed consolidated balance sheets, of which $728 is current and $1,365 is long-term as of April 30, 2022.

Deferred revenue represents amounts received from and/or billed to customers in excess of revenue recognized. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue depending on whether the revenue recognition criteria have been met.

As of April 30, 2022, the remaining performance obligations totaled $48,527. The Company’s future recognition of revenue will be as follows:


Delaware		83-4599446
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

7900 Tysons One Place, Suite 400
McLean, VA		22102
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	IRNT	The New York Stock Exchange
Warrants to purchase common stock	IRNT.WS	The New York Stock Exchange


		Page
PART I — FINANCIAL INFORMATION		2
Item 1. Financial Statements		2
Unaudited Condensed Consolidated Balance Sheets		2
Unaudited Condensed Consolidated Statements of Operations		3
Unaudited Condensed Consolidated Statements of Comprehensive Loss		4
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity		5
Unaudited Condensed Consolidated Statements of Cash Flows		6
Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		24
PART II — OTHER INFORMATION		24
Item 1. Legal Proceedings		25
Item 1A. Risk Factors		25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults upon Senior Securities		30
Item 4. Mine Safety Disclosures		30
Item 5. Other Information		30
Item 6. Exhibits		31
SIGNATURES		32


	April 30,			January 31,
	2022			2022
Assets
Current assets
Cash and cash equivalents	$	31,390		$	47,673
Accounts receivable		10,213			1,991
Unbilled receivables		1,198			4,637
Related party receivables and loan receivables		3,233			3,233
Accounts, related party and loans receivable		14,644			9,861
Inventory		5,416			4,581
Deferred costs		2,349			2,599
Prepaid warranty		1,138			829
Prepaid expenses		3,130			3,660
Other current assets		2,081			1,458
Total current assets	$	60,148		$	70,661
Deferred costs		3,838			3,243
Property and equipment, net		6,077			5,606
Prepaid warranty		1,294			1,229
Deposits and other assets		2,811			493
Total assets	$	74,168		$	81,232

Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	1,687		$	2,348
Accrued expenses		12,633			4,709
Deferred revenue		19,680			16,049
Deferred rent		-			159
Income tax payable		523			542
Other current liabilities		1,651			689
Total current liabilities		36,174			24,496
Deferred rent		-			769
Deferred revenue		18,851			17,517
Warrants		7			7
Other long-term liabilities		2,505			-
Total liabilities	$	57,537		$	42,789
Stockholders’ equity
Preferred stock, $0.0001 par value; 100,000 shares authorized; none issued or outstanding		-			-
Common stock; $0.0001 par value; 500,000 shares authorized; 100,426 and 88,876 shares issued and outstanding at April 30, 2022 and January 31, 2022, respectively		10			9
Additional paid-in capital		467,296			455,849
Accumulated other comprehensive income		179			271
Accumulated deficit		(450,854	)		(417,686	)
Total stockholders’ equity		16,631			38,443
Total liabilities and stockholders' equity	$	74,168		$	81,232


	Three Months Ended April 30,
	2022			2021
Product, subscription and support revenue	$	6,443		$	6,137
Professional services revenue		245			240
Total revenue		6,688			6,377
Cost of product, subscription and support revenue		2,330			1,754
Cost of professional services revenue		165			184
Total cost of revenue		2,495			1,938
Gross profit		4,193			4,439
Operating expenses
Research and development		10,727			6,891
Sales and marketing		10,667			7,149
General and administrative		15,586			5,720
Total operating expenses		36,980			19,760
Operating loss		(32,787	)		(15,321	)
Other income		10			8
Other expense		(380	)		(129	)
Loss before income taxes		(33,157	)		(15,442	)
Provision for income taxes		(11	)		(58	)
Net loss	$	(33,168	)	$	(15,500	)

Basic and diluted net loss per common share		(0.33	)		(0.23	)
Weighted average shares outstanding, basic and diluted		99,305			67,182


Large accelerated filer	☐	Accelerated filer	☐	Non-accelerated Filer	☒
Smaller reporting company	☒	Emerging growth company	☒


	Common Stock					Additional Paid- In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Subscription Notes Receivable			Total Stockholders' Equity
	Shares			Amount
Balance at January 31, 2022		88,876		$	9	$	455,849		$	(417,686	)	$	271			-		$	38,443
Exercise of stock options and delivery of vested restricted stock units		11,565			1		92			-			-			-			93
Statutory tax withholding related to net-share settlement of restricted stock units		(15	)	-			(91	)		-			-			-			(91	)
Stock-based compensation		-			-		11,446			-			-			-			11,446
Net loss		-			-		-			(33,168	)		-			-			(33,168	)
Foreign currency translation adjustment, net of tax of $0		-			-		-			-			(92	)	-				(92	)
Balance at April 30, 2022		100,426		$	10	$	467,296		$	(450,854	)	$	179		-			$	16,631

Balance at January 31, 2021 as recasted (1)		66,934		$	7	$	180,853		$	(175,039	)	$	40		$	(835	)	$	5,026
Issuance of common stock		414			-		209			-			-			-			209
Interest earned on subscription notes receivable		-			-		4			-			-			(4	)		-
Payments on subscription notes receivable		-			-		-			-			-			62			62
Stock-based compensation		-			-		17			-			-			-			17
Net loss		-			-		-			(15,500	)		-			-			(15,500	)
Foreign currency translation adjustment, net of tax of $0		-			-		-			-			(2	)		-			2
Balance at April 30, 2021		67,348		$	7	$	181,083		$	(190,539	)	$	38		$	(777	)	$	(10,189	)


	For the Three Months Ended April 30,
	2022			2021
Customer A	*				12	%
Customer B	*				10	%
Customer C		11	%		10	%
Customer D		11	%	*
		22	%		32	%


Balance at February 1, 2021	$	2,805
Amounts recognized in cost of revenue		(388	)
Costs deferred		229
Balance at April 30, 2021	$	2,646

Balance at February 1, 2022	$	4,604
Amounts recognized in cost of revenue		(610	)
Costs deferred		100
Balance at April 30, 2022	$	4,094


Balance at February 1, 2021	$	34,044
Revenue recognized		(5,143	)
Amounts deferred		7,480
Foreign exchange		(151	)
Balance at April 30, 2021	$	36,230

Balance at February 1, 2022	$	33,566
Revenue recognized		(6,680	)
Amounts deferred		11,645
Balance at April 30, 2022	$	38,531


Years Ending January 31,
2023 (9 months)	$	18,540
2024		16,505
2025		10,806
2026		2,676
	$	48,527