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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended July 31, 2023

or

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

Commission file number 001-39125

 

IronNet, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

83-4599446

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

 

 

 

6 Waelchli Ave, #7395

 

 

Halethorpe, MD

 

22102

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (443) 300-6761

(Former Name or Former Address, if Changed Since Last Report)

 

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

N/A

 

N/A

 

N/A

 

 

 

 

 

 

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.

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated Filer

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

There were 121,506,784 shares of Common Stock, par value $0.0001 per share, outstanding as of January 26, 2024.

 

 


 

IronNet, Inc.

Table of Contents

FORM 10‑Q

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

5

Item 1. Financial Statements

 

5

Unaudited Condensed Consolidated Balance Sheets

 

5

Unaudited Condensed Consolidated Statements of Operations

 

6

Unaudited Condensed Consolidated Statements of Comprehensive Loss

 

7

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

 

8

Unaudited Condensed Consolidated Statements of Cash Flows

 

10

Notes to Unaudited Condensed Consolidated Financial Statements

 

11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4. Controls and Procedures

 

34

PART II — OTHER INFORMATION

 

35

Item 1. Legal Proceedings

 

35

Item 1A. Risk Factors

 

35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

55

Item 3. Defaults upon Senior Securities

 

55

Item 4. Mine Safety Disclosures

 

55

Item 5. Other Information

 

55

Item 6. Exhibits

 

56

SIGNATURES

 

58

 

1


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”), including, without limitation, statements under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. Such statements include, but are not limited to, any statements relating to our ability to consummate any acquisition or other business combination and any other statements that are not statements of current or historical facts. These statements are based on management’s current expectations, but actual results may differ materially due to various factors, including, but not limited to:

risks and uncertainties relating to the Chapter 11 Cases, including but not limited to:
o
our ability to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 Cases, and our ability to satisfy the conditions precedent to any Chapter 11 plan;
o
the outcome of the Chapter 11 Cases in the Bankruptcy Court, including our ability to successfully market and sell all, substantially all or some of our assets and to develop, negotiate, confirm and consummate a Chapter 11 plan;
o
the effects of the Chapter 11 Cases on the Company and on the interests of various constituents;
o
Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general;
o
the length of time we will operate under the Chapter 11 Cases and the continued availability of operating capital during the pendency of Chapter 11;
o
whether the period over which we anticipate our existing cash and cash equivalents will be sufficient to fund our Chapter 11 Cases, operating expenses and capital expenditure requirements;
o
risks associated with any third-party motions in the Chapter 11 Cases;
o
the potential adverse effects of the Chapter 11 Cases on our liquidity or results of operations and increased legal and other professional costs necessary to execute the Company’s reorganization;
o
the conditions to which the Company’s cash collateral is subject and the risk that these conditions may not be satisfied for various reasons, including for reasons outside of our control;
o
the consequences of the acceleration of our debt obligations;
o
the trading price and volatility of our common stock;
o
employee attrition and our ability to retain senior management and other key personnel due to the distractions and uncertainties of the Chapter 11 Cases;
o
our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Chapter 11 Cases; and
o
the result of our post-petition marketing process is unknown, and there may be insufficient proceeds, if any, to make distributions to equity holders;
the effects of the delisting of our common stock from the New York Stock Exchange;
our ability to continue as a going concern;
changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;
the implementation, market acceptance and success of our business model and growth strategy;
our expectations and forecasts with respect to the size and growth of the cybersecurity industry and our products and services in particular;
the ability of our products and services to meet customers’ compliance and regulatory needs;
our ability to compete with others in the cybersecurity industry;
our ability to retain pricing power with our products;
our ability to grow our market share;
our ability to attract and retain qualified employees and management;
our ability to adapt to changes in consumer preferences, perception and spending habits and develop and expand our product offerings and gain market acceptance of our products, including in new geographies;
developments and projections relating to our competitors and industry;
our ability to develop and maintain our brand and reputation;
developments and projections relating to our competitors and industry;
the impact of health epidemics, including the COVID-19 pandemic, on our business and on the economy in general;
our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others;

2


 

expectations regarding our status as an emerging growth company under the JOBS Act;
our future capital requirements and sources and uses of cash;
our ability to obtain funding for our operations and future growth; and
our business, expansion plans and opportunities.

 

 

As previously announced, the Company voluntarily delisted from the New York Stock Exchange, and, as a result, our common stock trades exclusively in over-the-counter markets. The Company’s stockholders are cautioned that trading in shares of the Company’s common stock during the pendency of the Chapter 11 Cases remains highly speculative and will pose substantial risks. Trading prices for the Company’s common stock may bear little or no relation to actual recovery, if any, by holders thereof in the Chapter 11 Cases and the trading market (if any) may be very limited. Accordingly, the Company urges extreme caution with respect to existing and future investments in its common stock.

The forward-looking statements contained in this Quarterly Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors” in Part I, Item 1A. in our Annual Report on Form 10-K filed on May 16, 2023 (the “Annual Report”) as supplemented or restated under the heading “Risk Factors” in Part II, Item 1A. of this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.

 

SUMMARY OF RISK FACTORS

Below is a summary of material factors that make an investment in our securities speculative or risky. Importantly, this summary does not address all of the risks and uncertainties that we face. Additional discussion of the risks and uncertainties summarized in this risk factor summary, as well as other risks and uncertainties that we face, can be found under the section titled “Risk Factors” in this Quarterly Report on Form 10-Q. The below summary is qualified in its entirety by that more complete discussion of such risks and uncertainties. You should consider carefully the risks and uncertainties described under the section titled “Risk Factors” in this Quarterly Report on Form 10-Q as part of your evaluation of an investment in our securities:

We are subject to the risks and uncertainties associated with Chapter 11 proceedings.
We may not be able to obtain confirmation of a Chapter 11 plan of reorganization or complete any Bankruptcy Court-approved sales of our Company or assets, or we may not be able to realize adequate consideration for such sales.
We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial conditions and results of operations.
We have experienced, and may continue to experience, increased levels of employee attrition as a result of the Chapter 11 proceedings.
Our post-bankruptcy capital structure will be determined in accordance with the Chapter 11 plan and changes to our capital structure in accordance with the Chapter 11 plan will have a material adverse effect on existing debt and security holders, including holders of our common stock.
The Chapter 11 proceedings has caused our common stock to decrease in value materially or may render our common stock worthless.
Our common stock has been delisted from trading on the New York Stock Exchange, which has negatively impacted the trading price of our common stock and our stockholders and there may be risks involved with trading in an over-the-counter market.
There is substantial doubt about our ability to continue as a going concern for a period of twelve months from the date of this Quarterly Report on Form 10-Q.
Our management previously identified material weaknesses in our internal control over financial reporting, which resulted in a restatement of our unaudited condensed consolidated financial statements in a prior fiscal year. In the future, we may identify additional material weaknesses or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.
We have a history of losses and may not be able to achieve or sustain profitability in the future.
If organizations do not adopt cloud-enabled, and/or SaaS-delivered cybersecurity solutions that may be based on new and untested security concepts, our ability to grow our business and results of operations may be adversely affected.
Competition from existing or new companies could cause us to experience downward pressure on prices, fewer customer orders, reduced margins, the inability to take advantage of new business opportunities and loss of market share.
If our solutions fail or are perceived to fail to detect or prevent incidents or have or are perceived to have defects, errors, or vulnerabilities, our brand and reputation would be harmed, which would adversely affect our business and results of operations.
We rely on third-party data centers and our own colocation data centers to host and operate our platform, and any disruption of or interference with our use of these facilities may negatively affect our ability to maintain the performance and reliability of our platform, which could cause our business to suffer.

3


 

A limited number of customers represent a substantial portion of our revenue. If we fail to retain these customers, our revenue could decline significantly.
If we are unable to maintain successful relationships with our distribution partners, or if our distribution partners fail to perform, our ability to market, sell and distribute our platform and solutions efficiently will be limited, and our business, financial position and results of operations will be harmed.
Our business depends, in part, on sales to government organizations, and significant changes in the contracting or fiscal policies of such government organizations could have an adverse effect on our business and results of operations.
The success of our business will depend in part on our ability to protect and enforce our intellectual property rights.
We are subject to laws and regulations, including governmental export and import controls, sanctions, and anti-corruption laws, that could impair our ability to compete in our markets and subject us to liability if we are not in full compliance with applicable laws.
Our international operations expose us to significant risks, and failure to manage those risks could adversely impact our business.

 

4


 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

IronNet, Inc.

Condensed Consolidated Balance Sheets

($ and share data in thousands, except par value per share)

(unaudited)

 

 

July 31,

 

 

 

January 31,

 

 

 

2023

 

 

 

2023

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

534

 

 

 

$

7,568

 

Accounts receivable

 

 

2,840

 

 

 

 

3,373

 

Unbilled receivables

 

 

101

 

 

 

 

717

 

Accounts receivables

 

 

2,941

 

 

 

 

4,090

 

Inventory

 

 

2,643

 

 

 

 

2,669

 

Deferred costs

 

 

2,869

 

 

 

 

3,138

 

Prepaid warranty

 

 

1,111

 

 

 

 

1,218

 

Prepaid expenses

 

 

414

 

 

 

 

1,743

 

Other current assets

 

 

503

 

 

 

 

818

 

Total current assets

 

$

11,015

 

 

 

$

21,244

 

Deferred costs

 

 

1,482

 

 

 

 

2,975

 

Property and equipment, net

 

 

5,429

 

 

 

 

5,972

 

Prepaid warranty

 

 

626

 

 

 

 

1,141

 

Deposits and other assets

 

 

2,018

 

 

 

 

2,327

 

Total assets

 

$

20,570

 

 

 

$

33,659

 

 

 

 

 

 

 

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

9,100

 

 

 

$

7,287

 

Accrued expenses

 

 

3,581

 

 

 

 

9,973

 

Deferred revenue

 

 

15,431

 

 

 

 

17,180

 

Related party notes payable

 

 

23,055

 

 

 

 

11,845

 

Convertible notes payable

 

 

3,982

 

 

 

 

8,128

 

Conversion features on convertible notes payable

 

 

168

 

 

 

 

734

 

Income tax payable

 

 

426

 

 

 

 

412

 

Other current liabilities

 

 

671

 

 

 

 

735

 

Total current liabilities

 

 

56,414

 

 

 

 

56,294

 

Deferred revenue

 

 

7,449

 

 

 

 

9,961

 

Other long-term liabilities

 

 

1,780

 

 

 

 

2,128

 

Total liabilities

 

$

65,643

 

 

 

$

68,383

 

Stockholders’ (deficit) 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; 120,865 and 111,466 shares issued and outstanding at July 31, 2023 and January 31, 2023, respectively

 

 

12

 

 

 

 

11

 

Additional paid-in capital

 

 

499,806

 

 

 

 

493,902

 

Accumulated other comprehensive income

 

 

65

 

 

 

 

59

 

Accumulated deficit

 

 

(544,956

)

 

 

 

(528,696

)

Total stockholders’ (deficit) equity

 

 

(45,073

)

 

 

 

(34,724

)

Total liabilities and stockholders' (deficit) equity

 

$

20,570

 

 

 

$

33,659

 

 

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

5


 

IronNet, Inc.

Condensed Consolidated Statements of Operations

($ in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended July 31,

 

 

Six Months Ended July 31,

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

    Product, subscription and support revenue

 

 

$

5,957

 

 

$

6,214

 

 

$

12,621

 

 

$

12,657

 

    Professional services revenue

 

 

 

34

 

 

 

394

 

 

 

172

 

 

 

639

 

Total revenue

 

 

 

5,991

 

 

 

6,608

 

 

 

12,793

 

 

 

13,296

 

    Cost of product, subscription and support revenue

 

 

 

2,244

 

 

 

2,339

 

 

 

4,919

 

 

 

4,669

 

    Cost of professional services revenue

 

 

 

80

 

 

 

149

 

 

 

88

 

 

 

314

 

Total cost of revenue

 

 

 

2,324

 

 

 

2,488

 

 

 

5,007

 

 

 

4,983

 

Gross profit

 

 

 

3,667

 

 

 

4,120

 

 

 

7,786

 

 

 

8,313

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

    Research and development

 

 

 

2,976

 

 

 

9,715

 

 

 

6,357

 

 

 

20,442

 

    Sales and marketing

 

 

 

1,566

 

 

 

8,754

 

 

 

3,068

 

 

 

19,420

 

    General and administrative

 

 

 

5,174

 

 

 

13,433

 

 

 

12,299

 

 

 

29,020

 

Total operating expenses

 

 

 

9,716

 

 

 

31,902

 

 

 

21,724

 

 

 

68,882

 

Operating loss

 

 

 

(6,049

)

 

 

(27,782

)

 

 

(13,938

)

 

 

(60,569

)

    Interest expense

 

 

 

(1,209

)

 

 

(74

)

 

 

(2,538

)

 

 

(163

)

    Other income

 

 

 

432

 

 

 

24

 

 

 

613

 

 

 

34

 

    Other expense

 

 

 

(4

)

 

 

(593

)

 

 

(202

)

 

 

(884

)

    Change in fair value of warrant liabilities

 

 

 

-

 

 

 

3

 

 

 

-

 

 

 

3

 

Loss before income taxes

 

 

 

(6,830

)

 

 

(28,422

)

 

 

(16,065

)

 

 

(61,579

)

Provision for income taxes

 

 

 

(9

)

 

 

7

 

 

 

(13

)

 

 

(5

)

Net loss

 

 

 

(6,839

)

 

 

(28,415

)

 

 

(16,078

)

 

 

(61,584

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

 

 

(0.06

)

 

 

(0.28

)

 

 

(0.14

)

 

 

(0.61

)

Weighted average shares outstanding, basic and diluted

 

 

 

118,437

 

 

 

101,352

 

 

 

115,464

 

 

 

100,346

 

 

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

6


 

IronNet, Inc.

Condensed Consolidated Statements of Comprehensive Loss

($ in thousands)

(unaudited)

 

Three Months Ended July 31,

 

 

Six Months Ended July 31,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net loss

$

(6,839

)

 

$

(28,415

)

 

$

(16,078

)

 

$

(61,584

)

Foreign currency translations adjustment, net of tax

 

12

 

 

 

(173

)

 

 

6

 

 

 

(265

)

     Total Comprehensive loss

$

(6,827

)

 

$

(28,588

)

 

$

(16,072

)

 

$

(61,849

)

 

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

7


 

IronNet, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended July 31, 2023 and 2022

($ in thousands, number of common stock in thousands)

(unaudited)

 

 

Common Stock

 

 

Additional Paid- In Capital

 

 

Accumulated Deficit

 

 

Accumulated Other Comprehensive Income

 

 

Total Stockholders' (Deficit) Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 31, 2023

 

 

111,466

 

 

$

11

 

 

$

493,902

 

 

$

(528,696

)

 

$

59

 

 

$

(34,724

)

Cumulative effect adjustment for new accounting standard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(182

)

 

 

-

 

 

 

(182

)

Vesting of restricted stock units

 

 

695

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock issued for repayment of convertible debt

 

 

8,704

 

 

 

1

 

 

 

3,651

 

 

 

-

 

 

 

-

 

 

 

3,652

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,253

 

 

 

-

 

 

 

-

 

 

 

2,253

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16,078

)

 

 

-

 

 

 

(16,078

)

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

6

 

 Balance at July 31, 2023

 

 

120,865

 

 

 

12

 

 

 

499,806

 

 

 

(544,956

)

 

 

65

 

 

 

(45,073

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 31, 2022

 

 

88,876

 

 

$

9

 

 

$

455,849

 

 

$

(417,686

)

 

$

271

 

 

$

38,443

 

Exercise of stock options and settlement of restricted stock units

 

 

12,788

 

 

 

1

 

 

 

205

 

 

 

-

 

 

 

-

 

 

 

206

 

Statutory tax withholding related to net-share settlement of restricted stock units

 

 

(15

)

 

 

-

 

 

 

(91

)

 

 

-

 

 

 

-

 

 

 

(91

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

18,584

 

 

 

-

 

 

 

-

 

 

 

18,584

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(61,584

)

 

 

-

 

 

 

(61,584

)

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(265

)

 

 

(265

)

 Balance at July 31, 2022

 

 

101,649

 

 

$

10

 

 

$

474,547

 

 

$

(479,270

)

 

$

6

 

 

$

(4,707

)

 

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

8


 

IronNet, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended July 31, 2023 and 2022

($ in thousands, number of common stock in thousands)

(unaudited)

 

 

Common Stock

 

 

Additional Paid- In Capital

 

 

Accumulated Deficit

 

 

Accumulated Other Comprehensive Income

 

 

Total Stockholders' (Deficit) Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2023

 

 

111,776

 

 

$

11

 

 

$

494,901

 

 

$

(538,117

)

 

$

53

 

 

$

(43,152

)

Vesting of restricted stock units

 

 

385

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock issued for repayment of convertible debt

 

 

8,704

 

 

 

1

 

 

 

3,651

 

 

 

-

 

 

 

-

 

 

 

3,652

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

1,254

 

 

 

-

 

 

 

-

 

 

 

1,254

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,839

)

 

 

-

 

 

 

(6,839

)

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

12

 

 

 

12

 

Balance at July 31, 2023

 

 

120,865

 

 

$

12

 

 

$

499,806

 

 

$

(544,956

)

 

$

65

 

 

$

(45,073

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2022

 

 

100,426

 

 

$

10

 

 

$

467,296

 

 

$

(450,854

)

 

$

179

 

 

$

16,631

 

Exercise of stock options and settlement of restricted stock units

 

 

1,223

 

 

 

-

 

 

 

113

 

 

 

-

 

 

 

-

 

 

 

113

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

7,138

 

 

 

-

 

 

 

-

 

 

 

7,138

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(28,416

)

 

 

-

 

 

 

(28,416

)

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(173

)

 

 

(173

)

 Balance at July 31, 2022

 

 

101,649

 

 

$

10

 

 

$

474,547

 

 

$

(479,270

)

 

$

6

 

 

$

(4,707

)

 

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

 

9


 

IronNet, Inc.

Condensed Consolidated Statements of Cash Flows

($ in thousands)

(unaudited)

 

 

Six Months Ended July 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(16,078

)

 

$

(61,584

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Cumulative effect adjustment for new accounting standard

 

 

(182

)

 

 

-

 

Depreciation and amortization

 

 

1,048

 

 

 

1,231

 

Gain on sale of fixed assets

 

 

-

 

 

 

(9

)

Gain on disposal of fixed assets

 

 

(5

)

 

 

 

Employee stock-based compensation

 

 

2,253

 

 

 

18,584

 

Change in fair value of warrant liabilities

 

 

-

 

 

 

(3

)

Change in fair value of conversion options

 

 

(566

)

 

 

 

Change in fair value of commitment fee

 

 

195

 

 

 

 

Conversion option accretion

 

 

367

 

 

 

 

Non-cash interest expense

 

 

2,178

 

 

 

165

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts and related party receivable

 

 

1,148

 

 

 

634

 

Deferred costs

 

 

1,762

 

 

 

(284

)

Inventories

 

 

25

 

 

 

(2,007

)

Prepaid expenses

 

 

1,329

 

 

 

1,095

 

Other current assets

 

 

121

 

 

 

(36

)

Prepaid warranty

 

 

622

 

 

 

(172

)

Deposits and other assets

 

 

310

 

 

 

504

 

Accounts payable and accrued expenses

 

 

382

 

 

 

325

 

Income tax payable

 

 

14

 

 

 

(74

)

Other liabilities

 

 

 

 

 

(2

)

Deferred revenue

 

 

(4,261

)

 

 

512

 

Operating lease liability

 

 

(299

)

 

 

(582

)

Net cash used in operating activities

 

 

(9,637

)

 

 

(41,703

)

Cash flows from investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

 

 

(1,172

)

Capitalized software development costs

 

 

(500

)

 

 

(494

)

Proceeds from the sale of fixed assets

 

 

 

 

 

10

 

Net cash used in investing activities

 

 

(500

)

 

 

(1,656

)

Cash flows from financing activities

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

 

206

 

Statutory tax withholding related to net-share settlement of restricted stock units

 

 

 

 

 

(91

)

Cash received to fund employee tax obligation for vested RSUs

 

 

112

 

 

 

19,823

 

Cash remitted to fund employee tax obligation for vested RSUs

 

 

(6,672

)

 

 

(12,395

)

Payment of equity line commitment fee

 

 

 

 

 

(1,750

)

Proceeds from issuance of convertible notes

 

 

 

 

 

 

Proceeds from issuance of related party debt

 

 

11,150

 

 

 

 

Payment of debt issuance costs

 

 

 

 

 

 

Repayment of debt

 

 

(1,373

)

 

 

 

Payment of finance lease obligations

 

 

(120

)

 

 

(96

)

Payment of common stock issuance costs

 

 

 

 

 

(96

)

Net cash provided by financing activities

 

 

3,097

 

 

 

5,601

 

Effect of exchange rate changes on cash and cash equivalents

 

 

6

 

 

 

(265

)

Net change in cash and cash equivalents

 

 

(7,034

)

 

 

(38,023

)

Cash and cash equivalents

 

 

 

 

 

 

Beginning of the period

 

$

7,568

 

 

$

47,673

 

End of the period

 

$

534

 

 

$

9,650

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

142

 

 

$

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

Non-cash settlement of convertible debt for common stock

 

$

3,320

 

 

$

 

 

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

10


 

IronNet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(shares and dollars in thousands, unless stated otherwise)

 

1.
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.

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 transactions associated with the Merger, and IronNet, Inc. and the Company's subsidiaries after the Merger.

Voluntary Filings Under Chapter 11

On October 12, 2023 ("Petition Date"), the Company and IronNet Cybersecurity, (“IronNet Cybersecurity, Inc."), the Company’s wholly-owned subsidiary (collectively, the “Debtors”), filed voluntary petitions for reorganization under the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court of Delaware ("Bankruptcy Court") (such cases, the “Chapter 11 Cases”). The Debtors and their subsidiaries continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Chapter 11 Cases are currently jointly administered under the caption In re IronNet, Inc. et al., Case No. 23-11710 (Bankr. D. Del. 2023). See Note 13, Subsequent Events, for additional information.

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, 2023. 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 2024, for example, refer to the fiscal year ending January 31, 2024. The results of operations for the three and six months ended July 31, 2023 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending January 31, 2024 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 July 31, 2023, its results of operations for the three and six months ended July 31, 2023 and 2022, changes in stockholders’ equity for the three and six months ended July 31, 2023 and 2022, and cash flows for the six months ended July 31, 2023 and 2022. Certain prior-period amounts have been reclassified in the accompanying condensed consolidated financial statements and notes thereto in order to conform to the current period presentation. The accompanying unaudited condensed consolidated financial statements do not reflect the application of Financial Accounting Standards Board (“FASB”) Codification Topic 852, Reorganizations (“ASC 852”), as the Debtors did not file the Chapter 11 cases until October 12, 2023. Refer to Note 13, Subsequent Events, for more information.

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, fair value of conversion options of debt, obsolescence reserves for inventory, 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 and Going Concern

 

Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to meet our future obligations as they become due within one year of the financial statements being issued in this Quarterly Report on Form 10-Q.

As of July 31, 2023, the Company had cash and cash equivalents of $534 which is not legally restricted to use, and collectable receivables of $2,941, accounts payable and accrued expenses of $12,681, including $775 due to taxing authorities, $4,233 in principal amounts owed on convertible debt, $22,550 in principal amounts owed on related party debt, and $556 in principal amounts owed on the Korr Note, as discussed in Note 9.

In February 2022, the Company entered into an equity line with Tumim Stone Capital, LLC (“Tumim”) under which the Company may, in its discretion, sell shares of its common stock to Tumim subject to various conditions and limitations set forth in the purchase agreement with Tumim. On June 16, 2023, Tumim notified the Company of Tumim’s election to terminate the Purchase Agreement, effective as of June 20, 2023.

On September 14, 2022, the Company entered into a Securities Purchase Agreement ("SPA") with 3i LP ("3i"), which is an affiliate of Tumim, pursuant to which the Company agreed to sell and issue senior unsecured convertible promissory notes (the "Convertible Notes") to 3i in the aggregate principal amount of up to $25,750. On September 15, 2022, the Company issued a Convertible Note to 3i in the principal amount of $10,300, net of discount for cash proceeds of $10,000. The Company initially borrowed approximately $10,300 and issued related Convertible Notes to 3i, including a 3% Original Issue Discount ("OID"), with an 18-month term. The Company prepaid approximately $6,067 of the Convertible Notes to 3i and, as a result, approximately $4,233 principal amount of the Convertible Note remained outstanding as of July 31, 2023. As of the date of this report, the conditions to the additional borrowing have not been met. See Note 9 and Note 13, Subsequent Events, for additional information.

Between December 14, 2022 and September 17, 2023, the Company issued senior secured promissory notes in an aggregate principal amount of $8,475 to a total of eight lenders including directors of the Company. Between January 11, 2023 and August 31, 2023, the Company issued senior secured convertible promissory notes in the aggregate principal amount of $15,275 to entities affiliated with C5 Capital Limited (“C5”), a beneficial owner of more than 5% of the Company’s outstanding common stock. As of July 31, 2023, the Company had issued $7,675 in senior secured promissory notes to eight lenders and $14,875 in senior secured convertible promissory notes to C5. See Note 9 and Note 13, Subsequent Events, for additional information.

11


 

The Company’s future capital requirements will depend on many factors, including, but not limited to the rate of its 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. The Company needs additional equity or debt financing in order to continue its operations, which it may not be able to raise on terms acceptable to it or at all. If additional funds are not available to the Company on acceptable terms, or at all, the Company’s business, financial condition, and results of operations would be adversely affected.

Despite the Company’s current operating plans to implement the Joint Plan (as defined in Note 13) and emerge from bankruptcy, focus its business, reduce its expenses, improve its margins and mitigate uncertainties related to the foregoing, management believes that the Company does not have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date of issuance of these consolidated financial statements without additional financing. Management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern. The financial statements as of July 31, 2023 do not include any adjustments related to the filing of the Chapter 11 Cases.

Based on its current planned operations, in the absence of additional sources of liquidity, management anticipates that the Company’s existing cash and cash equivalents and anticipated cash flows from operations will not be sufficient to meet the Company’s operating and liquidity needs for any meaningful period of time following the date of this report. Given that additional sources of liquidity have not been available to it, the Company filed the Chapter 11 Cases. The Chapter 11 Cases have not been determined to alleviate the previously identified substantial doubt about the Company’s ability to continue as a going concern, including following the Effective Date of the Joint Plan. The Joint Plan was confirmed by the Bankruptcy Court on January 18, 2024. The Debtors expect that the Effective Date of the Joint Plan will occur as soon as all conditions precedent to the Joint Plan have been satisfied. Although the Debtors anticipate that all conditions will be satisfied, the Debtors can make no assurances as to when, or ultimately if, the Joint Plan will become effective.

On September 2, 2023, the Company furloughed almost all of the Company’s employees and substantially curtailed business operations as a result of the Company’s liquidity position. Subsequently, on September 29, 2023, given the unavailability of additional sources of liquidity and after considering strategic alternatives, the Company ceased substantially all of its business activities and terminated the remaining employees of the Company and its subsidiaries. The furlough of employees and cessation of business operations constituted events of default on all of the Company’s outstanding indebtedness. See Note 13, Subsequent Events, for additional information.

On October 10, 2023, the Debtors, and ITC Global Advisers LLC (“ITC GA”), and/or ITC GA’s designated affiliates and/or related funds or accounts, and such other lender parties that have agreed or may agree from time to time to provide commitments to fund the DIP Facility (as defined below) (the “DIP Facility Lender”) entered into a binding term sheet for debtor-in-possession financing (the “Term Sheet”), which sets forth the principal terms of a superpriority, senior secured debtor-in-possession credit facility (the “DIP Facility”, the credit agreement evidencing the DIP Facility, the “DIP Credit Agreement” and, together with the other definitive documents governing the DIP Facility and the DIP order, collectively, the “DIP Documents”), pursuant to which the DIP Facility Lender would provide the Company with a senior (priming) secured and superpriority debtor-in-possession delayed-draw term loan credit facility in an aggregate principal amount not to exceed $10,000, (the “Maximum Facility Amount”), consisting of up to $8,500 of term loans (the “DIP Term Loans”) and $1,499 of the Bridge Amount (as defined below) (collectively, the “DIP Loans”), subject to the terms and conditions set forth in the Term Sheet. Until the entry of a final order approving the DIP Facility by the Bankruptcy Court, a maximum amount of up to $4,500 of the DIP Facility (inclusive of the Bridge Amount) would be available on an interim basis. See Note 13, Subsequent Events, for additional information.

Upon the execution of the Term Sheet, the DIP Facility Lender advanced the Bridge Amount of $1,499 to the Company. The Bridge Amount is secured by all the assets of the Debtors. See Note 13, Subsequent Events, for additional information.

On October 12, 2023, the Debtors, filed the Chapter 11 Cases. In connection with the filing of the Chapter 11 Cases, the Debtors resumed business operations and rehired a portion of the previously furloughed and terminated employees. The Debtors and their subsidiaries continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The filing of the Charter 11 Cases constituted an event of default on all of the Company’s outstanding indebtedness. See Note 13, Subsequent Events, for additional information.

 

The Company’s ability to continue as a going concern is contingent upon its ability to generate sufficient liquidity to meet its contractual obligations and operating needs. Beginning on the Petition Date, it is also contingent upon its ability to, subject to the Bankruptcy Court’s approval, implement a Chapter 11 plan of reorganization and emerge from the Chapter 11 Cases. As noted above, the Bankruptcy Court entered the Confirmation Order for the Joint Plan on January 18, 2024, and the Joint Plan will become effective upon satisfaction of the conditions precedent to the Joint Plan, including the adoption of the Company’s new organization documents, the recapitalization of the Company in accordance with the Joint Plan, the filing of any final plan supplements, the Debtors shall have entered into the exit financing facility contemplated by the Joint Plan, and other customary conditions. Although the Debtors anticipate that all conditions will be satisfied, the Debtors can make no assurances as to when, or ultimately if, the Joint Plan will become effective. The Debtors expect that the Effective Date of the Joint Plan will occur as soon as all conditions precedent to the Joint Plan have been satisfied. Although the Debtors anticipate that all conditions will be satisfied, the Debtors can make no assurances as to when, or ultimately if, the Joint Plan will become effective. See Note 13, Subsequent Events, for additional information.

New York Stock Exchange Delisting

On July 17, 2023, the board of directors of the Company authorized the Company to voluntarily delist each class of its securities (including its warrants) from the New York Stock Exchange. On July 17, 2023, the Company delivered written notice to the Exchange of its intention to voluntarily delist each class of its common stock and its redeemable warrants from the New York Stock Exchange. The Company filed a Form 25 with the Securities and Exchange Commission relating to the delisting on July 27, 2023, and the delisting of its securities became effective on August 6, 2023. As a result of the delisting, the Company’s securities are traded on over-the-counter markets.

New Accounting Pronouncement Adopted in Fiscal 2024

In June 2016, the 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. The Company adopted the standard as of February 1, 2023 on a modified retrospective basis resulting in an increase to the beginning balance of accumulated deficit of approximately $182 as of February 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Company's condensed consolidated financial statements and related disclosures for the six-month period ended July 31, 2023. Results for reporting periods prior to FY2024 continue to be presented in accordance with previously applicable GAAP while results for subsequent reporting periods are presented under ASC 326.

Newly Issued Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures”, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This ASU also expands disclosure requirements to enable users of financial statements to better understand the entity’s measurement and assessment of segment performance and resource allocation. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

12


 

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures”, which enhances the transparency, effectiveness and comparability of income tax disclosures by requiring consistent categories and greater disaggregation of information related to income tax rate reconciliations and the jurisdictions in which income taxes are paid. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted.

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 July 31,

 

 

 

2023

 

 

2022

 

United States

 

$

4,723

 

 

$

5,735

 

International

 

 

1,268

 

 

 

873

 

Total

 

$

5,991

 

 

$

6,608

 

 

 

 

Six Months Ended July 31,

 

 

 

2023

 

 

2022

 

United States

 

$

10,272

 

 

$

11,844

 

International

 

 

2,521

 

 

 

1,452

 

Total

 

$

12,793

 

 

$

13,296

 

 

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

2. Revenue

Product, Subscription and Support Revenue

The Company sells a collective defense software solution that is comprised of three product offerings, IronDefense, IronDome, and IronRadar. Through December 2022, the software platform was delivered through both on-premises licenses bundled with on-premises hardware and through subscription software. The Company stopped offering on-premises deployment options in December 2022.

The security appliance deliverables include proprietary operating system software and hardware together with regular threat intelligence updates and support, maintenance, and warranty. The Company combines 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 the cybersecurity solution. The Company recognizes revenue for this single performance obligation ratably over the expected term. Judgment is required for the assessment of material rights relating to renewal options associated with the Company's contracts.

Revenue from subscriptions, which allow customers to use the Company's security software over a contracted period without taking possession of the software, and managed services, where the Company provides managed detection and response services for customers, is recognized over the contractual term. The cloud-based subscription revenue, where the Company also provides hosting, recognized for the three months ended July 31, 2023 and 2022 was $5,071 and $5,203, respectively, and for the six months ended July 31, 2023 and 2022 were $10,850 and $10,418, respectively. Overall product, subscription, and support revenue recognized for the three months ended July 31, 2023 and 2022, were $5,957 and $6,214, respectively, and for the six months ended July 31, 2023 and 2022, was $12,621 and $12,657, respectively.

Professional Services Revenue

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. Revenue recognized from professional services for the three months ended July 31, 2023 and 2022, were $34 and $394, respectively. Revenue recognized from professional services for the six months ended July 31, 2023 and 2022, were $172 and $639, respectively.

Customer Concentration

For the six months ended July 31, 2023, 4 customers accounted for 51%, or $6,579, of the Company's revenue, and for the six months ended July 31, 2022, 2 customers accounted for 22%, or $2,943, of the Company’s revenue. Two customers represented 89% and 56% of the total accounts receivable balance as of July 31, 2023 and January 31, 2023, respectively. Customer B elected not to renew the contract with the Company that ended in September 2023. The Company continues to pursue a subsequent contract with Customer B.

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:

 

For the Three Months Ended July 31,

 

For the Six Months Ended July 31,

 

2023

 

2022

 

2023

 

2022

Customer A

12%

 

12%

 

12%

 

11%

Customer B

12%

 

11%

 

11%

 

11%

Customer C

13%

 

*

 

14%

 

*

Customer D

15%

 

*

 

14%