After Wednesday’s market close, recent cybersecurity SPAC deal IronNet (NYSE:IRNT) reported another set of disappointing quarterly results with the company’s key performance metric Annual Recurring Revenue or “ARR” down sequentially for a second quarter in a row despite of expectations for approximately 50% growth in FY2023 (emphasis added by author):
We encountered unexpected headwinds in our transactional business this quarter. To contain costs, we are undertaking a further restructuring of the company with the support of our new CFO Cameron Pforr,” said General (Ret.) Keith Alexander, Chairman and co-CEO of IronNet. We have decided to forego a call with management this quarter, until we are better able to communicate on our progress….
In light of the management transitions, further restructuring of the company, and the underperformance of the transactional business this quarter, the company is withdrawing its previously issued revenue and ARR guidance for fiscal 2023.
Adding insult to injury, the company used most of its remaining cash balance and ended the quarter with a paltry $9.7 million in cash and cash equivalents.
Subsequent to the end of the quarter, IronNet entered into an unsecured convertible debt facility with a subsidiary of Tumim Stone Capital LLC pursuant to which it will borrow an initial $10 million under a promissory note with an 18-month term and a 5% annual interest rate with the potential option to borrow an additional $15 million under the facility at a future date.
While the company has not yet filed the exact terms of the convertible debt facility, the details provided in the 10-Q hint to a potentially toxic deal with the debtholder incentivized to short the common stock ahead of scheduled monthly installment payments as already suspected in my last article on the company.
The initial promissory note will have a principal balance of $10,300 and will have an 18-month term. Outstanding principal amounts will accrue interest at a rate of 5% per year. Beginning on the first day of the calendar month after 90 days have elapsed from the issuance of the initial promissory note, the Company will be obligated to make 15 monthly installment payments of principal and accrued interest. Subject to conditions and limitations set forth in the securities purchase agreement, each of the Company and 3i may elect to convert outstanding principal and interest payments into shares of the Company’s common stock. Subject to a number of conditions set forth in the securities purchase agreement with 3i, including specified minimum trading prices and trading volumes, and the repayment or conversion of a specified portion of the initial convertible promissory note, the Company may borrow an additional $15,000 from 3i on the same terms and conditions as will be set forth in the initial convertible promissory note.
IronNet also announced the resignation of Co-CEO William Welch as part of a comprehensive restructuring which includes an approximately 35% headcount reduction. In connection with the restructuring, the company expects to incur charges of approximately $1 million in the current quarter, primarily associated with one-time severance payments.
While the company’s aggressive cost-containment measures should result in substantially reduced cash usage going forward, quarterly cash burn is likely to remain well north of $10 million.
Given this issue, management was required to include a going concern warning in the company’s quarterly report on form 10-Q:
Based on our current operating plan, management believes that we do not have sufficient cash and cash equivalents on hand to support current operations for at least one year from the date of issuance of the condensed consolidated financial statements. Management has concluded that this circumstance raises substantial doubt about our ability to continue as a going concern.
With stiffening economic headwinds and the looming risk of recession, it is increasingly difficult to remain optimistic on the company’s prospects at this point.
Things are getting worse at IronNet as poor execution and ongoing cash burn are now threatening the company’s ability to continue as a going concern.
With management essentially back to the drawing board and still elevated liquidity requirements likely to result in substantial near-term dilution, I am having some trouble envisioning a happy end for the company’s badly-stricken equity holders.
Despite IronNet’s dire financial condition, the company still commands a rather juicy $220+ million market capitalization which I would expect to come down very substantially in the near-term.
Quite frankly, I would be surprised to see the company still being listed on the Big Board twelve months from now without a reverse stock split or at all.
This morning, BTIG analyst Gray Powell echoed my concerns while downgrading the stock to “Sell” from “Neutral” with an eye-catching $0.15 price target.
Given the issues discussed above, investors should consider selling existing positions or outright shorting the shares.
At the time of this writing, Interactive Brokers shows almost 600k shares being available for borrowing at a modest 12.4% rate.
As always, don’t bet the farm on short positions and adequately manage your risk.