IRONNET, INC. Unless otherwise indicated or the context otherwise requires, references in this section to "IronNet ," "we," "us," "our", "the Company" and other similar terms refer toIronNet, Inc. and its subsidiaries after giving effect to the Merger. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report"), and the annual consolidated financial statements for the year endedJanuary 31, 2022 and related notes included in our Annual Report on Form 10-K filed onMay 2, 2022 , as updated by our Current Report on Form 8-K filed onNovember 14, 2022 (the "Annual Report"). The interim condensed consolidated financial statements in this Quarterly Report are presented inU.S. dollars rounded to the nearest thousand, with the amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") rounded to the nearest tenth of a million. Therefore, differences in the tables between totals and sums of the amounts listed may occur due to such rounding. This Quarterly Report contains statements that may constitute "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"), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report 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 "believes," "expects," "intends," "estimates," "projects," "anticipates," "will," "plan," "design," "may," "should," or similar language are intended to identify forward-looking statements. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in the Annual Report under the captions "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors." The impact of COVID-19 and its variants, as well as geopolitical tensions, such as the ongoing conflict betweenRussia andUkraine , may also exacerbate these risks, any of which could have a material effect on us. All forward-looking statements included herein are made only as of the date hereof. Our fiscal year end isJanuary 31 , and our fiscal quarters end onApril 30 ,July 31 ,October 31 , andJanuary 31 . Our fiscal years endingJanuary 31, 2023 and endedJanuary 31, 2022 are referred to herein as "fiscal 2023" and "fiscal 2022," respectively.
Overview
GENKeith B. Alexander (Ret.) founded our company in 2014 to solve the major cybersecurity problem he witnessed and defined during his tenure as former head ofThe National Security Agency (the "NSA") and founding Commander ofU.S. Cyber Command: You can't defend against threats you can't see. Our innovative approach provides the ability for groups of organizations-within an industry sector, supply chain, state or country, for example-to see, detect and defend against sophisticated cyber attacks earlier and faster than ever before.IronNet has defined a new market category called Collective Defense.IronNet has developed the Collective Defense platform, a solution that can identify anomalous (potentially suspicious or malicious) behaviors on computer networks and share this intelligence anonymously and in real time among Collective Defense community members. Collective Defense communities comprise groups of organizations that have common risks, such as a supply chain, a business ecosystem, or across an industry sector, a state, or a country. This cybersecurity model delivers timely, actionable, and contextual alerts and threat intelligence on attacks targeting enterprise networks, and functions as an early-warning detection system for all community members. This new platform addresses a large and unwavering compound problem: limited threat visibility for increasingly borderless enterprises across sectors and at the national level, paired with ineffective threat knowledge sharing across companies and sectors and a "go it alone" approach to cybersecurity. These operational gaps, combined with market dynamics like the increased velocity of sophisticated cyber attacks and the deepening scarcity of qualified human capital, have set our mission to transform how cybersecurity is waged. Our Business We have focused on the development and delivery of a suite of advanced cybersecurity capabilities for detection, alerting, situational awareness and hunt/remediation combined into a comprehensive Collective Defense platform. In addition to our platform, our product offering also includes a threat intelligence feed sold primarily though our partner ecosystem that enables the cybersecurity stack to block adversary infrastructure immediately. We complement these capabilities, delivered to both commercial and public sector enterprises, with professional services.
Product, Subscription and Support Revenue
Our primary line of business is the delivery of integrated software capabilities
through our Collective Defense platform. The platform, targeting larger
organizations with a more mature cybersecurity infrastructure, is comprised of
two flagship products:
IronDefense is an advanced Network Detection Response ("NDR") solution that uses
AI-driven behavioral analytics to detect and prioritize anomalous activity
inside individual enterprises. IronNet leverages advanced AI/ML algorithms to
detect previously unknown threats, which are those that have not been identified
and "fingerprinted" by industry researchers), in addition to screening known
threats, and applies its Expert System to prioritize the severity of the
behaviors-all at machine speed and cloud scale.
IronDome is a threat-sharing solution that facilitates a crowdsource-like
environment in which the IronDefense threat detections from an individual
company are shared among members of a Collective Defense community, consisting
of our customers who have elected to permit their information to be anonymously
shared and cross-correlated by our IronDome systems. IronDome analyzes threat
detections across the community to identify broad attack patterns and provides
anonymized intelligence back to all community members in real time, giving all
members early insight into potential incoming attacks. Automated sharing across
the Collective Defense community enables faster detection of attacks at earlier
stages.
Our Collective Defense platform is designed to deliver strong network effects.
Every customer contributing its threat data (anonymously) into the community is
able to reap benefits from the shared intelligence of the other organizations.
The collaborative aspect of Collective Defense, and the resulting prioritization
of alerts based on their potential severity, helps address the known problem of
"alert fatigue" that plagues overwhelmed security analysts.
Our Collective Defense platform is largely cloud-deployed (public or private),
though it is also available in on-premise and hybrid environments, and is
scalable to include small-to-medium businesses and public-sector agencies as
well as multinational corporations. We provide professional cybersecurity
services such as incident response and threat hunting, as well as programs to
help customers assess cybersecurity governance, maturity, and readiness. Our
cybersecurity services are designed to create shared long-term success measures
with our customers, differentiating us from other cybersecurity vendors by
working alongside customers as partners and offering consultative and service
capabilities beyond implementation.
Our Collective Defense platform is a subscription-based pricing and flexible
delivery model, with 83.3% of our revenue for the nine months ended October 31,
2022 related to deployments involving our key public cloud providers Amazon Web
Services and Microsoft Azure. We also support private cloud, or hyperconverged
infrastructure such as Nutanix as well as on-premise environments through
hardware and virtual options. To make it as easy as possible for
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customers to add Collective Defense into their existing security stack, we have
built a rich set of APIs that enable integrations with standard security
products, including SIEM, SOAR, EDR, NGFW tools, and cloud-native logs from the
major public cloud providers.
IronRadar is a threat-sharing solution that proactively and automatically
updates customer cybersecurity tools to be able to detect and block malicious
indicators of adversary infrastructure. IronRadar, which we launched during the
three months ended October 31, 2022 , is intended to broaden our market reach to
companies of all sizes, including those with less sophisticated cybersecurity
infrastructure, and leverage our key partner relationships as the primary route
to market. Developed by IronNet's team of elite threat hunters, IronRadar scours
the internet fingerprinting servers to determine whether they are command and
control ("C2") infrastructure while being stood up, even before a cyber attack,
such as ransomware, is initiated. This threat detection and response solution
identifies known and unknown C2 infrastructure and is built from the ground up
to be easy to deploy, making it easy for security teams to integrate IronRadar
into existing tools, including SIEM/SOAR, TIP, EDRs, and firewalls, to increase
effectiveness and defense. Once set up, IronRadar is regularly updated and
automatically fed into a customer's security landscape to proactively block
threats, enabling faster response and creating efficiencies for security teams.
IronRadar is currently available for purchase as an annual subscription sold
directly from the Amazon Web Services ("AWS") Marketplace.
Professional Services
We sell professional services, including development of national cybersecurity strategies, cyber operations monitoring, security, training, red team, incident response and tailored maturity assessments. Revenue derived from these services is recognized as the services are delivered.
Financing to Date
Historically, we have financed our operations primarily through private placements of common stock, issuance of debt, warrants and redeemable convertible preferred stock.
In connection with the execution of the Merger Agreement, a number of purchasers (each, a "Subscriber") purchased an aggregate of 12,500,000 shares of our common stock (the "PIPE Shares"), for a purchase price of$10.00 per share and an aggregate purchase price of$125.0 million . As a result of the Merger, we also received$13.3 million held inLGL Systems Acquisitions Corporation's ("Legacy LGL") trust account from proceeds related to public trust shares, net of stockholder redemptions. Transaction costs related to the issuance of the trust shares were$9.0 million . OnSeptember 15, 2022 , we issued a senior unsecured convertible promissory note to 3i, LP ("3i") for an aggregate principal amount of$10.3 million , net of debt discount for cash proceeds of$10.0 million . For more information, see "Liquidity and Capital Resources-3i Convertible Debt Facility." BetweenDecember 2022 andApril 2023 , we issued and sold senior secured promissory notes in an aggregate principal amount of$7.2 million to a total of eight lenders, including certain members of our Board of Directors or their affiliates. BetweenDecember 2022 andApril 2023 , we issued and sold secured convertible promissory notes in an aggregate amount of$11.8 million toC5 Capital Limited ("C5"), one of our major stockholders. For more information, see "Liquidity and Capital Resources-Director and C5 Loans." We continue to negotiate with C5 as to a potential acquisition of our company by C5, as described below under "Recent Developments-C5 Strategic Transaction." OnSeptember 15, 2022 , we issued a convertible note (the "Convertible Note") to 3i, LP ("3i") for an aggregate principal amount of$10.3 million . For more information on the Convertible Note, see "Liquidity and Capital Resources-3i Convertible Debt Facility." During the nine months endedOctober 31, 2022 , we incurred a net loss of$93.6 million , of which$33.1 million related to non-cash expense related to stock-based compensation, and used$53.6 million in cash to fund our operations. As ofOctober 31, 2022 , we had$8.2 million of cash on hand to continue to fund our operations. Recent Developments Going concern Management expects that operating losses and negative cash flows from operating activities will continue in the foreseeable future as we continue to work to fund our operations. As ofOctober 31, 2022 , there is substantial doubt about our ability to continue as a going concern within one year from the issuance of our unaudited condensed consolidated financial statements. Based on our current planned operations, in the absence of additional sources of liquidity, management anticipates that our existing cash and cash equivalents and anticipated cash flows from operations will not be sufficient to meet our operating and liquidity needs for any meaningful period of time following the filing of this report. There is no assurance that management will be able to obtain additional liquidity or be successful in raising additional funds or that such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on our existing stockholders. In the event we determine that additional sources of liquidity will not be available to us or will not allow us to meet our obligations as they become due, we may need to file a voluntary petition for relief underthe United States Bankruptcy Code in order to implement a plan of reorganization, court-supervised sale, and/or liquidation. Reductions in force
Between
We do not expect to incur future material charges in connection with these reductions in force. These reductions in force are expected to result in approximately$20.0 million of annualized cost savings in total. We may incur additional expenses not currently contemplated due to events associated with the reductions in force. The annualized cost savings are estimates and subject to a number of assumptions, and actual results may differ materially.
Notice of failure to satisfy continued listing rules
OnOctober 25, 2022 , we received a written notice (the "Initial Notice") from theNew York Stock Exchange (the "NYSE") that we are no longer in compliance with the NYSE continued listing standards, set forth in Section 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock was less than$1.00 per share over a period of 30 consecutive trading days. OnDecember 21, 2022 , we received a second written notice (the "Second Notice") from the NYSE that we are no longer in compliance with the NYSE continued listing standards, set forth in Section 802.01E of theNYSE Listed Company Manual as a result of our failure to timely this Quarterly Report. OnJanuary 24, 2023 , we received a third written notice (the "Third Notice", together with the Initial Notice and Second Notice, the "Notices") from the NYSE that we are no longer in compliance with the NYSE continued listing standards, set forth in Section 802.01B of the NYSE Listed Company Manual because our average global market capitalization over a consecutive 30 trading-day period was less than$50.0 million and, at the same time, our last reported shareholders' equity was less than$50.0 million . The Notices have no immediate impact on the listing of our common stock, which will continue to be listed and traded on the NYSE during applicable cure periods, and do not result in a default under our material debt or other agreements. To address this issue, we intend to monitor the trading price of our listed securities and take steps to increase the value of our shares through implementation of our business strategy, and are considering all available options to regain compliance with the NYSE's continued listing standards. See "Risk Factors-The Company must regain compliance withNew York Stock Exchange requirements for the continued listing of its common stock" for additional information. 20 --------------------------------------------------------------------------------
Tumim Purchase Notices
BetweenNovember 25, 2022 andDecember 9, 2022 , we issued a series of purchase notices (the "Purchase Notices") toTumim Stone Capital, LLC ("Tumim") pursuant to the terms of a Common Stock Purchase Agreement (the "Purchase Agreement") we entered into with Tumim onFebruary 11, 2022 . Pursuant to the Purchase Notices, we issued 1,761,879 shares of our common stock to Tumim and received aggregate proceeds of approximately$0.6 million . For more information on the Purchase Agreement, see "Liquidity and Capital Resources-Tumim Stone Capital Committed Equity Financing." Director and C5 Loans BetweenDecember 14, 2022 andApril 20, 2023 , we issued senior secured promissory notes in an aggregate principal amount of$7.2 million to a total of eight lenders including directors of the Company. OnJanuary 11, 2023 ,January 12, 2023 ,February 8, 2023 ,February 27, 2023 , andApril 13, 2023 , we issued secured convertible promissory notes in the aggregate principal amount of$11.8 million to an entities affiliated withC5 Capital Limited ("C5"), a beneficial owner of more than 5% of our outstanding common stock. For more information see "Liquidity and Capital Resources-Director and C5 Loans."
C5 Strategic Transaction
OnDecember 28, 2022 , we entered into an agreement with C5 pursuant to which we agreed to a mutual exclusivity period throughJanuary 31, 2023 to seek to negotiate definitive agreements with respect to a potential offer by C5 to acquire all of the outstanding common stock of the Company not presently owned by C5 and certain of its affiliates (the "Proposed Transaction"). Commencement of the exclusivity period was subject to C5 providing$2.0 million of financing described above under "Director and C5 Loans." The exclusivity period was subsequently extended on multiple occasions following additional financing from C5. While we no longer remain under contractual exclusivity with C5, we are continuing to negotiate definitive agreements with C5 with respect to the Proposed Transaction.
Key Business Metrics
We monitor the following key metrics to measure our performance, identify trends, formulate business plans and make strategic decisions.
Recurring Software Customers
We believe that our ability to increase the number of subscription and other
recurring contract type customers on our platform is an indicator of our market
penetration, the growth of our business, and our potential future business
opportunities. Our recurring software customers include customers who have a
recurring contract for either or both of our IronDefense and IronDome platforms.
These platforms are generally sold together, but they also can be purchased on a
standalone basis. The following table sets forth the number of recurring
software customers as of the dates presented:
October 31,
2022 2021
Recurring Software Customers 70 74
Year-over-year growth (5 )% 196 %
Annual Recurring Revenue ("ARR")
ARR is calculated at a particular measurement date as the annualized value of
our then existing customer subscription contracts and the portions of other
software and product contracts that are to be recognized over the course of the
contracts and that are designed to renew, assuming any contract that expires
during the 12 months following the measurement date is renewed on its existing
terms. The following table sets forth our ARR as of the dates presented:
October 31,
2022 2021
($ in millions)
Annual recurring revenue $ 28.2 $ 27.5
Year-over-year growth 3 % 30 %
Because we have contracts from government entities whose back to back renewal
may be delayed due to the availability of funding between budget and
authorization cycles, potential changes in contract vehicles, and increased
requirements, ARR may temporarily decline in periods during which these
interruptions are active across reporting period ends. During the nine months
ended October 31, 2022 , $32.6 million of ARR from such temporary interruptions
adversely affected the ending ARR of $28.2 million and the annual year over year
increase of 3%. Had those contracts renewed without interruption, we would have
reported an ARR of $60.8 million as of October 31, 2022 and an increase of 121%
from the prior year.
Dollar-Based Average Contract Length
Our dollar-based average contract length is calculated from a set of customers against the same metric as of a prior period end. Because many of our customers have similar buying patterns and the average term of our contracts is more than 12 months, this metric provides a means of assessing the degree of built-in revenue repetition that exists across our customer base.
We calculate our dollar-based average contract length as follows:
a.
Numerator: We multiply the average total length of the contracts, measured in years or fractions thereof, by the respective revenue recognized for the nine months endedOctober 31, 2022 and 2021, as applicable.
b.
Denominator: We use the revenue attributable to software and product customers
for the nine months ended
Dollar-based average contract length is obtained by dividing the Numerator by the Denominator. Our dollar-based average contract length increased from 2.8 to 3.0 years, or 6.7%, as ofOctober 31, 2022 as compared to the end of the same period in fiscal 2022. The re-emergence of longer term contracts in our average has led to the increase in our average contract length as of the end of the most recent reporting period. Nine Months Ended October 31, 2022 2021 (in years) Dollar-based average contract length 3.0 2.8 Calculated Billings 21
-------------------------------------------------------------------------------- Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic performance. Calculated billings represent our total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to reflect amounts invoiced to customers to access our software-based, cybersecurity analytics products, cloud platform and professional services, together with related support services, for our new and existing customers. We typically invoice our customers on multi-year or annual contracts in advance, either annually or monthly. Calculated billings decreased by$2.7 million , or 14%, for the nine months endedOctober 31, 2022 as compared to the same period in fiscal 2022, and decreased by$4.5 million , or 59%, for the three months endedOctober 31, 2022 as compared to the same period in fiscal 2022. We expect that calculated billings will be affected by timing of entering into agreements with customers and the mix of billings in each reporting period as we typically invoice customers multi-year or annually in advance and, to a lesser extent, monthly in advance. While we believe that calculated billings may be helpful to investors because it provides insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-to-quarter or year-over-year comparative measure. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our metric of calculated billings as a tool for comparison. Because of these and other limitations, you should consider calculated billings along with revenue and our other GAAP financial results. The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated billings: Three Months Ended October 31, 2022 2021 2022 vs 2021 (in millions) Revenue $ 7.0 $ 6.9 0.1 1.4 % Add: Total Deferred revenue, end of period 30.2 34.3 (4.1 ) (12.0 )% Less: Total Deferred revenue, beginning of period 34.1 33.6 0.5 1.5 % Calculated billings $ 3.1 $ 7.6 (4.5 ) (59.2 )% Nine Months Ended October 31, 2022 2021 2022 vs 2021 (in millions) Revenue $ 20.3 $ 19.4 0.9 4.6 % Add: Total Deferred revenue, end of period 30.2 34.3 (4.1 ) (12.0 )% Less: Total Deferred revenue, beginning of period 33.5 34.0 (0.5 ) (1.5 )% Calculated billings $ 17.0 $ 19.7 (2.7 ) (13.7 )%
Components of Our Results of Operations
Revenue
Our revenues are derived from sales of product, subscriptions, subscription-like software products and software support contracts as well as from professional services. Product, subscription and support revenues accounted for 96% of our revenue in the three months endedOctober 31, 2022 , 89% of our revenue in the same period in fiscal 2022, 95% of our revenue in the nine months endedOctober 31, 2022 , and 93% of our revenue in the same period in fiscal 2022. Professional services revenues accounted for 4% of our revenue in the three months endedOctober 31, 2022 , 11% of our revenue in the same period in fiscal 2022, 5% of our revenue in the nine months endedOctober 31, 2022 , and 7% of our revenue in the same period in fiscal 2022. Our typical customer contracts and subscriptions range from one to five years. We typically invoice customers annually, in advance. We combine intelligence dependent hardware and software licenses as well as subscription-type deliverables with the related threat intelligence and support and maintenance as a single performance obligation, as it delivers the essential functionality of our cybersecurity solution. Most companies also participate in the IronDome collective defense software solution that provides them access to our collective defense infrastructure linking participating stakeholders. We recognize revenue for this single performance obligation ratably over the expected term with the customer. Amounts that have been invoiced are recorded in deferred revenue or they are recorded in revenue if the revenue recognition criteria have been met. Judgment is required for the assessment of material rights relating to renewal options associated with our contracts. Professional services revenues are generally sold separately from our products and include services such as development of national cyber security strategies, cyber operations monitoring, security, training, red team, incident response and tailored maturity assessments. Revenue derived from these services is recognized as the services are delivered.
Cost of Revenue
Cost of product, subscription and support revenue includes expenses related to our hosted security software, employee-related costs of our customer facing support, such as salaries, bonuses and benefits, an allocated portion of administrative costs, the amortization of deferred costs, and expense related to establishing an inventory reserve.
Cost of professional services revenue consists primarily of employee-related costs, such as salaries, bonuses and benefits, cost of contractors and an allocated portion of administrative costs.
Gross Profit
Gross profit, calculated as total revenue less total costs of revenue is
affected by various factors, including the timing of our acquisition of new
customers, renewals from existing customers, the data center and bandwidth costs
associated with operating our cloud platform, the extent to which we expand our
customer support organization, and the extent to which we can increase the
efficiency of our technology and infrastructure through technological
improvements. Also, we view our professional services in the context of our
larger business and as a lead generator for potential future product sales.
Because of these factors, our services revenue and gross profit may fluctuate
over time.
Operating Expenses
Research and development
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Our research and development efforts are aimed at continuing to develop and refine our products, including adding new features and modules, increasing their functionality, and enhancing the usability of our platform. Research and development costs primarily include personnel-related costs and acquired software costs. Research and development costs are expensed as incurred.
Sales and marketing
Sales and marketing expenses consist primarily of employee compensation and related expenses, including salaries, bonuses and benefits for our sales and marketing employees, sales commissions that are recognized as expenses over the period of benefit, marketing programs, travel and entertainment expenses, and allocated overhead costs. We capitalize our sales commissions and recognize them as expenses over the estimated period of benefit.
General and administrative
General and administrative costs include salaries, stock-based compensation expenses, and benefits for personnel involved in our executive, finance, legal, people and culture, and administrative functions, as well as third-party professional services and fees, and overhead expenses.
Interest expense
Interest expense consists of interest expense incurred.
Other income
Other income consists primarily of interest income and foreign currency gains.
Other expense
Other expense consists primarily of the settlement of a pre-Merger claim against Legacy LGL in the first quarter of fiscal year 2023, losses on the disposal of fixed assets, and the change in fair value of the Commitment Fee derivative asset established related to the Purchase Agreement entered into with Tumim during fiscal year 2023 to reflect its fair value at the end of the reporting period.
Change in fair value of warrant liabilities
The change in fair value of warrant liabilities includes the adjustments to the warrant liability to reflect its fair value as of the end of the reporting period.
Provision for income taxes
Provision for income taxes consists of federal and state income taxes in
Results of Operations
Comparison of the Three Months Ended
The following tables set forth our consolidated statement of operations data for
each period presented:
Three Months Ended October 31,
Percentage of Percentage of
2022 Revenue 2021 Revenue Change $ Change %
($ in thousands)
Product, subscription and support
revenue $ 6,674 96 % $ 6,132 89 % $ 542 9 %
Professional services revenue 314 4 % 781 11 % (467 ) (60 )%
Total revenue 6,988 100 % 6,913 100 % 75 1 %
Cost of product, subscription and
support revenue 4,206 60 % 2,082 30 % 2,124 102 %
Cost of professional services
revenue 83 1 % 286 4 % (203 ) (71 )%
Total cost of revenue 4,289 61 % 2,368 34 % 1,921 81 %
Gross profit 2,699 39 % 4,545 66 % (1,846 ) (41 )%
Operating expenses -
Research and development 6,804 97 % 24,455 354 % (17,651 ) (72 )%
Sales and marketing 7,774 111 % 51,244 741 % (43,470 ) (85 )%
General and administrative 19,723 282 % 79,735 1153 % (60,012 ) (75 )%
Total operating expenses 34,301 491 % 155,434 2,248 % (121,133 ) (78 )%
Operating loss (31,602 ) (452 )% (150,889 ) (2,183 )% 119,287 (79 )%
Interest expense (320 ) (5 )% (710 ) (10 )% 390 (55 )%
Other income 493 7 % 4 0 % 489 12,225 %
Other expense (581 ) (8 )% (18 ) 0 % (563 ) 3,127 %
Change in fair value of warrants
liabilities 3 0 % (11,302 ) (163 )% 11,305 (100 )%
Loss before income taxes (32,007 ) (458 )% (162,915 ) (2,357 )% 130,908 (80 )%
Provision for income taxes (2 ) 0 % (34 ) 0 % 32 (94 )%
Net loss $ (32,009 ) (458 )% $ (162,949 ) (2,357 )% $ 130,940 (80 )%
Revenue
Total revenue increased by
Product, subscription and support revenue increased by$0.5 million or 9% primarily due to the net effect of the Company's transition from contracts that had non-recurring elements which did not renew in full, replaced by revenues from contract forms that were designed to fully renew with legacy customers and signing new customers.
Professional services revenue decreased by
Cost of Revenue
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Total cost of revenue increased by $1.9 million or 81% in the three months ended
October 31, 2022 , as compared to the same period in fiscal 2022. Cost of
product, subscription and support revenue increased by $2.1 million or 102% in
the three months ended October 31, 2022 , as compared to the same period in
fiscal 2022. The increase was due primarily to an increase in cloud subscription
customers, costs incurred to fully ramp cloud hosting environments related to a
significant revenue customer that was onboarded in the second half of fiscal
year 2023, an increase in allocated labor costs related to software support
services, duplicative charges that occurred while certain customers transitioned
from their on-premises to cloud hosted deployment formats, and the establishment
of an inventory reserve in the three months ended October 31, 2022 .
Cost of professional service cost of revenue decreased by $0.2 million in the
three months ended October 31, 2022 , as compared to the same period in fiscal
2022. This decrease was primarily due to a decrease in headcount and decrease in
services provided to customers.
Gross Profit and Gross Margin
Certain business decisions related to cost of revenue resulted in a decrease in product, subscription and support gross margin to 37% in the three months endedOctober 31, 2022 , which would have been approximately 58% during the period when excluding the expense incurred related to establishing an inventory reserve, as compared to 66% in the same period in fiscal 2022, and an increase in professional services gross margin to 74% in the three months endedOctober 31, 2022 as compared to 63% in the same period in fiscal 2022. The period over period decrease in margin for software was primarily the result of cloud costs for a significant revenue customer that ramped up in the second half of fiscal 2023, an increase allocated to labor costs related to software support, and the establishment of an inventory reserve in the three months endedOctober 31, 2022 . Excluding the establishment of the inventory reserve in the quarter, product, subscription and support gross margin would have been 58%. Professional services margin will continue to be volatile contract to contract.
The following tables show gross profit and gross margin, respectively, for
product, subscription and support revenue and professional services revenue for
the three months ended
Three Months Ended October 31,
2022 2021 Change $ Change %
($ in millions)
Product, subscription and support gross
profit $ 2.5 $ 4.0 $ (1.5 ) (38 )%
Professional services gross profit 0.2 0.5 (0.3 ) (60 )%
Total gross profit $ 2.7 $ 4.5 $ (1.8 ) (40 )%
Three Months Ended October 31,
2022 2021 Change
Product, subscription and support margin 37.0 % 66.0 % (29.0 )%
Professional services margin 73.7 % 63.4 % 10.3 %
Total gross margin 38.6 % 65.7 % (27.1 )%
Operating expenses
Research and development
Research and development expenses decreased by $17.7 million or 72% in the three
months ended October 31, 2022 , as compared to the same period in fiscal 2022,
primarily due to non-cash stock compensation expense of $17.2 million incurred
in fiscal 2022 triggered by the modification of restricted stock units ("RSUs")
in the three months ended October 31, 2021 , as compared to $0.6 million in the
same period in fiscal 2023. The remaining decrease of $1.1 million was driven by
the decrease in headcount, a reduction in allocated labor costs related to
software support services, and cost saving actions.
Sales and marketing
Sales and marketing cost decreased by$43.5 million or 85% in the three months endedOctober 31, 2022 , as compared to the same period in fiscal 2022, primarily due to non-cash stock compensation expense of$43.5 million incurred in fiscal 2022 triggered by the modification of RSUs in the three months endedOctober 31, 2022 , as compared to$0.6 million in the same period in fiscal 2023. The remaining decrease of$0.6 million was driven by the decrease in headcount and cost saving actions. General and administrative General and administrative costs decreased by$60.0 million or 75% in the three months endedOctober 31, 2022 , as compared to the same period in fiscal 2022, primarily due to non-cash stock compensation expense of$69.2 million incurred in fiscal 2022 triggered by the modification of RSUs in the three months endedOctober 31, 2022 , as compared to$13.3 million in the same period in fiscal 2023. The remaining decrease of$4.1 million was primarily driven by the decrease in headcounts and cost saving actions.
Interest expense
The decrease in interest expense is due to the interest expense incurred on the bridge loan paid off in fiscal 2022 as a part of the merger offset by the interest accrued from the Convertible Note beginning in the three months endedOctober 31, 2022 . Other income
The increase in other income was due to foreign currency adjustments.
Other expense
Other expense increased by$0.6 million or 3,127% in the three months endedOctober 31, 2022 as compared to the same period in fiscal 2022, primarily as the result of the decrease in fair value of the commitment fee derivative asset established related to the Purchase Agreement entered into with Tumim and losses on the disposal of fixed assets.
Change in fair value of warrant liabilities
Change in fair value of warrant liabilities is the result of the exercise of 5.2
million private warrants in the three months ended
Provision for income taxes
24
--------------------------------------------------------------------------------The change in provision for income taxes was immaterial to the results of operations primarily due to our continued net loss position, the accumulation of net loss carryforwards, and offsetting valuation allowance.
Comparison of the Nine Months Ended
The following tables set forth our consolidated statement of operations data for
each period presented:
Nine Months Ended October 31,
Percentage of Percentage of
2022 Revenue 2021 Revenue Change $ Change %
($ in thousands)
Product, subscription and
support revenue $ 19,331 95 % $ 18,038 93 % $ 1,293 7 %
Professional services revenue 952 5 % 1,327 7 % (375 ) (28 )%
Total revenue 20,283 100 % 19,365 100 % 918 5 %
Cost of product, subscription
and support revenue 8,875 44 % 5,505 28 % 3,370 61 %
Cost of professional services
revenue 397 2 % 617 3 % (220 ) (36 )%
Total cost of revenue 9,272 46 % 6,122 32 % 3,150 51 %
Gross profit 11,011 54 % 13,243 68 % (2,232 ) (17 )%
Operating expenses -
Research and development 27,246 134 % 38,917 201 % (11,671 ) (30 )%
Sales and marketing 27,194 134 % 66,095 341 % (38,901 ) (59 )%
General and administrative 48,742 240 % 91,419 472 % (42,677 ) (47 )%
Total operating expenses 103,182 509 % 196,431 1,014 % (93,249 ) (47 )%
Operating loss (92,171 ) (454 )% (183,188 ) (946 )% 91,017 (50 )%
Interest expense (482 ) (2 )% (1,060 ) -5 % 578 (55 )%
Other income 55 0 % 19 0 % 36 189 %
Other expense (995 ) (5 )% (29 ) 0 % (966 ) 3,330 %
Change in fair value of warrants
liabilities 6 0 % (11,302 ) (58 )% 11,308 (100 )%
Loss before income taxes (93,587 ) (461 )% (195,560 ) (1,010 )% 101,973 (52 )%
Provision for income taxes (6 ) 0 % (56 ) 0 % 50 (90 )%
Net loss $ (93,593 ) (461 )% $ (195,616 ) (1,010 )% $ 102,023 (52 )%
Revenue
Total revenue increased by
Product, subscription and support revenue increased by$1.3 million or 7% primarily due to the net effect of the Company's transition from contracts that had non-recurring elements which did not renew in full, replaced by revenues from contract forms that were designed to fully renew with legacy customers and signing new customers.
Professional services revenue decreased by
Cost of Revenue
Total cost of revenue increased by$3.2 million or 51% in the nine months endedOctober 31, 2022 , as compared to the same period in fiscal 2022. Cost of product, subscription and support revenue increased by$3.4 million or 61% in the nine months endedOctober 31, 2022 , as compared to the same period in fiscal year 2022. The increase was due primarily to an increase in cloud subscription customers, costs incurred to fully ramp cloud hosting environments related to a significant revenue customer that was onboarded in fiscal year 2023, an increase in allocated labor costs related to software support services, duplicative charges that occurred while certain customers transitioned from their on-premises to cloud hosted deployment formats, and the establishment of an inventory reserve in the nine months endedOctober 31, 2022 .
Cost of professional services revenue decreased by
Gross Profit and Gross Margin
Certain business decisions related to cost of revenue resulted in a decrease in product, subscription and support gross margin to 54% in the nine months endedOctober 31, 2022 , which would have been approximately 61% during the period when excluding the expense incurred related to establishing an inventory reserve, as compared to 69% in the same period in fiscal 2022, and an increase in professional services gross margin to 58% in the nine months endedOctober 31, 2022 , as compared to 54% in the same period in fiscal 2022. The period over period decrease in margin for software was primarily the result of cloud costs for a significant revenue customer that ramped up in the second half of fiscal year 2023, an increase in warranty costs related to inventory held in readiness for large future contracts as well as duplicative charges that occurred while certain customers transitioned from their on-premises to cloud hosted deployment formats, the establishment of an inventory reserve in the nine months endedOctober 31, 2022 , and an increase in allocated labor costs related to software support services. Professional services will continue to be volatile contract to contract.
The following tables show gross profit and gross margin, respectively, for
product, subscription and support revenue and professional services revenue for
the nine months ended
Nine Months Ended October 31,
2022 2021 Change $ Change %
($ in millions)
Product, subscription and support gross
profit $ 10.5 $ 12.5 $ $ (2.0 ) (16 )%
Professional services gross profit 0.5 0.7 (0.2 ) (29 )%
Total gross profit $ 11.0 $ 13.2 $ $ (2.2 ) (17 )%
25--------------------------------------------------------------------------------
Nine Months Ended October 31,
2022 2021 Change
Product, subscription and support margin 54.1 % 69.5 % (15.4 )%
Professional services margin 58.3 % 53.5 % 4.9 %
Total gross margin 54.3 % 68.4 % (14.1 )%
Operating expenses
Research and development
Research and development expenses decreased by $11.7 million or 30% in the nine
months ended October 31, 2022 , as compared to the same period in fiscal 2022,
primarily due to non-cash stock compensation expense of $17.2 million incurred
in the nine months ended October 31, 2021 triggered by the modification of RSUs,
as compared to $4.6 million in non-cash stock compensation expense in the same
period in fiscal 2023. The offsetting increase in research and development costs
of $0.6 million is the result of ramping resources to support product
development, ramping of external costs to support product development and an
increase driven by cloud computing costs.
Sales and marketing
Sales and marketing cost decreased by$38.9 million or 59% in the nine months endedOctober 31, 2022 , as compared to the same period in fiscal 2022, primarily due to non-cash stock compensation of$43.5 million incurred in the nine months endedOctober 31, 2022 triggered by the modification of RSUs, as compared to$2.6 million in non-cash stock compensation expense in the same period in fiscal 2023. The offsetting increase in sales and marketing costs of$2.0 million is due to the expansion of our sales and marketing efforts in the first half of fiscal 2023. General and administrative General and administrative costs decreased by$42.7 million or 47% in the nine months endedOctober 31, 2022 , as compared to the same period in fiscal 2022, primarily due to non-cash stock compensation of$69.2 million incurred in the nine months endedOctober 31, 2022 triggered by the modification of RSUs, as compared to$25.8 million in non-cash stock compensation expense in the same period in fiscal 2023. The offsetting increase of$0.7 million is due to the increase in costs related to being a publicly traded company and the overall efforts to support business operations.
Interest Expense
The decrease in interest expense is due to the interest expense incurred on the bridge loan paid off in fiscal 2022 as a part of the merger offset by the interest accrued from the convertible debenture loan beginning in the third quarter of fiscal 2023.
Other income
The net fluctuation of other income was immaterial to the results of operations.
Other expense
Other expense increased by$0.97 million or 3,330% in the nine months endedOctober 31, 2022 , as compared to the same period in fiscal 2022, primarily as the result of a settlement of a pre-Merger claim against LGL, the cumulative impact of foreign currency losses, and the decrease in fair value of the commitment fee derivative asset established related to the Purchase Agreement entered into with Tumim..
Change in fair value of warrant liabilities
Change in fair value of warrant liabilities is the result of the exercise of 5.2
million private warrants in the nine months ended
Provision for income taxes
The change in provision for income taxes was immaterial to the results of operations primarily due to our continued net loss position, the accumulation of net loss carryforwards, and offsetting valuation allowance.
Liquidity and Capital Resources
Based on our current planned operations, in the absence of additional sources of liquidity, management anticipates that our existing cash and cash equivalents and anticipated cash flows from operations will not be sufficient to meet our operating and liquidity needs for any meaningful period of time following the date of this report. There is no assurance that management will be able to obtain additional liquidity or be successful in raising additional funds or that such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on our existing stockholders. In the event we determine that additional sources of liquidity will not be available to us or will not allow us to meet our obligations as they become due, we may need to file a voluntary petition for relief underthe United States Bankruptcy Code in order to implement a plan of reorganization, court-supervised sale, and/or liquidation. Prior toMarch 10, 2023 , we had a banking relationship with SVB. As of the closure of SVB onMarch 10, 2023 , we held approximately$8.1 million in cash, cash equivalents and investments at or through SVB, which represented approximately 96% of our total cash, cash equivalents and investments as of that date. SVB was closed onMarch 10, 2023 by theCalifornia Department of Financial Protection and Innovation , which appointed theFDIC as receiver. OnMarch 12, 2023 , theU.S. Treasury ,Federal Reserve , andFDIC announced that SVB depositors would have access to all of their money startingMarch 13, 2023 . OnMarch 13, 2023 , we were able to access all$8.1 million in cash, cash equivalents and investments held at or through SVB. While we have not experienced any losses in such accounts, the recent failure of SVB exposed us to significant credit risk prior to the completion by theFDIC of the resolution of SVB in a manner that fully protected all depositors. We are in the process of transferring some of our deposits to multiple banks to limit any future credit risk.
Sources of Liquidity
We have incurred losses and negative cash flows from operations since inception. ThroughOctober 31, 2022 , we have funded our operations with proceeds from sales of common stock and redeemable convertible preferred stock, proceeds related to the public trust shares held by Legacy LGL that were received as part of the Merger and recapitalization, the sale of Convertible Notes (as described below) to 3i, loans, and receipts from sales of our products and services to customers in the ordinary course of business. As ofOctober 31, 2022 , we had cash and cash equivalents of$8.2 million , and$10.3 million in convertible debt outstanding under the Convertible Note described below. Our primary source of liquidity is has been the financing transactions described and we are seeking additional debt funding in order to continue our operations. Our current indebtedness matures onJune 30, 2023 , and we will need to either extend the maturity date of this debt or raise additional funds to repay the debt in order to avoid an event of default on our current indebtedness.
Tumim Stone Capital Committed Equity Financing
26
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On February 11, 2022 , we entered into the Purchase Agreement with Tumim,
pursuant to which Tumim has committed to purchase up to $175 million of common
stock (the "Total Commitment"), at our direction from time to time, subject to
the satisfaction of the conditions in the Purchase Agreement. Also on February
11, 2022 , we entered into a registration rights agreement with Tumim (the
"Registration Rights Agreement"), pursuant to which we filed with the SEC a
registration statement to register for resale under the Securities Act the
shares of common stock that may be issued to Tumim under the Purchase Agreement.
Pursuant to the terms of the Purchase Agreement, at the time we signed the
Purchase Agreement and the Registration Rights Agreement, we paid a cash fee of
$1.8 million , or 1% of the Total Commitment, to Tumim as consideration for its
commitment to purchase shares of our common stock under the Purchase Agreement.
The sales of common stock by us to Tumim under the Purchase Agreement, if any,
will be subject to certain limitations and may occur, from time to time at our
sole discretion, over the approximately 36-month period commencing upon the date
of initial satisfaction of all conditions to Tumim's purchase obligations set
forth in the Purchase Agreement. We have the right, but not the obligation, from
time to time at our sole discretion, to direct Tumim to purchase certain amounts
of our common stock, subject to certain restrictions and limitations in the
Purchase Agreement, that we specify in purchase notices that we deliver to Tumim
under the Purchase Agreement (each such purchase, a "Purchase"). Shares of
common stock will be issued to Tumim at either a (i) 3% discount to the average
daily volume weighted average price (the "VWAP") of the common stock during the
three consecutive trading days from the date that a purchase notice with respect
to a particular purchase (a "VWAP Purchase Notice") is delivered to Tumim (a
"Forward VWAP Purchase"), or (ii) 5% discount to the lowest daily VWAP during
the three consecutive trading days from the date that a VWAP Purchase Notice
with respect to a particular purchase is delivered to Tumim (an "Alternative
VWAP Purchase"). Each VWAP Purchase Notice to Tumim will specify whether the
applicable purchase is a Forward VWAP Purchase or an Alternative VWAP Purchase,
and will direct that Tumim purchase the applicable number of shares of common
stock at the applicable purchase price. There is no upper limit on the price per
share that Tumim could be obligated to pay for the common stock under the
Purchase Agreement. The purchase price per share of common stock to be sold in a
Purchase will be appropriately adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, reverse stock split or other
similar transaction.
As of
3i Convertible Debt Facility
OnSeptember 14, 2022 , we entered into a Securities Purchase Agreement (the "SPA") with 3i, under which we agreed to sell and issue senior unsecured convertible promissory notes (the "Convertible Notes") to 3i in an aggregate principal amount of up to approximately$25.8 million , which are convertible into shares of our common stock, subject to certain conditions and limitations. OnSeptember 15, 2022 , we issued a Convertible Note under the SPA with a maturity date ofMarch 15, 2024 in the aggregate principal amount of$10.3 million for net cash proceeds after debt discount of$10.0 million . Upon the satisfaction of additional conditions set forth in the SPA that have not yet been met, we may issue an additional Convertible Note in the principal amount of$15.5 million at a second closing. The Convertible Notes bear interest at an annual rate of 5.00% per annum, payable monthly on the first of each month (The "Installment Date"), beginning the first month that is 90 days following the issuance date, payable in cash and/or shares of common stock, at our option. The interest rate will increase to an annual rate of 10.00% per annum upon the occurrence and during the continuance of an event of default under the Convertible Notes. Each Convertible Note issued pursuant to the SPA will have a maturity date of 18 months from issuance, which may be extended at the option of 3i in certain instances. The Convertible Notes provide a conversion right in which 3i may convert any portion of the principal, together with any unpaid interest and other unpaid amounts, into shares of common stock at a conversion price of$7.50 per share, subject to adjustments in accordance with the terms of the Convertible Notes. However, we will not issue any shares of common stock upon conversion of any Convertible Notes, or otherwise, if the issuance of such common stock, together with any common stock issued in connection with the SPA and the transaction contemplated thereby, would exceed 20,373,592 shares, except that such limitation shall not apply in the event that we obtain the approval of our stockholders as required by the applicable rules of the NYSE for issuances of shares of common stock in excess of such amount. The Convertible Note also contains provisions that provide 3i with the right, subject to certain exceptions, to require the Company to redeem all or a portion of the Convertible Note in cash. This convertible feature has been bifurcated from the host contract and accounted for separately as a derivative. On each monthly Installment Date, we shall repay the lesser of$0.7 million and the principal amount then outstanding, plus accrued and unpaid interest, in cash and/or shares of common stock, at our option (the "Installment Amount"). In certain instances, 3i will also have the right to accelerate some of the monthly repayment obligations. For any Installment Amount paid in the form of shares of common stock, the applicable conversion price will be equal to the lesser of (a)$7.50 , and (b) the greater of (x) 95% of the lowest VWAP in the five trading days immediately prior to such conversion, and (y) a "floor price" of approximately$0.44 , subject to adjustment in accordance with the terms of the Convertible Notes. For any Installment Amount paid in cash, the price paid will be equal to 105% of the Installment Amount. OnSeptember 14, 2022 , in connection with our entry into the SPA, we also entered into a Registration Rights Agreement with 3i (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, we agreed to file with theSecurities and Exchange Commission (the "SEC"), within 60 calendar days following the date of the Registration Rights Agreement, a registration statement covering the resale of the shares of common stock issuable upon conversion of the outstanding Convertible Note. This registration statement was filed onNovember 14, 2022 and declared effective by theSEC onNovember 30, 2022 . Director and C5 Loans BetweenDecember 14, 2022 andDecember 16, 2022 , we issued and sold senior secured promissory notes in an aggregate principal amount of$6.9 million (the "Initial Director Notes") to a total of eight lenders., which included seven lenders who are either our directors or entities affiliated with our directors. Subsequently we and the holders of the Initial Director Notes agreed to amend and restate the Initial Director Notes to be substantially in the form to be issued to C5 (the "Director Notes"). This amendment and restatement occurred onJanuary 11, 2023 . InApril 2023 , we issued and sold an additional Director Note in the amount of$0.3 million to a lender not affiliated with our directors. The Director Notes bear interest at a rate of 13.8% per annum from the respective dates of the Initial Director Notes, and the Director Notes are payable at scheduled maturity onJune 30, 2023 . OnDecember 30, 2022 , we issued a senior secured convertible promissory note in the principal amount of$2.0 million (the "Initial C5 Note") to an affiliate of C5, which was amended and restated onJanuary 11, 2023 (as amended and restated, the "Restated C5 Note"). OnJanuary 12, 2023 ,February 8, 2023 ,February 27, 2023 , andApril 13, 2023 , we issued additional secured convertible promissory notes to affiliates of C5 (together with the Restated C5 Note, the "C5 Notes") in principal amounts of$3.0 million ,$4.0 million ,$2.25 million , and$0.6 million , respectively. Each of the C5 Notes bear interest at a rate of 13.8% per annum from the date of issuance (or in the case of the Restated C5 Note, from the date of the Initial C5 Note), and all such notes are payable at scheduled maturity onJune 30, 2023 , subject to acceleration in certain circumstances.
Our obligations under the Director Notes and the C5 Notes are secured by substantially all of our assets, excluding our intellectual property.
The C5 Notes provide C5 with the right, at any time on or after the date that is
five calendar days prior to maturity, to convert all or any portion of the
aggregate principal amount of the C5 Notes, together with any accrued and unpaid
interest and any other unpaid amounts, into shares of our common stock, at a
conversion
27
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price of
Long-Term Liquidity Requirements
Based on our current operating plan, management believes that we do not have sufficient cash and cash equivalents on hand to support our current operations for any meaningful period of time following the date of this report. Management has concluded that there is substantial doubt about our ability to continue as a going concern. We require additional equity or debt financing in order to continue our operations. We may not be able to raise financing on terms acceptable to us or at all. If additional funds are not available to us on acceptable terms, or at all, we will likely need to declare bankruptcy or wind down our operations.
Cash Flows
For the Nine Months Ended
The following table summarizes our cash flows for the periods presented:
Nine Months Ended October 31,
2022 2021
(in millions)
Net cash used in operating activities $ (53.6 ) $ (59.1 ) Net cash used in investing activities $ (2.1 ) $
(2.2 ) Net cash provided by financing activities $ 16.3 $ 103.4
Operating Activities Net cash used in operating activities during the nine months endedOctober 31, 2022 was$53.6 million , which resulted from a net loss of$93.6 million , primarily driven by growth-related operating expenses exceeding the gross profits from sales, adjusted for non-cash charges of$37.2 million and net cash inflows of$2.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$33.1 million of stock compensation expense and$1.8 million of depreciation and amortization expense. Cash used in operating activities during the nine months endedOctober 31, 2022 was primarily driven by cash collections of accounts receivable of$5.6 million and an increase in accounts payable of$5.0 million , offset by a decrease in deferred revenue of$3.3 million , a decrease in accrued expenses of$2.5 million , and an increase in inventory of$1.0 million , which is the result of timing of new customer contracts. Net cash used in operating activities during the nine months endedOctober 31, 2021 was$59.1 million , which resulted from a net loss of$195.6 million , primarily driven by the modification of restricted stock unit awards of$129.9 million and related non-cash expenses. There was also an increase in the fair value of warrants liabilities of$11.3 million and an increase in accrued expenses. This was offset by an increase in accounts receivable of$7.2 million . The overall decrease in net cash used in operating activities in the nine months endedOctober 31, 2022 as compared to the same period in fiscal 2022 was driven by an decrease in cash operating expenses of approximately$9.3 million , primarily due to higher cash collections and fewer new billings from customers of$9.2 million and increases in accrued expenses of$2.7 million , offset by increases in inventory, prepaid warranty and deferred customer costs of$2.3 million and other minor cash activity.
Investing Activities
Net cash used in investing activities of
Net cash used in investing activities of
Financing Activities
Net cash provided by financing activities of$16.3 million during the nine months endedOctober 31, 2022 was primarily due to net cash proceeds of approximately$9.7 million from the issuance of the Convertible Note and$8.2 million net cash proceeds received to fund employees' tax withholding obligations associated with vested RSUs, which will be disbursed to the appropriate taxing authorities, offset by the$1.8 million payment to Tumim for the commitment fee in connection with the equity line. Net cash provided by financing activities of$103.4 million during the nine months endedOctober 31, 2021 was primarily due to gross proceeds from the Merger recapitalization of$13.3 million and issuance of PIPE Shares of$125.0 million and borrowing related to the Loan and Security Agreement (the "SVB Bridge ") withSVB Innovation Credit Fund VIII, L.P. for$15.0 million , offset by payment of a PPP loan and theSVB Bridge of$5.6 million .
Contractual Obligations
Our principal commitment consists of the obligation to repay amounts borrowed under (i) the Convertible Note issued to 3i, unless earlier converted into shares of our common stock under the terms of the Convertible Note, (ii) the Director Notes, and (iii) the C5 Notes. For more information regarding our indebtedness, see Note 10 to our interim condensed consolidated financial statements included in this report.
We also have commitments consisting of lease obligations for office space. For more information regarding our lease obligations, see Note 9 to our interim condensed consolidated financial statements included in this report.
We have made and, while not contractually committed, we expect to continue to make additional investments in our product, scale our operations, and continue to enhance our security measures. We will continue to expand the use of software systems to scale with our overall growth.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation
of these financial statements require us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses, as
well as related disclosures. We evaluate our estimates and assumptions on an
ongoing basis. Our estimates are based on historical experience and various
other assumptions that we believe to be reasonable under the circumstances. Our
actual results could differ from these estimates.
28
--------------------------------------------------------------------------------The critical accounting policies, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
Our revenues are derived from sales of product, subscriptions, support and maintenance, and other services. We satisfy performance obligations to recognize revenue for a single performance obligation ratably over the expected term with the customer.
Revenue is recognized when all of the following criteria are met:
1.
Identification of the contract, or contracts, with a customer-A contract with a customer to account for exists when (i) we enter into an enforceable contract with a customer that defines each party's rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and the parties are committed to perform, and (iii) we determine that collection of substantially all consideration to which we will be entitled in exchange for goods or services that will be transferred is probable based on the customer's intent and ability to pay the promised consideration.
2.
Identification of the performance obligations in the contract-Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation.
3.
Determination of the transaction price-The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.
4.
Allocation of the transaction price to the performance obligations in the contract-We allocate the transaction price to each performance obligation based on the amount of consideration expected to be received in exchange for transferring goods and services to the customer. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
5.
Recognition of revenue when, or as, we satisfy performance obligations-We satisfy performance obligations either over time or at a point in time. Revenue is recognized at or over the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
Costs to Obtain or Fulfill a Contract
We capitalize incremental costs of obtaining a non-cancelable subscription and support revenue contract and on professional services revenue as contract acquisition costs. The capitalized amounts consist primarily of sales commissions paid to our direct sales force. The capitalized amounts are recoverable through future revenue streams under all non-cancelable customer contracts. Amortization of capitalized costs, which occurs on a straight line basis, is included in sales and marketing expense in the accompanying condensed consolidated statements of operations. Contract fulfillment costs include appliance hardware and installation costs that are essential in providing the future benefit of the solution, which are also capitalized. We amortize our contract fulfillment costs ratably over the contract term in a manner consistent with the related revenue recognition on that contract and are included in cost of revenue. Stock-Based Compensation Stock compensation expense for stock options is recognized on a straight line basis and with a provision for forfeitures matched to historical experience for matured grant cohorts. Stock compensation expense for RSUs granted under the 2014 Plan, which contain both service and performance conditions, is recognized on a graded-scale basis matched to the length and vesting tranches for each grant. Stock compensation expense for RSUs granted under the 2021 Plan have only service vesting conditions. Expense will be recognized on a straight-line basis for all RSU awards with only service conditions. In the event that a RSU grant holder is terminated before the award is fully vested for RSUs granted under either Plan, the full amount of the unvested portion of the award will be recognized as a forfeiture in the period of termination. The fair value of RSUs is based on the fair value of our common stock on the date of the grant. We use the Black-Scholes pricing model to estimate the fair value of options on the date of grant. The use of a valuation model requires management to make certain assumptions with respect to selected model inputs. We grant stock options at exercise prices determined equal to the fair value of common stock on the date of the grant. The fair value of our common stock at each measurement date is based on a number of factors, including the results of third-party valuations, our historical financial performance, and observable arms-length sales of our capital stock including convertible preferred stock, and the prospects of a liquidity event, among other inputs. We estimate an expected forfeiture rate for stock options, which is factored into the determination of stock-based compensation expense. The volatility assumption is based on the historical and implied volatility of our peer group with similar business models. The risk-free interest rate is based onU.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The dividend yield percentage is zero because we do not currently pay dividends nor do we intend to do so in the future.
These estimates involve inherent uncertainties and the use of different assumptions may have resulted in stock-based compensation expense that was different from the amounts recorded.
As of
Leases
InFebruary 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) Section A- Leases: Amendments to the FASB Accounting Standards Codification. The standard requires lessees to recognize the assets and liabilities arising from leases on the balance sheet and retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. We adopted this standard and related amendments in the first quarter of fiscal 2023, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption with a cumulative adjustment to retained earnings. We elected the package of practical expedients which permits us 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. We also elected 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.
We applied a portfolio approach to effectively account for the lease liabilities and right-of-use lease assets. We exclude leases with an initial term of 12 months or less from the application of Topic 842.
29
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Adoption of the new standard resulted in the recording of $1.1 million and $2.7
million of current lease liabilities and long-term lease liabilities,
respectively, and $2.9 million in corresponding right-of-use lease assets. The
difference between the approximate value of the right-of-use lease assets and
lease liabilities is attributable to deferred rent, which is comprised of tenant
improvement allowance and rent abatement. The cumulative change in the beginning
accumulated deficit was $0.02 million due to the adoption of Topic 842. There
was no material impact on the Company's condensed consolidated statement of
operations or consolidated statements cash flows. Comparative periods continue
to be presented in accordance with legacy guidance in Topic 840.
Recently Issued Accounting Standards
Refer to Note 1, Organization and summary of changes in significant accounting policies, of the notes to our unaudited condensed consolidated financial statements included in this Form 10-Q for our assessment of recently issued and adopted accounting standards. Commitments and Contingencies
Refer to Note 8, Commitments and contingencies, of the notes to our unaudited condensed consolidated financial statements included in this Form 10-Q.
Emerging Growth Company ("EGC") Status
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until those standards apply to private companies. We have elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may or may not be comparable to companies that comply with new or revised accounting pronouncements as of public companies' effective dates.
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