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 (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 asRussia's recent incursion intoUkraine , 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
GEN.Keith B. Alexander (Ret.) founded our company in 2014 to solve the major cybersecurity problem he witnessed and defined during his tenure as former head of theNSA 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. We compliment these capabilities, delivered to both commercial and public sector enterprises, with professional services.
Software, Subscription and Support Revenue
Our primary line of business is the delivery of integrated software capabilities through our Collective Defense platform. The platform 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 80.9% of our revenue for the three months endedApril 30, 2022 related to deployments involving our key public cloud providersAmazon Web Services and Microsoft Azure. We also support private cloud, or HCI such as Nutanix as well as on-premise environments through hardware and virtual options. To make it as easy as possible for customers to add Collective Defense into 15 --------------------------------------------------------------------------------
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.
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, 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 in Legacy LGL's 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 . During the three months endedApril 30, 2022 , we incurred a net loss of$33.2 million , of which$11.4 million related to non-cash expense related to stock-based compensation, and used$22.2 million in cash to fund our operations. As ofApril 30, 2022 , we had$31.4 million of cash on hand to continue to fund our operations.
We expect our capital and operating expenditures to increase in connection with our ongoing activities, as we:
1.
continue to invest in research and development related to new technologies;
2.
increase our investment in marketing and advertising, as well as the sales and distribution infrastructure for our products and services;
3.
maintain and improve operational, financial, and management information systems;
4. hire additional personnel;
5.
obtain, maintain, expand, and protect our intellectual property portfolio; and
6.
enhance internal functions to support our operations as a publicly-traded company.
Key Factors Affecting Performance
New Customer Acquisition
Our future growth depends in large part on our ability to acquire new customers. If our efforts to attract new customers are not successful, our revenue may decline in the future. Our IronDefense and IronDome platforms are designed to be used in conjunction with point solutions to capture and share critical data and findings to enable our behavioral analytics to identify threats and for defenders to respond more accurately and quickly. We believe that we have significant room to capture additional market share and intend to continue to invest in sales and marketing to engage prospective customers, increase brand awareness, and drive adoption of our solution.
Customer Retention
Our ability to increase revenue depends in large part on our ability to retain existing customers.
Investing in Business Growth Since inception, we have invested significantly in the growth of our business. While remaining judicious and targeted in our investments, we intend to continue to invest in our research and development team to lead product improvements, our sales team to broaden our brand awareness and our general and administrative expenses to increase for the foreseeable future given the additional expenses for finance, compliance and investor relations as we grow as a public company. In addition to our internal growth, we may also consider acquisitions of businesses, technologies, and assets that complement and bolster additional capabilities to our product offerings.
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. We have a history of growing the number of customers who have contracted for our platforms on a recurring basis, which does not include our professional services customers. 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. We have consistently increased the number of such customers period-over-period, and we expect this trend to continue as we increase subscription offerings to small and medium-sized businesses, in addition to increased subscription offerings for our larger enterprise customers. The following table sets forth the number of recurring software customers as of the dates presented: April 30, 2022 2021 Recurring Software Customers 91 44 Year-over-year growth 107 % 120 %
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: 16 --------------------------------------------------------------------------------
April 30, 2022 2021 ($ in millions) Annual recurring revenue$ 30.1 $ 25.6 Year-over-year growth 18 % 54 % Because we have contracts from government entities whose back to back renewal may be delayed due to availability of funding between budget and authorization cycles, potential changes in contract vehicles and increased requirements, ARR may temporarily decline over the periods where these interruptions are active across reporting period ends. During the quarter endedApril 30, 2022 ,$4.9 million of ARR from such temporarily interrupted adversely affected the ending ARR of$30.1 million and the annual year over year increase of 18%. Had those contracts renewed without interruption, the Company would have reported an ARR of$35.0 million and an increase of 37%.
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 three months endedApril 30, 2022 and 2021, as applicable.
b.
Denominator: We use the revenue attributable to software and product customers
for the three 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 3.2 years, or 14%, as of the end of the three month period endedApril 30, 2022 as compared to the end of the three month period endedApril 30, 2021 . 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. As a longer term trend, we continue to expect our average contract length to trend downward over time as our overall revenue and customer base continues to increase and broaden. Declines in average contract length are not reflective of the average lifetime of a customer. Three Months Ended April 30, 2022 2021 (in years) Dollar-based average contract length 3.2 2.8 Calculated Billings 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 increased by$3.0 million , or 35%, for the three months endedApril 30, 2022 as compared to the three months endedApril 30, 2021 . We expect that calculated billings will be affected by timing of entering into agreements with customers and the mix of billings in each reporting period as we typically invoice customers multi-year or annually in advance and, to a lesser extent, monthly in advance. While we believe that calculated billings may be helpful to investors because it provides insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-to-quarter or year-over-year comparative measure. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our metric of calculated billings as a tool for comparison. Because of these and other limitations, you should consider calculated billings along with revenue and our other GAAP financial results. The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated billings: Three Months Ended April 30, 2022 2021 2022 vs 2021 ($ in millions) Revenue $ 6.7 $ 6.4$ 0.3 5 % Add: Total Deferred revenue, end of period 38.5 36.2 2.3 6 % Less: Total Deferred revenue, beginning of period 33.6 34.0 (0.4 ) (1 )% Calculated billings $ 11.6 $ 8.6$ 3.0 35 %
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. Products, subscriptions and support revenues accounted for 96% our revenue in each of the three months endedApril 30, 2022 and 2021. Professional services revenues accounted for 4% of our revenue in each of the three months endedApril 30, 2022 and 2021.
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. As a result, 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 17 -------------------------------------------------------------------------------- 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 and the amortization of deferred costs.
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 significant lead generator for future product sales. Because of these factors, our services revenue and gross profit may fluctuate over time. Operating Expenses Research and development
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. We intend to continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market and expand our global customer base. In particular, we will continue to invest in growing and training our sales force, broadening our brand awareness and expanding and deepening our channel partner relationships. We expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
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.
We expect that general and administrative expenses will increase in absolute dollars as we hire additional personnel and enhance our systems, processes, and controls to support the growth in our business as well as our increased compliance and reporting requirements as a public company.
Other income
Other income consists primarily of interest income.
Other expense
Other expense consists primarily of interest expense and foreign currency losses.
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:
18 -------------------------------------------------------------------------------- Three Months Ended April 30, Percentage of Percentage of 2022 Revenue 2021 Revenue Change $ Change % ($ in thousands) Product, subscription and support revenue$ 6,443 96 %$ 6,137 96 %$ 306 5 % Professional services revenue 245 4 % 240 4 % 5 2 % Total revenue 6,688 100 % 6,377 100 % 311 5 % Cost of product, subscription and support revenue 2,330 35 % 1,754 28 % 576 33 % Cost of professional services revenue 165 2 % 184 3 % (19 ) (10 )% Total cost of revenue 2,495 37 % 1,938 30 % 557 29 % Gross profit 4,193 63 % 4,439 70 % (246 ) (6 )% Operating expenses Research and development 10,727 160 % 6,891 108 % 3,836 56 % Sales and marketing 10,667 159 % 7,149 112 % 3,518 49 % General and administrative 15,586 233 % 5,720 90 % 9,866 172 % Total operating expenses 36,980 553 % 19,760 310 % 17,220 87 % Operating loss (32,787 ) -490 % (15,321 ) -240 % (17,466 ) 114 % Other income 10 - 8 - 2 25 % Other expense (380 ) -6 % (129 ) -2 % (251 ) 195 % Loss before income taxes (33,157 ) -496 % (15,442 ) -242 % (17,715 ) 115 % Provision for income taxes (11 ) - (58 ) -1 % 47 (81 )% Net loss$ (33,168 ) -496 %$ (15,500 ) -243 %$ (17,668 ) 114 % Revenue
Total revenue increased by
Product, subscription and support revenue increased by$0.3 million or 5% primarily due to the net effect of the Company's transition from contracts that had material nonrecurring elements which would 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 increased
Cost of Revenue
Total cost of revenue increased by$0.6 million or 29%, in the three months endedApril 30, 2022 , as compared to the same period in fiscal 2022. Cost of product, subscription and support revenue increased by$0.6 million or 33%, in the three months endedApril 30, 2022 , as compared to the same period in fiscal 2022. The increase was due primarily to an increase in customer count, costs incurred to fully ramp cloud hosting environments related to a significant revenue customer that was onboarded in fiscal year 2021, and an increase of$0.2 million in equipment warranty costs related to inventory on hand held in readiness for large future contracts.
Cost of professional service cost of revenue decreased by
Gross Profit and Gross Margin
Mix changes in cost of revenue resulted in a decrease in software, subscription, and support gross margin to 64% in the three months endedApril 30, 2022 , as compared to 71% in the same period in fiscal 2022, and an increase in professional services gross margin to 33% in the three months endedApril 30, 2022 as compared to 23% 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 2022 and an increase in warranty costs related to inventory held in readiness for large future contracts. Without the warranty costs related to inventory on hand, software margins would have been 67%. Professional services margin will continue to be volatile contract to contract as we scale our business.
We expect that gross margins will improve in the near term. Margins may remain volatile compared to fiscal 2022 due to the continuing presence of large contracts in our revenue mix.
The following tables show gross profit and gross margin, respectively, for
software products and support revenue and professional services revenue for the
three months ended
Three Months EndedApril 30, 2022 2021
Change $ Change %
($ in thousands) Product, subscription and support gross profit$ 4,113 $ 4,383 $ (270 ) (6 )% Professional services gross profit 80 56 24 43 % Total gross profit$ 4,193 $ 4,439 $ (246 ) (6 )% 2022 2021 Change Product, subscription and support margin 63.8 % 71.4 % (7.6 )% Professional services margin 32.7 % 23.3 % 9.4 % Total gross margin 62.7 % 69.6 % (6.9 )% Operating expenses Research and development Research and development expenses increased by$3.8 million or 56% in the three months endedApril 30, 2022 , primarily due to non-cash stock compensation expenses of$2.5 million and ramping resources to support product development. The remaining increase of$1.3 million was driven by the ramping of external costs to support product development and the increase in internal headcount, with some increase driven by cloud computing costs. At 160% of total revenues in the three months endedApril 30, 2022 , as compared to 108% in the same period in fiscal 2022, we expect that our overall research and development expenditure rate as a percentage of revenues will decline in the future. 19 --------------------------------------------------------------------------------
Sales and marketing
Sales and marketing cost increased by$3.5 million or 49% in the three months endedApril 30, 2022 , primarily due to non-cash stock compensation of$1.9 million . The remaining increase of$1.6 million is due to the expansion of our sales and marketing efforts. At 159% of revenues in the three months endedApril 30, 2022 as compared to 112% in the same period in fiscal 2022, we expect that our overall sales and marketing expenditure rates as a percentage of revenues will decline in the future. General and administrative General and administrative costs increased by$9.9 million or 172% in the three months endedApril 30, 2022 , primarily due to non-cash stock compensation of$7.0 million and an increase in costs related to becoming a publicly traded company and the overall efforts to grow and support business operations, including increased headcount, directors and officers insurance costs, and the implementation of systems to support operations as a public company. General and administrative expenses in the three months endedApril 30, 2022 were at 233% of total revenues as compared to 90% in the same period in fiscal 2022. We expect that our overall general and administrative expenditure rates as a percentage of revenues will decline in the future.
Other income
The net fluctuation of other income was immaterial to the results of operations.
Other expense
Other expense increased by$0.3 million or 195% in the three months endedApril 30, 2022 , primarily as the result of a settlement of a pre-Merger claim against LGL. 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
Sources of Liquidity
We have incurred losses and negative cash flows from operations since inception. ThroughApril 30, 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, loans, and receipts from sales of our products and services to customers in the ordinary course of business. As ofApril 30, 2022 , we had cash and cash equivalents of$31.4 million , with no debt outstanding. Our primary source of liquidity is cash flows from operating activities, which may be supplemented by our equity line of credit facility described below.
Tumim Stone Capital Committed Equity Financing
OnFebruary 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 onFebruary 11, 2022 , we entered into a registration rights agreement with Tumim (the "Registration Rights Agreement"), pursuant to which we have filed with theSEC 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$1.75 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 (the "Commencement Date"). From and after the Commencement Date, we will 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 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. Based on the current price of our common stock as of the date of this report, we estimate that we would be able to raise approximately$25 million in proceeds under the Purchase Agreement due to the ownership limitations set forth in the Purchase Agreement.
Outlook and Liquidity Requirements
As ofApril 30, 2022 , we had cash and cash equivalents of$31.4 million and collectable receivables of$14.6 million . We continue to benefit from being debt free, having paid off previous balances on our PPP Loan andSVB Bridge facility, as well as continuing to fund our operations from the proceeds of the business combination with Legacy LGL that closed onAugust 26, 2021 , pursuant to which we secured gross funding of$138.25 million . We have also secured a$175 million equity line withTumim Capital , which remains available, subject to a number of conditions and limitations on the amount we may draw at a particular point in time and in the aggregate, to fund future operations in the absence of any material adverse conditions. Based on our forecast and the proceeds from the recent merger, as well as plans which could be executed to moderate internal and external expenditures as needed, we believe we have sufficient liquidity to fund operations for a period of at least 12 months from the issuance of these financial statements. This estimate does not take into account potential sales of our common stock to Tumim under the Purchase Agreement, or payments under new contracts with strategic customers that we currently expect to enter into prior to the end of the fiscal year, each of which could extend this period. We also plan to continue to maintain efficient operations and to reduce certain expenses over the next several quarters in an effort to make the most effective use of our cash on hand. Our future capital requirements will depend on many factors, including, but not limited to the rate of our growth, our ability to attract and retain customers and their willingness and ability to pay for our products and services, and the timing and extent of spending to support our efforts to market and develop our products. Further, we may enter into future arrangements to acquire or invest in businesses, products, services, strategic partnerships, and technologies. As such, we may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to 20 --------------------------------------------------------------------------------
raise it on terms acceptable to us or at all. If additional funds are not available to us on acceptable terms, or at all, our business, financial condition, and results of operations could be adversely affected.
Cash Flows
For the Three Months Ended
The following table summarizes our cash flows for the periods presented:
Three Months Ended April 30, 2022 2021 (in millions) Net cash used in operating activities$ (22.2 ) $ (12.1 ) Net cash used in investing activities$ (0.9 ) $ (0.7 ) Net cash provided by financing activities $ 6.9 $ 0.3 Operating Activities Net cash used in operating activities during the three months endedApril 30, 2022 was$22.2 million , which primarily resulted from a net loss of$33.2 million , of which$11.4 million was attributable to non-cash stock based compensation. The remaining$21.8 million of the net loss accounted for much of the net cash used in operating activities, with an increase in the receivables balance of$4.8 million due to lower cash collections, largely being offset by an increase in deferred revenue of$4.9 million from customer payments that had not yet been recognized as revenue. Net cash used in operating activities during the three months endedApril 30, 2021 was$12.1 million , which resulted from a net loss of$15.5 million adjusted for non-cash charges of$0.2 million for depreciation and amortization expense. Cash used in operating activities during the three months endedApril 30, 2021 benefited from the increased in deferred revenue of$2.2 million , offset by an increase in deferred and prepaid expenses of$1.6 million . The$10.1 million increase in net cash used in operating activities in the three months endedApril 30, 2022 as compared to the same period in fiscal 2022 was driven by an increase in cash operating expenses of approximately$5.5 million , primarily due to the new recurring costs of operating as a public company of$2.6 million and increases in sales and marketing expense of$1.3 million and research and development costs of$1.6 million , an increase in receivables of$5.0 million , a decrease in other current assets of$0.2 million , and a decrease in accounts payable of$2.0 million , offset by an increase in deferred revenue of$2.8 million and other minor cash activity.
Investing Activities
Net cash used in investing activities of$0.9 million and$0.7 million during the three months endedApril 30, 2022 and 2021, respectively, was due solely to purchases of property and equipment.
Financing Activities
Net cash provided by financing activities of$6.9 million during the three months endedApril 30, 2022 was primarily due to$8.8 million net cash proceeds received to fund employees' tax withholding obligations associated with vested RSUs, which is disbursed to the appropriate taxing authorities, offset by the$1.8 million payment to Tumim for the commitment fee. Net cash provided by financing activities of$0.3 million during the three months endedApril 30, 2021 was primarily due to net proceeds from our issuance of common stock of$0.2 million and proceeds from stock subscriptions of$0.1 million . Contractual Obligations
Our principal commitments consist of lease obligations for office space. For more information regarding our lease obligations, see Note 8 to the interim condensed consolidated financial statements.
We have made and 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.
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 software, 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. 21 --------------------------------------------------------------------------------
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 on a relative standalone selling price based on the observable selling price of our products and services.
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 ofApril 30, 2022 , there was$57.2 million of unrecognized compensation cost related to unvested RSUs without performance obligations. The weighted average remaining vesting period was 3.38 years.
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.
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 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 7, 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. 22
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