IRNT - IronNet: Near-Term Bankruptcy Filing Might Be In The Cards - Sell

2023-05-17 20:59:12 ET

Summary

• IronNet remains on life support by long-term shareholder C5 Capital and a number of insiders which have provided more than $20 million in senior secured debt in recent months.
• IRNT's financial struggles have started to impact operations with key metrics like annual recurring revenue, customers, and calculated billings all down substantially in the most recent quarter.
• While the exclusivity period has expired in March, negotiations with C5 Capital regarding a proposed going-private transaction continue.
• Company remains out of compliance with a number of continued listing standards required by the NYSE.
• A near-term Chapter 11 filing might be in the cards, as there's no apparent need for C5 Capital to use more than $30 million in valuable cash to compensate outside common shareholders. With risk/reward looking increasingly unfavorable, investors should consider selling existing positions and moving on.

Note:

I have covered IronNet ( IRNT ) previously, so investors should view this as an update to my earlier articles on the company.

For a couple of quarters now, I have advised investors to consider selling existing positions in ailing cybersecurity start-up IronNet based on the company's severe execution issues and elevated liquidity needs.

IronNet has been on life support by long-term shareholder C5 Capital Ltd. ("C5 Capital") and a number of insiders and associated funds for some time now as C5 Capital and the company remain in negotiations regarding a proposed going-private transaction " at a price equal to $0.30 per share ".

After several extensions, the exclusivity period for negotiating a definitive transaction expired on March 14.

Please note that among other things, consummation of the transaction would be subject to C5 Capital obtaining sufficient financing.

On Tuesday, IronNet filed its annual report on form 10-K for the fiscal year ending January 21 with the SEC and warned on a potential near-term bankruptcy filing (emphasis added by author):

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 of January 31, 2023, there is substantial doubt about our ability to continue as a going concern within one year from the issuance of our 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 under the United States Bankruptcy Code in order to implement a plan of reorganization, court-supervised sale, and/or liquidation.

Following negative free cash flow of $67.9 million in fiscal year 2023, cash and cash equivalents were down to a paltry $7.6 million at the end of January.

The company's financial struggles have also started to impact operations with annual recurring revenue of $26.2 million ("ARR") down 18% on a year-over-year basis amid a 25% reduction in recurring software customers. In addition, calculated billings decreased by 23% to $20.8 million.

Adding insult to injury, IronNet has received written notice from the New York Stock Exchange ("NYSE") that the company is no longer in compliance with a number of continued listing standards. With the cure period for regaining compliance with the $1 minimum bid price requirement having already expired, the company's common shares might be delisted at any time now.

In recent months, IronNet has amassed $20.3 million in short-term debt obligations solely to keep the lights on for a little bit longer with the convertible notes issued to insiders and C5 Capital scheduled to mature at the end of next month.

Quite frankly, with C5 Capital and insiders having accumulated more than $20 million in senior secured debt obligations in recent months, I just don't see the need for C5 Capital to shell out more than $30 million in cash to acquire the company's remaining outstanding shares.

I would rather expect C5 Capital, insiders and the company to agree on a restructuring support agreement to be implemented under chapter 11 of the U.S. Bankruptcy Code with senior secured lenders becoming the company's new owners in exchange for equitizing their claims and providing a sufficient amount of debtor-in-possession ("DIP") financing.

With only a limited number of creditors being involved, implementation should go smoothly and IronNet would likely be able to emerge as a private entity within weeks after the filing.

As the potential upside for equity holders seems limited to the originally proposed acquisition price " equal to $0.30 " per share, risk/reward appears highly unfavorable.

Bottom Line

IronNet remains on life support by C5 Capital and a number of insiders which have provided over $20 million in senior secured short-term debt in recent months which is scheduled to mature on June 30.

Given the dismal state of the company's business and ongoing, substantial liquidity needs, I would expect IronNet to restructure under chapter 11 of the U.S. Bankruptcy Code with senior secured creditors C5 Capital and a number of insiders becoming the restructured company's new owners following its emergence from bankruptcy protection.

Even if C5 Capital will indeed agree on a bail-out deal " at a price equal to $0.30 per share" , upside for common shareholders would be very limited.

Given the highly unfavorable risk/reward, I would urge investors to consider selling existing positions and moving on.

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