IRNT - IronNet: On Life Support By C5 Capital - Sell

Summary

• Ailing cybersecurity firm remains in bail-out discussions with long-term shareholder C5 Capital.
• According to C5 Capital's non-binding expression of interest submitted in December, outside shareholders will be offered $0.30 per share in cash.
• Due to "exigent circumstances" and considering the composition of the Board of Directors and stockholder base, IronNet does not intend to seek outside shareholder approval for the transaction.
• Should negotiations break down, the company is likely to file for bankruptcy in the very near future.
• With the shares trading approximately 60% above C5 Capital's non-binding offer and a definitive agreement likely to be finalized until the end of this month, investors should consider selling existing positions and moving on.

Five months ago, I advised investors to consider selling existing positions or outright shorting the shares of ailing cybersecurity start-up IronNet ( IRNT ) based on severe execution issues and elevated liquidity needs.

Since that time, the company's fundamentals have continued to deteriorate as evidenced by IronNet's latest going concern warning on November 14:

The timing and extent of spending to support the Company’s efforts to market and continue to develop its products in fiscal 2023 has been in excess of forecasted levels and the delayed timing and magnitude of contracts with customers have been below the levels previously anticipated. Based on the Company’s current operating plans and after considering the liquidity sources described above, management believes that the Company may not have sufficient cash and cash equivalents and capital resources to support planned operations for at least one year from the date of issuance of these consolidated financial statements. Management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

On December 16, IronNet disclosed an Audit Committee Investigation related to certain allegations made by a former employee and delayed the filing of its quarterly report on form 10-Q for the fiscal quarter ended October 31, 2022.

In addition, the company announced a review of strategic alternatives amid an imminent cash crunch (emphasis added by author):

The Company is actively pursuing additional financing, and the Board of Directors has initiated a review of strategic alternatives for the Company, including retaining advisors to assist in the strategic review process. Based on its current operations, in the absence of additional sources of liquidity, management anticipates that the Company’s existing cash and cash equivalents and anticipated cash flows from operations will not be sufficient to meet the Company’s operating and liquidity needs through the end of December 2022.

In the event the Company determines that additional sources of liquidity will not be available to it or will not allow it to meet its obligations as they become due, the Company 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.

Between December 14 and December 16, IronNet raised $6.9 million from the issuance of secured promissory notes to insiders and associated funds to satisfy current liabilities:

The Company has used the proceeds of the Notes to satisfy certain of its current liabilities. However, even after the application of the proceeds, management anticipates that, in the absence of additional sources of liquidity, the Company’s existing cash and cash equivalents and anticipated cash flows from operations will not be sufficient to meet the Company’s operating and liquidity needs beyond the end of December 2022.

On December 24, long-term shareholder C5 Capital Ltd. ("C5 Capital") submitted a non-binding expression of interest to acquire all of the company's outstanding common shares " at a price equal to $0.30 per share " and provide bridge funding until completion of the proposed transaction:

Further, in light of the Company’s liquidity needs and in order to enable the Company to complete the Proposed Transaction, C5 indicated that it was prepared to extend the Company financing on terms no less favorable than those set forth in the secured promissory notes issued by the Company on or around December 14, 2022 in the aggregate principal amount of approximately $6.9 million, including (i) an initial payment of $2 million by December 28, 2022, (ii) a second payment of $3.5 million on January 9, 2023 and (iii) a mutually agreed amount to be placed in escrow upon entering into definitive agreements with respect to the Proposed Transaction. C5 has conditioned further discussion regarding the Proposal on the Company agreeing to a mutual exclusivity period through January 31, 2022 (subject to an automatic extension of an additional seven days) to seek to negotiate definitive agreements with respect to the Proposed Transaction.

On February 8, the exclusivity period was extended until February 28 to provide additional time for negotiating definitive agreements. In return, C5 Capital agreed to advance another $4.0 million in bridge financing.

Investors should note that under the " exigent circumstances " and considering the composition of the Board of Directors ("BoD") and the company's stockholder base, IronNet's BoD does not intend to establish a special committee of independent directors and engaging new financial and legal advisors or seek approval of the proposed transaction by a majority of outside shareholders.

Moreover, where time is of the essence, as it is here, these additional procedural hurdles could preclude the possibility of a Transaction.

Bottom Line

With long-term shareholder C5 Capital apparently not yet willing to give up on its investment, IronNet is likely to avoid bankruptcy but given the above-discussed circumstances, investors shouldn't expect the private equity firm to sweeten its offer materially or at all.

Should negotiations break down, I would expect the company to file for bankruptcy in the very near future.

With the shares trading approximately 60% above C5 Capital's non-binding offer and a definitive agreement likely to be finalized until the end of this month, investors should consider selling existing positions and moving on.

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