IronNet (IRNT): Sell On Weak Q1 2023 Earnings, Dwindling Cash Reserves

Two weeks ago, recent cybersecurity SPAC deal IronNet (NYSE:IRNT) reported another set of disappointing quarterly results with the company’s key performance metric Annual Recurring Revenue or “ARR” actually showing a $1.5 million sequential decline allegedly due to budgeting delays at certain federal customers.

Despite this issue, management reaffirmed FY2023 guidance:

• Revenue of approximately $34 million, representing nearly 25% growth year over year.
• ARR of approximately $48 million at the end of the fiscal year, representing 50% growth year over year.

At least in my view, IronNet is about to make the same mistake as last year when it failed miserably in managing investor expectations.

With Q1 showing negative ARR growth, the company’s 50%+ growth target for Annual Recurring Revenue looks overly ambitious again.

On the conference call, one analyst outright called for management to lower guidance while others appeared to be somewhat perplexed by a 3% negative impact on gross margins from an increase in warranty costs related to sensor inventory held for potential large future contracts.

Free cash flow was negative $23.1 million. IronNet finished the quarter with cash and cash equivalents of $31.4 million.

The company has not yet utilized its up to $175 million committed equity financing with Tumim Stone Capital (“Tumim”) but the collapse of its stock price in conjunction with a 9.99% ownership blocker specified in the common stock purchase agreement with Tumim has limited the amount available to IronNet to approximately $20 million as of today.

Clearly, something’s got to give as otherwise IronNet will likely run out of funds by the end of this year.

That said, with the company being debt-free, some sort of toxic convertible financing would still be an option to keep the lights on for a little bit longer.

With stiffening economic headwinds and the looming risk of recession, it is difficult to be optimistic on the company’s prospects.

Quite frankly, I would be surprised to see the company still being listed on the Big Board twelve months from now without a reverse stock split or at all.

Bottom Line:

IronNet has started FY2023 on a weak note with decreasing ARR, lower gross margins and substantial cash burn.

Given the weakening macroeconomic environment, it’s difficult to envision the company going against the grain and reaching its stated target of 50%+ ARR growth in FY2023, particularly given IronNet’s dwindling cash reserves which do not bode well for closing on the large-scale strategic transactions still advertised by management.

Assuming quarterly cash usage of $20 million and the company raising the entire available amount under the Tumim equity financing line, IronNet would run out of funds by the end of this year at the latest point.

That said, with the company being debt-free, some sort of toxic convertible financing would still be an option to keep the lights on for a little bit longer.

Given the headwinds discussed above, investors would be well-served to remain on the sidelines or outright sell existing positions.