Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or the context otherwise requires, references in this section to “IronNet,” “we,” “us,” “our”, “the Company” and other similar terms refer to IronNet, 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 the interim and annual consolidated financial statements and related notes included in the Company’s final prospectus filed with the Securities and Exchange Commission (the “SEC”) on September 30, 2021 pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended (the “Final Prospectus”). The interim condensed consolidated financial statements in this report are presented in U.S. dollars (USD) 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.
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in the Final Prospectus, particularly in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” Our fiscal year end is January 31, and our fiscal quarters end on April 30, July 31, October 31, and January 31. Our fiscal years ended January 31, 2021 and January 31, 2020 are referred to herein as fiscal 2021 and fiscal 2020, respectively. The three months ended October 31, 2021 and October 31, 2020 are referred to herein as quarter to date 2022 and quarter to date 2021, respectively. The nine months ended October 31, 2021 and October 31, 2020 are referred to herein as year to date 2022 and year to date 2021, respectively.
Except with respect to statements in this Amendment No. 1 revised or provided to reflect the effects of the Restatement, forward-looking statements herein are as of the Original Form 10-Q, filed with the SEC on December 15, 2021, unless specifically stated to be made as of a different date, and the Company has not updated forward-looking statements or information to reflect events occurring after the Original Form 10-Q.
Overview
Gen. Keith B. Alexander (Ret.) founded IronNet in 2014 to solve the major cybersecurity problem he witnessed and defined during his tenure as former head of the NSA and founding Commander of U.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.
Restatement
As discussed in the Explanatory Note to this Amendment No. 1 and Note 2, “Restatement of Condensed Consolidated Financial Statements,” included in the unaudited condensed consolidated financial statements, the Company has restated certain information contained in its previously issued unaudited condensed consolidated financial statements and related disclosures as of October 31, 2021 and for the three and nine months then ended, as a result of the Company not appropriately applying modification accounting to stock-based compensation awards that were issued and outstanding as of August 26, 2021, the closing date of the merger between the Company and Legacy IronNet. When calculating the additional stock-based compensation cost to recognize for modified unvested awards for the three months ended October 31, 2021, the Company considered requisite service rendered by the employee to start from the original vesting commencement date of the award. Upon further evaluation, we determined that the correct expense recognition applicable under Accounting Standards Codification Topic 718, Stock Compensation for a Type III (improbable-to-probable) modification requires the use of a method that utilizes the date of modification (August 26, 2021) as the beginning of the requisite service period for unvested portions of the awards outstanding, rather than the original vesting commencement date of the award. The impact of correcting the requisite service period start date is to shift the recognition of stock-based compensation expense to later periods.
Our Business
IronNet has 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. IronNet complements 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 its integrated software capabilities through its Collective Defense platform. The platform is comprised of two flagship products:
IronDefense is an advanced 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.
21
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. 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 Defense Community enables faster detection of attacks at earlier stages of the cyber kill chain.
Our Collective Defense platform delivers strong network effects: every customer contributing its threat data (anonymously) into the community reaps exponential 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.
The Collective Defense platform is available for on-premise, cloud (public or private), and hybrid environments, and is scalable to include small-to-medium businesses, public-sector agencies, as well as multinational corporations. We utilize the platform to 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 customer support 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 well beyond implementation of our Collective Defense platform.
The Collective Defense platform is available via a subscription-based pricing and flexible delivery model, with options available for major public cloud providers such as AWS and Microsoft Azure; private cloud, or HCI such as Nutanix; and on-premise environments through hardware and virtual options. To make it as easy as possible for customers to add Collective Defense into their existing security stack, we built a rich set of APIs that enable integrations with standard security products, SIEM; SOAR; EDR; NGFW tools; and cloud-native logs from 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
To date, IronNet has financed its operations primarily through private and public placements of common stock, warrants, redeemable convertible preferred stock and the closing of the Merger.
On August 26, 2021, the Company received $13.3 million held in Legacy LGL’s trust account net of redemptions.
In connection with the execution of the Merger Agreement, a number of purchasers (each, a “Subscriber”) purchased from the Company an aggregate of 12,500,000 shares of Company common stock (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of $125.0 million, pursuant to separate subscription agreements entered into effective as of March 15, 2021. Transaction costs associated with the issuance of the PIPE shares were $21.2 million.
During the nine months ended October 31, 2021, IronNet incurred a net loss of $195.6 million, of which $129.9 million related to a non-cash expense related to the modification of Restricted Stock Units, as well as a further non-cash expense to reflect the increase in fair market value in private warrants through the dates they were exercised, and used $59.3 million in cash to fund operations. As of October 31, 2021, IronNet had $73.9 million of cash on hand to continue to fund operations.
IronNet expects its capital and operating expenditures to increase in connection with its ongoing activities, as IronNet:
1.continues to invest in research and development related to new technologies;
2.increases its investment in marketing and advertising, as well as the sales and distribution infrastructure for its products and services;
3.maintains and improves operational, financial, and management information systems;
4.hires additional personnel;
5.obtains, maintains, expands, and protects its intellectual property portfolio; and
6.enhances internal functions to support its operations as a publicly-traded company.
Impact of COVID-19 On Our Business
In December 2019, the first cases of COVID-19 were reported in China. In March 2020, the World Health Organization declared COVID-19 a global pandemic. We operate in geographic locations that have been impacted by COVID-19. The pandemic has impacted, and could further impact, our operations and the operations of our customers as a result of quarantines, various local, state and federal government public health orders, facility and business closures, and travel and logistics restrictions. We anticipate governments and businesses will likely take additional actions or extend existing actions to respond to the risks of the COVID-19 pandemic. We are continuing to actively monitor the impacts and potential impacts of the COVID-19 pandemic on our customers, supply chain, and other integral parts of our operations. As the pandemic continues to varying impacts around the globe, we have noted that it has impacted the timing of certain of our professional services revenues.
We instituted a global work-from-home policy in March 2020 and to date have not experienced significant disruptions as a result. We expect that most of our employees will work from home indefinitely. As part of our shift to remote operations, we terminated several office leases that did not have a material financial impact on us.
In response to the increased economic uncertainties that the impact of the COVID-19 pandemic was expected to have on our business, results of operations, and liquidity and capital resources, we took measures to ensure that we would be able to maintain the continuity of our business operations. For example, in April 2020 we obtained a loan in the amount of $5.6 million from the U.S. Small Business Administration (SBA) under the Paycheck Protection Program (PPP) which was paid in full at the date of the Merger, August 26, 2021.
In addition to receiving a PPP loan under the CARES Act, we also elected to defer our portion of payroll taxes due for the period from March 2020 through December 31, 2020. Of the deferred amounts, one-half will become due on each of December 31, 2021 and 2022.
22
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. IronNet believes that it has significant room to capture additional market share and intends to continue to invest in sales and marketing to engage its prospective customers, increase brand awareness, and drive adoption of its 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:
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|
October 31, |
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|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
Recurring Software Customers |
|
|
74 |
|
|
|
25 |
|
Year-over-year growth |
|
|
196 |
% |
|
|
47 |
% |
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:
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October 31, |
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2021 |
|
|
2020 |
|
|
($ in millions) |
|
Annual recurring revenues |
|
$ |
27.5 |
|
|
$ |
21.2 |
|
Year-over-year growth |
|
|
30 |
% |
|
|
32 |
% |
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 ended October 31, 2021 and 2020, as applicable.
b.Denominator: We use the revenue attributable to software and product customers for the nine months ended October 31, 2021 and 2020 in the numerator. This effectively represents the revenue base that is being generated by those customers.
Dollar-based average contract length is obtained by dividing the Numerator by the Denominator. Our dollar-based average contract length decreased from 3.2 to 2.8 years, or (13)%, for the nine months ended October 31, 2021 as compared to the nine months ended October 31, 2020. As our revenues and our customer base increases, we expect our average contract length to trend downward over time. Declines in average contract length are not reflective of the average lifetime of a customer.
23
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|
October 31, |
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|
|
2021 |
|
|
2020 |
|
|
|
(in years) |
|
Dollar-based average contract length |
|
|
2.8 |
|
|
|
3.2 |
|
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 decreased $4.8 million, or 20%, for the nine months ended October 31, 2021 in comparison with the nine months ended October 31, 2020. Calculated billings decreased $0.5 million, or 6%, for the three months ended October 31, 2021 in comparison with the three months ended July 31, 2021. We expect that calculated billings will be affected by timing of entering into agreements with customers and the mix of billings in each reporting period as we typically invoice customers multi-year or annually in advance and, to a lesser extent, monthly in advance.
While we believe that calculated billings may be helpful to investors because it provides insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-to-quarter or
year-over-year comparative measure. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our metric of calculated billings as a tool for comparison. Because of these and other limitations, you should consider calculated billings along with revenue and our other GAAP financial results.
The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated billings:
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Three Months Ended October 31, |
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|
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|
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|
|
2021 |
|
|
2020 |
|
|
2021 vs 2020 |
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|
|
($ in millions) |
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|
|
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|
|
|
|
|
(As Restated) |
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|
|
|
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|
|
|
|
Revenue |
|
$ |
6.9 |
|
|
$ |
7.0 |
|
|
|
(0.1 |
) |
|
|
(1 |
)% |
Add: Total Deferred revenue, end of period |
|
|
34.3 |
|
|
|
23.0 |
|
|
|
11.3 |
|
|
|
49 |
|
Less: Total Deferred revenue, beginning of period |
|
|
33.6 |
|
|
|
21.9 |
|
|
|
11.7 |
|
|
|
53 |
|
Calculated billings |
|
$ |
7.6 |
|
|
$ |
8.1 |
|
|
|
(0.5 |
) |
|
|
(6 |
)% |
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|
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|
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|
|
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|
|
Nine Months Ended October 31, |
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|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
2021 vs 2020 |
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|
|
($ in millions) |
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|
|
|
|
|
|
|
|
(As Restated) |
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|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
19.4 |
|
|
$ |
21.8 |
|
|
|
(2.4 |
) |
|
|
(11 |
)% |
Add: Total Deferred revenue, end of period |
|
|
34.3 |
|
|
|
23.0 |
|
|
|
11.3 |
|
|
|
49 |
|
Less: Total Deferred revenue, beginning of period |
|
|
34.0 |
|
|
|
20.3 |
|
|
|
13.7 |
|
|
|
67 |
|
Calculated billings |
|
$ |
19.7 |
|
|
$ |
24.5 |
|
|
|
(4.8 |
) |
|
|
(20 |
)% |
Adjusted Results of Operations
The following table shows our non-GAAP results of operations for the three and nine months ended October 31, 2021 after excluding the impacts of the stock-based compensation expense and the revaluation of the Private Warrants prior to their cashless exercise and transaction costs incurred related to the Merger:
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|
|
Three Months Ended October 31, |
|
|
Nine Months Ended October 31, |
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|
|
|
2021 |
|
|
2021 |
|
|
|
|
($ in thousands) |
|
|
|
|
(As Restated) |
|
|
(As Restated) |
|
Net loss |
|
|
$ |
(162,949 |
) |
|
$ |
(195,616 |
) |
Stock compensation expense (1) |
|
|
|
129,921 |
|
|
|
129,921 |
|
Change in fair value of warrants liabilities |
|
|
|
11,302 |
|
|
|
11,302 |
|
Transaction costs expense (2) |
|
|
|
1,556 |
|
|
|
2,328 |
|
Non-GAAP Adjusted Net Loss |
|
|
$ |
(20,170 |
) |
|
$ |
(52,065 |
) |
1.Total stock based compensation of $129.9 million has been recorded within research and development of $17.2 million, sales and marketing of $43.5 million, and general and administrative expense of $69.2 million on the statement of operations
2.Transaction expenses have been recorded within general and administrative expense on the statement of operations
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 89% our revenue in quarter to date 2022, for 85% of our revenue in quarter to date 2021, for 93% of our revenue in year to date 2022 and for 83% of our revenue in year to date 2021. Professional services revenues accounted for 11% of our revenue in quarter to date 2022, for 15% of our revenue in our quarter to date 2021, for 7% of our revenue in year to date 2022 and for 17% of our revenue in year to date 2021.
24
Our typical customer contracts and subscriptions range from one to five years. We typically invoice customers 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 IronNet’s 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 they are recorded in revenue if the revenue recognition criteria have been met. Significant judgement 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 (expense), net
Other income (expense), net consists primarily of interest income, interest expense, and foreign currency exchange gains and losses.
Change in fair value of warrants liabilities
This line item consists of non-cash expense that was recognized due to the change in fair value of warrants liabilities.
Provision for income taxes
Provision for income taxes consists of federal and state income taxes in the United States and income taxes and withholding taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state deferred tax assets.
Results of Operations
Comparison of Quarter to Date 2022 and Quarter to Date 2021
The following tables set forth our consolidated statement of operations in dollar amounts and as a percentage of total revenue for each period presented:
25
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|
|
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|
|
Three Months Ended October 31, |
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
Change $ |
|
|
Change % |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
|
|
Product, subscription and support revenue |
|
$ |
6,132 |
|
|
$ |
5,958 |
|
|
$ |
174 |
|
|
|
3 |
% |
Professional services revenue |
|
|
781 |
|
|
|
1,055 |
|
|
|
(274 |
) |
|
|
(26 |
)% |
Total revenue |
|
|
6,913 |
|
|
|
7,013 |
|
|
|
(100 |
) |
|
|
(1 |
)% |
Cost of product, subscription and support revenue |
|
|
2,082 |
|
|
|
1,252 |
|
|
|
830 |
|
|
|
66 |
% |
Cost of professional services revenue |
|
|
286 |
|
|
|
817 |
|
|
|
(531 |
) |
|
|
(65 |
)% |
Total cost of revenue |
|
|
2,368 |
|
|
|
2,069 |
|
|
|
299 |
|
|
|
14 |
% |
Gross profit |
|
|
4,545 |
|
|
|
4,944 |
|
|
|
(399 |
) |
|
|
(8 |
)% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
24,455 |
|
|
|
5,687 |
|
|
|
18,768 |
|
|
|
330 |
% |
Sales and marketing |
|
|
51,244 |
|
|
|
7,155 |
|
|
|
44,089 |
|
|
|
616 |
% |
General and administrative |
|
|
79,735 |
|
|
|
4,715 |
|
|
|
75,020 |
|
|
|
1,591 |
% |
Total operating expenses |
|
|
155,434 |
|
|
|
17,557 |
|
|
|
137,877 |
|
|
|
785 |
% |
Operating loss |
|
|
(150,889 |
) |
|
|
(12,613 |
) |
|
|
(138,276 |
) |
|
|
1,096 |
% |
Other (expense) income, net |
|
|
(724 |
) |
|
|
178 |
|
|
|
(902 |
) |
|
|
(507 |
)% |
Change in fair value of warrants liabilities |
|
|
(11,302 |
) |
|
- |
|
|
|
(11,302 |
) |
|
|
100 |
% |
Loss before income taxes |
|
|
(162,915 |
) |
|
|
(12,435 |
) |
|
|
(150,480 |
) |
|
|
1,210 |
% |
Benefit (provision) for income taxes |
|
|
(34 |
) |
|
|
(19 |
) |
|
|
(15 |
) |
|
|
79 |
% |
Net loss |
|
$ |
(162,949 |
) |
|
$ |
(12,454 |
) |
|
$ |
(150,495 |
) |
|
|
1,208 |
% |
Revenue
Total revenue decreased by $0.1 million or (1)% in quarter to date 2022 compared to quarter to date 2021.
Product, subscription and support revenue increased by $0.2 million or 3% primarily due to the Company’s transition from contracts that had material non-recurring elements which would not renew in full to contract forms that were designed to fully renew.
Professional services revenue decreased $0.3 million or (26)% in quarter to date 2022 compared to quarter to date 2021, primarily due to the completion of a key Enterprise engagement in quarter to date 2021. Professional services accounted for 11% of our total revenue in quarter to date 2022 and for 15% of our total revenue in quarter to date 2021.
Cost of revenue
Total cost of revenue increased by $0.3 million or 14%, in quarter to date 2022, compared to quarter to date 2021. Cost of product, subscription and support revenue increased by $0.8 million or 66%, in quarter to date 2022, compared to quarter to date 2021. The increase was due primarily to an increase in customer cloud costs with business scale and a $0.2 million amortization catch-up for deployed sensors during quarter to date 2022 compared to quarter to date 2021.
Cost of professional service cost of revenue decreased by $0.5 million when comparing quarter to date 2022 and quarter to date 2021, aligned to changes in professional services revenue.
Gross Profit and Gross Margin
Mix changes in cost of revenue resulted in a decrease in software gross margin to 66% in quarter to date 2022 compared to 79% in quarter to date 2021, and an increase in professional services gross margin to 63% in quarter to date 2022 compared to 23% in quarter to date 2021. Quarter to date 2022 margin was lower due to amortization catch-up of $0.2 million that was not realized in the first half of fiscal 2022. In quarter to date 2021 we also onboarded several significant revenue customers which had not yet ramped their full cloud costs in the period and finalized the delivery of a key significant service contract in EMEA. This had materially increased margins in the comparable quarter last year. Professional services margin will continue to be volatile contract to contract as we scale the business.
We expect that gross margins for the rest of fiscal 2022 will improve slightly. Margins may remain volatile compared to fiscal 2021 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 quarter to date 2022 as compared to quarter to date 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, |
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
Change $ |
|
|
Change % |
|
|
|
($ in millions) |
|
|
|
|
|
|
|
Product, subscription and support gross profit |
|
$ |
4.0 |
|
|
$ |
4.7 |
|
|
$ |
(0.7 |
) |
|
|
(15 |
)% |
Professional services gross profit |
|
|
0.5 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
150 |
% |
Total gross profit |
|
$ |
4.5 |
|
|
$ |
4.9 |
|
|
$ |
(0.4 |
) |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
Change |
|
Product, subscription and support margin |
|
|
66.0 |
% |
|
|
79.0 |
% |
|
|
(13.0 |
)% |
Professional services margin |
|
|
63.4 |
% |
|
|
22.6 |
% |
|
|
40.8 |
% |
Total gross margin |
|
|
65.7 |
% |
|
|
70.5 |
% |
|
|
(4.8 |
)% |
Operating expenses
Research and development
Research and development expenses increased by $18.8 million or 330% in quarter to date 2022, compared to quarter to date 2021 primarily due to non-cash stock compensation expenses of $17.2 million triggered by the modification of the restricted stock units and ramping resources to support product development.
26
At 354% of total revenues in quarter to date 2022 compared to 81% in quarter to date 2021, we expect that our overall R&D expenditure rate as a percentage of revenues will decline in the future.
Sales and marketing
Sales and marketing cost increased by $44.1 million or 616% in quarter to date 2022, compared to quarter to date 2021, primarily due to non-cash stock compensation $43.5 million triggered by the modification of the restricted stock units and ramped sales and marketing personnel in quarter to date 2022. At 741% of revenues in quarter to date 2022 compared to 102% in quarter to date 2021, 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 $75.0 million or 1591% when comparing quarter to date 2022 to quarter to date 2021, primarily due to non-cash stock compensation $69.2 million triggered by the modification of the restricted stock units and costs related to being public. Quarter to date 2022 general and administrative expenses were at 1153% of total revenues compared to 67% in quarter to date 2021.We expect that our overall general and administrative expenditure rates as a percentage of revenues will decline in the future.
Other (expense) income, net
The net fluctuation of $0.9 million in Other (expense) income is largely the result of interest expense of $0.7 million related to the PPP loan and SVB Bridge loan. These debts and the interest were paid off at the date of the Merger.
Change in fair value of warrants liabilities
$11.3 million of non-cash expense was recognized due to the change in fair value of warrants liabilities.
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.
Comparison of Year to Date 2022 and Year to Date 2021
The following tables set forth our consolidated statements of operations in dollar amounts and as a percentage of total revenue for each period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31, |
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
Change $ |
|
|
Change % |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
|
|
Product, subscription and support revenue |
|
$ |
18,038 |
|
|
$ |
18,047 |
|
|
$ |
(9 |
) |
|
|
(0 |
)% |
Professional services revenue |
|
|
1,327 |
|
|
|
3,779 |
|
|
|
(2,452 |
) |
|
|
(65 |
)% |
Total revenue |
|
|
19,365 |
|
|
|
21,826 |
|
|
|
(2,461 |
) |
|
|
(11 |
)% |
Cost of product, subscription and support revenue |
|
|
5,505 |
|
|
|
3,534 |
|
|
|
1,971 |
|
|
|
56 |
% |
Cost of professional services revenue |
|
|
617 |
|
|
|
1,596 |
|
|
|
(979 |
) |
|
|
(61 |
)% |
Total cost of revenue |
|
|
6,122 |
|
|
|
5,130 |
|
|
|
992 |
|
|
|
19 |
% |
Gross profit |
|
|
13,243 |
|
|
|
16,696 |
|
|
|
(3,453 |
) |
|
|
(21 |
)% |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
38,917 |
|
|
|
19,965 |
|
|
|
18,952 |
|
|
|
95 |
% |
Sales and marketing |
|
|
66,095 |
|
|
|
23,265 |
|
|
|
42,830 |
|
|
|
184 |
% |
General and administrative |
|
|
91,419 |
|
|
|
16,690 |
|
|
|
74,729 |
|
|
|
448 |
% |
Total operating expenses |
|
|
196,431 |
|
|
|
59,920 |
|
|
|
136,511 |
|
|
|
228 |
% |
Operating loss |
|
|
(183,188 |
) |
|
|
(43,224 |
) |
|
|
(139,964 |
) |
|
|
324 |
% |
Other (expense) income, net |
|
|
(1,070 |
) |
|
|
125 |
|
|
|
(1,195 |
) |
|
|
(956 |
)% |
Change in fair value of warrants liabilities |
|
|
(11,302 |
) |
|
|
— |
|
|
|
(11,302 |
) |
|
|
100 |
% |
Loss before income taxes |
|
|
(195,560 |
) |
|
|
(43,099 |
) |
|
|
(152,461 |
) |
|
|
354 |
% |
Benefit (provision) for income taxes |
|
|
(56 |
) |
|
|
(58 |
) |
|
|
2 |
|
|
|
(3 |
)% |
Net loss |
|
$ |
(195,616 |
) |
|
$ |
(43,157 |
) |
|
$ |
(152,459 |
) |
|
|
353 |
% |
Revenue
Total revenue decreased by $2.5 million or (11)% in year to date 2022 compared to year to date 2021.
Product, subscription and support revenue decreased slightly by $0.01 million primarily due to the net effect of the Company’s transition from contracts that had material non-recurring 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 decreased $2.5 million or (65)% in year to date 2022 compared to year to date 2021, primarily due to the completion of a national cybersecurity strategy engagement in EMEA, a key Enterprise engagement, in fiscal 2021 and delays in professional services contract starts in year to date 2022 due to COVID-19. Professional services accounted for 7% of our total revenue in year to date 2022 and for 17% of our total revenue in year to date 2021.
Cost of revenue
Total cost of revenue increased by $1.0 million or 19%, in year to date 2022, compared to year to date 2021. Cost of product, subscription and support revenue increased by $2.0 million or 56%, in year to date 2022, compared to year to date 2021. The increase was due primarily to an increase in customer counts and related cloud hosting costs during year to date 2022 compared to year to date 2021.
27
Cost of professional service revenue decreased by $1.0 million or (61)% in year to date 2022, compared to year to date 2021. The decrease in cost of service revenue was primarily due to a decrease in overall professional services activity in year to date 2022 compared to year to date 2021.
Gross Profit and Gross Margin
Mix changes in cost of revenue resulted in a decrease in software gross margin to 70% in year to date 2022 compared to 80% in year to date 2021, and a decrease in professional services gross margin to 54% in year to date 2022 compared to 58% in year to date 2021. In year to date 2021 we onboarded several significant revenue customers which had not yet ramped their full cloud costs in period and finalized delivery of key significant service contract in EMEA. This had materially increased margin in the comparable period last year. Professional services margin will continue to be volatile contract to contract as we scale the business.
We expect that gross margins for the rest of fiscal 2022 will improve. Margins may remain volatile compared to fiscal 2021 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 year to date 2022 as compared to year to date 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31, |
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
Change $ |
|
|
Change % |
|
|
|
($ in millions) |
|
|
|
|
|
|
|
Product, subscription and support gross profit |
|
$ |
12.5 |
|
|
$ |
14.5 |
|
|
$ |
(2.0 |
) |
|
|
(14 |
)% |
Professional services profit |
|
|
0.7 |
|
|
|
2.2 |
|
|
|
(1.5 |
) |
|
|
(68 |
)% |
Total gross profit |
|
$ |
13.2 |
|
|
$ |
16.7 |
|
|
$ |
(3.5 |
) |
|
|
(21 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
|
Change |
|
Product, subscription and support margin |
|
|
69.5 |
% |
|
|
80.4 |
% |
|
|
(10.9 |
)% |
Professional services margin |
|
|
53.5 |
% |
|
|
57.8 |
% |
|
|
(4.3 |
)% |
Total gross margin |
|
|
68.4 |
% |
|
|
76.5 |
% |
|
|
(8.1 |
)% |
Operating expenses
Research and development
Research and development expenses increased by $19.0 million or 95%, in year to date 2022, compared to year to date 2021 primarily due to non-cash stock compensation expenses of $17.2 million triggered by the modification of the restricted stock units and the ramping external costs to support product development. At 201% of total revenues in year to date 2022 compared to 91% in year to date 2021, we expect that our overall R&D expenditure rate as a percentage of revenues will decline in the future.
Sales and marketing
Sales and marketing cost increased by $42.8 million or 184% in year to date 2022, compared to year to date 2021, primarily due to non-cash stock compensation expense $43.5 million triggered by the modification of the restricted stock units. At 341% of total revenues in year to date 2022 compared to 107% in year to date 2021, 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 $74.7 million when comparing year to date 2022 to year to date 2021, primarily due to stock compensation expense of $69.2 million triggered by the modification of the restricted stock units and costs related to being public. Year to date 2022 general and administrative expenses were at 472% of total revenues compared to 76% in year to date 2021. We expect that our overall general and administrative expenditure rates as a percentage of revenues will decline in the future.
Other (expense) income, net
The net fluctuation of $1.2 million in Other (expense) income is largely the result of interest expense of $1.1 million related to the PPP loan and SVB Bridge loan. These debts and the interest were paid off at the date of the Merger.
Change in fair value of warrants liabilities
$11.3 million of non-cash expense was recognized due to the change in fair value of warrants liabilities.
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 Legacy IronNet’s inception. Through October 31, 2021, we have funded our operations with proceeds from sales of IronNet common stock and redeemable convertible preferred stock, proceeds related to public trust shares as part of the recapitalization, proceeds from PIPE shares, loans, and receipts from sales of our products and services to customers in the ordinary course of business and proceeds from the Reverse Recapitalization. As of October 31, 2021, the Company had cash and cash equivalents of $73.9 million.
28
At the effective date of the Merger, the Company repaid the outstanding principal and interests related to the PPP loan and SVB Bridge Loan.
Long- Term Liquidity Requirements
Based on our growth plan, the Company believes that its cash on hand and collectable receivables, together with cash generated from sales of our products and services will satisfy its working capital and capital requirements for at least the next twelve months.
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 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 Year to Date 2022 and Year to Date 2021
The following table summarizes our cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31, |
|
|
|
2021 |
|
|
2020 |
|
|
|
(in thousands) |
|
Net cash used in operating activities |
|
$ |
(59,095 |
) |
|
$ |
(39,897 |
) |
Net cash (used in) provided by investing activities |
|
$ |
(2,156 |
) |
|
$ |
1,057 |
|
Net cash provided by financing activities |
|
$ |
103,381 |
|
|
$ |
49,707 |
|
Operating Activities
Net cash used in operating activities during year to date 2022 was $(59.1 million), which resulted from a net loss of $(195.6 million), primarily driven by the modification of the restricted stock units 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.
Net cash used in operating activities during year to date 2021 was $(39.9 million), which resulted from a net loss of $(43.2 million) adjusted for noncash charges of $1.3 million. Non-cash charges primarily consisted of $0.9 million of depreciation and amortization expense. Cash used in operating activities during year to date 2021 benefited from the change in deferred revenue of $2.7 million, offset by a change in accounts receivable of $(1.0 million).
The overall increase in net cash used in operating activities by the Company in 2022 compared to 2021 was driven by an increase in cash operating expenses of approximately $6.6 million, primarily due to one-time expenses of preparing for and completing the Merger as well as the new recurring costs of operating as a public company, decreases in services revenue and increases in cost of sales totaling approximately $3.4 million as more customers analytics came more fully online, and, on the balance sheet, primarily an increase in prepaid expenses and other current assets of $3.2 million.
Investing Activities
Net cash used in investing activities during year to date 2022 of $(2.2 million) was primarily due to $(2.1 million) in purchases of property and equipment.
Net cash provided by investing activities during year to date 2021 of $1.1 million was primarily due to net proceeds from sales and maturities of investments of $1.4 million offset by $(0.4 million) in purchases of property and equipment.
Financing Activities
Net cash provided by financing activities of $103.4 million during year to date 2022 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 SVB Bridge loan for $15.0 million, offset by payment of PPP loan and SVB Bridge loan of $5.6 million.
Net cash provided by financing activities of $49.7 million during year to date 2021 was primarily due to net proceeds from our issuance of common stock of $44.1 million and the net proceeds from the PPP loan of $5.6 million. The PPP loan was fully paid on August 26, 2021 as part of the Merger.
Contractual obligations
Our principal commitments consist of lease obligations for office space. For more information regarding our lease obligations, see Note 8, Commitments and Contingencies to the interim condensed consolidated financial statements.
During year to date 2022 and in future years, 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.
Off-Balance sheet arrangements
As of October 31, 2021, we did not have any off-balance sheet arrangements.
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
29
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 judgements 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. The Company satisfies 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 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 as discussed in further detail below. 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 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 ISOs 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 is recognized on a graded basis matched to the length and vesting tranches for each grant. In the event that a RSU grant holder is terminated before the award is fully vested, the full amount of the unvested portion of the award will be recognized as a forfeiture in the period of termination.
We use the Black-Scholes pricing model to estimate the fair value of options on the date of grant. On August 26, 2021, the Board authorized that the Liquidity Event Satisfaction for the restricted stock units will be deemed to have been met as a result of the merger and shares of common stock subject to the awards will be delivered, in accordance with the terms of the Restricted Stock Unit Agreement. As a consequence, the Company recognized a non cash expense in the fiscal third quarter 2022 in an amount of $129.9 million related to 16,634,972 outstanding RSUs, 8,204,455 remain unvested as of October 31, 2021.
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 on U.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.
Recently Issued Accounting Standards
Refer to Note 1 of the notes to our unaudited consolidated financial statements included in this Amendment No. 1 for our assessment of recently issued and adopted accounting standards.
Commitments and Contingencies
30
Refer to Note 8 of the notes to our unaudited consolidated financial statements included in this Amendment No. 1, Commitments and contingencies
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.