8-K/A
0001823575 0001823575 2022-08-03 2022-08-03 0001823575 us-gaap:CommonStockMember 2022-08-03 2022-08-03 0001823575 us-gaap:WarrantMember 2022-08-03 2022-08-03

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 3, 2022

 

 

ZEROFOX HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   001-39722   98-1557361
(State or other jurisdiction
of incorporation)
  (Commission
File Number)
  (IRS Employer
Identification No.)

 

1834 S. Charles Street

Baltimore, Maryland

  21230
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (855) 936-9369

Not Applicable

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading
Symbol(s)

 

Name of each exchange
on which registered

Common Stock, $0.0001 par value per share   ZFOX   The Nasdaq Stock Market LLC
Warrants, each whole warrant exercisable for one share of Common Stock at an exercise price of $11.50 per share   ZFOXW   The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

 

 


EXPLANTORY NOTE

This Amendment No. 1 on Form 8-K (“Amendment No. 1”) amends the Current Report on Form 8-K of ZeroFox Holdings, Inc., a Delaware corporation (the “Company”), filed on August 9, 2022 (the “Original Report”), in which the Company reported, among other events, the completion of the Business Combination (as defined in the Original Report).

The Company is filing this Amendment No. 1 to include the following:

 

  1.

Unaudited condensed consolidated financial statements of ZeroFox, Inc., a Delaware corporation, as of July 31, 2022, and for the six months ended July 31, 2022 and 2021, as Exhibit 99.1;

 

  2.

Management’s discussion and analysis of financial condition and results of operations for ZeroFox, Inc. for the six months ended July 31, 2022, as Exhibit 99.2; and

 

  3.

Unaudited pro forma condensed combined financial information as of and for the six months ended July 31, 2022, and the year ended January 31, 2022, as Exhibit 99.3.

This Amendment No. 1 does not amend any other item of the Original Report or purport to provide an update or a discussion of any developments at the Company or its subsidiaries subsequent to the filing date of the Original Report. The information previously reported or incorporated by reference in or filed with the Original Report is hereby incorporated by reference in this Amendment No. 1. Capitalized terms used but not defined herein have the meanings assigned to them in the Original Report.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired.

The unaudited condensed consolidated financial statements of ZeroFox, Inc., a Delaware corporation, as of July 31, 2022, and for the six months ended July 31, 2022 and 2021 are attached as Exhibit 99.1 and are incorporated herein by reference.

(b) Pro Forma Financial Information.

The unaudited pro forma condensed combined financial information as of and for the six months ended July 31, 2022, and for the year ended January 31, 2022, is set forth on Exhibit 99.3 hereto and is incorporated herein by reference.

 

2


(d) Exhibits.

 

 

3


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    ZEROFOX HOLDINGS, INC.
Date: September 12, 2022     By:  

/s/ Timothy S. Bender

    Name:    Timothy S. Bender
    Title:      Chief Financial Officer

 

4

EX-99.1

Exhibit 99.1

 

ZeroFox, Inc. and Subsidiaries

 

Condensed Consolidated Financial Statements as of July 31, 2022 and for the six months ended July 31, 2022 and 2021


ZeroFox, Inc. and Subsidiaries

TABLE OF CONTENTS

 

 

     Page  

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

  

Condensed Consolidated Balance Sheets as of July 31, 2022 and January 31, 2022

     1  

Condensed Consolidated Statements of Comprehensive Loss for the six months ended July 31, 2022 and 2021

     2  

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit as of July 31, 2022 and 2021

     3  

Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2022 and 2021

     4  

Notes to Condensed Consolidated Financial Statements

     6  


ZeroFox, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

 

     July 31,      January 31,  

(in thousands, except share data)

   2022      2022  

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 2,803      $ 10,274  

Accounts receivable, net of allowance for doubtful accounts
of $61 and $68, respectively

     14,210        17,046  

Deferred contract acquisition costs, current

     4,918        4,174  

Prepaid expenses and other assets

     2,859        1,276  
  

 

 

    

 

 

 

Total current assets

     24,790        32,770  

Property and equipment, net of accumulated depreciation of
$2,174 and $2,022, respectively

     609        694  

Capitalized software, net of accumulated amortization of
$3,972 and $3,657, respectively

     1,082        914  

Deferred contract acquisition costs, net of current portion

     6,854        7,481  

Acquired intangible assets - net of accumulated amortization
of $5,519 and $3,940, respectively

     12,631        14,210  

Goodwill

     35,002        35,002  

Other assets

     341        319  
  

 

 

    

 

 

 

Total assets

   $ 81,309      $ 91,390  
  

 

 

    

 

 

 

Liabilities, redeemable convertible preferred stock, and
stockholders’ deficit

     

Current liabilities:

     

Accounts payable

   $ 4,333      $ 4,276  

Accrued compensation, accrued expenses, and other current liabilities

     4,302        7,020  

Current portion of long-term debt

     6,094        5,970  

Deferred revenue, current

     36,019        29,532  
  

 

 

    

 

 

 

Total current liabilities

     50,748        46,798  

Deferred revenue—net of current portion

     6,326        9,299  

Long term debt—net of deferred financing costs of $1,866
and $1,627, respectively

     52,327        45,503  

Warrants

     7,387        10,709  
  

 

 

    

 

 

 

Total liabilities

     116,788        112,309  

Commitments and contingencies

     

Redeemable convertible preferred stock

     138,129        132,229  

Stockholders’ deficit

     

Common stock, $0.00001 par value; 319,462,878 authorized shares;
43,285,001 and 42,892,897 shares issued and outstanding, respectively

     —          —    

Additional paid-in capital

     4,829        3,873  

Accumulated deficit

     (178,278)        (156,820)  

Accumulated other comprehensive loss

     (159)        (201)  
  

 

 

    

 

 

 

Total stockholders’ deficit

     (173,608)        (153,148)  

Total liabilities, redeemable convertible preferred stock, and
stockholders’ deficit

   $ 81,309      $ 91,390  
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

1


ZeroFox, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 

     For the Six Months
Ended July 31,
 

(in thousands, except share data)

   2022      2021  

Revenue

   $ 28,743      $ 22,690  

Cost of revenue

     8,729        7,733  
  

 

 

    

 

 

 

Gross profit

     20,014        14,957  

Operating expenses

     

Research and development

     8,023        5,457  

Sales and marketing

     18,363        14,044  

General and administrative

     9,985        5,870  
  

 

 

    

 

 

 

Total operating expenses

     36,371        25,371  

Loss from operations

     (16,357)        (10,414)  
  

 

 

    

 

 

 

Other (expense) income

     

Interest expense, net

     (2,931)        (1,512)  

Change in fair value of warrant liability

     (2,059)        (5,320)  
  

 

 

    

 

 

 

Total other expense

     (4,990)        (6,832)  
  

 

 

    

 

 

 

Loss before income taxes

     (21,347)        (17,246)  

Income taxes

     111        56  
  

 

 

    

 

 

 

Net loss after tax

   $ (21,458)      $ (17,302)  
  

 

 

    

 

 

 

Net loss per share attributable to common stockholders, basic
and diluted

   $ (0.50)      $ (0.41)  
  

 

 

    

 

 

 

Weighted-average shares used in computation of net loss per
share attributable to common stockholders, basic and
diluted:

     43,038,331        41,953,610  
  

 

 

    

 

 

 

Other comprehensive income (loss)

     

Foreign currency translation

     42        (49)  
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     42        (49)  

Total comprehensive loss

   $ (21,416)      $ (17,351)  
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

2


ZeroFox, Inc. and Subsidiaries

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit (Unaudited)

 

     Redeemable Convertible Preferred Stock                                  Accumulated
Other
Comprehensive
Income
        

(in thousands, except
for share data)

   Series E
Redeemable
Convertible
Preferred Stock
     Series D-2
Redeemable
Convertible
Preferred Stock
     Series D-1
Redeemable
Convertible
Preferred Stock
     Series D
Redeemable
Convertible
Preferred Stock
     Series C-1
Redeemable
Convertible
Preferred Stock
     Series C
Redeemable
Convertible
Preferred Stock
     Series B
Redeemable
Convertible
Preferred Stock
     Series A
Redeemable
Convertible
Preferred Stock
     Series Seed
Redeemable Convertible
Preferred Stock
     Total
Redeemable Convertible
Preferred Stock
     Common Stock      Additional
Paid-in
Capital
     Accumulated
Deficit
     Stockholders’
Deficit
 

Balance—January 31, 2021

     12,006,090        25,409        993,868        1,451        5,878,303        8,171        13,871,547        21,067        11,376,115        13,979        21,124,699        19,899        26,914,949        22,047        15,997,285        10,159        9,198,372        2,208        117,361,228        124,390        41,904,944        —          2,975        (118,381      (123      (115,529
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Issuance of Series E convertible preferred stock

     3,221,347        7,839        —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          3,221,347        7,839        —          —          —          —          —          —    

Stock-based compensation expense

     —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          320        —          —          320  

Exercise of options

     —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          103,108        —          22        —          —          22  

Net loss

     —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          (17,302      —          (17,302

Foreign currency translation adjustment

     —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          (48      (48
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance—July 31, 2021

     15,227,437      $ 33,248        993,868      $ 1,451        5,878,303      $ 8,171        13,871,547      $ 21,067        11,376,115      $ 13,979        21,124,699      $ 19,899        26,914,949      $ 22,047        15,997,285      $ 10,159        9,198,372      $ 2,208        120,582,575      $ 132,229        42,008,052      $ —        $ 3,317      $ (135,683    $ (171    $ (132,537
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                                                             

Balance—January 31, 2022

     15,227,437        33,248        993,868        1,451        5,878,303        8,171        13,871,547        21,067        11,376,115        13,979        21,124,699        19,899        26,914,949        22,047        15,997,285        10,159        9,198,372        2,208        120,582,575        132,229        42,892,927        —          3,873        (156,820      (201      (153,148
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Exercise of warrants

     539,576        3,043        —          —          —          —          —          —          506,490        2,857        —          —          —          —          —          —          —          —          1,046,066        5,900                    

Stock-based compensation expense

     —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          852        —          —          852  

Exercise of options

     —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          392,074        —          104        —          —          104  

Net loss

     —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          (21,458      —          (21,458

Foreign currency translation adjustment

     —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          42        42  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance—July 31, 2022

     15,767,013      $ 36,291        993,868      $ 1,451        5,878,303      $ 8,171        13,871,547      $ 21,067        11,882,605      $ 16,836        21,124,699      $ 19,899        26,914,949      $ 22,047        15,997,285      $ 10,159        9,198,372      $ 2,208        121,628,641      $ 138,129        43,285,001      $ —        $ 4,829      $ (178,278    $ (159    $ (173,608
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

3


ZeroFox, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     For the Six Months Ended
July 31,
 

(in thousands)

   2022      2021  

Cash flows from operating activities:

     

Net loss

   $ (21,458)      $ (17,301)  

Adjustments to reconcile net loss to net cash used in
operating activities:

     

Depreciation and amortization

     317        236  

Amortization of software development costs

     315        289  

Amortization of acquired intangible assets

     1,579        1,444  

Stock-based compensation and consulting expense

     852        320  

Provision for bad debts

     (7)        10  

Change in fair value of warrants

     2,059        5,320  

Change in fair value of contingent consideration

     —          (32)  

Noncash interest expense

     523        197  

Changes in operating assets and liabilities:

     

Accounts receivable

     2,844        1,991  

Deferred contract acquisition costs

     (117)        461  

Prepaid expenses and other assets

     (1,583)        (1,181)  

Accounts payable, accrued compensation, accrued
expenses, and other current liabilities

     (2,660)        (356)  

Deferred revenue

     3,514        77  

Other liabilities

     (22)        —    
  

 

 

    

 

 

 

Net cash used in operating activities

     (13,844)        (8,525)  

Cash flows from investing activities:

     

Business acquisition

     —          (4,270)  

Purchases of property and equipment

     (245)        (322)  

Capitalized software

     (483)        (353)  
  

 

 

    

 

 

 

Net cash used in investing activities

     (728)        (4,945)  

Cash flows from financing activities:

     

Exercise of stock options

     104        21  

Proceeds from issuance of debt, net of issuance costs paid
in cash of $88 and $36, for the six months ended
July 31, 2022 and 2021, respectively

     7,412        4,964  

Repayment of debt

     (469)        —    
  

 

 

    

 

 

 

Net cash provided by financing activities

     7,047        4,985  

Foreign exchange translation adjustment

     54        (45)  
  

 

 

    

 

 

 

Net change in cash, cash equivalents, and restricted cash

     (7,471)        (8,530)  

Cash, cash equivalents, and restricted cash at beginning of year

     10,374        13,864  
  

 

 

    

 

 

 

Cash, cash equivalents, and restricted cash at end of year

   $ 2,903      $ 5,334  
  

 

 

    

 

 

 

Supplemental Cash Flow Information:

     

Cash paid for interest

   $ 2,266      $ 1,235  

Cash paid for income taxes

     50        29  

Non-cash investing and financing activities:

     

Exercise of warrants

   $ 5,900      $ —    

Issuance of warrants along with issuance of debt

     519        —    

Issuance of redeemable convertible preferred stock in
connection with acquisition

     —          7,839  

 

4


The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows.

 

     July 31, 2022      July 31, 2021  

Cash and cash equivalents

   $     2,803      $     5,234  

Restricted cash included in other assets

     100        100  
  

 

 

    

 

 

 

Total cash, cash equivalents, and restricted cash shown in the
condensed consolidated statements of cash flows

   $ 2,903      $ 5,334  
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

5


ZEROFOX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.

ORGANIZATION AND DESCRIPTION OF BUSINESS

The accompanying condensed consolidated financial statements include the assets, liabilities, revenues, expenses, and cash flows of ZeroFox, Inc., ZeroFox’s, Inc.’s subsidiaries, and the acquired sets of assets and activities obtained by ZeroFox, Inc. that are accounted for as business combinations (collectively, the “Company”) under accounting principles generally accepted in the United States of America (US GAAP).

The Company provides digital risk protection services and safeguards modern organizations from dynamic security risks across social, mobile, surface, deep web, dark web, email, and collaboration platforms. Using diverse data sources and artificial intelligence-based analysis, the ZeroFox platform identifies and remediates targeted phishing attacks, credential compromise, data exfiltration, brand hijacking, executive and location threats, and more. The patented ZeroFox Software as a Service (“SaaS”) technology processes and protects electronic posts, messages, and accounts daily across the social and digital landscape, spanning social media platforms, mobile app stores, the deep web, dark web, domains, and more. The Company offers its services on a subscription basis.

On December 17, 2021, the Company entered into a business combination agreement (the “Business Combination Agreement”) with L&F Acquisition Corp. (“L&F”), which was a Special Purpose Acquisition Company (a “SPAC”), and ID Experts Holdings, Inc. (“IDX”). Pursuant to the Business Combination Agreement, ZeroFox became a wholly-owned subsidiary of L&F (the “Business Combination”).

On August 3, 2022, the Business Combination, as contemplated in the Business Combination Agreement with L&F and IDX, was completed (See Note 10). In connection with the Business Combination, L&F renamed itself ZeroFox Holdings, Inc. (“New ZeroFox”)

Segment Information—Operating segments are defined as components of an enterprise for which discrete financial information is made available for evaluation by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and assessing performance. The CODM is the Company’s chief executive officer. The CODM views the Company’s operations and manages its activities as a single operating segment, which is the business of providing cybersecurity intelligence, analytics, and protection services to its customers. The Company’s assets are primarily located in the United States.

 

6


Liquidity and Going Concern—For the six months ended July 31, 2022 and 2021, the Company incurred net losses of $21.5 million and $17.3 million, respectively, and incurred negative cash flows from operating activities of $13.8 million and $8.6 million, respectively. The Company has incurred operating losses since inception and continues to face significant risks associated with successful execution of the Company’s business plan that include, but are not limited to, customer acquisition, competition, market risk, and liquidity risk. The Company has historically funded its operations through the issuance of redeemable convertible preferred stock (see Note 2) and debt (see Note 5). The Company evaluated its financial condition as of July 31, 2022 and determined it is probable that, without consideration of a remediation plan to refinance or renegotiate existing debt facilities, raise new sources of capital, or completion of the Business Combination with L&F, the Company would be unable to meet working capital shortfalls in the next twelve months from the date the condensed consolidated financial statements are available to be issued, and there is substantial doubt about the Company’s ability to continue as a going concern.

On August 3, 2022, the Business Combination, as contemplated in the Business Combination Agreement with L&F and IDX, was consummated resulting in the Company becoming a wholly-owned subsidiary of L&F.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business and does not include any adjustments to reflect the outcome of this uncertainty.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying condensed consolidated financial statements have been prepared in accordance with US GAAP as set forth by the Financial Accounting Standards Board (FASB). References to US GAAP issued by the FASB in these notes to the consolidated financial statements are to the FASB Accounting Standards Codifications (“ASC”).

 

7


Unaudited Interim Financial Information— The interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained herein comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are adequate to make the information presented not misleading. The interim condensed financial statements included herein reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the balance sheet, comprehensive loss, and cash flows for the interim periods presented. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the year ended January 31, 2022, incorporated by reference in this current report. The condensed consolidated statement of comprehensive loss for the six months ended July 31, 2022 is not necessarily indicative of the results to be anticipated for the entire year ending January 31, 2023, or thereafter. All references to July 31, 2022 and 2021 in the notes to condensed consolidated financial statements are unaudited.

Emerging Growth Company Status—The Company is an “emerging growth company,” (“EGC”) as defined in the Jumpstart Our Business Startups Act, (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. The Company may take advantage of these exemptions until it is no longer an EGC under Section 107 of the JOBS Act and has elected to use the extended transition period for complying with new or revised accounting standards. As a result of this election, the Company’s financial statements may not be comparable to companies that comply with public company Financial Accounting Standards Board (“FASB”) standards’ effective dates.

The Company completed its merger with L&F on August 3, 2022. The Company will be considered a variable interest entity (“VIE”) with L&F as the primary beneficiary of the VIE. Accordingly, the Business Combination will be accounted for as a forward merger of the Company by and into L&F. Refer to Note 10 for more information regarding the Business Combination. The surviving company will remain an emerging growth company until the earliest of (i) the last day of the Company’s first fiscal year following the fifth anniversary of the completion of L&F’s initial public offering, (ii) the last day of the fiscal year in which the Company has total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which the Company is deemed to be a large accelerated filer, which means the market value of the Company’s common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th or, (iv) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Principles of Consolidation—The accompanying condensed consolidated financial statements include the accounts of ZeroFox and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

8


Use of Estimates—The preparation of the accompanying condensed consolidated financial statements in conformity with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities within these condensed consolidated financial statements. Significant estimates and judgments include but are not limited to: (1) revenue recognition, (2) capitalization of internally developed software costs, (3) forecasts and assumptions used in determining the fair value of stock-based compensation, (4) valuation of assets acquired and liabilities assumed in business combinations, (5) useful lives of contract acquisition costs, (6) warrant valuation, (7) valuation of the Company’s stock, and (8) valuation allowances associated with deferred tax assets. Management bases its estimates and assumptions on historical experience, expectations, forecasts, and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ results of prior periods.

Revenue Recognition—The Company derives its revenue from providing its customers with subscription access to the Company’s enterprise cloud platform (“subscription revenue”) and from professional services (“professional services revenue”).

The Company generates cloud-based subscription revenue primarily from sales of subscriptions to access the ZeroFox cloud platform, together with related support and intelligence services to customers. These arrangements do not provide the customer with the right to take possession of the Company’s software operating on its cloud platform at any time. These arrangements represent a combined, stand-ready performance obligation to provide access to the software together with related support and intelligence services. Customers are granted continuous access to the Company’s cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that the Company’s service is made available to the customer. The Company’s cloud-based subscription contracts generally have terms of one to three years, which are billed in advance and are noncancelable.

The Company offers several types of professional services, including security advisory and training services. All of the Company’s professional services are considered distinct performance obligations from the cloud-based subscriptions services within the context of the Company’s contracts. Revenue is recognized over time when the customers benefit from the services as performed or as control of the promised services is transferred to the customer, as this reflects the pattern of transfer for these professional services. These contracts are most often fixed fee arrangements and less frequently arrangements that are billed at hourly rates. These contracts normally have terms of one year or less.

Subscription revenue was 96% and 95% of total revenue for the six months ended July 31, 2022 and 2021, respectively.

Reseller Arrangements— The Company enters into arrangements with third parties that allow those parties to resell the Company’s services to end users. The partners negotiate pricing with the end customer and the Company does not have visibility into the price paid by the end customer. For these arrangements, revenue is recognized at the amount charged to the reseller and does not reflect any mark-up to the end user.

As of July 31, 2022, the Company has approximately $57.4 million of revenue that is expected to be recognized from remaining performance obligations that are unsatisfied (or partially unsatisfied) under non-cancelable contracts. Of this $57.4 million, the Company expects to recognize revenue of approximately $42.1 million in the period August 2022 through July 2023, approximately $11.4 million in the period August 2023 through July 2024, and approximately $3.9 million thereafter.

 

9


Disaggregation of Revenue The table below provides revenues earned by line of service for the six months ended July 31, 2022 and 2021 (in thousands).

 

Revenue Line

   2022      2021  

Subscription revenue

   $ 27,468      $ 21,556  

Professional services

     1,275        1,134  
  

 

 

    

 

 

 

Total

   $ 28,743      $ 22,690  
  

 

 

    

 

 

 

The table below provides revenues earned based on geographic locations of our customers for the six months ended July 31, 2022 and 2021 (in thousands).

 

Country

   2022      2021  

United States

   $ 21,557      $ 17,251  

Other

     7,186        5,439  
  

 

 

    

 

 

 

Total

   $ 28,743      $ 22,690  
  

 

 

    

 

 

 

Goodwill and Intangible Assets– Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed when a business is acquired. The valuation of intangible assets and goodwill involves the use of management’s estimates and assumptions and can have a significant impact on future operating results. The Company initially records its intangible assets at fair value. Intangible assets with finite lives are amortized over their estimated useful lives while goodwill is not amortized but is evaluated for impairment at least annually. Goodwill is evaluated for impairment beginning on November 1 of each year or when an assessment of qualitative factors indicates an impairment may have occured. The quantitative assessment includes an analysis that compares the fair value of a reporting unit to its carrying value including goodwill recorded by the reporting unit.

The Company has a single reporting unit. Accordingly, the impairment assessment for goodwill is performed at the enterprise level. Goodwill is reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company initially assesses qualitative factors to determine if it is necessary to perform the goodwill impairment review. Goodwill is reviewed for impairment if, based on an assessment of the qualitative factors, it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying value, or the Company decides to bypass the qualitative assessment. The carrying value of the reporting unit is reviewed utilizing a combination of the discounted cash flow model and a market value approach. The estimated fair value of a reporting unit is determined based on assumptions regarding estimated future cash flows, discount rates, long-term growth rates, and market values. Additionally, the Company considers income tax effects from any tax-deductible goodwill (if applicable) on the carrying amount of the reporting unit when measuring the goodwill impairment loss.

The Company monitors for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term growth projections, profitability, discount rates, volatility in the Company’s market capitalization, general industry, and market and macro-economic conditions. It is possible that future changes in such circumstances, or in the variables associated with the judgments, assumptions, and estimates used in assessing the fair value of the reporting unit would require the Company to record a non-cash impairment charge.

 

10


The Company completed its annual assessment on November 30, 2021, and there was no impairment of goodwill at the assessment date. There were no events or circumstances that occurred during the six month period ended July 31, 2022, and through the date these condensed consolidated financial statements were available to be issued, that indicated that goodwill might be impaired.

Fair Value of Financial Instruments—ASC 820-10, Fair Value Measurements and Disclosures: Overall, defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and expands required disclosures about fair value measurements. The fair value of an asset and liability is defined as an exit price and represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value, is as follows:

Level 1—Inputs are quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of an input to the fair value measurement requires judgment and may affect the valuation of the asset or liability being measured and its placement within the fair value hierarchy. The Company effectuates transfers between levels of the fair value hierarchy, if any, as of the date of the actual circumstance that caused the transfer.

Certain assets and liabilities, including goodwill and intangible assets, are subject to measurement at fair value on a non-recurring basis if there are indicators of impairment or if they are deemed to be impaired as a result of an impairment review.

As of July 31, 2022 and January 31, 2022, respectively, the Company had warrant liabilities measured based on Level 3 inputs. A summary of the changes in the fair value of warrants for the six months ended July 31, 2022 and 2021, respectively, is as follows (in thousands):

 

Warrant liability - January 31, 2021

   $ 2,806  

Issuance of warrants

     —    

Loss due to change in fair value of warrants

     5,320  
  

 

 

 

Warrant liability - July 31, 2021

   $ 8,126  
  

 

 

 
  

Warrant liability - January 31, 2022

   $ 10,709  

Issuance of warrants

     519  

Exercise of warrants

     (5,900

Loss due to change in fair value of warrants

     2,059  
  

 

 

 

Warrant liability - July 31, 2022

   $ 7,387  
  

 

 

 

The assumptions used to value the warrants are described in Note 6.

 

11


The carrying amounts of accounts receivable, accounts payable, accrued expenses, and debt approximate fair value because of the short maturity terms of these instruments.

Contingent consideration liabilities related to acquisitions are measured at fair value each reporting period using Level 3 unobservable inputs. The Company’s estimates of fair value are based on assumptions believed to be reasonable, but which are uncertain and involve significant judgments by management. Any changes in the fair value of these contingent consideration liabilities are included in general and administrative expenses in the consolidated statements of comprehensive loss. There were no changes in fair value of contingent consideration during the six months ended July 31, 2022, as the contingent consideration liability was settled as of July 31, 2021. A summary of the changes in fair value of contingent consideration for the six months ended July 31, 2021 is as follows (in thousands):

 

Balance as of January 31, 2021

   $ 7,871  

Gain recognized in the consolidated statement of comprehensive loss

     (32

Issuance of redeemable convertible preferred stock

     (7,839
  

 

 

 

Balance as of July 31, 2021

   $ —    
  

 

 

 

Transaction Fees—Transaction fees and expenses associated with the Business Combination are being accounted for under the assumption of a forward merger transaction and being expensed as incurred. Accordingly, the Company has recorded approximately $3.2 million and $1.4 million of professional and other transaction fees related to the Business Combination in general and administrative expenses in the Condensed Consolidated Statement of Comprehensive Loss for the six months ended July 31, 2022 and 2021, respectively.

Net Loss Per Share Attributable to Common Stockholders— Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common stock. For the purposes of this calculation, outstanding stock options, unvested restricted stock, stock warrants, and redeemable convertible preferred stock are considered potential dilutive common stock and are excluded from the computation of net loss per share as their effect is anti-dilutive.

 

12


The following table set forth computation of basic loss per share attributable to common stockholders (in thousands, except share and per share data):

 

     Six Months Ended July 31,  
     2022      2021  

Numerator:

     

Net loss

   $ (21,458    $ (17,302
  

 

 

    

 

 

 

Net loss per share attributable to common stockholders

   $ (21,458    $ (17,302
  

 

 

    

 

 

 

Denominator:

     

Weighted-average common stock outstanding

     43,038,331        41,953,610  
  

 

 

    

 

 

 

Net loss per share attributable to common stockholders - basic and diluted

   $ (0.50    $ (0.41
  

 

 

    

 

 

 

The Company’s redeemable convertible preferred stock and restricted common stock contractually entitle the holders of such shares to participate in dividends but do not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss, such losses are not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to be outstanding if their effect is anti-dilutive. The following is a summary of the weighted average common stock equivalents for the securities outstanding during the period the respective periods that have been excluded from the computation of diluted net loss per common share, as their effect would be anti-dilutive:

 

     Six Months Ended July 31,  
     2022      2021  

Preferred stock, all series (on an as-converted basis)

     241,205,423        239,186,969  

Common stock options outstanding

     22,177,042        19,852,162  

Warrants to purchase preferred stock, all series

     5,840,764        5,267,696  
  

 

 

    

 

 

 
     269,223,229        264,306,827  
  

 

 

    

 

 

 

Redeemable convertible preferred stock—The Series Preferred is not mandatorily redeemable. The Series Preferred is contingently redeemable upon the occurrence of a deemed liquidation event and a majority vote of the holders of Series Preferred and Series Seed to redeem all outstanding shares of the Company’s redeemable convertible preferred stock. The contingent redemption upon the occurrence of a deemed liquidation is not within the Company’s control and therefore the Series Preferred is classified outside of permanent equity in mezzanine equity on the Company’s condensed consolidated balance sheets.

The redeemable convertible preferred stock was automatically converted into common stock immediately prior to the closing of the Business Combination and then converted into shares of New ZeroFox common stock.

Liquidation Rights—In the event of any liquidation or dissolution of the Company (“Liquidation Event”), the holders of common stock are entitled to the remaining assets of the Company legally available for distribution after the payment of the full liquidation preference for all series of outstanding redeemable convertible preferred stock (“Preferred Stock”).

 

13


The Company’s redeemable convertible preferred stock consists of (in thousands except share data):

 

     July 31, 2022      January 31, 2022  
     Shares
Issued and
Outstanding
     Amount      Shares
Issued and
Outstanding
    Amount  

Convertible preferred stock—Series E, $0.00001
par value—authorized 19,033,653 shares;
(liquidation preference $28,354,249)

     15,767,013      $ 36,291        15,227,437     $ 33,248  

Convertible preferred stock—Series D, $0.00001
par value—authorized 14,833,942 shares;
(liquidation preference $21,222,496)

     13,871,547      $ 21,067        13,871,547     $ 21,067  

Convertible preferred stock—Series D-2, $0.00001
par value—authorized 993,868 shares
(liquidation preference $1,216,439)

     993,868      $ 1,451        993,868     $ 1,451  

Convertible preferred stock—Series D-1, $0.00001
par value—authorized shares 5,878,303
(liquidation preference $8,094,053)

     5,878,303      $ 8,171        5,878,303     $ 8,171  

Convertible preferred stock—Series C-1, $0.00001
par value—authorized 16,208,756 shares
(liquidation preference $14,037,000)

     11,882,605      $ 16,836        11,376,115     $ 13,979  

Convertible preferred stock—Series C, $0.00001
par value—authorized 21,124,700 shares
(liquidation preference $19,999,999)

     21,124,699      $ 19,899        21,124,699     $ 19,899  

Convertible preferred stock—Series B, $0.00001
par value—authorized 26,914,949 shares
(liquidation preference $22,124,088)

     26,914,949      $ 22,047        26,914,949     $ 22,047  

Convertible preferred stock—Series A, $0.00001
par value—authorized 16,122,188 shares
(liquidation preference $10,246,261)

     15,997,285      $ 10,159        15,997,285     $ 10,159  

Convertible preferred stock—Series seed, $0.00001
par value—authorized 9,198,372 shares
(liquidation preference $2,285,795)

     9,198,372      $ 2,208        9,198,372     $ 2,208  
  

 

 

    

 

 

    

 

 

   

 

 

 
     121,628,641      $ 138,129        120,582,575     $ 132,229  
  

 

 

    

 

 

    

 

 

   

 

 

 

Standards Issued and Adopted—In October 2021, the FASB issued ASU No. 2021-08, Accounting Standards Update No. 2021-08—Business Combinations (Topic 805)—Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. As a result of the amendments, it is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its preacquisition financial statements. The standard is effective for the Company for annual reporting periods beginning after December 15, 2022, and early adoption is permitted. The Company elected to early adopt ASU No. 2021-08 for fiscal year 2023. There was no impact to the Company’s condensed consolidated financial statements for the six months ended July 31, 2022.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by

 

14


clarifying and amending existing guidance. The standard is effective for the Company for annual reporting periods beginning after December 15, 2021, and early adoption is permitted. The Company adopted ASU No. 2019-12 for fiscal year 2023. There was no impact on its condensed consolidated financial statements for the six months ended July 31, 2022.

Standards Issued, but Not Yet Effective—In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance is intended to improve financial reporting about leasing transactions. This ASU affects all companies and other organizations that lease assets. Under Topic 842, the critical determination is whether a contract is or contains a lease because lessees are required to recognize lease assets and lease liabilities for all leases—finance and operating—other than short-term leases. The standard is effective for the Company for annual reporting periods beginning after December 15, 2021, and early adoption is permitted. The Company is currently in the planning stage and will adopt the guidance for the financial statements for the year ending January 31, 2023. Upon adoption, the Company will be required to report operating leases on its consolidated balance sheet for the first time. The Company has begun its adoption efforts, but cannot reasonably estimate the impact to its condensed consolidated financial statements for the year ending January 31, 2023.

In June 2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which amends the accounting for credit losses for most financial assets and certain other instruments. The standard requires that entities holding financial assets that are not accounted for at fair value through net income be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The standard is effective for the Company for annual reporting periods beginning in fiscal year 2024. The Company believes the adoption will not have a material impact on its condensed consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Accounting Standards Update No. 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. Additionally, ASU 2020-06 requires the application of the if-converted method for all convertible instruments in the diluted earnings per share calculation and the inclusion of the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. The amendments in this ASU are effective for all public entities for fiscal years beginning after December 15, 2021. For all other entities, including ZeroFox, the amendments are effective for fiscal years beginning after December 15, 2023. Accordingly, the Company is planning to adopt the guidance of ASU No. 2020-06 in the year ending January 31, 2024. Or, after successful completion of the Business Combination (see Note 10) the combined, public company will adopt ASU No. 2020-06 for the year ending January 31, 2023. The Company is in the process of evaluating the guidance and the impact it will have on its condensed consolidated financial statements.

 

15


3.

FAIR VALUE MEASUREMENTS

The following table sets forth by level, within the fair value hierarchy, the assets/(liabilities) carried at fair value (in thousands):

 

     Fair value measurements at July 31, 2022
using:
 
     Level 1      Level 2      Level 3     Total  

Liabilities:

          

Warrant liabilities

   $ —        $ —        $ (7,387   $ (7,387
  

 

 

    

 

 

    

 

 

   

 

 

 

Total financial liabilities

   $ —        $ —        $ (7,387   $ (7,387

The following table sets forth by level, within the fair value hierarchy, the assets (liabilities) carried at fair value (in thousands):

 

     Fair value measurements at January 31, 2022
using:
 
     Level 1      Level 2      Level 3     Total  

Liabilities:

          

Warrant liabilities

   $ —        $ —        $ (10,709   $ (10,709
  

 

 

    

 

 

    

 

 

   

 

 

 

Total financial liabilities

   $ —        $ —        $ (10,709   $ (10,709

The assumptions used to value the warrants are described in Note 6.

The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short maturity terms of these instruments.

 

4.

ACQUISITIONS

Cyveillance Acquisition — On September 30, 2020, the Company executed an asset purchase agreement with Lookingglass Cyber Solutions, Inc. (“Lookingglass”) and Cyveillance, Inc. (collectively, the “Sellers”) to acquire substantially all of the assets and to assume certain liabilities attributable to Lookingglass’ Cyveillance business unit (the “Cyveillance Acquisition”). The Cyveillance business unit is an intelligence-led cybersecurity solutions provider. The Cyveillance Acquisition allows the Company to further scale its digital risk protection services and expand its threat intelligence capabilities. The Cyveillance Acquisition has been accounted for as a business combination in accordance with ASC 805, Business Combinations. The Company estimated a fair value of the aggregate consideration transferred to effect the Cyveillance Acquisition of $39.2 million, of which $7.2 million was paid in cash, $17.0 million was comprised of 8,110,058 shares of Series E redeemable convertible preferred stock, and $15.0 million was comprised of 10,171,735 shares of Series E redeemable convertible preferred stock held in escrow as contingent consideration.

There was no remaining contingent consideration liability as of July 31, 2022, January 31, 2022, and July 31, 2021. During the six months ended July 31, 2021, the Company released 3,221,347 shares of Series E preferred shares with a fair value of $7.8 million.

 

16


5.

DEBT

The tables below summarize key terms of the Company’s debt that was outstanding as of July 31, 2022 and January 31, 2022 (amounts in thousands, except for interest rates).

 

     As of July 31, 2022  

Lender

   Stated
Interest
Rate
    Effective
Interest
Rate
    Gross
Balance
     Unamortized
Debt
Discount
     Unamortized
Deferred
Debt Issuance
Costs
     Discount
on
Note
Payable
     Net
Carrying
Value
 

Stifel Bank

     4.50     6.50   $ 15,000      $ 71      $ 426      $ —        $ 14,503  

Orix Growth Capital, LLC

     10.00     11.87     37,500        382        987        —          36,131  

InfoArmor

     5.50     5.50     2,813        —          —          182        2,631  

PIPE Investors

     5.00     5.00     5,156        —          —          —          5,156  
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       $ 60,469      $ 453      $ 1,413      $ 182      $ 58,421  
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
            Current portion of long-term debt      $ 6,094  
            Long-term debt        52,327  
                  

 

 

 
                   $ 58,421  
                  

 

 

 

 

     As of January 31, 2022  

Lender

   Stated
Interest
Rate
    Effective
Interest
Rate
    Gross
Balance
     Unamortized
Debt
Discount
     Unamortized
Deferred
Debt Issuance
Costs
     Discount
on
Note
Payable
     Net
Carrying
Value
 

Stifel Bank

     4.50     6.50   $ 15,000      $ 96      $ 574      $ —        $ 14,330  

Orix Growth Capital, LLC

     10.00     12.13     30,000        349        608        —          29,043  

InfoArmor

     5.50     5.50     3,281        —          —          213        3,068  

PIPE Investors

     5.00     5.00     5,032        —          —          —          5,032  
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       $ 53,313      $ 445      $ 1,182      $ 213      $ 51,473  
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
            Current portion of long-term debt      $ 5,970  
            Long-term debt        45,503  
                  

 

 

 
                   $ 51,473  
                  

 

 

 

On February 10, 2022, the Company amended its loan and security agreement with Orix Growth Capital, LCC (Orix) and provided an additional $7.5 million in borrowing. From the amended loan and security agreement with Orix, in February 2022, the Company borrowed $7.5 million, from which it received approximately $7.4 million of proceeds net of issuance cost of $0.1 million, and issued 161,112 warrants to purchase Series E redeemable convertible preferred stock at an exercise price of $1.86205. As of July 31, 2022, the outstanding principal of the loan was $37.5 million.

The terms of the loan and security agreements with Stifel Bank and Orix include financial covenants whereby ZeroFox must be in compliance with the following: a) at any time, the ratio of Total Debt (as defined in the loan and security agreements) to Annual Recurring Revenue (“ARR”) (as defined in the loan and security agreements) shall not be more than 1.00:1.00, and b) the Company shall maintain a minimum ARR, which increases over time, as defined in the loan and security agreements, measured as of the last day of each quarter. The Company was in compliance with its financial covenants as of July 31, 2022.

 

17


6.

WARRANTS

The Company, in connection with several loan and security agreements, agreed to issue lenders warrants to purchase common shares, Series A preferred shares, Series B preferred shares, Series C-1 preferred shares, and Series E preferred shares.

In February 2022, along with the amendment to the loan and security agreement with Orix, the Company issued 161,112 warrants to purchase Series E redeemable convertible preferred stock at an exercise price of $1.86205.

On July 28, 2022, the holder of series C-1 warrants exercised their right to purchase redeemable convertible preferred shares. The holder elected to net exercise their warrants resulting in the issuance of 506,490 of series C-1 redeemable convertible preferred shares.

On July 29, 2022, a holder of series E warrants exercised their right to purchase redeemable convertible preferred shares. The holder elected to net exercise their warrants resulting in the issuance of 539,576 of series E redeemable convertible preferred shares.

The initial fair values of the Company’s warrants were determined using a Black-Scholes-Merton model. The assumptions used in estimating the fair values of the Company’s warrants at issuance are as follows:

 

     At Issuance  

Assumptions

   Series E Warrants     Series C-1
Warrants
    Common
Warrants
    Series B
Warrants
    Series A
Warrants
 

Initial Valuation Date:

    




February 10,
2022,
December 8,
2021 &
January 27,
2021
 

 

 
 
   
June 26,
2019
 
 
   
June 1,
2017
 
 
   
September 1,
2016
 
 
   
May 22,
2015
 
 

Exercise price of the warrant

   $ 1.86205     $ 1.23390     $ 0.20000     $ 0.82200     $ 0.64050  

Expected term of the warrant (in years)

     10.0       10.0       10.0       10.0       10.0  

Price of the underlying share - stay private

   $ 2.20 - $3.79     $ 1.25     $ 0.20     $ 0.82     $ 0.74  

Volatility

     36.38% - 40.64     51.90     60.00     60.41     66.74

Risk-free rate

     0.87% - 2.03     2.05     2.21     1.57     2.21

As a result of the potential Business Combination (see Note 10), the Company began utilizing a Probability-Weighted Expected Return Method (“PWERM”) to determining the fair value of the Company’s warrants. The Company utilized a PWERM relying on (1) a Black-Scholes model to value continued operations scenario where the Company remained a private entity and (2) a transaction scenario that reflected the Business Combination.

 

18


The assumptions used in estimating the fair values of the Company’s warrants as of July 31, 2022 are as follows:

 

     July 31, 2022  

Assumptions

   Series E
Warrants
     Common
Warrants
     Series B
Warrants
    Series A
Warrants
 

Exercise price of the warrant

   $ 1.86205      $ 0.20000      $ 0.82200     $ 0.64050  

Price of the underlying share after conversion

   $ 5.64      $ 2.82      $ 5.64     $ 5.64  

Expected term of the warrant (in years)

     0 - 9.4        0 - 4.8        0 - 4.1       0 - 2.8  

Fair value

   $ 3.78      $ 2.62      $ 4.82     $ 5.00  

Number of warrants

     268,521        1,924,790        146,341       124,903  

Liability (in thousands)

   $ 1,015      $ 5,043      $ 705     $ 624  

The assumptions used in estimating the fair values of the Company’s warrants as of January 31, 2022 are as follows:

 

     January 31, 2022  

Assumptions

   Series E
Warrants
    Series C-1
Warrants
    Common
Warrants
    Series B
Warrants
    Series A
Warrants
 

Exercise price of the warrant

   $ 1.86205     $ 1.23390     $ 0.20000     $ 0.82200     $ 0.64050  

Price of the underlying share - stay private

   $ 2.94     $ 2.76     $ 1.85     $ 3.70     $ 3.70  

Volatility

     36.71     36.95     38.11     39.30     44.69

Risk-free rate

     1.78     1.77     1.64     1.57     1.42

Price of the underlying share after conversion

   $ 5.64     $ 5.64     $ 2.82     $ 5.64     $ 5.64  

Expected term of the warrant (in years)

     0.4 - 9.9       0.4 - 8.2       0.4 - 5.3       0.4 - 4.6       0.4 - 3.3  

Fair value

   $ 3.20     $ 3.71     $ 2.21     $ 4.05     $ 4.21  

Number of warrants

     912,972       648,350       1,924,790       146,341       124,903  

Liability (in thousands)

   $ 2,922     $ 2,408     $ 4,260     $ 593     $ 526  

 

7.

STOCK-BASED COMPENSATION

On February 1, 2013, the Company adopted the 2013 Stock Plan (the “2013 Plan”). The 2013 Plan, as amended, provides for the issuance of up to 27,802,178 shares of common stock to employees, officers, directors, consultants, and advisors in the form of nonqualified and incentive stock options, unvested stock awards, and other stock-based awards. As of July 31, 2022, there were 230,471 shares of common stock available for issuance under the 2013 Plan.

 

19


Stock options are granted at exercise prices not less than the fair value of the stock at the date of grant. The Company determines fair value periodically through independent, third-party valuations based on historical financial information. Options generally vest over four years, with 25% vesting on the first anniversary date of the grant of the option and ratably over the remaining 36 months. Options expire 10 years from the date of grant. The Company intends to issue new shares to satisfy share options upon exercise.

The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires estimates of highly subjective assumptions, which affect the fair value of each stock option.

Expected Volatility—As the Company is privately held and there has been no public market for its common stock to date, the expected volatility is based on the average historical stock price volatility of comparable publicly-traded companies in its industry peer group, financial, and market capitalization data.

Expected Term— The expected term of the Company’s options represents the period that the stock-based awards are expected to be outstanding.

The Company has estimated the expected term of its employee awards using the SAB Topic 14 Simplified Method allowed by the FASB and SEC, for calculating expected term as it has limited historical exercise data to provide a reasonable basis upon which to otherwise estimate expected term. Certain of the Company’s options began vesting prior to the grant date, in which case the Company uses the remaining vesting term at the grant date in the expected term calculation.

Risk-Free Interest Rate— The Company estimates its risk-free interest rate by using the yield on actively traded non-inflation-indexed U.S. treasury securities with contract maturities equal to the expected term.

Dividend Yield— The Company has neither declared nor paid dividends to date and does not anticipate declaring dividends. As such, the dividend yield has been estimated to be zero.

Fair Value of Underlying Common Stock— Because the Company’s common stock is not yet publicly traded, the Company must estimate the fair value of common stock. The Board of Directors considers numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting in which awards are approved. The factors considered include, but are not limited to: (i) the results of contemporaneous independent third-party valuations of the Company’s common stock; (ii) the prices, rights, preferences, and privileges of the Company’s Convertible Redeemable Preferred Stock relative to those of its common stock; (iii) the lack of marketability of the Company’s common stock; (iv) actual operating and financial results; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions; and (vii) precedent transactions involving the Company’s shares.

 

20


The Company used the following weighted-average assumptions to estimate the fair value of stock options:

 

     July 31,  

Assumptions

   2022     2021  

Weighted-average risk-free rate

     1.48     1.45

Weighted-average expected term of the option (in years)

     6.07       5.99  

Weighted-average expected volatility

     38.92     37.84

Weighted-average dividend yield

     0.00     0.00

A summary of option activity for the six months ended July 31, 2022, is as follows (Aggregate Intrinsic Value in thousands):

 

     Shares      Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term (in
years)
    Aggregate
Intrinsic
Value
 

Outstanding as of February 1, 2022

     21,715,815      $ 0.4398        6.29     $ 51,688  

Granted

     1,214,500      $ 2.3920       

Exercised

     (392,450    $ 0.2659       

Cancelled

     (251,159    $ 1.4682       
  

 

 

         

Outstanding as of July 31, 2022

     22,286,706      $ 0.5376        6.45     $ 50,866  
  

 

 

         

Vested as of July 31, 2022

     14,784,495      $ 0.2660        5.41     $ 37,759  
  

 

 

         

Vested and expected to vest as of July 31, 2022

     19,660,894      $ 0.4661        6.18     $ 46,279  
  

 

 

         

The weighted-average grant-date fair value of options granted during the six months ended July 31, 2022 and 2021 was $1.0000 and $0.5040, respectively. The total intrinsic value of options exercised during the six months ended July 31, 2022 and 2021 was $1.0 million and $0.2 million, respectively.

Unrecognized compensation cost related to option-based compensation arrangements granted under the Plan totaled $4.3 million as of July 31, 2022. The unrecognized compensation cost as of July 31, 2022 is expected to be recognized over a weighted-average remaining period of 2.91 years. The total fair value of the common stock options that vested during the six months ended July 31, 2022, was $0.6 million.

 

21


Stock-Based Compensation Expense—The Company recognized noncash stock-based compensation expense in the accompanying Condensed Consolidated Statements of Comprehensive Loss for the six months ended July 31, 2022 and 2021, which is as follows (in thousands):

 

     Six Months Ended
July 31,
 
     2022      2021  

Cost of revenue

   $ 20      $ 14  

Research and development

     111        47  

Sales and marketing

     215        116  

General and administrative

     506        143  
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 852      $ 320  
  

 

 

    

 

 

 

 

8.

RELATED PARTY TRANSACTIONS

The Company leases office space in Baltimore, Maryland. The lessor is owned and operated by the Company’s chief executive officer. ZeroFox incurred rent expense of $0.2 million during each of the six months ended July 31, 2022 and 2021. The Company capitalized no leasehold improvements during the six months ended July 31, 2022. The Company capitalized $0.01 million of leasehold improvements during the year ended January 31, 2022. As of July 31, 2022 and January 31, 2022, the Company had leasehold improvements of $0.2 million and $0.2 million, respectively, net of accumulated depreciation of $0.2 million and $0.2 million, respectively. As of July 31, 2022 and January 31, 2022, the Company did not have any prepaid rent. The lessor holds a $0.1 million security deposit that is refundable at the end of the lease term.

As part of the consideration for the Cyveillance Acquisition (see Note 4), the Company issued Series E redeemable convertible preferred stock to Lookingglass. As a result, Lookingglass is a related party of the Company. Effective September 30, 2020, as part of the Cyveillance Acquisition, the Company entered into a sublease agreement with Lookingglass for office space in Reston, Virginia. Under the sublease agreement, the Company incurred rent expense of $0.1 million and $0.1 million for the six months ended July 31, 2022 and 2021, respectively. The initial term of the sublease ended on July 31, 2022 and the Company elected not to renew. During the six months ended July 31, 2022 and the year ended January 31, 2022, the Company did not capitalize any leasehold improvements. As of July 31, 2022 and January 31, 2022, the Company did not have any balance of prepaid or accrued rent for the subleased premises. In addition to the sublease, in connection with the Cyveillance Acquisition, ZeroFox and Lookingglass entered into a transition support agreement. The agreement stipulated that ZeroFox would reimburse Lookingglass for services performed as part of the transition. ZeroFox did not incur expenses under the agreement for the six months ended July 31, 2022. ZeroFox incurred $0.3 million of expenses under the agreement for the six months ended July 31, 2021. As of July 31, 2022 ZeroFox had no accrued liability payable to Lookingglass. As of January 31, 2022, ZeroFox had an accrued liability of $0.2 million that was incurred as a result of the transition support agreement.

The Company accrued $0.1 million of payment-in-kind (PIK) interest for notes payable with related parties during the six months ended July 31, 2022.

 

22


9.

COMMITMENTS AND CONTINGENCIES

General Litigation—In the ordinary course of business, the Company is involved in various disputes. In the opinion of management, the amount of liability, if any, resulting from the final resolution of these matters will not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. The Company was not involved in any pending litigation as of July 31, 2022.

Warranties and Indemnification—The Company’s enterprise cloud platform is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with the Company’s online help documentation under normal use and circumstances.

The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its services infringe a third-party’s intellectual property rights. To date, the Company has not incurred any material costs because of such obligations and has not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.

The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines, and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.

Risks and Uncertainties— The impact of the coronavirus (COVID-19) pandemic, or similar global health concerns, could negatively impact the Company’s operations, suppliers or other vendors, and its customer base. As of the report date, management is not aware of any impacts from quarantines, labor shortages or other disruptions related to COVID-19 that would have a material adverse effect on the Company’s operations. The COVID-19 pandemic did not have a material impact on our financial results.

 

10.

SUBSEQUENT EVENTS

ZeroFox Merger with L&F Acquisition Corp.— On December 17, 2021, the Company entered into the Business Combination Agreement with L&F.

On August 3, 2022, as contemplated by the Business Combination Agreement, ZeroFox, Inc. became a wholly-owned subsidiary of L&F. In connection with the Business Combination, L&F then changed its name to ZeroFox Holdings, Inc. (“New ZeroFox”).

All shares of ZeroFox Common Stock issued and outstanding immediately before completion of the Business Combination were exchanged for an aggregate of 82,030,308 shares of New ZeroFox Common Stock based upon the exchange ratio of approximately 0.2863 (“the Exchange Ratio”). All outstanding options to purchase shares of ZeroFox Common Stock were assumed by New ZeroFox and converted into comparable options to purchase 6,380,458 shares of New ZeroFox Common Stock based upon the Exchange Ratio. All outstanding warrants to purchase ZeroFox Redeemable Convertible Preferred Stock Series A, B and E

 

23


and ZeroFox Common Stock were assumed by New ZeroFox and converted into warrants to purchase 860,064 shares of New ZeroFox Common Stock. For warrants to purchase shares of ZeroFox Redeemable Convertible Preferred Stock Series A, B and E, the conversion first considered the conversion ratio of shares of ZeroFox Redeemable Convertible Preferred Stock into shares of ZeroFox Common Stock of 1 to 2 and then applying the Exchange Ratio. The warrants to purchase shares of ZeroFox Common Stock were converted into warrants to purchase shares of New ZeroFox Common Stock by applying the Exchange Ratio. All conversion of warrants assumed a net exercise of the warrants using the treasury stock method and an estimated ZeroFox value per share of approximately $2.86. Subsequent to July 31, 2022, all outstanding warrants assumed by New ZeroFox were net exercised.

New ZeroFox is considered both the legal and accounting acquirer of ZeroFox and accordingly, New ZeroFox will account for the Business Combination as a forward merger of ZeroFox into New ZeroFox. New ZeroFox is considered the accounting acquirer as ZeroFox is deemed to not have sufficient equity at risk to finance its ongoing operations, after consideration of the amount of non-subordinated financial support ZeroFox received as part of the Business Combination. As ZeroFox is not considered to have sufficient equity at risk, it is considered a variable interest entity (a “VIE”). New ZeroFox is considered the primary beneficiary of ZeroFox as VIE since it owns 100% of the shares of ZeroFox following the completion of the Business Combination. New ZeroFox must therefore consolidate ZeroFox as a VIE.

New ZeroFox also acquired IDX as part of the Business Combination Agreement. However, as New ZeroFox is considered the accounting acquirer of ZeroFox, the acquisition of IDX by New ZeroFox is not within the scope of these financial statements.

On August 3, 2022, as a part of the Business Combination, all outstanding principal amounts owned under the loan and security agreement with Orix were repaid from the proceeds of the Business Combination with L&F and IDX. In addition to the repayment of the outstanding principal, the loan and security agreement with Orix required a prepayment penalty of 3% of the outstanding principal balance, or $1.1 million.

On August 3, 2022 as part of the Business Combination, all outstanding principal amounts owned under the PIPE notes, $5.0 million, were set off against obligations those investors had under the Common Equity Subscription Agreements those investors had entered into with L&F.

Subsequent events have been considered for disclosure and recognition in the condensed consolidated financial statements through September 12, 2022, the date the condensed consolidated financial statements were available to be issued. No events occurred through that date that would require disclosure in the accompanying condensed consolidated financial statements, other than those discussed above.

 

24

EX-99.2

Exhibit 99.2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF ZEROFOX

You should read the following discussion and analysis of ZeroFox’s financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere or incorporated by reference in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations that involve risks and uncertainties. Our actual results and the timing of events 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 elsewhere or incorporated by reference in this report, particularly in the sections of the proxy statement/prospectus, incorporated by reference, titled ‘‘Risk Factors’’ and ‘‘Special Note Regarding Forward-Looking Statements.’’ Unless otherwise indicated or the context otherwise requires, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations of ZeroFox section to ‘‘ZeroFox,’’ ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ and other similar terms refer to ZeroFox, Inc. and its consolidated subsidiaries before the Business Combination.

The following discussion addresses the financial condition and operating results of ZeroFox, Inc. prior to the completion of the Business Combination. L&F is considered both the legal and accounting acquirer of ZeroFox, Inc. Though L&F is considered the accounting acquirer, the following discussion does include some discussion of the liquidity and capital resources of the combined company, ZeroFox Holdings, Inc., following the completion of the Business Combination. Additionally, as the ongoing operations of ZeroFox Holdings, Inc. will be made substantially of the legacy operations of ZeroFox, Inc., the included discussion of critical accounting estimates, judgments and uncertainties, and risks are also relevant to the financial condition and results of operations of ZeroFox Holdings, Inc. on an ongoing basis.

Overview

ZeroFox was founded in 2013 with the vision that the emergence and adoption of social media, mobile applications, and cloud computing by enterprises would fundamentally change the cybersecurity paradigm. Social media represents much more than a platform where individuals connect online. The adoption of social media revolutionized the way people communicate with each other and, subsequently, how enterprises and organizations enable communication among employees, customers, partners, and prospects. Mobile applications accelerated the digital transformation in which earlier versions of the web would need to become interactive and persist across multiple modern mediums. Furthermore, cloud computing’s continued evolution and adoption demonstrate how organizations are more comfortable with data residing beyond their traditional security perimeter outside of the historical boundaries of IT governance and control.

We provide customers with an innovative and comprehensive platform for external cybersecurity. Our ZeroFox platform, which is powered by patented artificial intelligence algorithms and cyber threat intelligence, is designed to dismantle external threats to brands, people and other assets across a customer’s internet-accessible attack surface. Our patented platform processes millions of pieces of content, rich media, posts, messages, global intelligence and threat actor activity across the digital landscape, including, without limitation, mobile app stores, social media sites, dark web forums, and discrete content sources. With the data we collect and process, we identify and remediate targeted phishing attacks, credential compromise, data exfiltration, brand hijacking, executive threats, and location threats across the public-facing, open web as well as the deep web and dark web. We protect our customers’ most valued internet accessible assets.

We sell subscriptions to our ZeroFox Platform and corresponding intelligence services to organizations of all sizes across multiple industries. We primarily sell subscriptions to our Platform through our direct sales teams which leverage our global network of channel partners on both a named account and territory basis.

A majority of our customers purchase subscription agreements with a term of one year. Our subscription agreements are generally priced on the number of assets protected and the desired levels of services. Customers may extend the value of the Platform by adding disruption and threat intelligence services. We generally recognize our subscription agreements ratably over the term of the agreement. We also generate revenue from our training and investigative services, which are generally priced on a fixed-fee basis and recognized as performed.

As of July 31, 2022, we had approximately 914 customers in 53 countries, including three of the Fortune 10. No single customer represented more than 7% of our revenue in the six months ended July 31, 2022 and 2021, or the years ended January 31, 2022, 2021, and 2020.

COVID-19

The COVID-19 pandemic has further accelerated the movement toward a digital-first strategy for nearly every organization. Given unprecedented work-from-home arrangements and consumers’ increasing reliance on digital engagement for products and services, organizations and their security teams must implement new security strategies that protect against external threats to ensure trust and reduce risk. We believe that enterprises will face growing attacks on their external attack surface as modern IT infrastructure will be characterized by greater decentralization and collaboration that is dependent upon public networks.

 

1


We have shifted our approach from almost entirely in-person to a flexible work environment that is composed of in-person, hybrid in-person and remote, and fully remote. Our fully remote global team is supported and enabled for remote-only work. Our hybrid team has access to work in-person from designated offices and remote, and our in-person teams have designated offices they report to for work. The impact of the COVID-19 pandemic continues to rapidly evolve. We will continue to monitor the situation and may take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, partners, and other constituents. We do not know the full extent to which the COVID-19 pandemic may impact our business and our financial performance. For additional information related to risks related to the COVID-19 pandemic see ‘‘Risk Factors—The COVID-19 pandemic could adversely affect our business, operating results, and financial condition.’’

Recent Acquisitions

On September 30, 2020, we acquired the Cyveillance business unit and particular assets from Lookingglass Cyber Solutions, Inc. (‘‘Lookingglass Cyber Solutions’’). Total consideration was $39.2 million, which consisted of $7.5 million in cash and $31.7 million in Series E Preferred Stock. The Cyveillance business unit provides threat intelligence, brand, and executive protection services to enterprise organizations.

On June 7, 2021, we acquired Vigilante ATI, Inc. (‘‘Vigilante’’) a provider of dark web threat intelligence collection and analysis capabilities. Total consideration was $7.4 million, which consisted of $3.8 million in cash and $3.8 million in a note payable, reduced by $0.2 million in net liabilities assumed.

Key Factors Affecting Performance

New Customer Acquisition

Our future growth depends in large part on our ability to acquire new customers. To attract new customers, we have invested and will continue to invest, in our sales and marketing efforts. Many organizations have not yet adopted external cybersecurity solutions. Our operating results will be affected by the rate at which organizations adopt our solutions. We believe our platform addresses the evolving needs of organizations of all sizes and industries and coupled with our go-to-market strategy, presents significant opportunities for growth.

Investing in Growth

We intend to continue to invest in our business so that we can capitalize on our market opportunity. We intend to continue to invest in sales and marketing to grow our sales team, expand our brand recognition, and optimize our channel partner network. We also intend to continue to invest in our research and development team to build additional functionality and enhance existing functionality in our platform to extend our capabilities. Our success depends on our ability to enhance our technological leadership. We will also evaluate strategic acquisitions of businesses and technologies to expand and enhance the functionality of our platform.

Our investments in growth may adversely affect our operating results in the near term however, we expect that these investments will contribute to our long-term growth and success.

If these investments do not lead to expected revenue growth, our operating losses may increase, we may not achieve profitability, and our growth rates may slow.

Retention and Expansion within Customers

Our ability to increase revenue depends on our ability to retain our existing customers and grow the value of their subscriptions. We focus on increasing sales from our existing customers by increasing the number of protected assets and corresponding intelligence services delivered on and through our platform. We intend to expand existing capabilities and launch new features which we believe will contribute to increased adoption by our growing base of customers. Our ability to expand within our customer base, particularly large enterprise and government customers, will depend on a number of factors, including platform performance, competitive offerings, pricing, overall changes in our customers’ spending levels, and the effectiveness of our efforts to help our customers realize the benefits of our Platform.

 

2


Key Business Metrics

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic directions:

Customers

We believe that the size of our customer base is an indicator of the adoption of our Platform by the market and that our net new customer additions are an indicator of the growth of our business. We focus our sales and marketing efforts on large enterprises and medium sized businesses. We define a customer as any entity that has entered into a distinct subscription agreement for access to the ZeroFox Platform for which the term has not ended or with which we are continuing to provide service and negotiating a renewal contract that expired within 90 days of the applicable measurement date. We do not consider our channel partners as customers and we treat managed service security providers, who may purchase our products on behalf of multiple companies, as a single customer.

 

     As of January 31,     As of July 31,  
     2022     2021     2020     2022     2021  

Customers

     835       692       447       914       763  

Period-over-period growth

     21     55     30     20     60

Annual Recurring Revenue (‘‘ARR’’)

We believe that ARR is a key operating metric to measure our business as changes in ARR reflect our ability to acquire net new customers and to maintain, retain, and expand our relationships with our existing customers. We define ARR as the annualized contractual value of all recurring revenue related to contracts in place at the end of the reporting date, assuming any contract is renewed on its existing terms. We continue to include ARR from customers whose term has expired within 90 days of the applicable measurement date for which we are actively negotiating renewal.

 

     As of January 31,     As of July 31,  
(dollars in thousands)    2022     2021     2020     2022     2021  

ARR

   $ 53,930     $ 44,088     $ 21,757     $ 61,343     $ 49,344  

Period-over-period growth

     22     103     83     24     100

Dollar-Based Net Retention

We believe that our ability to retain and expand our revenue generated from our existing customers is an indicator of the long-term value of our customer relationships and our potential future business opportunities. Our dollar-based net retention rate measures the percentage change in our ARR derived from our customer base at a point in time. We exclude public sector accounts and customers with less than $10,000 in ARR from our net retention. We calculate our dollar-based net retention rate as of the period end by starting with the ARR from all subscription customers as of 12 months prior to such period end, or prior period ARR. We then calculate the ARR from these same subscription customers as of the current period end, or current period ARR. Current period ARR reflects customer renewals, expansion, contraction, and churn over the trailing 12 months. Current period ARR excludes ARR from new subscription customers in the trailing 12 months. We then divide the current period ARR by the prior period ARR to arrive at our dollar-based net retention rate. Our dollar-based net retention rate can fluctuate from period to period due to large customer contracts in any period, which may reduce our dollar-based net retention in future periods if our customers do not continue to increase their subscriptions.

 

     As of January 31,     As of July 31,  
     2022     2021     2020     2022     2021  

Dollar-based net retention

     100     92     104     100     93

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance by excluding certain items that may not be

 

3


indicative of our business, results of operations, or outlook. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.

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 non-GAAP financial measures as tools for comparison. In particular, free cash flow is not a substitute for cash used in or generated by operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is limited as it does not represent the total increase or decrease in our cash balance for a given period.

A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, excluding stock-based compensation expense and amortization of acquired intangible assets. We believe non-GAAP gross profit and non-GAAP gross margin provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations, as these measures eliminate the effects of certain variables unrelated to our overall operating performance.

The following table provides a reconciliation of our GAAP subscription gross profit to our non-GAAP gross profit and of our GAAP subscription gross margin to our non-GAAP subscription gross margin, for each of the periods presented:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
(dollars in thousands)    2022     2021     2020     2022     2021  

Revenue

   $ 47,433     $ 28,538     $ 16,390     $ 28,743     $ 22,690  

Gross profit

     31,076       18,892       10,625       20,014       14,957  

Add: Stock-based compensation expense

     50       3       9       20       14  

Add: Amortization of acquired intangible assets

     481       140       —         256       225  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP gross profit

   $ 31,607     $ 19,035     $ 10,634     $ 20,290     $ 15,196  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     66     66     65     70     66

Non-GAAP gross margin

     67     67     65     71     67

Non-GAAP Loss from Operations

We define non-GAAP loss from operations as GAAP loss from operations, excluding stock-based compensation expense, amortization of acquired intangible assets, and public company offering costs. We believe non-GAAP loss from operations provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as these measures eliminate the effects of certain variables unrelated to our overall operating performance.

 

4


The following table provides a reconciliation of our GAAP loss from operations to our non-GAAP loss from operations, for each of the periods presented:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
(dollars in thousands)    2022     2021     2020     2022     2021  

Loss from operations

   $ (28,015   $ (18,197   $ (19,438   $ (21,347   $ (17,246

Add: Stock-based compensation expense

     696       450       268       852       320  

Add: Amortization of acquired intangible assets

     3,022       918       —         1,579       1,444  

Add: Public company offering costs

     3,521       —         —         3,234       1,423  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP loss from operations

   $ (20,776   $ (16,829   $ (19,170   $ (15,682   $ (14,059

Free Cash Flow

We define free cash flow as net cash used in operating activities less purchases of property and equipment and capitalized internal-use software. We believe that free cash flow is a useful indicator of liquidity that provides meaningful information to management and investors about the amount of cash provided or consumed by our operating activities to be used for other strategic initiatives. Free cash flow does not represent the total increase or decrease in our cash balance for a given period and does not reflect our future contractual commitments. In addition, other companies may calculate free cash flow differently or not at all, which reduces the usefulness of free cash flow as a tool for comparison.

The following table presents a reconciliation of net cash provided by (used in) operating activities to free cash flow:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
(dollars in thousands)    2022     2021     2020     2022     2021  

Net cash used in operating activities

   $ (18,072   $ (15,058   $ (18,633   $ (13,844   $ (8,525

Less: Purchases of property and equipment

     (572     (264     (224     (245     (322

Less: Capitalized software

     (674     (494     (580     (483     (353
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (19,318   $ (15,816   $ (19,437   $ (14,572   $ (9,200
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Components of Our Results of Operations

Revenue

We generate substantially all our revenue from subscription agreements which includes access to our hosted platform, intelligence services and disruption capabilities. The majority of our customers are invoiced annually in advance of their subscription term. Our subscription agreements are ‘‘stand ready’’ to permit platform access and provide our protection services over the contractual term. We recognize subscription revenue ratably over the term of the agreement. Professional services revenue includes training and investigative services. Professional services are most often fixed-fee arrangements and occasionally billed at hourly rates. Professional services contracts normally have terms of one year or less, revenue is recognized as the services are performed. Professional services have not been a material component of our operations.

 

5


Cost of Revenue

Costs of revenue consist primarily of third-party cloud infrastructure expenses; fees paid to data providers; personnel-related costs such salaries, bonuses, benefits, and stock-based compensation associated with our customer support, intelligence services, professional services, software services, and subscription services used to support our customers; amortization of our capitalized internal-use software; travel and related expenses; amortization of acquired technology; and allocated overhead costs. Our allocated overhead costs include depreciation and information technology expenses.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel related expenses including salaries, bonuses, commissions, benefits, and stock-based compensation are the most significant component of each of these categories. Operating expenses also include allocated overhead costs.

Research and Development

Research and development expenses consist primarily of personnel costs for our research, product, and engineering teams including salaries, bonuses, benefits, and stock-based compensation. Research and development expenses also include software and subscription services and third-party cloud infrastructure costs incurred in the design and development of our hosted platform along with allocated overhead costs.

We expect research and development expenses to increase in absolute dollars as we continue to increase our investments in our platform and services. However, we anticipate research and development expenses to decrease as a percentage of our revenue over time. Our research and development expenses may fluctuate as a percentage of our revenue from period-to-period depending on the timing of these expenses and the capitalization of expenses that qualify as internal-use software.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel costs for our sales and marketing teams including salaries, commissions, bonuses, benefits, and stock-based compensation. Sales and marketing expenses also include conferences, branding and other marketing events, software and subscription services, travel and related expenses, amortization of acquired customer relationships, and allocated overhead costs. We capitalize sales commissions from the initial acquisition of a customer subscription agreement and amortize them to sales and marketing expense over the estimated customer life. Any commissions paid for the renewal of a customer’s subscription are similarly capitalized and amortized over the term of the renewal.

We expect sales and marketing expenses to increase in absolute dollars as we continue to invest in our sales and marketing organization to drive additional revenue, further penetrate our market, and expand our global customer base. However, we anticipate sales and marketing expenses to decrease as a percentage of our revenue over time. Our sales and marketing expenses may fluctuate as percentage of our revenue from period-to-period depending on the timing of these expenses.

General and Administration

General and administrative expenses consist primarily of personnel costs for our executive, finance, legal, human resources, and information technology teams including salaries, bonuses, benefits, and stock-based compensation. General and administrative expenses also include professional fees for external accounting, legal, and other advisory services; insurance; software and subscription services; travel and related expenses; facilities related expenses; amortization of acquired trade names; and allocated overhead costs.

Following the closing of the proposed Business Combination, we expect to incur additional expenses as the result of operating as a public company including costs related to additional reporting and compliance requirements applicable to a listed company and increased expenses for insurance, accounting, legal, and other professional services. We expect general and administrative expenses to increase in absolute dollars. However, we anticipate general and administrative expenses to decrease as a percentage of our revenue over time.

 

6


Other Income (Expense), Net

Other income (expense), net consists primarily of interest expense and the change in fair value of warrant liability. Interest expense primarily consists of contractual interest expense, as well as amortization of debt discount and issuance costs related to our term loans.

Provision for Income Taxes

Provision for income taxes consists of income taxes in foreign jurisdictions where we conduct business and certain state income taxes in the United States. We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards. Based on our history of losses, we expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized.

Results of Operations

The following table sets forth our results of operations for the periods presented:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
(dollars in thousands)    2022     2021     2020     2022     2021  

Revenue

   $ 47,433     $ 28,538     $ 16,390     $ 28,743     $ 22,690  

Cost of revenue(1)

     16,357       9,646       5,765       8,729       7,733  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     31,076       18,892       10,625       20,014       14,957  

Operating expenses:

          

Research and development(1)

     12,810       5,942       5,582       8,023       5,457  

Sales and marketing(1)

     29,873       21,466       18,852       18,363       14,044  

General and administrative(1)

     16,408       9,681       5,629       9,985       5,870  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     59,091       37,089       30,063       36,371       25,371  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (28,015     (18,197     (19,438     (16,357     (10,414

Interest expense, net

     (3,585     (2,233     (1,854     (2,931     (1,512

Loss on extinguishment of debt

     —         (1,418     (1,274     —         —    

Change in fair value of warrant liability

     (7,375     (806     (75     (2,059     (5,320
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (38,975     (22,654     (22,641     (21,347     (17,246

(Benefit from) provision for income taxes

     (536     86       98       111       56  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss after tax

   $ (38,439   $ (22,740   $ (22,739   $ (21,458   $ (17,302
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes stock-based compensation expense as follows:

 

     Year Ended January 31,      Six Months Ended
July 31,
 
(dollars in thousands)    2022      2021      2020      2022      2021  

Cost of revenue

   $ 50      $ 3      $ 9      $ 20      $ 14  

Research and development

     97        72        85        111        47  

Sales and marketing

     222        130        87        215        116  

General and administrative

     327        245        87        506        143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 696      $ 450      $ 268      $ 852      $ 320  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

7


The following tables discloses the components of our consolidated statements of loss/operations as a percentage of revenue for each of the periods presented:

 

     Year Ended January 31,     Six Months Ended
July 31,
 

(as a percentage of total

revenue)

   2022     2021     2020     2022     2021  

Revenue

     100     100     100     100     100

Cost of revenue(1)

     34       34       35       30       34  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     66       66       65       70       66  

Operating expenses:

          

Research and development(1)

     27       21       34       28       24  

Sales and marketing(1)

     63       75       115       64       62  

General and administrative(1)

     35       34       34       35       26  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     125       130       183       127       112  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (59     (64     (118     (57     (46

Interest expense, net

     (8     (8     (12     (10     (7

Loss on extinguishment of debt

     —         (5     (8     —         —    

Change in fair value of warrant liability

     (16     (3     —         (7     (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (83     (80     (138     (74     (76

(Benefit from) provision for income taxes

     (1     —         1       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss after tax

     (82 )%      (80 )%      (139 )%      (74 )%      (76 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes stock-based compensation expense as follows:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
(dollars in thousands)    2022     2021     2020     2022     2021  

Cost of revenue

     0     0     0     0     0

Research and development

     —         —         —         0       0  

Sales and marketing

     —         —         1       1       0  

General and administrative

     1       1       1       2       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     1     1     2     3     1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

8


Comparison of the Six Months Ended July 31, 2022 and 2021

Revenue

 

     The Six Months Ended July 31,      Change  
(dollars in thousands)    2022      2021      $      %  

Revenue

   $ 28,743      $ 22,690      $ 6,053        27

Revenue increased $6.1 million or 27%, to $28.7 million for the six months ended July 31, 2022 from $22.7 million for the six months ended July 31, 2021, primarily due to increased customer adoption of our subscription services. Our customer base grew from 763 as of July 31, 2021 to 914 as of July 31, 2022.

Cost of Revenue, Gross Profit, and Gross Margin

 

     The Six Months Ended July 31,     Change  
(dollars in thousands)    2022     2021     $      %  

Cost of revenue

   $ 8,729     $ 7,733     $ 996        13

Gross profit

   $ 20,014     $ 14,957     $ 5,057        34

Gross margin

     70     66     

Cost of revenue increased $1.0 million, or 13%, to $8.7 million for the six months ended July 31, 2022, from $7.7 million the six months ended July 31, 2021, primarily due to increases of $0.3 million for cloud infrastructure and third-party data charges, $0.2 million for independent research analysts following the Vigilante acquisition, and $0.2 million for personnel-related expenses. These increases were primarily driven by growth of our subscription services.

Research and Development

 

     The Six Months Ended July 31,      Change  
(dollars in thousands)    2022      2021      $      %  

Research and development

   $ 8,023      $ 5,457      $ 2,566        47

Research and development costs increased $2.6 million, or 47%, to $8.0 million for the six months ended July 31, 2022, from $5.5 million for the six months ended July 31, 2021, primarily due to an increase of $2.3 million in personnel-related expenses.

Sales and Marketing

 

     The Six Months Ended July 31,      Change  
(dollars in thousands)    2022      2021      $      %  

Sales and marketing

   $ 18,363      $ 14,044      $ 4,319        31

Sales and marketing expenses increased $4.3 million, or 31%, to $18.3 million for the six months ended July 31, 2022, from $14.4 million for the six months ended July 31, 2021, primarily due to an increase of $2.8 million in personnel-related expenses, $1.0 million in marketing programs due to reflecting the shift from virtual to in-person conferences, customer, and partner events, and $0.4 million in travel-related expenses.

General and Administrative

 

     The Six Months Ended July 31,      Change  
(dollars in thousands)    2022      2021      $      %  

General and administrative

   $ 9,985      $ 5,870      $ 4,115        70

General and administrative expenses increased $4.1 million, or 70%, to $10.0 million for the six months ended July 31, 2022, from $5.9 million for the six months ended July 31, 2021, primarily due to an increase of $1.5 million for professional fees related to compliance and reporting requirements of the Business Combination, $1.1 million for personnel-related expenses, $0.4 million for productivity tools, $0.4 million for stock-based compensation, $0.2 million for rent and facilities, and $0.2 million for travel-related expenses.

 

9


Interest Expense, Net and Other Expense, Net

 

     The Six Months Ended July 31,      Change  
(dollars in thousands)    2022      2021      $     %  

Interest expense, net

   $ 2,931      $ 1,512      $ 1,419       94

Change in fair value of warrant liability

   $ 2,059      $ 5,320      $ (3,261     -61

The increase in interest expense of $1.4 million is due to increased borrowings under debt facilities. The decrease in the change in the fair value of warrant liability reflects the adjustments to record outstanding warrants at their fair value. During the six months ended July 31, 2021, the Company changed its methodology used to value warrants in order to contemplate the potential Business Combination. The change in methodology resulted in a significant increase in the Company’s warrant liability. During the six months ended July 31, 2022, the Company updated inputs to the valuation of the warrant liability to reflect the increased probability that the Business Combination would be completed, resulting in an incremental increase in the warrant liability.

Provision for Income Taxes

 

     The Six Months Ended July 31,      Change  
(dollars in thousands)    2022      2021      $      %  

Provision for incomes taxes

   $ 111      $ 56      $ 55        98

The increase in provision for income taxes of $0.06 million is due to estimated income taxes incurred by our foreign subsidiaries.

Critical Accounting Estimates

Our management’s discussion and analysis of financial condition and results of operations is based upon our financial statements and notes to our financial statements, which were prepared in accordance with GAAP. The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our management evaluates our estimates on an ongoing basis, including those related to the allowance for doubtful accounts, the carrying value and useful lives of long-lived assets, the fair value of financial instruments, the recognition and disclosure of contingent liabilities, income taxes, and stock-based compensation. We base our estimates and judgments on our historical experience, knowledge of factors affecting our business and our belief as to what could occur in the future considering available information and assumptions that are believed to be reasonable under the circumstances.

The accounting estimates we use in the preparation of our financial statements will change as new events occur, more experience is acquired, additional information is obtained and our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these estimates.

The critical accounting estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

Description:

We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers. Revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration we expect to be entitled to receive in exchange for those services. In recognizing revenue, we apply the following five steps:

 

   

Identify contracts with customers,

 

10


   

Identify the performance obligations in the contract,

 

   

Determine the transaction price,

 

   

Allocate the transaction price to performance obligations in the contract, and

 

   

Recognize revenue when or as performance obligations are satisfied.

Judgements and Uncertainties:

We apply judgment in determining the customer’s ability and intent to pay, including the customer’s historical payment experience or credit and financial information pertaining to the customer.

Our contracts may contain multiple performance obligations which are accounted separately if they are capable of being distinct or are distinct in the context of the contract. Contracts with multiple performance obligations require an allocation of the transaction price to each performance obligation based on the stand-alone selling price (SSP) of each performance obligation, using the relative selling price method of allocation. We apply judgment in determining SSP for our performance obligations utilizing our observable standalone sales, sales of bundled items when standalone sales are not available, and our overall pricing methodology.

Subscription Revenue—Subscription revenue consists of revenue from subscriptions to access our Platform together with related data and support service offerings. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer.

Customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right, as they are priced at our SSP.

Professional Services Revenue—All of our professional services are considered distinct performance obligations when sold on a stand-alone basis. Professional services are generally priced on a fixed-fee basis and revenue is recognized as the services are performed.

Sensitivity of Estimate to Change:

For the six months ended July 31, 2022 and 2021, subscription revenue accounted for 96% and 95% of total revenue, respectively. For the six months ended July 31, 2022 and 2021, no single customer exceeded 7% of total revenue. We do not expect SSP estimates to deviate materially period to period.

Deferred Contract Acquisition Costs

Description:

Contract acquisition costs are related to sales commissions earned for incremental costs to obtain a contract. We amortize the initial commissions over the longer of the customer relationship or over the same period as the initial revenue arrangement to which these costs relate.

Judgements and Uncertainties:

The critical accounting estimate for deferred contract acquisition costs is the amortizable life of the asset. We have estimated the period of benefit for customer relationships to be 4 years. Management monitors trends in customer attrition and the typical term of service arrangements to determine if the estimated amortizable life estimate should be updated.

Sensitivity of Estimate to Change:

The impact to our financial statements for change of one year to the estimated life of our customer relationships would approximately $0.3 million. We do not expect the useful life estimate to deviate materially period to period.

Stock-Based Compensation

Description:

We account for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation. ASC 718 requires that the cost of awards of equity instruments offered in exchange for employee services, including employee stock options and restricted stock awards, be measured based on the grant-date fair value of the award. We determine the fair value of options granted using the Black-Scholes model which requires the input of subjective assumptions. We recognize the fair value of stock option awards, net of estimated forfeitures, over the period which an employee is required to provide service in exchange for the award, generally the vesting period. The fair value of restricted stock awards is based on the estimated price of our common stock on the date of grant. We recognize the fair value of restricted stock awards, net of estimated forfeitures, as expense over the requisite service period of the awards.

 

11


Judgments and Uncertainties:

The critical accounting estimates related to stock-based compensation are the assumptions utilized in the Black-Scholes valuation model and our estimate of award forfeitures.

The assumptions used by Management in the Black-Scholes model are as follows:

 

   

Fair value of common stock: Our common stock is not publicly traded. As such, we estimate the fair value of our common stock, as discussed below in the section titled “Common Stock Valuations.”

 

   

Expected term: The expected term represents the period of time that options granted are expected to remain unexercised. We calculate the expected term using the simplified method, which equals the midpoint of the options’ vesting term and contractual period.

 

   

Expected Volatility: As our common stock is not publicly traded, we estimate the expected volatility based on historical volatilities of comparable public traded companies. The Company expects to continue to use this methodology until such time as the Company’s stock becomes publicly traded and there is a sufficient amount of historical data to reasonably calculate the volatility of the Company’s stock.

 

   

Risk-free interest rate: We use the U.S. Treasury yield for a period that corresponds to the expected term of the award.

 

   

Divided yield: We do not currently issue dividends, and do not expect to issued dividends in the foreseeable future. Accordingly, our dividend yield is zero.

 

     As of July 31,  
     2022     2021  

Weighted-average risk-free rate

     1.48     1.45

Weighted-average expected term of the option (in years)

     6.07       5.99  

Weighted-average expected volatility

     38.92     37.84

Weighted-average dividend yield

     0.00     0.00

The Company estimates the rate of option forfeiture by monitoring the rate of employee turnover and average tenure at separation of employment.

Sensitivity of Estimate to Change:

These estimates involve inherent uncertainties and the application of management’s judgement. If the Company had made different assumptions, the Company’s stock-based compensation expense and its net loss could have been materially different.

An increase in risk-free interest rate will reduce the estimated fair value of a stock option grant, while decrease in these factors will have an opposite effect.

Likewise, a decrease in volatility and expected term will decrease the estimated fair value of a stock option grant, while an increase in these factors will have an opposite effect. The Company utilizes a consistent group of peer companies unless one or more of those companies cease to be publicly traded or are no longer similar to the Company’s business. In cases where a peer group company is no longer able to be used, the Company identifies a replacement peer company for its volatility calculation.

The Company does not expect to change the dividend yield assumption in the near future.

A decrease in the Company’s estimate of option forfeiture will increase the amount of stock option expense recognized in a period while an increase will have the opposite effect.

Common Stock Valuations

Description:

Our board of directors, with input from management and third-party valuation specialists, determines the fair value of our common stock underlying our stock-based awards. The Company believes that its Board of Directors has the relevant experience and expertise to determine the fair value of its common stock. The Company’s Board of Directors intends all stock options granted to be exercisable at a price per share not less than the fair value per share of the common share underlying those stock options on the date of grant.

 

12


In the absence of a public market for the Company’s common stock, the valuation of the Company’s stock shares has been determined using a combination of valuation methodologies with varying weightings applied to each methodology. The valuation was performed in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation

Our warrant liabilities and contingent consideration are recorded at fair value based on our common stock valuation.

Judgments and Uncertainties:

Because our common stock is not publicly traded, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock including:

 

   

the results of contemporaneous independent third-party valuations of our common stock;

 

   

the prices, rights, preferences, and privileges of our Convertible Redeemable Preferred Stock relative to those of our common stock;

 

   

the lack of marketability of our common stock;

 

   

actual operating and financial results;

 

   

current business conditions and projections;

 

   

the likelihood of achieving a liquidity event, such as an initial public offering, sale of the Company, or successful business combination, given prevailing market conditions; and

 

   

precedent transactions involving our shares.

Sensitivity of Estimate to Change:

The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment. The probability of a liquidity event and the derived discount rate are significant assumptions used to estimate the fair value of the Company’s commons stock. If the Company had used different assumptions or estimates, the fair value of the Company’s common stock, its stock-based compensation expense, and changes in fair value for warrant liabilities and contingent consideration could have been materially different.

Business Combinations

Description:

We account for acquisitions using the acquisition method of accounting. The fair value of purchase consideration is allocated to the tangible and intangible assets acquired, and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase consideration over the values of the identifiable assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets.

We perform our annual goodwill impairment assessment beginning on November 1, or when an assessment of qualitative factors indicates an impairment may have occurred. The qualitative assessment includes an evaluation of events and circumstances including long-term growth projections, profitability, industry, market and macroeconomic conditions. The quantitative assessment includes an analysis that compares the fair value of a reporting unit to its carrying value including goodwill recorded by the reporting unit.

Judgments and Uncertainties:

Significant estimates in valuing certain identifiable assets include, but are not limited to, the selection of valuation methodologies, future expected cash flows, discount rates, and useful lives.

For goodwill, management applies judgement to determine if circumstances or events indicate if an impairment may exist. The estimate of the fair value of the related reporting unit includes several judgments, each with inherent uncertainties such as estimated future cash flows of the reporting unit and the discount rate applied to those estimated future cash flows.

 

13


Sensitivity of Estimate to Change:

Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

The impact to our financial statements for change of one year to the estimated lives our intangible assets would be approximately $0.6 million.

The Company completed its most recent annual assessment on November 30, 2021, and there was no impairment of goodwill at the assessment date.

Liquidity and Capital Resources

We have financed operations primarily through the sale of equity securities, borrowings under various security and loan agreements, and payments from customers. Our operating losses have been significant, as reflected in our accumulated deficit of $178,278 and $156,820 as of July 31, 2022, and January 31, 2022, respectively.

In connection with the Business Combination completed on August 3, 2022, ZeroFox received total net cash proceeds of $64.8 million, inclusive of the cash balances obtained through the merger with IDX and after the repayment of certain amounts of ZeroFox and IDX long term debt and transaction-related expenses. Prior to the completion of the Business Combination, we experienced an elevated level of redemptions, resulting in $10.2 million in the L&F trust account. The majority of the net proceeds of the Business Combination were provided by the Convertible Notes Financing, $150.0 million, and the Common Equity PIPE Financing, $20.0 million. Notwithstanding the value of redemptions we experienced, we believe that our cash on hand, the net proceeds of the Business Combination, and additional facilities with our current lenders will be sufficient to meet our cash requirements for at least the 12 months following the date of this prospectus.

Additional future sources of liquidity may come from the issuance of additional debt, exercise of Warrants, and/or the issuance of new shares of Common Stock. In the case of additional debt, we are permitted by the Indenture to issue no more than $50.0 million of senior debt. If we raise funds by issuing debt securities, such debt securities would have rights, preferences and privileges senior to those of holders of our Common Stock. The terms of debt securities or borrowings could impose significant restrictions on our operations. For Warrants, the Company will receive the proceeds from the cash exercise of any Warrants. The aggregate proceeds of the exercise of all outstanding Warrants, assuming cash exercise, would be $186.5 million. We believe the likelihood that warrant holders will exercise their Warrants, and therefore the amount of cash proceeds that we would receive, is dependent upon the market price of our Common Stock. If the market price for our Common Stock is less than $11.50 per share, we believe the warrant holders will be unlikely to exercise their Warrants. We may issue additional shares of our Common Stock or other equity securities of equal or senior rank in the future for investment or operational purposes. If we issue additional shares of Common Stock, dilution to our public shareholders may occur and the market price for our Common Stock may decrease and/or become more volatile.

The amount, timing, and mix of future amounts of liquidity will depend upon the judgment of ZeroFox’s management, the market price of our Common Stock, and prevailing interest rates, among other factors. Future capital requirements will depend on many factors including, but not limited to, cash collected from customers, additional borrowing, acceleration of sales and marketing costs to facilitate revenue expansion, and the continued adoption of our subscription products.

Cash Flows

The following table presents a summary of our cash flows for the periods presented:

 

     The Six Months Ended July 31,  
(dollars in thousands)    2022      2021  

Cash, cash equivalents, and restricted cash at beginning of year

   $ 10,374      $ 13,864  

Net cash used in operating activities

     (13,844      (8,525

Net cash used in investing activities

     (728      (4,945

Net cash provided by financing activities

     7,047        4,985  

Foreign exchange translation adjustment

     54        (45
  

 

 

    

 

 

 

Cash, cash equivalents, and restricted cash at end of year

   $ 2,903      $ 5,334  
  

 

 

    

 

 

 

 

14


Operating Activities

Our largest source of cash is payments from customers. Our primary uses of cash stem from personnel-related expense, third-party hosting expense, data source expense, and overhead expense, which is primarily comprised of IT support, facilities, and insurance expense. We have primarily funded operations through a combination of equity and debt financing. Cash used in operating activities primarily consists of our net losses from operations adjusted for non-cash expenses, including change in fair value of warrant liability, stock-based compensation expense, depreciation and amortization expense, and changes in period operating assets and liabilities.

Cash used in operating activities for the six months ended July 31, 2022, was $13.8 million which consisted of our net loss of $21.5 million adjusted by $5.6 million of non-cash expenses and $2.0 million of net cash inflows from changes in operating assets and liabilities. The changes in operating assets and liabilities were driven by $2.8 million in cash inflow from accounts receivable, primarily due to the historical cyclical timing of billings for the Company being most significant at year-end; $3.5 million in cash inflow from deferred revenue, primarily due to the growth in revenue; $2.7 million of cash outflows from accounts payable, accrued compensation, accrued expenses, and other current liabilities, primarily due to the timing of payments for variable personnel compensation and the payment of liabilities related to the Business Combination; and $1.6 million in cash outflows from prepaid expenses and other assets, primarily due to $0.6 million of reimbursable transaction expenses; $0.4 million of sales tax receivable from a customer; and $0.5 million of advanced payments for future goods, services, and marketing events.

Cash used in operating activities for the six months ended July 31, 2021, was $8.5 million which consisted of our net loss of $17.3 million adjusted by $7.8 million of non-cash expenses and $1.0 million of net cash outflows from changes in operating assets and liabilities. The changes in operating assets and liabilities were driven by $2.0 million in cash inflow from accounts receivable, primarily due to the historical cyclical timing of billings for the Company being most significant at year-end; and $1.1 million in cash outflows from prepaid expenses and other assets, primarily due to advanced payments for future goods, services, and marketing events.

Investing Activities

Cash used in investing activities for the six months ended July 31, 2022, was $0.7 million which consisted of $0.5 million of capitalized software development costs and $0.2 million of capital expenditures for property and equipment. Cash used in investing activities for the six months ended July 31, 2021, was $4.9 million which consisted of $4.3 million cash paid to complete the acquisition of Vigilante, $0.4 million of capitalized software development costs, and $0.3 million of capital expenditures for property and equipment.

Financing Activities

Financing activities for the six months ended July 31, 2022 provided $7.0 million of cash which primarily consisted of $7.0 million of net proceeds from new borrowings from Orix Growth Capital, LLC, partially offset by a repayment of debt of $0.5 million to InfoArmor. Financing activities for the six months ended July 31, 2021 provided $5.0 million of cash which consisted of net proceeds of $5.0 million from new borrowings from Orix Growth Capital, LLC.

 

15


Debt Obligations

The following table presents a summary of our debt obligations for the periods presented:

 

     As of July 31, 2022  
(dollars in thousands)    Stated
Interest
Rate
    Gross
Balance
     Unamortized
Debt
Discount
     Unamortized
Deferred
Debt
Issuance
Costs
     Discount
on Note
Payable
     Net
Carrying
Value
 

Stifel Bank

     4.50   $ 15,000      $ 71      $ 426      $ —        $ 14,503  

Orix Growth Capital, LLC(1)

     10.00     37,500        382        987        —          36,131  

InfoArmor

     5.50     2,813        —          —          182        2,631  

PIPE Investors(2)

     5.00     5,156        —          —          —          5,156  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     $ 60,469      $ 453      $ 1,413      $ 182      $ 58,421  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current portion of long-term debt

 

   $ 6,094  

Long-term debt

 

     52,327  
  

 

 

 
   $ 58,421  
  

 

 

 

 

(1) 

As part of the closing of the Business Combination on August 3, 2022, the note payable to Orix Growth Capital, LLC was repaid along with a prepayment fee of $1.1 million, accrued interest, and other fees, a total payment of $38.7 million.

(2) 

As part of the closing of the Business Combination on August 3, 2022, the notes payable to PIPE Investors were set off against those investors’ obligations under Common Equity Subscription Agreements those investors had entered into with LNFA.

 

     As of January 31, 2022  
(dollars in thousands)    Stated
Interest
Rate
    Gross
Balance
     Unamortized
Debt
Discount
     Unamortized
Deferred
Debt
Issuance
Costs
     Discount
on Note
Payable
     Net
Carrying
Value
 

Stifel Bank

     4.50   $ 15,000      $ 96      $ 574      $ —        $ 14,330  

Orix Growth Capital, LLC

     10.00     30,000        349        608        —          29,043  

InfoArmor

     5.50     3,281        —          —          213        3,068  

PIPE Investors

     5.00     5,032        —          —          —          5,032  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       53,313      $ 445      $ 1,182      $ 213      $ 51,473  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current portion of long-term debt

 

   $ 5,970  

Long-term debt

 

     45,503  
                

 

 

 
                 $ 51,473  
                

 

 

 

Material Cash Requirements

Our material cash requirements are associated with repayment of debt and obligations associated with non-cancelable contracts for the purchase of goods and third-party services and operating leases. We expect to satisfy these cash requirements through cash from operations along with possible future borrowings, either under existing facilities or new facilities, or possible future equity issuances.

 

16


The following table summarizes current and long-term material cash requirements as of July 31, 2022:

 

     As of July 31, 2022  
(dollars in thousands)    Total      Less than 1
year
     1-3 years      3-5 years      Thereafter  

Operating leases(1)

   $ 1,473      $ 887      $ 586      $ —        $ —    

Purchase commitments(2)

     3,645        2,692        953        —          —    

Debt repayments

     60,469        7,344        46,875        6,250        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 65,587      $ 10,923      $ 48,414      $ 6,250      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Relates to our office facilities.

(2) 

Relates to non-cancelable purchase commitments to purchase products and services entered into in the normal course of business.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency

To date, the majority of our sales contracts have been denominated in U.S. dollars (USD) with a limited number of contracts denominated in foreign currencies. Revenue denominated in USD was approximately 89%, 86%, and 85% for the years ended January 31, 2022, 2021, and 2020, respectively, and 90% for six months ended July 31, 2022 and 2021. Operating expenses within the United States are primarily denominated in U.S. dollars, while operating expenses incurred outside the United States are primarily denominated in each country’s respective local currency.

The functional currency of our foreign subsidiaries is each country’s respective local currency. Assets and liabilities of the foreign subsidiaries are translated into USD at the exchange rates in effect at the reporting date, and income and expenses are translated at average exchange rates during the period, with the resulting translation adjustments directly recorded as a component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations. As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.

We do not believe a hypothetical 10% increase or decrease in foreign exchange rates would have had a material impact on our financial statements.

Interest Rate Risk

As of July 31, 2022 and January 31, 2022, we had $60.5 million and $53.3 million, respectively, of outstanding borrowings under term loans. As part of the Business Combination completed on August 3, 2022, a total of $42.5 principal value of notes was repaid or otherwise satisfied and we obtained $150 million of convertible notes. The convertible notes have a fixed interest rate of 7.0%, if interest is paid in cash, or 8.75% if interest is paid in-kind. Of our notes outstanding after completion of the Business Combination, the Convertible Notes and InfoArmor note have fixed interest rates and the Stifel Bank note has a variable interest rate that would subject us to interest rate fluctuations

We do not believe a hypothetical 10% increase or decrease in interest rates would have had a material impact on our financial statements.

Emerging Growth Company

Upon the consummation of the Business Combination, we will be an emerging growth company, as defined in the Jumpstart Our Business Startups, ‘‘JOBS,’’ Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 

17

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Defined terms included below shall have the same meaning as terms defined and included in the Proxy Statement/Prospectus.

The following unaudited pro forma condensed combined financial statements are provided to aid you in your analysis of the financial aspects of the Business Combination involving L&F, ZeroFox, and IDX, the consummation of the Common Equity PIPE Investment Financing and the Convertible Notes Financing, and adjustments for other material events (“Adjustments for Material Events”), which are collectively referred to as the “Transactions.” For purposes of these unaudited pro forma condensed combined financial statements, the entity surviving the Business Combination is referred to as “New ZeroFox.”

The unaudited pro forma condensed combined financial statements are based on L&F’s historical financial statements and ZeroFox’s and IDX’s historical consolidated financial statements, as adjusted to give effect to the Business Combination. The historical financial statements of L&F and IDX were prepared based on a December 31 fiscal year-end and the historical financial statements of ZeroFox were prepared based on a January 31 fiscal year-end. Following the consummation of the Business Combination, New ZeroFox will have a January 31 fiscal year-end.

The historical balance sheets presented in the unaudited pro forma condensed combined financial statements reflect balances as of July 31, 2022 for ZeroFox and June 30, 2022 for L&F and IDX. The unaudited pro forma condensed combined balance sheet gives pro forma effect to the Business Combination as if they had been consummated on July 31, 2022.

The historical statements of operations presented in the unaudited pro forma condensed combined financial statements reflect ZeroFox’s activity for the six months ended July 31, 2022 and the year ended January 31, 2022. The historical statements of operations presented in the unaudited pro forma condensed combined financial statements reflect L&F’s and IDX’s activity for the six months ended June 30, 2022 and the year ended December 31, 2021. The unaudited pro forma condensed combined statements of operations give pro forma effect to the Business Combination as if they had been consummated on February 1, 2021.

The unaudited pro forma condensed combined financial statements have been derived from the historical financial statements and should be read in conjunction with:

 

   

the historical unaudited condensed financial statements of L&F as of and for the three months ended June 30, 2022, and the related notes which is incorporated by reference from the L&F Quarterly Report (10Q) filed on July 28, 2022;

 

   

the historical audited financial statements of L&F as of and for the year ended December 31, 2021 and the related notes which is incorporated by reference from the L&F Registration of Securities, Business Combinations Amendment (S-4/A) filed on July 14, 2022;

 

   

the historical unaudited condensed consolidated financial statements of ZeroFox as of and for the six months ended July 31, 2022 and the related notes; included within this current report.

 

   

the historical audited consolidated financial statements of ZeroFox as of and for the year ended January 31, 2022 and the related notes which is incorporated by reference from the L&F Registration of Securities, Business Combinations Amendment (S-4/A) filed on July 14, 2022;

 

   

the historical unaudited condensed financial statements of IDX as of and for the three months ended June 30, 2022, and the related notes included within this current report;

 

   

the historical audited consolidated financial statements of IDX as of and for the year ended December 31, 2021 and the related notes which is incorporated by reference from the L&F Registration of Securities, Business Combinations Amendment (S-4/A) filed on July 14, 2022;

 

   

the accompanying notes to the unaudited pro forma condensed combined financial statements;

 

   

the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of L&F,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of ZeroFox,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of IDX,” and other financial information relating to L&F, ZeroFox, and IDX included which is incorporated by reference from the L&F Registration of Securities, Business Combinations Amendment (S-4/A) filed on July 14, 2022.

The Business Combination will be accounted for in accordance with the acquisition method of accounting under the provisions of ASC 805, Business Combinations, with L&F as the accounting acquirer and ZeroFox and IDX as the accounting acquirees.

Upon consummation of the Business Combination, ZeroFox is considered a variable interest entity as the equity at risk for ZeroFox is not sufficient to fund expected future cash flow needs, including funding future projected losses, and servicing existing debt obligations. L&F will hold a variable interest in ZeroFox as it will own 100% of ZeroFox’s equity. L&F will be considered the primary beneficiary as its ownership will provide the power to direct the activities that most significantly impact ZeroFox’s performance and the obligation to absorb the losses and/or receive the benefits of ZeroFox that could potentially be significant to ZeroFox. L&F will be treated as the accounting acquirer.

IDX is considered a business under ASC 805, Business Combinations. IDX is not considered the accounting acquirer in the Business Combination based on evaluation of the following factors:

 

   

IDX shareholders will not have the largest voting interest in New ZeroFox;

 

   

IDX will not comprise all of the ongoing operations of New ZeroFox;

 

   

IDX will not designate a majority of the governing body of New ZeroFox;

 

   

IDX senior management will not have a substantive role in the senior management of New ZeroFox; and

 

   

the largest single owner of the combined company will not be a legacy owner of IDX;

L&F is determined to be the accounting acquirer as it will be ZeroFox’s primary beneficiary and it will own 100% of IDX’s equity. L&F’s acquisitions of ZeroFox and IDX will be considered business combinations under ASC 805, Business Combinations, and will be accounted for using the acquisition method of accounting. The consideration transferred will be allocated to the assets acquired and liabilities assumed based on their estimated acquisition-date fair values. The excess of consideration transferred to effect the acquisitions over the fair values of assets acquired and liabilities assumed will be recorded as goodwill. Transaction costs will be expensed as if the Business Combination had occurred on February 1, 2021.

The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the combined company.

 

1


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF JULY 31, 2022

(in thousands, except share amounts)

 

     Historical
June 30,
2022
     Historical
July 31,
2022
     Historical
June 30,
2022
     Transaction Accounting Adjustments              
     L&F      ZF      IDX      Adjustments
Related to
ZF
          Adjustments
Related to
IDX
          Additional
Pro Forma
Adjustments
          Pro
Forma
Balance
Sheet
 

ASSETS

                       

Current assets:

                       

Cash and cash equivalents

   $ 157      $ 2,803      $ 17,012        (11,731     5 (cc)    $ (64,112     5 (A)      34,865       5 (AA)    $ 62,086  
              (39,037     5 (ff)      (2,623     5 (B)      (10,248     5 (BB)   
                      149,806       5 (CC)   
                      15,000       5 (DD)   
                      (5,022     5 (EE)   
                      (24,626     5 (FF)   
                      (158     5 (GG)   

Accounts receivable, net of allowance for doubtful accounts

     —          14,210        12,037        —           —           —           26,247  

Deferred contract acquisitions costs, current

     —          4,918        1,065        —           —           —           5,983  

Prepaid expenses and other assets

     39        2,859        1,071        —           —           (39     5 (BB)      3,930  
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

     

 

 

     

 

 

 

Total current assets

     196        24,790        31,185        (50,768       (66,735       159,578         98,246  

Marketable investments held in Trust Account

     34,832        —          —                  (34,832     5 (AA)      —    

Property and equipment, net of accumulated depreciation

     —          609        128        —           —           —           737  

Capitalized software, net of accumulated amortization

     —          1,082        —          —           —           —           1,082  

Deferred contract acquisition costs, net of current portion

     —          6,854        188        —           —           —           7,042  

Acquired intangible assets, net of accumulated amortization

     —          12,631        —          172,000       5 (aa)      94,900       5 (A)      —           279,531  

Goodwill

     —          35,002        —          754,083       5 (aa)      245,843       5 (A)      —           1,034,928  

Deferred tax asset

     —          —          1,227        37,993       5 (aa)      (1,227     5 (A)      —           —    
              (37,993     5 (ee)           

Other assets

     —          341        —          —           —           —           341  
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

     

 

 

     

 

 

 

Total assets

   $ 35,028      $ 81,309      $ 32,728      $ 875,315       $ 272,781       $ 124,746       $ 1,421,907  
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

     

 

 

     

 

 

 

LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT)

                       

Current liabilities:

                       

Accounts payable

   $ —        $ 4,333      $ 7,950      $ —         $ —         $ —         $ 12,283  

Accrued liabilities

     6,253        4,302        5,680        12,777       5 (aa)      2,118       5 (A)      (6,253     5 (BB)      10,152  
              (11,731     5 (cc)      (2,623     5 (B)       
              (371     5 (ff)           

Accrued offering costs

     350        —          —          —           —           (350     5 (BB)      —    

Deferred revenue, current

     —          36,019        8,870        —           —           —           44,889  

Related party convertible debt, carried at fair value

     —          —          2,924        —           (2,924     5 (A)      —           —    

Current portion of long-term debt

     —          6,094        3,333        —           (3,333     5 (A)      (5,158     5 (GG)      936  
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

     

 

 

     

 

 

 

Total current liabilities

     6,603        50,748        28,757        675         (6,762       (11,761       68,260  

Deferred underwriting fee payable

     6,038        —          —                  (6,038     5 (EE)      —    

Deferred revenue—net of current portion

     —          6,326        1,610        —           —           —           7,936  

Accrued liabilities, long-term

     —          —          779        —           —           —           779  

Deferred tax liability

     —          —          —          56,430       5 (aa)      —           —           18,437  
              (37,993     5 (ee)           

Long term debt—net of current portion

     —          52,327        6,655        (36,131     5 (ff)      (6,655     5 (A)          16,196  

Convertible debt

     —          —          —          —           —           149,806       5 (CC)      149,806  

Warrants

     4,198        7,387        —          (7,387     5 (bb)      —           —           4,198  
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities

     16,839        116,788        37,801        (24,406       (13,417       132,007         265,612  
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

     

 

 

     

 

 

 

 

2


     Historical
June 30,
2022
    Historical
July 31,
2022
    Historical
June 30,
2022
   

 

             
     L&F     ZF     IDX     Adjustments
Related to
ZF and
Acquisition
of ZF
          Adjustments
Related to
IDX and
Acquisition
of IDX
          Additional
Pro Forma
Adjustments
          Pro
Forma
Balance
Sheet
 

ZeroFox redeemable convertible preferred stock

     —         138,129       —         1,914       5 (bb)      —           —           —    
           (140,043     5 (dd)           

IDX redeemable convertible preferred stock

     —         —         65,166       —           (65,166     5 (C)      —           —    
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total redeemable convertible preferred stock

     —         138,129       65,166       (138,129       (65,166       —           —    

L&F Class A ordinary shares subject to possible redemption

     34,832       —         —         —           —           (24,626     5 (FF)      —    
                   (10,206     5 (HH)   

Stockholders’ equity (deficit):

                    

L&F Class A ordinary shares

     —         —         —         8       5 (aa)      3       5 (A)      1       5 (HH)      12  

L&F Class B ordinary shares

     —         —         —         —           —           —           —    
                    

ZeroFox common stock

     —         —         —         —           —           —           —    
                    

IDX common stock

     —         —         1       —           (8     5 (A)      —           —    
               7       5 (C)       

Additional paid-in capital

     —         4,829       24       716,424       5 (aa)      215,939       5 (A)      (3,684     5 (BB)      1,174,412  
           5,473       5 (bb)      —           15,000       5 (DD)   
           140,043       5 (dd)      65,159       5 (C)      5,000       5 (GG)   
                   10,205       5 (HH)   

Accumulated deficit

     (16,643     (178,278     (70,264     178,278       5 (aa)      70,264       5 (A)      33       5 (AA)      (18,129
           (2,535     5 (ff)          1,016       5 (EE)   

Accumulated other comprehensive loss

     —         (159     —         159       5 (aa)      —           —           —    
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total stockholders’ equity (deficit)

     (16,643     (173,608     (70,239     1,037,850         351,364         27,571         1,156,295  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities, redeemable convertible preferred stock, L&F Class A ordinary shares, and stockholders’ equity (deficit)

   $ 35,028     $ 81,309     $ 32,728     $ 875,315       $ 272,781       $ 124,746       $ 1,421,907  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

See accompanying notes to the unaudited pro forma condensed combined financial statements.

 

3


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS

ENDED JULY 31, 2022

(in thousands, except share and per share amounts)

 

     Historical
Six

Months
Ended

June 30,
2022
    Historical
Six

Months
Ended
July 31,

2022
    Historical
Six

Months
Ended
June 30,
2022
    Transaction Accounting Adjustments                    
     L&F     ZF     IDX     Adjustments
Related to
ZF
          Adjustments
Related to
IDX
          Additional
Pro Forma
Adjustments
          Pro Forma
Statement of
Operations
       

Revenue

   $ —       $ 28,743     $ 56,706     $ —         $ —         $ —         $ 85,449    

Cost of revenue

     —         8,729       44,207       9,900       6 (aa)      1,400       6 (A)      —           64,236    
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

Gross profit

     —         20,014       12,499       (9,900       (1,400       —           21,213    

Operating expenses:

                      

Research and development

     —         8,023       2,838       —           —           —           10,861    

Sales and marketing

     —         18,363       4,828       4,500       6 (aa)      3,633       6 (A)      —           31,324    

General and administrative

     3,856       9,985       3,977       1,900       6 (aa)      3,090       6 (A)      —           16,075    
           (3,790     6 (ee)      (2,943     6 (F)         
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

Total operating expenses

     3,856       36,371       11,643       2,610         3,780         —           58,260    
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

(Loss) / income from operations

     (3,856     (16,357     856       (12,510       (5,180       —           (37,047  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

Other income (expense):

                      

Interest expense, net

     —         (2,931     (257     2,275       6 (bb)      257       6 (B)      (5,283     6 (AA)      (6,771  
           (607     6 (cc)             
           (225     6 (ff)             

Fair value adjustments

     14,439       (2,059     (133     2,059       6 (dd)      133       6 (E)      —           14,439    

Other expense

     —         —         (473     —           85       6 (C)          (25  
               363       6 (D)         

Interest earned on marketable securities held in Trust Account

     100       —         —         —           —           (100     6 (BB)      —      
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

Total other income (expense)

     14,539       (4,990     (863     3,502         838         (5,383       7,643    
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

Income / (loss) before taxes

     10,683       (21,347     (7     (9,008       (4,342       (5,383       (29,404  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

Income tax expense (benefit)

     —         111       22       (6,877     7 (b)      (1,940     7 (c)      (910     7 (d)      (9,594     7 (a) 
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

Net income / (loss) after taxes

   $ 10,683     $ (21,458   $ (29   $ (2,131     $ (2,402     $ (4,473     $ (19,810  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

   

Net income attributable to Class A redeemable ordinary shares (basic and diluted)

   $ 7,990                      
  

 

 

                     

Net income attributable to Class B non-redeemable ordinary shares (basic and diluted)

   $ 2,693                      
  

 

 

                     

Net income attributable to IDX redeemable convertible preferred stock (basic and diluted)

     $ (21,458   $ (8                
    

 

 

   

 

 

                 

Net (loss) / income attributable to common stockholders (basic and diluted)

     $ (21,458   $ (8                
    

 

 

   

 

 

                 

Net loss attributable to Class A non-redeemable ordinary shares (basic and diluted)

                     $ (19,810  
                    

 

 

   

Net income per share attributable to Class A redeemable ordinary shares (basic and diluted)

   $ 0.62                      
  

 

 

                     

Net income per share attributable to Class B non-redeemable ordinary shares (basic and diluted)

   $ 0.62                      
  

 

 

                     

Net (loss) / income per share attributable to IDX redeemable convertible preferred stock (basic and diluted)

       $ —                    
      

 

 

                 

Net (loss) / income per share attributable to common stockholders (basic and diluted)

     $ (0.50   $ —                    
    

 

 

   

 

 

                 

Net loss per share attributable to Class A non-redeemable ordinary shares (basic and diluted)

                     $ (0.17  
                    

 

 

   

Weighted-average shares outstanding of Class A redeemable ordinary shares used in computing net income per share attributable to stockholders of Class A redeemable ordinary shares (basic and diluted)

     12,795,500                      
  

 

 

                     

Weighted-average shares outstanding of Class B non-redeemable ordinary shares used in computing net income per share attributable to stockholders of Class B non-redeemable ordinary shares (basic and diluted)

     4,312,500