CISO Global, Inc. quarterly report, Q1 FY2024

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CISO Global, Inc. — Q1 2024 Form 10-Q Summary

Business context and reporting period

CISO Global provides cybersecurity consulting, compliance, managed security, incident response, forensics, training, and internally developed cybersecurity software. This unaudited quarterly report covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023. The company is a smaller reporting company and emerging growth company.

Financial performance and position

  • Revenue: $11.83 million, down $1.89 million, or 13.8%, from $13.73 million. Security managed services revenue was $10.45 million, professional services revenue was $1.29 million, and cybersecurity software revenue was $0.10 million.
  • Gross profit: $0.99 million versus $0.40 million. Gross margin improved to approximately 8.4% from 2.9%, primarily because of lower payroll, managed-services costs, and stock-based compensation.
  • Operating loss: $5.74 million versus $34.73 million. The prior-year period included a $20.20 million goodwill impairment charge; no goodwill impairment was recorded in Q1 2024.
  • Net loss: $6.61 million, or $0.55 per basic and diluted share, versus a $34.84 million net loss, or $3.56 per share.
  • Comprehensive loss: $7.27 million, including a $0.66 million unfavorable foreign-currency translation adjustment.
  • Cash flow: Operating cash use was $1.41 million, compared with $2.11 million in the prior-year period. Investing cash use was $0.08 million. Financing provided $2.01 million, primarily from borrowings, partially offset by debt repayments.
  • Cash and liquidity: Cash increased to $1.52 million from $1.06 million at December 31, 2023. Current assets were $9.28 million and current liabilities were $32.60 million, resulting in a working-capital deficit of $23.33 million versus $15.11 million at year-end.
  • Debt: Current liabilities included $3.50 million of loans payable, $2.30 million under a line of credit, $2.05 million of convertible notes, and $10.00 million of other convertible notes, including $5.00 million owed to a related party. Total loans payable were $5.78 million, excluding convertible notes.
  • Shareholders’ equity: $11.24 million, down from $16.14 million at December 31, 2023. Shares outstanding increased to 12.14 million from 11.95 million, reflecting stock issuances and adjustments.

Material changes versus the prior comparable period

  • Security managed services revenue decreased 11%, primarily because Q1 2023 included higher hardware sales in Latin America.
  • Professional services revenue decreased 34%, primarily because of lower project volumes in Latin America.
  • Cybersecurity software revenue began contributing revenue following the initial launch of the company’s internally developed software products.
  • Cost of revenue declined 18.6% to $10.84 million, while operating expenses declined 80.8% to $6.73 million.
  • Stock-based compensation decreased to approximately $2.20 million in operating expense and $1.10 million in cost of revenue, compared with $5.27 million and $1.77 million, respectively, in Q1 2023.
  • Interest expense increased to $0.87 million from $0.39 million, reflecting the company’s increased and expensive debt obligations.
  • Accounts receivable declined to $3.74 million from $5.69 million, while deferred revenue increased to $5.29 million from $5.26 million in total.
  • The company completed a 1-for-15 reverse stock split effective March 8, 2024; prior share and per-share amounts were retrospectively adjusted.

Guidance, outlook, risks, contingencies, and unusual items

  • Management expects to incur further losses through the end of 2024 and states that substantial doubt exists about the company’s ability to continue as a going concern.
  • Management is pursuing cost reductions, profitable operations, and additional debt and/or equity financing. It believes available cash and anticipated revenue may fund near-term requirements, but provides no assurance that financing will be available on acceptable terms.
  • The company had $291.30 million of available capacity under its shelf registration statement, subject to market demand and other conditions.
  • On January 31, 2024, the company entered into a secured line of credit of up to $3.50 million, limited to 80% of eligible accounts receivable, bearing interest at 19.25% and maturing January 30, 2025.
  • On March 28, 2024, the company restructured a LendSpark loan of $2.20 million at 51.73% interest, payable in 52 weekly installments. The loan is secured by company and U.S. subsidiary assets. The company issued 100,000 common shares as additional consideration.
  • Convertible notes include $1.05 million due June 7, 2024, $1.00 million due October 12, 2024, and $5.00 million owed to related party Hensley & Company due March 20, 2025. Certain notes are convertible into common stock or subsidiary interests.
  • The company recorded $0.56 million of interest expense during the quarter on the prior LendSpark business loan and faces substantial near-term debt maturities. Total future minimum payments for loans and convertible notes were reported at $15.37 million before discounts.
  • Indirect tax liabilities accrued were $0.22 million. Final tax audits or regulatory determinations could differ materially from the company’s estimates.
  • No material legal proceedings were pending, and management reported no material changes to previously disclosed risk factors.
  • Management concluded that disclosure controls and procedures were effective as of March 31, 2024; the independent auditor did not evaluate internal control over financial reporting for this interim filing.

Important facts for investors to verify

  • Whether the company can obtain sufficient financing to address its $23.33 million working-capital deficit and near-term debt maturities.
  • The repayment, refinancing, or conversion status of the June 2024 and October 2024 convertible notes and the secured LendSpark obligations.
  • Whether revenue declines in managed and professional services stabilize and whether newly launched software products generate material recurring revenue.
  • Whether gross-margin improvement is sustainable after excluding the benefit of lower prior-period costs and unusually high 2023 impairment charges.
  • The potential dilution from 1.95 million outstanding options, 49,614 warrants, and securities convertible into approximately 874,672 shares, all excluded from diluted loss-per-share calculations because they were antidilutive.
  • The impact of the related-party Hensley transactions, including $1.12 million of Q1 service receipts and the $5.00 million related-party convertible note.
  • The company’s ability to continue as a going concern and the potential effects on asset recoverability and liability classification if additional funding is unavailable.