CISO Global, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
CISO Global provides cybersecurity and compliance services, including managed security, security operations center, vCISO, compliance, incident response, digital forensics, assessments, training, and related professional services. The unaudited report covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
As of November 13, 2023, 180,176,477 common shares were outstanding. The company is a smaller reporting company and emerging growth company.
Financial performance and condition
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $14.1 million, up 25.0% | $43.3 million, up 36.2% |
| Gross profit | $2.5 million vs. $0.9 million | $3.9 million vs. $1.7 million |
| Gross margin | 17.6% vs. 8.2% | 9.0% vs. 5.5% |
| Operating loss | $4.6 million vs. $8.4 million | $68.1 million vs. $23.7 million |
| Net loss | $5.5 million vs. $8.5 million | $69.7 million vs. $23.9 million |
| Net loss per share | $0.03 vs. $0.06 | $0.44 vs. $0.17 |
- Managed security services revenue was $12.3 million in Q3 and $37.6 million year to date, increasing 22% and 32%, respectively. Professional services revenue was $1.8 million in Q3 and $5.7 million year to date, increasing 51% and 71%.
- Q3 operating expenses declined to $7.1 million from $9.3 million, primarily from lower selling, general and administrative expense and stock-based compensation. Nine-month operating expenses increased to $72.0 million, including a $41.0 million goodwill impairment charge.
- Interest expense increased to $0.8 million in Q3 and $1.9 million year to date, compared with $0.1 million and $0.3 million in the comparable periods.
- Cash and cash equivalents were $0.8 million at September 30, 2023, down from $1.8 million at December 31, 2022. Working capital was negative $11.4 million, compared with negative $8.8 million at year-end.
- Cash used in operating activities was $6.7 million for the first nine months, compared with $7.9 million in 2022. Financing activities provided $5.8 million, while investing activities used $0.1 million. Ending cash was $0.8 million versus $4.9 million at September 30, 2022.
- Total loans payable were $7.0 million, and convertible notes payable totaled $6.1 million, including a $5.0 million related-party note. Lease liabilities totaled $0.9 million.
- Accounts payable and accrued expenses increased to $13.2 million from $8.3 million at December 31, 2022; deferred revenue was $4.9 million.
Material changes versus the prior comparable period
- Revenue growth was primarily attributed to acquisitions completed during the preceding 12 months and growth from new and existing customers. Chilean revenue increased substantially, while U.S. revenue declined modestly in Q3 and for the nine-month period.
- Gross margin improved in both comparison periods, but remained low because security managed services cost of revenue and payroll increased with the acquired operations and expanded headcount.
- The company recorded $41.0 million of non-cash goodwill impairment for the nine months, reducing goodwill from $76.7 million to $35.6 million. It also recorded approximately $3.1 million of non-cash intangible-asset impairment, reducing net intangible assets to $4.2 million.
- Common shares outstanding increased from 146.4 million at December 31, 2022 to 178.2 million at September 30, 2023, reflecting equity offerings, option exercises, stock compensation, and acquisition-related issuance.
- The company completed a $4.0 million registered direct offering in May 2023 and received $6.7 million from common-stock sales during the nine-month period. Proceeds were used partly to repay short-term indebtedness.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects additional losses through the end of 2023. It plans to reduce overhead and pursue additional debt and/or equity financing, but states that financing and profitability are not assured.
- The filing contains a substantial doubt regarding the company’s ability to continue as a going concern for one year from issuance of the financial statements. Management believes current cash and anticipated revenue may cover near-term requirements, but acknowledges that the business plan may not be achieved.
- Debt includes highly expensive cash advance arrangements: one facility had an effective interest rate of 155.11% and another 112.00%, with weekly repayment obligations secured by accounts receivable.
- On November 9, 2023, after quarter-end, the company obtained a $2.2 million LendSpark loan bearing stated interest of 53.44%, payable in 52 weekly installments of $53,731. The loan is secured by substantially all assets of the company and its U.S. subsidiaries and was used to repay the Cedar Advance cash advance. The company also issued 2.0 million unregistered shares as partial consideration.
- The company’s disclosure controls and procedures were not effective as of September 30, 2023 because material weaknesses remained in risk-assessment procedures and documentation of key financial-reporting policies and procedures. Management is pursuing remediation.
- The remaining goodwill balance is subject to further impairment risk from lower share prices, higher discount rates, weaker forecast cash flows, slower growth, or lower profitability.
- The company reports no material pending legal proceedings and no material changes to previously disclosed risk factors. Estimated indirect tax liabilities were $0.6 million at September 30, 2023.
Important facts for investors to verify
- Whether additional financing can be obtained before available cash and operating cash flows are exhausted.
- The timing and terms of debt maturities, weekly cash advance payments, the related-party convertible note, and the post-quarter-end LendSpark loan.
- Whether revenue growth and improved gross margins can continue while acquired operations are integrated and payroll costs remain elevated.
- The potential for additional goodwill and intangible-asset impairment charges.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- The dilution implications of the 2023 equity offerings, outstanding options and warrants, convertible debt, and the 2.0 million shares issued to LendSpark.
- The filing’s detailed impairment disclosures and cash-flow reconciliation, which should be reviewed for consistency because certain impairment amounts are presented differently in the financial statements and notes.