CISO Global, Inc. quarterly report, Q2 FY2023

CISO Global, Inc. — Q2 2023 Form 10-Q Summary

Business context and reporting period

CISO Global provides cybersecurity and compliance services, including managed security, SOC and vCISO services, incident response, digital forensics, assessments, training and related consulting. The unaudited report covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods. The company is a smaller reporting company and emerging growth company.

Financial performance and position

Metric	Three months ended June 30, 2023	Three months ended June 30, 2022	Six months ended June 30, 2023	Six months ended June 30, 2022
Total revenue	$15.5 million	$11.2 million	$29.3 million	$20.6 million
Gross profit	$1.0 million	$0.8 million	$1.4 million	$0.8 million
Gross margin	6.5%	6.8%	4.8%	4.0%
Net loss	$29.3 million	$7.3 million	$64.2 million	$15.4 million
Net loss per share	$0.18	$0.05	$0.42	$0.11
Operating cash flow	Not separately disclosed for the quarter	$(5.3) million	$(3.6) million

Second-quarter revenue increased 38% year over year, led by security managed services revenue of $13.6 million, up 31%, and professional services revenue of $1.9 million, up 127%.
Six-month revenue increased 42% to $29.3 million. Management attributed growth primarily to three acquisitions completed during the prior 12 months and new and existing customer growth.
Operating expenses were $29.8 million in the quarter and $64.9 million for the six months, including goodwill impairment charges of $20.8 million and $41.0 million, respectively.
Six-month stock-based compensation totaled $14.4 million, including $8.6 million related to stock options and $5.7 million included in operating expenses.
Cash and cash equivalents were $1.9 million at June 30, 2023, compared with $1.8 million at December 31, 2022. Net cash increased only $39,012 during the first six months.
Current assets were $16.0 million and current liabilities were $23.1 million, producing a working-capital deficit of $7.1 million.
Total debt, based on loans payable and convertible notes payable reported on the balance sheet, was approximately $13.4 million, including $4.6 million classified as current under the debt maturity schedule.
Net cash provided by financing activities was $5.5 million, including $6.7 million from common-stock sales, $6.1 million from convertible notes and $2.2 million from loans, partially offset by $9.8 million of debt repayments.

Material changes versus the prior comparable period

Revenue growth did not translate into significant operating leverage: second-quarter gross margin declined modestly to 6.5%, while net loss expanded substantially.
Interest expense increased to $1.2 million for the first six months from $108,233 in the prior-year period, reflecting increased and higher-cost borrowing.
Goodwill was reduced by $41.0 million following impairment testing prompted primarily by the decline in the company’s share price, higher discount rates, uncertainty and lower forecast near-term cash flows. Goodwill declined from $76.7 million at year-end 2022 to $37.3 million at June 30, 2023.
Intangible assets were reduced by a $3.1 million non-cash impairment charge and declined from $8.5 million to $4.3 million.
Common shares outstanding increased from 146.4 million at December 31, 2022 to approximately 178.0 million as of August 7, 2023, reflecting equity issuance, stock compensation and option exercises.
Accounts payable and accrued expenses increased from $8.3 million to $13.3 million, while deferred revenue increased from $4.5 million to $5.0 million.

Guidance, outlook, risks and unusual items

The filing provides no formal quantitative revenue or earnings guidance. Management expects further losses through the end of 2023 and is pursuing overhead reductions and additional debt or equity financing.
Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern for one year from issuance of the financial statements. The company’s ability to continue depends on achieving profitable operations, conserving cash and obtaining additional financing.
The company reported a highly costly cash advance agreement: $2.0 million of gross proceeds received in March 2023, with aggregate repayments of $2.87 million and an effective interest rate of 155.11%. The agreement is secured by accounts receivable.
In May 2023, the company completed a $4.0 million registered direct offering of 20.0 million shares and used $2.0 million of proceeds to repay short-term debt. A placement agent received warrants for 600,000 shares at $0.25 per share.
The company issued a $5.0 million related-party convertible note to Hensley & Company at 10% interest, convertible at $1.20 per share and due March 20, 2025. A company director is an executive of Hensley & Company.
The company has a remaining $950,000 contractual obligation under an investor-relations and capital-introductions agreement terminating in November 2023.
Goodwill and remaining intangible assets remain exposed to additional impairment from further share-price declines, higher discount rates, weaker revenue growth or reduced profitability.
Management concluded that disclosure controls and procedures were not effective at June 30, 2023 because of continuing material weaknesses involving risk-assessment procedures and documentation of financial-reporting policies and procedures.
No material legal proceedings were reported, and management stated that previously disclosed risk factors had not materially changed. In July 2023, the company entered into an agreement to acquire SB Cyber Technologies, LLC; the filing does not provide transaction terms or purchase price.

Most important facts for investors to verify

Whether the company can obtain sufficient financing and improve operating cash flow despite $1.9 million of cash, a $7.1 million working-capital deficit and substantial recurring losses.
The repayment schedule, security interests and effective economics of the 155.11% cash advance agreement and other debt obligations.
Whether revenue growth from acquisitions can produce sustainable gross-margin improvement and reduce dependence on equity and debt financing.
The risk of further goodwill and intangible-asset impairments, particularly following the $44.2 million of combined first-half impairment charges.
Progress in remediating the material weaknesses in internal control over financial reporting.
The dilutive impact of outstanding options, warrants and convertible debt; approximately 39.8 million potentially dilutive securities were excluded from the June 30, 2023 diluted-share calculation because of the net loss.
The terms, financing impact and integration progress of the subsequent SB Cyber Technologies acquisition.