CISO Global, Inc. — Form 10-Q Summary
Business context and reporting period
CISO Global, Inc. is a cybersecurity and compliance services company providing managed security, security operations center, vCISO, compliance, incident response, digital forensics, assessments, training, and related services. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $13.7 million | $9.3 million |
| Gross profit | $0.4 million | $0.05 million |
| Gross margin | 2.9% | 0.5% |
| Loss from operations | $(34.7) million | $(7.9) million |
| Net loss | $(34.8) million | $(7.9) million |
| Net loss per diluted share | $(0.24) | $(0.06) |
| Net cash used in operations | $(2.1) million | $(3.0) million |
Revenue increased 47% year over year. Security managed services revenue was $11.8 million, up 46%, and professional services revenue was $2.0 million, up 54%. Management attributed the increases primarily to four acquisitions completed during the preceding 12 months and new and existing customer growth.
Gross profit improved to $399,084, but the company remained substantially unprofitable. Operating expenses were $35.1 million, including a $20.2 million non-cash goodwill impairment charge, $3.1 million of intangible-asset impairment included in selling, general and administrative expense, and $5.3 million of stock-based compensation expense.
Cash and cash equivalents were $3.8 million at March 31, 2023, compared with $1.8 million at December 31, 2022. The company generated $4.2 million from financing activities, including $3.1 million from common-stock sales, $2.0 million of loan proceeds, and $5.0 million from a related-party convertible note, partially offset by debt repayments. Current assets were $15.1 million and current liabilities were $21.7 million, resulting in a $6.6 million working-capital deficit.
Total debt, including current and long-term loans and convertible notes, was approximately $15.7 million before applicable discounts. The company also entered into a cash advance agreement providing $2.0 million of gross proceeds, requiring weekly payments totaling $2.87 million and carrying an effective interest rate of 155.11%. A $5.0 million unsecured related-party convertible note bears interest at 10% and matures March 20, 2025; it is convertible at $1.20 per share.
Material changes versus the prior comparable period
- Revenue rose by $4.4 million, or 47%, driven by acquisitions and customer growth.
- Gross profit increased by $350,368, although the gross margin remained very low.
- Operating expenses increased by $27.2 million, primarily because of goodwill impairment, higher selling and administrative costs, professional fees, and stock-based compensation.
- Goodwill declined from $76.7 million at December 31, 2022 to $58.5 million at March 31, 2023 following $20.2 million of impairment charges. The impairment was attributed principally to the company’s lower share price, higher discount rates, uncertainty, and lower forecast near-term cash flows.
- Net loss increased by $26.9 million to $34.8 million, while loss per share increased from $0.06 to $0.24.
- Operating cash use improved by $904,923, and investing cash use declined because Q1 2023 included no acquisition cash payments compared with $4.9 million in Q1 2022.
- Common shares outstanding increased to 154.2 million at March 31, 2023 from 146.4 million at December 31, 2022, reflecting stock issuance and option exercises.
Outlook, risks, contingencies, and unusual items
The company stated that it expects further losses through the end of 2023 and is actively pursuing additional debt and equity financing while planning to reduce overhead. Management believes cash on hand and anticipated revenue will meet near-term requirements, but the filing states that substantial doubt exists about the company’s ability to continue as a going concern for one year from the issuance of the financial statements. No formal revenue or earnings guidance was provided.
- The company’s ability to continue operations depends on developing profitable operations, controlling costs, generating cash, and obtaining additional financing.
- The financial statements do not include adjustments that could be required if the company cannot continue as a going concern.
- Goodwill and remaining intangible assets are exposed to further impairment from additional share-price declines, higher discount rates, weaker cash flows, lower growth, or reduced profitability.
- The company had material weaknesses in internal control over financial reporting relating to risk-assessment procedures and documentation of critical policies and procedures. Management concluded that disclosure controls were not effective as of March 31, 2023 and described remediation efforts.
- The company disclosed no material pending legal proceedings and no material changes to the risk factors reported in its 2022 Form 10-K.
- Key operating risks include cybersecurity incidents, service interruptions, talent retention, acquisition integration, customer retention, foreign exchange exposure, substantial indebtedness, regulatory compliance, and the need for additional capital.
Facts investors should verify
- Whether the company can raise sufficient debt or equity capital and on what terms, including potential dilution from convertible securities.
- Near-term debt maturities, weekly cash-advance obligations, interest costs, and compliance with debt agreements.
- Operating cash burn, cash collections, accounts payable growth, and the sustainability of the $3.8 million cash balance.
- Revenue quality and organic growth excluding the contribution from recent acquisitions, as well as whether gross margins can improve materially.
- Assumptions supporting the $20.2 million goodwill impairment and the risk of additional impairment charges.
- Progress in remediating material weaknesses in internal control over financial reporting.
- Integration results and profitability of the four acquisitions completed during the preceding 12 months.