CISO Global, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to CISO Global Inc., a Delaware corporation, and its wholly owned subsidiaries. Unless otherwise specified, all dollar amounts are expressed in U.S. dollars. Third Quarter 2023 Highlights Our operating results for the nine months ended September 30, 2023 included the following: ● Total revenue increased by $11.5 million to $43.3 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. ● Total gross profit increased to $3.9 million for the nine months ended September 30, 2023, as compared to $1.7 million the nine months ended September 30, 2022. Results of Operations Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022 Our financial results for the three months ended September 30, 2023 are summarized as follows in comparison to the three months ended September 30, 2022: Three Months Ended September 30, 2023 2022 Variance Revenue: Security managed services $ 12,266,690 $ 10,061,304 $ 2,205,386 Professional services 1,798,431 1,191,728 606,703 Total revenue 14,065,121 11,253,032 2,812,089 Cost of revenue: Security managed services 5,574,180 4,310,378 1,263,802 Professional services 234,549 182,413 52,136 Cost of payroll 5,458,001 4,978,768 479,233 Stock based compensation 317,851 857,950 (540,099 ) Total cost of revenue 11,584,581 10,329,509 1,255,072 Total gross profit 2,480,540 923,523 1,557,017 Operating expenses: Professional fees 745,426 624,391 121,035 Advertising and marketing 119,814 245,495 (125,681 ) Selling, general, and administrative 5,557,328 6,684,747 (1,127,419 ) Stock based compensation 677,231 1,791,724 (1,114,493 ) Total operating expenses 7,099,799 9,346,357 (2,246,558 ) Loss from operations (4,619,259 ) (8,422,834 ) 3,803,575 Other income (expense): Other income (121,689 ) 29,968 (151,657 ) Interest expense, net (766,315 ) (108,233 ) (658,082 ) Total other income (expense) (888,004 ) (78,265 ) (809,739 ) Loss before income taxes $ (5,507,263 ) $ (8,501,099 ) $ 2,993,836 20 Revenue Security managed services revenue increased by $2,205,386, or 22%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to revenue acquired through our completion of two acquisitions over the last 12 months and new and existing customer revenue growth. Professional services revenue increased by $606,703, or 51%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to revenue acquired through our completion of two acquisitions over the last 12 months and new and existing customer revenue growth. Expenses Cost of Revenue Security managed services cost of revenue increased by $1,263,802, or 29%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to our completion of two acquisitions over the last 12 months. Professional services cost of revenue increased by $52,136, or 29%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to our increase in revenue from professional services from two acquisitions completed over the last 12 months. Cost of payroll increased by $479,233, or 10%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to headcount added primarily through our completion of two acquisitions over the last 12 months. Stock-based compensation expenses decreased by $540,099, or 63%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees. Operating Expenses Professional fees increased by $121,035, or 19%, for the three months ended September 30, 2023 as compared to three months ended September 30, 2022, due to a increase in accounting, legal, and other professional fees. Advertising and marketing expenses decreased by $125,681, or 51%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to utilization of more internal marketing resources. Selling, general, and administrative expenses decreased by $1,127,419, or 17%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to a decrease in insurance costs and also cost reductions in software resulting from increase purchasing power with vendors. Stock based compensation expenses decreased by $1,114,493, or 62%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees. 21 Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022 Our financial results for the nine months ended September 30, 2023 are summarized as follows in comparison to the nine months ended September 30, 2022: Nine Months Ended September 30, 2023 2022 Variance Revenue: Security managed services $ 37,623,328 $ 28,489,698 $ 9,133,630 Professional services 5,693,468 3,320,689 2,372,779 Total revenue 43,316,796 31,810,387 11,506,409 Cost of revenue: Security managed services 18,444,204 10,678,728 7,765,476 Professional services 683,582 455,902 227,680 Cost of payroll 16,514,436 14,132,602 2,381,834 Stock based compensation 3,783,116 4,805,423 (1,022,307 ) Total cost of revenue 39,425,338 30,072,655 9,352,683 Total gross profit 3,891,458 1,737,732 2,153,726 Operating expenses: Professional fees 3,086,365 2,192,600 893,765 Advertising and marketing 288,984 641,340 (352,356 ) Selling, general, and administrative 21,178,969 15,856,705 5,322,264 Stock based compensation 6,421,245 6,761,283 (340,038 ) Impairment of goodwill 41,038,172 - 41,038,172 Total operating expenses 72,013,735 25,451,928 46,561,807 Loss from operations (68,122,277 ) (23,714,196 ) (44,408,081 ) Other income (expense): Other income (68,470 ) 134,447 (202,917 ) Interest expense, net (1,922,546 ) (293,991 ) (1,628,555 ) Total other income (expense) (1,991,016 ) (159,544 ) (1,831,472 ) Loss before income taxes $ (70,113,293 ) $ (23,873,740 ) $ (46,239,553 ) Revenue Security managed services revenue increased by $9,133,630, or 32%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to revenue acquired through our completion of two acquisitions over the last 12 months and new and existing customer revenue growth. Professional services revenue increased by $2,372,779, or 71%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to revenue acquired through our completion of two acquisitions over the last 12 months and new and existing customer revenue growth. 22 Expenses Cost of Revenue Security managed services cost of revenue increased by $7,765,476, or 73%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to our completion of two acquisitions over the last 12 months. Professional services cost of revenue increased by $227,680, or 50%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to our increase in revenue from professional services from two acquisitions completed over the last 12 months. Cost of payroll increased by $2,381,834, or 17%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to headcount added primarily through our completion of two acquisitions over the last 12 months. Stock-based compensation expenses decreased by $1,022,307, or 21%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees. Operating Expenses Professional fees increased by $893,765, or 41%, for the nine months ended September 30, 2023 as compared to nine months ended September 30, 2022, due to an increase in accounting, legal, and other professional fees incurred related to our periodic SEC filings and our efforts to raise additional capital. Advertising and marketing expenses decreased by $352,356, or 55%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to utilization of more internal marketing resources. Selling, general, and administrative expenses increased by $5,322,264, or 34%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to our analysis of our carrying amount of intangible assets being impaired and headcount added through our completion of two acquisitions over the last 12 months. Stock based compensation expense decreased by $340,038, or 5%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees. Impairment of goodwill increased by $41,038,172, or 100%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to our analysis of our carrying amount of goodwill being impaired. Liquidity and Capital Resources The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. For the nine months ended September 30, 2023, we incurred a net loss of $69,677,615 and negative cash flows from operations of $6,704,498 and expect to incur further losses through the end of 2023. In the report accompanying our financial statements for the year ended December 31, 2022, our independent auditors stated that our financial statements were prepared assuming that we would continue as a going concern and that they have substantial doubt as to our ability to do so based on our recurring losses from operations and need to raise additional capital. These condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern. As of September 30, 2023, we had $291,351,048 of available funding under our S-3 Registration Statement from which we may issue our securities to fund current and future operations, assuming there is adequate demand for our securities. 23 Working Capital Deficit Our working capital deficit as of September 30, 2023, in comparison to our working capital deficit as of December 31, 2022, is summarized as follows: As of September 30, December 31, 2023 2022 Current assets $ 11,589,911 $ 14,398,795 Current liabilities 22,963,261 23,213,039 Working capital deficit $ (11,373,350 ) $ (8,814,244 ) The decrease in current assets is primarily due to a decrease in cash, accounts receivable and prepaid expenses of $1,062,683, $1,791,678 and $302,486, respectively. Current liabilities remained consistent due to an increase in accounts payable and accrued expenses of $4,850,957, offset by a decrease in loans payable and convertible notes payable of $4,031,184 and $1,500,000, respectively. Cash Flows Our cash flows for the nine months ended September 30, 2023, in comparison to our cash flows for the nine months ended September 30, 2022, is summarized as follows: Nine Months ended September 30, 2023 2022 Net cash used in operating activities $ (6,704,498 ) $ (7,850,297 ) Net cash used in investing activities (135,848 ) (6,044,217 ) Net cash provided by financing activities 5,777,702 16,038,273 Effect of exchange rates on cash and cash equivalents (39 ) 19,539 (Decrease)/Increase in cash $ (1,062,683 ) $ 2,163,298 Operating Activities Net cash used in operating activities was $6,704,498 for the nine months ended September 30, 2023 and was primarily due to cash used to fund a net loss of $69,677,615, adjusted for non-cash expenses in the aggregate of $56,269,301 and additional cash inflow by changes in the levels of operating assets and liabilities, primarily as a result of a decrease in accounts receivable and increases in deferred revenue and accounts payable and accrued expenses. Net cash used in operating activities was $7,850,297 for the nine months ended September 30, 2022 and was primarily due to cash used to fund a net loss of $23,873,740, adjusted for non-cash expenses in the aggregate of $13,939,728, partially offset by cash generated by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts payable. Investing Activities Net cash used in investing activities of $135,848 for the nine months ended September 30, 2023 was due to purchases of property and equipment. Net cash used in investing activities of $6,044,217 for the nine months ended September 30, 2022 and was primarily due to net cash paid in the acquisition of True Digital Security, Inc. Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2023 was $5,777,702, which was primarily due to net cash received from the sale of our common stock of $6,682,198, $4,448,641 in net proceeds from our loans payable, and $6,050,000 in proceeds from convertible notes payable, offset by aggregate repayments on loans payable and convertible notes payable of $11,756,420. Net cash provided by financing activities for the nine months ended September 30, 2022 was $16,038,273 which was primarily due to cash received from the sale of our common stock in our public offerings of $10,562,763 and $5,975,000 in net proceeds from our bridge loans. 24 Based on our current business plan, we believe our cash balance as of the date of this filing, together with anticipated revenues, will be sufficient to meet our anticipated cash requirement for the near term. However, there can be no assurance that the current business plan will be achievable. Such conditions raise substantial doubts about our ability to continue as a going concern for one year from the date the condensed consolidated financial statements are issued. Our existence is dependent upon our ability to develop profitable operations. We are devoting substantially all of our efforts to developing our business, reducing overhead costs, and raising capital, although there can be no assurance that our efforts will be successful. No assurance can be given that our actions will result in profitable operations or the resolution of liquidity problems. The accompanying condensed consolidated financial statements do not include any adjustments that might result should we be unable to continue as a going concern. In order to improve our liquidity, in addition to a planned reduction in overhead costs, we are actively pursuing additional debt and/or equity financing through discussions with investment bankers and private investors. There can be no assurance that we will be successful in our efforts to secure additional financing. The financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern. Critical Accounting Policies and Estimates Our critical accounting policies are more fully described in the notes to our condensed consolidated financial statements included herein for the quarter and nine months ended September 30, 2023 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 31, 2023. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at dates of the financial statements and the reported amounts of revenue and expenses during the periods. Our significant estimates and assumptions include the allowance for doubtful accounts, the carrying value of intangible assets and goodwill, deferred tax asset and valuation allowance, the estimated fair value of assets acquired, liabilities assumed and stock issued in business combinations, and assumptions used in the Black-Scholes option pricing model, such as expected volatility, risk-free interest rate, share price, and expected dividend rate. Certain of our estimates, including the carrying amount of intangible assets and goodwill, could be affected by external conditions, including those unique to us and general economic conditions. It is reasonably possible that these external factors could have an effect on our estimates and could cause actual results to materially differ from those estimates. 25 Business Combination We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss. Intangible Assets Intangible assets are comprised of trademarks, customer bases, non-compete agreements, and intellectual property with original estimated useful lives with a range of 2 to 10 years. Once placed into service, we amortize the cost of intangible assets over their estimated useful lives on a straight-line basis. Goodwill Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually at year end or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and revenue multiple approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. Impairment of Long-Lived Assets We will periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review and at least annually. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose. Stock-Based Compensation We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date. Awards granted to directors are treated on the same basis as awards granted to employees. 26 Revenue Recognition Our agreements with clients are primarily service contracts that range in duration from a few months to one year. We recognize revenue when control of these services is transferred to the client for an amount, referred to as the transaction price, which reflects the consideration to which we are expected to be entitled in exchange for those goods or services. A contract with a client exists only when: ● the parties to the contract have approved it and are committed to perform their respective obligations; ● we can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”); ● we can determine the transaction price for the services to be transferred; and ● the contract has commercial substance, and it is probable that we will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the client. For the majority of our contracts, we receive non-refundable upfront payments. We do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between the time of transfer of the promised goods or services to the client and the time the client pays for these goods or services to be generally one year or less. Our credit terms to clients generally average 30 days, although in some cases payments are required in 15 days. We do not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less. Our revenue is categorized and disaggregated as reflected in our statements of operations as follows: Security Managed Services Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We consider these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer. Professional Services Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We consider these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources. Item 3. Quantitative and Qualitative Disclosures about Market Risk Because we are a smaller reporting company, we are not required to provide the information called for by this Item. 27