CISO Global, Inc. 10-K

ITEM 7. 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 consolidated financial statements and the related notes contained elsewhere in this Annual Report and is intended to provide information necessary to understand our audited consolidated financial statements for the year ended December 31, 2025 compared to the year ended December 31, 2024 and highlight certain other information which will enhance a reader’s understanding of our financial condition, changes in financial condition, and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial position and the operating results of our business during the year ended December 31, 2025 compared to the year ended December 31, 2024. These historical consolidated financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains numerous forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described throughout this filing, particularly in “Item 1A. Risk Factors.” Our Business We provide a comprehensive suite of cybersecurity consulting and related services built on four critical pillars: Proprietary Software Stack, Compliance, Cybersecurity, and Organizational Culture. Our services include managed security, compliance assessments, Security Operations Center (SOC) support, virtual Chief Information Security Officer (vCISO) services, incident response, digital forensics, technical assessments, and cybersecurity training. We have developed a unique offering called MCCP+, which integrates all four pillars through a dedicated team of subject matter experts. Unlike many cybersecurity firms focused on specific technologies or services, we remain technology-agnostic. Our approach is centered around building a world-class team of cybersecurity and compliance experts with diverse skill sets, enabling us to provide truly holistic solutions that address the chronic shortage of highly skilled cybersecurity professionals. The Proprietary Software Stack is foundational to our approach. We have developed a comprehensive suite of proprietary software solutions powered by machine learning, artificial intelligence (AI), and dark web threat intelligence. These multilayered technologies enhance our cybersecurity effectiveness, improve organizational resilience, and offer real-time insights to our clients, enabling them to stay ahead of evolving threats. We also emphasize Compliance, working with clients to ensure they meet industry regulations and standards. Compliance assessments, audits, and adherence to best practices are integrated into our services, helping organizations safeguard sensitive information and minimize risk. The Cybersecurity pillar includes advanced threat detection, incident response, and ongoing risk assessments to protect client systems, networks, and data from evolving cyber threats. Our team applies cutting-edge tools and methodologies to proactively defend against potential breaches, minimizing downtime and mitigating damage. Finally, we focus on Organizational Culture, recognizing that a strong security-first mindset is essential for resilience. By working with clients to cultivate a culture of security, we help them make security an integral part of their operations, improving both their overall security posture and return on cybersecurity investments. With a comprehensive portfolio of scalable intellectual property solutions, proprietary software stack, and an end-to-end team of experts, we are well-positioned for organic growth. By optimizing the user experience and leveraging digital interfaces, we can expand our client base without overburdening our service team. This scalability will enable us to drive increased revenue and profit margins concurrently. - 36 - Financial Highlights Our operating results for the year ended December 31, 2025 included the following: ● Total current liabilities reduced by $17,217,158 to $7,738,489 as compared to December 31, 2024 of $24,955,647. ● Total gross profit increased to $6,819,977 for the year ended December 31, 2025 as compared to $4,507,645 for the year ended December 31, 2024. ● Reduced our loss from operations to $8,785,052 for the year ended December 31, 2025, as compared to $14,589,635 for the year ended December 31, 2024. Results of Operations Comparison of the Year Ended December 31, 2025, to the Year Ended December 31, 2024 Our financial results for the year ended December 31, 2025 are summarized as follows in comparison to the year ended December 31, 2024: For the Year Ended December 31, 2025 December 31, 2024 Variance Revenue: Security managed services $ 23,773,050 $ 27,759,209 $ (3,986,159 ) Professional services 2,240,719 2,550,677 (309,958 ) Cybersecurity software 592,229 440,809 151,420 Total revenue 26,605,998 30,750,695 (4,144,697 ) Cost of revenue: Security managed services 7,322,440 9,296,185 (1,973,745 ) Professional services 231,154 465,952 (234,798 ) Cybersecurity software 202,720 119,900 82,820 Cost of payroll 10,432,447 12,023,206 (1,590,759 ) Stock-based compensation 1,597,260 4,337,807 (2,740,547 ) Total cost of revenue 19,786,021 26,243,050 (6,457,029 ) Total gross profit 6,819,977 4,507,645 2,312,332 Operating expenses: Professional fees 1,650,621 1,339,010 311,611 Advertising and marketing 1,012,140 - 1,012,140 Selling, general and administrative 10,592,957 13,081,606 (2,488,649 ) Stock-based compensation 2,349,311 4,676,664 (2,327,353 ) Total operating expenses 15,605,029 19,097,280 (3,492,251 ) Loss from operations (8,785,052 ) (14,589,635 ) 5,804,583 Other income (expense): Gain on extinguishment of convertible notes, net 4,432,434 - 4,432,434 Loss on issuance of convertible notes - (1,022,650 ) 1,022,650 Change in fair value of derivative liability 5,467,610 (593,083 ) 6,060,693 Interest expense, net (9,200,794 ) (3,584,172 ) (5,616,622 ) Other income (expense) 11,872 (116,061 ) 127,933 Total other income (expense) 711,122 (5,315,966 ) 6,027,088 Loss before income taxes $ (8,073,930 ) $ (19,905,601 ) $ 11,831,671 - 37 - Revenue Security managed services revenue decreased by $3,986,159, or 14%, for the year ended December 31, 2025, as compared to the year ended December 31, 2025, primarily due to loss of several higher-revenue customers, partially offset by newly acquired customers. Professional services revenue decreased by $309,958, or 12%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, primarily due to fewer customer projects. Cybersecurity software revenue increased by $151,420, or 34%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, primarily due to the initial launch of our suite of internally developed cybersecurity software products. Expenses Cost of Revenue Security managed services cost of revenue decreased by $1,973,745, or 21%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, primarily due to lower personnel related costs resulting from a reduction in headcount, as well as reduced costs related to the management of service vendors associated with our existing client base. Professional services cost of revenue decreased by $234,798, or 50%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, due to decreased use of consultants. Cybersecurity software cost of revenue increased by $82,820, or 69%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, primarily due to the initial launch of our suite of internally developed cybersecurity software products. Cost of payroll decreased by $1,590,759, or 13%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, due to headcount reductions. Stock-based compensation decreased by $2,740,547, or 63%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, primarily due to significantly lower grant date fair values on equity awards issued during the year, despite a higher number of grants. The decrease also reflects the impact of forfeitures of options by terminated employees, which reduced recognized expense. Operating Expenses Professional fees increased by $311,611, or 23%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, due to an increase in legal and accounting fees. Advertising and marketing expenses increased by $1,012,140, or 100%, for the year ended December 31, 2025, as compared to December 31, 2024, due to marketing efforts initiated in 2025. Selling, general, and administrative expenses decreased $2,488,649, or 19%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, primarily due to reductions in headcount during 2024 resulting in lower costs for compensation and leases in 2025. Stock-based compensation expenses decreased by $2,327,353, or 50%, for the year ended December 31, 2025, as compared to the year ended December 31, 2024, primarily due to significantly lower grant date fair values on equity awards issued during the year, despite a higher number of grants. The decrease also reflects the impact of forfeitures of options by terminated employees, which reduced recognized expense. - 38 - Other Income (Expense) The gain on extinguishment of convertible notes was $4,432,434 for the year ended December 31, 2025 due to the conversion of certain convertible notes into shares of our common stock and Series A Preferred Stock during 2025. The loss on issuance of convertible notes was $1,022,650 during the year ended December 31, 2024 due to our costs associated with issuing the convertible notes exceeding the fair value of such convertible notes. The change in fair value of derivative liability increased by $6,060,693 during the year ended December 31, 2025, as compared to the year ended December 31, 2024. This increase was primarily due to changes in significant valuation inputs—such as the market price of CISO common stock—used in estimating the fair value of the derivative liability following the issuance of the related convertible notes payable in December 2024 and January 2025, as well as the subsequent conversion of certain convertible notes into shares of our common stock in 2025. The estimated fair value of the conversion feature of the derivative liability is based on Monte Carlo simulations, a valuation model. Interest expense increased by $5,616,622 for the year ended December 31, 2025, as compared to the year December 31, 2024, primarily due to the accretion of convertible notes payable and the amortization of debt issuance costs associated with the issuance of certain convertible notes payable during December 2024 and January 2025. Working Capital Our working capital as of December 31, 2025, as compared to our working capital as of December 31, 2024, is summarized as follows: As of December 31, 2025 December 31, 2024 Current assets $ 3,264,224 $ 3,481,071 Current liabilities 7,738,489 24,955,647 Working capital deficit $ (4,474,265 ) $ (21,474,576 ) The decrease in current assets is primarily due to the $67,272 increase in prepaid expenses and other current assets being more than offset by decreases in accounts receivable and prepaid cost of revenue of $636,460 and $263,927, respectively. Accounts receivable and prepaid cost of revenue decreased due to collection efforts and lower revenue in 2025. Prepaid expenses increased due to increased prepaid marketing expenses. The decrease in current liabilities is primarily due to decreases in accounts payable, accrued expenses and other current liabilities, debt obligations, and the derivative liability of $5,359,450, $9,425,380, and $2,102,927, respectively. During the year ended December 31, 2025, we paid down accounts payable, accrued expenses, other current liabilities and loans payable outstanding, certain convertible notes payable were converted into shares of our common stock and Series A Preferred Stock, and the derivative liability was derecognized as a result of the conversion of the notes payable. Cash Flows Our cash flows for the year ended December 31, 2025, as compared to our cash flows for the year ended December 31, 2024, can be summarized as follows: Year Ended December 31, 2025 2024 Net cash used in operating activities $ (7,971,902 ) $ (3,841,706 ) Net cash used in investing activities (7,491 ) (83,095 ) Net cash provided by financing activities 8,682,798 3,914,162 Effect of exchange rates on cash and cash equivalents - (59,214 ) Increase (decrease) in cash $ 703,405 $ (69,853 ) Operating Activities Net cash used in operating activities was $7,971,902 for the year ended December 31, 2025 and was primarily due to cash used to fund a net loss of $8,073,930, adjusted for non-cash expenses in the aggregate of $5,070,143 and additional cash decreases from changes in the levels of operating assets and liabilities in the aggregate of $4,968,115, primarily as a result of a decrease in accounts payable, accrued expenses, and other current liabilities. Net cash used in operating activities was $3,841,706 for the year ended December 31, 2024 and was primarily due to cash used to fund a net loss of $24,243,919, adjusted for non-cash expenses in the aggregate of $17,100,898 and additional cash increases from changes in the levels of operating assets and liabilities in the aggregate of $3,301,315, primarily as a result of an increase in accounts receivable, accounts payable and accrued expenses, and deferred revenue. Investing Activities Net cash used in investing activities were $7,491 and $83,095 for the years ended December 31, 2025 and 2024, respectively, which were due to cash paid to purchase property and equipment. - 39 - Financing Activities Net cash provided by financing activities for the year ended December 31, 2025 was $8,682,798, which was primarily due to $2,816,075 cash received from the sale of our common stock, $1,774,935 cash received from the sale of our Series B Preferred Stock, $1,949,999 from the exercise of warrants, cash received from borrowings on our convertible loans payable and line of credit (net of debt issuance costs) of $23,072,983, offset by $20,934,296 in repayments of our loans payable and line of credit. Net cash provided by financing activities for the year ended December 31, 2024 was $3,914,162, which was primarily due to $154,947 cash received from the sale of our common stock, cash received from borrowings on our loans, line of credit, and convertible notes payable (net of debt issuance costs) of $10,984,412, offset by $7,225,197 in repayment of our loans payable and line of credit. Liquidity and Capital Resources The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the year ended December 31, 2025, we incurred a net loss of $8,073,930, reported cash used in operations of $7,971,902, and expect to incur further losses through the end of 2026. Further, we have a working capital deficit of $4,474,265 as of December 31, 2025. As a result, substantial doubt about our ability to continue as a going concern exists. The Company’s ability to fund ongoing operations is highly dependent upon raising additional capital through the issuance of equity securities and issuing debt or other financing vehicles. We are evaluating strategies to obtain the required additional funding for future operations. These strategies may include obtaining equity financing, issuing debt or entering into other financing arrangements, and restructuring operations to grow revenues and decrease expenses. Series A Preferred Stock On August 4, 2025, we entered into Exchange Agreements with each of the Holders. Pursuant to the Exchange Agreements, the Holders exchange certain outstanding convertible notes payable with aggregate principal and accrued interest of approximately $9,297,894 (collectively, the “Exchange Notes”) for an aggregate of 9,297,894 newly authorized shares of Series A Preferred Stock. Upon the closing of the transactions contemplated by the Exchange Agreements, the Exchange Notes were cancelled, and the Holders relinquished all rights, powers, privileges, remedies, or interest under such securities. On November 6, 2025, we converted all 9,297,894 outstanding shares of Series A Preferred Stock, together with $222,815 in accrued and unpaid dividends to 9,520,709 shares of common stock. Series B Preferred Stock On September 24, 2025, we entered into a Preferred Equity Purchase Agreement (the “Purchase Agreement”) with B. Riley Principal Capital I (“B. Riley”), an affiliate of B.Riley Securities, Inc. (“BRS”), pursuant to which we will have the right to issue and sell to B. Riley, and B. Riley must purchase from us, up to $15.0 million of shares of our newly authorized Series B Convertible Preferred Stock, par value $0.00001 per share (the “Series B Preferred Stock”). As of the issuance of these consolidated financial statements, B. Riley has purchased $2.3 million of the $15.0 million of shares of Series B Preferred Stock. Such sales of Series B Preferred Stock by us to B. Riley, if any, will be subject to certain limitations and conditions set forth in the Purchase Agreement, and may occur from time to time, at our sole discretion, over the 18-month period commencing September 24, 2025 and terminating on the earliest of (i) March 24, 2027, (ii) the date on which B. Riley shall have made payment of the aggregate purchase price equal to $15.0 million. In no event may we issue or sell to B. Riley under the Purchase Agreement shares of our Series B Preferred Stock that are convertible into an aggregate number of shares of common stock exceeding a customary 9.99% beneficial ownership limitation. July 2025 Prospectus On June 26, 2025, we filed a replacement shelf registration statement on Form S-3 (that was deemed effective on July 7, 2025) (“July 2025 Prospectus”) that contains two prospectuses: 1) a base prospectus that covers the potential offering, issuance, and sale from time to time of our common stock, preferred stock, warrants, debt securities, and units in one or more offerings with total proceeds of up to $100,000,000; and 2) a sales agreement prospectus covering the potential offering, issuance, and sale from time to time of shares of our common stock having aggregate gross sales proceeds of up to $10,380,600 pursuant to our At-the-Market (“ATM”) sales agreement, dated June 14, 2022, with BRS, Stifel, Nicolaus & Company, Incorporated and Boustead Securities, LLC. In no event will we sell securities under this registration statement with a value exceeding more than one-third of our “public float” (the aggregate market value of our common stock and any other equity securities that we may issue in the future that are held by non-affiliates) in any 12-calendar month period so long as our public float remains below $75 million. There can be no assurance that we will be able to obtain additional liquidity when needed or under acceptable terms, if at all. As such, we may be unable to access further equity or debt financing when needed. The ability for us to continue as a going concern is dependent upon our ability to successfully implement our strategies and eventually attain profitable operations. The accompanying consolidated financial statements do not include any adjustments to the carrying amounts or classification of assets, liabilities, and reported expenses that may be necessary if we are unable to continue as a going concern. On December 30, 2025, we received a letter from the listing qualifications staff of Nasdaq providing notification that the bid price of our common stock had closed below $1.00 per share for the previous 33 consecutive business days and our common stock no longer meets the minimum bid price requirement for continued listing under Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have 180 calendar days or until June 29, 2026, to regain compliance. To regain compliance, the closing bid price of our common stock must be $1.00 per share or more for a minimum of 10 consecutive business days at any time before June 29, 2026. If we do not regain compliance with Rule 5550(a)(2) by June 29, 2026, we may be eligible for an additional 180 calendar day compliance period. To qualify, we would need to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and would need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq would notify us that our securities would be subject to delisting. In the event of such notification, we may appeal the staff’s determination to delist our securities, but there can be no assurance the Staff would grant our request for continued listing. The Nasdaq notification has no immediate effect on the listing of our common stock on the Nasdaq Capital Market. We intend to actively monitor the bid price of our common stock and our minimum market value of listed securities and will consider options available to us to achieve compliance with the Nasdaq listing rules. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with the other listing standards for the Nasdaq Capital Market. Recently Issued Accounting Pronouncements See Note 3 to our consolidated financial statements for the years ended December 31, 2025 and 2024 included elsewhere in this Annual Report. - 40 - Critical Accounting Estimates Fair Value Measurements The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). The automatic discounted share-settlement feature of our convertible notes issued in December 2024 was an embedded derivative requiring bifurcation accounting as (1) the feature was not clearly and closely related to the debt host and (2) the feature met the definition of a derivative under ASC 815, Derivatives and Hedging . The bifurcated embedded features were initially recorded on the balance sheet at their fair value on the date of issuance. After the initial recognition, the fair value of the embedded derivative liability changed over time due to changes in the share price of our common stock. The change in fair value has been included in our statement of operations. The embedded derivative liability and related convertible notes payable were extinguished during the year ended December 31, 2025. Business Combinations 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 it has acquired in its 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. Goodwill Goodwill is assessed for impairment annually, or more frequently, if events occur that would indicate a potential reduction in the fair value of a reporting unit below its carrying value. We perform our annual impairment review of goodwill at the reporting unit level. If we determine the fair value of the reporting unit’s goodwill is less than their carrying value as a result of an annual or interim test, an impairment loss is recognized and reflected in operating income or loss in the consolidated statements of operations during the period incurred. We perform our impairment assessment based on a quantitative analysis performed for our reporting unit. We performed our annual impairment assessment of goodwill as of December 31, 2025 and concluded that no impairment of goodwill was indicated. As of December 31, 2025, we believe such assets are recoverable, however, there can be no assurance that these assets will not be impaired in future periods. Any future impairment charges could adversely impact our results of operations. - 41 - Impairment of Long-lived Assets We review finite-lived intangible assets for impairment whenever an event occurs or circumstances change that indicate that the carrying amount of an asset group may not be fully recoverable. Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset group and its eventual disposition. Should an asset group not be recoverable, an impairment loss is measured by comparing the fair value of the asset group to its carrying value. If we determine the fair value of an asset group is less than the carrying value, an impairment loss is recognized in operating income or loss in the consolidated statements of operations during the period incurred. Stock-based Compensation We measure and recognize compensation expense for equity-based awards based on the grant date fair values of the awards. For options with service or performance-based vesting conditions, the grant date fair value is estimated using the Black-Scholes option-pricing model, which requires management to make assumptions and apply judgment in determining the grant date fair value. The most significant assumptions and judgments include estimating the expected option term, the expected stock price volatility and the risk-free interest rates. The assumptions used in our option pricing model represent management’s best estimates. If factors change and different assumptions are used, our equity-based compensation expense could be materially different in the future. We record forfeitures when they occur We will continue to use judgment in evaluating the assumptions related to our equity-based awards on a prospective basis. As we continue to accumulate additional data related to our awards, we may refine our estimates, which could materially impact our future equity-based compensation expense. Revenue Recognition Our agreements with clients are primarily service contracts that range in duration from a few months to three years. 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. 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 thirty days, although in some cases payments are required in 15 days. See Note 3 to our consolidated financial statements for the years ended December 31, 2025 and 2024 included elsewhere in this Annual Report for additional information regarding revenue recognition and deferred revenue. 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 7A. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by Item 8 is included beginning on page F-1 contained in this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.