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CISO Global, Inc. - Quarter Report: 2023 March (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2023

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from _________ to _________

 

Commission file number: 001-41227

 

CISO GLOBAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   83-4210278

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

6900 E. Camelback Road, Suite 900, Scottsdale, Arizona   85251
(Address of Principal Executive Offices)   (Zip Code)

 

(480) 389-3444

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.00001 par value   CISO   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
       
Non-accelerated filer Smaller reporting company
       
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act:

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of May 10, 2023, there were 154,676,477 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 

CISO GLOBAL, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023

 

TABLE OF CONTENTS

 

  Page
   
PART I. FINANCIAL INFORMATION 5
     
ITEM 1. Financial Statements (unaudited) 5
     
  Condensed Consolidated Balance Sheets 5
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss 6
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity 7
     
  Condensed Consolidated Statements of Cash Flows 8
     
  Notes to Condensed Consolidated Financial Statements 9
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 26
     
ITEM 4. Controls and Procedures 26
     
PART II. OTHER INFORMATION 27
     
ITEM 1. Legal Proceedings 27
     
ITEM 1A. Risk Factors 27
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
     
ITEM 3. Defaults Upon Senior Securities 27
     
ITEM 4. Mine Safety Disclosures 27
     
ITEM 5. Other Information 27
     
ITEM 6. Exhibits 28
     
SIGNATURES 29

 

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FORWARD-LOOKING STATEMENTS

 

The information contained in this report should be read in conjunction with the financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q. Certain statements made in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based upon beliefs of, and information currently available to, us as of the date hereof, as well as estimates and assumptions made by us. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Forward-looking statements made in this Quarterly Report on Form 10-Q include statements about:

 

our ability to achieve and sustain profitability of our existing lines of business and through our wholly owned subsidiaries;
our ability to raise sufficient capital to continue to acquire cybersecurity companies;
our ability to attract and retain qualified cybersecurity talent;
our ability to identify potential acquisition targets within predetermined parameters;
our ability to successfully execute acquisitions, integrate the acquired businesses, and create synergies as a global cybersecurity consolidator;
our ability to attract and retain qualified key technology or management personnel and to expand our management team;
the accuracy of estimates regarding expenses, future revenue, capital requirements, profitability, and needs for additional financing;
our dependence on establishing and maintaining a strong brand;
the occurrence of service interruptions and security or privacy breaches and related remediation efforts and fines;
system failures or capacity constraints;
our ability to efficiently acquire customers and maintain high client retention rates;
the impact of fluctuations in foreign currency exchange rates on our business and our ability to effectively manage the exposure to such fluctuations;
our ability to maintain our relationships with our partners;
adverse consequences of our substantial level of indebtedness and our ability to repay our debt;
our ability to maintain, protect and enhance our intellectual property;
our ability to maintain or improve our market shares;
business interruptions resulting from geo-political actions, including war, terrorism, and disease outbreaks (such as COVID-19, the war in Ukraine, and geopolitical tensions involving China);
sufficiency of cash and cash equivalents to meet our needs for at least the next 12 months;
our ability to grow internationally;
beliefs and objectives for future operations;
our ability to stay in compliance with laws and regulations currently applicable to, or which may become applicable to our business both in the United States and internationally;
economic and industry trends or trend analysis;
anticipated income tax rates, tax estimates and tax standards;

 

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expectations regarding the impact of inflation, action taken by central banks to counter inflation, rising interest rates, and changes in foreign exchange rates on our business and financial results;
the future trading price of our common stock;
our ability to maintain an effective system of internal controls and accurately report our financial results and remediate material weaknesses;
our expectation regarding the outcome of any regulator investigation or litigation;
the potential impact of shareholder activism on our business and operations;
our ability to navigate through the increasingly complex cybersecurity regulatory environment; and
any other statements regarding our future operations, financial condition, growth prospects and business strategies.

 

These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks detailed from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, any of which may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. These risks may cause our or our industry’s actual results, levels of activity, or performance to be materially different from any future results, levels of activity, or performance expressed or implied by these forward-looking statements.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated Balance Sheets

(Unaudited)

 

   March 31,   December 31, 
   2023   2022 
         
ASSETS          
           
Current Assets:          
Cash and cash equivalents  $3,823,735   $1,833,163 
Accounts receivable, net   6,068,161    7,862,297 
Inventory   19,106    11,803 
Prepaid cost of revenue   2,482,217    2,634,667 
Prepaid expenses and other current assets   2,259,517    1,724,650 
Contract asset   412,131    332,215 
Total Current Assets   15,064,867    14,398,795 
           
Property and equipment, net   4,740,070    4,680,495 
Right of use asset, net   961,037    255,687 
Intangible assets, net   4,830,163    8,475,229 
Goodwill   58,491,954    76,664,017 
Other assets   23,500    22,592 
           
Total Assets  $84,111,591   $104,496,815 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities:          
Accounts payable and accrued expenses  $10,755,449   $8,310,337 
Deferred revenue   4,139,513    4,472,140 
Lease liability   194,070    121,731 
Loans payable   4,517,971    7,758,831 
Convertible notes payable   2,050,000    2,550,000 
Total Current Liabilities   21,657,003    23,213,039 
           
Long-term Liabilities:          
Loans payable, net of current portion   4,118,806    4,243,802 
Convertible notes payable, related party   5,000,000    - 
Lease liability, net of current portion   788,359    159,205 
Deferred tax liability   -    435,678 
           
Total Liabilities   31,564,168    28,051,724 
           
Commitments and Contingencies   -    - 
           
Stockholders’ Equity:          
Common stock, $.00001 par value; 300,000,000 shares authorized; 154,176,477 and 146,395,807 issued and outstanding at March 31, 2023 and December 31, 2022, respectively   1,541    1,464 
Preferred stock, $.00001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding on March 31, 2023 and December 31, 2022, respectively   -    - 
Additional paid-in capital   162,075,966    153,168,984 
Accumulated translation adjustment   3,099,209    1,062,247 
Accumulated deficit   (112,629,293)   (77,787,604)
Total Stockholders’ Equity   52,547,423    76,445,091 
           
Total Liabilities and Stockholders’ Equity  $84,111,591   $104,496,815 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

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CISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   March 31, 2023   March 31, 2022 
   Three Months Ended 
   March 31, 2023   March 31, 2022 
         
Revenue:          
Security managed services  $11,766,133   $8,052,225 
Professional services   1,960,548    1,277,185 
Total revenue   13,726,681    9,329,410 
           
Cost of revenue:          
Security managed services   5,560,563    2,602,924 
Professional services   198,293    110,337 
Cost of payroll   5,800,657    4,445,850 
Stock based compensation   1,768,084    2,121,583 
Total cost of revenue   13,327,597    9,280,694 
Total gross profit   399,084    48,716 
           
Operating expenses:          
Professional fees   1,677,387    623,061 
Advertising and marketing   115,394    155,341 
Selling, general and administrative   9,508,766    4,616,373 
Stock based compensation   3,628,975    2,565,510 
Impairment of goodwill   20,199,368    - 
Total operating expenses   35,129,890    7,960,285 
           
Loss from operations   (34,730,806)   (7,911,569)
           
Other income (expense):          
Other income (expense)   (156,420)   12,543 
Interest expense, net   (390,141)   (43,585)
           
Total other income (expense)   (546,561)   (31,042)
           
Loss before income taxes   (35,277,367)   (7,942,611)
Benefit from income taxes   (435,678)   - 
           
Net loss   (34,841,689)   (7,942,611)
Foreign currency translation adjustment   2,036,962    902,441 
           
Comprehensive loss  $(32,804,727)  $(7,040,170)
           
Net loss per common share - basic and diluted  $(0.24)  $(0.06)
           
Weighted average shares outstanding - basic   147,801,797    133,983,960 
Weighted average shares outstanding - diluted   147,801,797    133,983,960 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

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CISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

                       Accumulated         
                   Additional   Other         
   Common Stock   Preferred Stock   Paid-in   Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Gain/(Loss)   Deficit   Total 
                                 
Balance at January 1, 2023   146,395,807   $1,464         -   $       -   $153,168,984   $1,062,247   $(77,787,604)  $76,445,091 
                                         
Stock based compensation - stock options   -    -    -    -    5,272,059    -    -    5,272,059 
Stock issued for cash   6,739,853    67    -    -    3,143,080    -    -    3,143,147 
Exercise of options   1,040,817    10    -    -    491,843    -    -    491,853 
Foreign currency translation   -    -    -    -    -    2,036,962    -    2,036,962 
Net loss   -    -    -    -    -    -    (34,841,689)   (34,841,689)
Balance at March 31, 2023   154,176,477   $1,541    -   $-   $162,075,966   $3,099,209   $(112,629,293)  $52,547,423 
                                         
Balance at January 1, 2022   125,852,971   $1,258    -   $-   $69,309,369   $-   $(44,012,422)  $25,298,205 
                                         
Stock based compensation - stock options   -    -    -    -    4,687,093    -    -    4,687,093 
Stock based compensation - common stock   39,000    -    -    -    79,949    -    -    79,949 
Exercise of options   100,000    1    -    -    37,999    -    -    38,000 
Stock issued for cash in public offering   2,060,000    21    -    -    9,470,979    -    -    9,471,000 
Stock issued for True Digital acquisition   7,406,100    74    -    -    34,726,306    -    -    34,726,380 
Foreign currency translation   -    -    -    -    -    902,441    -    902,441 
Net loss   -    -    -    -    -    -    (7,942,611)   (7,942,611)
Balance at March 31, 2022   135,458,071   $1,354    -   $-   $118,311,695   $902,441   $(51,955,033)  $67,260,457 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

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CISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

 

   March 31, 2023   March 31, 2022 
Cash flows from operating activities:          
Net loss  $(34,841,689)  $(7,942,611)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation - stock options   5,272,059    4,687,093 
Stock based compensation - common stock   125,000    79,949 
Depreciation and amortization   1,050,193    458,988 
Right of use amortization   28,432    45,387 
Settlement liability   -    (470,000)
Other   18,431    (22,289)
Impairment of intangible assets   3,116,039    - 
Impairment of goodwill   20,199,368    - 
Changes in operating assets and liabilities:          
Accounts receivable, net   1,974,401    397,548 
Inventory   (6,382)   (522,342)
Contract assets   (79,916)   (86,811)
Prepaids and other current assets   (144,410)   (865,483)
Accounts payable and accrued expenses   1,723,688    1,133,313 
Deferred revenue   (546,086)   91,463 
           
Net cash used in operating activities   (2,110,872)   (3,015,795)
           
Cash flows from investing activities:          
           
Purchases of property and equipment   (182,839)   (103,858)
Cash paid for acquisitions, net   -    (4,917,768)
           
Net cash used in by investing activities   (182,839)   (5,021,626)
           
Cash flows from financing activities:          
Proceeds from sale of common stock   3,143,147    9,471,000 
Proceeds from stock option exercise   491,853    38,000 
Proceeds from loan payable   2,000,000    - 
Proceeds from convertible notes payable, related party   5,000,000    - 
Proceeds from line of credit   32,517    86,585 
Payment on line of credit   (61,673)   - 
Payment on loans payable   (5,779,547)   (458,719)
Payment on notes payable, related party   -    (125,861)
Payment of convertible note payable   (500,000)   - 
Payment of debt issuance cost   (87,500)   - 
           
Net cash provided by financing activities   4,238,797    9,011,005 
           
Effect of exchange rates on cash and cash equivalents   45,486    164,288 
           
Net increase in cash and cash equivalents   1,990,572    1,137,872 
           
Cash and cash equivalents - beginning of the period   1,833,163    2,725,035 
           
Cash and cash equivalents - end of the period  $3,823,735   $3,862,907 
           
Supplemental cash flow information:          
Cash paid for:          
Interest  $349,107   $36,069 
Income taxes  $-   $- 
Supplemental disclosure of non-cash transactions:          
Operating lease assets obtained in exchange for operating lease obligations  $733,782   $- 
Common stock issued in True Digital acquisition  $-   $34,726,380 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

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CISO GLOBAL, INC. and subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 United States dollars.

 

NOTE 1 – ORGANIZATION OF BUSINESS AND GOING CONCERN

 

Description of the Business

 

We are a cybersecurity and compliance company comprised of highly trained and seasoned security professionals who work with clients to improve their cybersecurity posture. We provide a full range of cybersecurity consulting and related services, encompassing strategy and risk, cyber defense operations, architecture and engineering, and readiness and resiliency. Our services include secured managed services, compliance services, security operations center (“SOC”) services, virtual Chief Information Security Officer (“vCISO”) services, incident response, digital forensics, technical assessments, and cybersecurity training. We believe that culture is the foundation of every successful cybersecurity and compliance program. To deliver that outcome, we deliver a holistic solution that provides these services in a unified way from a dedicated team of subject matter experts. In contrast to the majority of cybersecurity firms that are focused on a specific technology or service, we seek to differentiate ourselves by remaining technology agnostic, focusing on aggregating teams of highly sought-after practitioners. We continually seek to identify and acquire cybersecurity talent to expand our service scope and geographical coverage to provide the best possible service for our clients. We believe that bringing together a world-class team of technological experts with multi-faceted expertise in the critical aspects of cybersecurity is key to providing technology to our clients in a business environment that are experiencing challenges attracting and retaining cybersecurity talent, thereby setting us apart from competitors and in-house security teams. Our goal is to create a culture of security and to help quantify, define, and capture a return on investment from information technology and cybersecurity spending. Our brand rallies around the battle cry: “Cyber security is a Culture, not a Product.”

 

Basis of Presentation

 

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include our accounts and the accounts of our subsidiaries. All material intercompany accounts and transactions have been eliminated.

 

Our interim financial statements are unaudited, and in our opinion, include all adjustments of a normal recurring nature necessary for the fair presentation of the periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for any subsequent period or for the year ending December 31, 2023. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2022.

 

Going Concern

 

The accompanying unaudited condensed 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 three months ended March 31, 2023, we incurred a net loss of $34,841,689 and had negative cash flows from operations of $2,110,872. At March 31, 2023, we had total current assets of $15,064,867 and total current liabilities of $21,657,003, resulting in a working capital deficit of $6,592,136. At March 31, 2023, we had cash and cash equivalents of $3,823,735.

 

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 unaudited condensed consolidated financial statements are issued.

 

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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 unaudited 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 unaudited 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.

 

Reclassifications

 

Reclassifications of certain immaterial prior period amounts have been made to conform to the current period presentation.

 

Use of Estimates

 

GAAP requires management to make estimates and assumptions that affect the reported amounts in our unaudited condensed consolidated financial statements. We periodically evaluate our estimates and adjust prospectively, if necessary. We believe our estimates and assumptions are reasonable; however, actual results could materially differ.

 

We believe the critical accounting policies discussed below affects our more significant judgments and estimates used in the preparation of the accompanying unaudited condensed consolidated financial statements. Significant estimates 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.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Revenue

 

Our revenue is derived from two major types of services to clients: security managed services and professional services. With respect to security managed services, we provide culture education and enablement, tools and technology provisioning, data and privacy monitoring, regulations and compliance monitoring, remote infrastructure administration, and cybersecurity services, including, but not limited to, antivirus and patch management. With respect to professional services, we provide cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.

 

Our revenue is categorized and disaggregated as reflected in our unaudited condensed consolidated statement of operations as follows:

 

Security Managed Services

 

Security managed services revenue primarily consists of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.

 

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Professional Services

 

Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.

 

Accounts Receivable

 

Accounts receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. We periodically assess our accounts and other receivables for collectability on a specific identification basis. We provide for allowances for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. Payments are generally due within 30 days of invoice. We write off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of March 31, 2023 and December 31, 2022, our allowance for doubtful accounts was $199,945 and $270,011, respectively.

 

Inventory

 

Inventory consists of computer equipment for sale to customers. Inventory is measured using the first-in, first-out method and stated at lower of cost or net realizable value as of March 31, 2023 and December 31, 2022. The value of inventories is reduced for excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and adjust the value of inventory when required. We recorded no inventory impairment losses for the three months ended March 31, 2023 and 2022.

 

Net Loss per Common Share

 

Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. For dilutive securities, all outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options and shares issuable upon conversion thereof have been excluded from our computation of net loss per common share for the three months ended March 31, 2023 and 2022.

 

The following tables summarize the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to our net loss position even though the exercise price could be less than the average market price of the common shares:

 

   March 31, 2023   December 31, 2022 
Stock options   32,265,543    36,397,521 
Warrant   144,200    144,200 
Convertible debt   4,497,385    430,718 
Total   36,907,128    36,972,439 

 

Deferred Revenue

 

Deferred revenue primarily consists of billings or payments received from customers in advance of revenue recognized for the services provided to our customers or annual licenses and is recognized as services are performed or ratably over the life of the license. We generally invoice customers in advance or in milestone-based installments. Deferred revenue of $1,709,844 was recognized as revenue for the three months ended March 31, 2023, which was included in the deferred revenue balance as of December 31, 2022. As of March 31, 2023, deferred revenue is expected to be recognized during the succeeding 12-month period and is therefore presented as current.

 

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Deferred revenue consisted of the following:

 

   March 31, 2023   December 31, 2022 
Security managed services  $3,204,553   $3,609,087 
Professional services   934,960    863,053 
Total deferred revenue  $4,139,513   $4,472,140 

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, including tax loss and credit carry forwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

We utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. We account for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. At March 31, 2023, our net deferred tax asset has been fully reserved due to our current period impairment, we expect to be in a net deferred tax asset position in Chile, and a valuation allowance has been recorded for this jurisdiction during the current period.

 

For uncertain tax positions that meet a “more likely than not” threshold, we recognize the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. Our practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is made that such expense is likely.

 

NOTE 3 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of:

 

  

March 31,

2023

  

December 31,

2022

 
Prepaid expenses  $1,137,213   $987,651 
Prepaid taxes   1,036,618    572,645 
Prepaid insurance   85,686    164,354 
Total prepaid expenses and other current assets  $2,259,517   $1,724,650 

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

  

March 31,

2023

  

December 31,

2022

 
Computer equipment  $1,353,901   $1,264,713 
Building   1,910,137    1,776,040 
Leasehold improvements   580,871    541,647 
Vehicles   37,273    28,229 
Furniture and fixtures   155,286    151,142 
Software   1,830,191    1,667,283 
Property and equipment gross   5,867,659    5,429,054 
Less: accumulated depreciation   (1,127,589)   (748,559)
Property and equipment, net  $4,740,070   $4,680,495 

 

Total depreciation expense was $305,705 and $154,074 for the three months ended March 31, 2023 and 2022, respectively.

 

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NOTE 5 – INTANGIBLE ASSETS AND GOODWILL

 

Goodwill

 

During the quarterly period ended March 31, 2023, our share price reduction was determined to be an indicator of impairment under ASC 350 of our two reporting units, United States and Latin America. We performed an ongoing assessment to consider whether events or circumstances had occurred that could more likely than not reduce the fair value of a reporting unit below its carrying value. The valuation limitation from our recent share price decline caused us to perform an interim goodwill impairment test as of March 31, 2023.

 

Based on the results of this testing, we recorded an $15,445,981 and $4,753,387 pre-tax non-cash impairment charge related to the United States reporting unit and Latin America reporting unit, respectively, for the three-months ended March 31, 2023. This charge is recorded as Impairment of goodwill on the Consolidated Statements of Operations and Comprehensive Loss. The overall enterprise fair value was limited by the recent decline in our share price. The reduction in fair value for the reporting units, and corresponding impairment charge, was primarily driven by increase in the discount rate arising from higher equity premiums that reflect significant uncertainty surrounding our company and a decrease in forecasted near-term cashflows of our reporting units.

 

As part of our quantitative testing process for goodwill of the reporting units, we estimated fair values using a revenue multiple analysis, a form of the income approach, from the perspective of a market participant. Significant assumptions used in the revenue multiple approach are revenue growth rates and revenue multiples of key comparable companies within our industry. The terminal business value is determined by applying the long-term growth rate to the latest year for which a forecast exists.

 

The following table summarizes the changes in goodwill during the three months ended March 31, 2023:

 

Balance December 31, 2022  $76,664,017 
Impairment   (20,199,368)
Foreign currency translation adjustment   2,027,305 
Ending balance, March 31, 2023  $58,491,954 

 

The remaining balance of goodwill for the reporting units continue to be at risk for future impairment. There continues to be uncertainty surrounding the factors impacting our business, and a sustained downturn, significantly extended recovery or a change in long-term revenue growth or profitability for our reporting units could increase the likelihood of an additional future impairment. Additionally, changes in market participant assumptions or further share price reductions could increase the likelihood of further future impairment.

 

Intangible Assets

 

We performed an interim impairment test of our intangible assets based upon the conditions that precipitated the interim goodwill impairment test described above.

 

Based on the results of this testing, we recorded pre-tax non-cash impairment charges totaling $3,116,039 for the three months ended March 31, 2023, related to our customer base, intellectual property, tradenames-trademarks and non-compete, which is included in the net carry amount of intangibles in the table below. These charges were recorded in Selling, general and administrative expenses on the Consolidated Statement of Operations and Comprehensive Loss.

 

Fair values used in testing for potential impairment of our intangible assets are calculated using a discounted cash flows method by applying estimated cash flows from our forecasted revenue and expenses of the business that utilize those assets. The assumed cash flows from this calculation are discounted at a rate based on a market participant discount rate.

 

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There is uncertainty surrounding the revenue growth factors for these assets and a change in the long-term revenue growth rate or increase in the discount rate assumption could increase the likelihood of a future impairment.

 

Following the recognition of the impairment losses, the affected assets had an aggregate carrying value of $576,001 as of March 31, 2023.

 

Intangible assets, net are summarized as follows:

 

   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
   March 31, 2023 
   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Tradenames – trademarks  $4,095,754   $(1,584,604)  $2,511,150 
Customer base   1,157,163    (603,461)   553,702 
Non-compete agreements   707,835    (521,316)   186,519 
Intellectual property/technology   2,329,507    (750,715)   1,578,792 
Intangible Asset  $8,290,259   $(3,460,096)  $4,830,163 

 

   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
   December 31, 2022 
   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Tradenames – trademarks  $4,744,409   $(1,167,476)  $3,576,933 
Customer base   2,949,143    (449,565)   2,499,578 
Non-compete agreements   796,583    (436,611)   359,972 
Intellectual property/technology   2,659,391    (620,645)   2,038,746 
Intangible Asset  $11,149,526   $(2,674,297)  $8,475,229 

 

The weighted average remaining useful life of identifiable amortizable intangible assets remaining is 3.49 years as of March 31, 2023.

 

Amortization of identifiable intangible assets for the three months ended March 31, 2023 and 2022 was $747,172 and $304,914, respectively.

 

Based on the balance of intangible assets at March 31, 2023, expected future amortization expense is as follows:

 

      
2023 (remainder of)  $1,302,853 
2024   1,240,000 
2025   1,043,231 
2026   964,336 
2027   279,743 
Future Amortization Expense  $4,830,163 

 

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following amounts:

 

   March 31, 2023   December 31, 2022 
Accounts payable  $6,725,778   $5,267,492 
Accrued payroll and bonuses   1,839,065    1,274,919 
Accrued expenses   1,874,543    1,296,382 
Accrued commissions   105,149    305,768 
Accrued interest   210,914    165,776 
Total accounts payable and accrued expenses  $10,755,449   $8,310,337 

 

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Note 7 – RELATED PARTY TRANSACTIONS

 

Independent Consulting Agreement with Stephen Scott

 

In August 2020, we entered into an Independent Consulting Agreement with Stephen Scott, a director of our company, with respect to advisory and consulting services relating to our strategic and business development and sales and marketing. Mr. Scott receives a consulting fee of $11,500 per month for such services. During the three months ended March 31, 2023 and 2022, we paid consulting fees to Mr. Scott in the amount of $34,500 and $34,500, respectively.

 

Managed Services Agreement with Hensley Beverage Company – Related Party

 

In July 2021, we entered into a 1-year Managed Services Agreement with Hensley Beverage Company to provide secured managed services. We also may be engaged by Hensley Beverage Company from time to time to provide other related services outside the scope of the Managed Services Agreement. While the agreement provides for a term through December 31, 2021, the agreement will continue until terminated by either party. For the three months ended March 31, 2023 and 2022, we received $212,006 and $166,388, respectively, from Hensley Beverage Company for contracted services, and had an outstanding receivable balance of $145,627 and $15,737 as of March 31, 2023 and 2022, respectively. Andy McCain, a director of our company, is President and Chief Operating Officer of Hensley & Company, the parent company of Hensley Beverage Company.

 

Convertible Note Payable with Hensley & Company

 

In March 2023, we issued an unsecured convertible note to Hensley & Company in the principal amount of $5,000,000 bearing an interest rate of 10.00% per annum. The principal amount, together with accrued and unpaid interest is due on March 20, 2025. At any time prior to or on the maturity date, Hensley & Company is permitted to convert all or any portion of the outstanding principal amount and all accrued but unpaid interest thereon into shares of our common stock at a conversion price of $1.20 per share. During the quarter ended March 31, 2023, we recorded accrued interest of $13,888. Mr. McCain, a director of our company, is President and Chief Operating Officer of Hensley & Company.

 

Note 8 – STOCKHOLDERS’ EQUITY

 

Options

 

We granted stock options vesting solely upon the continued service of the recipient. We recognize the accounting grant date fair value of equity-based awards as compensation expense over the required service period of each award.

 

The following table summarizes stock option activity:

 

   Shares  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life

(in years)

  

Aggregate

Intrinsic

Value

 
Outstanding at January 1, 2023   36,397,521   $2.45    -    - 
Granted   -    -    -    - 
Exercised   (1,040,817)   0.48    -    - 
Expired or cancelled   (3,091,161)   3.26    -    - 
Outstanding at March 31, 2023   32,265,543   $2.43    5.12   $38,249,342 
Exercisable at March 31, 2023   20,869,071   $1.69    3.62   $35,143,051 

 

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Total compensation expense related to the options was $5,272,059 and $4,687,093 for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, there was future compensation expense of $39,593,463 with a weighted average recognition period of 2.19 years related to the options.

 

Warrant Activity Summary

 

The following table summarizes warrant activity:

 

   Shares  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life

(in years)

  

Aggregate

Intrinsic

Value

 
Outstanding at January 1, 2023   144,200   $5.00    4.06            - 
Granted   -    -    -    - 
Exercised   -    -    -    - 
Expired or cancelled   -    -    -    - 
Outstanding at March 31, 2023   144,200   $5.00    3.76   $- 
Exercisable at March 31, 2023   144,200   $5.00    3.76   $- 

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

Legal Claims

 

There are no material pending legal proceedings in which we or any of our subsidiaries are a party or in which any of our directors, officers or affiliates, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.

 

Indirect Taxes

 

We are subject to indirect taxation in some, but not all, of the various states and foreign jurisdictions in which we conduct business. Laws and regulations attempting to subject commerce conducted over the Internet to various indirect taxes are becoming more prevalent, both in the U.S. and internationally, and may impose additional burdens on us in the future. Increased regulation could negatively affect our business directly, as well as the business of our customers. Taxing authorities may impose indirect taxes on the Internet-related revenue we generated based on regulations currently being applied to similar, but not directly comparable industries. There are many transactions and calculations where the ultimate indirect tax determination is uncertain. In addition, domestic and international indirect taxation laws are complex and subject to change. We may be audited in the future, which could result in changes to our indirect tax estimates. We continually evaluate those jurisdictions in which nexus exists, and believe we maintain adequate indirect tax accruals.

 

As of March 31, 2023 and December 31, 2022, our accrual for estimated indirect tax liabilities was $202,529 and $409,187, respectively, reflecting our best estimate of the potential liability based on an analysis of our business activities, revenues subject to indirect taxes, and applicable regulations. Although we believe our indirect tax estimates and associated liabilities are reasonable, the final determination of indirect tax audits, litigation, or settlements could be materially different than the amounts established for indirect tax contingencies.

 

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NOTE 10 – LOANS PAYABLE AND LINES OF CREDIT

 

Loans Payable

 

Loans payable was as follows:

SCHEDULE OF LOAN PAYABLE 

   Interest Rate  Maturities   March 31, 2023   December 31, 2022 
                
Term loans (US dollar denominated)  5.00% – 155.11%  2023 - 2027   $2,214,841   $5,461,520 
Term loans (Chilean peso denominated)  3.48% - 7.14%  2023 - 2029    6,421,936    6,541,113 
            8,636,777    12,002,633 
Less, current portion           (4,517,971)   (7,758,831)
Long term loans payable          $4,118,806   $4,243,802 

 

In June 2022, we entered into a bridge loan, secured by substantially all of our assets, in the principal amount of $5,000,000 bearing an interest rate of 4.00% per annum payable monthly with a maturity date of December 14, 2022, which was extended to March 14, 2023. We did not repay this bridge loan on the maturity date, which resulted in an event of default under the terms thereof. As a result, the interest rate applicable to amounts due under this bridge loan increased from 4.00% to 7.50%. This bridge loan was repaid in full on March 20, 2023. We recorded interest expense of $116,667 during the three months ended March 31, 2023.

 

Various subsidiaries in the United States are borrowers under certain term loans. These term loans require monthly principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense on these term loans of $6,222 for the three months ended March 31, 2023. Accrued interest as of March 31, 2023 was zero. The aggregate effective interest rate of the term loans is 10.80%.

 

Our Latin America subsidiaries are the borrowers under certain term loans denominated in Chilean Pesos. These term loans require monthly principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense on these term loans of $135,916 for the three months ended March 31, 2023. Accrued interest as of March 31, 2023 was zero. The aggregate effective interest rate of the term loans is 10.90%.

 

In March 2023, we entered into a Cash Advance Agreement, pursuant to which we received gross proceeds of $2,000,000 and paid $87,500 in upfront fees. The terms of the Cash Advance Agreement calls for us to remit aggregate weekly payments of $99,398 until such time as we have repaid $2,870,000. The effective interest rate of the Cash Advance Agreement is 155.11%. This Cash Advance Agreement is secured by the accounts receivable of CISO Global Inc. and our wholly-owned subsidiaries, Talatek, LLC and True Digital Security, Inc. We recorded interest expense of $86,528 for the three months ended March 31, 2023.

 

Convertible Notes Payable

 

In October 2021, we issued a convertible note to Neil Stinchcombe in the principal amount of $1,500,000 bearing an interest rate of 5.00% per annum payable at maturity with a maturity date of January 27, 2022, with a conversion price of $5.00 per share. On March 10, 2022, we entered into an amendment to the note pursuant to which the maturity date was extended to October 27, 2022. In March 2023, we entered into a letter agreement with Neil Stinchcombe to resolve certain payment terms of his convertible note. We agreed to repay the principal amount of the note in three equal installments of $500,000 on each of March 31, April 28, and May 31, 2023, with accrued interest to be paid on May 31, 2023. The outstanding principal of this note was $1,000,000 at March 31, 2023. At March 31, 2023 and December 31, 2022, we had accrued interest of $137,757 and $119,007, respectively, with respect to this note. We recorded interest expense of $18,750 and $18,493 during the three months ended March 31, 2023 and 2022, respectively.

 

In June 2022, we issued an unsecured convertible note in the principal amount of $1,000,000 bearing an interest rate of 5.00% per annum payable monthly with a maturity date of June 2023, with a conversion price of $7.83 per share. The outstanding principal of this note can be redeemed at any time by us or at maturity at 105%. At March 31, 2023, we recorded interest expense of $12,500, and as of March 31, 2023, we recorded accrued interest of $41,667.

 

17

 

 

In March 2023, we issued an unsecured convertible note to Hensley & Company in the principal amount of $5,000,000 bearing an interest rate of 10.00% per annum. The principal amount, together with accrued and unpaid interest is due on March 20, 2025. At any time prior to or on the maturity date, Hensley & Company is permitted to convert all or any portion of the outstanding principal amount and all accrued but unpaid interest thereon into shares of our common stock at a conversion price of $1.20 per share. During the quarter ended March 31, 2023, we recorded accrued interest of $13,888. Mr. McCain, a director of our company, is President and Chief Operating Officer of Hensley & Company.

 

Future minimum payments under the above loans payable and convertible notes payable due as of March 31, 2023 were as follows:

 

     
2023 (remainder of)  $6,165,617 
2024   1,679,548 
2025   6,346,031 
2026   596,496 
2027   328,864 
Thereafter   654,596 
Total future minimum payments   15,771,152 
Less: discount   (84,375)
Total   15,686,777 
Less: current   (6,567,971)
Long term debt, net of current portion  $9,118,806 

 

NOTE 11 – LEASES

 

We have entered into various non-cancellable operating lease agreements for certain offices. These leases currently have lease periods expiring between 2023 and 2028. The lease agreements may include one or more options to renew. Renewals were not assumed in our determination of the lease term unless the renewals were deemed to be reasonably assured at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The components of lease costs, weighted-average lease term, and discount rates are detailed below.

 

When measuring lease liabilities for leases that were classified as operating leases, we discounted lease payments using our estimated incremental borrowing rate at commencement date of each lease. The weighted average incremental borrowing rate applied was 9.78%. As of March 31, 2023, our leases had a remaining weighted average term of 4.34 years.

 

Operating leases are included in the unaudited condensed consolidated balance sheets as follows:

 

   Classification  March 31, 2023   December 31, 2022 
Lease assets             
Operating lease cost ROU assets  Assets  $961,037   $255,687 
Total lease assets     $961,037   $255,687 
              
Lease liabilities             
Operating lease liabilities, current  Current liabilities  $194,070   $121,731 
Operating lease liabilities, non-current  Liabilities   788,359    159,205 
Total lease liabilities     $982,429   $280,936 

 

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The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations, were as follows:

 

   2023   2022 
   Three Months Ended March 31, 
   2023   2022 
Leases costs          
Operating lease costs  $35,714   $158,041 
Short term lease cost   30,054    - 
Total lease costs  $65,768   $158,041 

 

Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the three months ended March 31, 2023 were as follows:

 

     
Fiscal Year  Operating Leases 
2023 (remainder of)  $234,924 
2024   294,383 
2025   252,513 
2026   199,177 
2027   205,145 
Thereafter   51,661 
Total future minimum lease payments   1,237,803 
Amount representing interest   (255,374)
Present value of net future minimum lease payments  $982,429 

 

NOTE 12 – CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

 

Our financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Although we deposit cash with multiple banks, these deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. These deposits may generally be redeemed upon demand and bear minimal risk.

 

No single customer represented over 10% of our total revenue for any period presented.

 

NOTE 13 – GEOGRAPHIC INFORMATION

 

Revenue by geography is based on the customer’s billing address and was as follows:

 

  

March 31, 2023

  

March 31, 2022

 
         
U.S.  $8,600,864   $8,406,230 
Chile   4,891,318    923,180 
All other countries   234,499    - 
Revenue  $13,726,681   $9,329,410 

 

Property and equipment, net by geography was as follows:

 

  

 

March 31, 2023

  

 

December 31, 2022

 
         
U.S.  $1,184,847   $1,198,057 
Chile   3,554,089    3,480,911 
All other countries   1,134    1,527 
Property and equipment net  $4,740,070   $4,680,495 

 

No other international country represented more than 10% of property and equipment, net in any period presented.

 

NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table presents AOCI activity in equity:

 

  

Foreign Currency

Translation

Adjustments

   Total AOCI 
         
Balance as of December 31, 2022  $1,062,247   $1,062,247 
Other comprehensive income   2,036,962    2,036,962 
Amounts reclassified from AOCI   -    - 
Balance as of March 31, 2023  $3,099,209   $3,099,209 

 

19

 

 


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.

 

First Quarter 2023 Highlights

 

Our operating results for the three months ended March 31, 2023 included the following:

 

  Total revenue increased by $4.4 million to $13.7 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
  Total gross profit increased to $0.4 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022

 

Our financial results for the three months ended March 31, 2023 are summarized as follows in comparison to the three months ended March 31, 2022:

 

   Three Months Ended March, 31     
   2023   2022   Variance 
Revenue:            
Security managed services  $11,766,133   $8,052,225   $3,713,908 
Professional services   1,960,548    1,277,185    683,363 
Total revenue   13,726,681    9,329,410    4,397,271 
                
Cost of revenue:               
Security managed services   5,560,563    2,602,924    2,957,639 
Professional services   198,293    110,337    87,956 
Cost of payroll   5,800,657    4,445,850    1,354,807 
Stock based compensation   1,768,084    2,121,583    (353,499)
Total cost of revenue   13,327,597    9,280,694    4,046,903 
Total gross profit   399,084    48,716    350,368 
Operating expenses:               
Professional fees   1,677,387    623,061    1,054,326 
Advertising and marketing   115,394    155,341    (39,947)
Selling, general, and administrative   9,508,766    4,616,373    4,892,393 
Stock-based compensation   3,628,975    2,565,510    1,063,465 
Impairment of goodwill   20,199,368    -    20,199,368 
Total operating expenses   35,129,890    7,960,285    27,169,605 
                
Loss from operations   (34,730,806)   (7,911,569)   (26,819,237)
Other income (expense):               
Other income (expense)   (156,420)   12,543    (168,963)
Interest expense, net   (390,141)   (43,585)   (346,556)
                
Total other income (expense)   (546,561)   (31,042)   (515,519)
                
Loss before income taxes  $(35,277,367)  $(7,942,611)  $(27,334,756)

 

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Revenue

 

Security managed services revenue increased by $3,713,908 or 46%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to revenue acquired through our completion of four acquisitions over the last 12 months and new and existing customer revenue growth.

 

Professional services revenue increased by $683,363, or 54%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to revenue acquired through our completion of four 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 $2,957,639, or 114%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to our completion of four acquisitions over the last 12 months.

 

Professional services cost of revenue increased by $87,956, or 80%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, due to our increase in revenue from professional services from four acquisitions completed over the last 12 months.

 

Cost of payroll cost of revenue increased by $1,354,807, or 30%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, due to headcount added primarily through our completion of four acquisitions over the last 12 months.

 

Stock-based compensation expenses decreased by $353,499, or 17%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, due to a decrease in the amount of stock options awarded to our revenue generating employees.

 

Operating Expenses

 

Professional fees increased by $1,054,326, or 169%, for the three months ended March 31, 2023 as compared to three months ended March 31, 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 $39,947, or 26%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, due to utilization of more internal marketing resources.

 

Selling, general, and administrative expenses increased by $4,892,393, or 106%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to our analysis of our carrying amount of intangible assets being impaired and headcount added through our completion of four acquisitions over the last 12 months.

 

Stock based compensation expenses increased by $1,063,465, or 41%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, due to an increase in stock options awarded to employees through the completion of four acquisitions in the last 12 months and an increase in headcount in administration positions.

 

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Impairment of goodwill increased by $20,199,368, or 100%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 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 three months ended March 31, 2023, we incurred a net loss of $34,841,689 and negative cash flows from operations of $2,110,872 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 March 31, 2023, we had $295,351,048 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.

 

Working Capital Deficit

 

Our working capital deficit as of Mach 31, 2023, in comparison to our working capital surplus as of December 31, 2022, is summarized as follows:

 

   As of 
   March 31,   December 31, 
   2023   2022 
Current assets  $15,064,867   $14,398,795 
Current liabilities   21,657,003    23,213,039 
Working capital deficit  $(6,592,136)  $(8,814,244)

 

The increase in current assets is primarily due to an increase in cash and cash equivalents and prepaid expenses and other current assets of $1,990,572 and $534,867, respectively, offset by a decrease in accounts receivable of $1,794,136. The decrease in current liabilities is primarily due to the loans payable and convertible notes payable of $3,240,860 and $500,000, respectively, offset by an increase in accounts payable and accrued expenses of $2,445,112.

 

Cash Flows

 

Our cash flows for the three months ended March 31, 2023, in comparison to our cash flows for the three months ended March 31, 2023, can be summarized as follows:

 

   Three Months ended March 31, 
   2023   2022 
Net cash used in operating activities  $(2,110,872)  $(3,015,795)
Net cash used in investing activities   (182,839)   (5,021,626)
Net cash provided by financing activities   4,238,797    9,011,005 
Effect of exchange rates on cash and cash equivalents   45,486    164,288 
Increase in cash  $1,990,572   $1,137,872 

 

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Operating Activities

 

Net cash used in operating activities was $2,110,872 for the three months ended March 31, 2023 and was primarily due to cash used to fund a net loss of $34,841,689, adjusted for non-cash expenses in the aggregate of $29,809,522 and additional cash inflow by changes in the levels of operating assets and liabilities, primarily as a result of an increase in current assets, and accounts payable and accrued expenses. Net cash used in operating activities was $3,015,795 for the three months ended March 31, 2022 and was primarily due to cash used to fund a net loss of $7,942,611, adjusted for non-cash expenses in the aggregate of $911,534, 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 $182,839 for the three months ended March 31, 2023, was due to purchases of property and equipment. Net cash used in investing activities of $5,021,626 for the three months ended March 31, 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 three months ended March 31, 2023 was $4,238,797, which was primarily due to cash received from the sale of our common stock of $3,143,147, $1,912,500 in net proceeds from our loan payable, and $5,000,000 in proceeds from a related party convertible note payable, offset by aggregate repayments on loans payable and a convertible note payable of $6,279,547. Net cash provided by financing activities for the three months ended March 31, 2022 was $9,011,055, which was primarily due to cash received from the sale of our common stock in our public offering of $9,521,798.

 

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 ended March 31, 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.

 

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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.

 

Fair Value Measurement

 

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).

 

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 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 discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.

 

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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. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. Awards granted to directors are treated on the same basis as awards granted to employees.

 

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.

 

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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.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2023, our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below. Thus there remains a reasonable possibility that a material misstatement of our interim financial statements will not be prevented or detected on a timely basis. This does not include an evaluation by our registered public accounting firm regarding our internal control over financial reporting. Accordingly, we cannot provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, to allow our principal financial and executive officers to make timely decisions regarding required disclosures as of March 31, 2023.

 

Our management’s evaluation was based on the following material weaknesses in our internal control over financial reporting, which existed as of December 31, 2022 and which continue to exist, as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022:

 

  lack of risk assessment procedures on internal controls to detect financial reporting risks in a timely manner; and
  lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives.

 

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A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As a company with limited accounting resources, a significant amount of management’s time and attention has been and will be diverted from our business to ensure compliance with these regulatory requirements.

 

Management’s Plan to Remediate the Material Weaknesses

 

We are implementing measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:

 

identifying gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and
developing policies and procedures on internal control over financial reporting and monitoring the effectiveness of operations on existing controls and procedures.

 

We will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis, and we are committed to taking further action and implementing additional enhancements or improvements, as necessary and in accordance with financial and budgetary considerations.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2023, other than those noted above, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are currently not a party to any material legal proceedings.

 

Item 1A. Risk Factors

 

We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023, risk factors that materially affect our business, financial condition, or results of operations. There have been no material changes from the risk factors previously disclosed.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

27

 

 

Item 6. Exhibits

 

        Incorporated by Reference

Exhibit

Number

  Exhibit Description   Form   Exhibit   Filing Date
3.1*   Amended and Restated Certificate of Incorporation of the Registrant            
3.2   Amended and Restated By-Laws of the Registrant   8-K   3.2   04/10/2023
10.1   Letter Agreement between the Registrant and Neil Stinchcombe   10-K   10.5(a)   03/31/2023
10.2   Purchase Agreement, dated March 20, 2023, between the Registrant and Hensley & Company dba Hensley Beverage Company   8-K   10.1   03/20/2023
10.3   10% Unsecured Convertible Note by the Registrant payable to Hensley & Company, dated March 20, 2023   8-K   10.2   03/20/2023
10.4#   Employment Agreement by and between the Registrant and Kyle J. Young   10-K   10.12   03/31/2023
31.1*   Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer            
31.2*   Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer            
32.1   Section 1350 Certification of Principal Executive Officer            
32.2   Section 1350 Certification of Principal Financial Officer            
101.INS*   Inline XBRL Instance Document            
101.SCH*   Inline XBRL Taxonomy Extension Schema Document            
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document            
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document            
101.LAB*   Inline XBRL Taxonomy Extension Label Linkbase Document            
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document            
104*   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)            

 

*Filed herewith.

#Management contracts and compensatory plans and arrangements.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CISO GLOBAL, INC.  
     
By: /s/ David G. Jemmett  
  David G. Jemmett  
  Chief Executive Officer  
  (Principal Executive Officer)  
Date: May 15, 2023  
     
By: /s/ Debra L. Smith  
  Debra L. Smith  
  Chief Financial Officer  
  (Principal Financial Officer and Principal Accounting Officer)  
Date: May 15, 2023  

 

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