CISO Global, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated 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, 2023.

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.

Second Quarter 2024 Highlights

Our operating results for the six months ended June 30, 2024 included the following:

• Total revenue decreased by $1.2 million to $15.8 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.
• Total gross profit increased to $1.6 million for the six months ended June 30, 2024, as compared to ($0.2) million for the six months ended June 30, 2023.
• Gross profit percentage increased to 10.4% for the six months ended June 30, 2024, as compared to (1.4%) for the six months ended June 30, 2023.
• Improved our net loss from continuing operations to $10.5 million for the six months ended June 30, 2024, as compared to $50.4 million for the six months ended June 30, 2023.

Results of Operations

Comparison of the Three Months Ended June 30, 2024 to the Three Months Ended June 30, 2023

Our financial results for the three months ended June 30, 2024 are summarized as follows in comparison to the three months ended June 30, 2023:

22

Revenue

Security managed services revenue decreased by $483,962, or 6%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to lower hardware and software sales.

Professional services revenue decreased by $288,081, or 31%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to lower customer projects.

Cybersecurity software revenue increased by $95,874, or 100%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, 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 $382,759, or 14%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to lower hardware and software sales.

Professional services cost of revenue increased by $10,734, or 9%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, due to our steady use of consultants.

Cybersecurity software cost of revenue increased by $28,264, or 100%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to the initial launch of our suite of internally developed cybersecurity software products.

Cost of payroll decreased by $637,212, or 17%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to headcount reductions.

Stock-based compensation expenses decreased by $497,034, or 29%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, due to outstanding option awards becoming fully vested, a decrease in the amount of new stock options awarded to our revenue generating employees, and the decline in our share price which produces a lower fair value of our option awards to recognize as stock-based compensation.

Operating Expenses

Professional fees decreased by $210,010, or 40%, for the three months ended June 30, 2024 as compared to three months ended June 30, 2023, due to a decrease 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 $40,909, or 87%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, due to utilization of more internal marketing resources.

Selling, general, and administrative expenses decreased by $1,125,810, or 24%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to our analysis of our carrying amount of intangible assets being impaired for the three months ended June 30, 2023, reductions in headcount, and lower costs for insurance and lease expenses for the three months ended June 30, 2024.

Stock based compensation expenses decreased by $862,319, or 41%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, due to outstanding option awards becoming fully vested, a decrease in the amount of new stock options awarded to our employees, and the decline in our share price which produces a lower fair value of our option awards to recognize as stock-based compensation.

Impairment of goodwill decreased by $16,330,839, or 100%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, due to our analysis of our carrying amount of goodwill being impaired in 2023.

Comparison of the Six Months Ended June 30, 2024 to the Three Months Ended June 30, 2023

Our financial results for the six months ended June 30, 2024 are summarized as follows in comparison to the six months ended June 30, 2023:

Revenue

Security managed services revenue decreased by $816,117, or 5%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to lower hardware and software sales.

Professional services revenue decreased by $631,659, or 31%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to lower customer projects.

Cybersecurity software revenue increased by $196,157, or 100%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, 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 $293,663, or 6%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to lower hardware and software sales.

Professional services cost of revenue increased by $36,376, or 14%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, due to our increased use of consultants.

Cybersecurity software cost of revenue increased by $58,769, or 100%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to the initial launch of our suite of internally developed cybersecurity software products.

Cost of payroll decreased by $1,763,660, or 21%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to headcount reductions.

Stock-based compensation expenses decreased by $1,167,868, or 34%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, due to outstanding option awards becoming fully vested, a decrease in the amount of new stock options awarded to our revenue generating employees, and the decline in our share price which produces a lower fair value of our option awards to recognize as stock-based compensation.

Operating Expenses

Professional fees decreased by $1,249,378, or 61%, for the six months ended June 30, 2024 as compared to six months ended June 30, 2023, due to a decrease 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 $120,861, or 79%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, due to utilization of more internal marketing resources.

Selling, general, and administrative expenses decreased by $1,930,736, or 20%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to our analysis of our carrying amount of intangible assets being impaired for the six months ended June 30, 2023, reductions in headcount, and lower costs for insurance and lease expenses for the six months ended June 30, 2024.

Stock based compensation expenses decreased by $3,384,272, or 59%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, due to outstanding option awards becoming fully vested, a decrease in the amount of new stock options awarded to our employees, and the decline in our share price which produces a lower fair value of our option awards to recognize as stock-based compensation.

Impairment of goodwill decreased by $31,776,820, or 100%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, due to our analysis of our carrying amount of goodwill being impaired in 2023.

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 the realization of assets and satisfying liabilities in the normal course of business. For the six months ended June 30, 2024, we incurred a net loss of $15,046,075 and negative cash flows from operations of $2,679,622 and expect to incur further losses through the end of 2024. In the report accompanying our financial statements for the year ended December 31, 2023, our independent registered public accounting firm 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 June 30, 2024, we had $291,190,324 of available funding under our Shelf Registration Statement on From S-3 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 June 30, 2024 in comparison to our working capital deficit as of December 31, 2023, is summarized as follows:

The increase in current assets is primarily due to increases in our cash and cash equivalents from borrowings and collection of accounts receivable, offset by a decrease in accounts receivable due to the timing of receipt of customer payments. The increase in current liabilities is primarily due to our $5,000,000 related party convertible note coming due in March 2025 and net borrowings on our new line of credit and short-term borrowings of $3,628,473.

Cash Flows

Our cash flows for the six months ended June 30, 2024 in comparison to our cash flows for the six months ended June 30, 2023, can be summarized as follows:

Operating Activities

Net cash used in operating activities was $2,679,622 for the six months ended June 30, 2024 and was primarily due to cash used to fund a net loss of $15,046,075, adjusted for non-cash expenses in the aggregate of $9,898,579 and additional cash inflow by changes in the levels of operating assets and liabilities, primarily as a result of a decrease in accounts receivables, net, and an increase in deferred revenue. Net cash used in operating activities was $5,318,960 for the six months ended June 30, 2023 and was primarily due to cash used to fund a net loss of $64,170,352, adjusted for non-cash expenses in the aggregate of $55,321,005 and additional cash inflow by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts receivable, prepaid and other current assets, deferred revenue and accounts payable and accrued expenses.

Investing Activities

Net cash used in investing activities of $83,095 for the six months ended June 30, 2024 was due to purchases of property and equipment. Net cash used in investing activities of $148,866 for the six months ended June 30, 2023 was due to purchases of property and equipment.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2024 was $3,068,338, which was primarily due to cash received from borrowings on our loans payable and lines of credit, net of debt issuance cost, of $6,694,412, offset by $3,781,021 in repayments of our loans payable and lines of credit. Net cash provided by financing activities for the six months ended June 30, 2023 was $5,493,207, which was primarily due to cash received from the sale of our common stock of $6,682,198, $2,122,522 in net proceeds from our loans payable, and $6,050,000 in proceeds from convertible notes payable, offset by aggregate repayments on loans payable and convertible notes payable of $9,847,980.

Based on our current business plan, we believe our cash balance as of the date of this filing, together with anticipated revenues and additional debt or equity financing, will be sufficient to meet our anticipated cash requirement for the near term. Upon obtaining additional debt of equity financing new investors may require that we take the Company private and no longer operate as a publicly traded company. 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 reductions 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 June 30, 2024 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on April 16, 2024.

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 the dates of the financial statements and the reported amounts of revenue and expenses during the periods. Our material estimates and assumptions include the allowance for credit losses, 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).

Intangible Assets

Intangible assets are comprised of trademarks, customer bases, non-compete agreements, and intellectual property with original estimated useful lives with a range of 2 to 10 years. Once placed into service, we amortize the cost of intangible assets over their estimated useful lives on a straight-line basis.

Goodwill

Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually at year end or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and revenue multiple approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.

Impairment of Long-Lived and Intangible Assets

We will periodically evaluate the carrying value of long-lived and intangible 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 and intangible 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 and intangible assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.

Stock-Based Compensation

We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date. Awards granted to directors are treated on the same basis as awards granted to employees.

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

Professional Services

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

Cybersecurity Software

Cybersecurity revenue primarily consists of our internally developed software products CHECKLIGHT Endpoint Security Monitoring, ARGO Security Management, CISO Edge Cloud Security Platform, DISC Net Gen VPN and Skanda Breach Assessment Tool. Each software offering is a single performance obligation, and we begin revenue recognition upon provisioning of our cybersecurity software to our customers and recognize ratably over the duration of the service period. We currently do not bundle our cybersecurity software with other product offerings and as a result, judgment is not required to determine standalone selling price.

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, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

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, not absolute, 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 June 30, 2024, our disclosure controls and procedures were effective. This does not include an evaluation by our independent registered public accounting firm regarding our internal control over financial reporting.

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 June 30, 2024, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 16, 2024, 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.