UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the Quarterly Period Ended
or
For the Transition Period from _________ to _________
Commission
file number:
(Exact name of registrant as specified in its charter)
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(State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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 | ☐ |
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☒ | Smaller reporting company |
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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:
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by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 13, 2023, there were shares of the registrant’s common stock outstanding.
CISO GLOBAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
| 2 |
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:
| ● | that 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; |
| ● | our belief that 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; |
| ● | the doubt about our ability to continue as a going concern; |
| ● | our efforts to developing our business, reducing overhead costs, and capital raising; |
| ● | our plan to improve our liquidity by a planned reduction in overhead costs and actively pursuing additional debt and/or equity financing through discussions with investment bankers and private investors; |
| ● | our estimate for indirect tax liabilities; and |
| ● | our expectation that we will incur further losses through the end of 2023. |
| 3 |
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 consolidated 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 consolidated 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 consolidated financial statements and notes thereto appearing elsewhere in this report.
| 4 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CISO GLOBAL, INC. and subsidiaries
CONDENSED Consolidated Balance Sheets
(Unaudited)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ |
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$ |
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| Accounts receivable, net |
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| Inventory |
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| Prepaid cost of revenue |
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| Prepaid expenses and other current assets |
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| Contract asset |
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| Total Current Assets |
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| Property and equipment, net |
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| Right of use asset, net |
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| Intangible assets, net |
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| Goodwill |
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| Other assets |
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| Total Assets | $ |
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$ |
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ |
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$ |
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| Deferred revenue |
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| Lease liability |
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| Loans payable |
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| Convertible notes payable |
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| Total Current Liabilities |
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| Long-term Liabilities: | ||||||||
| Loans payable, net of current portion |
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| Convertible notes payable, related party |
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| Lease liability, net of current portion |
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| Deferred tax liability |
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| Total Liabilities |
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| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $ par value; shares authorized; and issued and outstanding at September 30, 2023 and December 31, 2022, respectively |
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| Preferred stock, $ par value; shares authorized; shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital |
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| Accumulated other comprehensive income |
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| Accumulated deficit |
(
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| Total Stockholders’ Equity |
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| Total Liabilities and Stockholders’ Equity | $ |
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$ |
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The accompanying footnotes are an integral part of these condensed consolidated financial statements.
| 5 |
CISO GLOBAL, INC. and subsidiaries
CONDENSED Consolidated STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
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September 30, 2023 |
September 30,
2022 |
September 30,
2023 |
September 30,
2022 |
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| Revenue: | ||||||||||||||||
| Security managed services | $ |
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$ |
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$ |
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$ |
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| Professional services |
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| Total revenue |
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| Cost of revenue: | ||||||||||||||||
| Security managed services |
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| Professional services |
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| Cost of payroll |
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| Stock based compensation |
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| Total cost of revenue |
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| Total gross profit |
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| Operating expenses: | ||||||||||||||||
| Professional fees |
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| Advertising and marketing |
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| Selling, general and administrative |
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| Stock based compensation |
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| Impairment of goodwill |
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| Total operating expenses |
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| Loss from operations |
(
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(
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| Other income (expense): | ||||||||||||||||
| Other income |
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| Interest expense, net |
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(
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| Total other income (expense) |
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(
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| Loss before income taxes |
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| Benefit from income taxes |
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| Net loss |
(
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(
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| Foreign currency translation adjustment |
(
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(
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| Comprehensive loss | $ |
(
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) | $ |
(
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) | $ |
(
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) | $ |
(
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| Net loss per common share - basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average shares outstanding - basic |
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| Weighted average shares outstanding - diluted |
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The accompanying footnotes are an integral part of these condensed consolidated financial statements.
| 6 |
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 |
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$ |
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$ |
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$ |
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$ |
(
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) | $ |
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| Stock based compensation - stock options | - | - |
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| Stock based compensation - common stock |
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- |
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| Stock issued for cash |
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- |
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| Exercise of options |
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- |
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| Stock issued for SB Cyber acquisition |
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- |
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| Foreign currency translation | - | - |
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| Net loss | - | - |
(
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(
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| Balance at September 30, 2023 |
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$ |
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$ | $ |
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$ |
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$ |
(
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) | $ |
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| Balance at January 1, 2022 |
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$ |
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$ |
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$ | $ |
(
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) | $ |
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| Stock based compensation - stock options | - | - |
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| Stock based compensation - common stock |
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- |
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| Stock issued for cash |
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- |
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| Exercise of options |
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- |
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| Stock issued for cash in public offering |
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- |
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| Stock issued for True Digital acquisition |
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- |
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| Stock issued for VelocIT acquisition |
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- |
(
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| Stock issued for Red74 acquisition |
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- | ||||||||||||||||||||||||||||||
| Stock issued for Creatrix acquisition |
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- |
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| Stock issued for CyberViking acquisition |
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- |
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| Stock issued for CUATROi acquisition |
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- |
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| Stock issued for NLT Secure acquisition |
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- |
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| Foreign currency translation | - | - |
(
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(
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| Net loss | - | - |
(
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(
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| Balance at September 30, 2022 |
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$ |
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$ | $ |
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$ |
(
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) | $ |
(
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) | $ |
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The accompanying footnotes are an integral part of these condensed consolidated financial statements.
| 7 |
CISO GLOBAL, INC. and subsidiaries
CONDENSED Consolidated STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, 2023 | September 30, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ |
(
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) | $ |
(
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| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation - stock options |
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| Stock based compensation - common stock |
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| Depreciation and amortization |
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| Right of use amortization |
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| Other |
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| Impairment of intangible assets |
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| Impairment of goodwill |
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| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net |
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| Inventory |
(
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(
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| Contract assets |
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(
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| Prepaids and other current assets |
(
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(
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| Accounts payable and accrued expenses |
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| Lease liability |
(
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(
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| Settlement liability |
(
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| Deferred revenue |
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| Net cash used in operating activities |
(
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(
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| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment |
(
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(
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| Cash (paid)/acquired in acquisitions, net |
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(
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| Net cash used in investing activities |
(
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(
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| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock |
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| Proceeds from stock option exercise |
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| Proceeds from loan payable |
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| Proceeds from convertible notes payable, related party |
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| Proceeds from convertible note payable |
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| Proceeds from line of credit |
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| Payment on line of credit |
(
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| Payment on loans payable |
(
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(
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| Payment on notes payable, related party |
(
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| Payment of convertible note payable |
(
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| Payment of debt issuance cost |
(
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(
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| Net cash provided by financing activities |
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| Effect of exchange rates on cash and cash equivalents |
(
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| Net (decrease)/increase in cash and cash equivalents |
(
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| Cash and cash equivalents - beginning of the period |
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| Cash and cash equivalents - end of the period | $ |
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$ |
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| Supplemental cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ |
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$ |
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| Income taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash transactions: | ||||||||
| Operating lease assets obtained in exchange for operating lease obligations | $ |
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$ |
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| Common stock issued in VelocIT acquisition | $ | $ | ||||||
| Common stock issued in RED 74 acquisition | $ | $ | ||||||
| Common stock issued in NLT Secure acquisition | $ | $ |
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| Common stock issued in SB Cyber acquisition | $ |
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$ | |||||
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
| 8 |
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. 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.
We believe that culture is the foundation of every successful cybersecurity and compliance program, as it affects every area of the business, from policies and practices to technology settings and configurations. To deliver that outcome, we offer a holistic approach 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 focusing on leveraging teams of highly sought-after practitioners, as well as designing best-in-class solutions to accompany them. 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 solutions to our clients. As we help them build cyber resilience, we recognize that today’s business environment suffers from widespread cybersecurity ineffectiveness due to key challenges in attracting and retaining cybersecurity talent. This workforce shortfall drives consistent demand for both cybersecurity expertise and cutting edge, automated solutions that can supplement in-house teams’ existing capabilities. Our goal is to leverage thought leadership and innovation to help our clients create a culture of security across their people, processes, and technologies, helping them quantify, define, and capture a return on investment from information technology and cybersecurity spending. Our brand is founded on and rallies around a simple truth that experts learn through experience, “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”), the instructions to Form 10-Q pursuant to regulations of the SEC, 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 nine months ended September 30, 2023,
we incurred a net loss of $
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.
| 9 |
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.
| 10 |
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 current expected credits loss 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 September 30, 2023 and December 31, 2022, our allowance
for doubtful accounts was $
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 September 30, 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
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, warrants, and convertible debt is considered potentially outstanding common stock. The dilutive effect, if any, of stock options and warrants 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 and nine months ended September 30, 2023 and 2022.
|
September 30,
2023 |
December 31,
2022 |
|||||||
| Stock options |
|
|
||||||
| Warrants |
|
|
||||||
| Convertible debt |
|
|
||||||
| Total |
|
|
||||||
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 $
| 11 |
D eferred revenue consisted of the following:
|
September 30, 2023 |
December 31,
2022 |
|||||||
| Security managed services | $ |
|
$ |
|
||||
| Professional services |
|
|
||||||
| Total deferred revenue | $ |
|
$ |
|
||||
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 September 30, 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 the following:
|
September 30, 2023 |
December 31, 2022 |
|||||||
| Prepaid expenses | $ |
|
$ |
|
||||
| Prepaid taxes |
|
|
||||||
| Prepaid insurance |
|
|
||||||
| Total prepaid expenses and other current assets | $ |
|
$ |
|
||||
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
September 30, 2023 |
December 31, 2022 |
|||||||
| Computer equipment | $ |
|
$ |
|
||||
| Building |
|
|
||||||
| Leasehold improvements |
|
|
||||||
| Vehicles |
|
|||||||
| Furniture and fixtures |
|
|
||||||
| Software |
|
|
||||||
|
|
|
|||||||
| Less: accumulated depreciation |
(
|
) |
(
|
) | ||||
| Property and equipment, net | $ |
|
$ |
|
||||
Total
depreciation expense was $
| 12 |
NOTE 5 – INTANGIBLE ASSETS AND GOODWILL
Goodwill
During the quarterly period ended September 30, 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 September 30, 2023.
Based
on the results of this testing, we did not record a pre-tax, non-cash impairment charge related to the United States reporting unit
and Latin America reporting unit, respectively, for the three-months ended September 30, 2023. For the nine-months ended September
30, 2023, we recorded $
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 following table summarizes the changes in goodwill during the nine months ended September 30, 2023:
| Balance December 31, 2022 | $ |
|
||
| Impairment |
(
|
) | ||
| Foreign currency translation adjustment |
(
|
) | ||
| Ending balance, September 30, 2023 | $ |
|
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
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.
| 13 |
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 $
Intangible assets, net are summarized as follows:
| September 30, 2023 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Tradenames – trademarks | $ |
|
$ |
(
|
) | $ |
|
|||||
| Customer base |
|
(
|
) |
|
||||||||
| Non-compete agreements |
|
(
|
) |
|
||||||||
| Intellectual property/technology |
|
(
|
) |
|
||||||||
| $ |
|
$ |
(
|
) | $ |
|
||||||
| December 31, 2022 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Tradenames – trademarks | $ |
|
$ |
(
|
) | $ |
|
|||||
| Customer base |
|
(
|
) |
|
||||||||
| Non-compete agreements |
|
(
|
) |
|
||||||||
| Intellectual property/technology |
|
(
|
) |
|
||||||||
| $ |
|
$ |
(
|
) | $ |
|
||||||
The
weighted average remaining useful life of identifiable amortizable intangible assets remaining is
Amortization
of identifiable intangible assets for the three months ended September 30, 2023 and 2022 was $
Based on the balance of intangible assets at September 30, 2023, expected future amortization expense is as follows:
| 2023 (remainder of) | $ |
|
||
| 2024 |
|
|||
| 2025 |
|
|||
| 2026 |
|
|||
| 2027 |
|
|||
| $ |
|
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following amounts:
|
September 30,
2023 |
December 31,
2022 |
|||||||
| Accounts payable | $ |
|
$ |
|
||||
| Accrued payroll and bonuses |
|
|
||||||
| Accrued expenses |
|
|
||||||
| Accrued commissions |
|
|
||||||
| Accrued interest |
|
|
||||||
| Total accounts payable and accrued expenses | $ |
|
$ |
|
||||
| 14 |
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 then 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 $
In
July 2023, we entered into an Independent Consulting Agreement with Mr. Scott to provide, on a non-exclusive basis, advisory and consulting
services relating to our strategic and business development, intellectual property development, banking relationships, and strategic
M&A for a period of one year. Mr. Scott will receive a consulting fee of $
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 and nine months ended September 30, 2023, we received $
Convertible Note Payable with Hensley & Company
In
March 2023, we issued an unsecured convertible note to Hensley & Company in the principal amount of $
Note 8 – STOCKHOLDERS’ EQUITY
In
May 2023, we completed a $
For
the nine months ended September 30, 2023, we sold
shares of our common stock for net proceeds of $
Our 2023 Equity Incentive Plan (the “2023 Plan”), which replaces our 2019 Equity Incentive Plan (the “2019 Plan”), became effective on September 13, 2023. T he total number of shares of our common stock reserved and available for delivery under the 2023 Plan at any time during the term of the 2023 Plan will be shares plus any shares remaining available for delivery under the 2019 Plan on the effective date of the 2023 Plan. As of the effective date of the 2023 Plan, there were shares remaining available for delivery under the 2019 Plan. Therefore, as of September 13, 2023, there were an aggregate of shares reserved and available for delivery under the 2023 Plan. In addition, to the extent that any stock options pursuant to the 2019 Plan expire, terminate, or are canceled or forfeited under the terms of the 2019 Plan, the shares of common stock reserved for issuance pursuant to such stock options will become available for issuance under the 2023 Plan.
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.
| Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (in years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at January 1, 2023 |
|
$ |
|
- | - | |||||||||||
| Granted |
|
|
- | - | ||||||||||||
| Exercised |
(
|
) |
|
- | - | |||||||||||
| Expired or cancelled |
(
|
) |
|
- | - | |||||||||||
| Outstanding at September 30, 2023 |
|
$ |
|
$ |
|
|||||||||||
| Exercisable at September 30, 2023 |
|
$ |
|
$ |
|
|||||||||||
| 15 |
Total compensation expense related to the options was $ and $ for the three months ended September 30, 2023 and 2022, respectively, and $ and $ for the nine months ended September 30 2023 and 2022, respectively. As of September 30, 2023, there was future compensation expense of $ with a weighted average recognition period of 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 |
|
$ |
|
$ | ||||||||||||
| Granted |
|
|
- | |||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired or cancelled | - | - | ||||||||||||||
| Outstanding at September 30, 2023 |
|
$ |
|
$ | ||||||||||||
| Exercisable at September 30, 2023 |
|
$ |
|
$ | ||||||||||||
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
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 United States 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 September 30, 2023 and December 31, 2022, our accrual for estimated indirect tax liabilities was $
| 16 |
NOTE 10 – LOANS PAYABLE AND LINES OF CREDIT
Loans Payable
Loans payable was as follows:
| Interest Rate | Maturities |
September 30, 2023 |
December
31,
2022 |
|||||||||||||
| Term loans (US dollar denominated) |
|
% |
|
$ |
|
$ |
|
|||||||||
| Term loans (Chilean peso denominated) |
|
% |
|
|
|
|||||||||||
|
|
|
|||||||||||||||
| Less, current portion |
(
|
) |
(
|
) | ||||||||||||
| Long term loans payable | $ |
|
$ |
|
||||||||||||
In
June 2022, we entered into a bridge loan, secured by substantially all of our assets, in the principal amount of $
Various
subsidiaries in the United States are borrowers under certain unsecured term loans. These term loans require monthly principal and
interest payments. We recorded aggregate interest expense
on these term loans of $
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 $
In
March 2023, we entered into a Cash Advance Agreement, pursuant to which we received gross proceeds of $
In
August 2023, we entered into a second Cash Advance Agreement, pursuant to which we received gross proceeds of $
Convertible Notes Payable
In
October 2021, we issued a convertible note to Neil Stinchcombe in the principal amount of $
| 17 |
In
June 2022, we issued an unsecured convertible note in the principal amount of $
In
June 2023, we issued an unsecured convertible note in the principal amount of $
In
March 2023, we issued an unsecured convertible note to Hensley & Company in the principal amount of $
Future minimum payments under the above loans payable and convertible notes payable due as of September 30, 2023 were as follows:
| 2023 (remainder of) | $ |
|
||
| 2024 |
|
|||
| 2025 |
|
|||
| 2026 |
|
|||
| 2027 |
|
|||
| Thereafter |
|
|||
| Total future minimum payments |
|
|||
| Less: discount |
(
|
) | ||
|
|
||||
| Less: current |
(
|
) | ||
| $ |
|
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 the commencement date of each lease. The weighted average incremental borrowing rate applied was
Operating leases are included in the unaudited condensed Consolidated Balance Sheets as follows:
| Classification |
September 30, 2023 |
December 31,
2022 |
||||||||
| Lease assets | ||||||||||
| Operating lease cost ROU assets | Assets | $ |
|
$ |
|
|||||
| Total lease assets | $ |
|
$ |
|
||||||
| Lease liabilities | ||||||||||
| Operating lease liabilities, current | Current liabilities | $ |
|
$ |
|
|||||
| Operating lease liabilities, non-current | Liabilities |
|
|
|||||||
| Total lease liabilities | $ |
|
$ |
|
||||||
| 18 |
The components of lease costs, which are included in loss from operations in our unaudited condensed consolidated Statements of Operations, were as follows:
|
Nine Months Ended September 30, |
||||||||
| 2023 | 2022 | |||||||
| Leases costs | ||||||||
| Operating lease costs | $ |
|
$ |
|
||||
| Short term lease cost |
|
|||||||
| Total lease costs | $ |
|
$ |
|
||||
Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the nine months ended September 30, 2023 were as follows:
| Fiscal Year | Operating Leases | |||
| 2023 (remainder of) | $ |
|
||
| 2024 |
|
|||
| 2025 |
|
|||
| 2026 |
|
|||
| 2027 |
|
|||
| Thereafter |
|
|||
| Total future minimum lease payments |
|
|||
| Amount representing interest |
|
|||
| Present value of net future minimum lease payments | $ |
|
||
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
NOTE 13 – GEOGRAPHIC INFORMATION
Revenue by geography is based on the customer’s billing address and was as follows:
|
Three Months Ended September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| U.S. | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Chile |
|
|
|
|
||||||||||||
| All other countries |
|
|
|
|
||||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
|||||||||
Property and equipment, net by geography was as follows:
|
September 30,
2023 |
December 31,
2022 |
|||||||
| U.S. | $ |
|
$ |
|
||||
| Chile |
|
|
||||||
| All other countries |
|
|
||||||
| $ |
|
$ |
|
|||||
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 | $ |
|
$ |
|
||||
| Other comprehensive income |
|
|
||||||
| Amounts reclassified from AOCI | ||||||||
| Balance as of September 30, 2023 | $ |
|
$ |
|
||||
NOTE 15 – SUBSEQUENT EVENTS
On
November 9, 2023, we and our US subsidiaries entered into a Business Loan and Security Agreement (the “Loan Agreement” with
LendSpark Corporation (the “Lender”), pursuant to which we obtained a loan with a principal amount of $
Pursuant to the Loan Agreement, we granted the Lender a security interest in all if its assets and the assets of our US subsidiaries (the “Collateral”). Upon the occurrence of an event of default, the Lender may, among other things, accelerate the Loan and declare all obligations immediate due and payable or take possession of the Collateral.
The proceeds from the Loan were used to repay in full the amount owed under Cash Advance Agreement with Cedar Advance, LLC that we entered into in March 2023.
In connection with Loan, we entered into a Fee Agreement (the “Fee Agreement”) with the Lender pursuant to which we issued shares of our common stock, par value $ per share (the “Shares”) as partial consideration for the Lender’s agreement to enter into the Loan Agreement and extend credit to us. Pursuant to the Fee Agreement, if we repay the Loan in full by (i) December 9, 2023, the Lender will return all of the Shares to us, (ii) January 8, 2023, the Lender will return of the Shares to us and (iii) February 8, 2024, the Lender will return of the Shares to us. The Fee Agreement contains customary representations, warranties, agreements and obligations of the parties.
| 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.
Third Quarter 2023 Highlights
Our operating results for the nine months ended September 30, 2023 included the following:
| ● | Total revenue increased by $11.5 million to $43.3 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. | |
| ● | Total gross profit increased to $3.9 million for the nine months ended September 30, 2023, as compared to $1.7 million the nine months ended September 30, 2022. |
Results of Operations
Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022
Our financial results for the three months ended September 30, 2023 are summarized as follows in comparison to the three months ended September 30, 2022:
| Three Months Ended September 30, | ||||||||||||
| 2023 | 2022 | Variance | ||||||||||
| Revenue: | ||||||||||||
| Security managed services | $ | 12,266,690 | $ | 10,061,304 | $ | 2,205,386 | ||||||
| Professional services | 1,798,431 | 1,191,728 | 606,703 | |||||||||
| Total revenue | 14,065,121 | 11,253,032 | 2,812,089 | |||||||||
| Cost of revenue: | ||||||||||||
| Security managed services | 5,574,180 | 4,310,378 | 1,263,802 | |||||||||
| Professional services | 234,549 | 182,413 | 52,136 | |||||||||
| Cost of payroll | 5,458,001 | 4,978,768 | 479,233 | |||||||||
| Stock based compensation | 317,851 | 857,950 | (540,099 | ) | ||||||||
| Total cost of revenue | 11,584,581 | 10,329,509 | 1,255,072 | |||||||||
| Total gross profit | 2,480,540 | 923,523 | 1,557,017 | |||||||||
| Operating expenses: | ||||||||||||
| Professional fees | 745,426 | 624,391 | 121,035 | |||||||||
| Advertising and marketing | 119,814 | 245,495 | (125,681 | ) | ||||||||
| Selling, general, and administrative | 5,557,328 | 6,684,747 | (1,127,419 | ) | ||||||||
| Stock based compensation | 677,231 | 1,791,724 | (1,114,493 | ) | ||||||||
| Total operating expenses | 7,099,799 | 9,346,357 | (2,246,558 | ) | ||||||||
| Loss from operations | (4,619,259 | ) | (8,422,834 | ) | 3,803,575 | |||||||
| Other income (expense): | ||||||||||||
| Other income | (121,689 | ) | 29,968 | (151,657 | ) | |||||||
| Interest expense, net | (766,315 | ) | (108,233 | ) | (658,082 | ) | ||||||
| Total other income (expense) | (888,004 | ) | (78,265 | ) | (809,739 | ) | ||||||
| Loss before income taxes | $ | (5,507,263 | ) | $ | (8,501,099 | ) | $ | 2,993,836 | ||||
| 20 |
Revenue
Security managed services revenue increased by $2,205,386, or 22%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to revenue acquired through our completion of two acquisitions over the last 12 months and new and existing customer revenue growth.
Professional services revenue increased by $606,703, or 51%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to revenue acquired through our completion of two acquisitions over the last 12 months and new and existing customer revenue growth.
Expenses
Cost of Revenue
Security managed services cost of revenue increased by $1,263,802, or 29%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to our completion of two acquisitions over the last 12 months.
Professional services cost of revenue increased by $52,136, or 29%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to our increase in revenue from professional services from two acquisitions completed over the last 12 months.
Cost of payroll increased by $479,233, or 10%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to headcount added primarily through our completion of two acquisitions over the last 12 months.
Stock-based compensation expenses decreased by $540,099, or 63%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees.
Operating Expenses
Professional fees increased by $121,035, or 19%, for the three months ended September 30, 2023 as compared to three months ended September 30, 2022, due to a increase in accounting, legal, and other professional fees.
Advertising and marketing expenses decreased by $125,681, or 51%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to utilization of more internal marketing resources.
Selling, general, and administrative expenses decreased by $1,127,419, or 17%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to a decrease in insurance costs and also cost reductions in software resulting from increase purchasing power with vendors.
Stock based compensation expenses decreased by $1,114,493, or 62%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees.
| 21 |
Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022
Our financial results for the nine months ended September 30, 2023 are summarized as follows in comparison to the nine months ended September 30, 2022:
| Nine Months Ended September 30, | ||||||||||||
| 2023 | 2022 | Variance | ||||||||||
| Revenue: | ||||||||||||
| Security managed services | $ | 37,623,328 | $ | 28,489,698 | $ | 9,133,630 | ||||||
| Professional services | 5,693,468 | 3,320,689 | 2,372,779 | |||||||||
| Total revenue | 43,316,796 | 31,810,387 | 11,506,409 | |||||||||
| Cost of revenue: | ||||||||||||
| Security managed services | 18,444,204 | 10,678,728 | 7,765,476 | |||||||||
| Professional services | 683,582 | 455,902 | 227,680 | |||||||||
| Cost of payroll | 16,514,436 | 14,132,602 | 2,381,834 | |||||||||
| Stock based compensation | 3,783,116 | 4,805,423 | (1,022,307 | ) | ||||||||
| Total cost of revenue | 39,425,338 | 30,072,655 | 9,352,683 | |||||||||
| Total gross profit | 3,891,458 | 1,737,732 | 2,153,726 | |||||||||
| Operating expenses: | ||||||||||||
| Professional fees | 3,086,365 | 2,192,600 | 893,765 | |||||||||
| Advertising and marketing | 288,984 | 641,340 | (352,356 | ) | ||||||||
| Selling, general, and administrative | 21,178,969 | 15,856,705 | 5,322,264 | |||||||||
| Stock based compensation | 6,421,245 | 6,761,283 | (340,038 | ) | ||||||||
| Impairment of goodwill | 41,038,172 | - | 41,038,172 | |||||||||
| Total operating expenses | 72,013,735 | 25,451,928 | 46,561,807 | |||||||||
| Loss from operations | (68,122,277 | ) | (23,714,196 | ) | (44,408,081 | ) | ||||||
| Other income (expense): | ||||||||||||
| Other income | (68,470 | ) | 134,447 | (202,917 | ) | |||||||
| Interest expense, net | (1,922,546 | ) | (293,991 | ) | (1,628,555 | ) | ||||||
| Total other income (expense) | (1,991,016 | ) | (159,544 | ) | (1,831,472 | ) | ||||||
| Loss before income taxes | $ | (70,113,293 | ) | $ | (23,873,740 | ) | $ | (46,239,553 | ) | |||
Revenue
Security managed services revenue increased by $9,133,630, or 32%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to revenue acquired through our completion of two acquisitions over the last 12 months and new and existing customer revenue growth.
Professional services revenue increased by $2,372,779, or 71%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to revenue acquired through our completion of two acquisitions over the last 12 months and new and existing customer revenue growth.
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Expenses
Cost of Revenue
Security managed services cost of revenue increased by $7,765,476, or 73%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to our completion of two acquisitions over the last 12 months.
Professional services cost of revenue increased by $227,680, or 50%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to our increase in revenue from professional services from two acquisitions completed over the last 12 months.
Cost of payroll increased by $2,381,834, or 17%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to headcount added primarily through our completion of two acquisitions over the last 12 months.
Stock-based compensation expenses decreased by $1,022,307, or 21%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees.
Operating Expenses
Professional fees increased by $893,765, or 41%, for the nine months ended September 30, 2023 as compared to nine months ended September 30, 2022, due to an increase in accounting, legal, and other professional fees incurred related to our periodic SEC filings and our efforts to raise additional capital.
Advertising and marketing expenses decreased by $352,356, or 55%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to utilization of more internal marketing resources.
Selling, general, and administrative expenses increased by $5,322,264, or 34%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to our analysis of our carrying amount of intangible assets being impaired and headcount added through our completion of two acquisitions over the last 12 months.
Stock based compensation expense decreased by $340,038, or 5%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees.
Impairment of goodwill increased by $41,038,172, or 100%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to our analysis of our carrying amount of goodwill being impaired.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. For the nine months ended September 30, 2023, we incurred a net loss of $69,677,615 and negative cash flows from operations of $6,704,498 and expect to incur further losses through the end of 2023. In the report accompanying our financial statements for the year ended December 31, 2022, our independent auditors stated that our financial statements were prepared assuming that we would continue as a going concern and that they have substantial doubt as to our ability to do so based on our recurring losses from operations and need to raise additional capital. These condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern.
As of September 30, 2023, we had $291,351,048 of available funding under our S-3 Registration Statement from which we may issue our securities to fund current and future operations, assuming there is adequate demand for our securities.
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Working Capital Deficit
Our working capital deficit as of September 30, 2023, in comparison to our working capital deficit as of December 31, 2022, is summarized as follows:
| As of | ||||||||
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Current assets | $ | 11,589,911 | $ | 14,398,795 | ||||
| Current liabilities | 22,963,261 | 23,213,039 | ||||||
| Working capital deficit | $ | (11,373,350 | ) | $ | (8,814,244 | ) | ||
The decrease in current assets is primarily due to a decrease in cash, accounts receivable and prepaid expenses of $1,062,683, $1,791,678 and $302,486, respectively. Current liabilities remained consistent due to an increase in accounts payable and accrued expenses of $4,850,957, offset by a decrease in loans payable and convertible notes payable of $4,031,184 and $1,500,000, respectively.
Cash Flows
Our cash flows for the nine months ended September 30, 2023, in comparison to our cash flows for the nine months ended September 30, 2022, is summarized as follows:
| Nine Months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (6,704,498 | ) | $ | (7,850,297 | ) | ||
| Net cash used in investing activities | (135,848 | ) | (6,044,217 | ) | ||||
| Net cash provided by financing activities | 5,777,702 | 16,038,273 | ||||||
| Effect of exchange rates on cash and cash equivalents | (39 | ) | 19,539 | |||||
| (Decrease)/Increase in cash | $ | (1,062,683 | ) | $ | 2,163,298 | |||
Operating Activities
Net cash used in operating activities was $6,704,498 for the nine months ended September 30, 2023 and was primarily due to cash used to fund a net loss of $69,677,615, adjusted for non-cash expenses in the aggregate of $56,269,301 and additional cash inflow by changes in the levels of operating assets and liabilities, primarily as a result of a decrease in accounts receivable and increases in deferred revenue and accounts payable and accrued expenses. Net cash used in operating activities was $7,850,297 for the nine months ended September 30, 2022 and was primarily due to cash used to fund a net loss of $23,873,740, adjusted for non-cash expenses in the aggregate of $13,939,728, partially offset by cash generated by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts payable.
Investing Activities
Net cash used in investing activities of $135,848 for the nine months ended September 30, 2023 was due to purchases of property and equipment. Net cash used in investing activities of $6,044,217 for the nine months ended September 30, 2022 and was primarily due to net cash paid in the acquisition of True Digital Security, Inc.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2023 was $5,777,702, which was primarily due to net cash received from the sale of our common stock of $6,682,198, $4,448,641 in net proceeds from our loans payable, and $6,050,000 in proceeds from convertible notes payable, offset by aggregate repayments on loans payable and convertible notes payable of $11,756,420. Net cash provided by financing activities for the nine months ended September 30, 2022 was $16,038,273 which was primarily due to cash received from the sale of our common stock in our public offerings of $10,562,763 and $5,975,000 in net proceeds from our bridge loans.
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Based on our current business plan, we believe our cash balance as of the date of this filing, together with anticipated revenues, will be sufficient to meet our anticipated cash requirement for the near term. However, there can be no assurance that the current business plan will be achievable. Such conditions raise substantial doubts about our ability to continue as a going concern for one year from the date the condensed consolidated financial statements are issued.
Our existence is dependent upon our ability to develop profitable operations. We are devoting substantially all of our efforts to developing our business, reducing overhead costs, and raising capital, although there can be no assurance that our efforts will be successful. No assurance can be given that our actions will result in profitable operations or the resolution of liquidity problems. The accompanying condensed consolidated financial statements do not include any adjustments that might result should we be unable to continue as a going concern.
In order to improve our liquidity, in addition to a planned reduction in overhead costs, we are actively pursuing additional debt and/or equity financing through discussions with investment bankers and private investors. There can be no assurance that we will be successful in our efforts to secure additional financing.
The financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern.
Critical Accounting Policies and Estimates
Our critical accounting policies are more fully described in the notes to our condensed consolidated financial statements included herein for the quarter and nine months ended September 30, 2023 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 31, 2023.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at dates of the financial statements and the reported amounts of revenue and expenses during the periods. Our significant estimates and assumptions include the allowance for doubtful accounts, the carrying value of intangible assets and goodwill, deferred tax asset and valuation allowance, the estimated fair value of assets acquired, liabilities assumed and stock issued in business combinations, and assumptions used in the Black-Scholes option pricing model, such as expected volatility, risk-free interest rate, share price, and expected dividend rate. Certain of our estimates, including the carrying amount of intangible assets and goodwill, could be affected by external conditions, including those unique to us and general economic conditions. It is reasonably possible that these external factors could have an effect on our estimates and could cause actual results to materially differ from those estimates.
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Business Combination
We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
Intangible Assets
Intangible assets are comprised of trademarks, customer bases, non-compete agreements, and intellectual property with original estimated useful lives with a range of 2 to 10 years. Once placed into service, we amortize the cost of intangible assets over their estimated useful lives on a straight-line basis.
Goodwill
Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually at year end or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and revenue multiple approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.
Impairment of Long-Lived Assets
We will periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review and at least annually. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date. Awards granted to directors are treated on the same basis as awards granted to employees.
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Revenue Recognition
Our agreements with clients are primarily service contracts that range in duration from a few months to one year. We recognize revenue when control of these services is transferred to the client for an amount, referred to as the transaction price, which reflects the consideration to which we are expected to be entitled in exchange for those goods or services.
A contract with a client exists only when:
| ● | the parties to the contract have approved it and are committed to perform their respective obligations; | |
| ● | we can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”); | |
| ● | we can determine the transaction price for the services to be transferred; and | |
| ● | the contract has commercial substance, and it is probable that we will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the client. |
For the majority of our contracts, we receive non-refundable upfront payments. We do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between the time of transfer of the promised goods or services to the client and the time the client pays for these goods or services to be generally one year or less. Our credit terms to clients generally average 30 days, although in some cases payments are required in 15 days.
We do not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
Our revenue is categorized and disaggregated as reflected in our statements of operations as follows:
Security Managed Services
Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We consider these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.
Professional Services
Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We consider these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Because we are a smaller reporting company, we are not required to provide the information called for by this Item.
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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 September 30, 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 independent 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 September 30, 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. |
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 September 30, 2023, other than those noted above, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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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
On November 9, 2023, we and our US subsidiaries entered into a Business Loan and Security Agreement (the “Loan Agreement” with LendSpark Corporation (the “Lender”), pursuant to which we obtained a loan with a principal amount of $2,200,000 (the “Loan”) from the Lender. Pursuant to the Loan Agreement, we paid the Lender a $44,000 origination fee. The Loan bears interest at a rate of 53.44% per annum and is payable in 52 weekly installments of $53,731, commencing on November 16, 2023. We may prepay the Loan in whole or in part, but partial repayments do not reduce the total interest payable on the Loan, or $594,000. If the Loan is prepaid in full prior to the 90-day anniversary of the date of the Loan Agreement, the total interest is reduced as follows: (i) if the Loan is repaid within 30 days, the total amount of interest due will be $464,000, (ii) if the Loan is repaid within 60 days, the total amount of interest due will be $508,000, and (iii) if the Loan is repaid within 90 days, the total amount of interest due will be $552,000.
Pursuant to the Loan Agreement, we granted the Lender a security interest in all if its assets and the assets of our US subsidiaries (the “Collateral”). Upon the occurrence of an event of default, the Lender may, among other things, accelerate the Loan and declare all obligations immediate due and payable or take possession of the Collateral.
The Loan Agreement contains customary representations and warranties, indemnification provisions in favor of Lender, events of default and affirmative and negative covenants, including, among others, covenants that limit or restrict the our ability to, among other things, merge or consolidate.
The proceeds from the Loan were used to repay in full the amount owed under Cash Advance Agreement with Cedar Advance, LLC that we entered into in March 2023.
In connection with Loan, we entered into a Fee Agreement (the “Fee Agreement”) with the Lender pursuant to which we issued 2,000,000 shares of our common stock, par value $0.00001 per share (the “Shares”) as partial consideration for the Lender’s agreement to enter into the Loan Agreement and extend credit to us. Pursuant to the Fee Agreement, if we repay the Loan in full by (i) December 9, 2023, the Lender will return all of the Shares to us, (ii) January 8, 2023, the Lender will return 1,500,000 of the Shares to us and (iii) February 8, 2024, the Lender will return 1,000,000 of the Shares to us. The Fee Agreement contains customary representations, warranties, agreements and obligations of the parties.
The Shares have not been registered under the Securities Act and are being offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and Rule 506(b) promulgated thereunder.
During
the quarter ended September 30, 2023, no director or officer of our company
Item 6. Exhibits
| Exhibit | Incorporated by Reference | |||||||
| Number | Exhibit Description | Form | Exhibit | Filing Date | ||||
| 3.1 | Second Amended and Restated By-Laws of the Registrant | 8-K | 3.1 | 10/10/2023 | ||||
| 10.1# | 2023 Equity Incentive Plan | S-8 | 10.2 | 10/31/2023 | ||||
| 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) | |||||||
#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: | November 13, 2023 | |
| By: | /s/ Debra L. Smith | |
| Debra L. Smith | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| Date: | November 13, 2023 | |
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