CISO GLOBAL INC. 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
Unless otherwise indicated or the context requires otherwise, the terms "we,"
"us," "our," and "our company" refer to
Second Quarter 2022 Highlights
Our operating results for the three months ended
? Total revenue increased by
ended
? Total gross profit increased to
30, 2022, as compared to the six months ended
? Cash used in operating activities decreased to
months ended
ended
? We closed
? We acquired Creatrix, which became our wholly owned subsidiary.
On
? A base prospectus that covers the potential offering, issuance, and sale from
time to time of our common stock, preferred stock, warrants, debt securities,
and units in one or more offerings with a total value of up to $300,000,000 ;
and
? A sales agreement prospectus covering the potential offering, issuance, and
sale from time to time of our common stock having an aggregate gross sales
price of up to $100,000,000 pursuant to a sales agreement with B. Riley
Securities, Inc. , Stifel, Nicolaus & Company, Incorporated , and Boustead
Securities, LLC .
21
Results of Operations
Comparison of the Three Months Ended
Our financial results for the three months ended
Three Months Ended
June 30,
2022 2021 Variance
Revenue:
Security managed services $ 10,376,169 $ 2,077,351 $ 8,298,818
Professional services 851,776 872,326 (20,550 )
Total revenue 11,227,945 2,949,677 8,278,268
Cost of revenue:
Security managed services 3,765,426 340,460 3,424,966
Professional services 163,152 139,973 23,179
Cost of payroll 4,707,984 1,531,910 3,176,074
Stock based compensation 1,825,890 197,848 1,628,042
Total cost of revenue 10,462,452 2,210,191 8,252,261
Total gross profit 765,493 739,486 26,007
Operating expenses:
Professional fees 945,148 244,261 700,887
Advertising and marketing 240,504 172,468 68,036
Selling, general, and administrative 4,468,415 1,682,879 2,785,536
Stock-based compensation 2,404,049 693,278 1,710,771
Total operating expenses 8,058,116 2,792,886 5,265,230
Loss from operations (7,292,623 ) (2,053,400 ) (5,239,223 )
Other income (expense):
Other income 17,425 2,179 15,246
Interest expense, net (64,648 ) (65,641 ) 993
Total other income (expense) (47,223 ) (63,462 ) 16,239
Net loss (7,339,846 ) (2,116,862 ) (5,222,984 )
Foreign currency translation adjustment (2,200,710 ) - (2,200,710 )
Comprehensive loss $ (9,540,556 ) $ (2,116,862 ) $ (7,423,694 )
Revenue
Security managed services revenue increased by
Professional services revenue decreased by
22 Expenses Cost of Revenue
Security managed services cost of revenue increased by
Professional services cost of revenue increased by
Cost of payroll cost of revenue increased by
Stock-based compensation expenses increased by
Operating Expenses
Professional fees increased by
Advertising and marketing expenses increased by
Selling, general, and administrative expenses increased by
Stock based compensation expenses increased by
Comparison of the Six Months Ended
Our financial results for the six months ended
Six Months Ended
June 30,
2022 2021 Variance
Revenue:
Security managed services $ 18,428,394 $ 3,967,055 $ 14,461,339
Professional services 2,128,961 1,542,400 586,561
Total revenue 20,557,355 5,509,455 15,047,900
Cost of revenue:
Security managed services 6,368,350 534,127 5,834,223
Professional services 273,489 257,767 15,722
Cost of payroll 9,153,834 2,959,612 6,194,222
Stock based compensation 3,947,473 380,924 3,566,549
Total cost of revenue 19,743,146 4,132,430 15,610,716
Total gross profit 814,209 1,377,025 (562,816 )
Operating expenses:
Professional fees 1,568,209 401,615 1,166,594
Advertising and marketing 395,845 217,695 178,150
Selling, general, and administrative 9,171,958 3,170,520 6,001,438
Stock-based compensation 4,969,559 1,348,964 3,620,595
Total operating expenses 16,105,571 5,138,794 10,966,777
Loss from operations (15,291,362 ) (3,761,769 ) (11,529,593 )
Other income (expense):
Other income 29,968 2,384 27,584
Interest expense, net (108,233 ) (134,336 ) 26,103
Total other income (expense) (78,265 ) (131,952 ) 53,687
Net loss (15,369,627 ) (3,893,721 ) (11,475,906 )
Foreign currency translation adjustment (1,298,269 ) - (1,298,269 )
Comprehensive loss $ (16,667,896 ) $ (3,893,721 ) $ (12,774,175 )
23
Revenue
Security managed services revenue increased by
Professional services revenue increased by
Expenses Cost of Revenue
Security managed services cost of revenue increased by
Professional services cost of revenue increased by 15,722, or 6%, for the six
months ended
Cost of payroll cost of revenue increased by
Stock-based compensation expenses increased by
Operating Expenses
Professional fees increased by
Advertising and marketing expenses increased by
Selling, general, and administrative expenses increased by
24
Stock based compensation expenses increased by
Liquidity and Capital Resources
The accompanying unaudited 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. At
To date we have funded operations primarily through the sale of equity in
private placements, debt, and revenue generated by our services. During the six
months ended
We believe that we have sufficient liquidity and capital resources to meet our requirements for at least the next 12 months from the filing date of this Quarterly Report on Form 10-Q, as well as our longer-term expected future cash requirements and obligations.
Our future capital requirements, both near-term and long-term, will depend on many factors, in addition to our recurring operating expenses, including our growth rate, the continued expansion of sales and marketing activities, the introduction of new and enhanced products and service offerings, and the costs of any future acquisitions in complementary businesses and technologies. To the extent existing cash and cash equivalents are not sufficient to fund future activities, we will seek to raise additional funds through equity, equity-linked, or debt financings. Any additional equity financing may be dilutive to our existing stockholders. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results, and financial condition would be adversely affected.
Working Capital (Deficit)/Surplus
Our working capital deficit as of
As of
June 30,
2022 December 31, 2021
Current assets $ 18,547,284 $ 9,807,301
Current liabilities 19,315,593 5,141,561
Working capital (deficit)/surplus
The increase in current assets is primarily due to an increase in cash and cash
equivalents and prepaid expenses and other current assets of
25 Cash Flows
Our cash flows for the six months ended
Six Months ended
June 30,
2022 2021
Net cash used in operating activities $ (3,574,474 ) $ (2,646,739 )
Net cash used in investing activities (5,114,700 ) -
Net cash provided by financing activities 14,781,284 3,174,458
Effect of exchange rates on cash and cash equivalents (48,625 ) -
Increase in cash $ 6,043,485 $ 527,719
Operating Activities
Net cash used in operating activities was
Investing Activities
Net cash used in investing activities of
Financing Activities
Net cash provided by financing activities for the six months ended
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenue, or operating results during the periods presented.
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
six months ended
Use of Estimates
The preparation of financial statements in conformity with
26 Fair Value Measurement
The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Business Combination
We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
Intangible Assets
Intangible assets are comprised of trademarks, customer bases, non-compete agreements, and intellectual property with original estimated useful lives with a range of 2 to 10 years. Once placed into service, we amortize the cost of intangible assets over their estimated useful lives on a straight-line basis.
27
Impairment of Long-lived Assets
We will periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review and at least annually. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. Awards granted to directors are treated on the same basis as awards granted to employees.
Revenue Recognition
Our agreements with clients are primarily service contracts that range in duration from a few months to one year. We recognize revenue when control of these services is transferred to the client for an amount, referred to as the transaction price, which reflects the consideration to which we are expected to be entitled in exchange for those goods or services.
A contract with a client exists only when:
? the parties to the contract have approved it and are committed to perform
their respective obligations;
? we can identify each party's rights regarding the distinct services to be
transferred ("performance obligations");
? we can determine the transaction price for the services to be transferred; and
? the contract has commercial substance, and it is probable that we will collect
the consideration to which it will be entitled in exchange for the goods or
services that will be transferred to the client.
For the majority of our contracts, we receive non-refundable upfront payments. We do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between the time of transfer of the promised goods or services to the client and the time the client pays for these goods or services to be generally one year or less. Our credit terms to clients generally average 30 days, although in some cases payments are required in 15 days.
We do not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:
Security Managed Services.
Security managed services revenue primarily consist 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.
28 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.
New and Recently Adopted Accounting Pronouncements
Any new and recently adopted accounting pronouncements are more fully described
in Note 2 to our unaudited condensed consolidated financial statements herein
for the quarter ended
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.
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