CISO (CISO) - 2025 Q1 - Quarterly Report

Part I. Financial Information Financial Statements This section presents the unaudited condensed consolidated financial statements for Q1 2025, revealing a $5.4 million net loss, a significant increase in gross profit to $1.8 million, a $15.3 million working capital deficit, and a 'going concern' warning Condensed Consolidated Balance Sheets As of March 31, 2025, total assets stood at $27.8 million, total liabilities at $20.8 million, with a working capital deficit improving to $15.3 million, and stockholders' equity significantly increasing to $7.0 million due to debt conversion | | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $5,010,286 | $3,481,071 | | Total Assets | $27,819,282 | $26,654,456 | | Total Current Liabilities | $20,357,544 | $24,955,647 | | Total Liabilities | $20,839,917 | $25,505,392 | | Total Stockholders' Equity | $6,979,365 | $1,149,064 | - Cash and cash equivalents increased to $1.79 million from $0.99 million at the end of 2024[15] - The decrease in current liabilities was mainly driven by a reduction in derivative liability from $2.1 million to $79,919 and a decrease in loans payable from $2.7 million to $1.0 million[15] Condensed Consolidated Statements of Operations and Comprehensive Loss For Q1 2025, total revenue decreased by 10.7% to $7.2 million, yet gross profit more than doubled to $1.8 million, resulting in an improved net loss of $5.4 million compared to $6.6 million in Q1 2024 | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total Revenue | $7,162,322 | $8,025,414 | | Total Gross Profit | $1,781,602 | $706,222 | | Loss from Operations | ($1,709,745) | ($4,897,099) | | Net Loss | ($5,379,604) | ($6,609,199) | | Net Loss Per Share (Basic & Diluted) | ($0.38) | ($0.55) | - The improved net loss was influenced by a $5.4 million positive change in the fair value of derivative liability, which was offset by a significant increase in interest expense to $8.2 million[17] Condensed Consolidated Statements of Cash Flows In Q1 2025, net cash used in operating activities significantly increased to $3.0 million, while financing activities provided $3.7 million, leading to a quarter-end cash balance of $1.8 million, an increase of $0.8 million | Cash Flow Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | ($2,953,508) | ($1,408,633) | | Net cash used in investing activities | $0 | ($75,571) | | Net cash provided by financing activities | $3,747,779 | $2,014,034 | | Net increase in cash | $794,271 | $454,547 | - Financing activities included $1.7 million from the sale of common stock and $5.0 million from a related-party convertible note[20] - A significant non-cash transaction was the conversion of $7.7 million of debt into equity[20] Notes to Condensed Consolidated Financial Statements The notes provide critical context, including a 'going concern' warning, details on revenue streams, significant debt obligations, key related-party transactions like a $5 million convertible note, and subsequent events including further debt conversion and a new loan agreement - Going Concern: The financial statements were prepared on a going concern basis, but the company's recurring losses raise substantial doubt about its ability to continue Future viability depends on raising additional funding and achieving profitability[27][28][29] - Debt and Financing: The company has numerous loans and convertible notes In December 2024, it entered a securities purchase agreement for up to $8.125 million in convertible notes, of which $7.7 million was converted to equity during Q1 2025[85][89] - Related Party Transactions: A $5 million convertible note is held by Hensley & Company, whose President is a director of CISO Global In March 2025, the note's maturity was extended to March 2026[54][78] - Subsequent Events: On April 1, 2025, the remaining $420,000 of a convertible note was converted to common stock On April 14, 2025, the company entered into a new Loan and Security Agreement with Aion for up to $3.5 million[103][104] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2025 financial results, highlighting a 10.7% revenue decrease, a significant gross profit increase to $1.8 million, reduced operating loss, ongoing liquidity challenges, and critical accounting policies - Key highlights for Q1 2025 include the repayment of two term loans with interest rates exceeding 100%, the conversion of $7.7 million of convertible debt to equity, and a significant increase in gross profit to $1.8 million[108] Results of Operations Total revenue for Q1 2025 decreased by 10.7% to $7.2 million, primarily due to lower hardware sales, yet gross profit surged to $1.8 million due to a 26.5% reduction in cost of revenue and a 37.7% cut in operating expenses | Revenue Stream | Q1 2025 Revenue | YoY Change | Reason for Change | | :--- | :--- | :--- | :--- | | Security managed services | $6,445,233 | -10% | Lower hardware and software sales | | Professional services | $569,823 | -26% | Fewer customer projects | | Cybersecurity software | $147,266 | +47% | Increase in Checklight software subscriptions | - Total cost of revenue decreased by $1.9 million (26.5%) YoY, primarily due to lower hardware/software costs, reduced use of consultants, and lower payroll costs from headcount reductions[107][112][113] - Selling, general, and administrative (SG&A) expenses decreased by $1.3 million (33%) YoY, mainly due to lower compensation, insurance, and lease costs resulting from 2024 headcount reductions[117] Liquidity and Capital Resources The company faces significant liquidity challenges with a $15.3 million working capital deficit, a $5.4 million net loss, and $3.0 million cash used in operations, leading to a reiterated 'going concern' warning and plans for future equity or debt financing limited by 'baby shelf' rules | Metric | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Working Capital Deficit | ($15,347,258) | ($21,474,576) | - The company's independent auditors have expressed substantial doubt about its ability to continue as a going concern due to recurring losses and the need to raise additional capital[118][125] - Future funding plans may include equity or debt financing, but access to its S-3 shelf registration is limited to one-third of its public float (under $75M) in any 12-month period due to 'baby shelf' rules[119][126] Critical Accounting Policies and Estimates Management identifies key accounting policies requiring significant estimates and judgments, including revenue recognition, valuation of goodwill and intangible assets, impairment reviews, fair value measurements for derivative liabilities, and stock-based compensation expense calculations - Significant estimates include the allowance for credit losses, carrying value of intangible assets and goodwill, valuation of convertible notes and derivative liabilities, and assumptions for the Black-Scholes model[129] - Goodwill and indefinite-lived intangible assets are assessed for impairment annually or more frequently if triggering events occur[131] - Revenue is recognized when control of services is transferred to the client and is disaggregated into three categories: Security Managed Services, Professional Services, and Cybersecurity Software[137][140] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2025, with no changes to internal control over financial reporting identified during the quarter - Based on an evaluation by the principal executive and financial officers, the company's disclosure controls and procedures were deemed effective as of March 31, 2025[148] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[149] Part II. Other Information Legal Proceedings The company is not involved in any material legal proceedings - As of the filing date, the company is not involved in any material legal proceedings[151] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2024 Annual Report on Form 10-K - There have been no material changes from the risk factors disclosed in the company's 2024 Annual Report on Form 10-K[152] Unregistered Sales of Equity Securities and Use of Proceeds In March 2025, the company issued 100,000 shares of common stock to TraDigital Marketing Group as compensation for investor relations services - In March 2025, 100,000 shares of common stock were issued to a marketing group for investor relations services[153] Other Items (Defaults, Mine Safety, Other Info) The company reported no defaults upon senior securities, mine safety disclosures were not applicable, and No directors or officers adopted or terminated a Rule 10b5-1 trading plan during the quarter - There were no defaults upon senior securities during the period[154] - No directors or officers adopted or terminated a Rule 10b5-1 trading agreement or non-Rule 10b5-1 trading agreement during the quarter[156]