Business Context and Reporting Period
The filing is a Form 10-Q for Cerberus Cyber Sentinel Corporation, the predecessor name of CISO Global, Inc., covering the three and six months ended June 30, 2021. The company provides technology-agnostic cybersecurity managed services and consulting, including risk assessments, compliance auditing, penetration testing, SOC services, training, and technology consulting. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $2.950 million | $1.550 million | $5.509 million | $2.619 million |
| Gross profit | $0.937 million | $0.692 million | $1.758 million | $0.985 million |
| Gross margin | 31.8% | 44.6% | 31.9% | 37.6% |
| Loss from operations | $(2.053) million | $(0.552) million | $(3.762) million | $(1.389) million |
| Net loss | $(2.117) million | $(0.546) million | $(3.894) million | $(1.385) million |
| Net loss per share | $(0.02) | $(0.00) | $(0.03) | $(0.01) |
| Operating cash flow | Not separately provided | Not separately provided | $(2.647) million | $(0.740) million |
Six-month revenue increased 110.4%, primarily from the inclusion of Techville, Clear Skies, and Alpine for additional periods. Consulting revenue increased to $4.514 million from $1.864 million, while managed services revenue increased to $0.995 million from $0.754 million. Gap and risk assessment services generated approximately $4.186 million, or most of six-month revenue.
At June 30, 2021, cash and cash equivalents were $5.725 million, accounts receivable were $1.609 million, and working capital surplus was $3.532 million. Total assets were $13.996 million and total liabilities were $5.168 million. The company had an accumulated deficit of $8.760 million.
Debt included a $3.0 million related-party convertible note, net carrying value of $2.963 million, due December 31, 2021 and convertible at $2.00 per share; approximately $1.015 million of loans payable classified as long-term; and $0.152 million of lease liabilities. The company also had $0.801 million of PPP loans outstanding at June 30, 2021, subsequently approved for forgiveness.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased $1.399 million, or approximately 90%, while six-month revenue increased $2.891 million, or approximately 110%.
- Gross profit increased in absolute dollars, but gross margin declined because payroll and other delivery costs grew faster than revenue.
- Six-month operating expenses increased to $5.520 million from $2.373 million. Selling, general and administrative expense rose to $3.155 million, and stock-based compensation increased to $1.730 million from $0.669 million.
- Six-month operating cash use increased to $2.647 million from $0.740 million, reflecting higher losses and a $0.618 million increase in accounts receivable.
- Financing activities provided $3.174 million, principally from the issuance of 1.625 million common shares for $3.250 million. Shares outstanding increased to 117.730 million from 116.105 million at December 31, 2020.
- Cerberus standalone revenue declined 14% for the first six months and 40% for the second quarter because a major customer reduced required services. Acquired businesses contributed substantially to consolidated growth.
Guidance, Outlook, Risks, and Unusual Items
- Management expects additional losses through the end of 2021 despite positive revenue and gross-profit trends. It believes current cash resources and commitments should support planned operations for at least twelve months from issuance of the financial statements, but acknowledges that additional funding may be required.
- The company intends to pursue additional acquisitions of small- and medium-sized cybersecurity service firms. On August 2, 2021, it completed the VelocIT acquisition for up to 2,566,778 shares, subject to a 256,678-share holdback.
- The company received subsequent approval for forgiveness of $801,200 of PPP loans.
- Liquidity risks include recurring operating losses, negative operating cash flow, the December 2021 maturity of the related-party convertible note, reliance on equity financing, and concentration of revenue. One client represented 30% of six-month 2021 revenue.
- As of June 30, 2021, approximately $4.761 million of cash exceeded FDIC insurance limits.
- Goodwill was $4.101 million, and the company had not obtained a third-party valuation for the Alpine acquisition; the purchase price allocation and goodwill may change.
- Disclosure controls and procedures were not effective because of material weaknesses in internal control over financial reporting identified in the prior Form 10-K. Management reported additional finance staff and the establishment of an audit committee as remediation efforts.
- The filing reports no material pending litigation, no defaults upon senior securities, and no material off-balance-sheet arrangements.
- The filing contains an internal inconsistency: the consolidated statement reports six-month gross profit of $1.758 million, while one MD&A table shows $1.768 million. The financial statement figure should be verified against the filed XBRL and original filing.
Investor Verification Priorities
- Verify the company’s current legal name, ticker, exchange listing, and relationship to the historical Cerberus Cyber Sentinel entity.
- Reconcile revenue, gross profit, and gross-margin trends excluding acquisition timing effects and determine the sustainability of gap-assessment revenue.
- Review the status, maturity, conversion terms, and related-party nature of the $3.0 million convertible note.
- Confirm PPP loan forgiveness accounting and any resulting gain or debt extinguishment effects.
- Assess the material weaknesses in internal controls and the progress of remediation.
- Evaluate dilution from outstanding options of 25.844 million shares, the convertible note, the VelocIT consideration, and subsequent option grants.
- Review customer concentration, accounts receivable collection, acquisition integration, and the company’s need for additional capital.