CISO Global, Inc. (formerly Cerberus Cyber Sentinel Corporation) — Q2 2022 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and six months ended June 30, 2022. The company provides cybersecurity and compliance services, including managed security, security operations center services, vCISO services, incident response, forensics, assessments, training, and professional services. The company completed the True Digital acquisition in January 2022 and the Creatrix acquisition on June 1, 2022. The filing refers to the registrant as Cerberus Cyber Sentinel Corporation, although the requested company name is CISO Global, Inc.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $11.2 million, versus $2.9 million | $20.6 million, versus $5.5 million |
| Gross profit | $0.8 million, versus $0.7 million | $0.8 million, versus $1.4 million |
| Gross margin | 6.8%, versus 25.1% | 4.0%, versus 25.0% |
| Loss from operations | $(7.3) million, versus $(2.1) million | $(15.3) million, versus $(3.8) million |
| Net loss | $(7.3) million, versus $(2.1) million | $(15.4) million, versus $(3.9) million |
| Net loss per share | $(0.05), versus $(0.02) | $(0.11), versus $(0.03) |
- Security managed services revenue increased 399% in Q2 and 365% for the six-month period, primarily from acquisitions and organic customer growth. Professional services revenue declined 2% in Q2 but increased 38% year to date.
- Operating expenses were $8.1 million in Q2 and $16.1 million for the six months, including stock-based compensation of $2.4 million and $5.0 million, respectively. Cost of revenue also included stock-based compensation of $1.8 million and $3.9 million.
- Cash and cash equivalents were $8.8 million at June 30, 2022, compared with $2.7 million at December 31, 2021.
- Operating cash flow was $(3.6) million for the six months, compared with $(2.6) million in the prior-year period. Investing cash flow was $(5.1) million, primarily reflecting cash paid for acquisitions. Financing cash flow was $14.8 million.
- Working capital was $(0.8) million at June 30, 2022, compared with positive working capital of $4.7 million at year-end 2021. The company reported an accumulated deficit of $59.4 million.
- Total liabilities were $22.7 million. Debt included $9.4 million of loans payable, $2.5 million of current convertible notes payable, a $0.4 million line of credit, and related-party notes payable. Future minimum payments for long-term debt and the line of credit totaled $12.7 million before discounts.
Material changes versus the prior comparable period
- Revenue increased $8.3 million, or approximately 281%, in Q2 and $15.0 million, or approximately 273%, for the six months, primarily due to acquisitions.
- Despite substantially higher revenue, Q2 gross profit increased only $26,000 and the six-month gross profit declined $563,000. Gross margin contracted materially because of higher service delivery costs, payroll, hardware and software costs, and stock-based compensation.
- Operating losses increased $5.2 million in Q2 and $11.5 million for the six-month period. Management attributed higher expenses to acquired headcount, back-office expansion, professional fees, marketing, and increased equity compensation.
- Goodwill increased from $16.8 million at December 31, 2021 to $58.5 million at June 30, 2022, primarily from acquisition accounting. The purchase price allocations for True Digital and Creatrix remained preliminary and may change.
- Common shares outstanding increased to 137.1 million at June 30, 2022 from 125.9 million at December 31, 2021. The company also had 36.1 million outstanding stock options and 144,200 warrants, creating potential dilution.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects to incur additional losses through the end of 2022. It stated that existing liquidity and capital resources were expected to satisfy requirements for at least the next 12 months from the filing date, but future acquisitions and growth may require additional equity, equity-linked, or debt financing.
- A $300 million shelf registration statement became effective in June 2022, including a potential $100 million at-the-market offering. No securities had been sold under the registration statement as of June 30, 2022. Future financing could dilute existing shareholders.
- The company entered into $5.0 million of secured bridge loans in June 2022, bearing 4% interest and maturing December 14, 2022. A $1.5 million convertible note was extended to October 27, 2022, and a new $1.0 million convertible note matures in June 2023.
- The financial statements were prepared on a going-concern basis. The company had continuing operating losses, negative operating cash flow, a working-capital deficit, and substantial near-term debt obligations.
- Disclosure controls and procedures were concluded to be ineffective because material weaknesses in internal control over financial reporting remained unresolved. The weaknesses involved inadequate risk-assessment procedures and insufficient documentation of key financial-reporting policies and procedures.
- In July 2022, after the reporting period, the company acquired CyberViking for 499,000 shares. The acquisition specializes in application security, incident response, threat hunting, and security operations centers.
- Key risks include integration and execution of acquisitions, the ability to achieve profitability, access to capital, retention of cybersecurity personnel, goodwill impairment, potential customer spending reductions, inflation, interest-rate increases, geopolitical volatility, and foreign-currency effects. The company recorded a $1.3 million foreign-currency translation loss for the six-month period.
- The company reported no material pending legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the company’s current legal name and whether the filing’s Cerberus Cyber Sentinel Corporation name has been formally changed to CISO Global, Inc.
- Assess whether the large increase in revenue from acquisitions can translate into sustainable gross-margin improvement and operating profitability.
- Review the maturity and refinancing requirements for the $12.7 million of disclosed future debt payments, especially the bridge loans and convertible notes due in late 2022 and 2023.
- Monitor cash burn, the working-capital deficit, and the company’s ability to fund operations and acquisitions without additional dilutive financing.
- Validate the preliminary purchase price allocations and the recoverability of the $58.5 million goodwill balance and $8.2 million net intangible asset balance.
- Track remediation of the material weaknesses in internal controls and any resulting restatements or reporting delays.
- Consider dilution from outstanding options, warrants, convertible debt, the shelf registration statement, and shares issued for acquisitions.