CISO Global, Inc. (formerly Cerberus Cyber Sentinel Corporation) — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended March 31, 2022, with comparative results for the three months ended March 31, 2021. The company provides cybersecurity and compliance services, including managed security, SOC services, compliance, vCISO, incident response, assessments, forensics, and training. The filing identifies the registrant as Cerberus Cyber Sentinel Corporation; the company subsequently uses the CISO name and trades on Nasdaq under “CISO.”
Growth is being pursued through acquisitions, direct hiring, and stock-based compensation. On January 19, 2022, the company acquired True Digital, expanding its managed cybersecurity and compliance operations.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $9.329 million | $2.560 million | +$6.770 million, 265% |
| Security managed services revenue | $8.052 million | $1.872 million | +$6.180 million, 330% |
| Professional services revenue | $1.277 million | $0.688 million | +$0.589 million, 86% |
| Gross profit | $48,717 | $719,690 | -$670,973 |
| Gross margin | 0.5% | 28.1% | Down approximately 27.6 percentage points |
| Operating loss | $(7.912) million | $(1.708) million | Loss increased $6.203 million |
| Net loss | $(7.943) million | $(1.777) million | Loss increased $6.166 million |
| Comprehensive loss | $(7.040) million | $(1.777) million | Includes $0.902 million currency translation gain |
| Basic loss per share | $(0.06) | $(0.02) | Worsened |
| Cash flow from operations | $(3.016) million | $(1.130) million | Higher cash use |
Cost of revenue was $9.281 million, or approximately 99.5% of revenue. Operating expenses were $7.960 million. Stock-based compensation totaled $4.687 million, including $2.122 million in cost of revenue and $2.566 million in operating expenses, compared with $0.839 million in Q1 2021.
At March 31, 2022, cash and cash equivalents were $3.863 million, total current assets were $14.090 million, and current liabilities were $10.887 million, producing working capital of $3.202 million. Total assets were $83.630 million, including $59.274 million of goodwill. Total liabilities were $16.370 million, and stockholders’ equity was $67.260 million.
Reported debt and financing obligations included $5.492 million of loans payable, $369,829 drawn on a line of credit, a $1.500 million related-party convertible note, and a $419,472 related-party note payable. The filing reports $7.781 million of future minimum payments under the line of credit and notes payable, including $2.502 million classified as current. Lease liabilities totaled $414,670.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from the Arkavia and True Digital acquisitions and expanded services to existing customers.
- Gross profit declined sharply despite revenue growth because direct software and hardware costs, payroll, and stock-based compensation increased significantly.
- Operating expenses increased by $5.532 million, driven by higher employee costs, professional fees, marketing, SEC and Nasdaq-related costs, and stock-based compensation.
- Cash used in operating activities increased to $3.016 million from $1.130 million.
- Investing cash outflows were $5.022 million, primarily related to the True Digital acquisition; there were no investing cash outflows in Q1 2021.
- Financing activities provided $9.011 million, principally from the January public offering, compared with $3.260 million in Q1 2021.
- Shares issued and outstanding increased to 135.458 million at March 31, 2022 from 125.853 million at December 31, 2021. The company also had 34.820 million outstanding stock options and 144,200 warrants, creating substantial potential dilution.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects to incur additional losses through the end of 2022 and states that gross profit is trending negatively, primarily because of increased stock compensation associated with sales activity. Management expects existing cash resources and operating cash flows to support planned expenditures for at least 12 months from issuance of the financial statements, but acknowledges that additional capital will likely be required for future acquisitions and may be unavailable on acceptable terms.
The True Digital acquisition had total consideration of $40.879 million, consisting of cash and common stock, and generated provisional goodwill of $41.766 million. The company had not obtained a third-party valuation at the filing date, so the purchase price allocation and goodwill could change.
The company completed a $10.300 million public offering, receiving approximately $9.471 million in net proceeds after fees and expenses. The proceeds were intended for acquisitions, sales, marketing, and general corporate purposes. The related-party $1.500 million convertible note was extended to October 27, 2022.
Management concluded that disclosure controls and procedures were not effective as of March 31, 2022 because of continuing material weaknesses involving risk-assessment procedures and documentation of financial reporting policies and procedures. Management plans to address these weaknesses by improving staffing, policies, procedures, and monitoring.
Other risks include acquisition integration, dependence on cybersecurity talent, the need to attract and retain customers, potential future financing dilution, goodwill impairment, customer and technology execution risk, regulatory complexity, foreign-currency exposure, and the company’s history of operating losses. The filing reports no material pending legal proceedings and no material subsequent events through the issuance date.
Important Facts for Investors to Verify
- Reconcile the filing’s professional-services revenue presentation: the financial statements report $1.277 million for Q1 2022, while one MD&A table states $1.227 million.
- Assess whether the near-zero gross margin is temporary or reflects the sustainable economics of the acquired and expanded service base.
- Review True Digital’s finalized purchase price allocation, goodwill valuation, and any subsequent impairment risk.
- Evaluate liquidity against expected operating losses, debt maturities, acquisition plans, and the need for additional financing.
- Quantify dilution from outstanding options, warrants, acquisition shares, stock compensation, and potential conversion of the related-party convertible note.
- Monitor remediation of the disclosed material weaknesses in internal control over financial reporting.
- Review the terms, collateral, and maturity dates of the line of credit, notes payable, related-party obligations, and lease commitments.