CISO Global, Inc. (formerly Cerberus Cyber Sentinel Corporation) — 2022 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended December 31, 2022, filed March 31, 2023. The registrant name in the filing is Cerberus Cyber Sentinel Corporation; the request identifies the company as CISO Global, Inc. The company provides cybersecurity and compliance services, including managed security, SOC services, vCISO services, compliance, incident response, forensics, technical assessments, and training. Its growth strategy relies heavily on acquiring and integrating cybersecurity businesses.
During 2022, the company completed acquisitions of True Digital Security, Creatrix, CyberViking, CUATROi, and NLT Secure. It had 449 employees at December 31, 2022, including 443 full-time employees.
Financial performance and condition
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $46.5 million | $15.1 million | +$31.4 million, or 207% |
| Security managed services revenue | $40.9 million | $11.8 million | +$29.1 million, or 247% |
| Professional services revenue | $5.6 million | $3.3 million | +$2.3 million, or 68% |
| Gross profit | $2.7 million | $1.8 million | +$0.9 million |
| Gross margin | 5.9% | 11.9% | Down approximately 6.0 percentage points |
| Loss from operations | $(33.1) million | $(39.8) million | Improved by $6.6 million |
| Net loss | $(33.8) million | $(39.1) million | Improved by $5.4 million |
| Basic and diluted loss per share | $(0.24) | $(0.33) | Improved |
| Cash flow from operations | $(10.7) million | $(7.4) million | Outflow increased by $3.3 million |
| Cash and cash equivalents | $1.8 million | $2.7 million | Down $0.9 million |
| Working capital | $(8.8) million | $4.7 million | Decline of $13.5 million |
Operating expenses were $35.9 million, including $9.9 million of stock-based compensation. Cost of revenue was $43.8 million, including $20.0 million of payroll and $7.5 million of stock-based compensation. The operating margin was approximately negative 71.2%, and the net margin was approximately negative 72.6%.
Total liabilities were $28.1 million at year-end, including $12.0 million of loans payable, $2.6 million of current convertible notes payable, $8.3 million of accounts payable and accrued expenses, and $4.5 million of deferred revenue and other current liabilities. Debt maturities shown in the filing totaled $10.3 million in 2023 and $14.6 million over all stated periods. The company reported an accumulated deficit of $77.8 million.
Financing activities generated $15.8 million in cash, primarily from $10.7 million of common-stock sales, $5.0 million of loan proceeds, $1.0 million of convertible-note proceeds, and $1.5 million from option exercises. Investing activities used $6.0 million, primarily for acquisitions. The company had no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue more than tripled, primarily because of five acquisitions and growth from new and existing customers.
- Security managed services became the dominant revenue stream, representing approximately 88% of 2022 revenue.
- Gross profit increased, but gross margin declined substantially because cost of revenue grew faster than revenue, including increased payroll and stock-based compensation.
- Operating loss and net loss improved partly because 2021 included a $22.1 million goodwill impairment charge. No goodwill impairment was recorded in 2022.
- Interest expense increased 122% to $680,921 because of debt assumed in acquisitions and $6.0 million of short-term borrowing obtained to fund working capital.
- Operating cash outflow worsened despite the lower net loss, while cash and working capital declined materially.
- Common shares outstanding increased from 125.9 million to 146.4 million, reflecting equity financing, acquisition consideration, option exercises, and equity issued for services. Additional dilution risk remained from 36.4 million outstanding options and 144,200 warrants.
- Goodwill increased from $16.8 million to $76.7 million, primarily from 2022 acquisitions, increasing exposure to future impairment charges.
Guidance, outlook, management commentary, risks, and unusual items
Management stated that the company expected to incur further losses through the end of 2023. Management planned to reduce overhead, improve operational efficiency, grow revenue, pursue acquisitions, and raise additional debt or equity financing, but provided no quantified revenue, earnings, or cash-flow guidance.
The auditors included an explanatory paragraph regarding substantial doubt about the company’s ability to continue as a going concern. The company cited recurring losses, negative operating cash flow, a $8.8 million working-capital deficit, limited cash, and dependence on additional financing. Management stated that it was pursuing financing but provided no assurance that funding would be available on acceptable terms.
- On March 15, 2023, the company obtained a $2.0 million cash advance requiring weekly payments of $99,398 until $2.87 million had been repaid; the estimated effective interest rate was 155.11%, secured by specified accounts receivable.
- The Bell Bank $5.0 million note was not repaid by its March 14, 2023 maturity date and went into default, increasing the interest rate from 4.0% to 7.5%. It was subsequently repaid using proceeds from a related-party convertible note and existing cash.
- On March 20, 2023, the company issued Hensley & Company, an entity affiliated with a director, a $5.0 million unsecured convertible note bearing 10% interest and convertible at $1.20 per share, with a 24% default rate.
- A $1.5 million convertible note held by Neil Stinchcombe was scheduled for repayment in three $500,000 installments beginning March 31, 2023; late payments could trigger a 24% default rate.
- On March 29, 2023, Nasdaq notified the company that its share price had remained below $1.00 for 30 consecutive business days. The initial compliance period ran through September 25, 2023, with a possible additional period and potential reverse stock split. Failure to regain compliance could result in delisting.
- The company reported material weaknesses in internal control over financial reporting related to inadequate risk-assessment procedures and insufficient documentation of critical policies and procedures. Management planned to add expertise and formalize controls. The auditor was not required to provide an internal-control attestation.
- On March 30, 2023, the Chief Operating Officer separated from the company and Kyle J. Young was appointed interim Chief Operating Officer.
- The company entered into a definitive agreement to acquire RAN Security in January 2023, subject to customary closing conditions and regulatory approvals.
- The company faces risks from acquisition integration, talent shortages, cybersecurity incidents, international operations and foreign exchange, competition, regulatory changes, debt service, customer retention, potential litigation, dilution, stock-price volatility, and Nasdaq listing compliance.
Most important facts for an investor to verify
- Whether the company has secured sufficient financing and operating cash flow to address the going-concern uncertainty and near-term debt maturities.
- The current status and effective cost of the Cedar Advance facility, Bell Bank repayment, Stinchcombe note repayment, and other debt obligations.
- Whether the company regained Nasdaq minimum-bid-price compliance and whether any reverse stock split or delisting action occurred.
- Acquisition-level revenue, profitability, cash requirements, integration progress, and the valuation support for the $76.7 million goodwill balance.
- Whether gross margins and operating cash flow improved after the 2022 acquisition activity and cost-reduction initiatives.
- The extent of actual and potential dilution from stock issuances, options, warrants, convertible notes, and acquisition consideration.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- The closing status and financing terms of the planned RAN Security acquisition.