Business Context and Reporting Period
Cerberus Cyber Sentinel Corporation, the predecessor name associated with CISO Global, Inc., filed this unaudited Form 10-Q for the three and nine months ended September 30, 2020. The company provides technology-agnostic cybersecurity managed services and consulting, including compliance, risk assessments, penetration testing, SOC services, training and remediation. It does not sell cybersecurity products.
The 2020 results include TalaTek from October 1, 2019, Technologyville from May 25, 2020, and Clear Skies Security from August 1, 2020. These acquisitions make comparisons with 2019 substantially less comparable.
Financial Results and Key Metrics
| Metric | Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 |
|---|---|---|---|---|
| Revenue | $2.010 million | $0.281 million | $4.628 million | $0.633 million |
| Gross profit | $0.698 million | $0.090 million | $1.683 million | $0.311 million |
| Gross margin | 34.7% | 32.0% | 36.4% | 49.1% |
| Loss from operations | $(1.030) million | $(0.571) million | $(2.419) million | $(0.989) million |
| Operating margin | (51.3%) | (203.1%) | (52.3%) | (156.2%) |
| Net loss | $(1.035) million | $(0.575) million | $(2.420) million | $(0.999) million |
- Revenue was composed of $1.347 million of managed services and $3.281 million of consulting services for the nine-month period. Gap and risk assessments generated approximately $2.917 million, including approximately $2.497 million from public-sector customers.
- Operating expenses were $1.728 million for the third quarter and $4.102 million for the nine-month period. Nine-month expenses included $1.062 million of stock-based compensation, $1.525 million of salaries and benefits, and $685,821 of professional fees.
- Cash used in operating activities was $1.158 million for the nine months ended September 30, 2020, compared with cash provided of $31,571 in the prior-year period. Cash flow benefited from $1.062 million of non-cash stock compensation and $364,961 of higher accounts payable and accrued expenses.
- Cash increased to $2.416 million at September 30, 2020 from $1.877 million at December 31, 2019, primarily due to $790,000 of equity proceeds and $709,600 of Paycheck Protection Program borrowings.
- Current assets were $3.542 million and current liabilities were $1.973 million, producing working capital of $1.569 million. Accounts receivable were $978,362, net of a $70,847 allowance.
- Total liabilities were $2.026 million. Loans payable totaled $891,959, consisting of $853,070 current and $38,889 long-term; a related-party note payable added $109,787, excluding accrued related-party interest of $20,480.
- Goodwill increased to $3.008 million from $922,579 at year-end, primarily from acquisitions. No impairment was recorded during the period.
- There were 114.310 million common shares outstanding at September 30, 2020 and 115.035 million reported outstanding as of November 16, 2020. An additional 21.436 million stock options were outstanding at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased by $3.995 million, or approximately 631%, primarily because the 2019 period did not include TalaTek, Technologyville or Clear Skies. Cerberus standalone revenue also increased approximately 93% according to management.
- Third-quarter revenue increased by $1.728 million, or approximately 614%, for the same acquisition-related reason. Acquired businesses contributed approximately $1.673 million of third-quarter revenue.
- Nine-month gross margin declined from 49.1% to 36.4%, reflecting the addition of acquired operations and higher payroll and delivery costs. Cost of revenue increased by $2.623 million.
- The operating loss widened to $2.419 million from $989,476, reflecting higher personnel, professional, administrative and stock-based compensation costs.
- Stockholders’ equity increased to $5.639 million from $3.919 million despite the larger accumulated deficit, primarily because of equity issued for cash, acquisitions and compensation.
- The company issued 3.392 million shares for the Technologyville acquisition and 2.330 million shares for the Clear Skies acquisition. It also raised $790,000 through private equity sales.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue, earnings or margin guidance was provided. Management stated that it expected to incur further losses through the end of 2020.
- Management intends to pursue additional acquisitions of small-to-medium-sized cybersecurity service firms, but this strategy depends on financing, acquisition execution and integration.
- The company stated that current cash resources and commitments were expected to support planned operations for at least twelve months from issuance of the financial statements, while acknowledging that additional funding may be required sooner.
- The filing identifies an accumulated deficit of approximately $3.87 million, negative operating cash flow, continuing expected losses and dependence on equity financing, operating revenue and government-backed loans as liquidity concerns.
- Revenue concentration was significant: two customers represented 68% of nine-month revenue, while two customers represented 56% of accounts receivable at September 30, 2020. The filing identifies major customer contributions to several large gap-assessment and managed-service contracts.
- COVID-19 could materially affect operations, customer demand, employee productivity and liquidity, although the filing states that the magnitude and duration of the impact could not be determined.
- The Clear Skies purchase-price allocation was provisional and subject to third-party valuation. The recorded $729,247 of goodwill may be reallocated among goodwill and identifiable intangible assets during the measurement period.
- Paycheck Protection Program loans totaling $843,800 were outstanding at September 30, 2020. Forgiveness was subject to application requirements and lender or governmental approval; otherwise, repayment obligations apply.
- Management concluded that disclosure controls and procedures were not effective because of material weaknesses in internal control over financial reporting previously disclosed in the 2019 Form 10-K.
- Subsequent events included the issuance of 725,000 shares for services and commitments for $291,010 of additional equity financing in November 2020. The shares related to the November financing had not been issued as of the report date.
- No material litigation was reported, and management stated that there were no material off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether acquired revenue is recurring and whether customer concentration, particularly in gap and risk assessments, will persist.
- The company’s ability to convert gross profit into positive operating cash flow and achieve profitability after acquisition-related and stock-based costs.
- The status, eligibility and potential forgiveness of the $843,800 of Paycheck Protection Program loans.
- The final valuation of Clear Skies acquired assets, liabilities, goodwill and identifiable intangible assets, including any future impairment risk.
- Remediation progress for the disclosed material weaknesses in internal controls.
- Available liquidity after considering continuing operating losses, debt maturities, related-party obligations and the possibility of additional equity financing and dilution.
- The effect of the 21.436 million outstanding options and subsequent share issuances on ownership and potential dilution.