Cerberus Cyber Sentinel Corporation (now identified in the request as CISO Global, Inc.) — Q2 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2020, with comparative periods ended June 30, 2019. The registrant named in the filing is Cerberus Cyber Sentinel Corporation, a cybersecurity services company providing managed services, consulting, compliance auditing, vulnerability assessment, penetration testing, SOC services, remediation, and training. The company does not sell cybersecurity products and pursues a technology-agnostic, acquisition-driven growth strategy.
The consolidated business included GenResults, TalaTek, and Technologyville. TalaTek was acquired effective October 1, 2019, and Technologyville was acquired on May 25, 2020 in exchange for 3,392,271 common shares. The filing was signed August 14, 2020; 111,654,771 common shares were outstanding at that date.
Financial performance and key metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $1,550,487 | $154,318 | $2,618,708 | $352,131 |
| Gross profit | $691,986 | $66,528 | $984,966 | $220,678 |
| Gross margin | 44.6% | 43.1% | 37.6% | 62.7% |
| Loss from operations | $(551,666) | $(520,229) | $(1,388,529) | $(418,072) |
| Operating margin | (35.6%) | (337.2%) | (53.0%) | (118.7%) |
| Net loss | $(546,103) | $(523,281) | $(1,385,247) | $(424,139) |
| Net loss per diluted share | $(0.00) | $(0.01) | $(0.01) | $(0.00) |
Six-month revenue consisted of $754,257 from managed services and $1,864,451 from consulting services. Gap and risk assessment generated $1,803,928, while managed security services generated $636,676.
- Cash and cash equivalents were $2,043,469 at June 30, 2020, compared with $1,876,645 at December 31, 2019.
- Working capital surplus was $1,337,215, down from $1,900,200 at year-end 2019.
- Accounts receivable were $806,532, net of a $70,847 allowance for doubtful accounts.
- Total assets were $6,513,878, including $2,278,939 of goodwill and $1,053,556 of net intangible assets.
- Total liabilities were $1,814,347, including $718,650 of current loans payable, $40,858 of long-term loans payable, a $27,000 line-of-credit balance, and a $109,787 related-party note payable.
- Six-month operating cash flow was $(740,120), compared with positive operating cash flow of $101,412 in the prior-year period.
- Six-month investing cash flow was positive $65,037, primarily from cash acquired in the Technologyville acquisition.
- Six-month financing cash flow was positive $841,907, including $709,600 of Paycheck Protection Program loans and $140,000 from common-stock sales.
Material changes versus the prior comparable period
- Six-month revenue increased $2,266,577, or approximately 644%, primarily because the 2020 results included TalaTek and Technologyville and reflected growth in Cerberus managed security services and gap and risk assessment work.
- Second-quarter revenue increased $1,396,169, or approximately 905%, versus the second quarter of 2019. TalaTek contributed $856,574 and Technologyville contributed $155,132 during the quarter.
- Six-month gross profit increased $764,288, but gross margin declined to 37.6% from 62.7%, reflecting the addition of payroll and delivery costs associated with the acquired businesses.
- Six-month operating expenses increased to $2,373,495 from $638,750. The increase included $808,671 of salaries and benefits, $669,339 of stock-based compensation, and $15,000 for an accounts-receivable write-off.
- The accumulated deficit increased to $2,838,757 from $1,453,510 at December 31, 2019.
- Goodwill increased by $1,356,360 from the Technologyville acquisition. The purchase price allocation was provisional and subject to a third-party valuation and measurement-period adjustments.
- Common shares outstanding increased through the Technologyville acquisition and a $140,000 private placement. Outstanding stock options increased to 20,820,000 shares, creating potential dilution that was excluded from diluted loss per share because the options were antidilutive.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects additional losses through the end of 2020. The filing does not provide specific revenue, earnings, margin, or cash-flow guidance.
- Management stated that available cash and current commitments should support planned development and expenditures for at least twelve months from issuance of the financial statements, while noting that additional funding may be required sooner.
- The company’s going-concern disclosures cite the accumulated deficit, six-month operating loss of approximately $1.39 million, and negative operating cash flow of approximately $740,000.
- The company relies substantially on equity financing, service revenue, and acquisition-related financing. PPP loans totaling $709,600 were outstanding at June 30, 2020 and could be forgiven if applicable requirements are met; otherwise, repayment obligations apply.
- The related-party note payable was extended from June 30, 2020 to June 15, 2021. The balance was $109,787, with accrued related-party interest of $16,811.
- Two customers accounted for 80% of six-month revenue, including one customer at 59%. Three customers represented 70% of accounts receivable, creating significant concentration risk.
- COVID-19 introduced uncertainty regarding operations, client demand, employee arrangements, and liquidity. The filing states that the magnitude and duration of the impact could not be determined.
- Principal stated risks include continued losses, the need for additional capital, acquisition execution and integration, customer and cybersecurity-talent retention, dependence on consultants, regulatory complexity, growth-management challenges, and potential future goodwill impairment.
- Internal control over financial reporting remained ineffective because of material weaknesses previously disclosed in the 2019 Form 10-K. Management stated that it would pursue additional enhancements as funds allow.
- After quarter-end, the company agreed to acquire Clear Skies Security, LLC for 2,330,000 common shares. The filing also disclosed a subsequent grant of options to purchase 50,000 shares at a $2.00 exercise price.
- No material pending legal proceedings were reported, and the company reported no material off-balance-sheet arrangements.
Most important facts for an investor to verify
- Confirm the relationship between the requested company name, CISO Global, Inc., and the registrant name used in this filing, Cerberus Cyber Sentinel Corporation.
- Assess whether revenue growth is sustainable apart from the TalaTek and Technologyville acquisitions and whether major-customer concentration remains elevated.
- Evaluate the path to profitability given the accumulated deficit, negative operating cash flow, high stock-based compensation, and management’s expectation of further 2020 losses.
- Review PPP loan forgiveness eligibility, repayment terms, maturities, collateral, and the company’s future financing needs.
- Examine the provisional Technologyville purchase accounting, including the $1,356,360 goodwill balance and potential third-party valuation adjustments.
- Monitor remediation of the material weaknesses in internal control over financial reporting.
- Review dilution from 20,820,000 outstanding options, acquisition-related share issuances, employee compensation, and subsequent transactions.
- Assess COVID-19 effects, customer concentration, accounts-receivable collectability, and the company’s stated ability to maintain liquidity for at least twelve months.