CISO Global, Inc. (formerly Cerberus Cyber Sentinel Corporation) — FY2020 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended December 31, 2020. The registrant identified in the filing is Cerberus Cyber Sentinel Corporation, a cybersecurity services company that provides managed security, consulting, compliance auditing, vulnerability assessment, penetration testing, remediation, security operations center support and training. The company does not sell cybersecurity products and operates as a technology-agnostic adviser.
Growth is centered on acquiring small- and medium-sized, engineer-led cybersecurity businesses and realizing operating, geographic and cross-selling synergies. The company had 61 employees at December 31, 2020 and traded on the OTC Markets under the symbol CISO. It was classified as a smaller reporting company and emerging growth company.
Key Financial Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $7.241 million | $1.908 million | +$5.333 million, or 279% |
| Gross profit | $2.875 million | $0.972 million | +$1.904 million, or 196% |
| Gross margin | 39.7% | 50.9% | Down 11.2 percentage points |
| Operating loss | $(3.407) million | $(1.343) million | Loss increased $2.064 million |
| Operating margin | (47.0%) | (70.4%) | Improved 23.4 percentage points |
| Net loss | $(3.413) million | $(1.354) million | Loss increased $2.059 million |
| Net margin | (47.1%) | (71.0%) | Improved 23.9 percentage points |
| Net loss per share | $(0.03) | $(0.01) | Not directly comparable because of share issuance |
| Cash flow from operations | $(1.702) million | $(0.203) million | Greater cash use |
| Cash flow from investing | $0.285 million | $0.170 million | Primarily cash acquired in acquisitions |
| Cash flow from financing | $4.737 million | $1.830 million | Higher equity and debt funding |
| Cash and cash equivalents | $5.197 million | $1.877 million | +$3.320 million |
| Working capital surplus | $2.482 million | $1.900 million | +$0.582 million |
| Accumulated deficit | $(4.867) million | $(1.454) million | Deficit increased $3.413 million |
Consulting services generated $5.426 million, or approximately 75% of revenue, while managed services generated $1.815 million. Gap and risk assessment was the largest disclosed service line at approximately $4.779 million. Two customers accounted for 59% of FY2020 revenue, including one customer representing 44%.
Gross profit increased substantially, but gross margin declined because cost of revenue grew faster than revenue. Operating expenses increased to $6.282 million from $2.314 million, including $1.896 million of stock-based compensation, $3.294 million of selling, general and administrative expense and $0.927 million of professional fees.
Liquidity, Debt and Capital Resources
- Current assets were $6.346 million and current liabilities were $3.864 million at December 31, 2020.
- Cash and cash equivalents were $5.197 million, but operating activities consumed $1.702 million during the year.
- Financing included $1.131 million from common-stock sales, $3.000 million from a related-party convertible note and approximately $0.710 million from Paycheck Protection Program loans.
- The related-party convertible note bears 6% interest, is due December 31, 2021, may be extended to December 31, 2022, and is convertible at $2.00 per share. The balance sheet reported $2.927 million net of debt discount.
- Total liabilities were $4.905 million, including $1.037 million of long-term loans and $3.000 million of convertible debt before the related discount.
- Management stated that it expected further losses through the end of 2021 but believed existing cash resources and commitments would support planned operations for at least twelve months from issuance of the financial statements. Management also stated that additional funding might be required.
Material Changes Versus FY2019
- Revenue growth was driven primarily by the TalaTek acquisition, completed October 1, 2019, and the 2020 acquisitions of Techville, Clear Skies and Alpine. The company issued 3,392,271 shares for Techville, 2,330,000 shares for Clear Skies and 900,000 shares for Alpine.
- Techville contributed $1.337 million of post-acquisition revenue, Clear Skies contributed approximately $0.661 million and Alpine contributed approximately $0.037 million during their respective post-acquisition periods.
- Goodwill increased from $0.923 million to $4.101 million, and net intangible assets increased from $1.085 million to $2.105 million. The company recorded no goodwill impairment in 2020.
- Stock-based compensation increased from $0.824 million to $1.896 million and was a major contributor to the operating loss, although it was non-cash.
- Shares outstanding increased from 107.9 million at December 31, 2019 to 116.1 million at December 31, 2020, excluding subsequent issuances and dilution from options and convertible debt. The company had 24.6 million options outstanding at year-end.
- Subsequent to year-end, the company received $3.250 million for 1.625 million shares at $2.00 per share; the filing stated that the shares had not yet been issued as of the report date.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal revenue, earnings or margin guidance. Management expects continued expansion through acquisitions, broader service offerings, geographic coverage and centralized operations, but also expects further losses through the end of 2021.
- Profitability and funding: The company has recurring operating losses, negative operating cash flow and an accumulated deficit. Failure to increase revenue, improve efficiency or obtain financing could require reductions in expansion plans.
- Acquisition execution: The strategy depends on identifying, financing and integrating acquisitions. Purchase-price allocations, goodwill and intangible valuations involve significant estimates and could result in future impairment charges.
- Customer concentration: Two customers represented 59% of 2020 revenue and 41% of year-end accounts receivable, creating material customer-retention and collection exposure.
- Personnel constraints: The company faces intense competition for cybersecurity engineers, management and sales personnel and does not maintain key-person insurance for certain executives.
- Cybersecurity and liability: A breach affecting the company or its clients could cause service interruptions, reputational damage, litigation, regulatory penalties and costs exceeding insurance coverage.
- Debt and dilution: The convertible note is related-party debt due in 2021 and could convert into approximately 1.5 million shares at $2.00 per share. Additional equity financing, acquisition consideration and option grants may dilute existing stockholders.
- Internal controls: Management concluded that internal control over financial reporting was not effective because of weaknesses in risk assessment and documentation. The auditor did not provide an attestation on internal controls because the company qualified for emerging-growth-company exemptions.
- PPP loans: The company and subsidiaries had approximately $0.981 million of PPP loans outstanding at year-end and had not applied for forgiveness for the disclosed loans.
- Related-party activity: The company had a $3.000 million convertible note from a related party, a $59,787 note payable to an entity controlled by the CEO and a $0.500 million common-stock sale to an entity associated with a director.
- Market and governance: The common stock had limited OTC trading activity, no established active market was assured, directors and executive officers beneficially owned approximately 81% of shares as disclosed, and no cash dividends were expected.
- Legal and tax matters: The company reported no material pending legal proceedings. It had approximately $2.732 million of tax net operating loss carryforwards, with a full valuation allowance against net deferred tax assets, and had not filed its 2020 federal and state corporate tax returns as of the filing date.
Most Important Facts for Investors to Verify
- Whether the company can convert substantial revenue growth into positive operating cash flow and profitability.
- The sustainability and collectability of revenue from the largest customers, particularly the customer representing 44% of FY2020 revenue.
- The status, repayment or forgiveness of PPP loans and the maturity, extension or conversion of the $3.000 million related-party convertible note.
- The final purchase-price allocations for Alpine and other acquisitions, including potential changes to goodwill and intangible assets.
- Progress in remediating the disclosed material weaknesses in internal control over financial reporting.
- The fully diluted share count, including 24.6 million outstanding options, convertible-note shares and subsequent equity issuances.
- Whether acquisition-related costs, stock-based compensation and centralized operating initiatives improve margins without creating additional liquidity pressure.