Business Context and Reporting Period
Cerberus Cyber Sentinel Corporation, now associated with CISO Global, Inc., filed its first annual report for the fiscal year ended December 31, 2019. The company was formed on March 5, 2019 and provides cybersecurity consulting and managed services, including CISO-as-a-service, gap and risk assessments, managed security services, compliance auditing, penetration testing, SOC services and training. The company does not sell cybersecurity products and pursues growth through acquisitions of engineer-led cybersecurity firms.
Key 2019 transactions included the reorganization and acquisition of GenResults, the VCAB bankruptcy merger, and the October 1, 2019 acquisition of TalaTek. TalaTek contributed results only for the fourth quarter of 2019.
Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $1,907,930 | $641,606 |
| Gross profit | $971,758 | $526,938 |
| Gross margin | 50.9% | 82.1% |
| Operating income (loss) | $(1,342,515) | $323,124 |
| Operating margin | (70.3%) | 50.4% |
| Net income (loss) | $(1,354,368) | $323,124 |
| Net margin | (71.0%) | 50.4% |
| Cash flow from operations | $(203,358) | $243,772 |
| Cash flow from investing | $169,790 | $0 |
| Cash flow from financing | $1,830,207 | $(204,831) |
| Cash and cash equivalents | $1,876,645 | $80,006 |
| Working capital surplus | $1,900,200 | $236,128 |
| Total liabilities | $578,687 | $219,878 |
Revenue was composed primarily of gap and risk assessment services of $1,483,672, CISO-as-a-service revenue of $216,000, managed security services revenue of $208,023 and application sales of $235. Three customers represented 80% of 2019 revenue and 79% of year-end accounts receivable.
Year-end assets were $4,497,218, including $1,084,852 of net intangible assets and $922,579 of goodwill. The company had a $109,787 related-party note payable outstanding, maturing June 30, 2020, and no borrowings under TalaTek’s $500,000 secured revolving line of credit.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $1,266,324, or approximately 197%, primarily because of the TalaTek acquisition and the introduction of gap and risk assessment services. Cerberus standalone revenue increased 53%.
- Gross profit increased 84%, but gross margin declined materially because of higher payroll and delivery costs and the inclusion of TalaTek.
- The company moved from $323,124 of operating income and net income in 2018 to a $1,342,515 operating loss and $1,354,368 net loss in 2019.
- Operating expenses increased to $2,314,273 from $203,814. Major 2019 items included $622,336 of professional fees, $823,651 of stock-based compensation and a $100,000 impairment charge for a SaaS option acquired with TalaTek.
- Operating cash flow became negative, while financing cash flow increased primarily from $2,045,000 of common-stock proceeds.
- The TalaTek acquisition was funded with 6,200,000 shares valued at $2,480,000 and generated $925,464 of fourth-quarter revenue and a $106,923 net loss.
- Common shares issued and outstanding increased substantially, and the company also repurchased 6,000,000 shares from a founder for nominal cash consideration while recording $2.4 million as a capital contribution.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified revenue, earnings or cash-flow guidance. Its outlook emphasizes additional acquisitions, cross-selling, geographic expansion and centralized administrative efficiencies. Management stated that available resources were expected to support planned activities for at least 12 months from the financial statement issuance date, but also acknowledged that additional capital may be required.
- The company was not profitable, had an accumulated deficit of $1,453,510, and may need additional equity or other financing. Future equity issuance could materially dilute existing shareholders.
- Management identified material weaknesses in internal control over financial reporting, including inadequate segregation of duties, no audit committee, insufficient risk-assessment procedures and inadequate documentation. Management had not completed remediation at filing.
- COVID-19 and other epidemics were identified as potential sources of business interruption, reduced sales activity, workforce disruption and weaker customer demand.
- Acquisition execution, integration, valuation of intangible assets and goodwill impairment are significant risks. Goodwill was $922,579 at year-end and was not impaired; a $100,000 SaaS-option impairment was recorded.
- The business depends on key cybersecurity personnel in a highly competitive labor market and faces risks from customer concentration, service-level obligations, cyber incidents, litigation, regulatory changes and competition from larger providers.
- There was no established trading market for the common stock, and the company had applied for OTCQB quotation. Directors and executive officers beneficially owned approximately 84.7% of outstanding shares.
- The company has not paid dividends and does not expect to do so in the foreseeable future.
- The company reported no material pending legal proceedings and no material off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Confirm the company’s current legal name, ticker, trading venue and capitalization, given the filing is under Cerberus Cyber Sentinel Corporation while the requested company is CISO Global, Inc.
- Reconcile the reported share counts, including 107,912,500 shares outstanding at December 31, 2019, 113,912,500 shares issued, treasury stock and 108,032,500 shares reported outstanding in March 2020.
- Assess whether the company achieved profitability and positive operating cash flow after the 2019 acquisition-driven expansion.
- Review financing needs, subsequent equity issuances, option grants and potential dilution from the 17,245,000 outstanding options.
- Evaluate customer concentration, accounts-receivable collectability and dependence on TalaTek’s public-sector revenue.
- Monitor remediation of the material weaknesses and whether an audit committee and stronger financial controls were established.
- Review the related-party note, Eventus consulting arrangement, executive compensation and other insider transactions.
- Reassess the carrying values of goodwill and intangible assets, particularly in light of the company’s losses and the prior SaaS-option impairment.