Business Context and Reporting Period
This Form 10-Q was filed by Cerberus Cyber Sentinel Corporation, the predecessor name referenced in the filing, for the three and nine months ended September 30, 2021, with comparative periods ended September 30, 2020. The request identifies the company as CISO Global, Inc.; the supplied filing itself names Cerberus Cyber Sentinel Corporation.
The company provides technology-agnostic cybersecurity and compliance services, including managed security services, compliance, SOC services, vCISO services, incident response, technical assessments, forensics and training. It does not sell cybersecurity products. The company completed the VelocIT acquisition on August 12, 2021, issuing 2,566,778 common shares.
Financial Metrics
| Metric | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 |
|---|---|---|---|---|
| Total revenue | $3.745 million | $2.010 million | $9.255 million | $4.628 million |
| Gross profit | $0.767 million | $0.698 million | $2.525 million | $1.683 million |
| Gross margin | 20.5% | 34.7% | 27.3% | 36.4% |
| Loss from operations | $(3.158) million | $(1.030) million | $(6.920) million | $(2.419) million |
| Net loss | $(2.253) million | $(1.035) million | $(6.147) million | $(2.420) million |
| Net loss per diluted share | $(0.02) | $(0.01) | $(0.05) | $(0.02) |
- Third-quarter revenue increased 86% year over year; nine-month revenue increased 100%. Managed services revenue rose 84% in the quarter and 93% year to date, while professional services revenue rose 98% and 124%, respectively.
- Gross profit increased in absolute dollars, but gross margin declined, primarily reflecting higher payroll and service delivery costs.
- Operating expenses were $3.925 million in the quarter and $9.445 million for the nine months, including stock-based compensation of $1.252 million and $2.982 million, respectively.
- The quarter included $980,800 of PPP loan forgiveness, which reduced the reported net loss but was non-recurring in nature.
- Cash and cash equivalents were $2.730 million at September 30, 2021, down from $5.197 million at December 31, 2020. Accounts receivable was $2.269 million.
- Working capital surplus was approximately $646,000, versus $2.482 million at December 31, 2020.
- Net cash used in operating activities was $4.312 million for the nine months, compared with $1.158 million in the prior-year period. Financing activities provided $1.183 million, including $3.250 million from common-stock sales, partly offset by approximately $2.005 million of loan payments.
- Total liabilities were $5.389 million. Current liabilities included a $2.981 million related-party convertible note, due December 31, 2021, with a $2.00-per-share conversion price. Noncurrent loans payable were $443,000.
- Goodwill increased to $20.695 million from $4.101 million at year-end, primarily from $16.824 million of provisional goodwill recorded for VelocIT. The purchase-price allocation remained subject to third-party valuation and could change.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected acquisitions of VelocIT, Clear Skies, Alpine and Technologyville, as well as new customers and higher usage from existing customers.
- Cost of revenue increased 127% for the nine months, while operating expenses increased 130%. Selling, general and administrative expense rose 135%, and stock-based compensation rose 181%.
- Gross margin contracted from 36.4% to 27.3% for the nine-month period, and the operating loss widened from $2.419 million to $6.920 million.
- The nine-month net loss increased from $2.420 million to $6.147 million despite the $980,800 PPP forgiveness benefit.
- Common shares outstanding increased from 116.1 million at December 31, 2020 to 120.5 million at September 30, 2021. The filing reported 117.8 million weighted-average diluted shares for the nine-month period.
Guidance, Outlook, Risks and Unusual Items
- Management stated that the company expects to incur additional losses through the end of 2021. No specific revenue, earnings or margin guidance was provided.
- Management believes existing cash resources and commitments should support planned operations for at least twelve months from the financial-statement issuance date, but acknowledged that additional financing may be required sooner.
- Key risks include continued operating losses and cash burn, dependence on equity financing, the ability to attract and retain cybersecurity talent, acquisition execution and integration, achievement of expected synergies, customer concentration, regulatory complexity and potential business interruptions.
- One customer represented 26% of nine-month revenue. Two customers represented 27% of accounts receivable at September 30, 2021. Approximately $1.788 million of cash deposits exceeded FDIC insurance limits.
- The company reported no material pending legal proceedings and no material off-balance-sheet arrangements.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses in internal control over financial reporting identified in the prior Form 10-K. Management reported that additional finance staff and a newly established audit committee were improving segregation of duties.
- Subsequent events included the October 1, 2021 acquisition of Atlantic for 200,000 shares and $75,000 cash, with contingent additional consideration, and the October 27, 2021 issuance of a $1.5 million convertible note for acquisition and general corporate funding.
Most Important Facts to Verify
- Confirm the registrant’s current legal name and whether this filing corresponds to CISO Global, Inc. or its predecessor, Cerberus Cyber Sentinel Corporation.
- Verify the maturity, repayment or conversion status of the $3.0 million related-party convertible note due December 31, 2021 and the subsequent $1.5 million convertible note.
- Assess whether the company can reduce operating cash burn and achieve profitability without additional equity or debt financing.
- Review the final third-party valuation and purchase-price allocation for VelocIT, including potential changes to the $16.824 million provisional goodwill balance.
- Evaluate dilution from 27.680 million outstanding stock options, 1.5 million shares related to convertible debt, acquisition shares and other equity incentives.
- Review remediation of the disclosed material weaknesses in internal control over financial reporting.
- Reconcile the MD&A reference to $4.313 million of operating cash outflow with the cash-flow statement amount of $4.312 million.