SEC Form 10-Q Summary
Company: Cerberus Cyber Sentinel Corporation, identified in the request as CISO Global, Inc. The filing covers the three months ended March 31, 2021, with comparison to March 31, 2020. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Reporting Period
The Company provides technology-agnostic cybersecurity services, including managed security, consulting, compliance auditing, vulnerability assessments, penetration testing, remediation, SOC services, and training. It does not sell cybersecurity products. Techville, Clear Skies, and Alpine were acquired during 2020, so their results were included in the 2021 quarter but not in the comparable 2020 period.
As of May 12, 2021, 117,729,971 common shares were outstanding. The Company was a smaller reporting company, emerging growth company, and non-accelerated filer. It was not a shell company.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $2.560 million | $1.068 million | +$1.492 million, approximately +140% |
| Gross profit | $820,615 | $292,980 | +$527,635 |
| Gross margin | 32.1% | 27.4% | +4.7 percentage points |
| Operating loss | $(1.708) million | $(836,863) | Loss increased by $871,506 |
| Operating margin | (66.7%) | (78.3%) | Improved by approximately 11.6 percentage points |
| Net loss | $(1.777) million | $(839,144) | Loss increased by $937,715 |
| Net loss per share | $(0.02) | $(0.01) | — |
| Cash flow from operations | $(1.130) million | $(443,938) | Cash use increased by $686,235 |
| Cash flow from financing | $3.260 million | $140,000 | Primarily equity issuance |
| Cash and equivalents, period-end | $7.327 million | $1.573 million | Increased $5.754 million year over year |
Managed-services revenue was $440,417, compared with $137,913 in the prior-year quarter. Consulting-services revenue was $2.119 million, compared with $930,308. Gap and risk assessments generated approximately $1.990 million of 2021 revenue, and one customer represented 32% of quarterly revenue.
Operating expenses were $2.529 million, compared with $1.130 million. Selling, general and administrative expense increased to $1.488 million from $580,198, while stock-based compensation increased to $838,762 from $325,429. Interest expense increased to $68,695 from $2,281. No income tax provision was recorded; the net deferred tax asset was fully reserved.
Balance Sheet, Debt, and Liquidity
| Balance-sheet item | March 31, 2021 | December 31, 2020 |
|---|---|---|
| Total assets | $15.089 million | $12.647 million |
| Current assets | $8.665 million | $6.346 million |
| Current liabilities | $3.945 million | $3.864 million |
| Working capital surplus | $4.721 million | $2.482 million |
| Total liabilities | $5.036 million | $4.905 million |
| Stockholders’ equity | $10.053 million | $7.741 million |
| Accumulated deficit | $(6.644) million | $(4.867) million |
Debt included a $2.945 million related-party convertible note, $1.026 million of loans payable, $59,787 of a related-party note, and $33,358 drawn under a line of credit, net of the reported debt discount where applicable. The convertible note has a $3.0 million principal amount, bears 6% interest, matures December 31, 2021, and is convertible at $2.00 per share. Future minimum payments on notes payable after March 31, 2021 totaled $4.086 million before a $55,294 discount.
The Company issued 1,625,000 shares for $3.250 million in private placements during the quarter. It reported no investing cash flows. Management stated that existing cash resources and commitments should support planned operations for at least twelve months from issuance of the financial statements, although additional funding may be required earlier. The Company expects further losses through the end of 2021.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 140%, driven by organic growth at Cerberus and TalaTek and the inclusion of Techville, Clear Skies, and Alpine.
- Gross profit increased 180%, and gross margin improved from approximately 27.4% to 32.1%.
- Operating expenses more than doubled, primarily from acquired-company payroll, additional staffing, and higher stock-based compensation.
- The operating loss and net loss widened despite revenue growth.
- Operating cash burn increased substantially, while financing proceeds increased from $140,000 to $3.250 million from equity sales.
- Shares outstanding increased from 116,104,971 at December 31, 2020 to 117,729,971 at March 31, 2021. Options outstanding totaled 25,404,533, and 1,500,000 potential shares related to convertible debt were excluded from diluted share calculations.
- Additional right-of-use assets and lease liabilities were recorded under ASC 842, resulting in $175,927 of right-of-use assets and $176,668 of present-value lease obligations at quarter-end.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued losses through the end of 2021 and does not provide quantitative revenue or earnings guidance.
- The Company plans to pursue additional acquisitions of small- and medium-sized cybersecurity service firms, creating acquisition execution, integration, financing, and valuation risks.
- Material risks include the ability to achieve profitability, raise capital, attract and retain cybersecurity personnel, retain clients, integrate acquisitions, and manage cybersecurity regulation, COVID-19 or other business disruptions.
- The Company had an accumulated deficit of approximately $6.644 million, negative operating cash flow, and dependence on equity financing and service revenue, creating ongoing liquidity risk.
- Approximately $6.527 million of cash exceeded FDIC insurance limits at March 31, 2021.
- One customer represented 32% of quarterly revenue and one customer represented 20% of accounts receivable, creating concentration risk.
- Several Small Business Administration loans had not yet been submitted for forgiveness. If not forgiven, required payments will begin under the stated loan terms; lenders may have rights to call certain amounts in full.
- Goodwill totaled $4.101 million. The purchase-price allocation for the Alpine acquisition had not received a third-party valuation and could change.
- Management concluded that disclosure controls and procedures were not effective because of material weaknesses in internal control over financial reporting previously disclosed in the 2020 Form 10-K. The Company hired finance and accounting staff and established an audit committee during the quarter.
- No material pending litigation or material subsequent events were reported.
Investor Verification Checklist
- Verify the company-name transition from Cerberus Cyber Sentinel Corporation to CISO Global, Inc. and the effect of any subsequent corporate actions.
- Assess whether revenue growth from acquired businesses can continue while controlling payroll, SG&A, and stock-based compensation.
- Review cash burn, expected 2021 losses, equity-financing needs, and the maturity or conversion of the $3.0 million related-party convertible note.
- Confirm the status and potential forgiveness of the outstanding PPP loans and other near-term debt maturities.
- Evaluate customer concentration, particularly the customer representing 32% of Q1 2021 revenue.
- Monitor remediation of the material weaknesses in internal control over financial reporting.
- Review the final valuation and purchase-price allocation for Alpine and potential goodwill impairment.
- Consider dilution from 25.4 million outstanding options and potential shares associated with convertible debt.