CISO (US:CISO)2021-03-30 16:00Part I Item 1. Business Cerberus Cyber Sentinel provides technology-agnostic cybersecurity services, expanding through strategic acquisitions and offering managed and consulting solutions - The company's business model focuses on providing cybersecurity services and fostering a security culture, explicitly stating it does not sell cybersecurity products26 - The growth strategy involves acquiring engineer-owned cybersecurity firms with revenues of $2M-$15M and profit margins of 15%-25%, aiming to create synergies by centralizing administrative functions and cross-selling services3940 - In 2020, the company completed three key acquisitions to expand its capabilities and geographic presence: Techville, Inc. (May), Clear Skies Security, LLC (August), and Alpine Security, LLC (December)232425 - Service offerings are categorized into two main types: Managed Services (e.g., CISO-as-a-service and SOC services) and Consulting Services (e.g., compliance auditing, penetration testing, and risk assessments)303133 - As of December 31, 2020, the company had 61 employees and utilized independent contractors for specialized projects58 Item 1A. Risk Factors The company faces significant risks from its acquisition-driven growth, capital needs, integration challenges, and high insider control - The company requires additional capital to execute its growth strategy, having incurred a net loss of $3,413,262 for the year ended December 31, 2020, and an accumulated deficit of $4,866,7726263 - The acquisition-based growth strategy presents risks such as difficulties in integrating new businesses, managing personnel, and potential failure to identify or consummate acquisitions667678 - The company operates in a highly competitive industry and faces a shortage of qualified cybersecurity engineers, which could impact its ability to attract and retain talent7273 - A breach of the company's own IT infrastructure could severely harm its brand and reputation, leading to lawsuits and loss of customers9293 - Directors and executive officers beneficially own over 70% of the company's outstanding common stock, giving them effective control over company affairs122 Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments, rendering this section not applicable - Not Applicable130 Item 2. Properties The company leases its Scottsdale, Arizona headquarters, with monthly costs of $6,558 through 2021 and $6,695 in 2022 - The company leases its principal office at 6900 E. Camelback Road, Suite 240, Scottsdale, Arizona 85251131 - The monthly lease cost is $6,558 through December 31, 2021, and will increase to $6,695 per month through December 31, 2022131 Item 3. Legal Proceedings The company is not involved in any material pending legal proceedings that would adversely affect its business or operations - The company is not involved in any material pending legal proceedings133 Item 4. Mine Safety Disclosures This section is not applicable to the company's business operations - Not applicable134 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock, quoted on OTC Markets under CISO since June 2020, has 700 record holders and no dividend policy - The company's common stock is quoted on the OTC Markets under the symbol "CISO" since June 26, 2020136 - As of March 30, 2021, there were approximately 700 holders of record of the common stock137 - The company has never paid dividends on its common stock and does not expect to pay any in the foreseeable future138 Item 6. Selected Financial Data As a smaller reporting company, the registrant is not required to provide selected financial data - Not applicable141 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Acquisitions significantly boosted 2020 revenue to $7.2 million but also widened the net loss to $3.4 million due to increased operating expenses Results of Operations Total revenue increased 280% to $7.24 million in 2020 due to acquisitions, while net loss widened to $3.41 million from increased operating expenses Comparison of Financial Results (2020 vs. 2019) | Metric | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $7,240,828 | $1,907,930 | +$5,332,898 | +280% | | Gross Profit | $2,875,262 | $971,758 | +$1,903,504 | +196% | | Operating Expenses | $6,282,124 | $2,314,273 | +$3,967,851 | +171% | | Net Loss | ($3,413,262) | ($1,354,368) | ($2,058,894) | +152% | - The $5.3M revenue increase was driven by acquisitions, with TalaTek's revenue growing by $2.5M, and 2020 acquisitions contributing a combined $2.0M157158159 - Operating expenses rose by $4.0M, primarily due to a $1.1M increase in stock-based compensation and a $2.6M increase in selling, general, and administrative expenses, which included higher payroll from new employees170171 Working Capital and Cash Flows Working capital surplus increased to $2.5 million in 2020, with cash rising by $3.3 million to $5.2 million, primarily from $4.7 million in financing activities Cash Flow Summary (2020 vs. 2019) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($1,702,080) | ($203,358) | | Net cash provided by investing activities | $285,297 | $169,790 | | Net cash provided by financing activities | $4,737,167 | $1,830,207 | | Net increase in cash | $3,320,384 | $1,796,639 | - Financing activities in 2020 were driven by $3.0M from a convertible note payable, $1.1M from the sale of common stock, and $0.7M from PPP loans181 - Working capital surplus increased to $2,482,414 at year-end 2020 from $1,900,200 at year-end 2019176 Critical Accounting Policies Critical accounting policies involve significant estimates for business combinations, goodwill impairment, stock-based compensation, and revenue recognition based on service transfer - Significant estimates are required for business combination accounting, including the fair value of intangible assets and goodwill183185 - Goodwill is not amortized but is tested for impairment at least annually, with no impairment recorded in 2020188 Disaggregation of Revenue by Service Type (2020) | Service Type | Revenue 2020 | | :--- | :--- | | Managed Services | $1,814,869 | | Consulting Services | $5,425,959 | | Total | $7,240,828 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide market risk disclosures - Not applicable203 Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2020 and 2019, with the auditor identifying intangible asset valuation from 2020 acquisitions as a critical audit matter Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion, identifying intangible asset valuation from the Technologyville and Clear Skies acquisitions as a Critical Audit Matter due to subjective estimates - The auditor issued an unqualified opinion, stating the financial statements are presented fairly in all material respects306 - The valuation of intangible assets from the Technologyville and Clear Skies acquisitions was identified as a Critical Audit Matter due to the subjective nature of the assumptions used311312313 Consolidated Financial Statements Consolidated financial statements show significant growth from acquisitions, with 2020 total assets at $12.6 million and liabilities at $4.9 million, and a net loss of $3.4 million on $7.2 million revenue Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $12,646,865 | $4,497,218 | | Goodwill | $4,101,369 | $922,579 | | Total Liabilities | $4,905,402 | $578,687 | | Total Stockholders' Equity | $7,741,463 | $3,918,531 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $7,240,828 | $1,907,930 | | Gross Profit | $2,875,262 | $971,758 | | Net Loss | ($3,413,262) | ($1,354,368) | Notes to Consolidated Financial Statements Notes detail accounting policies and financial activities, including 2020 acquisitions, 10.6 million options granted, a $3.0 million related-party convertible note, and significant customer concentration - Note 3 (Acquisitions) details the purchase of Technologyville, Clear Skies, and Alpine in 2020, which were accounted for as business combinations and were the primary drivers of balance sheet growth387397405 - Note 10 (Stock-Based Compensation) discloses that the company granted options to purchase 10,593,700 shares in 2020 under its 2019 Equity Incentive Plan442 - Note 12 (Debt) details a $3.0 million convertible note issued to a related party on December 23, 2020, with a 6% interest rate and a conversion price of $2.00 per share506 - Note 15 (Concentration of Credit Risk) shows that two clients accounted for 59% of revenue in 2020, and three clients accounted for 80% of revenue in 2019, indicating significant customer concentration524525 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing procedures - None204 Item 9A. Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2020, due to material weaknesses in risk assessment and documentation, with remediation plans underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020207 - Identified material weaknesses include a lack of risk assessment procedures and a lack of documented policies and procedures critical to financial reporting213 - Remediation plans involve identifying skill gaps, developing formal policies, and monitoring control effectiveness, with additional finance staff hired and an audit committee established in Q1 2021214217 Item 9B. Other Information On December 14, 2020, Bryce Hancock, with over 20 years of C-Level experience, was appointed Chief Operating Officer - Bryce Hancock was appointed Chief Operating Officer on December 14, 2020218 Part III Item 10. Directors, Executive Officers and Corporate Governance This section details the company's leadership, including CEO David G. Jemmett and COO Bryce Hancock, and the six-member Board of Directors, which established independent Audit, Compensation, and Nominating committees - The executive officers are David G. Jemmett (CEO), William Santos (President), and Bryce Hancock (COO)221 - The Board of Directors is comprised of six members, a majority of whom are independent per Nasdaq standards239242 - The Board established Audit, Compensation, and Nominating committees on December 10, 2020, with members appointed from the independent directors244247252 Item 11. Executive Compensation Executive compensation in 2020 was heavily weighted towards equity for COO Bryce Hancock, who received $3.34 million primarily from 3 million stock options 2020 Summary Compensation Table | Name and Principal Position | Salary ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | David G. Jemmett, CEO | 208,958 | - | 208,958 | | William Santos, President | 247,708 | 180,744 | 428,452 | | Bryce Hancock, COO | 9,375 | 3,333,345 | 3,342,720 | - Upon his appointment on December 14, 2020, COO Bryce Hancock was granted options to purchase 3,000,000 shares of common stock at an exercise price of $2.00 per share267269 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 30, 2021, directors and executive officers beneficially owned 81.05% of common stock, with CEO David G. Jemmett controlling 56.43% - Directors and executive officers as a group beneficially own 81.05% of the company's common stock278 - CEO David G. Jemmett, through Jemmett Enterprises, LLC, is the largest beneficial owner with 56.43% of the common stock278279 Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be Issued Upon Exercise of Outstanding Options | Remaining Available for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 21,828,700 | 3,171,300 | Item 13. Certain Relationships and Related Transactions, and Director Independence The company engaged in significant related-party transactions, including a note payable to an entity controlled by CEO David G. Jemmett and a $3.0 million convertible note to Hensley & Company, where a director serves as President - The company has a note payable with Jemmett Enterprises, LLC, an entity controlled by CEO David G. Jemmett, with an outstanding balance of $59,787 as of December 31, 2020286 - On December 23, 2020, the company issued a $3,000,000 convertible note to Hensley & Company, where Andrew McCain, a director of the company, is the President and COO287 Item 14. Principal Accountant Fees and Services The company's independent auditor, Semple, Marchal & Cooper, LLP, billed total fees of $201,487 in 2020 and $202,681 in 2019, with significant audit-related fees Principal Accountant Fees | Service Category | 2020 Fees | 2019 Fees | | :--- | :--- | :--- | | Audit fees | $97,958 | $53,207 | | Audit-related fees | $90,821 | $142,429 | | Tax fees | $12,708 | $2,200 | | All other fees | - | $4,845 | | Total fees | $201,487 | $202,681 | - Audit-related fees were for professional services related to reviews of Form 10 filings and the acquisition audits of Talatek, Techville, and Clear Skies292 Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate documents, material contracts, the 2019 Equity Incentive Plan, and required officer certifications - The exhibits include key corporate documents, the 2019 Equity Incentive Plan, and material contracts such as the acquisition agreements for GenResults, TalaTek, Techville, Clear Skies, and Alpine299 Item 16. Form 10-K Summary This section is not applicable as the company has not provided a Form 10-K summary - Not applicable299