It’s getting to be that spicy time of year of annual report releases for our lovely December year-end companies. Without much fanfare, the CYBL 2022 annual report was dropped on Friday. Naturally, I had to read and get an article out as quickly as possible.
Just to get this out of the way at the beginning, this release has some serious issues in accuracy which I’ll get into. If OTCM accepts this in its current form to satisfy pink current and remove the CE, they’ll have even lower standards than I thought…
I genuinely believe this annual report will need to be re-issued. But it’s not an impossible task, I actually think the changes they need to make aren’t actually that difficult, which begs the question of why they need to be made at all…
The general feeling I got at the end of this was: “What in the world have they been doing for the last four months?!”
Anyways, let’s get to the details.
General Results
Before I start with my issue spotting, let’s get a brief snapshot of their results. Note – this assumes their quarterly income statements were correct, but the full year 2022 is from their annual report.
The general trend over the year was a very strong Q1/2 followed by a lackluster end of the year, with CYBL ending in a small profit. My take – they likely had a larger influx of projects / orders in earlier in the year that tapered off in Q3/Q4 while they were executing on those earlier projects.
So sometimes it’s not the most effective to compare subsequent quarters to each other, so the jury’s still out in my opinion until we get firmer 2023 data. Then we can look back on 2022.
On the cash flow front, they were not cash flow positive and had negative cash flow from ops of 2.45m. Most of this was driven by a growing AR balance of 2.25m. So, in theory, they could collect on this in early 2023 and be in a stronger cash position next year (assuming some level of profitability).
To cover help cash needs, they had to issue 134m shares at a weighted average price of 0.0039. So it was post-the share price tank… ouch. In the end, though, that’s not a massive amount of shares. But it still stings.
All in all, 2022 appears to have been a good start on the road to growth for CYBL but they may have lost some momentum in Q3/Q4 – 2023 is more important.
Miscellaneous Notes
Some quick interesting things that I jotted down in my notes as I read this thing:
Legal
They’ve retroactively added a lawsuit which began in August 2022. This was not present in the Q3 report and theoretically it should have been. This is what George Sharp was posting about here in case anyone cares.
Interest Income
This is sort of silly in the grand scheme of things, but I find it funny that they’ve well over 1m in cash at various points in the year but had zero interest income. Not saying it’s fraud by any means, but these guys should get a high yield savings account or something! Have you seen short term interest rates today?! All kidding aside, who cares.
Issues with Filing
I was pretty close to pulling my hair out reading this thing, but I’m going to try really hard to stay level headed when writing out the below sections. I think I failed in that some places…
Preferred B
This is the most confusing, unclear, and sometimes flat out inaccurate topic of the 2022 annual report. This is also probably the single most important equity stake in the company given that they account for so much ownership.
Where to begin?…
- Updated Description
First, they’ve updated the description of the Preferred B to make it clearer the owner can convert into 200 shares of common per preferred share. I ranted about this before and I’m glad they did it. HOWEVER, the sentence they used is grammatically comical… PROOFREAD, PEOPLE!
2. Changes in Ownership and Lack of Disclosures
At the baseline, and it’s EXTREMELY hard to follow what happened here, but 29.5m shares of the Preferred B were returned to the treasury. So not cancelled, but returned to the company and free to be re-issued at any given time. Remember, 29.5m shares of Pref. B are the equivalent of 5.9 billion common shares, which is about as many common shares outstanding as there are now.
So with that in mind, here are my issues.
Below we have our proof that there’s only 70.5m shares outstanding now. But that EXCLUDES treasury stock. So really, it’s more like 100m with 29.5m owned by CYBL.
Where do we find out that they were returned to the treasury, the ONLY place it’s presented is here:
That’s right, that’s the only place we can see it. And we have to back into by knowing the par value of the Preferred B. There’s no other mention of it…
Next, we should see some sort of Preferred B movement in “issuance history”, but we don’t. So we have no detail as to what actually happened with those 29.5m.
Nothing. They’ve been presenting return of stock to the treasury before in that table, but they don’t want to show the Preferred B?? That way we could see exactly who returned their Preferred B to the treasury.
Next, we get the tables that show security ownership by directors / control persons. Below is what they presented at year-end and what they presented at Q3 2022:
Year-End 2022:
Q3 2022
This is where I started really pulling my hair out. What happened to David Downing’s Preferred B? What happened to John Ringo’s? It looks like WAY more than 29.5m was returned to the treasury, but apparently only 29.5m was returned. According to this, >5% owners only own 49.3m Preferred B, who owns the other 21.2m Preferred B (100m-29.5m-49.3m) not listed here?!
Remember, the owners of the Preferred B effectively own and control the company, so what happened to the owners?! It’s never good when you have no clue who a major owner of a company is.
I have so many questions – is John Ringo out of the company from an ownership perspective? Why did the CFO give up so much of stake for nothing? What happened to those missing 21.2m shares?
This is such bad disclosure it’s almost laughable. Imagine if Berkshire Hathaway just started to make common shares disappear and Charlie Munger suddenly owned no shares in the company. That’s basically what’s happening here.
3. Summary of Issues
That was a lot to digest above… let’s summarize:
- I applaud them admitting Preferred B holders can convert into 200 common shares, albeit in a sentence that has the grammar of a landfill.
- 29.5m of Preferred B returned to treasury, but nobody knows who they came from.
- They do not disclosure the return to treasury in the “Issuance History” table.
- There are 21.2m Preferred B shares missing and not disclosed and you don’t know what happened to them/who owns them now.
Not good. This report needs to be re-issued, I’m sorry to burst peoples’ bubbles.
Whew, just when you thought we were done with issues…
Preferred A and C
See the above ownership table… notice the Series A and Series C shares missing? Refer to the Q3 2022 disclosure… there are several owners of the Preferred A that own more than 5%, and each Series C owner owns 50%… why are they now missing from this table?? The shares clearly still exist, this makes no sense to me. It’s lazy. Even if they are relatively immaterial, especially the Series A, you still have to disclose it.
Related Party Loans
This table below is complete laziness, how do you disclose John Ringo’s related party loan but you just slap an “all others” label on almost 1m in related party loans?! Who are the lenders, why are they related to the company??? These are all extremely important questions that must be answered in these reports. This is also just complete laziness.
Subsequent Events
The subsequent events section is blank… are you kidding me? They win a huge government contract and that’s not a material event? Laziness again. Come on. It would have taken 30 seconds to write a sentence on it, it’s not like it was top-secret information. It makes me wonder if there’s anything else they’re not saying…
Wrap Up
This was kind of an info dump, so in short:
On the business itself, they had a stronger beginning of the year than end, but they ended with profit. They’re cash flow negative and needed to issue shares to raise cash for working capital. I wouldn’t read into much of this until we start getting 2023 financials. We’re definitely going to want to see growth trajectory continue, but based on news we’ve been receiving, their pipeline is strong.
On the disclosure side – they have SERIOUS issues with their disclosures, and I don’t see how this annual report will last in its current form. There are missing Preferred B shares, the Series A and C owners are not even listed, the related party loan section is incomplete, and subsequent events is missing material information.
It’s bad, like laughably bad. What have they been doing for the last four months?!
Expect to see this reissued. If not and they get pink current, I will have completely lost faith in OTCMarkets.
End of article – thanks for listening to my ramblings.
Edits: Removed discussion RB Capital – incorrect point on them having to disclose his ownership.
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I DO NOT HAVE A POSITION, LONG OR SHORT, IN CYBL. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN RESEARCH.
