YouTube Commentary: https://youtu.be/YUGdADrgGik
Hello everyone! I’m finally caught up CYBL after being out of town and semi out of the loop for about two weeks. Naturally, I needed to get down my thoughts on CYBL’s Q1 2023 report.
Keeping with my new recent process, I’m going to try to keep this article shorter and issue YouTube commentary sometime this week with more detail. So I may speed through some things.
Let’s get right to it.
This was frankly not a very inspiring quarter financially for CYBL. Honestly, the only positive I saw was that they were profitable from a book perspective. Everything else was pretty poor. They did not grow their revenue vs. Q1 2022, though they did grow from Q4 2022.
So a 6.1m revenue and 325k net income on the face of it seems alright, but they are falling well below their own expectations. I refer you back to their own financial forecasts from around a year ago:
So yes, these are forecasts and anything can happen. But when they’re aiming for 84m in revenue for 2023 and Q1 comes in at 6.1m, it’s disappointing.
Now, we still know they have government contracts coming which don’t appear to be recognized as revenue yet. So that may change things. They also have three more quarters to go. But to meet this target of 84m in revenue, they’d need to average 26m in revenue for the next three quarters. Quite a tall order.
I guess we can wait and see, but so far not so good.
Cash Flow / Balance Sheet
Another disappointment was that they were not cash flow positive again and had to raise about 700k in debt in order to meet their cash shortfall. They do not give detail on their non-convertible/non-related party debt, so we don’t know terms.
But at some point, this company needs to turn over their AR collections and stop having it balloon. I would normally give a growing company a pass and give them 6-12 months to roll it over into positive cash flow.
And despite being profitable for 2022 and Q1 2023, they have yet to have a quarter of positive cash flow from ops. One would expect them to be cash flow positive by now because their revenues have effectively plateaued for the last five quarters.
That signals ballooning AR that isn’t being collected on timely, not AR growing because revenue is growing faster than in prior periods.
So not good, but it theoretically will reverse once, or if, CYBL collects on its oldest AR balances (of which they have zero allowances for doubtful accounts).
I won’t reiterate too much, but this was very underwhelming. Maybe it had to do with the drag of the CE or some government contracts that still need to be recognized. But I think we were all expecting more from this filing, and we’re definitely going to need to see improvement by Q2.
But all in all, this is more on the minor side versus my other issues…
Here is where I want to spend most of the time. Honestly, CYBL has been one stop forward two steps back with this filing. I found two very big problems that need more context and explanation.
Maybe they’re not required, or the company doesn’t think they need to tell shareholders about these, but I would NOT and will NOT invest my money in CYBL until these are explained / addressed. If you don’t care, feel free to roll the dice. Power to you.
People are probably sick of hearing about this, but they’ve gone and muddied up the Series B yet again to perhaps an even more concerning level.
Before I start, why do these matter?
First, they have voting and conversion rights of 200 shares each. Upon liquidation, assuming they’re not converted, their liquidation value is AT LEAST $1 per share. So if I owned 10m shares, I would have preferred liquidation value of 10m dollars over common. If converted, they would have a value equal to the number of converted common shares.
Second, despite what management says, these are absolutely management’s equity in the company for at least SOME of management. The CEO, for example, does not own a significant number of common shares. All of his equity is tied up in Series B. The same can be said for the CFO, but we don’t know for sure for the others.
The company claims it’s only for voting control i.e. a Poison Pill, but why do the CEO and CFO not have any other significant ownership stake? Nobody has been able to answer that. What kind of CEO on the OTC doesn’t own significant equity in his own company?? Therein lies the point… the Series B have a very real value and shouldn’t be dismissed.
So what do we do about these as an investor or prospective investor?
You assume that their value is equal to the number of potentially converted shares to be conservative. If there are 100m Series B, you assume that there’s effectively another 20bn common shares out there. So if there’s 5.6bn outstanding shares, assume the “real” number is like 25.6bn and value the company that way.
In other words, if I buy 1m shares, I don’t own 1m/5.6b of the company, I own 1m/25.6bn of the company.
Now, here are some points I read online about these that I want to discuss.
- These can never be converted.
Not true. First, they have voting control of the company. They can simply do a reverse split and then convert. Or, conversely, raise the authorized shares and convert. They don’t need to put these things to a vote, they control the company.
That’s not to say the share price would remain where it is, but mechanically they can do it. Selling them would also be a problem. But just because they don’t sell on the open market doesn’t mean they don’t have value.
- If they’re not converted, they don’t have value?
Not true. They have a liquidation value of AT LEAST $1 per share if not converted. Also, voting rights allow the holders to do whatever they want, such as define their own compensation without oversight.
- Don’t other companies have this?
Yes. Generally it’s to protect founder’s/management of a company, allow them voting control, and give them a massive equity stake. Having voting control only is also very common, though it can be abused by some unscrupulous management teams. But not always and I’m not saying that’s what CYBL is doing. But factually they can do whatever they want.
- Couldn’t these be amended to be a true voting protection without a conversion feature?
Yes. If they simply removed the conversion feature and kept it just has voting rights, it would be gone. Why don’t they? Think about why the CEO and CFO don’t own much other equity…
- If they’re so valuable, why are people giving them up?
These are probably not equity stakes for all holders, like those for Brown (which probably don’t exist anymore), Ringo’s old shares, and maybe the Kalenja ones. Either that, or they could be compensated in the future under some other arrangement. But I can’t speculate on that.
I can’t read minds, but it seems like they are incorrectly using these as voting control for everyone, and equity for only some people like the CEO.
- Isn’t this priced in?
Most likely, yes. Hence the very low “perceived” market cap as market cap only factors in outstanding common shares, but doesn’t factor in convertible preferreds like the Series B. So I think it’s priced in, but management are acting like they have no value (they do).
I will end with this:
Even if these don’t get converted, management absolutely is entitled to a significant equity stake in the company. This means that they could decide not to recognize the full benefits of the Series B and instead give themselves something else, such as less common shares than entitled, etc. Remember, they can do whatever they want with voting control.
But one way or another, you need to factor in a LARGE equity stake that isn’t currently present on the current outstanding shares. Whatever that number is, is up to you. I am assuming the full conversion of 200 common per preferred.
But the more management / insiders tell us not to worry about these, the more I worry about them.
That’s the rundown. Onto the problems!
Changes in Ownership – Denis Kalenja / Montague Capital Partners
Let’s recap – below is the progression of disclosures around the Series B.
Basically around the end of 2022 and into early 2023, some shares went missing, were found, people had the wrong number of shares, people returned some shares, etc. I mention above that these may not be management equity for all holders because some of these seem to change hands quite easily.
The big transaction in Q1, and the likely reason why all of those shares were returned, is that 30m shares were issued to Montague Capital Partners, or Denis Kalenja (I’m assuming he controls the firm), for 30k. So the equivalent of 30m*200 common = 6bn shares for 30k.
So the company has effectively changed owners of the Series B and all of that value, but no new shares were created. Well that’s okay I guess, what’s the issue?
First off, how can they just exchange these around so easily and give all of these massive rights without explanation? Who is this guy, why was he given these for 30k? What is the purpose of handing these out to this person? Basically, what the f*ck does this person do for CYBL that he deserves these?
The only info we have is that this guy was a toxic lender to CYBL and converted at a 97% discount to market in November 2021. He converted 200m shares at 0.001 when the closing price was about 0.038. He turned $200k in debt into $7.6m in common shares (assuming he sold at that price). Oh, and he sold at some point, or else they would have disclosed his 200m shares. So he got rich from CYBL’s toxic debt basically.
Furthermore, and I hate to put the guy on blast, but CYBL and Brett Rosen have given conflicting accounts of the point of this person. Well, CYBL only said his affiliation was “none” and basically said nothing else. Whereas Brett Rosen called him an “insider” and “affiliate”… That’s very different than “none” and kind of concerning. See below:
This whole arrangement is a massive red flag for me. Why is CYBL willy-nilly moving these shares around, what is the plan here? Are these truly an equity stake for this guy? Or are they incorrectly using the Series B again and only want to give him voting rights?
If I don’t know who real management is or why they’re there, why in the world would I ever invest in a company like this?
More clarity is needed, this seems very strange, and I don’t like it. Even if they had the CE off, I wouldn’t invest without more reasoning.
Digital Automation Solutions
Whenever I read these reports, I always read a track change version first to see the difference between the last report. I noticed that they have, with no explanation, stopped referring to Digital Automation Solutions (“DAS”) as a subsidiary.
Why? No reason given at all…
It was still listed in all three 2022 annual reports and this is the first we’re seeing it.
*Note – In doing my DD, I saw that a certain OTC personality did quite a lot of digging on this. I don’t want to give them any additional eyeballs for my own reasons, but I’m not the first person to notice this.
Needless to say, I don’t understand how a subsidiary can just disappear without explanation… what happened to it? Was it sold? Was it ever a subsidiary in the first place?
Here is the press release and terms of the deal from more than two years ago.
The lack of explanation and context around this is extremely concerning. At this point, I’m not totally sure what to believe!
My only theory is that they didn’t meet their earn outs and they just removed them from the group because of it. But that’s my benign theory… we don’t really know what happened… Not good and a huge red flag.
All in all, this report really brought back all of the frustrations from past CYBL reports. All of these reporting problems are amateurish and really make me wonder how they ever think they are going to up list. This kind of junk is what I’d expect from your run of the mill OTC garbage company, not a company like CYBL with this much potential.
I’m not even an investor and they make me incredibly frustrated and disappointed at the way they treat shareholders with reports like this. It’s honestly insulting to shareholders and I expect much better from them. And I’ll keep releasing these articles/videos pointing out all of these problems until they actually start releasing the reports that they’re capable of.
I’m going to end here before I go full rant mode… thanks for reading as always.
Discord Channel: https://discord.gg/kSNKGdwBfJ
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.