CYBL Analysis – FY 2022 Q3 10Q

Today we’re talking about Cyberlux Corp., or CYBL. This is a new one for me in terms of articles, but I have been watching them in silence for about a year now. Because this is a new one, if you haven’t read any background on what the company does (it’s business, segments, etc.), I won’t get into that today. I suggest you read their IR deck first located here.

For this article I’m going to take a deep dive into their operating performance as presented in their FY 2022 Q3 10Q (technically not a 10Q, but it’s shorter than saying “Q3 Quarterly Filing with OTCMarkets” over and over again 😊).

One initial disclosure here, I have a high opinion of the company itself in terms of performance, growth projections, industry, etc. BUT, I am not giving any endorsement, good or bad, with respect to the actual current common share price and share structure with their Series A-C Preferred Shares. In other words, I’m not saying their common shares are over or undervalued. I will have a separate article out explaining their ownership structure and how to think about a common share price target for them. I also do not own shares in the company as of publishing this article.

Now that that’s out of the way, let’s get to it!

Income Statement

From an income statement perspective, CYBL is checking all of the boxes. If you’ve read the IR deck, you’ll know their revenue goal for FY 2022 is 44.75m, up from around 8.1m in FY 2021 (almost all in Q4 2021). When comparing to YTD performance, we’re seeing nine months revenue of 23.3m and three months revenue of 8.7m.

So on the face of it, yes, it is not looking likely that they will meet their 44m revenue goal for 2022 unless they have an incredible Q4. If current momentum continues, it seems like revenue of maybe 35m is not unrealistic, so a 9m shortfall from targets.

That being said, in terms of revenue misses from targets on the OTC, this is NOTHING. Whenever I see revenue goals on the OTC or revenue guidance, I immediately divide by AT LEAST two and that is considered my “upper bound” of revenue targets. Them falling short by less than 10m on a 44m target vs prior year revenue of 8.1m is extremely good. We’re talking about 4x growth which is right where they should be as an early growth stage company. But enough about topline…

As a tech heavy company, CYBL is earning the kinds of gross margins we’d expect, well over 50%. I would not expect these to trim down as the company grows. If anything, I expect gross margins to get healthier as they grow from supplier buying power, synergies within the company, etc.

As we move down to operating income, my personal favorite metric, we see that for Q3 they ran at a loss due to heavy R&D spend (3.9m). However, YTD the company is still book profitable and earning a healthy operating margin of around 10%. All great stuff for a growth stage company… I’m actually surprised they are able to run at an operating profit YTD at all.

Bottom line, looking forward we can obviously expect revenue to continue to grow. Maybe not exponentially, but the company is forecasting a hair under 2x growth per year for the next few years. At that rate, the company will be on the NASDAQ within the next few years. From a margin perspective, look for gross margins to increase, but depending on their R&D / OPEX growth spend, I wouldn’t be surprised if they run at a “healthy” loss occasionally. Not a cause for concern at all if they do, but it could happen.

Balance Sheet

CYBL’s balance sheet, all things considered, is actually cleaner than we’d expect for an early-stage growth company on the OTC. From an assets perspective, we have a decent cash pile of around 1.2m, which is pretty close to their YTD negative cash flow from operations. So the company is not exactly hurting for short term cash to keep their heads above water. They also have a “not excessive” AR balance which I’ll get to below.

From a liabilities perspective, the company has actually demonstrated a bit of a pivot from equity financing to debt financing, and it shows. CYBL is actually decently levered, but big caveat, they have positive equity which is a great sign. Around 1/3 of their notes are with management and are accruing interest between 10-12%, so not great but not too bad either. Other notes are mostly with Brett Rosen, so we already know those aren’t bottom feeder terms. Current liabilities should be easily covered by cash on hand and incoming AR balances.

All in all, looking pretty good here. We should see healthy expansion of the balance sheet in the coming quarters if the company stays marginally profitable / operationally cash flow positive.

Cash Flow

Other than topline growth, this is probably where I’m most impressed with the company. Cash flow from operations YTD is only showing a cash burn of 1.5m which is miniscule in my opinion. Most of that cash burn is just due to newer AR from their early-stage revenue. That should wash out within a few quarters. Cash management looks very well done from management it appears YTD.

For investing activities, we are of course seeing some healthy CAPEX expense in their subsidiaries. This is very normal and I’m confident the 2.5m spend is being well spent given their current revenue trajectory.

I’ll talk financing activities next…

All in all, cash management is looking strong in my opinion, and I am excited to see what they can do with some real outside investment in the form of debt or non-toxic dilution.

Financing / Dilution

It seems like the company has gone for a healthy mix of debt and equity financing over the last nine months, which I think tells a lot about the company’s position. On the debt side, they basically received the buy-in of the ever so famous Brett Rosen and have received some not insignificant seed capital in the form debt. I don’t even think he is charging them interest; they just have non-toxic conversion features.

The equity side, it seems like dilution is slowing down some, and any dilution was basically cancelled out by the 700m shares that were cancelled recently. Dilution has either been Brett Rosen buying shares or as part of payouts from prior acquisitions, but those are small. The Brett Rosen shares over the last nine months have totaled 200m, in addition to about 250m shares last year which were unrestricted as part of operation alpha. So he’s now purchased 450m shares… which brings me to.

I cannot completely confirm this, I can only infer what I see on their filings. But as RB Capital is not listed as a 5.0% or greater owner of common shares, he likely has sold some amount of his position. Maybe he didn’t want to be more than a 5.0% owner (I don’t blame him), maybe there’s an error in the quarterly filing, etc. I don’t know. But what I do know is that he purchased them at non-toxic prices (at market) and that he still holds around 5m in very company-favorable notes. So he is by no means toxic based on this… but he very likely sold parts of his position.

As a final point, we’ve heard talk from the company on share buybacks. I am not the biggest fan of buybacks unless they think their shares are grossly undervalued, which maybe they do. Their current max for buybacks is $19.5m worth of common shares which will be paid via earnings. There’s two key points there:

  • First, they want to buy back common shares, not the Preferred B’s which I think are the most problematic for an uplist. I hope they change course and buyout these shares over time from management rather than common. There is effectively no difference to the common shareholder, but it will look much better to clear these from the ownership structure… big convertible preferred shares don’t play well on a real exchange.
  • Second, they will fund these out of earnings as opposed to debt. This is a much more conservative approach than issuing debt and using that to repurchase shares. This also makes me think that, barring any crazy earnings that aren’t reinvested, we won’t see significant buybacks in the next year or two. I hope I’m wrong, but don’t expect it.

To close out here, it seems like the company is showing it has multiple financing options and is able to get common stock friendly deals to help it grow. That being said, it obviously does not need the funds right now to keep its head above water. Additional financing through debt and equity recently has been put directly into growth, not paying ongoing expense. This is a recipe for success, and if they can keep it up, it’ll mean good things for common shareholders.

Quality of Reporting

I’ll keep this short, but this is a big gripe with the company and I understand it. Their quality of reporting is not very good. We see a lot of late filings, incorrect filings, and lack of detail in their reports. They have also been pink limited for quite a while now. I personally think these are just growing pains and cleaning up the absolute hot garbage the company used to be before Operation Alpha (see the Series A and C Preferred Shares for a good example).

That being said, they really need to step up their game when it comes to financial reporting. I think it is holding the company back in terms of new investors who have a higher minimum threshold for reporting quality. Luckily, they seem to have the business operations to support a bigger investment in G&A to do this. They just need to do it soon…

My Closing Thoughts

Now I still need to make an article about their ownership structure which is very confusing… but the company itself is doing great things. We’re seeing strong revenue growth coupled with (relatively) modest revenue growth projections of just under 2x per year for the next three years. While they may not hit those goals, even if they get somewhat close the business will be resounding success.

I will not hold my breath for strong operating margins given their growth stage nature and the need for investment via R&D and OPEX, but we should see plenty of available cash flow from gross margins to fund reinvestment in the company.

From a financing perspective, we’ll see what sort of strategy they take. I personally am hoping for a healthy mix of debt and equity like they have been doing, coupled with keeping their financing raises relatively minimal. I get nervous when an OTC company goes crazy too soon and then, more often than not, blows it all. I would rather they take it easy, shore up their business, and then ease into a NASDAQ uplist and do a public offering from the NASDAQ to get their huge financing raise.

Either way, I think the company has incredible growth prospects and I am currently looking for the right time to invest.

Anyways, thanks for reading and I’m looking forward to more releases on CYBL.


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