UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021March 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission file number: 000-56059001-41227
CERBERUS CYBER SENTINEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 83-4210278 | |
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
6900 E. Camelback Road, Suite 240, Scottsdale, AZ | 85251 | |
(Address of Principal Executive Offices) | (Zip Code) |
(480) 389-3444
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.00001 par value |
| |||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 12, 2021,May 16, 2022, there were shares of the registrant’s common stock outstanding.
CERBERUS CYBER SENTINEL CORPORATION
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2022 AND 2021 AND 2020
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that reflect management’s current views with respect to future events and financial performance. These statements are based upon beliefs of, and information currently available to, us as of the date hereof, as well as estimates and assumptions made by us. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ materially from those anticipated, believed, estimated, expected, intended, or planned.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Forward-looking statements made in this Quarterly Report on Form 10-Q include statements about:
● | our ability to achieve and sustain profitability of our existing lines of business and through our wholly owned subsidiaries; | |
● | our ability to raise sufficient capital to continue to acquire cybersecurity companies; | |
● | our ability to attract and retain cybersecurity talent; | |
● | our ability to identify potential acquisition targets within predetermined parameters; | |
● | our ability to successfully execute acquisitions, integrate the acquired businesses, and create synergies as a global cybersecurity consolidator; | |
● | our ability to attract and retain key technology or management personnel and to expand our management team; | |
● | the accuracy of estimates regarding expenses, future revenue, capital requirements, profitability, and needs for additional financing; | |
● | our ability to attract and retain clients; | |
● | our ability to generate revenue and gross profit; and | |
● | our ability to navigate through the increasingly complex cybersecurity regulatory environment. |
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 15, 2022, any of which may cause our or our industry’s actual results, levels of activity, or performance or achievements to be materially different from any future results, levels of activity, or performance or achievements expressed or implied in our forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Except as required by law, we undertake no obligation to update any forward-looking statements after the date of this report to conform these statements to actual results.
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated Balance Sheets
1 | 2 | |||||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 2,729,579 | $ | 5,197,030 | $ | 3,862,907 | $ | 2,725,035 | ||||||||
Accounts receivable, net of allowances for doubtful accounts of $76,200 and $40,000, respectively | 2,268,833 | 1,006,834 | ||||||||||||||
Accounts receivable, net of allowances for doubtful accounts of $91,707 and $77,811, respectively | 5,945,709 | 4,840,802 | ||||||||||||||
Notes receivable, related party | 1,161,718 | 1,090,903 | ||||||||||||||
Inventory | 735,887 | 189,596 | ||||||||||||||
Prepaid expenses and other current assets | 485,617 | 142,144 | 2,165,525 | 960,965 | ||||||||||||
Contract asset | 218,153 | - | ||||||||||||||
Total Current Assets | 5,484,029 | 6,346,008 | 14,089,899 | 9,807,301 | ||||||||||||
Property and equipment, net of accumulated depreciation of $30,310 and $14,473, respectively | 89,401 | 80,630 | ||||||||||||||
Property and equipment, net of accumulated depreciation of $256,540 and $102,466, respectively | 3,442,937 | 2,394,424 | ||||||||||||||
Right of use asset, net | 268,096 | 13,426 | 406,770 | 277,578 | ||||||||||||
Intangible assets, net of accumulated amortization of $226,964 and $116,468, respectively | 2,359,402 | 2,105,432 | ||||||||||||||
Intangible assets, net of accumulated amortization of $628,245 and $323,331, respectively | 6,397,492 | 6,540,269 | ||||||||||||||
Goodwill | 20,695,024 | 4,101,369 | 59,274,429 | 16,792,535 | ||||||||||||
Other assets | 18,681 | - | ||||||||||||||
Total Assets | $ | 28,895,952 | $ | 12,646,865 | $ | 83,630,208 | $ | 35,812,107 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable and accrued expenses | $ | 1,494,159 | $ | 809,804 | $ | 6,221,551 | $ | 2,709,066 | ||||||||
Stock payable | 79,950 | 46,000 | ||||||||||||||
Deferred revenue | 1,952,543 | 52,824 | ||||||||||||||
Settlement liability | - | 470,000 | ||||||||||||||
Lease liability, current portion | 166,709 | 8,989 | 211,752 | 196,472 | ||||||||||||
Loans payable, current portion | 115,981 | 9,405 | 212,262 | 213,199 | ||||||||||||
Line of credit | - | 3,000 | 369,829 | - | ||||||||||||
Convertible note payable, net of debt discount, related party | 2,981,401 | 2,926,609 | 1,500,000 | 1,500,000 | ||||||||||||
Note payable, related party | - | 59,787 | 419,472 | - | ||||||||||||
Total Current Liabilities | 4,838,200 | 3,863,594 | 10,887,409 | 5,141,561 | ||||||||||||
Long-term Liabilities: | ||||||||||||||||
Loans payable, net of current portion | 443,373 | 1,037,115 | 5,279,424 | 5,284,301 | ||||||||||||
Lease liability, net of current portion | 107,899 | 4,693 | 202,918 | 88,040 | ||||||||||||
Total Liabilities | 5,389,472 | 4,905,402 | 16,369,751 | 10,513,902 | ||||||||||||
Commitments and Contingencies | - | - | - | - | ||||||||||||
Stockholders’ Equity: | ||||||||||||||||
Common stock, $ | par value; shares authorized; and shares issued and outstanding on September 30, 2021 and December 31, 2020, respectively1,205 | 1,161 | ||||||||||||||
Common stock, $ | par value; shares authorized; and shares issued and outstanding on March 31, 2022 and December 31, 2021, respectively1,354 | 1,258 | ||||||||||||||
Additional paid-in capital | 34,518,667 | 12,607,074 | 118,311,695 | 69,309,369 | ||||||||||||
Accumulated translation adjustment | 902,441 | - | ||||||||||||||
Accumulated deficit | (11,013,392 | ) | (4,866,772 | ) | (51,955,033 | ) | (44,012,422 | ) | ||||||||
Total Stockholders’ Equity | 23,506,480 | 7,741,463 | 67,260,457 | 25,298,205 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 28,895,952 | $ | 12,646,865 | $ | 83,630,208 | $ | 35,812,107 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
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CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| March 31, 2022 |
| March 31, 2021 | |||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | March 31, 2022 | March 31, 2021 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Security managed services | $ | 3,099,753 | $ | 1,683,733 | $ | 6,979,146 | $ | 3,612,489 | $ | 8,052,225 | $ | 1,871,817 | ||||||||||||
Professional services | 645,255 | 325,865 | 2,275,437 | 1,015,816 | 1,277,185 | 687,961 | ||||||||||||||||||
Total revenue | 3,745,008 | 2,009,598 | 9,254,583 | 4,628,305 | 9,329,410 | 2,559,778 | ||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||
Security managed services | 650,955 | 423,784 | 1,326,788 | 726,614 | 2,602,924 | 193,667 | ||||||||||||||||||
Professional services | 234,326 | 18,962 | 350,388 | 82,992 | 110,337 | 117,794 | ||||||||||||||||||
Cost of payroll | 2,093,072 | 868,810 | 5,052,684 | 2,135,691 | 4,445,850 | 1,427,702 | ||||||||||||||||||
Stock based compensation | 2,121,583 | 100,925 | ||||||||||||||||||||||
Total cost of revenue | 2,978,353 | 1,311,556 | 6,729,860 | 2,945,297 | 9,280,693 | 1,840,088 | ||||||||||||||||||
Total gross profit | 766,655 | 698,042 | 2,524,723 | 1,683,008 | 48,717 | 719,690 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Professional fees | 293,408 | 284,511 | 695,023 | 685,821 | 623,061 | 157,354 | ||||||||||||||||||
Advertising and marketing | 254,026 | 30,488 | 471,721 | 104,058 | 155,341 | 45,227 | ||||||||||||||||||
Selling, general and administrative | 2,085,720 | 1,020,765 | 5,241,095 | 2,235,041 | 4,616,374 | 1,487,641 | ||||||||||||||||||
Stock based compensation | 1,251,635 | 392,661 | 2,981,523 | 1,062,000 | 2,565,510 | 737,837 | ||||||||||||||||||
Loss on write-off of account receivable | 40,264 | - | 55,528 | 15,000 | ||||||||||||||||||||
Total operating expenses | 3,925,053 | 1,728,425 | 9,444,890 | 4,101,920 | 7,960,286 | 2,428,059 | ||||||||||||||||||
Loss from operations | (3,158,398 | ) | (1,030,383 | ) | (6,920,167 | ) | (2,418,912 | ) | (7,911,569 | ) | (1,708,369 | ) | ||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Other income | 169 | 751 | 2,553 | 10,751 | ||||||||||||||||||||
Other income (expense) | 12,543 | 205 | ||||||||||||||||||||||
Interest expense, net | (75,470 | ) | (5,567 | ) | (209,806 | ) | (12,285 | ) | (43,585 | ) | (68,695 | ) | ||||||||||||
PPP loan forgiveness | 980,800 | - | 980,800 | - | ||||||||||||||||||||
Total other income (expense) | 905,499 | (4,816 | ) | 773,547 | (1,534 | ) | (31,042 | ) | (68,490 | ) | ||||||||||||||
Net loss | $ | (2,252,899 | ) | $ | (1,035,199 | ) | $ | (6,146,620 | ) | $ | (2,420,446 | ) | (7,942,611 | ) | (1,776,859 | ) | ||||||||
Foreign currency translation adjustment | 902,441 | - | ||||||||||||||||||||||
Net loss per common share - basic | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.02 | ) | ||||||||||||
Net loss per common share - diluted | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.02 | ) | ||||||||||||
Comprehensive loss | $ | (7,040,170 | ) | $ | (1,776,859 | ) | ||||||||||||||||||
Net loss per common share - basic and diluted | $ | (0.06 | ) | $ | (0.02 | ) | ||||||||||||||||||
Weighted average shares outstanding - basic | 118,856,026 | 113,174,336 | 117,801,672 | 110,305,671 | 133,983,960 | 116,418,173 | ||||||||||||||||||
Weighted average shares outstanding - diluted | 118,856,026 | 113,174,336 | 117,801,672 | 110,305,671 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
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CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ DEFICITEQUITY
(Unaudited)
Additional | ||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Treasury | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||
Balance at January 1, 2021 | 116,104,971 | $ | 1,161 | $ | 12,607,074 | $ | (4,866,772 | ) | $ | - | $ | 7,741,463 | ||||||||||||
Stock based compensation - stock options | - | - | 838,762 | - | - | 838,762 | ||||||||||||||||||
Stock issued for cash | 1,625,000 | 16 | 3,249,984 | - | - | 3,250,000 | ||||||||||||||||||
Stock based compensation - shares | ||||||||||||||||||||||||
Stock based compensation - shares, shares | ||||||||||||||||||||||||
Stock issued for VelocIT acquisition | ||||||||||||||||||||||||
Stock issued for VelocIT acquisition, shares | ||||||||||||||||||||||||
Return of treasury stock to authorized capital | ||||||||||||||||||||||||
Net loss | - | - | - | (1,776,859 | ) | - | (1,776,859 | ) | ||||||||||||||||
Balance as of March 31, 2021 | 117,729,971 | 1,177 | 16,695,820 | (6,643,631 | ) | - | 10,053,366 | |||||||||||||||||
Stock based compensation - stock options | - | - | 891,126 | - | - | 891,126 | ||||||||||||||||||
Net loss | - | - | - | (2,116,862 | ) | - | (2,116,862 | ) | ||||||||||||||||
Balance as of June 30, 2021 | 117,729,971 | 1,177 | 17,586,946 | (8,760,493 | ) | - | 8,827,630 | |||||||||||||||||
Stock based compensation - stock options | - | - | 1,251,635 | - | - | 1,251,635 | ||||||||||||||||||
Stock based compensation - shares | 232,900 | 2 | 279,443 | - | - | 279,445 | ||||||||||||||||||
Stock issued for VelocIT acquisition | 2,566,778 | 26 | 15,400,643 | - | - | 15,400,669 | ||||||||||||||||||
Net loss | - | - | - | (2,252,899 | ) | - | (2,252,899 | ) | ||||||||||||||||
Balance as of September 30, 2021 | 120,529,649 | $ | 1,205 | $ | 34,518,667 | $ | (11,013,392 | ) | $ | - | $ | 23,506,480 | ||||||||||||
Balance at January 1, 2020 | 107,912,500 | $ | 1,139 | $ | 7,770,902 | $ | (1,453,510 | ) | $ | (2,400,000 | ) | $ | 3,918,531 | |||||||||||
Stock based compensation - stock options | - | - | 325,429 | - | - | 325,429 | ||||||||||||||||||
Stock issued for cash | 350,000 | 4 | 139,996 | - | - | 140,000 | ||||||||||||||||||
Return of treasury stock to authorized capital | - | (60 | ) | (2,399,940 | ) | - | 2,400,000 | - | ||||||||||||||||
Net loss | - | - | - | (839,144 | ) | - | (839,144 | ) | ||||||||||||||||
Balance as of March 31, 2020 | 108,262,500 | 1,083 | 5,836,387 | (2,292,654 | ) | - | 3,544,816 | |||||||||||||||||
Stock based compensation - stock options | - | - | 343,910 | - | - | 343,910 | ||||||||||||||||||
Stock issued for Technologyville acquisition | 3,392,271 | 34 | 1,356,874 | - | - | 1,356,908 | ||||||||||||||||||
Net loss | - | - | - | (546,103 | ) | - | (546,103 | ) | ||||||||||||||||
Balance as of June 30, 2020 | 111,654,771 | 1,117 | 7,537,171 | (2,838,757 | ) | - | 4,699,531 | |||||||||||||||||
Stock based compensation - stock options | - | - | 392,661 | - | - | 392,661 | ||||||||||||||||||
Common shares issued for cash | 325,000 | 3 | 649,997 | - | - | 650,000 | ||||||||||||||||||
Stock issued for Clear Skies acquisition | 2,330,000 | 23 | 931,977 | - | - | 932,000 | ||||||||||||||||||
Net loss | - | - | - | (1,035,199 | ) | - | (1,035,199 | ) | ||||||||||||||||
Balance as of September 30, 2020 | 114,309,771 | $ | 1,143 | $ | 9,511,806 | $ | (3,873,956 | ) | $ | - | $ | 5,638,993 |
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Income | Earnings | Total | |||||||||||||||||||
Balance at January 1, 2022 | 125,852,971 | $ | 1,258 | $ | 69,309,369 | - | $ | (44,012,422 | ) | $ | 25,298,205 | |||||||||||||
Stock based compensation - stock options | - | - | 4,687,093 | - | - | 4,687,093 | ||||||||||||||||||
Stock based compensation - common stock | 39,000 | - | 79,949 | - | - | 79,949 | ||||||||||||||||||
Exercise of options | 100,000 | 1 | 37,999 | - | - | 38,000 | ||||||||||||||||||
Stock issued for cash in public offering | 2,060,000 | 21 | 9,470,979 | - | - | 9,471,000 | ||||||||||||||||||
Stock issued for True Digital acquisition | 7,406,100 | 74 | 34,726,306 | - | - | 34,726,380 | ||||||||||||||||||
Foreign currency translation | - | - | - | 902,441 | - | 902,441 | ||||||||||||||||||
Net loss | - | - | - | - | (7,942,611 | ) | (7,942,611 | ) | ||||||||||||||||
Balance as of March 31, 2022 | 135,458,071 | $ | 1,354 | $ | 118,311,695 | $ | 902,441 | $ | (51,955,033 | ) | $ | 67,260,457 | ||||||||||||
Balance at January 1, 2021 | 116,104,971 | $ | 1,161 | $ | 12,607,074 | - | $ | (4,866,772 | ) | $ | 7,741,463 | |||||||||||||
Stock based compensation - stock options | - | - | 838,762 | - | - | 838,762 | ||||||||||||||||||
Stock issued for cash | 1,625,000 | 16 | 3,249,984 | - | - | 3,250,000 | ||||||||||||||||||
Net loss | - | - | - | - | (1,776,859 | ) | (1,776,859 | ) | ||||||||||||||||
Balance as of March 31, 2021 | 117,729,971 | $ | 1,177 | $ | 16,695,820 | $ | 902,441 | $ | (6,643,631 | ) | $ | 10,053,366 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
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CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS OF CASH FLOWS
(Unaudited)
1 | 1 | |||||||||||||||
September 30, 2021 | September 30, 2020 | March 31, 2022 | March 31, 2021 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (6,146,620 | ) | $ | (2,420,446 | ) | $ | (7,942,611 | ) | $ | (1,776,859 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Stock based compensation - stock options | 2,981,523 | 1,062,000 | 4,687,093 | 838,762 | ||||||||||||
Loss on write-off of accounts receivable | 55,528 | 15,000 | ||||||||||||||
Issuance of common stock for services | 313,395 | 34,000 | 79,949 | 2,000 | ||||||||||||
Depreciation and amortization | 131,403 | 55,365 | 458,988 | 57,515 | ||||||||||||
Right of use amortization | 75,842 | 3,729 | 45,387 | 13,257 | ||||||||||||
Amortization of debt discount | 54,792 | - | ||||||||||||||
Forgiveness of PPP Loan | (980,800 | ) | ||||||||||||||
Settlement liability | (470,000 | ) | - | |||||||||||||
Gain on termination of operating lease | (22,289 | ) | - | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (355,946 | ) | (191,958 | ) | 397,548 | (176,484 | ) | |||||||||
Other current assets | (305,532 | ) | (77,083 | ) | ||||||||||||
Inventory | (522,342 | ) | - | |||||||||||||
Contract assets | (86,811 | ) | - | |||||||||||||
Prepaids and other current assets | (865,483 | ) | (13,426 | ) | ||||||||||||
Accounts payable and accrued expenses | (66,311 | ) | 364,961 | 1,149,469 | (62,166 | ) | ||||||||||
Lease liability | (69,586 | ) | (3,544 | ) | (16,156 | ) | (12,772 | ) | ||||||||
Deferred revenue | 91,463 | - | ||||||||||||||
Net cash used in operating activities | (4,312,312 | ) | (1,157,976 | ) | (3,015,795 | ) | (1,130,173 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Cash acquired in acquisitions | 662,176 | 254,180 | ||||||||||||||
Purchases of property and equipment | (103,858 | ) | - | |||||||||||||
Cash paid in acquisitions, net | (4,917,768 | ) | - | |||||||||||||
Net cash provided by investing activities | 662,176 | 254,180 | ||||||||||||||
Net cash used in investing activities | (5,021,626 | ) | - | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from sale of common stock | 3,250,000 | 790,000 | 9,471,000 | 3,250,000 | ||||||||||||
Proceeds from PPP loans | - | 709,600 | ||||||||||||||
Proceeds from stock option exercise | 38,000 | - | ||||||||||||||
Proceeds from line of credit | 221,346 | 60,000 | 86,585 | 221,346 | ||||||||||||
Payment on line of credit | (224,346 | ) | (93,705 | ) | - | (190,988 | ) | |||||||||
Payment on loans payable | (2,004,528 | ) | (2,737 | ) | (458,719 | ) | (20,606 | ) | ||||||||
Payment on notes payable, related party | (59,787 | ) | - | (125,861 | ) | - | ||||||||||
Distributions to member | - | (20,000 | ) | |||||||||||||
Net cash provided by financing activities | 1,182,685 | 1,443,158 | 9,011,005 | 3,259,752 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (2,467,451 | ) | 539,362 | |||||||||||||
Effect of exchange rates on cash and cash equivalents | 164,288 | - | ||||||||||||||
Net increase in cash and cash equivalents | 1,137,872 | 2,129,579 | ||||||||||||||
Cash and cash equivalents - beginning of the period | 5,197,030 | 1,876,645 | 2,725,035 | 5,197,030 | ||||||||||||
Cash and cash equivalents - end of the period | $ | 2,729,579 | $ | 2,416,007 | $ | 3,862,907 | $ | 7,326,609 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Cash paid for: | ||||||||||||||||
Interest | $ | 91,490 | $ | 169 | $ | 36,069 | $ | 34,163 | ||||||||
Income taxes | $ | - | $ | 5,882 | $ | - | $ | - | ||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Right of use asset and lease liability recorded | $ | 330,512 | $ | 19,393 | ||||||||||||
Forgiveness of PPP Loan | $ | 980,800 | $ | - | ||||||||||||
Common shares issued in Technologyville acquisition | $ | - | $ | 1,356,908 | ||||||||||||
Common shares issued in Clear Skies acquisition | $ | - | $ | 932,000 | ||||||||||||
Right of use asset and lease liability recorded upon adoption of ASC 842 | $ | - | $ | 175,759 | ||||||||||||
Common stock issued in True Digital acquisition | $ | 34,726,380 | $ | - |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
6
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CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation (“Cerberus”), and its wholly owned subsidiaries, including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”), Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT”), Southford Equities, Inc., a British Virgin Islands company (“Arkavia”), True Digital Security, Inc., a Delaware corporation (“True Digital”), RED74 LLC, a New Jersey limited liability company (“RED74”), Atlantic Technology Systems, Inc., a New Jersey corporation (“ATS”), Atlantic Technology Enterprises, Inc., a New Jersey corporation (“ATE” and together with ATS, “Atlantic”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature of the Business
We are a cybersecurity and compliance company comprised of highly trained and seasoned security professionals who work with clients to enhance or create a better cyber posture in their organization. Cybersecurity, also known as computer security or information technology security, is the protection of computer systems and networks from information disclosure, theft of or damage to their hardware, software, or electronic data, as well as from the disruption or misdirection of the services they provide. The cybersecurity industry has a supply and demand issue wherein there is more demand for cybersecurity services than there are expert and seasoned compliance and cybersecurity professionals available in the market. We seek to identify, attract, and retain highly skilled cyber and compliance teams and bring them together to provide holistic cyber services. We accomplish this through acquisitions, direct hiring, and incentivizing employees with stock options to help retain them. On an ongoing basis, we seek to identify cyber talent that is culturally aligned and that offers operating leverage through both existing customer revenue and relationships. We have invested in enterprise solutions and executive talent to integrate our different organizations into an ecosystem that works together to provide complete and holistic cybersecurity through cross pollination of solutions. The ecosystem is intended to provide additional revenue opportunities and drive overall recurring revenue.
We provide a full range of cybersecurity consulting and related services, encompassing all three pillars of compliance, cybersecurity, and culture. Our services include secured managed services, compliance services, security operations center (“SOC”) services, virtual Chief Information Security Officer (“vCISO”) services, incident response, certified forensics, technical assessments, and cybersecurity training. We believe that culture is the foundation of every successful cybersecurity and compliance program. To deliver that outcome, we developed our unique offering of MCCP+ (“Managed Compliance & Cybersecurity Provider + Culture”), which is the only holistic solution that provides all three of these pillars under one roof from a dedicated team of subject matter experts. In contrast to the majority of cybersecurity firms that are focused on a specific technology or service, we seek to differentiate ourselves by remaining technology agnostic, focusing on accumulating highly sought-after topic experts. We continually seek to identify and acquire cybersecurity talent to expand our service scope and geographical coverage to provide the best possible service for our clients. We believe that bringing together a world-class team of technological experts with multi-faceted expertise in the critical aspects of cybersecurity is key to providing technology agnostic solutions to our clients in a business environment that has suffered from a chronic lack of highly skilled professionals, thereby setting us apart from competitors and in-house security teams. Our goal is to create a culture of security and to help quantify, define, and capture a return on investment from information technology and cybersecurity spending. Our brand rallies around the battle cry: “Cybersecurity is a Culture, not a Product.”
Corporate and Acquisition History
Cerberus Cyber Sentinel Corporation (“Cerberus Sentinel,” “Cerberus,” or the “Company”) wasWe were formed on March 5, 2019 as a Delaware corporation. The Company’sOur principal offices are located at 6900 E.East Camelback Road, Suite 240, Scottsdale, AZ 85258.Arizona 85251.
EffectiveOn April 1, 2019, we acquired GenResults. GenResults was established on June 22, 2015. Prior to our acquisition of GenResults, GenResults was wholly owned by an entity affiliated with David G. Jemmett, our Chief Executive Officer and a director of our company. Due to the companies being under common control, we accounted for the acquisition as a reorganization.
On April 12, 2019, we consummated a transaction whereby VCAB Six Corporation, a Texas corporation, (“VCAB”) merged with and into us (the “VCAB Merger”). At the time of the VCAB Merger, VCAB was subject to a bankruptcy proceeding and had minimal assets, no equity owners, and no liabilities, except for approximately holders of Class 5 Allowed General Unsecured Claims and a holder of allowed administrative expenses (collectively the “Claim Holders”). Pursuant to the terms of the VCAB Merger, and in accordance with the bankruptcy plan, we issued an aggregate of shares of our common stock (the “Plan Shares”) to the Claim Holders as full settlement and satisfaction of their respective claims. As provided in the bankruptcy plan, the Plan Shares were issued pursuant to Section 1145 of the United States Bankruptcy Code. As a result of the VCAB Merger, the separate corporate existence of VCAB was terminated. We entered into the VCAB Merger to increase our stockholder base to, among other things, assist us in satisfying the listing standards of a national securities exchange.
On October 1, 2019, we entered into an agreement and plan of merger with TalaTek (the “TalaTek Merger”) pursuant to which TalaTek became our wholly owned subsidiary. Under the TalaTek Merger, all issued and outstanding units representing membership interests in TalaTek were converted into an aggregate of shares of our common stock.
On October 2, 2019, we filed a registration statement on Form 10-12G with the SEC to effect registration of our common stock, par value $ per share, under the Exchange Act. The registration statement became effective on December 1, 2019.
On May 25, 2020, the Companywe entered into a Stock Purchase Agreementstock purchase agreement with Technologyville, Inc., an Illinois corporation (“Techville”),Techville and its sole shareholder, pursuant to which Techville became a wholly owned subsidiarywe acquired all of the Company (the “Techville Acquisition”). Under the terms of the Techville Acquisition, all issued and outstanding common stock of Techville was exchanged for an aggregate of shares of the Company’s common stock.Techville.
EffectiveOn August 1, 2020, the Companywe entered into a Stock Purchase Agreementstock purchase agreement with Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), and its equity holders, pursuant to which Clear Skies became a wholly owned subsidiarywe acquired all of the Company (the “Clear Skies Acquisition”). Under the terms of the Clear Skies Acquisition, all issued and outstanding equity securities inof Clear Skies were exchanged for an aggregate of shares of the Company’s common stock.Skies.
EffectiveOn December 16, 2020, the Companywe entered into an Agreementagreement and Planplan of Mergermerger with Alpine Security, LLC, an Illinois limited liability company (“Alpine”), and its sole member, pursuant to which Alpine became aour wholly owned subsidiary of the Company (the “Alpine Acquisition”). Under the terms of the Alpine Acquisition, all issued and outstanding membership units in Alpine were exchanged for an aggregate of shares of the Company’s common stock.subsidiary.
Effective August 12,On October 1, 2021, the Companywe entered into an Agreementa stock purchase agreement with ATS, ATE, James Montagne as the sole shareholder of ATS, and PlanJames Montagne and Miriam Montagne, as the sole shareholders of MergerATE.
On October 8, 2021, we entered into a merger agreement with Catapult Acquisition Corporation,RED74 and Ticato Holdings, Inc., a New Jersey corporation (“VelocIT”Ticato”), and its equity holders,Tim Coleman, as sole shareholder of Ticato. Tim Coleman and Ticato were the sole shareholders of RED74.
9 |
On July 26, 2021, we entered into an agreement and plan of merger with VelocIT, pursuant to which VelocIT became a wholly owned subsidiary of the Company (the “Catapult Acquisition”). Under the termsour company.
On December 1, 2021, we entered into a stock purchase agreement with Arkavia and all of the Catapult Acquisition,owners of Arkavia, pursuant to which we acquired all of the issued and outstanding equity secruities in VelocIT were exchanged for an aggregatesecurities of shares of the Company’s common stock.Arkavia.
NatureOn January 5, 2022, we entered into a stock purchase agreement (the “True Digital Stock Purchase Agreement”) with certain stockholders of True Digital and an agreement and plan of merger (the “True Digital Merger Agreement”) with True Digital and certain of its other stockholders. On January 19, 2022, the Businesstransactions contemplated by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company.
Cerberus Sentinel isOn January 18, 2022, we completed a security services company comprised$ underwritten public offering of security professionals who work with clients throughout the United Statesshares of our common stock, pursuant to create a continuously aware security culture. We do not sell cybersecurity products. We position the Company as a trusted cybersecurity advisor and are committed to delivering tailored security solutions to organizationswhich an aggregate of different sizes and across all geographies and industries to fit their budgetary needs and limit their cyber threat exposure.2,060,000
We currently provide a multitude shares of cybersecurity services including managed security service, cybersecurity consulting, technology consulting, compliance auditing, vulnerability assessment, penetration testing, security remediation, Security Operations Center (“SOC”) set-up and consulting and cybersecurity training. We differentiate ourselves from our competitors by staying technology agnostic. We believe that many cybersecurity service providers in the market today are committed to a specific technology solution which limits their service scope and ability to quickly respond to any emerging cybersecurity challenges.common stock were issued (see Note 9). In addition, as we continuegranted the underwriter warrants to servepurchase an aggregate of shares of our clients withincommon stock (see Note 10). We intend to use the net proceeds from the offering to fund acquisitions, sales, marketing, and general corporate purposes. In connection with the public offering, our existing capacities, we plan to continue making strategic acquisitions of small-to-medium-sized engineer-led cybersecurity service firms to continue to expand our service scope and geographical coverage. We believe that having a world-class technology team with multi-faceted expertise is key to providing technology agnostic solutions to our clients and maximizing their returncommon stock was listed on investment from information technology (“IT”) and cybersecurity spending.The Nasdaq Stock Market LLC.
7
Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Companywe will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At September 30, 2021, the CompanyMarch 31, 2022, we had an accumulated deficit of $11,013,392 51,955,033 and working capital surplus of approximately $3,202,490646,000. For the ninethree months ended September 30, 2021, the CompanyMarch 31, 2022, we had a loss from operations of approximately $6,920,1677,911,569 and negative cash flows from operations of approximately $4,312,3123,015,795. Although the Company iswe are showing positive revenues andrevenue, gross profit trends, the Company expectsis trending negatively primarily due to increased stock compensation related to sales activity, we expect to incur further losses through the end of 2021.2022.
To date, the Company has been fundingwe have funded operations primarily through the sale of equity in private placements and revenuesrevenue generated by the Company’sour services. During the ninethree months ended September 30, 2021, the CompanyMarch 31, 2022, we received $3,250,0009,471,000 in net proceeds from private placements of the Company’s common stock.our public offering.
BasedAlthough we expect that we will need to raise additional capital for future acquisitions, based on itsour current cash resources and commitments, the Company believes itwe believe we will be able to maintain itsour current planned development and corresponding level of expenditure for at least twelve12 months from the date of the issuance of these unaudited condensed consolidated financial statements, although no assurance can be given that itwe will not need additional funds prior to such time.
10 |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial informationstatements as of September 30, 2021,March 31, 2022, and for the three and nine months ended September 30,March 31, 2022 and 2021, and 2020, has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of our management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such dates and the operating results and cash flows for such periods. Operating results for the three and nine months ended September 30, 2021,March 31, 2022, are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission or the SEC.(the “SEC”). These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2020,2021, included in the Company’sour Annual Report on Form 10-K filed with the SEC on March 31, 2021.April 15, 2022.
Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Companyour company and itsour wholly owned subsidiaries, GenResults, LLC (“GenResults”), TalaTek, Inc. (“TalaTek”), Techville, Clear Skies, Alpine, and VelocIT.subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the financial statements for the three and nine months ended September 30, 2020,March 31, 2021, to conform to the financial statements presentation for the three and nine months ended September 30, 2021.March 31, 2022. These reclassifications had no effect on net loss or cash flows as previously reported.
8
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenuesrevenue and expenses during the reporting period. Actual results could materially differ from those estimates.
The Company believesWe believe the critical accounting policies discussed below affect itsaffects our more significant judgments and estimates used in the preparation of the accompanying unaudited condensed consolidated financial statements. Significant estimates include the allowance for doubtful accounts, the carrying value of intangible assets and goodwill, deferred tax asset and valuation allowance, the estimated fair value of assets acquired, liabilities assumed and stock issued in business combinations, and assumptions used in the Black-Scholes option pricing model, such as expected volatility, risk-free interest rate, share price, and expected divideddividend rate.
Revenue
The Company’s revenues are
Our revenue is derived from two major types of services to clients: Managed Servicessecurity managed services and Consulting Services.professional services. With respect to Managed Services, the Company providessecurity managed services, we provide culture education and enablement, tools and technology provisioning, data and privacy monitoring, regulations and compliance monitoring, remote infrastructure administration, and cybersecurity services including, but not limited to, antivirus and patch management. With respect to Consulting Services, the Company providesprofessional services, we provide cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.
Practical Expedients
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As part of Accounting Standards Codification (“ASC”) 606, the Company has adopted several practical expedients including the following: (i) the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less and (ii) the Company recognizes any incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
Disaggregated RevenuesRevenue
Revenue consistsconsisted of the following by service offering for the ninethree months ended September 30, 2021:March 31, 2022:
SCHEDULE OF DISAGGREGATION OF REVENUES
Security Managed Services | Professional Services | Total | ||||||||||
Primary Sector Markets | ||||||||||||
Public | $ | 3,179,047 | $ | 44,579 | $ | 3,223,626 | ||||||
Private | 3,607,146 | 2,178,545 | 5,785,691 | |||||||||
Not-for-Profit | 192,953 | 52,313 | 245,266 | |||||||||
$ | 6,979,146 | $ | 2,275,437 | $ | 9,254,583 | |||||||
Major Service Lines | ||||||||||||
Compliance | $ | 3,336,795 | $ | - | $ | 3,336,795 | ||||||
Secured Managed Services | 3,134,269 | - | 3,134,269 | |||||||||
SOC Managed Services | 352,535 | - | 352,535 | |||||||||
vCISO | 155,547 | - | 155,547 | |||||||||
Technical Assessments | - | 1,844,496 | 1,844,496 | |||||||||
Forensics & I/R | - | 265,567 | 265,567 | |||||||||
Training | - | 149,529 | 149,529 | |||||||||
Other CyberSecurity Services | - | 15,845 | 15,845 | |||||||||
$ | 6,979,146 | $ | 2,275,437 | $ | 9,254,583 |
9
Security Managed Services | Professional Services | Total | ||||||||||
Primary Sector Markets | ||||||||||||
Public | $ | 1,118,844 | $ | 136,272 | $ | 1,255,116 | ||||||
Private | 6,746,088 | 1,110,530 | 7,856,618 | |||||||||
Not-for-profit | 187,293 | 30,383 | 217,676 | |||||||||
Revenue | $ | 8,052,225 | $ | 1,277,185 | $ | 9,329,410 | ||||||
Major Service Lines | ||||||||||||
Compliance | $ | 1,612,167 | $ | - | $ | 1,612,167 | ||||||
Secured managed services | 5,790,764 | - | 5,790,764 | |||||||||
SOC managed services | 629,561 | - | 629,561 | |||||||||
vCISO | 19,733 | - | 19,733 | |||||||||
Technical assessments | - | 908,232 | 908,232 | |||||||||
Incident reporting and forensics | - | 158,447 | 158,447 | |||||||||
Training | - | 2,550 | 2,550 | |||||||||
Other cybersecurity services | - | 207,956 | 207,956 | |||||||||
Revenue | $ | 8,052,225 | $ | 1,277,185 | $ | 9,329,410 | ||||||
Major Geographic Location | ||||||||||||
U.S. | $ | 7,183,987 | $ | 1,222,243 | $ | 8,406,230 | ||||||
Chile | 868,238 | 54,942 | 923,180 | |||||||||
Revenue | $ | 8,052,225 | $ | 1,277,185 | $ | 9,329,410 |
Revenue consistsconsisted of the following by service offering for the ninethree months ended September 30, 2020:March 31, 2021:
Security Managed Services | Professional Services | Total | Security Managed Services | Professional Services | Total | |||||||||||||||||||
Primary Sector Markets | ||||||||||||||||||||||||
Public | $ | 2,498,371 | $ | 5,068 | $ | 2,503,439 | $ | 971,834 | $ | 6,000 | $ | 977,834 | ||||||||||||
Private | 1,024,744 | 1,001,748 | 2,026,492 | 848,463 | 681,961 | 1,530,424 | ||||||||||||||||||
Not-for-Profit | 89,374 | 9,000 | 98,374 | |||||||||||||||||||||
$ | 3,612,489 | $ | 1,015,816 | $ | 4,628,305 | |||||||||||||||||||
Not-for-profit | 51,520 | - | 51,520 | |||||||||||||||||||||
Revenue | $ | 1,871,817 | $ | 687,961 | $ | 2,559,778 | ||||||||||||||||||
Major Service Lines | ||||||||||||||||||||||||
Compliance | $ | 2,519,958 | $ | - | $ | 2,519,958 | $ | 1,066,628 | $ | - | $ | 1,066,628 | ||||||||||||
Secured Managed Services | 752,371 | - | 752,371 | |||||||||||||||||||||
SOC Managed Services | 301,760 | - | 301,760 | |||||||||||||||||||||
Secured managed services | 567,594 | - | 567,594 | |||||||||||||||||||||
SOC managed services | 206,035 | - | 206,035 | |||||||||||||||||||||
vCISO | 38,400 | - | 38,400 | 31,560 | - | 31,560 | ||||||||||||||||||
Technical Assessments | - | 190,825 | 190,825 | |||||||||||||||||||||
Forensics & I/R | - | 554,069 | 554,069 | |||||||||||||||||||||
Technical assessments | - | 561,297 | 561,297 | |||||||||||||||||||||
Incident reporting and forensics | - | 85,350 | 85,350 | |||||||||||||||||||||
Training | - | 58,625 | 58,625 | - | 40,725 | 40,725 | ||||||||||||||||||
Other CyberSecurity Services | - | 212,297 | 212,297 | |||||||||||||||||||||
Other cybersecurity services | - | 589 | 589 | |||||||||||||||||||||
Revenue | $ | 1,871,817 | $ | 687,961 | $ | 2,559,778 | ||||||||||||||||||
$ | 3,612,489 | $ | 1,015,816 | $ | 4,628,305 | |||||||||||||||||||
Major Geographic Location | ||||||||||||||||||||||||
U.S. | $ | 1,871,817 | $ | 687,961 | $ | 2,559,778 | ||||||||||||||||||
Chile | - | - | - | |||||||||||||||||||||
Revenue | $ | 1,871,817 | $ | 687,961 | $ | 2,559,778 |
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Cash and Cash Equivalents
The Company considersWe consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. The CompanyWe periodically assesses itsassess our accounts and other receivables for collectability on a specific identification basis. The Company providesWe provide for allowances for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. Payments are generally due within 30 days of invoice. The Company writesWe write off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of September 30, 2021,March 31, 2022 and December 31, 2020, the Company’s2021, our allowance for doubtful accounts was $76,200 91,707and $40,00077,811, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally between three and five years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Computer equipment costs for the Company are capitalized, as incurred, and depreciated on a straight-line basis over three years. TalaTek capitalizes all equipment costs over $5,000 and depreciates these costs on a straight-line basis over three years.
Maintenance and repairs are charged to expense as incurred. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts, and the resulting gain or loss, if any, is reflected in results of operations.
Inventory
Inventory consists of software licenses and computer equipment for sale to customers. Inventory is measured using the first-in, first-out (“FIFO”) method and stated at lower of cost or net realizable value as of March 31, 2022 and December 31, 2021. The value of inventories is reduced for excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and adjusts the value of inventory when required. We recorded 0 inventory impairment losses for the three months ended March 31, 2022 and 2021.
Impairment of Long-Lived Assets
The Company reviewsWe review long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. During the three ended March 31, 2022 and nine months ended September 30, 2021, the Companywe did not record a loss on impairment.
10
Intangible Assets
The Company records itsWe record our intangible assets at costfair value in accordance with ASC 350, Intangibles – Goodwill and Other. Finite-lived intangible assets are amortized over their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.
Goodwill
Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually at year end, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit level (See(see Note 6).
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Advertising and Marketing Costs
The Company expensesWe expense advertising and marketing costs as they are incurred. Advertising and marketing expenses were $254,026155,341 and $30,48845,227 for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, and are recorded in operating expenses on the unaudited condensed consolidated statements of operations. Advertising and marketing expenses were $471,721 and $104,058 for the nine months ended September 30, 2021 and 2020, respectively, and are recorded in operating expenses on the unaudited condensed consolidated statements of operations.
Fair Value Measurements
As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level(Level 1 measurement) and the lowest priority to unobservable inputs (level(Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
Level 1: | Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
Level 2: | Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. |
Level 3: | Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques. |
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All vested outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options and shares issuable upon conversion thereof have been excluded from the Company’sour computation of net loss per common share for the three and nine months ended September 30, 2021March 31, 2022 and 2020.2021.
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SUMMARY OF SECURITIES EXCLUDED FROM DILUTED PER SHARE CALCULATION
September 30, 2021 | September 30, 2020 | |||||||
Stock Options | 27,680,040 | 21,435,700 | ||||||
Convertible Debt | 1,500,000 | - | ||||||
Total | 29,180,040 | 21,435,700 |
March 31, 2022 | March 31, 2021 | |||||||
Stock options | 34,820,131 | 25,404,533 | ||||||
Convertible debt | 300,000 | 1,500,000 | ||||||
Total | 35,120,131 | 26,904,533 |
Stock-Based Stock-based Compensation
The Company appliesWe apply the provisions of ASC 718, Compensation - Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements of operations.
For stock options issued to employees and members of theour board of directors for their services, the Company estimateswe estimate the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates, and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizeswe recognize stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised. Due to the Company’sour limited history and lack of public trading volume for itsour common stock, the Companywe used the average of historical share prices of similar companies within itsour industry to calculate volatility for use in the Black-Scholes option pricing model.
Pursuant to Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, the Company accountswe account for stock options issued to non-employees for their services in accordance with ASC 718. The Company usesWe use valuation methods and assumptions to value stock options that are in line with the process for valuing employee stock options noted above.
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Leases
Leases in which the Company iswe are the lessee are comprised of corporate offices and property and equipment. All of the leases are classified as operating leases. The Company leasesWe lease multiple office spaces with a remaining weighted average term of 1.172.21 years. The Company leasesWe lease a vehicle with a remaining term of 0.670.25 years.
In accordance with ASC 842, Leases, the Companywe recognized a right-of-use (“ROU”) asset and corresponding lease liability on itsour unaudited condensed consolidated balance sheet for long-term office leases and a vehicle operating lease agreement. See Note 12 – Leases for further discussion, including the impact on the Company’sour unaudited condensed consolidated financial statements and related disclosures.
Deferred Revenue
Deferred revenue primarily consists of billings or payments received from customers in advance of revenue recognized for the services provided to our customers or annual licenses and is recognized as services are performed or ratably over the life of the lease. We generally invoice customers in advance or in milestone-based installments. Deferred revenue of approximately $54,000 was recognized for the three months ended March 31, 2022 that was included in the deferred revenue balance as of December 31, 2021. As of March 31, 2022, deferred revenue related to such customer payments was $1,952,543, all of which is expected to be recognized during the succeeding twelve-month period and is therefore presented as current.
Deferred revenue consisted of the following:
SCHEDULE OF DEFERRED REVENUE
March 31, 2022 | December 31, 2021 | |||||||
Security managed services | $ | 1,724,543 | $ | 52,824 | ||||
Professional services | 228,000 | - | ||||||
Total deferred revenue | $ | 1,952,543 | $ | 52,824 |
Foreign Currency
Arkavia, uses the local currency as their functional currency. Assets and liabilities for Arkavia have been translated into U.S. dollars at the exchange rates prevailing at the end of the period and results of operations at the average exchange rates for the period. Unrealized exchange gains and losses arising from the translation of the financial statements of our non-U.S. functional currency operations are accumulated in the cumulative foreign currency translation adjustments account in the unaudited condensed consolidated statements of operations and comprehensive loss.
Accumulated Other Comprehensive Gain
Foreign currency translation adjustments of $902,441 represent the difference between net loss and comprehensive gain for the three months ended March 31, 2022.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, including tax loss and credit carry forwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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The Company utilizesWe utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. The Company accountsWe account for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. At September 30, 2021,March 31, 2022, and December 31, 2020, the Company’s2021, our net deferred tax asset has been fully reserved.
For uncertain tax positions that meet a “more likely than not” threshold, the Company recognizeswe recognize the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. The Company’sOur practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is made that such expense is likely.
Recently Issued Accounting Standards
In March 2021, the FASB issued ASU No. 2021-03, Intangibles – Goodwill and Other (Topic 350). ASU 2021-03 requires an entity to identify and evaluate goodwill impairment triggering events when they occur to determine whether it is more likely than not that the fair value of a reporting unit (or entity, if the entity has elected the accounting alternative for amortizing goodwill and chosen that option) is less than its carrying amount. If an entity determines that it is more likely than not that the goodwill is impaired. It must test goodwill for impairment using the triggering event date as the measurement date. An entity is required to disclose the amount assigned to goodwill in total and by major business combination, or by reorganization event resulting in fresh-start reporting. Also, the entity must disclose the weighted average amortization period in total and the amortization period by major business combination, or by reorganization event resulting in fresh-start reporting. ASU 2021-03 was effective for the Company on January 1, 2021 and did not have a significant impact on our unaudited condensed consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force). The ASU requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the ASU, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The ASU is applied prospectively and is effective for the Companyus for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. We adopted the standard on January 1, 2022 and management noted that there is no material impact to the unaudited condensed consolidated financial statements.
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In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers. The Companynew guidance requires contract assets and contract liabilities acquired in business combinations to be recognized in accordance with ASC Topic 606 as if the acquirer had originated the contracts. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that adopting this standard will have on the unaudited condensed consolidated financial statements.
All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.us.
NOTE 3 – ACQUISITIONS
Catapult Acquisition Corporation
On August 12, 2021,January 5, 2022, we entered into True Digital Stock Purchase Agreement with certain stockholders of True Digital and the Company effected an AmendedTrue Digital Merger Agreement with True Digital and Restatedcertain of its other stockholders. On January 19, 2022, the transactions contemplated by the True Digital Stock Purchase Agreement and Plan of Merger (the “Merger Agreement”) with Catapult Acquisition Merger Sub, LLC (“Merger Sub”), Catapult Acquisition Corporation (d/b/a VelocIT) (“VelocIT”), the shareholders of VelocIT and Derek Hahn, in his capacity as the shareholder representative. Pursuant to theTrue Digital Merger Agreement the Merger Sub mergedwere consummated, with and into VelocIT, with VelocIT surviving the Merger asTrue Digital becoming a wholly-ownedwholly owned subsidiary of the Companyour company (the “VelocIT“True Digital Acquisition”). At the effective time of the VelocIT Acquisition, VelocIT’sTrue Digital’s outstanding common stock was exchanged for shares of the Company’s common stock.
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Immediately following the VelocIT Acquisition, the Company had shares of common stock issued and outstanding. The pre-acquisition stockholders of the Company retainedright to receive an aggregate of $117,729,9716,153,000 in cash and shares representing approximatelyof our common stock, subject to a 98%10% ownershipholdback. In the event that no claim is made by a Cerberus Indemnitee (as defined in the Merger Agreement) within one year from closing, then we shall pay the entire amount of the post-acquisition company. Therefore, upon consummation10% holdback to the shareholders of the VelocIT Acquisition, there was no change in control.True Digital.
The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations. Assets and liabilities of the acquired business were included in the consolidated balance sheet as of September 30, 2021, based on the respective estimated fair value on the date of acquisition as determined in a purchase price allocation using available information and making assumptions management believed are reasonable.
Per ASC 805, Business Combinations, the measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination. The measurement period shall not exceed one year from the acquisition date. The Company has identified the acquisition date as August 12, 2021. Subsequent to the issuance of these financial statements, the Company expectswe expect to obtain a third-party valuation on the fair value of the assets acquired, including identifiable intangible assets, and the liabilities assumed for use in the purchase price allocation.
During the period subsequent to the effective date of the acquisition, VelocIT recorded revenue of $985,146 and a net loss of $1,695,276 for the period from August 12, 2021 to September 30, 2021.
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The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and the liabilities assumed as of the transaction date:
SUMMARY OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES
August 12,2021 | ||||||||
Consideration paid | $ | 15,400,668 | $ | 40,879,380 | ||||
Tangible assets acquired: | ||||||||
Cash | 662,176 | 485,232 | ||||||
Accounts receivable | 961,581 | 1,404,386 | ||||||
Prepaid expenses | 37,941 | |||||||
Contract assets | 131,342 | |||||||
Prepaid expenses and other current assets | 196,825 | |||||||
Property and equipment | 24,608 | 906,006 | ||||||
Capitalizable expenses | 5,091 | |||||||
Other assets | 17,505 | |||||||
Total tangible assets | 1,691,397 | 3,141,296 | ||||||
Intangible assets acquired: | ||||||||
Intellectual property | 134,445 | |||||||
Total intangible assets | 134,445 | |||||||
Assumed liabilities: | ||||||||
Accounts payable | 528,571 | 419,100 | ||||||
Accrued expenses | 222,095 | 812,091 | ||||||
Deferred revenue | 1,796,330 | |||||||
Line of credit | 283,244 | |||||||
Loans payable | 1,071,313 | 156,783 | ||||||
SBA loan payoff | 1,426,850 | |||||||
Loans payable - shareholder | 543,581 | |||||||
Other liabilities | 17,012 | |||||||
Total assumed liabilities | 3,248,829 | 4,028,141 | ||||||
Net liabilities assumed | (1,422,987 | ) | (886,845 | ) | ||||
Goodwill (a.)(b.) | $ | 16,823,655 | ||||||
Goodwill (a) | $ | 41,766,225 |
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NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consistconsisted of:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
Prepaid expenses | $ | 398,712 | $ | 128,398 | $ | 1,182,061 | $ | 453,498 | ||||||||
Prepaid taxes | 688,100 | 231,014 | ||||||||||||||
Prepaid insurance | 56,125 | 13,746 | 51,130 | 46,751 | ||||||||||||
Other current assets | 30,780 | - | ||||||||||||||
Deferred interest | 244,234 | 229,702 | ||||||||||||||
Total prepaid expenses and other current assets | $ | 485,617 | $ | 142,144 | $ | 2,165,525 | $ | 960,965 |
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NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consistsconsisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
Computer equipment | $ | 15,735 | $ | 15,735 | $ | 687,086 | $ | 495,235 | ||||||||
Building | 1,047,020 | 1,047,020 | ||||||||||||||
Leasehold improvements | 177,853 | 109,626 | ||||||||||||||
Vehicle | 63,052 | 63,052 | 63,052 | 63,052 | ||||||||||||
Furniture and fixtures | 30,832 | 6,224 | 45,835 | 33,358 | ||||||||||||
Software | 10,092 | 10,092 | 1,678,631 | 748,599 | ||||||||||||
Property and equipment, gross | 119,711 | 95,103 | ||||||||||||||
Property and equipment gross | 3,699,477 | 2,496,890 | ||||||||||||||
Less: accumulated depreciation | (30,310 | ) | (14,473 | ) | (256,540 | ) | (102,466 | ) | ||||||||
Property and equipment, net | $ | 89,401 | $ | 80,630 | $ | 3,442,937 | $ | 2,394,424 |
Total depreciation expense was $6,989154,074 and $5,3614,424 for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively. Total depreciation expense was $15,837 and $8,668 for the nine months ended September 30, 2021 and 2020, respectively.
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the changes in goodwill during the ninethree months ended September 30, 2021:March 31, 2022:
SCHEDULE OF CHANGES IN GOODWILL
Balance December 31, 2020 | $ | 4,101,369 | ||
Acquisition of goodwill | 16,823,655 | |||
Impairment | - | |||
Reclassification based on valuation report(1) | (230,000 | ) | ||
Ending balance, September 30, 2021(2) | $ | 20,695,024 |
Balance December 31, 2021 | $ | 16,792,535 | ||
Acquisition of goodwill | 41,766,225 | |||
Foreign currency translation adjustment | 715,669 | |||
Ending balance, March 31, 2022(1) | $ | 59,274,429 |
(1) |
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The following table summarizes the identifiable intangible assets as of September 30, 2021,March 31, 2022 and December 31, 2020:2021:
SUMMARY OF IDENTIFIABLE INTANGIBLE ASSETS
Useful life | September 30, 2021 | December 31, 2020 | Useful life | March 31, 2022 | December 31, 2021 | |||||||||||||||
Tradenames – trademarks | Indefinite | $ | 1,211,800 | $ | 1,094,500 | Indefinite | $ | 1,211,800 | $ | 1,211,800 | ||||||||||
Customer base (1) | 15 years | 384,000 | 370,000 | |||||||||||||||||
Non-compete agreements (1) | 5 years | 242,100 | 236,400 | |||||||||||||||||
Intellectual property/technology (1) | 10 years | 748,466 | 521,000 | |||||||||||||||||
Tradenames - trademarks | 5 years | 1,849,449 | 1,798,300 | |||||||||||||||||
Customer base | 5 - 10 years | 1,712,242 | 1,650,000 | |||||||||||||||||
Non-compete agreements | 2 - 5 years | 695,238 | 675,500 | |||||||||||||||||
Intellectual property/technology | 5 - 10 years | 1,557,008 | 1,528,000 | |||||||||||||||||
Identifiable intangible assets | 2,586,366 | 2,221,900 | 7,025,737 | 6,863,600 | ||||||||||||||||
Less accumulated amortization | (226,964 | ) | (116,468 | ) | (628,245 | ) | (323,331 | ) | ||||||||||||
Total | $ | 2,359,402 | $ | 2,105,432 | $ | 6,397,492 | $ | 6,540,269 |
The weighted average remaining useful life of identifiable amortizable intangible assets remaining is 8.243.88 years.
Amortization of identifiable intangible assets for the three months ended September 30,March 31, 2022 and 2021 and 2020, was $40,506304,914 and $15,64834,994, respectively. Amortization of identifiable intangible assets for the nine months ended September 30, 2021 and 2020, was $110,495 and $46,944, respectively.
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The below table summarizes the future amortization expense for the remainder of 2021 and the next four years thereafter:
SCHEDULE OF FUTURE AMORTIZATION EXPENSE
2 | 2021 | |||||||
Remainder of 2021 | $ | 51,709 | ||||||
2022 | 153,554 | |||||||
2022 (excluding the three months ended March 31, 2022) | $ | 879,235 | ||||||
2023 | 125,086 | 1,166,080 | ||||||
2024 | 127,939 | 940,215 | ||||||
2025 | 100,444 | 909,440 | ||||||
2026 | 865,360 | |||||||
Thereafter | 588,869 | 425,362 | ||||||
Future Amortization Expense | $ | 1,147,602 | $ | 5,185,692 |
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consistconsisted of the following amounts:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
September 30, 2021 | December 31, 2020 | March 31, 2022 | December 31, 2021 | |||||||||||||
Accounts payable | $ | 788,268 | $ | 328,368 | $ | 2,975,474 | $ | 1,700,260 | ||||||||
Accrued payroll | 408,602 | 39,670 | 453,147 | 482,588 | ||||||||||||
Accrued expenses | 265,532 | 417,832 | 2,032,540 | 513,718 | ||||||||||||
Accrued commissions | 26,678 | - | 729,397 | - | ||||||||||||
Accrued interest – related party | 5,079 | 23,934 | 30,993 | 12,500 | ||||||||||||
Total accounts payable and accrued expenses | $ | 1,494,159 | $ | 809,804 | $ | 6,221,551 | $ | 2,709,066 |
NOTENote 8 - RELATED PARTY TRANSACTIONS
Convertible Note Payable, Consulting, and Stock Payable – Related Party
On December 31, 2018, GenResultsNovember 1, 2021, we entered into an unsecured note payablea two-year consulting agreement with Jemmett Enterprises, LLC,Smile on Fridays LLP (“Smile”) pursuant to which Smile will represent us as the Company’s majority stockholder that is controlled byChief Marketing Officer. Upon execution of the Company’s Chief Executive Officer, inagreement, we were to issue a total of shares of our common stock. The shares shall be deemed vested and earned to upon the original principal amountexecution of $200,000. The note has a maturity datethe agreement and 25% at the beginning of June 15, 2021, and bears interest at 6% per annum. There was no remaining balance at September 30, 2021, The outstanding principal balanceeach subsequent six-month period. As of this loan was $9,787 at DecemberMarch 31, 2020. At September 30, 2021, and December 31, 2020, the Company has recorded accrued interest2022, shares of $5,079 and $23,934, respectively, with respect to this note payable. The Company has recorded interest expense related to this note of $186 and $3,669 during the three months ended September 30, 2021 and 2020, respectively, and $4,595 and $9,358 during the nine months ended September 30, 2021 and 2020, respectively.
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Convertible Note Payable, Accounts Receivable and Revenue – Related Partyour stock have been issued.
On December 23, 2020,January 1, 2021, we entered into a two-year consulting agreement with Smile, pursuant to which Smile will provide marketing and public relations services to us. Upon execution of the Companyagreement, we were to issue a total of shares of our common stock. As of March 31, 2022, shares of our common stock have been issued.
On October 27, 2021, we issued to a related partyNeil Stinchcombe, the sole owner of Smile, a convertible note in the principal amount of $bearing an interest atrate of 6%5% per annum payable at maturity with aan original maturity date of December 31, 2021 andJanuary 27, 2022, with a conversion price of $2.00 $5.00 per share. Pursuant to the note, the maturity date, at our election, was extended to April 22, 2022. On March 10, 2022, we entered into an amendment to the note pursuant to which the maturity date was extended to October 27, 2022. The outstanding principal balance of this loannote was $3,000,0001,500,000 at September 30, 2021,on March 31, 2022 and December 31, 2020, respectively. See 2021. During the three months ended March 31, 2022, we recorded $18,493 in accrued interest.
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Note 12 for additional details.Receivable – Related Party
At September 30, 2021, the Company had $48,270 in outstanding accounts receivable fromArkavia provided cash infusions to a related party. In addition, duringparty to fund an intended wholly owned subsidiary, Arkavia Peru, for start-up and operational costs. As of March 31, 2022, the nine months ended September 30, 2021,subsidiary has yet to be incorporated and as such, Arkavia has recorded the Company generatedamount as a receivable. The amount outstanding at March 31, 2022 is $305,1271,161,718 in revenues from the related party. and is considered short-term and non-interest bearing.
Note 9 -– STOCKHOLDERS’ EQUITY
Equity Transactions During the Period
During the nine months ended September 30, 2021, the Company issued an aggregate of shares of common stock with a fair value of $ per share, respectively, to investors for cash proceeds of $3,250,000.
On August 12, 2021, the Company issued an aggregate of shares of common stock with a fair value of $ per share, to VelocIT pursuant to the Acquisition (See Note 3).
On August 16, 2021, the Company issued an aggregate of shares of common stock with a fair value of $per share to a consultant for services rendered (See Note 10).
Stock Payable
On January 16, 2020, the Company entered into a consulting agreement, with Eskenzi PR Limited (“Eskenzi”). As per the agreement, Eskenzi will provide various marketing and public relations services to the Company. The initial term of the agreement was for twelve months and automatically renews for an additional twelve months unless either the Company or Eskenzi provides at least three months advance written notice of termination. On January 16, 2021, the consulting agreement was automatically renewed per the terms of the agreement.
Upon execution of the consulting agreement the Company was to issue shares of the Company’s restricted common stock, valued at $48,000 to Eskenzi. Upon the renewal of the consulting agreement the Company was to issue shares of the Company’s restricted stock, valued at $639,600, for a two-year period. On August 16, 2021, the Company issued shares of vested common stock under the consulting agreement. As of September 30, 2021, of vested shares have yet to be issued. As such, the Company recorded a stock payable in the amount of $79,950 and $46,000 representing the fair value of services performed through the nine months and year ended September 30, 2021 and December 31, 2020, respectively.
See Note 10 for disclosure of additional equity related transactions.
Note 10 – StocK-BASED COMPENSATION
2019 Equity Incentive Plan
The BoardOur board of Directors and stockholders of the Companydirectors approved the Company’sour 2019 Equity Incentive Plan (the “2019 Plan”) on June 6, 2019.2019, and our stockholders holding a majority of the outstanding shares of our common stock approved and adopted the 2019 Plan. The maximum number of shares of the Company’sour common stock that may be issued under the Company’s 2019 Plan is shares. The 2019 Plan has a term of of the Company, or (iii) previously issued shares of common stock reacquired by the Company,us, including shares purchased on the open market. from the date it was adopted. Shares issued under the 2019 Plan shall be made available from (i) authorized but unissued shares of common stock, (ii) common stock held in our treasury,
Warrant and Option Valuation
We computed the fair value of options granted using the Black-Scholes option pricing model. The expected terms for options issued to non-employees is the contractual life and the expected term used for options issued to employees and directors is the estimated period of time that options granted are expected to be outstanding. We utilize the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option grants. We utilize an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within our industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
Options
The CompanyWe granted options for the purchase of shares of common stock during the ninethree months ended September 30, 2021.March 31, 2022.
The CompanyWe granted options for the purchase of shares of common stock during the ninethree months ended September 30, 2020.March 31, 2022.
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SCHEDULE OF BLACK-SCHOLES STOCK OPTIONS GRANTEDASSUMPTIONS
For the Nine Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Three Months Ended | |||||||||||||
September 30, 2021 | September 30, 2020 | March 31, 2022 | March 31, 2021 | |||||||||||||
Risk free interest rate | - | - | - | % - % | ||||||||||||
Contractual term (years) | ||||||||||||||||
Expected volatility | - | - | % | % | ||||||||||||
Expected dividends | % | % |
The total weighted average grant date fair value of options issued during the nine months ended September 30, 2020, was $157,384. The weighted average non-vested grant date fair value of non-vested options was $1,871,528 at September 30, 2020.
SCHEDULE OF STOCK OPTIONOPTIONS ACTIVITY
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
Outstanding at January 1, 2021 | 24,573,700 | $ | 0.86 | |||||||||||||
Outstanding at January 1, 2022 | 31,372,148 | $ | 1.84 | |||||||||||||
Granted | 3,236,340 | 2.40 | 6,025,815 | 3.95 | ||||||||||||
Exercised | - | - | (100,000 | ) | 0.38 | |||||||||||
Expired or cancelled | (130,000 | ) | 0.54 | (2,477,832 | ) | 1.84 | ||||||||||
Outstanding at September 30, 2021 | 27,680,040 | $ | 1.04 | |||||||||||||
Outstanding at March 31, 2022 | 34,820,131 | $ | 2.21 |
SUMMARY OF OPTIONS TO PURCHASE SHARES OF COMMON STOCK OUTSTANDING AND EXERCISABLE
Weighted- | Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||||||
Outstanding | Remaining Life | Exercise | Number | Outstanding | Remaining Life | Exercise | Number | |||||||||||||||||||||||||||||
Exercise Prices | Exercise Prices | Options | In Years | Price | Exercisable | Exercise Prices | Options | In Years | Price | Exercisable | ||||||||||||||||||||||||||
$ | 0.38 | 3,000,000 | $ | 0.38 | 3,000,000 | 0.38 | 2,733,333 | $ | 0.38 | 2,733,333 | ||||||||||||||||||||||||||
0.40 | 3,600,000 | 0.40 | 3,000,000 | 0.40 | 3,600,000 | 0.40 | 3,600,000 | |||||||||||||||||||||||||||||
0.50 | 12,026,000 | 0.50 | 8,081,238 | 0.50 | 8,732,388 | 0.50 | 8,412,538 | |||||||||||||||||||||||||||||
2.00 | 6,277,700 | 2.00 | 108,333 | 1.40 | 1,417,251 | 1.40 | 1,372,395 | |||||||||||||||||||||||||||||
2.05 | 1,857,000 | 2.05 | - | 2.00 | 5,045,200 | 2.00 | 2,251,750 | |||||||||||||||||||||||||||||
3.05 | 170,000 | 3.05 | - | 2.05 | 1,421,703 | 2.05 | 342,396 | |||||||||||||||||||||||||||||
3.60 | 155,000 | 3.60 | - | 2.25 | 1,100,000 | 2.25 | - | |||||||||||||||||||||||||||||
4.00 | 499,340 | 4.00 | - | 3.05 | 170,000 | 3.05 | - | |||||||||||||||||||||||||||||
3.20 | 22,000 | 3.20 | - | |||||||||||||||||||||||||||||||||
3.46 | 12,000 | 3.46 | - | |||||||||||||||||||||||||||||||||
3.60 | 155,000 | 3.60 | - | |||||||||||||||||||||||||||||||||
4.00 | 624,340 | 4.00 | - | |||||||||||||||||||||||||||||||||
4.12 | 12,000 | 4.12 | - | |||||||||||||||||||||||||||||||||
4.21 | 18,000 | 4.21 | - | |||||||||||||||||||||||||||||||||
4.82 | 1,062,827 | 4.82 | - | |||||||||||||||||||||||||||||||||
5.00 | 8,599,088 | 5.00 | 52,958 | |||||||||||||||||||||||||||||||||
$ | 6.75 | 95,000 | 6.75 | - | 6.75 | 95,000 | 5.00 | - | ||||||||||||||||||||||||||||
27,680,040 | $ | 1.03 | 14,189,571 | 34,820,131 | $ | 2.21 | 18,765,371 |
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The compensation expense attributed to the issuance of the options is recognized ratably over the vesting period.
Options granted under the 2019 Plan are exercisable for a specified period, generally five to ten years from the grant date, and generally vest over three to four years from the grant date.
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Total compensation expense related to the options was $ and $ for the three months ended September 30,March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, we attributed $and 2020, respectively. Total$of compensation expense related to the options wasto cost of payroll and selling, general, and administrative expenses, respectively. During the three months ended March 31, 2021, we attributed $and $ forof compensation expense related to the nine months ended September 30, 2021options to cost of payroll and 2020,selling, general, and administrative expenses, respectively. As of September 30, 2021,March 31, 2022, there was future compensation expense of $ with a weighted average recognition period of years related to the options.
The aggregate intrinsic value totaled $and $, for total outstanding and exercisable options, respectively, and was based on the Company’sour estimated fair value of the common stock of $as of September 30, 2021,March 31, 2022, which is the aggregate fair value of the common stock that would have been received by the option holders had all option holders exercised their options as of that date, net of the aggregate exercise price.
Warrant Activity Summary
Options Pending
In applying the Black-Scholes option pricing model to warrants granted or issued, we used the following assumptions:
AsSCHEDULE OF STOCK WARRANTS ASSUMPTIONS
For the Three Months Ended | ||||
March 31, 2022 | ||||
Risk free interest rate | % - | % | ||
Contractual term (years) | – | |||
Expected volatility | 84 | % | ||
Expected dividends | 0.00 | % |
A summary of September 30, 2021, the Company has approximately warrant activity during the three months ended March 31, 2022 is presented below:
3,400,000SCHEDULE OF STOCK WARRANT ACTIVITY options
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at January 1, 2022 | - | $ | - | |||||
Granted | 144,200 | 5.00 | ||||||
Exercised | - | - | ||||||
Expired or cancelled | - | - | ||||||
Outstanding at March 31, 2022 | 144,200 | $ | 5.00 |
SUMMARY OF STOCK OUTSTANDING AND EXERCISABLE
Weighted- | Weighted- | |||||||||||||||||
Average | Average | |||||||||||||||||
Outstanding | Remaining Life | Exercise | Number | |||||||||||||||
Exercise Prices | Options | In Years | Price | Exercisable | ||||||||||||||
$ | 5.00 | 144,200 | $ | 5.00 | 144,200 | |||||||||||||
144,200 | $ | 5.00 | 144,200 |
The majority of these employees workaggregate intrinsic value totaled $ , for VelocIT. The options will be granted with an exercise price equal to the trading pricetotal outstanding and exercisable warrants and was based on the dateestimated fair value of grant, and will be valued utilizing a Black-Scholes valuation. The expense will be amortized overour common stock of $ as of March 31, 2022, which is the termaggregate fair value of the options vesting period, althoughcommon stock that would have been received by the amountwarrant holders had all warrant holders exercised their warrants as of that date, net of the expense has yet to be determined.aggregate exercise price.
22 |
NOTE 1110 – COMMITMENTS AND CONTINGENCIES
Maxim Settlement Agreement
On October 27, 2020, we entered into an advisory agreement (the “Advisory Agreement”) with Maxim Group LLC (“Maxim”), pursuant to which the parties agreed to certain compensation obligations in the form of our common stock, cash and future rights. Certain disputes arose between the parties regarding the duties and obligations pursuant to the Advisory Agreement, resulting in the parties agreeing to enter into a settlement and release agreement on January 13, 2022. As a result, the Company recorded a settlement liability at December 31, 2021 of $470,000 and issued shares of the Company’s common stock to Maxim, with a fair value of $ per share, pursuant to the settlement. During the three months ended March 31, 2022, the Company paid $470,000 in cash.
Legal Claims
There are no material pending legal proceedings in which the Companywe or any of itsour subsidiaries is a party or in which any director, officerof our directors, officers or affiliate of the Company,affiliates, any owner of record or beneficially of more than 5% of any class of itsour voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company.us.
NOTE 1211 – LOANS PAYABLE AND LINES OF CREDIT
Lines of Credit
TalaTek, Inc.
On July 29, 2019, TalaTek entered into a secured line of credit with SunTrust Bank (“SunTrust”) for $500,000. The line of credit bears interest at LIBOR plus 2.25%. The line of credit is an open-end revolving line of credit and may be terminated at any time by SunTrust without notice to TalaTek. At September 30,March 31, 2022 and December 31, 2021, the line of credit remained open and no amounts were drawn on the line of credit.
Technologyville, Inc.True Digital
On August 24, 2017, TechvilleSeptember 9, 2021, True Digital entered into a secured revolving line of credit with WintrustBlue Sky Bank (“Wintrust”Blue Sky”) for a maximum amount of $75,000500,000. The line of credit bears interest at 1.99%3.25% for the first twelve (12) months, then Prime plus 2%, with a floor rate of 6% and a maturity date of August 24, 2021.per annum. The line of credit was collateralized by allhas an ending term of Techville’s assets. During the nine months ended September 30, 2021, Techville drew $221,346 against the line of credit and made payments of $224,346August 9, 2022. At September 30, 2021, and DecemberMarch 31, 2020, there2022, the outstanding balance was $-369,829 and $3,000 outstanding, respectively, and has expired..
Loans Payable
Technologyville, Inc.
On April 29, 2019, Techville entered into a note payable with VCI Account Services, that subsequently was assigned to U.S. Bancorp, in the original principal amount of $59,905. The note has a maturity date of May 12, 2025and bears an interest atrate of 5.77%per annum. During the ninethree months ended September 30, 2021, the CompanyMarch 31, 2022, we made cash payments of $8,5805,532, of which $. 8,054 and $526 was attributed to principal and interest, respectively. The loan is collateralized by a vehicle. At September 30, 2021, $37,826 was outstanding.
On June 22, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Techville entered into a note payable with a financial institution for $179,600 bearing interest at 1% per annum and a maturity date of June 22, 2025. Pursuant to the note, principal and interest payments were deferred for ten months. Techville applied for loan forgiveness on a timely basis, and at September 30, 2021, the total amount due of $179,600 had been forgiven.
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GenResults, LLC
On DecemberMarch 31, 2018, GenResults entered into an unsecured note payable with Jemmett Enterprises, LLC, the Company’s majority stockholder that is controlled by the Company’s Chief Executive Officer, in the original principal amount of $200,000. The note had a maturity date of June 15, 2021, and bore interest at 6% per annum. There was no remaining balance at September 30, 2021, The outstanding principal balance of this loan was $9,787 at December 31, 2020. At September 30, 2021,2022 and December 31, 2020, the Company has recorded accrued interest of2021, $5,07927,122 and $23,93432,474 , respectively, with respect to this note payable. The Company has recorded interest expense related to this note of $186 and $3,669 during the three months ended September 30, 2021 and 2020, respectively, and $4,595 and $9,358 during the nine months ended September 30, 2021 and 2020,was outstanding, respectively.
Cerberus Cyber Sentinel Corporation
On April 17, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Cerberus entered into a note payable with a financial institution for $530,000 bearing interest at 1% per annum and a maturity date of April 17, 2022. Pursuant to the note, principal and interest payments were deferred for six months. The Company applied for loan forgiveness on a timely basis, and at September 30, 2021, the total amount due of $530,000 had been forgiven.
Clear Skies Security LLC
On May 8, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Clear Skies entered into a loan payable with a financial institution for $134,200 bearing interest at 1% per annum and a maturity date of May 8, 2022. Pursuant to the loan, principal and interest payments were deferred for six months. Clear Skies applied for loan forgiveness on a timely basis, and at September 30, 2021, the total amount due of $134,200 had been forgiven.
Alpine Security, LLC
On April 18, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Alpine entered into a loan payable with a financial institution for $137,000 bearing interest at 1% per annum and a maturity date of April 8, 2022. Pursuant to the loan, principal and interest payments were deferred for six months. Alpine applied for loan forgiveness on a timely basis, and at September 30, 2021, the total amount due of $137,000 had been forgiven.
Catapult Acquisition Corp.
On July 9, 2016, Catapult AcquistionAcquisition Corp. entered into several seller notes payable with shareholders of VelocIT. The total borrowing amount was $600,000and each loan bears interest at 5%per annum with a maturity date of July 31, 2023. Pursuant to the terms of the loans, principal and interest payments were deferred for two years on three of the loans, making up $150,000of the $600,000 total amount borrowed. During the three months ended March 31, 2022, we made cash payments totaling $80,956, of which $75,652 and $5,304 was attributable to principal and interest, respectively. The amount outstanding as of September 30,March 31, 2022 and December 31, 2021 was $559,354370,587 and $446,239, respectively.
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Arkavia
At March 31, 2022 and December 31, 2021, notes payable consist of the following amounts:
SCHEDULE OF NOTES PAYABLE
March 31, 2022 | December 31, 2021 | |||||||
Total notes payable | 4,697,586 | 5,018,788 | ||||||
4.22% Note payable, due March 30, 2026 | $ | 557,582 | $ | 607,915 | ||||
4.22% Note payable, due March 30, 2026 | 400,981 | 437,178 | ||||||
4.81% Note payable, due April 10, 2028 | 141,804 | 148,665 | ||||||
4.81% Note payable, due April 10, 2028 | 160,530 | 168,308 | ||||||
4.20% Note payable, due June 3, 2024 | 29,230 | 33,418 | ||||||
4.20% Note payable, due March 6, 2026 | 939,066 | 998,759 | ||||||
3.48% Note payable, due May 15, 2023 | 109,774 | 129,692 | ||||||
4.88% Note payable, due August 8, 2024 | 149,538 | 179,591 | ||||||
3.50% Note payable, due May 26, 2021 | - | 5,817 | ||||||
3.50% Note payable, due December 1, 2023 | 45,936 | 58,805 | ||||||
4.69% Note payable, due April 15, 2024 | 136,172 | 206,993 | ||||||
6.48% Note payable, due February 17, 2022 | 196,206 | 191,792 | ||||||
3.50% Note payable, due April 15, 2024 | 136,172 | 182,088 | ||||||
7.14% Note payable, due December 3, 2029 | 540,933 | 557,445 | ||||||
7.14% Note payable, due December 3, 2029 | 95,981 | 99,574 | ||||||
7.14% Note payable, due December 3, 2029 | 924,168 | 869,179 | ||||||
7.14% Note payable, due December 3, 2029 | 133,513 | 143,569 | ||||||
Total notes payable | 4,697,586 | 5,018,788 | ||||||
Less current portion | (196,206 | ) | (213,199 | ) | ||||
Long term notes payable | $ | 4,501,380 | $ | 4,805,589 |
At various times during the three months ended March 31, 2022, Arkavia paid an aggregate of $337,680 in cash towards outstanding principal.
True Digital
On April 26, 2018, True Digital entered into a loan agreement with a shareholder for the principal amount of $250,000. The note had a maturity date of April 25, 2022 and bore an interest rate of 6% per annum. During the period of January 19, 2022 through March 31, 2022, True Digital made aggregate cash payments of $97,731. The loan was repaid prior the March 31, 2022.
On April 13, 2020, True Digital entered into a promissory note with a financial institution for the principal amount of $1,271,000. The note has a maturity date of April 13, 2022, bore an interest rate of 1% per annum and called for seventeen monthly payments of principal and interest of $71,171 beginning on November 13, 2020. At March 31, 2022, the amount outstanding was $74,427. Subsequent to March 31, 2022, the note was paid in full.
On February 10, 2020, True Digital entered into a promissory note with a shareholder for the principal amount of $ . The note has a maturity date of and bears an interest rate % per annum. During the period of January 19, 2022 through March 31, 2022, True Digital made aggregate cash payments of $ . At March 31, 2022, the amount outstanding was $ .
On February 2, 2021, True Digital entered into a promissory note with a shareholder for the principal amount of $ . The note has a maturity date of and bears an interest rate of % per annum. During the period of January 19, 2022 through March 31, 2022, True Digital made aggregate cash payments of $ . At March 31, 2022, the amount outstanding was $ .
Convertible Note Payable
On December 23, 2020, the CompanyOctober 27, 2021, we issued to a related party lenderNeil Stinchcombe, the sole owner of Smile, a convertible note payable in the principal amount of $3,000,0001,500,000 . The convertible note bears interest at 6% per annum, withbearing an effective interest rate due to the if converted value of the note, of 8.5%5% per annum payable at maturity with a maturity date of December 31, 2021. Amounts due under the note may be converted into shares of the Company’s common stock at any time at the option of the holder, atJanuary 27, 2022, with a conversion price of $2.005.00 per share. At December 31, 2020, the if converted value ofOn March 10, 2022, we entered into an amendment to the note atpursuant to which the market price of $maturity date was extended to 2.05 per share, would be $3,075,000October 27, 2022. The issuance of the note resulted in a discount from the beneficial conversion feature totaling $75,000. Total straight-line amortizationoutstanding principal of this discount totalednote was $56,5011,500,000 at March 31, 2022. At March 31, 2022 and December 31, 2021, we recorded accrued interest of $30,993 and $12,500 with respect to this note. We recorded interest expense of $18,493 during the ninethree months ended September 30, 2021, and has a remaining amortization period of 0.25 years. Total interest expense on the note was $46,000 and $135,000 for the three and nine months ended September 30, 2021.March 31, 2022.
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Future minimum payments under the above line of credit and notes payable forfollowing the remainder of 2021 and thereafter and the amount of loans payable, net of current portion,three months ended March 31, 2022, are as follows:
SCHEDULE OF FUTURE MINIMUM PAYMENTS UNDER NOTES PAYABLEFOR LONG TERM DEBT
Sep. 30, 2021 | ||||
2021 | $ | 3,000,000 | ||
2022 | 559,354 | |||
Total future minimum payments | 3,559,354 | |||
Less: discount | (18,599 | ) | ||
Loans payable | 3,540,755 | |||
Less: current | (3,097,382 | ) | ||
Loans payable, noncurrent | $ | 443,373 |
March 31, 2022 | ||||
2022 (excluding the three months ended March 31, 2022) | $ | 3,465,848 | ||
2023 | 1,069,214 | |||
2024 | 1,207,280 | |||
2025 | 752,419 | |||
2026 | 278,215 | |||
Thereafter | 1,008,011 | |||
Total future minimum payments | 7,780,987 | |||
Less: current | (2,501,563 | ) | ||
Long term debt, noncurrent | $ | 5,279,424 |
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NOTE 1312 – LEASES
All of the Company’sour leases are classified as operating leases. With the adoption of Topic 842, operating lease agreements are required to be recognized on the condensed consolidated balance sheet as ROU assets and corresponding lease liabilities.
On January 1, 2021, February 1, 2021, and August 12, 2021, the Company19, 2022, we recognized additional ROU assets and lease liabilities of $37,932226,942, $137,826and 154,767, respectively. The Company. We elected to not recognize ROU assets and lease liabilities arising from office leases with initial terms of twelve months or less (deemed immaterial) on the unaudited condensed consolidated balance sheets.
ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Companywe will exercise that option.
When measuring lease liabilities for leases that were classified as operating leases, the Companywe discounted lease payments using itsour estimated incremental borrowing rate at January 1, 2021.2022. The weighted average incremental borrowing rate applied was6%. As of September 30, 2021, the Company’sMarch 31, 2022, our leases had a remaining weighted average term of 1.152.21 years.
The following table presents net lease cost and other supplemental lease information:Operating leases are included in the unaudited condensed consolidated balance sheets as follows:
SCHEDULE OF LEASE COST AND OTHER SUPPLEMENT LEASE INFORMATION
Nine Months Ended September 30, 2021 | ||||
Lease cost | ||||
Operating lease cost (cost resulting from lease payments) | $ | 80,251 | ||
Short term lease cost | 29,329 | |||
Net lease cost | $ | 109,580 | ||
Operating lease – operating cash flows (fixed payments) | $ | 80,251 | ||
Operating lease – operating cash flows (liability reduction) | $ | 72,639 | ||
Non-current leases – right of use assets | $ | 268,096 | ||
Current liabilities – operating lease liabilities | $ | 166,709 | ||
Non-current liabilities – operating lease liabilities | $ | 107,899 |
Classification | March 31, 2022 | December 31, 2021 | ||||||||
Lease assets | ||||||||||
Operating lease cost ROU assets | Assets | $ | 406,770 | $ | 277,578 | |||||
Total lease assets | $ | 406,770 | $ | 277,578 | ||||||
Lease liabilities | ||||||||||
Operating lease liabilities, current | Current liabilities | $ | 211,752 | $ | 196,472 | |||||
Operating lease liabilities, non-current | Liabilities | 202,918 | 88,040 | |||||||
Total lease liabilities | $ | 414,670 | $ | 284,512 |
The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations, were as follows:
SCHEDULE OF LEASE COST
2022 | 2021 | |||||||
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
Leases costs | ||||||||
Operating lease costs | $ | 158,041 | $ | 14,194 | ||||
Total lease costs | $ | 158,041 | $ | 14,194 |
25 |
Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the ninethree months ended September 30, 2021,March 31, 2022, are as follows:
SCHEDULE OF FUTURE MINIMUM UNDER NON-CANCELLABLE LEASES FOR OPERATING LEASES
Sep. 30, 2021 | March 31, 2022 | |||||||
Fiscal Year | Operating Leases | Operating Leases | ||||||
2021 (excluding the nine months ended September 30, 2021) | $ | 44,638 | ||||||
2022 | 178,273 | |||||||
(Unaudited) | ||||||||
2022 (excluding the three months ended March 31, 2022) | $ | 189,657 | ||||||
2023 | 66,738 | 144,866 | ||||||
2024 | 57,605 | |||||||
2025 | 54,389 | |||||||
Total future minimum lease payments | 289,649 | 446,517 | ||||||
Amount representing interest | (15,041 | ) | (31,846 | ) | ||||
Present value of net future minimum lease payments | $ | 274,608 | $ | 414,670 |
NOTE 13 – GEOGRAPHIC INFORMATION
Revenue by geography is based on the customer’s billing address for the three months ended March 31, 2022 was as follows:
SCHEDULE OF REVENUE BY GEOGRAPHY IS BASED ON CUSTOMERS BILLING ADDRESS
Secured Managed Services | Professional Services |
Total | ||||||||||
Major Geographic Location | ||||||||||||
U.S. | $ | 7,183,987 | $ | 1,222,243 | $ | 8,406,230 | ||||||
Chile | 868,238 | 54,942 | 923,180 | |||||||||
Revenue | $ | 8,052,225 | $ | 1,277,185 | $ | 9,329,410 |
Revenue by geography is based on the customer’s billing address for the three months ended March 31, 2021, was as follows:
Secured Managed Services | Professional Services | Total | ||||||||||
U.S. | $ | 1,871,817 | $ | 687,961 | $ | 2,559,778 | ||||||
Chile | - | - | - | |||||||||
Revenue | $ | 1,871,817 | $ | 687,961 | $ | 2,559,778 |
No international country represented more than 10% of total revenue in any period presented.
Property and equipment, net by geography was as follows:
SCHEDULE OF PROPERTY AND EQUIPMENT, NET BY GEOGRAPHIC AREAS
March 31, 2022 | December 31, 2021 | |||||||
U.S. | $ | 1,064,519 | $ | 95,069 | ||||
Chile | 2,378,418 | 2,299,355 | ||||||
Property and equipment net | $ | 3,442,937 | $ | 2,394,424 |
No other international country represented more than 10% of property and equipment, net in any period presented.
21
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NOTE 14 – CONCENTRATION OF CREDIT RISK
Cash Deposits
Financial instruments that potentially subject the Companyus to concentrations of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of September 30, 2021,March 31, 2022, and December 31, 2020, the Company2021, we had approximately $1,788,0001,894,000 and $4,252,0001,119,000, respectively, in excess of the FDIC insured limit.
SCHEDULES OF CONCENTRATION OF RISK, BY RISK FACTORRevenue
Revenues
No clients accounted for more than 10% of revenue for the three months ended March 31, 2022.
One client accounted for 26%32% of revenue for the ninethree months ended September 30,March 31, 2021.
Two clients accounted for 68% of revenue for the nine months ended September 30, 2020, as set forth below:
Accounts Receivable
TwoNo clients accounted for more than 27%10% of the accounts receivable as of September 30, 2021, as set forth below:March 31, 2022.
Two clientsOne client accounted for 56%20% of the accounts receivable as of September 30, 2020, as set forth below:March 31, 2021.
Accounts Payable
Two vendors accounted for of the accounts payable as of September 30, 2021, as set forth below:
Two vendors accounted for of the accounts payable as of September 30, 2020, as set forth below.
NOTE 15 – SUBSEQUENT EVENTS
In accordance with ASC 855, Atlantic Technology Systems, Inc. AcquisitionSubsequent Events
On October 1, 2021,, which establishes general standards general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company entered into a Stock Purchase Agreement (the “Agreement”) byhas evaluated all events and amongtransactions that occurred after March 31, 2022 through the date the unaudited condensed consolidated financial statements are available for issuance. During this period the Company Atlantic Technology Systems, Inc. (“ATS”) and Atlantic Technology Enterprises, Inc. (“ATE”) (collectively, “Atlantic”) and James Montagne, the sole shareholder of ATS, and James Montagne and Miriam Montagne as the sole shareholders of ATE (the “Shareholder”). Pursuant to the Agreement, the Company purchased from the Shareholder all of the outstanding shares of Atlantic, with ATE and ATS becoming wholly-owned subsidiaries of the Company. The aggregate purchase price for the Atlantic shares was shares of the Company’s common stock, par value $, and $75,000 in cash. Furthermore, the Shareholder shall receive an additional shares of the Company’s common stock based upon Atlantic achieving certain revenue and earnings thresholds and an additional $150,000 in cash upon the Company listing to a national exchange.
Convertible Note Issuance
On October 27, 2021, the Company issued a 5% Unsecured Convertible Note (the “Note”) to Neil Stinchcombe (the “Lender”), in consideration of the Lender lending the Company $1,500,000 (the “Principal Amount”) to provide funding for the Company’s prospective acquisitions and other general corporate purposes. The Principal Amount, together with accrued and unpaid interest, is due on January 27, 2022 (the “Maturity Date”), with no prepayment option. Interest is calculated at 6% per annum (based on a 360-day year) and is payable monthly. The Maturity Date may be extended at the Company’s election to April 27, 2022.did not have any material reportable subsequent events.
22
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed financial statements and related notes.
This Quarterly Report on Form 10-Q includes a number of forward-looking statements that reflect management’s current views with respect to future events and financial performance.Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue”Unless otherwise indicated or the negative of these terms or other comparable terminology. These statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2021, any of which may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in our forward-looking statements. These risks and factors include, by way of example and without limitation:
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in the future operating results over time, except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.
As used in this Quarterly Report on Form 10-Q and unlesscontext requires otherwise, indicated, the terms “Company,” “we,” “us,” “our,” and “our”“our company” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation (“Cerberus”), and its wholly owned subsidiaries, including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”) and, Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT)VelocIT”), Southford Equities, Inc., a British Virgin Islands company (“Arkavia”), True Digital Security, Inc., a Delaware corporation (“True Digital”), RED74 LLC, a New Jersey limited liability company (“RED74”), Atlantic Technology Systems, Inc., a New Jersey corporation.corporation (“ATS”), and Atlantic Technology Enterprises, Inc., a New Jersey corporation (“ATE” and together with ATS, “Atlantic”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.
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Corporate History
Cerberus Cyber Sentinel Corporation (“Cerberus Sentinel”) was formed on March 5, 2019 as a Delaware corporation. Our principal offices are located at 6900 E. Camelback Road, Suite 240, Scottsdale, AZ 85251.
Effective May 25, 2020, we entered into a Stock Purchase Agreement with Techville and its sole shareholder, pursuant to which Techville became a wholly owned subsidiary of the Company (the “Techville Acquisition”). Under the terms of the Techville Acquisition, all issued and outstanding common stock of Techville was exchanged for an aggregate of 3,392,271 shares of our common stock.
Effective August 1, 2020, we entered into a Stock Purchase Agreement with Clear Skies and its equity holders, pursuant to which Clear Skies became a wholly owned subsidiary of the Company (the “Clear Skies Acquisition”). Under the terms of the Clear Skies Acquisition, all issued and outstanding equity securities in Clear Skies were exchanged for an aggregate of 2,330,000 shares of our common stock.
On December 16, 2020, we entered into an Agreement and Plan of Merger pursuant to which Alpine became a wholly owned subsidiary of the Company. All units representing membership interests of Alpine issued and outstanding were converted into 900,000 shares of our common stock.
On July 26, 2021, and effective August 12, 2021, we entered into an Amended and Restated Agreement and Plan of Merger pursuant to which VelocIT became a wholly-owned subsidiary of the Company. All issued and outstanding shares of common stock of VelocIT were converted into the right to receive an aggregate of up to 2,566,778 shares of common stock of the Company, subject to a holdback of 256,678 shares of Company stock.
Our Business
The cyber security industry has a supply and demand issue; there is more demand for cyber security services than expert and seasoned compliance and cybersecurity professionals available in the market. We are a cybersecurity and compliance company comprised of highly trained and seasoned security professionals who work with clients to enhance or create a better cyber posture in their organization. Cybersecurity, also known as computer security or information technology security, is the protection of computer systems and networks from information disclosure, theft of or damage to their hardware, software, or electronic data, as well as from the disruption or misdirection of the services they provide. The cybersecurity industry has a supply and demand issue wherein there is more demand for cybersecurity services than there are expert and seasoned compliance and cybersecurity professionals available in the market. We seek to identify, attract, and retain highly skilled cyber and compliance teams and bring them together to provide holistic cyber services. This is accomplishedWe accomplish this through acquisitions, direct hiring, and incentivizing employees with stock options to help retain them. On an ongoing basis, we seek to identify cyber talent that is culturally aligned and that offers operating leverage through both existing customer revenue and relationships. We have invested in enterprise solutions and executive talent to integrate our different organizations into an ecosystem that works together to provide complete and holistic cybersecurity through cross pollination of solutions. The ecosystem is intended to provide additional revenue opportunities and drive overall recurring revenue.
We emphasize to clients the critical nature of having their work force create a continuously aware security culture. Once engaged, we strive to become the trusted advisors for customers’ cybersecurity and compliance needs by providing tailored security solutions based upon their organizational needs. We do not focus on the selling of cybersecurity products; we are product agnostic so that we can provide solutions that fit customers’ security needs, financial realities, and future strategy. Our approach is to evaluate clients’ organizations holistically, identify compliance requirements, and help secure the infrastructure while helping to create a culture of security.
We provide a full range of cybersecurity consulting and related services, encompassing all three pillars of compliance, cybersecurity, and culture. Our services include secured managed services, compliance services, security operations center (“SOC”) services, virtual Chief Information Security Officer (“vCISO”) services, incident response, certified forensics, technical assessments, and culture, including Secured Managed Services, Compliance Services, SOC Services, Virtual CISO (vCISO) Services, Incident Response, Certified Forensics, Technical Assessments, and Cybersecurity Training.cybersecurity training. We believe that culture is the foundation of every successful cybersecurity and compliance program. To deliver that outcome, we developed our unique offering of MCCP+ (“Managed Compliance & Cybersecurity Provider + Culture”), which is the only holistic solution that provides all three of these pillars under one roof from a dedicated team of subject matter experts. In contrast to the majority of cybersecurity firms that are focused on a specific technology or service, we seek to differentiate ourselves by remaining technology agnostic, focusing on accumulating highly-sought afterhighly sought-after topic experts. We continually seek to identify and acquire cyber securitycybersecurity talent to expand our service scope and geographical coverage to provide the best possible service for our clients. We believe that bringing together a world-class team of technological experts with multi-faceted expertise in the critical aspects of cybersecurity is key to providing technology agnostic solutions to our clients in a business environment that has suffered from a chronic lack of highly-skilledhighly skilled professionals, thereby setting us apart from competitors and in-house security teams. Our goal is to create a culture of security and to help quantify, define, and capture a return on investment (ROI) from information technology and cybersecurity spending. Our brand rallies around the battle cry: “Cybersecurity is a Culture, not a Product.”
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Offering this set of cybersecurity services allows us to capture more revenue with greater efficiency, facilitating greater profitability and stronger customer retention. The benefit to our customers is that they receive an efficient engagement from a single provider that covers a wide range of their needs. This means their challenges are addressed more thoroughly and problems are resolved more rapidly when compared to working with multiple vendors. This leads to the best possible outcome which enables them to commit to usFirst Quarter Fiscal 2022 Highlights
Our operating results for the long term.three months ended March 31, 2022 included the following:
We believe that our business model is differentiated from other companies in the industry in that our employees are not consultants; they’re dedicated partners available on a recurring monthly contract. Due to the numerous challenges in hiring experienced cybersecurity and compliance professionals, we believe that assimilating our team of industry and subject matter experts into our clients’ teams is the ideal solution.
● | Total revenue increased by $6.8 million to $8.1 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. | |
● | Total gross profit decreased by $670,000 to $49,000 for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. | |
● | We acquired TrueDigital, which is now wholly owned subsidiaries of our company. |
We are technology agnostic. Whereas, most cybersecurity firms are locked into working with a single technology, we seek to differentiate ourselves by remaining technology agnostic. This approach enables us to work with any business, no matter what systems or tools they use. For our customers the benefit is equally valuable; they’re able to choose the best tools and technology for their business needs without affecting their relationship with us.
We believe that building a world-class technology team with industry-specific and subject-matter expertise is the key to providing cutting-edge solutions to our clients. We aim to continue to identify and acquire cybersecurity talent to expand our scope of services and geographical footprint to fortify our capability to deliver excellence to our customers. Furthermore, our commitment is that we will stay a step ahead of threat actors and regulatory obligations to keep our customers safe and compliant.
Our Service OfferingSignificant Developments During First Quarter Fiscal 2022
We currently offer two major types of services to clients including Security Managed ServicesNasdaq Listing and Professional Services.
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Security Managed ServicesPublic Offering
Our Security Managed Services deliver an end-to-end solution to cybersecurity and compliance needs. We begin withOn January 19, 2022, we completed a gap analysispublic offering of our customers’ existing cybersecuritycommon stock. Pursuant to the public offering, we issued and compliance practices. Next, we perform penetration testing, vulnerability scanning,sold 2,060,000 shares of common stock at a public offering price of $5.00 per share and a best practices assessment. This culminates with a deliverable report outlining failuresgranted to the underwriter warrants for the purchase of 144,200 shares of common stock at an exercise price of $5.00 per share. We received net proceeds of approximately $9,471,000 from the public offering, after deducting underwriting discounts and riskscommissions of $721,000 and includes a remediation roadmap organized based on highest-value opportunities and critical necessities. This prioritized approach utilizes the maxi-min strategy to optimize our customers’ budget; something that comes from decadesestimated offering costs of experiential wisdom. Using this roadmap, our team performs remediation and change implementation throughout a customer’s business. This is followed by our culture program that delivers cybersecurity and compliance awareness training, risk reporting, and periodic knowledge verification. We cover every area of our customers’ businesses and engage with every member of their team. This is our end-to-end holistic approach that we believe leaves no stone unturned to ensure our customers are truly safe, secure, and compliant.$108,000.
We offer multiple services inOn January 14, 2022, we were approved to list our common stock on The Nasdaq Stock Market LLC under the Security Managed Services portfolio including the following:
● Compliance: Our compliance practice ensures the customers are implementing the right controls, properly prioritizing risks, and investing in the appropriate remediation, so our customers can achieve compliance, adhere to industry standards and guidelines, and manage continuous monitoring over time. We provide the combination of integrated processes and systems, experienced staff, and innovative technology to help our customers meet those goals. Our seasoned experts possess the stringent industry certifications and accreditations that prove they understand security compliance regulations, frameworks, and controls. Our deep knowledge of these rigorous and unique requirements means we can offer a thorough, timely assessment that will identify residual risk within the customer’s information system. We then propose mitigation strategies to manage the customer’s risk effectively. As an authorized FedRAMP vendor ourselves, we bring an insider’s perspective to the process in the following standards:
○ FedRAMP - The Federal Risk and Authorization Management Program (FedRAMP) provides standardization to cloud security for Cloud Service Providers (CSP). FedRAMP recognition is required to sell cloud services to the US Federal and many state and local governments https://www.fedramp.gov/
○ FISMA 2014 - codifies the Department of Homeland Security’s role in administering the implementation of information security policies for federal Executive Branch civilian agencies, overseeing agencies’ compliance with those policies, and assisting OMB in developing those policies. https://www.cisa.gov/federal-information-security-modernization-act
○ ISO 17021, ISO 27001 is an International Standard that provides Certification Bodies (CB) with a set of requirements that will enable them to ensure that their management system certification process is carried out in a competent, consistent and impartial manner. https://www.iso.org/
○ HIPAA - Technology for Economic and Clinical Health Act of 2009 (“HITECH”) – These are laws regulated by the Department of Health and Human Services (“HHS”) to secure the privacy and confidentiality of protected health information (“PHI”) (https://www.hhs.gov/hipaa/index.html)
○ PCI - This is a standard administered by the Payment Card Industry Security Standards Council (https://www.pcisecuritystandards.org/pci_security/)
○ Cyber Security Framework (CSF) Consist of five core functions: Identify, Protect, Detect, Respond, and Recover. NIST defines the framework core on its official website as a set of cybersecurity activities, desired outcomes, and applicable informative references common across critical infrastructure sectors. https://www.nist.gov/cyberframework
○ NIST - The National Institute of Standards and Technology (“NIST”) – This is formally known as a National Bureau of Standards, which is a federal agency that promotes and maintains measurement standards while encouraging and assisting industry and science to develop and use these standards. https://www.nist.gov/
○ 800-171/CMMC - CMMC is intended to serve as a verification mechanism to ensure that DIB companies implement appropriate cybersecurity practices and processes to protect Federal Contract Information (FCI) and Controlled Unclassified Information (CUI) within their unclassified networks. https://csrc.nist.gov/publications/detail/sp/800-171/rev-2/final
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○ GDPR - The General Data Protection Regulation is one of the most wide-ranging pieces of legislation passed by the EU in recent memory. It was introduced to standardize data protection law across the single market and give people in a growing digital economy greater control over how their personal information is used. https://gdpr.eu/compliance/
○ Service Organization 2 (“SOC 2”) – This is an auditing procedure that focuses on a business’ non-financial reporting controls related to security, availability, processing, integrity, confidentiality, and privacy of a system; https://www.aicpa.org/
○ HITRUST CSF – This is a comprehensive security framework (“CSF”) developed by the Health Information Trust Alliance (“HITRUST”) in collaboration with healthcare, technology and information security leaders, to create access, store and exchange sensitive and/or regulated data; https://hitrustalliance.net/
● Secured Managed Services: Cybersecurity companies who may excel at pointing out vulnerabilities or configuration issues, we have experts with the capability to resolve fix them. Our team has extensive experience in remediating security issues in a holistic fashion, to quickly effect change at organization scale. We know our customers’ teams are busy enough as is, so we offload the burden of addressing the dozens or hundreds of remediation items that may come from a security review, penetration test, or incident response project. Our remediation services resolve vulnerabilities that may expose risk to, or have caused, unwanted conditions or outcomes. Examples of issues that Cerberus Sentinel remediate include writing new or more effective policies, rearchitecting computer networks to minimize attack surface, implementing high security password requirements and multi-factor authentication, applying missing security patches that expose an organization to security attack, or correcting misconfigurations that can lead to unauthorized access such as a user being granted overly broad permissions. Our remediation services provide customers with a mature methodology for the heavy lifting needed to ensure that implementing solutions to minimize security risk are done safely, efficiently, and correctly the first time.
● SOC Managed Services: We offer SOC-as-a-service, which is a subscription-based service that manages and monitors client’s’ logs, devices, clouds, network, and assets for possible cyber threats. This lets our service provide the clients with the knowledge and skills necessary to combat cybersecurity threats.
● vCISO Service: Corporations are in need of cybersecurity services but many do not have the capital resources or knowledge base to hire a Chief Information Security Officer (“CISO”). We offer this service to companies on an ongoing managed service basis as a resource to augment their management team. vCISO includes road mapping the future state for the client and providing our knowledgeable expertise to help them achieve their security needs.
Professional Services
Our advisory services include a wide array of tailored solutions for organizations of all sizes. Our in-depth and uniquely acquired industry expertise allows us to act as a trusted advisor of our clients to help them lower their risk profile, minimize cost impact to organizations and meet regulatory compliance demands. We specialize in:
● Incident Response and Forensics: This is where we focus on identification, investigation, and remediation of cyberattacks.
● Technical Assessments: We specialize in advanced cyber security assessments that highlight the skills and experience of our team’s top-tier talent. Our customers benefit from our routine identification of issues based on our emphasis on real-world manual testing techniques and custom exploit development to uncover new avenues of attack. We believe that our approach to penetration testing services strikes the perfect equilibrium between cost, time and results. Our team of highly skilled testers utilize the same tools and techniques a malicious cybercriminal would use to try to gain unauthorized access to highly-guarded corporate systems and data to evaluate technical controls and quantify business risks in a meaningful way. This level of analysis provides business leaders the knowledge required to not only understand the impact a successful attack might have on their business operations, but also can validate the effectiveness of existing security controls and justify additional security related investment.
Training: This targets the root cause for 75% of cyber breach events by starting with a culture of security-first forward thinking. Our security awareness training can prevent a catastrophic cyberattack before it even occurs by equipping users with the tools and techniques required to spot a potential cyberattack in the early stages.
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● Other Cybersecurity Services:
○ Cybersecurity Road Mapping: Bringing the culture of cybersecurity to client’s leadership team and penetrating throughout the organization is a critical first step of building any successful cybersecurity system. Through our consulting service, we dive into both the cultural and technical aspects of cybersecurity within the organization, providing meaningful recommendations to improve cybersecurity posture immediately. We help our clients build effective policies and best practices, design or enhance a cybersecurity system and train the executive management team to foster a top-down culture of cybersecurity in order to facilitate diligent implementation of cybersecurity awareness.
○ Gap and Risk Assessment: Threat actors probe and exploit the weakest points in an organization, it doesn’t matter if a business has done 100 things right when one mistake can be catastrophic. Cerberus Sentinel combines decades of security expertise and in-depth knowledge of how cyberattackers operate to deliver a thorough security risk gap analysis that identifies real world threats and issues guidance for protection. We first familiarize ourselves with the customer’s environment, business model, operations, and business drivers to best determine a customer’s cybersecurity posture in an ever evolving threat landscape. We then use our advanced threat intelligence, data breach experience, and analytics to accurately assess the customers unique cybersecurity risk based on their “as is” state. We then operate with a holistic mindset, considering every link in the cybersecurity chain from people, processes, and technology, to determine their ideal “to be” state, aligned with their business goals, compliance requirements, and risk tolerance. Finally, we collaboratively devise and develop a strategic cybersecurity plan that takes into account critical priorities to effectively reduce cybersecurity risk by closing the gap between their “as is” and “to be” states. This comprehensive awareness of internal systems and policies provides our customers with a clear understanding of their overall risk as well as the strategies and tools they need to protect their most valuable assets: their data and brand reputation.
Significant Development During the Quartersymbol “CISO.”
Acquisition of VelocITTrue Digital
On June 30, 2021,January 5, 2022, we entered into a stock purchase agreement (the “True Digital Stock Purchase Agreement”) with certain stockholders of True Digital and an agreement and plan of merger (the “True Digital Merger Agreement”) with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated by the True Digital Stock Purchase Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Catapult Acquisition Merger Sub, LLC (“Merger Sub”), Catapult Acquisition Corporation (“Catapult”), the shareholders of Catapult Acquisition Corporation (the “Catapult Shareholders”) and Darek Hahn, in his capacity as the shareholder representative (the “Shareholder Representative”). Pursuant to theTrue Digital Merger Agreement Catapult agreed to mergewere consummated, with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger asTrue Digital becoming a wholly-ownedwholly owned subsidiary of the Company. The Merger was to become effective as soon as practicable following completion of certain conditions to closing in the Merger Agreement (the “Effective Time”).
On July 26, 2021, the Company, Merger Sub, Catapult, the Catapult Shareholders and the Shareholder Representative entered into an Amended and Restated Agreement and Plan of Merger (the “Amended and Restated Merger Agreement”) to provide, among other things, that Merger Sub would mergeour company. In connection with and into Catapult, with Catapult surviving the Merger as a wholly-owned subsidiaryconsummation of the Company. All issuedtransactions, we paid aggregate consideration of $6,153,000 in cash and outstanding8,229,000 shares of our common stock, of Catapult immediately prior to the Effective Time were converted into the right to receive an aggregate of up to 2,566,778 shares of common stock, par value $0.00001, of the Company, subject to a holdback of 256,678822,900 shares of Cerberus Stock. The Effective Time was August 12, 2021.our common stock and $615,300 of cash.
Catapult, which operates under
True Digital is a managed cybersecurity and compliance provider dedicated to the brand nameadvancement of VelocIT, offers enterprise solutionssecurity in an increasingly connected world. Through integrated services and deep visibility, True Digital helps organizations manage risk and compliance. From its own U.S.-based security operations center and network operations center, True Digital manages client networks and endpoints, including cybersecurity monitoring and cyber incident response. Additionally, True Digital enables both regulated and unregulated companies to redefine their security operations and establishes a holistic viewpoint of their IT, cybersecurity, and compliance operations through a suite of products and services to small and medium sized businesses. Such suite of products and services include IT leadership, vector alerts, active directory management, server management, email management, antivirus services, LAN services, wireless management, firewall management, virtualization management, WAN services, SAN services, endpoint back-up, endpoint encryption and business continuity support. VelocIT is based in Cranbury, New Jersey.TrueSpeed, its proprietary IT-security compliance operational intelligence platform.
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Results of Operations
Comparison of the Three Months Ended September 30, 2021March 31, 2022 to the Three Months Ended September 30, 2020March 31, 2021
Our financial results for the three months ended September 30, 2021March 31, 2022 are summarized as follows in comparison to the three months ended September 30, 2020:March 31, 2021:
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||
2021 | 2020 | Variance | 2022 | 2021 | Variance | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Security Managed Services | $ | 3,099,753 | $ | 1,683,733 | $ | 1,416,020 | ||||||||||||||||||
Professional Services | 645,255 | 325,865 | 319,390 | |||||||||||||||||||||
Security managed services | $ | 8,052,225 | $ | 1,871,817 | $ | 6,180,408 | ||||||||||||||||||
Professional services | 1,227,185 | 687,961 | 589,224 | |||||||||||||||||||||
Total revenue | 3,745,008 | 2,009,598 | 1,735,410 | 9,329,410 | 2,559,778 | 6,769,632 | ||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||
Security Managed Services | 650,955 | 423,784 | 227,171 | |||||||||||||||||||||
Professional Services | 234,326 | 18,962 | 215,364 | |||||||||||||||||||||
Security managed services | 2,602,924 | 193,667 | 2,409,257 | |||||||||||||||||||||
Professional services | 110,337 | 117,794 | (7,457 | ) | ||||||||||||||||||||
Cost of payroll | 2,093,072 | 868,810 | 1,224,262 | 4,445,850 | 1,427,702 | 3,018,148 | ||||||||||||||||||
Stock based compensation | 2,121,583 | 100,925 | 2,020,658 | |||||||||||||||||||||
Total cost of revenue | 2,978,353 | 1,311,556 | 1,666,797 | 9,280,693 | 1,840,088 | 7,440,605 | ||||||||||||||||||
Total gross profit | 766,655 | 698,042 | 68,613 | 48,717 | 719,690 | (670,973 | ) | |||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Professional fees | 293,408 | 284,511 | 8,897 | 623,061 | 157,354 | 465,707 | ||||||||||||||||||
Advertising and marketing | 254,026 | 30,488 | 223,538 | 155,341 | 45,227 | 110,114 | ||||||||||||||||||
Selling, general and administrative | 2,085,720 | 1,020,765 | 1,064,955 | |||||||||||||||||||||
Stock based compensation | 1,251,635 | 392,661 | 858,974 | |||||||||||||||||||||
Loss on write-off of account receivable | 40,264 | - | 40,264 | |||||||||||||||||||||
Selling, general, and administrative | 4,616,374 | 1,487,641 | 3,128,733 | |||||||||||||||||||||
Stock-based compensation | 2,565,510 | 737,837 | 1,827,673 | |||||||||||||||||||||
Total operating expenses | 3,925,053 | 1,728,425 | 2,196,628 | 7,960,286 | 2,428,059 | 5,532,227 | ||||||||||||||||||
Loss from operations | (3,158,398 | ) | (1,030,383 | ) | (2,128,015 | ) | (7,911,569 | ) | (1,708,369 | ) | (6,203,200 | ) | ||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Other income | 169 | 751 | (582 | ) | 12,543 | 205 | 12,338 | |||||||||||||||||
Interest expense, net | (75,470 | ) | (5,567 | ) | (69,903 | ) | (43,585 | ) | (68,695 | ) | 25,110 | |||||||||||||
PPP loan forgiveness | 980,800 | - | 980,800 | |||||||||||||||||||||
Total other income (expense) | 905,499 | (4,816) | 899,935 | (31,042 | ) | (68,490 | ) | 37,448 | ||||||||||||||||
Net loss | $ | (2,252,899 | ) | $ | (1,035,199 | ) | $ | (1,217,700 | ) | (7,942,611 | ) | (1,776,859 | ) | (6,165,752 | ) | |||||||||
Foreign currency translation adjustment | 902,441 | - | 902,441 | |||||||||||||||||||||
Comprehensive net loss | $ | (7,040,170 | ) | $ | (1,776,859 | ) | $ | (5,263,311 | ) |
RevenuesRevenue
Security managed services revenuesrevenue increased by $1,416,020,$6,180,408, or 84%330%, for the three months ended September 30, 2021,March 31, 2022, as compared to the three months ended September 30, 2020,March 31, 2021, due mainly to to revenues of $985,146 for VelocIT for the 3 months ended September 30, 2021. We did not recognize any revenue attributable to VelocIT during the 3 months ended September 30, 2020 because the acquisition consummated on August 12, 2021. The additionalan increase in revenues were a result of additional customers from the Arkavia and usage increases withinTrue Digital acquisitions, as well as expanded services to existing customers.
Professional services revenuesrevenue increased by $319,390,$589,224, or 98%86%, for the three months ended September 30, 2021,March 31, 2022, as compared to the three months ended September 30, 2020,March 31, 2021, due to revenuesan increased demand for Clear Skies and Alpine of $695,069 for the 3 months ended September 30, 2021. The acquisitions of Clear Skies and Alpine were consummated on August 1, 2020 and December 16, 2020, respectively. Revenues for Clear Skies was approximately $141,000 for the 3 months ended September 30, 2020. technical assessments.
Expenses
Cost of RevenuesRevenue
Security managed services cost of revenuesrevenue increased by $227,171,$2,409,257, or 54%1,244%, for the three months ended September 30, 2021,March 31, 2022, as compared to the three months ended September 30, 2020,March 31, 2021, and was primarily the result of as a result ofhigher direct software and hardware costs to support the VelocIT acquisition on August 12, 2020.increased customer demand.
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ProfesionalProfessional services cost of revenues increasedrevenue decreased by $215,364,$7,457, or 1,136%6%, for the three months ended September 30, 2021,March 31, 2022, as compared to the three months ended September 30, 2020,March 31, 2021, due to cost of revenues for Clear Skies and Alpine. The acquisitions of Clear Skies and Alpine were consummated on August 1, 2020 and December 16, 2020, respectively.our ability to utilize internal expert professionals to deliver our services.
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Cost of payroll cost of revenuesrevenue increased by $1,224,262,$3,018,148, or 141%211%, for the three months ended September 30, 2021,March 31, 2022, as compared to the three months ended September 30, 2020,March 31, 2021, as a result of the cost of headcount for the VelocIT, Clear Skies,increased staff resulting from acquisitions and Alpine acquisitions as well as an increase in employees resulting in an increase in salaries in other lines of business due to an increase in demand for our services.
higher stock compensation expense.
Operating Expenses
Professional fees remained relatively consistent during the three months ended September 30, 2021 as compared to three months ended September 30, 2020.
Advertising and marketingStock-based compensation expenses increased by $223,538,$2,020,658, or 733%2,002%, for the three months ended September 30, 2021,March 31, 2022, as compared to the three months ended September 30, 2020, as a result of increased public relations and marketing prograams.
Selling, general and administrative expenses increased by $1,064,955, or 104%, for the three months ended September 30,March 31, 2021, as compared to the three months ended September 30, 2020, primarily as a result of an increase in payroll due to the Company being able to recognize Alpine’s payroll as well as a portion of VelocIT’s payroll, which both were not recognizeable during the three months ended September 30, 2020, due to the acquisition dates of December 1, 2020 and August 12, 2021, respectively.
Stock based compensation expenses increased by $858,974, or 219%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, due to an increase in stock options awarded during the three months ended September 30, 2021.
March 31, 2022.
Loss on write-off of accounts receivable remained relatively consistent during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.
Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020
Our financial results for the nine months ended September 30, 2021 are summarized as follows in comparison to the nine months ended September 30, 2020:
Nine Months Ended September 30, | ||||||||||||
2021 | 2020 | Variance | ||||||||||
Revenue: | ||||||||||||
Security Managed Services | $ | 6,979,146 | $ | 3,612,489 | $ | 3,366,657 | ||||||
Professional Services | 2,275,437 | 1,015,816 | 1,259,621 | |||||||||
Total revenue | 9,254,583 | 4,628,305 | 4,626,278 | |||||||||
Cost of revenue: | ||||||||||||
Security Managed Services | 1,326,788 | 726,614 | 600,174 | |||||||||
Professional Services | 350,388 | 82,992 | 267,396 | |||||||||
Cost of payroll | 5,052,684 | 2,135,691 | 2,916,993 | |||||||||
Total cost of revenue | 6,729,860 | 2,945,297 | 3,784,563 | |||||||||
Total gross profit | 2,524,723 | 1,683,008 | 841,715 | |||||||||
Operating expenses: | ||||||||||||
Professional fees | 695,023 | 685,821 | 9,202 | |||||||||
Advertising and marketing | 471,721 | 104,058 | 367,663 | |||||||||
Selling, general and administrative | 5,241,095 | 2,235,041 | 3,006,054 | |||||||||
Stock based compensation | 2,981,523 | 1,062,000 | 1,919,523 | |||||||||
Loss on write-off of account receivable | 55,528 | 15,000 | 40,528 | |||||||||
Total operating expenses | 9,444,890 | 4,101,920 | 5,342,970 | |||||||||
Loss from operations | (6,920,167 | ) | (2,418,912 | ) | (4,501,255 | ) | ||||||
Other income (expense): | ||||||||||||
Other income | 2,553 | 10,751 | (8,218 | ) | ||||||||
Interest expense, net | (209,806 | ) | (12,285 | ) | (197,521 | ) | ||||||
PPP loan forgiveness | 980,800 | - | 980,800 | |||||||||
Total other income (expense) | 773,547 | (1,534 | ) | 775,081 | ||||||||
Net loss | $ | (6,146,620 | ) | $ | (2,420,446 | ) | $ | (3,726,174 | ) |
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Revenues
Security managed services revenues increased by $3,366,657, or 93%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to the acquisitions of VelocIT and Technologyville consummated on August 12, 2021 and May 25, 2020, respectively. Approximately $2,400,000 was a result of these acquisitions. The balance is a result of increase in usage and various new client contracts that were entered into subsequent to September 30, 2020.
Professional services revenues increased by $1,259,621, or 124%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to the acquisitions of Clear Skies and Alpine consummated on August 1, 2020 and December 16, 2020, respectively.
Expenses
Cost of Revenues
Secuity managed services cost of revenues increased by $600,174, or 83%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, and was primarily due to the acquisitions of VelocIT and Technologyville consummated on August 12, 2021 and May 25, 2020, respectively.
Professional services cost of revenues increased by $267,396, or 322%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to the acquisitions of Clear Skies and Alpine consummated on August 1, 2020 and December 16, 2020, respectively.
Cost of payroll increased by $2,916,993, or 137%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to as a result of the cost of headcount for the VelocIT, Clear Skies, and Alpine acquisitions as well as an increase in employees resulting in an increase in salaries in other lines of business due to an increase in demand for our services.
Operating Expenses
Professional fees remained relatively consistent duringincreased by $465,707, or 296%, for the ninethree months ended September 30, 2021March 31, 2022 as compared to the ninethree months ended September 30, 2020.March 31, 2021 as a result of higher accounting and audit fees due for our financial reporting and periodic SEC filings, legal fees, and fees for listing to Nasdaq.
Advertising and marketing expenses increased by $367,663,$110,114, or 353%243%, for the ninethree months ended September 30, 2021,March 31, 2022, as compared to the ninethree months ended September 30, 2020,March 31, 2021, as a result of additional spend on public relations.marketing campaign initiatives.
Selling, general, and administrative expenses increased by $3,006,054,$3,128,733, or 135%210%, for the ninethree months ended September 30, 2021,March 31, 2022, as compared to the ninethree months ended September 30, 2020, as a result ofMarch 31, 2021, primarily as a result of an increase in payroll due to the Company being able to recognize a full nine months of Clear Skies’ and Alpine’s payroll as well as a portion of VelocIT’s payroll, which were not recognizeable during the nine months ended September 30, 2020, due to the acquisition dates of August 1, 2020, December 1, 2020 and August 12, 2021, respectively.increased employee costs.
Stock based compensation expenses increased by $1,919,523,$1,827,673, or 181%248%, for the ninethree months ended September 30, 2021,March 31, 2022, as compredcompared to the ninethree months ended September 30, 2020, as a result ofMarch 31, 2021, due to an increase in stock options awarded during the ninethree months ended September 30, 2021.March 31, 2022.
Liquidity and Capital Resources
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At March 31, 2022, we had an accumulated deficit of $51,955,033 and working capital surplus of $3,202,490. For the three months ended March 31, 2022, we had a loss from operations of $7,911,569 and negative cash flows from operations of $3,015,795. Although we are showing positive revenue, gross profit is trending negatively primarily due to increased stock compensation related to sales activity, we expect to incur further losses through the end of 2022.
To date we have funded operations primarily through the sale of equity in private placements and revenue generated by our services. During the three months ended March 31, 2022, we received $9,471,000 from our public offering of our common stock.
We believe that our existing cash and cash equivalents and cash generated by operating activities will be sufficient to meet our operating and capital requirements for at least the next 12 months as well as our longer-term expected future cash requirements and obligations.
LossOur future capital requirements, both near-term and long-term, will depend on write-offmany factors, in addition to our recurring operating expenses, include our growth rate, the continued expansion of accounts receivable remained relatively consistent duringsales and marketing activities, the nine months ended September 30, 2021 as comparedintroduction of new and enhanced products and service offerings, and the costs of any future acquisitions in complementary businesses and technologies. To the extent existing cash and cash equivalents are not sufficient to fund future activities, we may seek to raise additional funds through equity, equity-linked or debt financings. Any additional equity financing may be dilutive to our existing stockholders. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, which could also require us to seek additional equity financing, incur indebtedness or use cash resources. In the nine months ended September 30, 2020.event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected.
Working Capital Surplus
Our working capital surplus as of September 30, 2021,March 31, 2022, in comparison to our working capital surplus as of December 31, 2020,2021, is summarized as follows:
As of | ||||||||
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
Current assets | $ | 5,484,029 | $ | 6,346,008 | ||||
Current liabilities | 4,838,200 | 3,863,594 | ||||||
Working capital surplus | $ | 645,829 | $ | 2,482,414 |
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As of | ||||||||
March 31, | December 31, | |||||||
2022 | 2021 | |||||||
Current assets | $ | 14,089,899 | $ | 10,345,679 | ||||
Current liabilities | 10,887,409 | 5,141,561 | ||||||
Working capital surplus | $ | 3,202,490 | $ | 5,204,118 |
The decreaseincrease in current assets is primarily due to a decreasean increase in cash and cash equivalents, of $2,467,451, offset by an increase in accounts receivable, and prepaid expenses and other current assets of $1,261,999.$1,137,872, $1,104,907, and $1,204,560, respectively. The increase in current liabilities is primarily due to the increase in accounts payable and accrued expense, and the current portiondeferred revenue of lease liabilities of $684,355$3,512,486 and $157,720,$1,899,719, respectively.
Cash Flows
Our cash flows for the ninethree months ended September 30, 2021,March 31, 2022, in comparison to our cash flows for the ninethree months ended September 30, 2020,March 31, 2021, can be summarized as follows:
Nine months ended September 30, | Three months ended March 31, | |||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Net cash used in operating activities | $ | (4,312,312 | ) | $ | (1,157,976 | ) | $ | (3,015,795 | ) | $ | (1,130,173 | ) | ||||
Net cash provided by investing activities | 662,176 | 254,180 | ||||||||||||||
Net cash used in investing activities | (5,021,626 | ) | - | |||||||||||||
Net cash provided by financing activities | 1,182,685 | 1,443,158 | 9,011,005 | 3,259,579 | ||||||||||||
Increase (decrease) in cash | $ | (2,467,451 | ) | $ | 539,362 | |||||||||||
Effect of exchange rates on cash and cash equivalents | 164,288 | - | ||||||||||||||
Increase in cash | $ | 1,137,872 | $ | 2,129,579 |
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Operating Activities
Net cash used in operating activities was $4,313,312$3,015,795 for the ninethree months ended September 30, 2021March 31, 2022 and was primarily due to cash used to fund a net loss of $7,124,149,$7,942,611, adjusted for non-cash expenses in the aggregate of $2,631,683$5,398,770 and additional cash outlaid by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts receivable and other current assets. Net cash used in operating activities was $1,157,976$1,130,173 for the ninethree months ended September 30, 2020March 31, 2021 and was primarily due to cash used to fund a net loss of $2,420,446,$1,776,859, adjusted for non-cash expenses in the aggregate of $1,170,094,$911,534, partially offset by cash generated by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts payable.
Investing Activities
Net cash provided byused in investing activities of $662,176$5,021,626 for the ninethree months ended September 30, 2021,March 31, 2022, was primarily due to cash acquiredpaid in the VelocITTrue Digital acquisition. NetThere was no cash provided byused in investing activities of $254,180 for the ninethree months ended September 30, 2020, was due to cash acquired in the Techville and Clear Skies Acquisitions.March 31, 2021.
Financing Activities
Net cash provided by financing activities for the ninethree months ended September 30, 2021March 31, 2022 was $1,182,685,$9,250,657, which was primarily due to cash received from the sale of the Company’sour common stock in our public offering of $3,250,000 and offset by the payment of loans of approximately $2,000,000.$9,471,000. Net cash provided by financing activities for the ninethree months ended September 30, 2020March 31, 2021 was $1,443,158$3,259,579 and was primarily due to cash received from the sale of the Company’sour common stock of $790,000 and proceeds from PPP loans of $709,600.
Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At September 30, 2021, the Company had an accumulated deficit of approximately $11,013,000 and working capital surplus of approximately $646,000. For the nine months ended September 30, 2021, the Company had a loss from operations of approximately $6,920,000 and negative cash flows from operations of approximately $4,312,000. Although the Company is showing positive revenues and gross profit trends, the Company expects to incur further losses through the end of 2021.
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To date the Company has been funding operations primarily through the sale of equity in private placements and revenues generated by the Company’s services. During the nine months ended June 30, 2021, the Company received $3,250,000 from private placements of the Company’s common stock.
Based on its current cash resources and commitments, the Company believes it will be able to maintain its current planned development and corresponding level of expenditure for at least twelve months from the date of the issuance of these unaudited condensed consolidated financial statements, although no assurance can be given that it will not need additional funds prior to such time.$3,250,000.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenuesrevenue or operating results during the periods presented.
Significant Critical Accounting Policies and Estimates
Our significantcritical accounting policies are more fully described in the notes to our condensed consolidated financial statements included herein for the quarter and sixthree months ended June 30, 2021March 31, 2022 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020,2021, as filed with the SEC on March 31, 2021.
Fair Value Measurement
The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Business Combination
The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.April 15, 2022.
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If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
Goodwill
Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually at year end, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.
Impairment of Long-lived Assets
We will periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review and at least annually. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
Revenue Recognition
The Company’s agreements with its clients are primarily service contracts that range in duration from a few months to one year. The Company recognizes revenue when control of these services is transferred to the client for an amount, referred to as the transaction price, which reflects the consideration to which the Company is expected to be entitled in exchange for those goods or services.
A contract with a client exists only when:
For the majority of its contracts, the Company receives non-refundable upfront payments. The Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between the time of transfer of the promised goods or services to the client and the time the client pays for these goods or services to be generally one year or less. The Company’s credit terms to clients generally average thirty days, although in some cases payments are required in 15 days.
The Company does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
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Disaggregation of Revenue
Revenue consists of the following by service offering for the nine months ended September 30, 2021:
Security Managed Services | Professional Services | Total | ||||||||||
Primary Sector Markets | ||||||||||||
Public | $ | 3,179,047 | $ | 44,579 | $ | 3,223,626 | ||||||
Private | 3,607,146 | 2,178,545 | 5,785,691 | |||||||||
Not-for-Profit | 192,953 | 52,313 | 245,266 | |||||||||
$ | 6,979,146 | $ | 2,275,437 | $ | 9,254,583 | |||||||
Major Service Lines | ||||||||||||
Compliance | $ | 3,336,795 | $ | - | $ | 3,336,795 | ||||||
Secured Managed Services | 3,134,269 | - | 3,134,269 | |||||||||
SOC Managed Services | 352,535 | - | 352,535 | |||||||||
vCISO | 155,547 | - | 155,547 | |||||||||
Technical Assessments | - | 1,844,496 | 1,844,496 | |||||||||
Forensics & I/R | - | 265,567 | 265,567 | |||||||||
Training | - | 149,529 | 149,529 | |||||||||
Other CyberSecurity Services | - | 15,845 | 15,845 | |||||||||
$ | 6,979,146 | $ | 2,275,437 | $ | 9,254,583 |
Revenue consists of the following by service offering for the nine months ended September 30, 2020:
Security Managed Services | Professional Services | Total | ||||||||||
Primary Sector Markets | ||||||||||||
Public | $ | 2,498,371 | $ | 5,068 | $ | 2,503,439 | ||||||
Private | 1,024,744 | 1,001,748 | 2,026,492 | |||||||||
Not-for-Profit | 89,374 | 9,000 | 98,374 | |||||||||
$ | 3,612,489 | $ | 1,015,816 | $ | 4,628,305 | |||||||
Major Service Lines | ||||||||||||
Compliance | $ | 2,519,958 | $ | - | $ | 2,519,958 | ||||||
Secured Managed Services | 752,371 | - | 752,371 | |||||||||
SOC Managed Services | 301,760 | - | 301,760 | |||||||||
vCISO | 38,400 | - | 38,400 | |||||||||
Technical Assessments | - | 190,825 | 190,825 | |||||||||
Forensics & I/R | - | 554,069 | 554,069 | |||||||||
Training | - | 58,625 | 58,625 | |||||||||
Other CyberSecurity Services | - | 212,297 | 212,297 | |||||||||
$ | 3,612,489 | $ | 1,015,816 | $ | 4,628,305 |
Practical Expedients
As part of ASC 606, the Company has adopted several practical expedients including the following: (i) the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less and (ii) the Company recognizes any incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
Reimbursed Expenses
The Company includes reimbursed expenses in revenues and costs of revenue as the Company is primarily responsible for fulfilling the promise to provide the specified service, including the integration of the related services into a combined output to the client, which are inseparable from the integrated service. These costs include such items as consumables, transportation and travel expenses, over which the Company has discretion in establishing prices.
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Costs of Revenue
Costs of revenue include (i) compensation and benefits for billable employees and consultants directly involved with delivering services offerings and engagements; (ii) consumables used for the services; and (iii) other expenses directly related to service contracts such as professional services, meals and travel expenses.
Volatility in Stock-Based Compensation
The volatility is based on historical volatilities of companies in comparable stages as well as the historical volatility of companies in the industry and, by statistical analysis of the daily share-pricing model. The volatility of stock-based compensation at any point in time is based on historical volatility of similar companies in the industry for the last two to five years.
New and Recently Adopted Accounting Pronouncements
Any new and recently adopted accounting pronouncements are more fully described in Note 2 to our unaudited condensed consolidated financial statements herein for the quarter ended September 30, 2021.March 31, 2022.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenuesrevenue or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to stockholders.resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable. As
Because we are a smaller reporting company, we are not required to provide the information requiredcalled for by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officerChief Executive Officer and our principal financial officer,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
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Our management, with the participation of our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation and subject to the foregoing, our principal executive officerChief Executive Officer and principal financial officerChief Financial Officer concluded that, as of March 31, 2022, our disclosure controls and procedures were not effective due to provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosures as of March 31, 2022.
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Our management’s evaluation was based on the following material weakness(es)weaknesses in our internal control over financial reporting disclosedwhich existed as of December 31, 2021, and which continue to exist, as discussed in our annual reportAnnual Report on Form 10-K for10-K:
● | Lack of risk assessment procedures on internal controls to detect financial reporting risks in a timely manner; and |
● | Lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives. |
A material weakness is a control deficiency or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the fiscal year ended December 31, 2020.annual or interim financial statements will not be prevented or detected on a timely basis. As a company with limited accounting resources, a significant amount of management’s time and attention has been and will be diverted from our business to ensure compliance with these regulatory requirements.
Management’s Plan to Remediate the Material Weaknesses
Our management plans to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:
● | Identify gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and |
● | Develop policies and procedures on internal control over financial reporting and monitor the effectiveness of operations on existing controls and procedures. |
Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.in accordance with financial and budgetary considerations.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2021, our additional finance and accounting staff that we hired in the first quarter of this year continued to positively impact our segregation of duties. In addition, during the nine months ended September 30, 2021, we established an audit committee.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2021,March 31, 2022, other than those noted above, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are currently not involved ina party to any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.legal proceedings.
Item 1A. Risk Factors
An investment in our common stock involves a number of very significant risks. You should carefully consider
We have disclosed under the risk factors included in theheading “Risk Factors” section ofin our Annual Report on Form 10-K for the year ended December 31, 2020, as2021, filed with the SEC on March 31, 2021, in addition to other information contained in those reports and in this quarterly report in evaluating the Company and itsApril 15, 2022, risk factors that materially affect our business, before purchasing shares of our common stock. The Company’s business, operating results and financial condition, could be adversely affected due to anyor results of those risks.operations. There have been no material changes from the risk factors previously disclosed.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2021,March 31, 2022, there were no sales of equity securities during the period covered by this report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Incorporated by Reference | ||||||||
Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date | ||||
2.1 | Stock Purchase Agreement among the Registrant and certain shareholders of True Digital Security Inc. dated January 5, 2022 | 8-K | 10.1 | 01/06/2022 | ||||
2.2** | Agreement and Plan of Merger among the Registrant and certain shareholders of True Digital Security Inc. dated January 5, 2022 | 8-K | 10.2 | 01/06/2022 | ||||
4.1 | Form of Underwriter Warrant | S-1 | 4.3 | 12/14/2021 | ||||
10.1 | Form of Lockup Agreement | S-1/A | 10.14 | 01/07/2022 | ||||
31.1* | Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer | |||||||
31.2* | Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer | |||||||
32.1 | Section 1350 Certification of Principal Executive Officer | |||||||
32.2 | Section 1350 Certification of Principal Financial Officer | |||||||
101.INS* | Inline XBRL Instance Document | |||||||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Filed herewith.
**In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
Certain exhibits, annexes, and/or s# Management contracts and compensatory plans and arrangements required to be filed as exhibitschedules have been omitted from this filing pursuant to Item 15(b)601(b)(2) of this reportRegulation S-K. We agree to furnish supplementally a copy of any omitted exhibit, annex, or schedule to the Securities and Exchange Commission upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CERBERUS CYBER SENTINEL CORPORATION
By: | /s/ David G. Jemmett | |
David G. Jemmett | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: | ||
By: | /s/ Debra L. Smith | |
Debra L. Smith | ||
Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) | ||
Date: May 16, 2022 |
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