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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 March 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: 001-41227

 

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   CISO   The Nasdaq Stock Market LLC

 

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 May 16, 2022, there were 124,704,567 shares of the registrant’s common stock outstanding.

 

 

 

 
 

 

CERBERUS CYBER SENTINEL CORPORATION

FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

 

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION 4
     
ITEM 1. Financial Statements 4
     
  Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2020 4
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021 (unaudited) 5
     
  Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Three Months Ended March 31, 2022 and 2021 (unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited) 7
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 33
     
ITEM 4. Controls and Procedures 33
     
PART II. OTHER INFORMATION 34
     
ITEM 1. Legal Proceedings 34
     
ITEM 1A. Risk Factors 34
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
ITEM 3. Defaults Upon Senior Securities 35
     
ITEM 4. Mine Safety Disclosures 35
     
ITEM 5. Other Information 35
     
ITEM 6. Exhibits 35
     
SIGNATURES 36

 

2
 

 

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.

 

3
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated Balance Sheets

 

     1     2 
   March 31,   December 31, 
   2022   2021 
   (Unaudited)     
ASSETS          
           
Current Assets:          
Cash and cash equivalents  $3,862,907   $2,725,035 
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   2,165,525    960,965 
Contract asset   218,153    - 
Total Current Assets   14,089,899    9,807,301 
           
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   406,770    277,578 
Intangible assets, net of accumulated amortization of $628,245 and $323,331, respectively   6,397,492    6,540,269 
Goodwill   59,274,429    16,792,535 
Other assets   18,681    - 
           
Total Assets  $83,630,208   $35,812,107 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities:          
Accounts payable and accrued expenses  $6,221,551   $2,709,066 
Deferred revenue   1,952,543    52,824 
Settlement liability   -    470,000 
Lease liability, current portion   211,752    196,472 
Loans payable, current portion   212,262    213,199 
Line of credit   369,829    - 
Convertible note payable, net of debt discount, related party   1,500,000    1,500,000 
Note payable, related party   419,472    - 
Total Current Liabilities   10,887,409    5,141,561 
           
Long-term Liabilities:          
Loans payable, net of current portion   5,279,424    5,284,301 
Lease liability, net of current portion   202,918    88,040 
           
Total Liabilities   16,369,751    10,513,902 
           
Commitments and Contingencies   -    - 
           
Stockholders’ Equity:          
Common stock, $.00001 par value; 250,000,000 shares authorized; 135,458,071 and 125,852,971 shares issued and outstanding on March 31, 2022 and December 31, 2021, respectively   1,354    1,258 
Additional paid-in capital   118,311,695    69,309,369 
Accumulated translation adjustment   902,441    - 
Accumulated deficit   (51,955,033)   (44,012,422)
Total Stockholders’ Equity   67,260,457    25,298,205 
           
Total Liabilities and Stockholders’ Equity  $83,630,208   $35,812,107 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

  

 

March 31,

2022

  

 

March 31,

2021

 
   Three Months Ended 
  

March 31,

2022

  

March 31,

2021

 
         
Revenue:          
Security managed services  $8,052,225   $1,871,817 
Professional services   1,277,185    687,961 
Total revenue   9,329,410    2,559,778 
           
Cost of revenue:          
Security managed services   2,602,924    193,667 
Professional services   110,337    117,794 
Cost of payroll   4,445,850    1,427,702 
Stock based compensation   2,121,583    100,925 
Total cost of revenue   9,280,693    1,840,088 
Total gross profit   48,717   719,690 
           
Operating expenses:          
Professional fees   623,061    157,354 
Advertising and marketing   155,341    45,227 
Selling, general and administrative   4,616,374    1,487,641 
Stock based compensation   2,565,510    737,837 
Total operating expenses   7,960,286    2,428,059 
           
Loss from operations   (7,911,569)   (1,708,369)
           
Other income (expense):          
Other income (expense)   12,543    205 
Interest expense, net   (43,585)   (68,695)
           
Total other income (expense)   (31,042)   (68,490)
           
Net loss   (7,942,611)   (1,776,859)
Foreign currency translation adjustment   902,441    - 
           
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   133,983,960    116,418,173 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

5
 

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

                         
               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.

 

6
 

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

 

     1     1 
  

March 31,

2022

  

March 31,

2021

 
Cash flows from operating activities:          
Net loss  $(7,942,611)  $(1,776,859)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation - stock options   4,687,093    838,762 
Issuance of common stock for services   79,949    2,000 
Depreciation and amortization   458,988    57,515 
Right of use amortization   45,387    13,257 
Settlement liability   (470,000)   - 
Gain on termination of operating lease   (22,289)   - 
Changes in operating assets and liabilities:          
Accounts receivable, net   397,548    (176,484)
Inventory   (522,342)   - 
Contract assets   (86,811)   - 
Prepaids and other current assets   (865,483)   (13,426)
Accounts payable and accrued expenses   1,149,469    (62,166)
Lease liability   (16,156)   (12,772)
Deferred revenue   91,463    - 
           
Net cash used in operating activities   (3,015,795)   (1,130,173)
           
Cash flows from investing activities:          
           
Purchases of property and equipment   (103,858)   - 
Cash paid in acquisitions, net   (4,917,768)   - 
           
Net cash used in investing activities   (5,021,626)   - 
           
Cash flows from financing activities:          
Proceeds from sale of common stock   9,471,000    3,250,000 
Proceeds from stock option exercise   38,000    - 
Proceeds from line of credit   86,585    221,346 
Payment on line of credit   -    (190,988)
Payment on loans payable   (458,719)   (20,606)
Payment on notes payable, related party   (125,861)   - 
           
Net cash provided by financing activities   9,011,005    3,259,752 
           
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   2,725,035    5,197,030 
           
Cash and cash equivalents - end of the period  $3,862,907   $7,326,609 
           
Supplemental cash flow information:          
Cash paid for:          
Interest  $36,069   $34,163 
Income taxes  $-   $- 
Non-cash investing and financing activities:          
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.

 

7
 

 

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.”

 

8
 

 

Corporate and Acquisition History

 

We were formed on March 5, 2019 as a Delaware corporation. Our principal offices are located at 6900 East Camelback Road, Suite 240, Scottsdale, Arizona 85251.

 

On 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 1,500 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 2,000,000 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 6,200,000 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 $0.00001 per share, under the Exchange Act. The registration statement became effective on December 1, 2019.

 

On May 25, 2020, we entered into a stock purchase agreement with Techville and its sole shareholder, pursuant to which we acquired all of the issued and outstanding common stock of Techville.

 

On August 1, 2020, we entered into a stock purchase agreement with Clear Skies and its equity holders, pursuant to which we acquired all of the issued and outstanding equity securities of Clear Skies.

 

On December 16, 2020, we entered into an agreement and plan of merger with Alpine and its sole member, pursuant to which Alpine became our wholly owned subsidiary.

 

On October 1, 2021, we entered into a stock purchase agreement with ATS, ATE, James Montagne as the sole shareholder of ATS, and James Montagne and Miriam Montagne, as the sole shareholders of ATE.

 

On October 8, 2021, we entered into a merger agreement with RED74 and Ticato Holdings, Inc., a New Jersey corporation (“Ticato”), and 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 our company.

 

On December 1, 2021, we entered into a stock purchase agreement with Arkavia and all of the owners of Arkavia, pursuant to which we acquired all of the issued and outstanding equity securities of Arkavia.

 

On 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 the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company.

 

On January 18, 2022, we completed a $10,300,000 underwritten public offering of shares of our common stock, pursuant to which an aggregate of 2,060,000 shares of our common stock were issued (see Note 9). In addition, we granted the underwriter warrants to purchase an aggregate of 144,200 shares of our common 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 common stock was listed on The Nasdaq Stock Market LLC.

 

Liquidity

 

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 approximately $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 in net proceeds from our public offering.

 

Although we expect that we will need to raise additional capital for future acquisitions, based on our current cash resources and commitments, we believe we will be able to maintain our current planned development and corresponding level of expenditure for at least 12 months from the date of the issuance of these unaudited condensed consolidated financial statements, although no assurance can be given that we 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 statements as of March 31, 2022, and for the three months ended March 31, 2022 and 2021, 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 months ended 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 (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, 2021, included in our Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of our company and our wholly owned 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 months ended March 31, 2021, to conform to the financial statements presentation for the three months ended March 31, 2022. These reclassifications had no effect on net loss or cash flows as previously reported.

 

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 revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

 

We believe the critical accounting policies discussed below affects 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 dividend rate.

 

Revenue

 

Our revenue is derived from two major types of services to clients: security managed services and professional services. With respect to security 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 professional services, we provide cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.

 

11
 

 

Disaggregated Revenue

 

Revenue consisted of the following by service offering for the three months ended March 31, 2022:

 

   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 consisted of the following by service offering for the three months ended March 31, 2021:

 

   Security Managed
Services
   Professional
Services
   Total 
Primary Sector Markets               
Public  $971,834   $6,000   $977,834 
Private   848,463    681,961    1,530,424 
Not-for-profit   51,520    -    51,520 
Revenue  $1,871,817   $687,961   $2,559,778 
                
Major Service Lines               
Compliance  $1,066,628   $-   $1,066,628 
Secured managed services   567,594    -    567,594 
SOC managed services   206,035    -    206,035 
vCISO   31,560    -    31,560 
Technical assessments   -    561,297    561,297 

Incident reporting and forensics

   -    85,350    85,350 
Training   -    40,725    40,725 
Other cybersecurity services   -    589    589 
Revenue  $1,871,817   $687,961   $2,559,778 
                
Major Geographic Location               
U.S.  $1,871,817   $687,961   $2,559,778 
Chile   -    -    - 
Revenue  $1,871,817   $687,961   $2,559,778 

 

12
 

 

Cash and Cash Equivalents

 

We 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. We periodically assess our accounts and other receivables for collectability on a specific identification basis. We 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. We write off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of March 31, 2022 and December 31, 2021, our allowance for doubtful accounts was $91,707 and $77,811, 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.

 

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 no inventory impairment losses for the three months ended March 31, 2022 and 2021.

 

Impairment of Long-Lived Assets

 

We 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 2021, we did not record a loss on impairment.

 

Intangible Assets

 

We record our intangible assets at fair 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 Note 6).

 

13
 

 

Advertising and Marketing Costs

 

We expense advertising and marketing costs as they are incurred. Advertising and marketing expenses were $155,341 and $45,227 for the three months ended March 31, 2022 and 2021, 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 1 measurement) and the lowest priority to unobservable inputs (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

 

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 our computation of net loss per common share for the three months ended March 31, 2022 and 2021.

 

The following tables summarize the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive due to our net loss position even though the exercise price could be less than the average market price of the common shares:

 

   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 Compensation

 

We 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 our board of directors for their services, we 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, we 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 our limited history and lack of public trading volume for our common stock, we used the average of historical share prices of similar companies within our 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, we account for stock options issued to non-employees for their services in accordance with ASC 718. We use valuation methods and assumptions to value stock options that are in line with the process for valuing employee stock options noted above.

 

14
 

 

Leases

 

Leases in which we are the lessee are comprised of corporate offices and property and equipment. All of the leases are classified as operating leases. We lease multiple office spaces with a remaining weighted average term of 2.21 years. We lease a vehicle with a remaining term of 0.25 years.

 

In accordance with ASC 842, Leases, we recognized a right-of-use (“ROU”) asset and corresponding lease liability on our 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 our 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:

 

   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.

 

We 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. We 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 March 31, 2022, and December 31, 2021, our net deferred tax asset has been fully reserved.

 

For uncertain tax positions that meet a “more likely than not” threshold, we recognize the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. Our 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 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 us 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.

 

15
 

 

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 new 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 us.

 

NOTE 3 – ACQUISITIONS

 

On January 5, 2022, we entered into True Digital Stock Purchase Agreement with certain stockholders of True Digital and 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 the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company (the “True Digital Acquisition”). True Digital’s outstanding common stock was exchanged for the right to receive an aggregate of $6,153,000 in cash and 8,229,000 shares of our common stock, subject to a 10% holdback. 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 10% holdback to the shareholders of True Digital.

 

Subsequent to the issuance of these financial statements, we 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.

 

16
 

 

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:

 

      
Consideration paid  $40,879,380 
      
Tangible assets acquired:     
Cash   485,232 
Accounts receivable   1,404,386 
Contract assets   131,342 
Prepaid expenses and other current assets   196,825 
Property and equipment   906,006 
Other assets   17,505 
Total tangible assets   3,141,296 
      
Assumed liabilities:     
Accounts payable   419,100 
Accrued expenses   812,091 
Deferred revenue   1,796,330 
Line of credit   283,244 
Loans payable   156,783 
Loans payable - shareholder   543,581 
Other liabilities   17,012 
Total assumed liabilities   4,028,141 
      
Net liabilities assumed   (886,845)
      
Goodwill (a)  $41,766,225 

 

  (a) Goodwill and intangibles are not deductible for tax purposes.

 

NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of:

 

  

March 31,

2022

  

December 31,

2021

 
Prepaid expenses  $1,182,061   $453,498 
Prepaid taxes   688,100    231,014 
Prepaid insurance   51,130    46,751 
Deferred interest   244,234    229,702 
Total prepaid expenses and other current assets  $2,165,525   $960,965 

 

17
 

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

  

March 31,

2022

   December 31, 2021 
Computer equipment  $687,086   $495,235 
Building   1,047,020    1,047,020 
Leasehold improvements   177,853    109,626 
Vehicle   63,052    63,052 
Furniture and fixtures   45,835    33,358 
Software   1,678,631    748,599 
Property and equipment gross   3,699,477    2,496,890 
Less: accumulated depreciation   (256,540)   (102,466)
Property and equipment, net  $3,442,937   $2,394,424 

 

Total depreciation expense was $154,074 and $4,424 for the three months ended March 31, 2022 and 2021, respectively.

 

NOTE 6 – INTANGIBLE ASSETS AND GOODWILL

 

The following table summarizes the changes in goodwill during the three months ended March 31, 2022:

 

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) As of March 31, 2022, we had not obtained a third-party valuation for the January 19, 2022 acquisition of True Digital. As such, the purchase price allocation disclosed in this Quarterly Report for True Digital may change, and, therefore, goodwill from the acquisition may change.

 

The following table summarizes the identifiable intangible assets as of March 31, 2022 and December 31, 2021:

 

   Useful life 

March 31,

2022

   December 31, 2021 
Tradenames – trademarks   Indefinite  $1,211,800   $1,211,800 
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      7,025,737    6,863,600 
Less accumulated amortization      (628,245)   (323,331)
Total     $6,397,492   $6,540,269 

 

The weighted average remaining useful life of identifiable amortizable intangible assets remaining is 3.88 years.

 

Amortization of identifiable intangible assets for the three months ended March 31, 2022 and 2021 was $304,914 and $34,994, respectively.

 

18
 

 

The below table summarizes the future amortization expense for the remainder of 2021 and the next four years thereafter:

 

 SCHEDULE OF FUTURE AMORTIZATION EXPENSE

      
2022 (excluding the three months ended March 31, 2022)  $879,235 
2023   1,166,080 
2024   940,215 
2025   909,440 
2026   865,360 
Thereafter   425,362 
Future Amortization Expense  $5,185,692 

 

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following amounts:

 

  

March 31,

2022

  

December 31,

2021

 
Accounts payable  $2,975,474   $1,700,260 
Accrued payroll   453,147    482,588 
Accrued expenses   2,032,540    513,718 
Accrued commissions   729,397    - 
Accrued interest – related party   30,993    12,500 
Total accounts payable and accrued expenses  $6,221,551   $2,709,066 

 

Note 8 - RELATED PARTY TRANSACTIONS

 

Convertible Note Payable, Consulting, and Stock Payable – Related Party

 

On November 1, 2021, we entered into a two-year consulting agreement with Smile on Fridays LLP (“Smile”) pursuant to which Smile will represent us as the Chief Marketing Officer. Upon execution of the agreement, we were to issue a total of 432,000 shares of our common stock. The shares shall be deemed vested and earned to 25% upon the execution of the agreement and 25% at the beginning of each subsequent six-month period. As of March 31, 2022, 108,000 shares of our stock have been issued.

 

On 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 agreement, we were to issue a total of 312,000 shares of our common stock. As of March 31, 2022, 156,000 shares of our common stock have been issued.

 

On October 27, 2021, we issued to Neil Stinchcombe, the sole owner of Smile, a convertible note in the principal amount of $1,500,000 bearing an interest rate of 5% per annum payable at maturity with an original maturity date of January 27, 2022, with a conversion price of $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 of this note was $1,500,000 on March 31, 2022 and December 31, 2021. During the three months ended March 31, 2022, we recorded $18,493 in accrued interest.

 

19
 

 

Note Receivable – Related Party

 

Arkavia provided cash infusions to a related party to fund an intended wholly owned subsidiary, Arkavia Peru, for start-up and operational costs. As of March 31, 2022, the subsidiary has yet to be incorporated and as such, Arkavia has recorded the amount as a receivable. The amount outstanding at March 31, 2022 is $1,161,718 and is considered short-term and non-interest bearing.

 

Note 9 STOCKHOLDERS’ EQUITY

 

2019 Equity Incentive Plan

 

Our board of directors approved our 2019 Equity Incentive Plan (the “2019 Plan”) on June 6, 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 our common stock that may be issued under the 2019 Plan is 25,000,000 shares. The 2019 Plan has a term of ten years 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, or (iii) previously issued shares of common stock reacquired by us, including shares purchased on the open market.

 

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

 

We granted options for the purchase of 6,025,815 shares of common stock during the three months ended March 31, 2022.

 

We granted options for the purchase of 900,000 shares of common stock during the three months ended March 31, 2022.

 

20
 

 

In applying the Black-Scholes option pricing model to stock options granted, we used the following assumptions:

 

   For the Three
Months Ended
   For the Three
Months Ended
 
  

March 31, 2022

  

March 31, 2021

 
Risk free interest rate   0.63% - 2.46%    0.42% - 0.48% 
Contractual term (years)   10.00    5.00 
Expected volatility   65%   74%
Expected dividends   0.00%   0.00%

 

The following table summarize stock option activity:

 

       Weighted 
       Average 
   Shares   Exercise Price 
Outstanding at January 1, 2022   31,372,148   $1.84 
Granted   6,025,815    3.95 
Exercised   (100,000)   0.38 
Expired or cancelled   (2,477,832)   1.84 
Outstanding at March 31, 2022   34,820,131   $2.21 

 

The following table summarizes information about options to purchase shares of our common stock outstanding and exercisable at March 31, 2022:

 

        Weighted-   Weighted-     
        Average   Average     
    Outstanding   Remaining Life   Exercise   Number 
Exercise Prices   Options   In Years   Price   Exercisable 
                  
$0.38    2,733,333    2.37   $0.38    2,733,333 
 0.40    3,600,000    2.31    0.40    3,600,000 
 0.50    8,732,388    3.12    0.50    8,412,538 
 1.40    1,417,251    5.39    1.40    1,372,395 
 2.00    5,045,200    4.83    2.00    2,251,750 
 2.05    1,421,703    3.92    2.05    342,396 
 2.25    1,100,000    9.78    2.25    - 
 3.05    170,000    4.33    3.05    - 
 3.20    22,000    9.93    3.20    - 
 3.46    12,000    9.94    3.46    - 
 3.60    155,000    4.33    3.60    - 
 4.00    624,340    4.30    4.00    - 
 4.12    12,000    9.93    4.12    - 
 4.21    18,000    9.97    4.21    - 
 4.82    1,062,827    9.96    4.82    - 
 5.00    8,599,088    9.60    5.00    52,958 
$6.75    95,000    4.33    5.00    - 
      34,820,131    5.42   $2.21    18,765,371 

 

21
 

 

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.

 

Total compensation expense related to the options was $4,687,093 and $838,762 for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, we attributed $2,121,583 and $2,565,510 of compensation expense related to the options to cost of payroll and selling, general, and administrative expenses, respectively. During the three months ended March 31, 2021, we attributed $100,925 and $737,837 of compensation expense related to the options to cost of payroll and selling, general, and administrative expenses, respectively. As of March 31, 2022, there was future compensation expense of $46,517,161 with a weighted average recognition period of 2.20 years related to the options.

 

The aggregate intrinsic value totaled $105,004,192 and $85,717,281, for total outstanding and exercisable options, respectively, and was based on our estimated fair value of the common stock of $5.32 as of 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

 

In applying the Black-Scholes option pricing model to warrants granted or issued, we used the following assumptions:

 

   For the Three Months Ended 
   March 31, 2022 
Risk free interest rate   1.47% - 1.62%
Contractual term (years)   4.005.00 
Expected volatility   84%
Expected dividends   0.00%

 

A summary of the warrant activity during the three months ended March 31, 2022 is presented below:

 

       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 

 

The following table summarizes information about warrants to purchase shares of our common stock outstanding and exercisable at March 31, 2022:

 

        Weighted-   Weighted-     
        Average   Average     
    Outstanding   Remaining Life   Exercise   Number 
Exercise Prices   Options   In Years   Price   Exercisable 
                  
$5.00    144,200    4.76   $5.00    144,200 
      144,200    4.76   $5.00    144,200 

 

The aggregate intrinsic value totaled $46,144, for total outstanding and exercisable warrants and was based on the estimated fair value of our common stock of $5.32 as of March 31, 2022, which is the aggregate fair value of the common stock that would have been received by the warrant holders had all warrant holders exercised their warrants as of that date, net of the aggregate exercise price.

 

22
 

 

NOTE 10 – 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 400,000 shares of the Company’s common stock to Maxim, with a fair value of $5.00 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 we or any of our subsidiaries is a party or in which any of our directors, officers or affiliates, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.

 

NOTE 11 – 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 March 31, 2022 and December 31, 2021, no amounts were drawn on the line of credit.

 

True Digital

 

On September 9, 2021, True Digital entered into a secured line of credit with Blue Sky Bank (“Blue Sky”) for $500,000. The line of credit bears interest at 3.25% per annum. The line of credit has an ending term of August 9, 2022. At March 31, 2022, the outstanding balance was $369,829.

 

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, 2025 and bears an interest rate of 5.77% per annum. During the three months ended March 31, 2022, we made cash payments of $5,532. The loan is collateralized by a vehicle. At March 31, 2022 and December 31, 2021, $27,122 and $32,474 was outstanding, respectively.

 

Catapult Acquisition Corp.

 

On July 9, 2016, Catapult Acquisition Corp. entered into several seller notes payable with shareholders of VelocIT. The total borrowing amount was $600,000 and 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 $150,000 of 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 March 31, 2022 and December 31, 2021 was $370,587 and $446,239, respectively.

 

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Arkavia

 

At March 31, 2022 and December 31, 2021, notes payable consist of the following amounts:

 

  

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 $113,975. The note has a maturity date of February 10, 2027 and bears an interest rate 6% per annum. During the period of January 19, 2022 through March 31, 2022, True Digital made aggregate cash payments of $2,693. At March 31, 2022, the amount outstanding was $92,834.

 

On February 2, 2021, True Digital entered into a promissory note with a shareholder for the principal amount of $510,000. The note has a maturity date of May 2, 2024 and bears an interest rate of 4% per annum. During the period of January 19, 2022 through March 31, 2022, True Digital made aggregate cash payments of $23,685. At March 31, 2022, the amount outstanding was $326,639.

 

Convertible Note Payable

 

On October 27, 2021, we issued to Neil Stinchcombe, the sole owner of Smile, a convertible note in the principal amount of $1,500,000 bearing an interest rate of 5% per annum payable at maturity with a maturity date of January 27, 2022, with a conversion price of $5.00 per share. 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 of this note was $1,500,000 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 three months ended March 31, 2022.

 

Future minimum payments under the above line of credit and notes payable following the three months ended March 31, 2022, are as follows:

 

    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 12 – LEASES

 

All of our 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 19, 2022, we recognized additional ROU assets and lease liabilities of $226,942. 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 we will exercise that option.

 

When measuring lease liabilities for leases that were classified as operating leases, we discounted lease payments using our estimated incremental borrowing rate at January 1, 2022. The weighted average incremental borrowing rate applied was 6%. As of March 31, 2022, our leases had a remaining weighted average term of 2.21 years.

 

Operating leases are included in the unaudited condensed consolidated balance sheets as follows:

 

   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:

 

   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 

 

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Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the three months ended March 31, 2022, are as follows:

 

   March 31, 2022 
Fiscal Year  Operating Leases 
   (Unaudited) 
2022 (excluding the three months ended March 31, 2022)  $189,657 
2023   144,866 
2024   57,605 
2025   54,389 
Total future minimum lease payments   446,517 
Amount representing interest   (31,846)
Present value of net future minimum lease payments  $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:

 

   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:

 

   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.

 

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NOTE 14CONCENTRATION OF CREDIT RISK

 

Cash Deposits

 

Financial instruments that potentially subject us 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 March 31, 2022, and December 31, 2021, we had approximately $1,894,000 and $1,119,000, respectively, in excess of the FDIC insured limit.

 

Revenue

 

No clients accounted for more than 10% of revenue for the three months ended March 31, 2022.

 

One client accounted for 32% of revenue for the three months ended March 31, 2021.

 

Accounts Receivable

 

No clients accounted for more than 10% of accounts receivable as of March 31, 2022.

 

One client accounted for 20% of accounts receivable as of March 31, 2021.

 

NOTE 15 – SUBSEQUENT EVENTS

 

In accordance with ASC 855, Subsequent Events, 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 has evaluated all events and transactions that occurred after March 31, 2022 through the date the unaudited condensed consolidated financial statements are available for issuance. During this period the Company did not have any material reportable subsequent events.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.

 

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”), 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.

 

Our 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.”

 

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First Quarter Fiscal 2022 Highlights

 

Our operating results for the three months ended March 31, 2022 included the following:

 

  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.

 

Significant Developments During First Quarter Fiscal 2022

 

Nasdaq Listing and Public Offering

 

On January 19, 2022, we completed a public offering of our common stock. Pursuant to the public offering, we issued and sold 2,060,000 shares of common stock at a public offering price of $5.00 per share and granted 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 commissions of $721,000 and estimated offering costs of $108,000.

 

On January 14, 2022, we were approved to list our common stock on The Nasdaq Stock Market LLC under the symbol “CISO.”

 

Acquisition of True Digital

 

On 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 the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company. In connection with consummation of the transactions, we paid aggregate consideration of $6,153,000 in cash and 8,229,000 shares of our common stock, subject to a holdback of 822,900 shares of our common stock and $615,300 of cash.

 

True Digital is a managed cybersecurity and compliance provider dedicated to the advancement of security 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 TrueSpeed, its proprietary IT-security compliance operational intelligence platform.

 

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Results of Operations

 

Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021 

 

Our financial results for the three months ended March 31, 2022 are summarized as follows in comparison to the three months ended March 31, 2021:

 

   Three Months Ended March 31,     
   2022   2021   Variance 
Revenue:            
Security managed services  $8,052,225   $1,871,817   $6,180,408 
Professional services   1,227,185    687,961    589,224 
Total revenue   9,329,410    2,559,778    6,769,632