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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 September 30, 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, Arizona   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 November 14, 2022, there were 146,253,545 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 

CERBERUS CYBER SENTINEL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022

 

TABLE OF CONTENTS

 

  Page
   
PART I. FINANCIAL INFORMATION 4
     
ITEM 1. Financial Statements (unaudited) 4
     
  Condensed Consolidated Balance Sheets 4
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss 5
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity 6
     
  Condensed Consolidated Statements of Cash Flows 7
     
  Notes to Condensed Consolidated Financial Statements 8
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 31
     
ITEM 4. Controls and Procedures 31
     
PART II. OTHER INFORMATION 32
     
ITEM 1. Legal Proceedings 32
     
ITEM 1A. Risk Factors 32
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
     
ITEM 3. Defaults Upon Senior Securities 33
     
ITEM 4. Mine Safety Disclosures 33
     
ITEM 5. Other Information 33
     
ITEM 6. Exhibits 34
     
SIGNATURES 35

 

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 rate of growth and anticipated trends and challenges in our business and in the market for our services;
our future financial performance, including our expectations regarding our revenue, cost of revenue, operating expenses, and our ability to achieve and maintain future profitability;
sufficiency of cash and cash equivalent to meet our needs for at least the next 12 months;
our ability to attract and retain clients;
our ability to expand our professional services offerings and capabilities;
our ability to generate revenue and gross profit;
our ability to navigate through the increasingly complex cybersecurity regulatory environment;
beliefs and objectives for future operations;
our ability to stay in compliance with laws and regulations currently applicable to, or which may become applicable to, our business both in the United States and internationally;
economic and industry trends or trend analysis;
our beliefs regarding the timing of rebranding and marketing efforts;
our beliefs regarding the sufficiency of our liquidity and capital resources; and
anticipated income tax rates, tax estimates and tax standards.

 

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. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur, and actual results could differ materially and adversely from those implied in our forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or events and circumstances described in the forward-looking statements will be achieved or occur. 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. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which are only predictions and speak only as of the date hereof.

 

3
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated Balance Sheets

(Unaudited)

 

   September 30,   December 31, 
   2022   2021 
         
ASSETS          
           
Current Assets:          
Cash and cash equivalents  $4,888,333   $2,725,035 
Accounts receivable, net   5,763,431    4,840,802 
Notes receivable, related party   -    1,090,903 
Inventory   336,527    189,596 
Prepaid expenses and other current assets   3,456,400    960,965 
Contract asset   495,374    - 
Total Current Assets   14,940,065    9,807,301 
           
Property and equipment, net   4,460,763    2,394,424 
Right of use asset, net   316,698    277,578 
Intangible assets, net   7,650,150    6,540,269 
Goodwill   74,094,780    16,792,535 
Other assets   17,068    - 
           
Total Assets  $101,479,524   $35,812,107 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities:          
Accounts payable and accrued expenses  $6,700,021   $2,709,066 
Deferred revenue   3,074,173    52,824 
Settlement liability   -    470,000 
Lease liability   163,233    196,472 
Loans payable   7,235,352    213,199 
Convertible notes payable   1,050,000    1,500,000 
Total Current Liabilities   18,222,779    5,141,561 
           
Long-term Liabilities:          
Loans payable, net of current portion   4,465,244    5,284,301 
Lease liability, net of current portion   167,462    88,040 
Convertible notes payable, net of current portion   1,500,000    - 
           
Total Liabilities   24,355,485    10,513,902 
           
Commitments and Contingencies   -    - 
           
Stockholders’ Equity:          
Common stock, $.00001 par value; 300,000,000 shares authorized; 145,945,679 and 125,852,971 shares issued and outstanding on September 30, 2022 and December 31, 2021, respectively   1,459    1,258 
Preferred stock, $.00001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding on September 30, 2022 and December 31, 2021   -    - 
Additional paid-in capital   147,215,998    69,309,369 
Accumulated translation adjustment   (2,207,256)   - 
Accumulated deficit   (67,886,162)   (44,012,422)
Total Stockholders’ Equity   77,124,039    25,298,205 
           
Total Liabilities and Stockholders’ Equity  $101,479,524   $35,812,107 

 

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

 

4
 

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
   Three Months Ended   Nine Months Ended 
   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
                 
Revenue:                    
Security managed services  $10,061,304   $3,099,753   $28,489,698   $6,979,146 
Professional services   1,191,728    645,255    3,320,689    2,275,437 
Total revenue   11,253,032    3,745,008    31,810,387    9,254,583 
                     
Cost of revenue:                    
Security managed services   4,310,378    650,955    10,678,728    1,326,788 
Professional services   182,413    234,326    455,902    350,388 
Cost of payroll   4,978,768    2,093,072    14,132,602    5,052,684 
Stock based compensation   857,950    312,909    4,805,423    745,381 
Total cost of revenue   10,329,509    3,291,262    30,072,655    7,475,241 
Total gross profit   923,523    453,746    1,737,732    1,779,342 
                     
Operating expenses:                    
Professional fees   624,391    293,408    2,192,600    695,023 
Advertising and marketing   245,495    254,026    641,340    471,721 
Selling, general and administrative   6,684,747    2,125,984    15,856,705    5,296,623 
Stock based compensation   1,791,724    938,726    6,761,283    2,236,142 
Total operating expenses   9,346,357    3,612,144    25,451,928    8,699,509 
                     
Loss from operations   (8,422,834)   (3,158,398)   (23,714,196)   (6,920,167)
                     
Other income (expense):                    
Other income   29,968    169    134,447    2,553 
Interest expense, net   (108,233)   (75,470)   (293,991)   (209,806)
PPP loan forgiveness   -    980,800    -    980,800 
                     
Total other income (expense)   (78,265)   905,499    (159,544)   773,547 
                     
Net loss   (8,501,099)   (2,252,899)   (23,873,740)   (6,146,620)
Foreign currency translation adjustment   (908,987)   -    (2,207,256)   - 
                     
Comprehensive loss  $(9,410,086)  $(2,252,899)  $(26,080,996)  $(6,146,620)
                     
Net loss per common share - basic and diluted  $(0.06)  $(0.02)  $(0.17)  $(0.05)
                     
Weighted average shares outstanding - basic   142,295,780    117,729,971    136,764,168    117,081,360 

 

The accompanying footnotes are an integral part of these 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   Preferred Stock     Paid-in   Comprehensive   Accumulated     
   Shares   Amount   Shares       Amount     Capital   Gain/(Loss)   Deficit   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   -    -     -       -      10,432,048    -    -    10,432,048 
Stock based compensation - common stock   736,819    7     -       -      1,592,977    -    -    1,592,984 
Stock issued for cash   304,608    3     -       -      1,040,962    -    -    1,040,965 
Exercise of options   2,459,809    25     -       -      1,359,239    -    -    1,359,264 
Stock issued for cash in public offering   2,060,000    21     -       -      9,521,777    -    -    9,521,798 
Stock issued for True Digital acquisition   8,229,000    82     -       -      34,726,298    -    -    34,726,380 
Stock issued for VelocIT acquisition   256,678    3     -       -      (3)   -    -    - 
Stock issued for Red74 acquisition   34,000    -     -       -      -    -    -    - 
Stock issued for Creatrix acquisition   600,000    6     -       -      3,629,994    -    -    3,630,000 
Stock issued for CyberViking acquisition   499,000    5     -       -      1,836,315    -    -    1,836,320 
Stock issued for CUATROi acquisition   2,166,922    22     -       -      6,847,452    -    -    6,847,474 
Stock issued for NLT acquisition   2,745,872    27     -       -      6,919,570    -    -    6,919,597 
Foreign currency translation   -    -     -       -      -    (2,207,256)   -    (2,207,256)
Net loss   -    -     -     -      -    -    (23,873,740)   (23,873,740)
Balance at September 30, 2022   145,945,679   $1,459     -   $ -     $147,215,998   $(2,207,256)  $(67,886,162)  $77,124,039 
                                               
Balance at January 1, 2021   116,104,971   $1,161     -       -     $12,607,074    -   $(4,866,772)  $7,741,463 
                                               
Stock based compensation - stock options   -    -     -       -      1,729,888    -    -    1,729,888 
Stock based compensation - common stock   232,900    2     -       -      -    -    -    2 
Stock issued for cash   1,625,000    16     -       -      3,249,984    -    -    3,250,000 
Stock issued for VelocIT acquisition   2,310,100    23     -       -      13,603,924    -    -    13,603,947 
Replacement options issued in VelocIT acquisition   -    -     -       -      6,861,203    -    -    6,861,203 
Net loss   -    -     -       -      -    -    (6,146,620)   (6,146,620)
Balance at September 30, 2021   120,272,971   $1,202     -   $ -     $38,052,073   $-   $(11,013,392)  $27,039,883 

 

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

 

6
 

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

 

   September 30, 2022   September 30, 2021 
Cash flows from operating activities:          
Net loss  $(23,873,740)  $(6,146,620)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation - stock options   10,432,048    2,981,523 
Loss on write-off of accounts receivable   -    55,528 
Issuance of common stock for services   1,134,658    313,395 
Non-cash interest expense   60,651    54,792 
Depreciation and amortization   2,138,493    131,403 
Right of use amortization   184,167    75,842 
Gain on disposal of property and equipment   12,000    - 
Forgiveness of PPP Loan   -    (980,800)
Gain on termination of operating lease   (22,289)   - 
Changes in operating assets and liabilities:          
Accounts receivable, net   887,816    (355,946)
Inventory   (106,246)   - 
Contract assets   (330,067)   - 
Prepaids and other current assets   (1,952,488)   (305,532)
Accounts payable and accrued expenses   3,003,623    (66,311)
Lease liability   (154,816)   (69,586)
Settlement liability   (470,000)   - 
Deferred revenue   1,205,893    - 
           
Net cash used in operating activities   (7,850,297)   (4,312,312)
           
Cash flows from investing activities:          
           
Purchases of property and equipment   (510,973)   - 
Cash (paid)/acquired in acquisitions, net   (5,533,244)   662,176 
           
Net cash (used in)/provided by investing activities   (6,044,217)   662,176 
           
Cash flows from financing activities:          
Proceeds from sale of common stock   10,562,763    3,250,000 
Proceeds from stock option exercise   1,359,264    - 
Proceeds from loan payable   5,000,000    - 
Proceeds from convertible note payable   1,000,000    - 
Proceeds from line of credit   86,585    221,346 
Payment on line of credit   (369,829)   (224,346)
Payment on loans payable   (1,575,510)   (2,004,528)
Payment on notes payable, related party   -    (59,787)
Payment of debt issuance cost   (25,000)   - 
           
Net cash provided by financing activities   16,038,273    1,182,685 
           
Effect of exchange rates on cash and cash equivalents   19,539    - 
           
Net increase in cash and cash equivalents   2,163,298    (2,467,451)
           
Cash and cash equivalents - beginning of the period   2,725,035    5,197,030 
           
Cash and cash equivalents - end of the period  $4,888,333   $2,729,579 
           
Supplemental cash flow information:          
Cash paid for:          
Interest  $224,813   $91,490 
Income taxes  $-   $- 
Non-cash investing and financing activities:          
Right of use asset and lease liability recorded upon adoption of ASC 842  $476,986   $330,512 
Forgiveness of PPP Loan  $-   $980,800 
Common stock issued in VelocIT acquisition  $-   $13,603,947 
Common stock issued in RED 74 acquisition  $-   $- 
Common stock issued in True Digital acquisition  $34,726,380   $- 
Common stock issued in Creatrix acquisition  $3,630,000   $- 
Common stock issued in CyberViking acquisition  $1,836,320   $- 
Common stock issued in CUATROi acquisition  $6,847,474   $- 
Common stock issued in NLT Secure acquisition  $6,919,597   $- 

 

The accompanying footnotes are an integral part of these 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”), Ocean Point 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”), Creatrix, Inc., a Maryland corporation (“Creatrix”), CyberViking, LLC, an Oregon limited liability company (“CyberViking”), Servicios Informaticos CUATROi, S.P.A., a Chilean corporation, Comercializadora CUATROi S.P.A., a Chilean corporation CUATROi Peru, S.A.C., a Peruvian corporation, and CUATROi S.A.S., a Colombian corporation (collectively “CUARTOi”), NLT Networks, S.P.A., a Chilean corporation; NLT Tecnologias, Limitada, a Chilean corporation, and NLT Servicios Profesionales, S.P.A., a Chilean corporation (collectively “NLT”), White and Blue Solutions, LLC, a Florida limited liability company (“W&B” and together with NLT, “NLT Secure”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

 

NOTE 1 –ORGANIZATION AND BACKGROUND

 

Description 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. 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.

 

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. In addition, we granted the underwriter warrants to purchase an aggregate of 144,200 shares of our common stock. We used 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.

 

On June 1, 2022, we entered into a stock purchase agreement with the stockholders of Creatrix, pursuant to which we acquired all of the issued and outstanding capital stock of Creatrix, with Creatrix becoming a wholly owned subsidiary of our company. Creatrix offers recognized expertise in identity management as well as systems integration and software engineering, and specializes in biometrics, vetting, credentialing, and case management.

 

On July 1, 2022, we entered into a stock purchase agreement with CyberViking and its interest holders, pursuant to which we acquired all of the issued and outstanding units of CyberViking, with CyberViking becoming a wholly owned subsidiary of our company. CyberViking specializes in application security services, incident response, and threat hunting as well as the creation and management of security operation centers.

 

8
 

 

On August 25, 2022, we entered into a stock purchase agreement with CUATROi and its partners, pursuant to which we acquired all of the issued and outstanding units of CUATROi, with CUATROi becoming a wholly owned subsidiary of our company. CUATROi is a cloud, managed services provider & cybersecurity company with offices in South America.

 

On September 1, 2022, we entered into a stock purchase agreement with NLT Secure and its interest holders, pursuant to which we acquired all of the issued and outstanding units of NLT Secure, with NLT Secure becoming a wholly owned subsidiary of our company. NLT Secure provides a broad range of security solutions and managed services to organizations throughout South America.

 

Basis of Presentation

 

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include our accounts and the accounts of our subsidiaries. All intercompany accounts and transactions have been eliminated.

 

Our interim financial statements are unaudited, and in our opinion, include all adjustments of a normal recurring nature necessary for the fair presentation of the periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for any subsequent period or for the year ending December 31, 2022. These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2021.

 

Reclassifications

 

Certain reclassifications have been made to the financial statements for the nine months ended September 30, 2021 to conform to the financial statements presentation for the nine months ended September 30, 2022. These reclassifications had no effect on net loss or cash flows as previously reported.

 

Use of Estimates

 

GAAP requires management to make estimates and assumptions that affect the reported amounts in our financial statements. We periodically evaluate our estimates and adjust prospectively, if necessary. We believe our estimates and assumptions are reasonable; however, actual results could materially differ.

 

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.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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.

 

Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:

 

9
 

 

Security Managed Services

 

Security managed services revenue primarily consists of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.

 

Professional Services

 

Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.

 

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 September 30, 2022 and December 31, 2021, our allowance for doubtful accounts was $308,560 and $77,811, respectively.

 

Inventory

 

Inventory consists of software licenses and computer equipment for sale to customers. Inventory is measured using the first-in, first-out method and stated at lower of cost or net realizable value as of September 30, 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 adjust the value of inventory when required. We recorded no inventory impairment losses for the nine months ended September 30, 2022 and 2021.

 

Fair Value Measurements

 

As defined in ASC (“Accounting Standards Codification”) 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.

 

10
 

 

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. For dilutive securities, all 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 nine months ended September 30, 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:

 

   September 30, 2022   September 30, 2021 
Stock options   34,856,288    27,680,040 
Warrant   144,200    - 
Convertible debt   430,718    1,500,000 
Total   35,431,206    29,180,040 

 

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 license. We generally invoice customers in advance or in milestone-based installments. Deferred revenue of $52,824 was recognized for the nine months ended September 30, 2022, which was included in the deferred revenue balance as of December 31, 2021. As of September 30, 2022, deferred revenue related to such customer payments was $3,074,173, all of which is expected to be recognized during the succeeding 12-month period and is therefore presented as current.

 

Deferred revenue consisted of the following:

  

   September 30, 2022   December 31, 2021 
Security managed services  $2,038,072   $52,824 
Professional services   1,036,101    - 
Total deferred revenue  $3,074,173   $52,824 

 

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 September 30, 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.

 

11
 

 

Recently Issued Accounting Standards

 

In May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

 

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 other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to us.

 

NOTE 3 – ACQUISITIONS

 

True Digital Security, Inc.

 

On January 5, 2022, we entered into the 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 $6,153,000 in cash and 8,229,000 shares of our common stock.

 

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  $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 
      
Intangible assets acquired:     
Tradename - trademarks   1,744,200 
Intellectual property   1,137,000 
Non-competes   124,900 
Total intangible assets   3,006,100 
      
Assumed liabilities:     
Accounts payable and accrued expenses   1,283,003 
Deferred revenue   1,956,600 
Line of credit   283,244 
Loans payable   181,741 
Loans payable - shareholder   543,581 
Total assumed liabilities   4,248,169 
      
Net assets acquired   1,899,227 
      
Goodwill (a)  $38,980,153 

 

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

 

12
 

 

Creatrix, Inc.

 

On June 1, 2022, we entered into a stock purchase agreement with the stockholders of Creatrix, pursuant to which Creatrix became our wholly owned subsidiary. We anticipate that this will expand our professional services offerings and capabilities. Creatrix offers recognized expertise in identity management as wells as systems integration and software engineering and specializes in biometrics, vetting, credentialing, and case management.

 

The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed:

 

      
Consideration paid  $3,630,000 
      
Tangible assets acquired:     
Cash   3,572 
Accounts receivable   125,908 
Contract assets   33,965 
Prepaid expenses and other current assets   3,597 
Total tangible assets   167,042 
      
Assumed liabilities:     
Accounts payable and accrued expenses   48,001 
Loans payable   56,687 
Total assumed liabilities   104,688 
      
Net assets acquired   62,354 
      
Goodwill (a)  $3,567,646 

 

(a)Goodwill is not deductible for tax purposes.

 

CyberViking, LLC.

 

On July 1, 2022, we entered into a stock purchase agreement with CyberViking and its interest holders, pursuant to which we acquired all of the issued and outstanding units of CyberViking, with CyberViking becoming a wholly owned subsidiary of our company. We anticipate that this will expand our professional services offerings and capabilities. CyberViking specializes in application security services, incident response, and threat hunting as well as the creation and management of security operation centers.

 

13
 

 

We did not acquire assets nor assume liabilities in our purchase of CyberViking, as a result the $1,836,320 of consideration paid is recognized as goodwill. The goodwill is not deductible for tax purposes.

 

CUATROi.

 

On August 25, 2022, we entered into a stock purchase agreement with CUATROi and its partners, pursuant to which CUATROi became our wholly owned subsidiary. We anticipate that this will expand our professional services offerings and capabilities. CUATROi is a cloud, managed services provider & cybersecurity company with offices in South America.

 

The aggregate purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess recorded to goodwill. During the measurement period, which will not exceed one year from closing, we will continue to obtain information to assist us in finalizing the acquisition date fair values. Any qualifying changes to our preliminary estimates will be recorded as adjustments to the respective assets and liabilities, with any residual amounts allocated to goodwill.

 

The following table summarizes the preliminary estimated acquisition date fair values of the assets acquired and liabilities assumed:

 

      
Consideration paid  $6,847,474 
      
Tangible assets acquired:     
Cash   77,804 
Accounts receivable   478,210 
Prepaid expenses and other current assets   51,464 
Property and equipment   434,816 
Total tangible assets   1,042,294 
      
Assumed liabilities:     
Accounts payable and accrued expenses   242,830 
Loans payable   850,199 
Total assumed liabilities   1,093,029 
      
Net liabilities assumed   50,735 
      
Goodwill (a)  $6,898,209 

 

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

 

NLT Secure

 

On September 1, 2022, we entered into a stock purchase agreement with NLT Secure and its interest holders, pursuant to which we acquired all of the issued and outstanding units of NLT Secure with them becoming a wholly owned subsidiary of our company. We anticipate that this will expand our professional services offerings and capabilities. NLT Secure provides a broad range of security solutions and managed services to organizations throughout South America.

 

The aggregate purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimate fair values as of the acquisition date, with the excess recorded to goodwill. During the measurement period, which will not exceed one year from closing, we will continue to obtain information to assist us in finalizing the acquisition date fair values. Any qualifying changes to our preliminary estimates will be recorded as adjustments to the respective assets and liabilities, with any residual amounts allocated to goodwill.

 

14
 

 

The following table summarizes the preliminary estimated acquisition date fair values of the assets acquired and liabilities assumed:

 

      
Consideration paid  $6,919,597 
      
Tangible assets acquired:     
Cash   48,858 
Accounts receivable   66,972 
Prepaid expenses and other current assets   154,300 
Property and equipment   1,071,401 
Total tangible assets   1,341,531 
      
Assumed liabilities:     
Accounts payable and accrued expenses   791,228 
Loans payable   1,778,591 
Total assumed liabilities   2,569,819 
      
Net liabilities assumed   1,228,288 
      
Goodwill (a)  $8,147,885 

 

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

 

Pro forma financial information is not presented because the acquisitions were not material to our financial statements, individually or in the aggregate.

 

NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of:

 

  

September 30,

2022

  

December 31,

2021

 
Prepaid expenses  $1,363,761   $441,259 
Deferred cost of sales   1,090,066    12,239 
Prepaid taxes   347,189    231,014 
Prepaid insurance   333,635    46,751 
Deferred interest   321,749    229,702 
Total prepaid expenses and other current assets  $3,456,400   $960,965 

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

  

September 30,

2022

  

December 31,

2021

 
Computer equipment  $1,068,918   $495,235 
Building   2,111,698    1,047,020 
Leasehold improvements   85,800    109,626 
Vehicles   87,323    63,052 
Furniture and fixtures   140,008    33,358 
Software   1,591,450    748,599 
Property and equipment gross   5,085,197    2,496,890 
Less: accumulated depreciation   (624,434)   (102,466)
Property and equipment, net  $4,460,763   $2,394,424 

 

Total depreciation expense was $186,738 and $6,989 for the three months ended September 30, 2022 and 2021, respectively, and was $519,121 and $15,837 for the nine months ended September 30, 2022, and 2021, respectively.

 

15
 

 

NOTE 6 – INTANGIBLE ASSETS AND GOODWILL

 

The following table summarizes the changes in goodwill during the nine months ended September 30, 2022:

 

Balance December 31, 2021  $16,792,535 
Acquisition of goodwill   59,430,213 
Foreign currency translation adjustment   (2,127,968)
Ending balance, September 30, 2022(1)  $74,094,780 

 

 

(1)As of September 30, 2022, we had not obtained a third-party valuation for the acquisitions of CUATROi and NLT Secure. As such, the purchase price allocation disclosed in this Quarterly Report for CUATROi and NLT Secure may change, and, therefore, goodwill from the acquisitions may change.

 

The following table summarizes the identifiable intangible assets as of September 30, 2022 and December 31, 2021:

 

   Useful life  September 30, 2022   December 31, 2021 
Tradenames – trademarks  1-5 years  $4,649,220   $3,010,100 
Customer base  5 - 10 years   1,522,131    1,650,000 
Non-compete agreements  2 - 5 years   759,850    675,500 
Intellectual property/technology  5 - 10 years   2,605,406    1,528,000 
Identifiable intangible assets        9,536,607    6,863,600 
Less: accumulated amortization      (1,886,457)   (323,331)
Total     $7,650,150   $6,540,269 

 

The weighted average remaining useful life of identifiable amortizable intangible assets remaining is 4.23 years.

 

During the third quarter of 2022, as the result of rebranding and expected future marketing of our products and services, we made the decision to phase out certain indefinite-lived tradenames from acquired subsidiaries. We believe the phase-out and integration of the rebranding and marketing will be completed no later than June 30, 2024, and expect to recognize $1,211,800 of amortization expense from tradenames previously held as indefinite-lived.

 

Amortization of identifiable intangible assets for the three months ended September 30, 2022 and 2021 was $797,703 and $40,506, respectively, and was $1,615,170 and $110,495 for the nine months ended September 30, 2022 and 2021, respectively.

 

The below table summarizes the future amortization expense for the remainder of 2022 and the next four years thereafter:

 

      
2022 (remainder of)  $667,397 
2023   2,341,057 
2024   1,623,017 
2025   1,434,081 
2026   1,334,585 
Thereafter   250,013 
Finite-lived intangible assets, net   $7,650,150 

 

16
 

 

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following amounts:

 

   September 30, 2022   December 31, 2021 
Accounts payable  $4,309,601   $1,700,260 
Accrued payroll   1,040,353    482,588 
Accrued expenses   1,016,663    513,718 
Accrued commissions   320,904    - 
Accrued interest – related party   12,500    12,500 
Total accounts payable and accrued expenses  $6,700,021   $2,709,066 

 

Note 8 – RELATED PARTY TRANSACTIONS

 

Independent Consulting Agreement with Stephen Scott

 

In August 2020, we entered into an Independent Consulting Agreement with Stephen Scott, a Director of our company, with respect to advisory and consulting services relating to our strategic and business development, and sales and marketing. Mr. Scott receives a consulting fee of $11,500 per month for such services. During the three and nine months ended September 30, 2022, we paid consulting fees to Mr. Scott in the amount of $34,500 and $103,500, respectively.

 

Managed Services Agreement with Hensley Beverage Company – Related Party

 

In July 2021, we entered into a 1-year Managed Services Agreement with Hensley Beverage Company to provide secured managed services. We also may be engaged by Hensley Beverage Company from time to time to provide other related services outside the scope of the Managed Services Agreement. While the agreement provides for a term through December 31, 2021, the agreement will continue until terminated by either party. For the three and nine months ended September 30, 2022, we received $206,818 and $579,826 from Hensley Beverage Company for contracted services and had an outstanding receivable balance of $39,615 as of September 30, 2022.

 

Note Receivable – Related Party

 

Arkavia provided cash infusions to a related party to fund a wholly owned subsidiary, Arkavia Peru, for start-up and operational costs. The subsidiary is incorporated and as such, the assets, liabilities and operation results of Arkavia Peru are included in the condensed consolidated financial statements. At September 30, 2022, no amount remains outstanding.

 

Note 9 – STOCKHOLDERS’ EQUITY

 

On June 14, 2022, our Board of Directors approved and recommended that our stockholders approve (a) an amended and restated certificate of incorporation to, among other things, (i) increase our authorized shares of common stock from 250,000,000 to 300,000,000 and (ii) authorize the issuance of 50,000,000 shares of preferred stock, par value $0.00001 per share; and (b) increase the number of shares authorized for issuance under our 2019 Equity Incentive Plan from 25,000,000 to 60,000,000. On June 27, 2022, stockholders holding approximately 61.96% of our outstanding voting stock executed a written consent in lieu of a special meeting of stockholders approving such amended and restated certificate of incorporation and equity plan amendment (the “Written Consent”). Pursuant to Rule 14c-2 of the Exchange Act, such amended and restated certificate of incorporation became effective on August 8, 2022 and such equity plan amendment became effective on August 7, 2022.

 

Options

 

We granted stock options vesting solely upon the continued service of the recipient. We recognize the accounting grant date fair value of equity-based awards as compensation expense over the required service period of each award.

 

17
 

 

The following table summarizes stock option activity:

 

   Shares  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life

(in years)

  

Aggregate

Intrinsic

Value

 
Outstanding at January 1, 2022   31,372,148   $1.84    -   $- 
Granted   13,745,513    3.40    -    - 
Exercised   (2,459,809)   0.55    -    - 
Expired or cancelled   (7,801,564)   3.12    -    - 
Outstanding at September 30, 2022   34,856,288    2.30    5.74    39,981,362 
Exercisable at September 30, 2022   18,189,900   $1.05    3.55   $35,988,384 

 

Total compensation expense related to the options was $2,252,716 and $1,251,635 for the three months ended September 30, 2022 and 2021, respectively, and $10,432,048 and $2,981,523 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, there was future compensation expense of $49,608,286 with a weighted average recognition period of 3.12 years related to the options.

 

Warrant Activity Summary

 

The following table summarizes warrant activity:

 

   Shares  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life

(in years)

  

Aggregate

Intrinsic

Value

 
Outstanding at January 1, 2022   -   $-    -   $       - 
Granted   144,200    5.00    4.26    - 
Exercised   -    -    -    - 
Expired or cancelled   -    -    -    - 
Outstanding at September 30, 2022   144,200    5.00    4.26    - 
Exercisable at September 30, 2022   144,200   $5.00    4.26   $- 

 

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 entering into a settlement and release agreement on January 13, 2022. As a result, we recorded a settlement liability at December 31, 2021 of $470,000 and issued 400,000 shares of our common stock to Maxim, pursuant to the settlement. During the nine months ended September 30, 2022, we paid $470,000 in cash to Maxim.

 

18
 

 

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.

 

Indirect Taxes

 

We are subject to indirect taxation in some, but not all, of the various states and foreign jurisdictions in which we conduct business. Laws and regulations attempting to subject commerce conducted over the Internet to various indirect taxes are becoming more prevalent, both in the United States and internationally, and may impose additional burdens on us in the future. Increased regulation could negatively affect our business directly, as well as the business of our customers. Taxing authorities may impose indirect taxes on the Internet-related revenue we generated based on regulations currently being applied to similar, but not directly comparable industries. There are many transactions and calculations where the ultimate indirect tax determination is uncertain. In addition, domestic and international indirect taxation laws are complex and subject to change. We may be audited in the future, which could result in changes to our indirect tax estimates. We continually evaluate those jurisdictions in which nexus exists, and believe we maintain adequate indirect tax accruals.

 

As of September 30, 2022 and December 31, 2021, our accrual for estimated indirect tax liabilities was $216,906 and $99,088, respectively, reflecting our best estimate of the potential liability based on an analysis of our business activities, revenues subject to indirect taxes, and applicable regulations. Although we believe our indirect tax estimates and associated liabilities are reasonable, the final determination of indirect tax audits, litigation, or settlements could be materially different than the amounts established for indirect tax contingencies.

 

NOTE 11 – LOANS PAYABLE AND LINES OF CREDIT

 

Loans Payable

 

Loans payable was as follows:

 

   Interest Rate  Maturities   September 30, 2022   December 31, 2021 
                
Term loans (US dollar denominated)  5.00% – 6.00%  2023 - 2027   $5,639,096   $478,712 
Term loans (Chilean peso denominated)  3.48% - 19.20%  2022 - 2031    6,061,500    5,018,788 
            11,700,596    5,497,500 
Less current portion           (7,235,352)   (213,199)
Long term loans payable          $4,465,244   $5,284,301 

 

In June 2022, we entered into bridge loans, secured by substantially all of our assets, in the principal amount of $5,000,000 bearing an interest rate of 4.00% per annum payable monthly with a maturity date of December 14, 2022. These bridge loans are guaranteed by our assets. We recorded interest expense of $51,111 and $60,000 during the three and nine months ended September 30, 2022, respectively.

 

Various subsidiaries in the United States are borrowers under certain term loans. These term loans require monthly principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense of these term loans of $13,985 and $65,972 for the three and nine months ended September 30, 2022, respectively.

 

Our Chilean subsidiary, Arkavia, is the borrower under certain term loans denominated in Chilean Pesos. These term loans require monthly principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense on these term loans of $40,711 and $102,596 for the three and nine months ended September 30, 2022, respectively.

 

19
 

 

Debt Assumed through Acquisition

 

As part of the True Digital Acquisition, we assumed $1,008,566 of debt previously held by True Digital. This debt was comprised of a revolving line of credit and four separate term loans. We repaid three of the four term loans during the nine months ended September 30, 2022. The line of credit matured and was repaid in full on August 9, 2022, and the outstanding term loan matures in February 2027. The line of credit had an interest rate 3.25% per annum.

 

We assumed $2,716,167 of debt held by CUATROi and NLT Secure as part of their respective acquisitions, which was comprised of multiple separate terms loan secured by the assets of CUATROi and NLT Secure. These loans mature through November 2031 and had interest rates between 3.48% and 19.20%.

 

Convertible Notes Payable

 

In October 2021, we issued a convertible note in the principal amount of $1,500,000 bearing an interest rate of 5.00% per annum payable at maturity with a maturity date of January 27, 2022, with a conversion price of $5.00 per share. On October 21, 2022, we entered into an amendment to the note pursuant to which the maturity date was extended to December 31, 2023. The outstanding principal of this note was $1,500,000 at September 30, 2022.

 

In June 2022, we entered into an unsecured convertible note in the principal amount of $1,000,000 bearing an interest rate of 5.00% per annum payable monthly with a maturity date of June 2023, with a conversion price of $7.65 per share. The outstanding principal of this note can be redeemed at any time by us or at maturity at 105%. The outstanding principal of this note was $1,000,000 at September 30, 2022.

 

Future minimum payments under the above line of credit and loans payable due as of September 30, 2022 were as follows:

      
2022 (remainder of)  $5,815,709 
2023   4,341,115 
2024   1,231,461 
2025   1,007,017 
2026   601,371 
Thereafter   1,253,923 
Total future minimum payments   14,250,596 
Less: current   (8,285,352)
Long term debt, net of current portion    $5,965,244 

 

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 Right of Use (“ROU”) assets and corresponding lease liabilities.

 

On January 19, 2022, we recognized additional ROU assets and lease liabilities of $226,942 from the True Digital Acquisition. We elected to not recognize ROU assets and lease liabilities arising from office leases with initial terms of 12 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 6.00%. As of September 30, 2022, our leases had a remaining weighted average term of 2.45 years.

 

20
 

 

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

 

   Classification  September 30, 2022   December 31, 2021 
Lease assets             
Operating lease cost ROU assets  Assets  $316,698   $277,578 
Total lease assets     $316,698   $277,578 
              
Lease liabilities             
Operating lease liabilities, current  Current liabilities  $163,233   $196,472 
Operating lease liabilities, non-current  Liabilities   167,462    88,040 
Total lease liabilities     $330,695   $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 
   Nine Months Ended September 30, 
   2022   2021 
Leases costs          
Operating lease costs  $277,842   $54,376 
Total lease costs  $277,842   $54,376 

 

Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the nine months ended September 30, 2022 were as follows:

 

     
Fiscal Year  Operating Leases 
2022 (remainder of)  $61,394 
2023   120,268 
2024   106,639 
2025   64,332 
Total future minimum lease payments   352,633 
Amount representing interest   (21,938)
Present value of net future minimum lease payments  $330,695 

 

NOTE 13 – GEOGRAPHIC INFORMATION

 

Revenue by geography is based on the customer’s billing address and was as follows:

 

   2022   2021   2022   2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
                 
U.S.  $9,000,560   $3,745,008   $26,764,895   $9,254,583 
Chile   2,148,503    -    4,941,523    - 
All other countries   103,969    -    103,969    - 
Revenue  $11,253,032   $3,745,008   $31,810,387   $9,254,583 

 

No other international country represented more than 10% of revenue in any period presented.

 

21
 

 

Property and equipment, net by geography was as follows:

 

  

September 30, 2022

  

December 31, 2021

 
         
U.S.  $1,164,643   $95,069 
Chile   3,294,765    2,299,355 
All other countries   1,355    - 
Property and equipment net  $4,460,763   $2,394,424 

 

No other international country represented more than 10% of property and equipment, net in any period presented.

 

NOTE 14 – SUBSEQUENT EVENTS

 

On October 21, 2022, we entered into an amendment on our convertible note with an outstanding balance of $1,500,000, pursuant to which the maturity date was extended to December 31, 2023.

 

22
 

 

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 consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

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”), Ocean Point 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”), Creatrix, Inc., a Maryland corporation (“Creatrix”), CyberViking, LLC, an Oregon limited liability company (“CyberViking”), Servicios Informaticos CUATROi, S.P.A., a Chilean corporation, Comercializadora CUATROi S.P.A., a Chilean corporation CUATROi Peru, S.A.C., a Peruvian corporation, and CUATROi S.A.S., a Colombian corporation (collectively “CUARTOi”), NLT Networks, S.P.A., a Chilean corporation, NLT Tecnologias, Limitada, a Chilean corporation and NLT Servicios Profesionales, S.P.A., a Chilean corporation (collectively “NLT”), White and Blue Solutions, LLC, a Florida limited liability company (“W&B” and together with NLT, “NLT Secure”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

 

Third Quarter 2022 Highlights

 

Our operating results for the three months ended September 30, 2022 included the following:

 

Total revenue increased by $7.5 million to $11.3 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.
Total gross profit increased by $0.5 million to $0.9 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.
We acquired CyberViking, CUATROi, and NLT Secure, each of which became our wholly owned subsidiaries.

 

23
 

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021

 

Our financial results for the three months ended September 30, 2022 are summarized as follows in comparison to the three months ended September 30, 2021:

 

   Three Months Ended September 30,     
   2022   2021   Variance 
Revenue:               
Security managed services  $10,061,304   $3,099,753   $6,961,551 
Professional services   1,191,728    645,255    546,473 
Total revenue   11,253,032    3,745,008    7,508,024 
                
Cost of revenue:               
Security managed services   4,310,378    650,955    3,659,423 
Professional services   182,413    234,326    (51,913)
Cost of payroll   4,978,768    2,093,072    2,885,696 
Stock based compensation   857,950    312,909    545,041 
Total cost of revenue   10,329,509    3,291,262    7,038,247 
Total gross profit   923,523    453,746    469,777 
Operating expenses:               
Professional fees   624,391    293,408    330,983 
Advertising and marketing   245,495    254,026    (8,531)
Selling, general, and administrative   6,684,747    2,125,984    4,558,763 
Stock-based compensation   1,791,724    938,726    852,998 
Total operating expenses   9,346,357    3,612,144    5,734,213 
                
Loss from operations   (8,422,834)   (3,158,398)   (5,264,436)
Other income (expense):               
Other income   29,968    169    29,799 
Interest expense, net   (108,233)   (75,470)   (32,763)
PPP loan forgiveness   -    980,800    (980,800)
Total other income (expense)   (78,265)   905,499    (983,764)
Net loss   (8,501,099)   (2,252,899)   (6,248,200)
Foreign currency translation adjustment   (908,987)   -    (908,987)
Comprehensive loss  $(9,410,086)  $(2,252,899)  $(7,157,187)

 

Revenue

 

Security managed services revenue increased by $6,961,551, or 225%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due primarily to revenue acquired through our completion of eight acquisitions over the last 12 months and new and existing customer revenue growth.

 

Professional services revenue increased by $546,473, or 85%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due primarily to our recent acquisitions in Latin America.

 

Expenses

 

Cost of Revenue

 

Security managed services cost of revenue increased by $3,659,423, or 562%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to our completion of eight acquisitions over the last 12 months, which increased our revenues from hardware and software sales and their related costs.

 

Professional services cost of revenue decreased by $51,913, or 22%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due to our increased use of internal resources for delivery of our services.

 

Cost of payroll cost of revenue increased by $2,885,696, or 138%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due to headcount added primarily through our completion of eight acquisitions over the last 12 months.

 

Stock-based compensation expenses increased by $545,041, or 174%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due to an increase of stock options awarded to our growing base of revenue generating employees.

 

24
 

 

Operating Expenses

 

Professional fees increased by $330,983, or 113%, for the three months ended September 30, 2022 as compared to three months ended September 30, 2021, due to an increase in accounting, legal, and other professional fees incurred related to our periodic SEC filings and our efforts to raise additional capital.

 

Advertising and marketing expenses decreased by $8,531, or 3%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due to our increased use of internal resources for advertising and marketing activities.

 

Selling, general, and administrative expenses increased by $4,558,763, or 214%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to headcount added through our completion of eight acquisitions over the last 12 months.

 

Stock-based compensation expenses increased by $852,998, or 91%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, due to an increase in stock options awarded to employees through the completion of eight acquisitions over the last 12 months and shares issued to consultants for marketing services provided.

 

Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

 

Our financial results for the nine months ended September 30, 2022 are summarized as follows in comparison to the nine months ended September 30, 2021:

 

   Nine Months Ended September 30,     
   2022   2021   Variance 
Revenue:               
Security managed services  $28,489,698   $6,979,146   $21,510,552 
Professional services   3,320,689    2,275,437    1,045,252 
Total revenue   31,810,387    9,254,583    22,555,804 
                
Cost of revenue:               
Security managed services   10,678,728    1,326,788    9,351,940 
Professional services   455,902    350,388    105,514 
Cost of payroll   14,132,602    5,052,684    9,079,918 
Stock based compensation   4,805,423    745,381    4,060,042 
Total cost of revenue   30,072,655    7,475,241    22,597,414 
Total gross profit   1,737,732    1,779,342    (41,610)
Operating expenses:               
Professional fees   2,192,600    695,023    1,497,577 
Advertising and marketing   641,340    471,721    169,619 
Selling, general, and administrative   15,856,705    5,296,623    10,560,082 
Stock-based compensation   6,761,283    2,236,142    4,525,141 
Total operating expenses   25,451,928    8,699,509    16,752,419 
                
Loss from operations   (23,714,196)   (6,920,167)   (16,794,029)
Other income (expense):               
Other income   134,447    2,553    131,894 
Interest expense, net   (293,991)   (209,806)   (84,185)
PPP loan forgiveness   -    980,800   (980,800)
Total other income (expense)   (159,544)   773,547   (933,091)
Net loss   (23,873,740)   (6,146,620)   (17,727,120)
Foreign currency translation adjustment   (2,207,256)   -    (2,207,256)
Comprehensive loss  $(26,080,996)  $(6,146,620)  $(19,934,376)

 

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Revenue

 

Security managed services revenue increased by $21,510,552, or 308%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due primarily to revenue acquired through our completion of eight acquisitions over the last 12 months and new and existing customer revenue growth.

 

Professional services revenue increased by $1,045,252, or 46%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to revenue acquired through our completion of eight acquisitions over the last 12 months.

 

Expenses

 

Cost of Revenue

 

Security managed services cost of revenue increased by $9,351,940, or 705%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due primarily to our completion of eight acquisitions over the last 12 months, which increased our revenues from hardware and software sales and their related costs.

 

Professional services cost of revenue increased by $105,514, or 30%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to our increase in revenue from professional services from acquisitions completed over the last 12 months.

 

Cost of payroll cost of revenue increased by $9,079,918, or 180%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to headcount added primarily through our completion of eight acquisitions over the last 12 months.

 

Stock-based compensation expenses increased by $4,060,042, or 545%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to an increase of stock options awarded to our growing base of revenue generating employees.

 

Operating Expenses

 

Professional fees increased by $1,497,577, or 215%, for the nine months ended September 30, 2022 as compared to nine months ended September 30, 2021, due to an increase in accounting, legal, and other professional fees incurred related to our periodic SEC filings and our efforts to raise additional capital.

 

Advertising and marketing expenses increased by $169,619, or 36%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to our current marketing campaign initiatives to stimulate organic revenue growth, and an increased effort to utilize more internal resources for advertising and marketing activities.

 

Selling, general, and administrative expenses increased by $10,560,082, or 199%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to headcount added through our completion of eight acquisitions over the last 12 months.

 

Stock-based compensation expenses increased by $4,525,141, or 202%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to an increase in stock options awarded to employees through the completion of eight acquisitions over the last 12 months and shares issued to consultants for marketing services provided.

 

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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 September 30, 2022, we had an accumulated deficit of $67,886,162 and working capital deficit of $3,282,714. For the nine months ended September 30, 2022, we had a loss from operations of $23,714,196 and negative cash flows from operations of $7,850,297. Although we are showing positive revenue, gross profit has remained flat 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, debt, and revenue generated by our services. During the nine months ended September 30, 2022, we received $10,562,763 from our public offerings of our common stock, $5,975,000 in net proceeds from our bridge loans, and $1,359,264 from the exercise of stock options. On June 27, 2022, our Registration Statement on Form S-3 was declared effective, and we may offer and sell from time to time, in one or more series, any of our securities, for total gross proceeds up to $300,000,000. As of September 30, 2022, we had $298,921,085 of available funding from our S-3 Registration Statement.

 

We believe that we have sufficient liquidity and capital resources to meet our requirements for at least the next 12 months from the filing date of this Quarterly Report on Form 10-Q, as well as our longer-term expected future cash requirements and obligations.

 

Our future capital requirements, both near-term and long-term, will depend on many factors, in addition to our recurring operating expenses, including our growth rate, the continued expansion of sales and marketing activities, the introduction 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 will 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 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 (Deficit)/Surplus

 

Our working capital deficit as of September 30, 2022, in comparison to our working capital surplus as of December 31, 2021, is summarized as follows:

 

   As of 
   September 30,   December 31, 
   2022   2021 
Current assets  $14,940,065   $9,807,301 
Current liabilities   18,222,779    5,141,561 
Working capital (deficit)/surplus  $(3,282,714)  $4,665,740 

 

The increase in current assets is primarily due to an increase in cash and cash equivalents, accounts receivable and prepaid expenses and other current assets of $2,163,298, $922,629, and $2,495,435, respectively. The increase in current liabilities is primarily due to the increase in accounts payable and accrued expense, deferred revenue, loans payable, current portion, and convertible notes payable of $3,990,955, $3,021,349, $7,022,153, and $1,050,000, respectively.

 

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Cash Flows

 

Our cash flows for the nine months ended September 30, 2022, in comparison to our cash flows for the nine months ended September 30, 2021, can be summarized as follows:

 

   Nine Months ended September 30, 
   2022   2021 
Net cash used in operating activities  $(7,850,297)  $(4,312,312)
Net cash used in investing activities   (6,044,217)   662,176 
Net cash provided by financing activities   16,038,273    1,182,685 
Effect of exchange rates on cash and cash equivalents   19,539    - 
Increase in cash  $2,163,298   $(2,467,451)

 

Operating Activities

 

Net cash used in operating activities was $7,850,297 for the nine months ended September 30, 2022 and was primarily due to cash used to fund a net loss of $23,873,740, adjusted for non-cash expenses in the aggregate of $13,939,728 and additional cash outlaid by changes in the levels of operating assets and liabilities, primarily as a result of an increase in current assets, and accounts payable and accrued liabilities. Net cash used in operating activities was $4,312,312 for the nine months ended September 30, 2021 and was primarily due to cash used to fund a net loss of $6,146,620, adjusted for non-cash expenses in the aggregate of $2,631,683, 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 used in investing activities of $6,044,217 for the nine months ended September 30, 2022 and was primarily due to net cash paid in the True Digital acquisition. Net cash from investing activities for the nine months ended September 30, 2021 was due to cash acquired from the VelocIT acquisition which was financed with equity consideration.

 

Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2022 was $16,038,273, which was primarily due to cash received from the sale of our common stock in our public offerings of $10,562,763 and $5,975,000 in net proceeds from our bridge loans. Net cash provided by financing activities for the nine months ended September 30, 2021 was $1,182,685 and was primarily due to cash received from the sale of our common stock of $3,250,000, offset by $2,064,315 of loan repayments.

 

Effects of Inflation

 

We do not believe that inflation has had a material impact on our business, revenue, or operating results during the periods presented.

 

Critical Accounting Policies and Estimates

 

Our critical accounting policies are more fully described in the notes to our condensed consolidated financial statements included herein for the quarter and nine months ended September 30, 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, 2021, as filed with the SEC on April 15, 2022.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at dates of the financial statements and the reported amounts of revenue and expenses during the periods. Our significant estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, and the valuation allowance related to our deferred tax assets. Certain of our estimates, including the carrying amount of intangible assets and goodwill, could be affected by external conditions, including those unique to us and general economic conditions. It is reasonably possible that these external factors could have an effect on our estimates and could cause actual results to differ from those estimates.

 

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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

 

We allocate 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. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition.

 

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.

 

Intangible Assets

 

Intangible assets are comprised of trademarks, customer bases, non-compete agreements, and intellectual property with original estimated useful lives with a range of 1 to 10 years. Once placed into service, we amortize the cost of intangible assets over their estimated useful lives on a straight-line basis.

 

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 the reporting unit level at least annually at year end 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.

 

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Impairment of Long-lived Assets

 

We will evaluate the carrying value of long-lived assets to be held and used at least annually during the fourth quarter when events and circumstances warrant such a review. 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.

 

Stock-Based Compensation

 

We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. Awards granted to directors are treated on the same basis as awards granted to employees.

 

Revenue Recognition

 

Our agreements with clients are primarily service contracts that range in duration from a few months to one year. We recognize 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 we are expected to be entitled in exchange for those goods or services.

 

A contract with a client exists only when:

 

the parties to the contract have approved it and are committed to perform their respective obligations;
we can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”);
we can determine the transaction price for the services to be transferred; and
the contract has commercial substance, and it is probable that we will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the client.

 

For the majority of our contracts, we receive non-refundable upfront payments. We do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, 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. Our credit terms to clients generally average 30 days, although in some cases payments are required in 15 days.

 

We do not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.

 

Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:

 

Security Managed Services.

 

Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.

 

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Professional Services.

 

Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.

 

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 as of and for the quarter ended September 30, 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, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Because we are a smaller reporting company, we are not required to provide the information called 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 Exchange Act) that are designed to provide reasonable assurance 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 officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Our management, with the participation of our principal executive officer and principal 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, our principal executive officer and principal financial officer concluded that, as of September 30, 2022, our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below. Thus there remains a reasonable possibility that a material misstatement of our interim financial statements will not be prevented or detected on a timely basis. This does not include an evaluation by our registered public accounting firm regarding our internal control over financial reporting. Accordingly, we cannot provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, to allow our principal financial and executive officers to make timely decisions regarding required disclosures as of September 30, 2022.

 

Our management’s evaluation was based on the following material weaknesses in our internal control over financial reporting which existed as of December 31, 2021 and which continue to exist, as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021:

 

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.

 

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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 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

 

We are implementing 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:

 

identifying gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and
developing policies and procedures on internal control over financial reporting and monitoring the effectiveness of operations on existing controls and procedures.

 

We 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 we are committed to taking further action and implementing additional enhancements or improvements, as necessary and in accordance with financial and budgetary considerations.

 

Changes in Internal Control Over Financial Reporting

 

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 September 30, 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 a party to any material legal proceedings.

 

Item 1A. Risk Factors

 

We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 15, 2022, risk factors that materially affect our business, financial condition, or results of operations. There have been no material changes from the risk factors previously disclosed, except as follows:

 

Economic conditions in the U.S and international economies may adversely impact our business operating on operating results.

 

General macro-economic conditions, such as a rise in interest rates, inflation in the cost of goods and services including labor, a recession or an economic slowdown in the United States or internationally, including as a result of continuing uncertainty from the COVID-19 pandemic or the Russia-Ukraine military conflict, could adversely affect demand for our services and make it difficult to accurately forecast and plan our future business activities. U.S. and global markets have recently been experiencing volatility and disruption due to new interest rate and inflation increases as well as the continued escalation of geopolitical tensions. For example, inflation in the United States began to rise in the second half of 2021 and have remained at high levels through the third quarter 2022. Although our business has not yet been materially negatively impacted by such inflationary pressures, we cannot be certain that neither we nor our customers will be materially impacted by continued pressures. Additionally, on February 24, 2022, Russian troops engaged in a full-scale military invasion of Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, it could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. This military conflict has led to sanctions and other penalties being levied by the United States and European Union, and other countries against Russia, and other potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds. We do not have employees or facilities in Russia or Ukraine, nor do we have customers and contractors in these locations. Our business has not yet been materially negatively impacted by this military conflict to date. However, we cannot be certain that this will not impact our position in the credit market or our ability to acquire cybersecurity businesses in the short and long term.

 

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To the extent conditions in the domestic and global economy change, our business could be harmed as current and potential customers may reduce or postpone spending or choose not to purchase or renew our services, which they may consider discretionary. If our customers face decreased consumer demand, increased regulatory burdens, or more limited access to international markets, we may face a decline in the demand for our services and our operating results could be adversely impacted.

 

Uncertain and adverse economic conditions may also lead to a decline in the ability of our customers to use or access credit, which could adversely affect our business. In addition, changing economic conditions may also adversely affect third parties with which we have entered into relationships and upon which we depend in order to grow our business. As a result, we may be unable to continue to grow in the event of future economic slowdowns.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

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
3.1   Amended and Restated Certificate of Incorporation of the Registrant   10-Q   3.1   8/15/2022
10.3#   2019 Equity Incentive Plan, as amended   10-Q   10.3   8/15/2022
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.

#Management contracts and compensatory plans and arrangements.

 

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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: November 14, 2022  

 

By: /s/ Debra L. Smith  
  Debra L. Smith  
  Chief Financial Officer  
  (Principal Financial Officer and Principal Accounting Officer)  
Date: November 14, 2022  

 

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