UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the Quarterly Period Ended
or
For the Transition Period from _________ to _________
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State
or other Jurisdiction of Incorporation or Organization) |
(I.R.S.
Employer Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
(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 exchange on which registered | ||
| None | N/A | N/A |
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.
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).
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 | ☐ |
| ☒ | 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 ☐
As of November 12, 2021, there were shares of the registrant’s common stock outstanding.
CERBERUS CYBER SENTINEL CORPORATION
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
TABLE OF CONTENTS
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowances for doubtful accounts of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net of accumulated depreciation of $ | ||||||||
| Right of use asset, net | ||||||||
| Intangible assets, net of accumulated amortization of $ | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Stock payable | ||||||||
| Lease liability, current portion | ||||||||
| Loans payable, current portion | ||||||||
| Line of credit | - | |||||||
| Convertible note payable, net of debt discount, related party | ||||||||
| Note payable, related party | - | |||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities: | ||||||||
| Loans payable, net of current portion | ||||||||
| Lease liability, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding on September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
3
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Security managed services | $ | $ | $ | $ | ||||||||||||
| Professional services | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of revenue: | ||||||||||||||||
| Security managed services | ||||||||||||||||
| Professional services | ||||||||||||||||
| Cost of payroll | ||||||||||||||||
| Total cost of revenue | ||||||||||||||||
| Total gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Advertising and marketing | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| Loss on write-off of account receivable | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| PPP loan forgiveness | ||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share - diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding - basic | ||||||||||||||||
| Weighted average shares outstanding - diluted | ||||||||||||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
4
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Stock based compensation - stock options | - | - | - | - | ||||||||||||||||||||
| Stock issued for cash | - | - | ||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance as of March 31, 2021 | ( | ) | - | |||||||||||||||||||||
| Stock based compensation - stock options | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance as of June 30, 2021 | ( | ) | - | |||||||||||||||||||||
| Stock based compensation - stock options | - | - | - | - | ||||||||||||||||||||
| Stock based compensation - shares | - | - | ||||||||||||||||||||||
| Stock issued for VelocIT acquisition | - | - | ||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock based compensation - stock options | - | - | - | - | ||||||||||||||||||||
| Stock issued for cash | - | - | ||||||||||||||||||||||
| Return of treasury stock to authorized capital | - | ( | ) | ( | ) | - | - | |||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance as of March 31, 2020 | ( | ) | - | |||||||||||||||||||||
| Stock based compensation - stock options | - | - | - | - | ||||||||||||||||||||
| Stock issued for Technologyville acquisition | - | - | ||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance as of June 30, 2020 | ( | ) | - | |||||||||||||||||||||
| Stock based compensation - stock options | - | - | - | - | ||||||||||||||||||||
| Common shares issued for cash | - | - | ||||||||||||||||||||||
| Stock issued for Clear Skies acquisition | - | - | ||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
5
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS OF CASH FLOWS
(Unaudited)
| September 30, 2021 | September 30, 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation - stock options | ||||||||
| Loss on write-off of accounts receivable | ||||||||
| Issuance of common stock for services | ||||||||
| Depreciation and amortization | ||||||||
| Right of use amortization | ||||||||
| Amortization of debt discount | - | |||||||
| Forgiveness of PPP Loan | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash acquired in acquisitions | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from PPP loans | - | |||||||
| Proceeds from line of credit | ||||||||
| Payment on line of credit | ( | ) | ( | ) | ||||
| Payment on loans payable | ( | ) | ( | ) | ||||
| Payment on notes payable, related party | ( | ) | - | |||||
| Distributions to member | - | ( | ) | |||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents - beginning of the period | ||||||||
| Cash and cash equivalents - end of the period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Right of use asset and lease liability recorded | $ | $ | ||||||
| Forgiveness of PPP Loan | $ | $ | ||||||
| Common shares issued in Technologyville acquisition | $ | $ | ||||||
| Common shares issued in Clear Skies acquisition | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
6
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Corporate History
Cerberus Cyber Sentinel Corporation (“Cerberus Sentinel,” “Cerberus,” or the “Company”) was formed on March 5, 2019, as a Delaware corporation. The Company’s principal offices are located at 6900 E. Camelback Road, Suite 240, Scottsdale, AZ 85258.
Effective May 25, 2020, the Company entered into a Stock Purchase Agreement with Technologyville, Inc., an Illinois corporation (“Techville”), and its sole shareholder, pursuant to which Techville became a wholly owned subsidiary of the Company (the “Techville Acquisition”). Under the terms of the Techville Acquisition, all issued and outstanding common stock of Techville was exchanged for an aggregate of shares of the Company’s common stock.
Effective August 1, 2020, the Company entered into a Stock Purchase Agreement with Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), and its equity holders, pursuant to which Clear Skies became a wholly owned subsidiary of the Company (the “Clear Skies Acquisition”). Under the terms of the Clear Skies Acquisition, all issued and outstanding equity securities in Clear Skies were exchanged for an aggregate of shares of the Company’s common stock.
Effective December 16, 2020, the Company entered into an Agreement and Plan of Merger with Alpine Security, LLC, an Illinois limited liability company (“Alpine”), and its sole member, pursuant to which Alpine became a wholly owned subsidiary of the Company (the “Alpine Acquisition”). Under the terms of the Alpine Acquisition, all issued and outstanding membership units in Alpine were exchanged for an aggregate of shares of the Company’s common stock.
Effective August 12, 2021, the Company entered into an Agreement and Plan of Merger with Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT”), and its equity holders, pursuant to which VelocIT became a wholly owned subsidiary of the Company (the “Catapult Acquisition”). Under the terms of the Catapult Acquisition, all issued and outstanding equity secruities in VelocIT were exchanged for an aggregate of shares of the Company’s common stock.
Nature of the Business
Cerberus Sentinel is a security services company comprised of security professionals who work with clients throughout the United States to create a continuously aware security culture. We do not sell cybersecurity products. We position the Company as a trusted cybersecurity advisor and are committed to delivering tailored security solutions to organizations of different sizes and across all geographies and industries to fit their budgetary needs and limit their cyber threat exposure.
We currently provide a multitude of cybersecurity services including managed security service, cybersecurity consulting, technology consulting, compliance auditing, vulnerability assessment, penetration testing, security remediation, Security Operations Center (“SOC”) set-up and consulting and cybersecurity training. We differentiate ourselves from our competitors by staying technology agnostic. We believe that many cybersecurity service providers in the market today are committed to a specific technology solution which limits their service scope and ability to quickly respond to any emerging cybersecurity challenges. In addition, as we continue to serve our clients within our existing capacities, we plan to continue making strategic acquisitions of small-to-medium-sized engineer-led cybersecurity service firms to continue to expand our service scope and geographical coverage. We believe that having a world-class technology team with multi-faceted expertise is key to providing technology agnostic solutions to our clients and maximizing their return on investment from information technology (“IT”) and cybersecurity spending.
7
Liquidity
The
accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as
a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At September 30,
2021, the Company had an accumulated deficit of $
To
date the Company has been funding operations primarily through the sale of equity in private placements and revenues generated by the
Company’s services. During the nine months ended September 30, 2021, the Company received $
Based on its current cash resources and commitments, the Company believes it will be able to maintain its current planned development and corresponding level of expenditure for at least twelve months from the date of the issuance of these unaudited condensed consolidated financial statements, although no assurance can be given that it will not need additional funds prior to such time.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial information as of September 30, 2021, and for the three and nine months ended September 30, 2021 and 2020, has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such dates and the operating results and cash flows for such periods. Operating results for the three and nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission, or the SEC. These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2021.
Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, GenResults, LLC (“GenResults”), TalaTek, Inc. (“TalaTek”), Techville, Clear Skies, Alpine, and VelocIT. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the financial statements for the three and nine months ended September 30, 2020, to conform to the financial statements presentation for the three and nine months ended September 30, 2021. These reclassifications had no effect on net loss or cash flows as previously reported.
8
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company believes the critical accounting policies discussed below affect its 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, and expected divided rate.
Revenue
The Company’s revenues are derived from two major types of services to clients: Managed Services and Consulting Services. With respect to Managed Services, the Company provides culture education and enablement, tools and technology provisioning, data and privacy monitoring, regulations and compliance monitoring, remote infrastructure administration, and cybersecurity services including, but not limited to, antivirus and patch management. With respect to Consulting Services, the Company provides cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.
Practical Expedients
As part of Accounting Standards Codification (“ASC”) 606, the Company has adopted several practical expedients including the following: (i) the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less and (ii) the Company recognizes any incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
Disaggregated Revenues
Revenue consists of the following by service offering for the nine months ended September 30, 2021:
| Security Managed Services | Professional Services | Total | ||||||||||
| Primary Sector Markets | ||||||||||||
| Public | $ | $ | $ | |||||||||
| Private | ||||||||||||
| Not-for-Profit | ||||||||||||
| $ | $ | $ | ||||||||||
| Major Service Lines | ||||||||||||
| Compliance | $ | $ | $ | |||||||||
| Secured Managed Services | ||||||||||||
| SOC Managed Services | ||||||||||||
| vCISO | ||||||||||||
| Technical Assessments | ||||||||||||
| Forensics & I/R | ||||||||||||
| Training | ||||||||||||
| Other CyberSecurity Services | ||||||||||||
| $ | $ | $ | ||||||||||
9
Revenue consists of the following by service offering for the nine months ended September 30, 2020:
| Security Managed Services | Professional Services | Total | ||||||||||
| Primary Sector Markets | ||||||||||||
| Public | $ | $ | $ | |||||||||
| Private | ||||||||||||
| Not-for-Profit | ||||||||||||
| $ | $ | $ | ||||||||||
| Major Service Lines | ||||||||||||
| Compliance | $ | $ | $ | |||||||||
| Secured Managed Services | ||||||||||||
| SOC Managed Services | ||||||||||||
| vCISO | ||||||||||||
| Technical Assessments | ||||||||||||
| Forensics & I/R | ||||||||||||
| Training | ||||||||||||
| Other CyberSecurity Services | ||||||||||||
| $ | $ | $ | ||||||||||
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Accounts Receivable
Accounts
receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. The Company periodically
assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides for allowances
for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other
factors considered appropriate. Payments are generally due within 30 days of invoice. The Company writes off accounts receivable against
the allowance for doubtful accounts when a balance is determined to be uncollectible. As of September 30, 2021, and December 31, 2020,
the Company’s allowance for doubtful accounts was $
Property and Equipment
Property
and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related
assets, generally between three and five years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated.
Computer equipment costs for the Company are capitalized, as incurred, and depreciated on a straight-line basis over three years. TalaTek
capitalizes all equipment costs over $
Maintenance and repairs are charged to expense as incurred. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in results of operations.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. During the three and nine months ended September 30, 2021, the Company did not record a loss on impairment.
10
Intangible Assets
The Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. Finite-lived intangible assets are amortized over their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.
Goodwill
Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually at year end, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit level (See Note 6).
Advertising and Marketing Costs
The
Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $
Fair Value Measurements
As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
| Level 1: | Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. |
| 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 3: | Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques. |
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All vested outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options have been excluded from the Company’s computation of net loss per common share for the three and nine months ended September 30, 2021 and 2020.
11
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 the Company’s net loss position even though the exercise price could be less than the average market price of the common shares:
| September 30, 2021 | September 30, 2020 | |||||||
| Stock Options | ||||||||
| Convertible Debt | ||||||||
| Total | ||||||||
Stock-based Compensation
The Company applies the provisions of ASC 718, Compensation - Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements of operations.
For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised. Due to the Company’s limited history and lack of public trading volume for its common stock, the Company used the average of historical share prices of similar companies within its industry to calculate volatility for use in the Black-Scholes option pricing model.
Pursuant to Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance with ASC 718. The Company uses valuation methods and assumptions to value stock options that are in line with the process for valuing employee stock options noted above.
Leases
Leases
in which the Company is the lessee are comprised of corporate offices and property and equipment. All of the leases are classified as
operating leases. The Company leases multiple office spaces with a remaining weighted average term of
In accordance with ASC 842, Leases, the Company recognized a right-of-use (“ROU”) asset and corresponding lease liability on its unaudited condensed consolidated balance sheet for long-term office leases and a vehicle operating lease agreement. See Note 12 – Leases for further discussion, including the impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
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.
12
The Company utilizes ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. At September 30, 2021, and December 31, 2020, the Company’s net deferred tax asset has been fully reserved.
For uncertain tax positions that meet a “more likely than not” threshold, the Company recognizes the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. The Company’s practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is made that such expense is likely.
Recently Issued Accounting Standards
In March 2021, the FASB issued ASU No. 2021-03, Intangibles – Goodwill and Other (Topic 350). ASU 2021-03 requires an entity to identify and evaluate goodwill impairment triggering events when they occur to determine whether it is more likely than not that the fair value of a reporting unit (or entity, if the entity has elected the accounting alternative for amortizing goodwill and chosen that option) is less than its carrying amount. If an entity determines that it is more likely than not that the goodwill is impaired. It must test goodwill for impairment using the triggering event date as the measurement date. An entity is required to disclose the amount assigned to goodwill in total and by major business combination, or by reorganization event resulting in fresh-start reporting. Also, the entity must disclose the weighted average amortization period in total and the amortization period by major business combination, or by reorganization event resulting in fresh-start reporting. ASU 2021-03 was effective for the Company on January 1, 2021 and did not have a significant impact on our unaudited condensed consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force). The ASU requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the ASU, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The ASU is applied prospectively and is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that adopting this standard will have on the unaudited condensed consolidated financial statements.
All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
NOTE 3 – ACQUISITIONS
Catapult Acquisition Corporation
On August 12, 2021, the Company effected an Amended and Restated Agreement and Plan of Merger (the “Merger Agreement”) with Catapult Acquisition Merger Sub, LLC (“Merger Sub”), Catapult Acquisition Corporation (d/b/a VelocIT) (“VelocIT”), the shareholders of VelocIT and Derek Hahn, in his capacity as the shareholder representative. Pursuant to the Merger Agreement, the Merger Sub merged with and into VelocIT, with VelocIT surviving the Merger as a wholly-owned subsidiary of the Company (the “VelocIT Acquisition”). At the effective time of the VelocIT Acquisition, VelocIT’s outstanding common stock was exchanged for shares of the Company’s common stock.
13
Immediately
following the VelocIT Acquisition, the Company had shares of common stock issued and outstanding. The pre-acquisition stockholders
of the Company retained an aggregate of shares, representing approximately
The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations. Assets and liabilities of the acquired business were included in the consolidated balance sheet as of September 30, 2021, based on the respective estimated fair value on the date of acquisition as determined in a purchase price allocation using available information and making assumptions management believed are reasonable.
Per
ASC 805, Business Combinations, the measurement period is the period after the acquisition date during which the acquirer may
adjust the provisional amounts recognized for a business combination. The measurement period shall not exceed one year from the acquisition
date. The Company has identified the acquisition date as
During
the period subsequent to the effective date of the acquisition, VelocIT recorded revenue of $
The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and the liabilities assumed as of the transaction date:
| Consideration paid | $ | |||
| Tangible assets acquired: | ||||
| Cash | ||||
| Accounts receivable | ||||
| Prepaid expenses | ||||
| Property and equipment | ||||
| Capitalizable expenses | ||||
| Total tangible assets | ||||
| Intangible assets acquired: | ||||
| Intellectual property | ||||
| Total intangible assets | ||||
| Assumed liabilities: | ||||
| Accounts payable | ||||
| Accrued expenses | ||||
| Loans payable | ||||
| SBA loan payoff | ||||
| Total assumed liabilities | ||||
| Net liabilities assumed | ( | ) | ||
| Goodwill (a.)(b.) | $ |
| a. |
| b. |
14
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of:
September 30, 2021 | December 31, 2020 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Other current assets | - | |||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, 2021 | December 31, 2020 | |||||||
| Computer equipment | $ | $ | ||||||
| Vehicle | ||||||||
| Furniture and fixtures | ||||||||
| Software | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Total
depreciation expense was $
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the changes in goodwill during the nine months ended September 30, 2021:
| Balance December 31, 2020 | $ | |||
| Acquisition of goodwill | ||||
| Impairment | ||||
| Reclassification based on valuation report(1) | ( | ) | ||
| Ending balance, September 30, 2021(2) | $ |
| (1) |
| (2) |
15
The following table summarizes the identifiable intangible assets as of September 30, 2021, and December 31, 2020:
| Useful life | September 30, 2021 | December 31, 2020 | ||||||||
| Tradenames – trademarks (1) | $ | $ | ||||||||
| Customer base (1) | ||||||||||
| Non-compete agreements (1) | ||||||||||
| Intellectual property/technology (1) | ||||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||||
| Total | $ | $ | ||||||||
| (1) |
The
weighted average remaining useful life of identifiable amortizable intangible assets remaining is
Amortization
of identifiable intangible assets for the three months ended September 30, 2021 and 2020, was $
The below table summarizes the future amortization expense for the remainder of 2021 and the next four years thereafter:
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| $ |
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following amounts:
| September 30, 2021 | December 31, 2020 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll | ||||||||
| Accrued expenses | ||||||||
| Accrued commissions | - | |||||||
| Accrued interest – related party | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
NOTE 8 - RELATED PARTY TRANSACTIONS
Note Payable – Related Party
On
December 31, 2018, GenResults entered into an unsecured note payable with Jemmett Enterprises, LLC, the Company’s majority stockholder
that is controlled by the Company’s Chief Executive Officer, in the original principal amount of $
16
Convertible Note Payable, Accounts Receivable and Revenue – Related Party
On
December 23, 2020, the Company issued to a related party a convertible note in the principal amount of $
At
September 30, 2021, the Company had $
Note 9 - STOCKHOLDERS’ EQUITY
Equity Transactions During the Period
During
the nine months ended September 30, 2021, the Company issued an aggregate of shares of common stock with a fair value of $
per share, respectively, to investors for cash proceeds of $
On August 12, 2021, the Company issued an aggregate of shares of common stock with a fair value of $ per share, to VelocIT pursuant to the Acquisition (See Note 3).
On August 16, 2021, the Company issued an aggregate of shares of common stock with a fair value of $per share to a consultant for services rendered (See Note 10).
Stock Payable
On January 16, 2020, the Company entered into a consulting agreement, with Eskenzi PR Limited (“Eskenzi”). As per the agreement, Eskenzi will provide various marketing and public relations services to the Company. The initial term of the agreement was for twelve months and automatically renews for an additional twelve months unless either the Company or Eskenzi provides at least three months advance written notice of termination. On January 16, 2021, the consulting agreement was automatically renewed per the terms of the agreement.
Upon
execution of the consulting agreement the Company was to issue shares of the Company’s restricted common stock, valued
at $
See Note 10 for disclosure of additional equity related transactions.
Note 10 – StocK-BASED COMPENSATION
2019 Equity Incentive Plan
The Board of Directors and stockholders of the Company approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) on June 6, 2019. The maximum number of shares of the Company’s common stock that may be issued under the Company’s 2019 Plan is shares. The 2019 Plan has a term of ten years from the date it was adopted. Shares issued under the 2019 Plan shall be made available from (i) authorized but unissued shares of common stock, (ii) common stock held in treasury of the Company, or (iii) previously issued shares of common stock reacquired by the Company, including shares purchased on the open market.
Options
The Company granted options for the purchase of shares of common stock during the nine months ended September 30, 2021.
The Company granted options for the purchase of shares of common stock during the nine months ended September 30, 2020.
17
| For the Nine Months Ended | For the Nine Months Ended | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Risk free interest rate | - | - | ||||||
| Contractual term (years) | ||||||||
| Expected volatility | - | - | ||||||
The
total weighted average grant date fair value of options issued and vested during the nine months ended September 30, 2021, was $
The
total weighted average grant date fair value of options issued during the nine months ended September 30, 2020, was $
| Weighted | ||||||||
| Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding at January 1, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired or cancelled | ( | ) | ||||||
| Outstanding at September 30, 2021 | $ | |||||||
| Weighted- | Weighted- | |||||||||||||||||
| Average | Average | |||||||||||||||||
| Outstanding | Remaining Life | Exercise | Number | |||||||||||||||
| Exercise Prices | Options | In Years | Price | Exercisable | ||||||||||||||
| $ | $ | |||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
The compensation expense attributed to the issuance of the options is recognized ratably over the vesting period.
Options granted under the 2019 Plan are exercisable for a specified period, generally five to ten years from the grant date and generally vest over three to four years from the grant date.
18
Total
compensation expense related to the options was $ and $ for the three months ended September 30, 2021 and 2020, respectively.
Total compensation expense related to the options was $ and $ for the nine months ended September 30, 2021 and 2020,
respectively. As of September 30, 2021, there was future compensation expense of $
The aggregate intrinsic value totaled $ and $, for total outstanding and exercisable options, respectively, and was based on the Company’s estimated fair value of the common stock of $ as of September 30, 2021, which is the aggregate fair value of the common stock that would have been received by the option holders had all option holders exercised their options as of that date, net of the aggregate exercise price.
Options Pending
As of September 30, 2021, the Company has approximately options to be awarded to employees upon their acceptance of employment. The majority of these employees work for VelocIT. The options will be granted with an exercise price equal to the trading price on the date of grant, and will be valued utilizing a Black-Scholes valuation. The expense will be amortized over the term of the options vesting period, although the amount of the expense has yet to be determined.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal Claims
There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company.
NOTE 12 – LOANS PAYABLE AND LINES OF CREDIT
Lines of Credit
TalaTek, Inc.
On
July 29, 2019, TalaTek entered into a secured line of credit with SunTrust Bank (“SunTrust”) for $
Technologyville, Inc.
On
August 24, 2017, Techville entered into a secured revolving line of credit with Wintrust Bank (“Wintrust”) for a maximum
amount of $
Loans Payable
Technologyville, Inc.
On
April 29, 2019, Techville entered into a note payable with VCI Account Services, that subsequently was assigned to U.S. Bancorp, in the
original principal amount of $
On
June 22, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Techville entered into a note payable
with a financial institution for $
19
GenResults, LLC
On
December 31, 2018, GenResults entered into an unsecured note payable with Jemmett Enterprises, LLC, the Company’s majority stockholder
that is controlled by the Company’s Chief Executive Officer, in the original principal amount of $
Cerberus Cyber Sentinel Corporation
On
April 17, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Cerberus entered into a note payable
with a financial institution for $
Clear Skies Security LLC
On
May 8, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Clear Skies entered into a loan payable
with a financial institution for $
Alpine Security, LLC
On
April 18, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Alpine entered into a loan payable
with a financial institution for $
Catapult Acquisition Corp.
On
July 9, 2016, Catapult Acquistion Corp. entered into several seller notes payable with shareholders of VelocIT. The total borrowing amount
was $
Convertible Note Payable
On
December 23, 2020, the Company issued to a related party lender a convertible note payable in the principal amount of $
20
Future minimum payments under the above notes payable for the remainder of 2021 and thereafter and the amount of loans payable, net of current portion, are as follows:
| 2021 | $ | |||
| 2022 | ||||
| Total future minimum payments | ||||
| Less: discount | ( | ) | ||
| Less: current | ( | ) | ||
| $ |
NOTE 13 – LEASES
All of the Company’s leases are classified as operating leases. With the adoption of Topic 842, operating lease agreements are required to be recognized on the condensed consolidated balance sheet as ROU assets and corresponding lease liabilities.
On
January 1, 2021, February 1, 2021, and August 12, 2021, the Company recognized additional ROU assets and lease liabilities of
$
ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.
When
measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated
incremental borrowing rate at January 1, 2021. The weighted average incremental borrowing rate applied was
The following table presents net lease cost and other supplemental lease information:
| Nine Months Ended September 30, 2021 | ||||
| Lease cost | ||||
| Operating lease cost (cost resulting from lease payments) | $ | |||
| Short term lease cost | ||||
| Net lease cost | $ | |||
| Operating lease – operating cash flows (fixed payments) | $ | |||
| Operating lease – operating cash flows (liability reduction) | $ | |||
| Non-current leases – right of use assets | $ | |||
| Current liabilities – operating lease liabilities | $ | |||
| Non-current liabilities – operating lease liabilities | $ | |||
Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the nine months ended September 30, 2021, are as follows:
| Fiscal Year | Operating Leases | |||
| 2021 (excluding the nine months ended September 30, 2021) | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total future minimum lease payments | ||||
| Amount representing interest | ( | ) | ||
| Present value of net future minimum lease payments | $ | |||
21
NOTE 14 – CONCENTRATION OF CREDIT RISK
Cash Deposits
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
Revenues
One
client accounted for
Two
clients accounted for
| Client A | % | |||
| Client B | % |
Accounts Receivable
Two
clients accounted for
| Client A | % | |||
| Client B | % |
Two
clients accounted for
| Client A | % | |||
| Client B | % |
Accounts Payable
Two vendors accounted for of the accounts payable as of September 30, 2021, as set forth below:
| Vendor A | % | |||
| Vendor B | % |
Two vendors accounted for of the accounts payable as of September 30, 2020, as set forth below.
| Vendor A | % | |||
| Vendor B | % |
NOTE 15 – SUBSEQUENT EVENTS
Atlantic Technology Systems, Inc. Acquisition
On
October 1, 2021, the Company entered into a Stock Purchase Agreement (the “Agreement”) by and among the Company, Atlantic
Technology Systems, Inc. (“ATS”) and Atlantic Technology Enterprises, Inc. (“ATE”) (collectively, “Atlantic”)
and James Montagne, the sole shareholder of ATS, and James Montagne and Miriam Montagne as the sole shareholders of ATE (the “Shareholder”).
Pursuant to the Agreement, the Company purchased from the Shareholder all of the outstanding shares of Atlantic, with ATE and ATS becoming
wholly-owned subsidiaries of the Company. The aggregate purchase price for the Atlantic shares was shares of the Company’s
common stock, par value $, and $
Convertible Note Issuance
On
October 27, 2021, the Company issued a 5% Unsecured Convertible Note (the “Note”) to Neil Stinchcombe (the “Lender”),
in consideration of the Lender lending the Company $
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes a number of forward-looking statements that reflect management’s current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2021, any of which may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in our forward-looking statements. These risks and factors include, by way of example and without limitation:
| ● | our ability to achieve and sustain profitability of the existing lines of business through expansion; |
| ● | our ability to raise sufficient capital to acquire world-class engineer-owned cybersecurity companies; |
| ● | our ability to attract and retain world-class 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 nationwide cybersecurity consolidator; |
| ● | our ability to attract and retain key technology or management personnel and to expand our management team; |
| ● | the accuracy of estimates regarding expenses, future revenue, capital requirements, profitability, and needs for additional financing; |
| ● | business interruptions resulting from geo-political actions, including war, and terrorism or disease outbreaks (such as the outbreak of COVID-19 or any of its variants); |
| ● | our ability to attract and retain clients; and |
| ● | our ability to navigate through the increasingly complex cybersecurity regulatory environment. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in the future operating results over time, except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.
As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms “Company,” “we,” “us,” and “our” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation, and its wholly owned subsidiaries including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”) and Catapult Acquisition Corporation (“VelocIT), a New Jersey corporation. Unless otherwise specified, all dollar amounts are expressed in United States dollars.
23
Corporate History
Cerberus Cyber Sentinel Corporation (“Cerberus Sentinel”) was formed on March 5, 2019 as a Delaware corporation. Our principal offices are located at 6900 E. Camelback Road, Suite 240, Scottsdale, AZ 85251.
Effective May 25, 2020, we entered into a Stock Purchase Agreement with Techville and its sole shareholder, pursuant to which Techville became a wholly owned subsidiary of the Company (the “Techville Acquisition”). Under the terms of the Techville Acquisition, all issued and outstanding common stock of Techville was exchanged for an aggregate of 3,392,271 shares of our common stock.
Effective August 1, 2020, we entered into a Stock Purchase Agreement with Clear Skies and its equity holders, pursuant to which Clear Skies became a wholly owned subsidiary of the Company (the “Clear Skies Acquisition”). Under the terms of the Clear Skies Acquisition, all issued and outstanding equity securities in Clear Skies were exchanged for an aggregate of 2,330,000 shares of our common stock.
On December 16, 2020, we entered into an Agreement and Plan of Merger pursuant to which Alpine became a wholly owned subsidiary of the Company. All units representing membership interests of Alpine issued and outstanding were converted into 900,000 shares of our common stock.
On July 26, 2021, and effective August 12, 2021, we entered into an Amended and Restated Agreement and Plan of Merger pursuant to which VelocIT became a wholly-owned subsidiary of the Company. All issued and outstanding shares of common stock of VelocIT were converted into the right to receive an aggregate of up to 2,566,778 shares of common stock of the Company, subject to a holdback of 256,678 shares of Company stock.
Our Business
The cyber security industry has a supply and demand issue; there is more demand for cyber security services than expert and seasoned compliance and cybersecurity professionals available in the market. We are a cybersecurity and compliance company comprised of highly trained and seasoned security professionals who work with clients to enhance or create a better cyber posture in their organization. We seek to identify, attract, and retain highly skilled cyber and compliance teams and bring them together to provide holistic cyber services. This is accomplished through acquisitions, direct hiring and incentivizing employees with stock options to help retain them. On an ongoing basis, we seek to identify cyber talent that is culturally aligned and that offers operating leverage through both existing customer revenue and relationships. We have invested in enterprise solutions and executive talent to integrate our different organizations into an ecosystem that works together to provide complete and holistic cybersecurity through cross pollination of solutions. The ecosystem is intended to provide additional revenue opportunities and drive overall recurring revenue.
We emphasize to clients the critical nature of having their work force create a continuously aware security culture. Once engaged, we strive to become the trusted advisors for customers’ cybersecurity and compliance needs by providing tailored security solutions based upon their organizational needs. We do not focus on the selling of cybersecurity products; we are product agnostic so that we can provide solutions that fit customers’ security needs, financial realities, and future strategy. Our approach is to evaluate clients’ organizations holistically, identify compliance requirements, and help secure the infrastructure while helping to create a culture of security.
We provide a full range of cybersecurity services, encompassing all pillars of cybersecurity, compliance, and culture, including Secured Managed Services, Compliance Services, SOC Services, Virtual CISO (vCISO) Services, Incident Response, Certified Forensics, Technical Assessments, and Cybersecurity Training. We believe that culture is the foundation of every successful cybersecurity and compliance program. To deliver that outcome, we developed our unique offering of MCCP+, which is the only holistic solution that provides all three of these pillars under one roof from a dedicated team of subject matter experts. In contrast to the majority of cybersecurity firms that are focused on a specific technology or service, we seek to differentiate ourselves by remaining technology agnostic, focusing on accumulating highly-sought after topic experts. We continually identify and acquire cyber security talent to expand our service scope and geographical coverage to provide the best possible service for our clients. We believe that bringing together a world-class team of technological experts with multi-faceted expertise in the critical aspects of cybersecurity is key to providing technology agnostic solutions to our clients in a business environment that has suffered from a chronic lack of highly-skilled professionals, thereby setting us apart from competitors and in-house security teams. Our goal is to create a culture of security and to help quantify, define and capture a return on investment (ROI) from information technology and cybersecurity spending. Our brand rallies around the battle cry: “Cybersecurity is a Culture, not a Product.”
24
Offering this set of cybersecurity services allows us to capture more revenue with greater efficiency, facilitating greater profitability and stronger customer retention. The benefit to our customers is that they receive an efficient engagement from a single provider that covers a wide range of their needs. This means their challenges are addressed more thoroughly and problems are resolved more rapidly when compared to working with multiple vendors. This leads to the best possible outcome which enables them to commit to us for the long term.
We believe that our business model is differentiated from other companies in the industry in that our employees are not consultants; they’re dedicated partners available on a recurring monthly contract. Due to the numerous challenges in hiring experienced cybersecurity and compliance professionals, we believe that assimilating our team of industry and subject matter experts into our clients’ teams is the ideal solution.
We are technology agnostic. Whereas, most cybersecurity firms are locked into working with a single technology, we seek to differentiate ourselves by remaining technology agnostic. This approach enables us to work with any business, no matter what systems or tools they use. For our customers the benefit is equally valuable; they’re able to choose the best tools and technology for their business needs without affecting their relationship with us.
We believe that building a world-class technology team with industry-specific and subject-matter expertise is the key to providing cutting-edge solutions to our clients. We aim to continue to identify and acquire cybersecurity talent to expand our scope of services and geographical footprint to fortify our capability to deliver excellence to our customers. Furthermore, our commitment is that we will stay a step ahead of threat actors and regulatory obligations to keep our customers safe and compliant.
Our Service Offering
We currently offer two major types of services to clients including Security Managed Services and Professional Services.
25
Security Managed Services
Our Security Managed Services deliver an end-to-end solution to cybersecurity and compliance needs. We begin with a gap analysis of our customers’ existing cybersecurity and compliance practices. Next, we perform penetration testing, vulnerability scanning, and a best practices assessment. This culminates with a deliverable report outlining failures and risks and includes a remediation roadmap organized based on highest-value opportunities and critical necessities. This prioritized approach utilizes the maxi-min strategy to optimize our customers’ budget; something that comes from decades of experiential wisdom. Using this roadmap, our team performs remediation and change implementation throughout a customer’s business. This is followed by our culture program that delivers cybersecurity and compliance awareness training, risk reporting, and periodic knowledge verification. We cover every area of our customers’ businesses and engage with every member of their team. This is our end-to-end holistic approach that we believe leaves no stone unturned to ensure our customers are truly safe, secure, and compliant.
We offer multiple services in the Security Managed Services portfolio including the following:
● Compliance: Our compliance practice ensures the customers are implementing the right controls, properly prioritizing risks, and investing in the appropriate remediation, so our customers can achieve compliance, adhere to industry standards and guidelines, and manage continuous monitoring over time. We provide the combination of integrated processes and systems, experienced staff, and innovative technology to help our customers meet those goals. Our seasoned experts possess the stringent industry certifications and accreditations that prove they understand security compliance regulations, frameworks, and controls. Our deep knowledge of these rigorous and unique requirements means we can offer a thorough, timely assessment that will identify residual risk within the customer’s information system. We then propose mitigation strategies to manage the customer’s risk effectively. As an authorized FedRAMP vendor ourselves, we bring an insider’s perspective to the process in the following standards:
○ FedRAMP - The Federal Risk and Authorization Management Program (FedRAMP) provides standardization to cloud security for Cloud Service Providers (CSP). FedRAMP recognition is required to sell cloud services to the US Federal and many state and local governments https://www.fedramp.gov/
○ FISMA 2014 - codifies the Department of Homeland Security’s role in administering the implementation of information security policies for federal Executive Branch civilian agencies, overseeing agencies’ compliance with those policies, and assisting OMB in developing those policies. https://www.cisa.gov/federal-information-security-modernization-act
○ ISO 17021, ISO 27001 is an International Standard that provides Certification Bodies (CB) with a set of requirements that will enable them to ensure that their management system certification process is carried out in a competent, consistent and impartial manner. https://www.iso.org/
○ HIPAA - Technology for Economic and Clinical Health Act of 2009 (“HITECH”) – These are laws regulated by the Department of Health and Human Services (“HHS”) to secure the privacy and confidentiality of protected health information (“PHI”) (https://www.hhs.gov/hipaa/index.html)
○ PCI - This is a standard administered by the Payment Card Industry Security Standards Council (https://www.pcisecuritystandards.org/pci_security/)
○ Cyber Security Framework (CSF) Consist of five core functions: Identify, Protect, Detect, Respond, and Recover. NIST defines the framework core on its official website as a set of cybersecurity activities, desired outcomes, and applicable informative references common across critical infrastructure sectors. https://www.nist.gov/cyberframework
○ NIST - The National Institute of Standards and Technology (“NIST”) – This is formally known as a National Bureau of Standards, which is a federal agency that promotes and maintains measurement standards while encouraging and assisting industry and science to develop and use these standards. https://www.nist.gov/
○ 800-171/CMMC - CMMC is intended to serve as a verification mechanism to ensure that DIB companies implement appropriate cybersecurity practices and processes to protect Federal Contract Information (FCI) and Controlled Unclassified Information (CUI) within their unclassified networks. https://csrc.nist.gov/publications/detail/sp/800-171/rev-2/final
26
○ GDPR - The General Data Protection Regulation is one of the most wide-ranging pieces of legislation passed by the EU in recent memory. It was introduced to standardize data protection law across the single market and give people in a growing digital economy greater control over how their personal information is used. https://gdpr.eu/compliance/
○ Service Organization 2 (“SOC 2”) – This is an auditing procedure that focuses on a business’ non-financial reporting controls related to security, availability, processing, integrity, confidentiality, and privacy of a system; https://www.aicpa.org/
○ HITRUST CSF – This is a comprehensive security framework (“CSF”) developed by the Health Information Trust Alliance (“HITRUST”) in collaboration with healthcare, technology and information security leaders, to create access, store and exchange sensitive and/or regulated data; https://hitrustalliance.net/
● Secured Managed Services: Cybersecurity companies who may excel at pointing out vulnerabilities or configuration issues, we have experts with the capability to resolve fix them. Our team has extensive experience in remediating security issues in a holistic fashion, to quickly effect change at organization scale. We know our customers’ teams are busy enough as is, so we offload the burden of addressing the dozens or hundreds of remediation items that may come from a security review, penetration test, or incident response project. Our remediation services resolve vulnerabilities that may expose risk to, or have caused, unwanted conditions or outcomes. Examples of issues that Cerberus Sentinel remediate include writing new or more effective policies, rearchitecting computer networks to minimize attack surface, implementing high security password requirements and multi-factor authentication, applying missing security patches that expose an organization to security attack, or correcting misconfigurations that can lead to unauthorized access such as a user being granted overly broad permissions. Our remediation services provide customers with a mature methodology for the heavy lifting needed to ensure that implementing solutions to minimize security risk are done safely, efficiently, and correctly the first time.
● SOC Managed Services: We offer SOC-as-a-service, which is a subscription-based service that manages and monitors client’s’ logs, devices, clouds, network, and assets for possible cyber threats. This lets our service provide the clients with the knowledge and skills necessary to combat cybersecurity threats.
● vCISO Service: Corporations are in need of cybersecurity services but many do not have the capital resources or knowledge base to hire a Chief Information Security Officer (“CISO”). We offer this service to companies on an ongoing managed service basis as a resource to augment their management team. vCISO includes road mapping the future state for the client and providing our knowledgeable expertise to help them achieve their security needs.
Professional Services
Our advisory services include a wide array of tailored solutions for organizations of all sizes. Our in-depth and uniquely acquired industry expertise allows us to act as a trusted advisor of our clients to help them lower their risk profile, minimize cost impact to organizations and meet regulatory compliance demands. We specialize in:
● Incident Response and Forensics: This is where we focus on identification, investigation, and remediation of cyberattacks.
● Technical Assessments: We specialize in advanced cyber security assessments that highlight the skills and experience of our team’s top-tier talent. Our customers benefit from our routine identification of issues based on our emphasis on real-world manual testing techniques and custom exploit development to uncover new avenues of attack. We believe that our approach to penetration testing services strikes the perfect equilibrium between cost, time and results. Our team of highly skilled testers utilize the same tools and techniques a malicious cybercriminal would use to try to gain unauthorized access to highly-guarded corporate systems and data to evaluate technical controls and quantify business risks in a meaningful way. This level of analysis provides business leaders the knowledge required to not only understand the impact a successful attack might have on their business operations, but also can validate the effectiveness of existing security controls and justify additional security related investment.
Training: This targets the root cause for 75% of cyber breach events by starting with a culture of security-first forward thinking. Our security awareness training can prevent a catastrophic cyberattack before it even occurs by equipping users with the tools and techniques required to spot a potential cyberattack in the early stages.
27
● Other Cybersecurity Services:
○ Cybersecurity Road Mapping: Bringing the culture of cybersecurity to client’s leadership team and penetrating throughout the organization is a critical first step of building any successful cybersecurity system. Through our consulting service, we dive into both the cultural and technical aspects of cybersecurity within the organization, providing meaningful recommendations to improve cybersecurity posture immediately. We help our clients build effective policies and best practices, design or enhance a cybersecurity system and train the executive management team to foster a top-down culture of cybersecurity in order to facilitate diligent implementation of cybersecurity awareness.
○ Gap and Risk Assessment: Threat actors probe and exploit the weakest points in an organization, it doesn’t matter if a business has done 100 things right when one mistake can be catastrophic. Cerberus Sentinel combines decades of security expertise and in-depth knowledge of how cyberattackers operate to deliver a thorough security risk gap analysis that identifies real world threats and issues guidance for protection. We first familiarize ourselves with the customer’s environment, business model, operations, and business drivers to best determine a customer’s cybersecurity posture in an ever evolving threat landscape. We then use our advanced threat intelligence, data breach experience, and analytics to accurately assess the customers unique cybersecurity risk based on their “as is” state. We then operate with a holistic mindset, considering every link in the cybersecurity chain from people, processes, and technology, to determine their ideal “to be” state, aligned with their business goals, compliance requirements, and risk tolerance. Finally, we collaboratively devise and develop a strategic cybersecurity plan that takes into account critical priorities to effectively reduce cybersecurity risk by closing the gap between their “as is” and “to be” states. This comprehensive awareness of internal systems and policies provides our customers with a clear understanding of their overall risk as well as the strategies and tools they need to protect their most valuable assets: their data and brand reputation.
Significant Development During the Quarter
Acquisition of VelocIT
On June 30, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Catapult Acquisition Merger Sub, LLC (“Merger Sub”), Catapult Acquisition Corporation (“Catapult”), the shareholders of Catapult Acquisition Corporation (the “Catapult Shareholders”) and Darek Hahn, in his capacity as the shareholder representative (the “Shareholder Representative”). Pursuant to the Merger Agreement, Catapult agreed to merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger as a wholly-owned subsidiary of the Company. The Merger was to become effective as soon as practicable following completion of certain conditions to closing in the Merger Agreement (the “Effective Time”).
On July 26, 2021, the Company, Merger Sub, Catapult, the Catapult Shareholders and the Shareholder Representative entered into an Amended and Restated Agreement and Plan of Merger (the “Amended and Restated Merger Agreement”) to provide, among other things, that Merger Sub would merge with and into Catapult, with Catapult surviving the Merger as a wholly-owned subsidiary of the Company. All issued and outstanding shares of common stock of Catapult immediately prior to the Effective Time were converted into the right to receive an aggregate of up to 2,566,778 shares of common stock, par value $0.00001, of the Company, subject to a holdback of 256,678 shares of Cerberus Stock. The Effective Time was August 12, 2021.
Catapult, which operates under the brand name of VelocIT, offers enterprise solutions through a suite of products and services to small and medium sized businesses. Such suite of products and services include IT leadership, vector alerts, active directory management, server management, email management, antivirus services, LAN services, wireless management, firewall management, virtualization management, WAN services, SAN services, endpoint back-up, endpoint encryption and business continuity support. VelocIT is based in Cranbury, New Jersey.
28
Results of Operations
Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020
Our financial results for the three months ended September 30, 2021 are summarized as follows in comparison to the three months ended September 30, 2020:
Three Months Ended September 30, | ||||||||||||
| 2021 | 2020 | Variance | ||||||||||
| Revenue: | ||||||||||||
| Security Managed Services | $ | 3,099,753 | $ | 1,683,733 | $ | 1,416,020 | ||||||
| Professional Services | 645,255 | 325,865 | 319,390 | |||||||||
| Total revenue | 3,745,008 | 2,009,598 | 1,735,410 | |||||||||
| Cost of revenue: | ||||||||||||
| Security Managed Services | 650,955 | 423,784 | 227,171 | |||||||||
| Professional Services | 234,326 | 18,962 | 215,364 | |||||||||
| Cost of payroll | 2,093,072 | 868,810 | 1,224,262 | |||||||||
| Total cost of revenue | 2,978,353 | 1,311,556 | 1,666,797 | |||||||||
| Total gross profit | 766,655 | 698,042 | 68,613 | |||||||||
| Operating expenses: | ||||||||||||
| Professional fees | 293,408 | 284,511 | 8,897 | |||||||||
| Advertising and marketing | 254,026 | 30,488 | 223,538 | |||||||||
| Selling, general and administrative | 2,085,720 | 1,020,765 | 1,064,955 | |||||||||
| Stock based compensation | 1,251,635 | 392,661 | 858,974 | |||||||||
| Loss on write-off of account receivable | 40,264 | - | 40,264 | |||||||||
| Total operating expenses | 3,925,053 | 1,728,425 | 2,196,628 | |||||||||
| Loss from operations | (3,158,398 | ) | (1,030,383 | ) | (2,128,015 | ) | ||||||
| Other income (expense): | ||||||||||||
| Other income | 169 | 751 | (582 | ) | ||||||||
| Interest expense, net | (75,470 | ) | (5,567 | ) | (69,903 | ) | ||||||
| PPP loan forgiveness | 980,800 | - | 980,800 | |||||||||
| Total other income (expense) | 905,499 | (4,816) | 899,935 | |||||||||
| Net loss | $ | (2,252,899 | ) | $ | (1,035,199 | ) | $ | (1,217,700 | ) | |||
Revenues
Security managed services revenues increased by $1,416,020, or 84%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, due to to revenues of $985,146 for VelocIT for the 3 months ended September 30, 2021. We did not recognize any revenue attributable to VelocIT during the 3 months ended September 30, 2020 because the acquisition consummated on August 12, 2021. The additional increase in revenues were a result of additional customers and usage increases within existing customers.
Professional services revenues increased by $319,390, or 98%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, due to revenues for Clear Skies and Alpine of $695,069 for the 3 months ended September 30, 2021. The acquisitions of Clear Skies and Alpine were consummated on August 1, 2020 and December 16, 2020, respectively. Revenues for Clear Skies was approximately $141,000 for the 3 months ended September 30, 2020.
Expenses
Cost of Revenues
Security managed services cost of revenues increased by $227,171, or 54%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, and was primarily the result of as a result of the VelocIT acquisition on August 12, 2020.
29
Profesional services cost of revenues increased by $215,364, or 1,136%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, due to cost of revenues for Clear Skies and Alpine. The acquisitions of Clear Skies and Alpine were consummated on August 1, 2020 and December 16, 2020, respectively.
Cost of payroll cost of revenues increased by $1,224,262, or 141%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, as a result of the cost of headcount for the VelocIT, Clear Skies, and Alpine acquisitions as well as an increase in employees resulting in an increase in salaries in other lines of business due to an increase in demand for our services.
Operating Expenses
Professional fees remained relatively consistent during the three months ended September 30, 2021 as compared to three months ended September 30, 2020.
Advertising and marketing expenses increased by $223,538, or 733%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, as a result of increased public relations and marketing prograams.
Selling, general and administrative expenses increased by $1,064,955, or 104%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, primarily as a result of an increase in payroll due to the Company being able to recognize Alpine’s payroll as well as a portion of VelocIT’s payroll, which both were not recognizeable during the three months ended September 30, 2020, due to the acquisition dates of December 1, 2020 and August 12, 2021, respectively.
Stock based compensation expenses increased by $858,974, or 219%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, due to an increase in stock options awarded during the three months ended September 30, 2021.
Loss on write-off of accounts receivable remained relatively consistent during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.
Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020
Our financial results for the nine months ended September 30, 2021 are summarized as follows in comparison to the nine months ended September 30, 2020:
| Nine Months Ended September 30, | ||||||||||||
| 2021 | 2020 | Variance | ||||||||||
| Revenue: | ||||||||||||
| Security Managed Services | $ | 6,979,146 | $ | 3,612,489 | $ | 3,366,657 | ||||||
| Professional Services | 2,275,437 | 1,015,816 | 1,259,621 | |||||||||
| Total revenue | 9,254,583 | 4,628,305 | 4,626,278 | |||||||||
| Cost of revenue: | ||||||||||||
| Security Managed Services | 1,326,788 | 726,614 | 600,174 | |||||||||
| Professional Services | 350,388 | 82,992 | 267,396 | |||||||||
| Cost of payroll | 5,052,684 | 2,135,691 | 2,916,993 | |||||||||
| Total cost of revenue | 6,729,860 | 2,945,297 | 3,784,563 | |||||||||
| Total gross profit | 2,524,723 | 1,683,008 | 841,715 | |||||||||
| Operating expenses: | ||||||||||||
| Professional fees | 695,023 | 685,821 | 9,202 | |||||||||
| Advertising and marketing | 471,721 | 104,058 | 367,663 | |||||||||
| Selling, general and administrative | 5,241,095 | 2,235,041 | 3,006,054 | |||||||||
| Stock based compensation | 2,981,523 | 1,062,000 | 1,919,523 | |||||||||
| Loss on write-off of account receivable | 55,528 | 15,000 | 40,528 | |||||||||
| Total operating expenses | 9,444,890 | 4,101,920 | 5,342,970 | |||||||||
| Loss from operations | (6,920,167 | ) | (2,418,912 | ) | (4,501,255 | ) | ||||||
| Other income (expense): | ||||||||||||
| Other income | 2,553 | 10,751 | (8,218 | ) | ||||||||
| Interest expense, net | (209,806 | ) | (12,285 | ) | (197,521 | ) | ||||||
| PPP loan forgiveness | 980,800 | - | 980,800 | |||||||||
| Total other income (expense) | 773,547 | (1,534 | ) | 775,081 | ||||||||
| Net loss | $ | (6,146,620 | ) | $ | (2,420,446 | ) | $ | (3,726,174 | ) | |||
30
Revenues
Security managed services revenues increased by $3,366,657, or 93%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to the acquisitions of VelocIT and Technologyville consummated on August 12, 2021 and May 25, 2020, respectively. Approximately $2,400,000 was a result of these acquisitions. The balance is a result of increase in usage and various new client contracts that were entered into subsequent to September 30, 2020.
Professional services revenues increased by $1,259,621, or 124%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to the acquisitions of Clear Skies and Alpine consummated on August 1, 2020 and December 16, 2020, respectively.
Expenses
Cost of Revenues
Secuity managed services cost of revenues increased by $600,174, or 83%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, and was primarily due to the acquisitions of VelocIT and Technologyville consummated on August 12, 2021 and May 25, 2020, respectively.
Professional services cost of revenues increased by $267,396, or 322%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to the acquisitions of Clear Skies and Alpine consummated on August 1, 2020 and December 16, 2020, respectively.
Cost of payroll increased by $2,916,993, or 137%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, due to as a result of the cost of headcount for the VelocIT, Clear Skies, and Alpine acquisitions as well as an increase in employees resulting in an increase in salaries in other lines of business due to an increase in demand for our services.
Operating Expenses
Professional fees remained relatively consistent during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.
Advertising and marketing expenses increased by $367,663, or 353%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, as a result of additional spend on public relations.
Selling, general and administrative expenses increased by $3,006,054, or 135%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, as a result of primarily as a result of an increase in payroll due to the Company being able to recognize a full nine months of Clear Skies’ and Alpine’s payroll as well as a portion of VelocIT’s payroll, which were not recognizeable during the nine months ended September 30, 2020, due to the acquisition dates of August 1, 2020, December 1, 2020 and August 12, 2021, respectively.
Stock based compensation expenses increased by $1,919,523, or 181%, for the nine months ended September 30, 2021, as compred to the nine months ended September 30, 2020, as a result of an increase in stock options awarded during the nine months ended September 30, 2021.
Loss on write-off of accounts receivable remained relatively consistent during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.
Working Capital Surplus
Our working capital surplus as of September 30, 2021, in comparison to our working capital surplus as of December 31, 2020, is summarized as follows:
| As of | ||||||||
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Current assets | $ | 5,484,029 | $ | 6,346,008 | ||||
| Current liabilities | 4,838,200 | 3,863,594 | ||||||
| Working capital surplus | $ | 645,829 | $ | 2,482,414 | ||||
31
The decrease in current assets is primarily due to a decrease in cash and cash equivalents of $2,467,451, offset by an increase in accounts receivable of $1,261,999. The increase in current liabilities is primarily due to the increase in accounts payable and accrued expense, and the current portion of lease liabilities of $684,355 and $157,720, respectively.
Cash Flows
Our cash flows for the nine months ended September 30, 2021, in comparison to our cash flows for the nine months ended September 30, 2020, can be summarized as follows:
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (4,312,312 | ) | $ | (1,157,976 | ) | ||
| Net cash provided by investing activities | 662,176 | 254,180 | ||||||
| Net cash provided by financing activities | 1,182,685 | 1,443,158 | ||||||
| Increase (decrease) in cash | $ | (2,467,451 | ) | $ | 539,362 | |||
Operating Activities
Net cash used in operating activities was $4,313,312 for the nine months ended September 30, 2021 and was primarily due to cash used to fund a net loss of $7,124,149, adjusted for non-cash expenses in the aggregate of $2,631,683 and additional cash outlaid by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts receivable and other current assets. Net cash used in operating activities was $1,157,976 for the nine months ended September 30, 2020 and was primarily due to cash used to fund a net loss of $2,420,446, adjusted for non-cash expenses in the aggregate of $1,170,094, partially offset by cash generated by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts payable.
Investing Activities
Net cash provided by investing activities of $662,176 for the nine months ended September 30, 2021, was due to cash acquired in the VelocIT acquisition. Net cash provided by investing activities of $254,180 for the nine months ended September 30, 2020, was due to cash acquired in the Techville and Clear Skies Acquisitions.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2021 was $1,182,685, which was primarily due to cash received from the sale of the Company’s common stock of $3,250,000 and offset by the payment of loans of approximately $2,000,000. Net cash provided by financing activities for the nine months ended September 30, 2020 was $1,443,158 and was due to cash received from the sale of the Company’s common stock of $790,000 and proceeds from PPP loans of $709,600.
Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At September 30, 2021, the Company had an accumulated deficit of approximately $11,013,000 and working capital surplus of approximately $646,000. For the nine months ended September 30, 2021, the Company had a loss from operations of approximately $6,920,000 and negative cash flows from operations of approximately $4,312,000. Although the Company is showing positive revenues and gross profit trends, the Company expects to incur further losses through the end of 2021.
32
To date the Company has been funding operations primarily through the sale of equity in private placements and revenues generated by the Company’s services. During the nine months ended June 30, 2021, the Company received $3,250,000 from private placements of the Company’s common stock.
Based on its current cash resources and commitments, the Company believes it will be able to maintain its current planned development and corresponding level of expenditure for at least twelve months from the date of the issuance of these unaudited condensed consolidated financial statements, although no assurance can be given that it will not need additional funds prior to such time.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.
Significant Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our condensed consolidated financial statements included herein for the quarter and six months ended June 30, 2021 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 31, 2021.
Fair Value Measurement
The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Business Combination
The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition.
33
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
Goodwill
Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually at year end, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.
Impairment of Long-lived Assets
We will periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review and at least annually. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
Revenue Recognition
The Company’s agreements with its clients are primarily service contracts that range in duration from a few months to one year. The Company recognizes revenue when control of these services is transferred to the client for an amount, referred to as the transaction price, which reflects the consideration to which the Company is expected to be entitled in exchange for those goods or services.
A contract with a client exists only when:
| ● | the parties to the contract have approved it and are committed to perform their respective obligations; | |
| ● | the Company can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”); | |
| ● | the Company can determine the transaction price for the services to be transferred; and | |
| ● | the contract has commercial substance, and it is probable that the Company 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 its contracts, the Company receives non-refundable upfront payments. The Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between the time of transfer of the promised goods or services to the client and the time the client pays for these goods or services to be generally one year or less. The Company’s credit terms to clients generally average thirty days, although in some cases payments are required in 15 days.
The Company does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
34
Disaggregation of Revenue
Revenue consists of the following by service offering for the nine months ended September 30, 2021:
Security Managed Services | Professional Services | Total | ||||||||||
| Primary Sector Markets | ||||||||||||
| Public | $ | 3,179,047 | $ | 44,579 | $ | 3,223,626 | ||||||
| Private | 3,607,146 | 2,178,545 | 5,785,691 | |||||||||
| Not-for-Profit | 192,953 | 52,313 | 245,266 | |||||||||
| $ | 6,979,146 | $ | 2,275,437 | $ | 9,254,583 | |||||||
| Major Service Lines | ||||||||||||
| Compliance | $ | 3,336,795 | $ | - | $ | 3,336,795 | ||||||
| Secured Managed Services | 3,134,269 | - | 3,134,269 | |||||||||
| SOC Managed Services | 352,535 | - | 352,535 | |||||||||
| vCISO | 155,547 | - | 155,547 | |||||||||
| Technical Assessments | - | 1,844,496 | 1,844,496 | |||||||||
| Forensics & I/R | - | 265,567 | 265,567 | |||||||||
| Training | - | 149,529 | 149,529 | |||||||||
| Other CyberSecurity Services | - | 15,845 | 15,845 | |||||||||
| $ | 6,979,146 | $ | 2,275,437 | $ | 9,254,583 | |||||||
Revenue consists of the following by service offering for the nine months ended September 30, 2020:
Security Managed Services | Professional Services | Total | ||||||||||
| Primary Sector Markets | ||||||||||||
| Public | $ | 2,498,371 | $ | 5,068 | $ | 2,503,439 | ||||||
| Private | 1,024,744 | 1,001,748 | 2,026,492 | |||||||||
| Not-for-Profit | 89,374 | 9,000 | 98,374 | |||||||||
| $ | 3,612,489 | $ | 1,015,816 | $ | 4,628,305 | |||||||
| Major Service Lines | ||||||||||||
| Compliance | $ | 2,519,958 | $ | - | $ | 2,519,958 | ||||||
| Secured Managed Services | 752,371 | - | 752,371 | |||||||||
| SOC Managed Services | 301,760 | - | 301,760 | |||||||||
| vCISO | 38,400 | - | 38,400 | |||||||||
| Technical Assessments | - | 190,825 | 190,825 | |||||||||
| Forensics & I/R | - | 554,069 | 554,069 | |||||||||
| Training | - | 58,625 | 58,625 | |||||||||
| Other CyberSecurity Services | - | 212,297 | 212,297 | |||||||||
| $ | 3,612,489 | $ | 1,015,816 | $ | 4,628,305 | |||||||
Practical Expedients
As part of ASC 606, the Company has adopted several practical expedients including the following: (i) the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less and (ii) the Company recognizes any incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
Reimbursed Expenses
The Company includes reimbursed expenses in revenues and costs of revenue as the Company is primarily responsible for fulfilling the promise to provide the specified service, including the integration of the related services into a combined output to the client, which are inseparable from the integrated service. These costs include such items as consumables, transportation and travel expenses, over which the Company has discretion in establishing prices.
35
Costs of Revenue
Costs of revenue include (i) compensation and benefits for billable employees and consultants directly involved with delivering services offerings and engagements; (ii) consumables used for the services; and (iii) other expenses directly related to service contracts such as professional services, meals and travel expenses.
Volatility in Stock-Based Compensation
The volatility is based on historical volatilities of companies in comparable stages as well as the historical volatility of companies in the industry and, by statistical analysis of the daily share-pricing model. The volatility of stock-based compensation at any point in time is based on historical volatility of similar companies in the industry for the last two to five years.
New and Recently Adopted Accounting Pronouncements
Any new and recently adopted accounting pronouncements are more fully described in Note 2 to our unaudited condensed consolidated financial statements herein for the quarter ended September 30, 2021.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable. As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
36
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 and subject to the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective due to the material weakness(es) in internal control over financial reporting disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2020.
Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2021, our additional finance and accounting staff that we hired in the first quarter of this year continued to positively impact our segregation of duties. In addition, during the nine months ended September 30, 2021, we established an audit committee.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2021, other than those noted above, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors
An investment in our common stock involves a number of very significant risks. You should carefully consider the risk factors included in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 31, 2021, in addition to other information contained in those reports and in this quarterly report in evaluating the Company and its business before purchasing shares of our common stock. The Company’s business, operating results and financial condition could be adversely affected due to any of those risks.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2021, there were no sales of equity securities during the period covered by this report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
37
Item 6. Exhibits
*Filed herewith.
**In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
# Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to Item 15(b) of this report
38
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 12, 2021 |
| By: | /s/ Deb Smith | |
| Deb Smith | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| Date: November 12, 2021 |
39