UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the Quarterly Period Ended
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Commission
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CERBERUS CYBER SENTINEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
TABLE OF CONTENTS
| 2 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that reflect management’s current views with respect to future events and financial performance. These statements are based upon beliefs of, and information currently available to, us as of the date hereof, as well as estimates and assumptions made by us. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ materially from those anticipated, believed, estimated, expected, intended, or planned.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Forward-looking statements made in this Quarterly Report on Form 10-Q include statements about:
| ● | our ability to achieve and sustain profitability of our existing lines of business and through our wholly owned subsidiaries; |
| ● | our ability to raise sufficient capital to continue to acquire cybersecurity companies; |
| ● | our ability to attract and retain cybersecurity talent; |
| ● | our ability to identify potential acquisition targets within predetermined parameters; |
| ● | our ability to successfully execute acquisitions, integrate the acquired businesses, and create synergies as a global cybersecurity consolidator; |
| ● | our ability to attract and retain key technology or management personnel and to expand our management team; |
| ● | the rate of growth and anticipated trends and challenges in our business and in the market for our services; |
| ● | our future financial performance, including our expectations regarding our revenue, cost of revenue, operating expenses, and our ability to achieve and maintain future profitability; |
| ● | sufficiency of cash and cash equivalent to meet our needs for at least the next 12 months; |
| ● | our ability to attract and retain clients; |
| ● | our ability to generate revenue and gross profit; |
| ● | our ability to navigate through the increasingly complex cybersecurity regulatory environment; |
| ● | beliefs and objectives for future operations; |
| ● | our ability to stay in compliance with laws and regulations currently applicable to, or which may become applicable to, our business both in the United States and internationally; |
| ● | economic and industry trends or trend analysis; and |
| ● | anticipated income tax rates, tax estimates and tax standards. |
Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur, and actual results could differ materially and adversely from those implied in our forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or events and circumstances described in the forward-looking statements will be achieved or occur. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Except as required by law, we undertake no obligation to update any forward-looking statements after the date of this report to conform these statements to actual results. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which are only predictions and speak only as of the date hereof.
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated Balance Sheets
(Unaudited)
| June 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Notes receivable, related party | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Contract asset | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred revenue | ||||||||
| Settlement liability | ||||||||
| Lease liability | ||||||||
| Loans payable | ||||||||
| Line of credit | ||||||||
| Convertible notes payable | ||||||||
| Note payable, related party | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities: | ||||||||
| Loans payable, net of current portion | ||||||||
| Lease liability, net of current portion | ||||||||
| Note payable, related party, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding on June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated translation adjustment | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Revenue: | ||||||||||||||||
| Security managed services | $ | $ | $ | $ | ||||||||||||
| Professional services | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of revenue: | ||||||||||||||||
| Security managed services | ||||||||||||||||
| Professional services | ||||||||||||||||
| Cost of payroll | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| Total cost of revenue | ||||||||||||||||
| Total gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Advertising and marketing | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding - basic | ||||||||||||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Gain/(Loss) | Deficit | Total | |||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock based compensation - stock options | - | |||||||||||||||||||||||
| Stock based compensation - common stock | ||||||||||||||||||||||||
| Exercise of options | ||||||||||||||||||||||||
| Stock issued for cash in public offering | ||||||||||||||||||||||||
| Stock issued for True Digital acquisition | ||||||||||||||||||||||||
| Stock issued for VelocIT acquisition | ( | ) | ||||||||||||||||||||||
| Stock issued for Red74 acquisition | ||||||||||||||||||||||||
| Stock issued for Creatrix acquisition | ||||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2022 | | $ | $ | | $ | ( | ) | $ | ( | ) | $ | | ||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Stock based compensation - stock options | - | |||||||||||||||||||||||
| Stock issued for cash | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS OF CASH FLOWS
(Unaudited)
| June 30, 2022 | June 30, 2021 | |||||||
| 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 | ||||||||
| Non-cash interest expense | ||||||||
| Depreciation and amortization | ||||||||
| Right of use amortization | ||||||||
| Amortization of debt discount | ||||||||
| Gain on termination of operating lease | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Prepaids and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Lease liability | ( | ) | ||||||
| Settlement liability | ( | ) | ||||||
| Deferred revenue | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ||||||
| Cash paid in acquisitions, net | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from stock option exercise | ||||||||
| Proceeds from loan payable | ||||||||
| Proceeds from convertible note payable | ||||||||
| Proceeds from line of credit | ||||||||
| Payment on line of credit | ( | ) | ||||||
| Payment on loans payable | ( | ) | ( | ) | ||||
| Payment on notes payable, related party | ( | ) | ( | ) | ||||
| Payment of debt issuance cost | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rates on cash and cash equivalents | ( | ) | ||||||
| Net increase 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 upon adoption of ASC 842 | $ | $ | ||||||
| Common stock issued in True Digital acquisition | $ | $ | ||||||
| Common stock issued in Creatrix acquisition | $ | $ | ||||||
| Common stock issued in VelocIT acquisition | $ | $ | ||||||
| Common stock issued in RED 74 acquisition | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation (“Cerberus”), and its wholly owned subsidiaries, including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”), Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT”), Southford Equities, Inc., a British Virgin Islands company (“Arkavia”), True Digital Security, Inc., a Delaware corporation (“True Digital”), RED74 LLC, a New Jersey limited liability company (“RED74”), Atlantic Technology Systems, Inc., a New Jersey corporation (“ATS”), Atlantic Technology Enterprises, Inc., a New Jersey corporation (“ATE” and together with ATS, “Atlantic”), Creatrix, Inc., a Maryland corporation (“Creatrix”), and CyberViking, LLC, an Oregon limited liability company (“CyberViking”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.
NOTE 1 –ORGANIZATION AND BACKGROUND
Description of the Business
We are a cybersecurity and compliance company comprised of highly trained and seasoned security professionals who work with clients to enhance or create a better cyber posture in their organization. We provide a full range of cybersecurity consulting and related services, encompassing all three pillars of compliance, cybersecurity, and culture. Our services include secured managed services, compliance services, security operations center (“SOC”) services, virtual Chief Information Security Officer (“vCISO”) services, incident response, certified forensics, technical assessments, and cybersecurity training.
On January 5, 2022, we entered into a stock purchase agreement (the “True Digital Stock Purchase Agreement”) with certain stockholders of True Digital and an agreement and plan of merger (the “True Digital Merger Agreement”) with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company.
On
January 18, 2022, we completed a $ underwritten public offering of shares of our common stock, pursuant to which an aggregate
of
On June 1, 2022, we entered into a stock purchase agreement with the stockholders of Creatrix, pursuant to which Creatrix became our wholly owned subsidiary. Creatrix offers recognized expertise in identity management as well as systems integration and software engineering, and specializes in biometrics, vetting, credentialing, and case management.
Basis of Presentation
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include our accounts and the accounts of our subsidiaries. All material intercompany accounts and transactions have been eliminated.
Our interim financial statements are unaudited, and in our opinion, include all adjustments of a normal recurring nature necessary for the fair presentation of the periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for any subsequent period or for the year ending December 31, 2022. These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2021.
| 8 |
Reclassifications
Certain reclassifications have been made to the financial statements for the six months ended June 30, 2021 to conform to the financial statements presentation for the six months ended June 30, 2022. These reclassifications had no effect on net loss or cash flows as previously reported.
Use of Estimates
GAAP requires management to make estimates and assumptions that affect the reported amounts in our financial statements. We periodically evaluate our estimates and adjust prospectively, if necessary. We believe our estimates and assumptions are reasonable; however, actual results could materially differ.
We believe the critical accounting policies discussed below affects our more significant judgments and estimates used in the preparation of the accompanying unaudited condensed consolidated financial statements. Significant estimates include the allowance for doubtful accounts, the carrying value of intangible assets and goodwill, deferred tax asset and valuation allowance, the estimated fair value of assets acquired, liabilities assumed and stock issued in business combinations, and assumptions used in the Black-Scholes option pricing model, such as expected volatility, risk-free interest rate, share price, and expected dividend rate.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Our revenue is derived from two major types of services to clients: security managed services and professional services. With respect to security managed services, we provide culture education and enablement, tools and technology provisioning, data and privacy monitoring, regulations and compliance monitoring, remote infrastructure administration, and cybersecurity services, including, but not limited to, antivirus and patch management. With respect to professional services, we provide cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.
Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:
Security Managed Services
Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.
Professional Services
Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.
Accounts Receivable
Accounts
receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. We periodically assess
our accounts and other receivables for collectability on a specific identification basis. We provide for allowances for doubtful receivables
based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate.
Payments are generally due within 30 days of invoice. We write off accounts receivable against the allowance for doubtful accounts when
a balance is determined to be uncollectible. As of June 30, 2022 and December 31, 2021, our allowance for doubtful accounts was $
| 9 |
Inventory
Inventory
consists of software licenses and computer equipment for sale to customers. Inventory is measured using the first-in, first-out method
and stated at lower of cost or net realizable value as of June 30, 2022 and December 31, 2021. The value of inventories is reduced for
excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and
adjust the value of inventory when required. We recorded
Fair Value Measurements
As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
| Level 1: | Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
| Level 2: | Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. |
| Level 3: | Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques. |
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. For dilutive securities, all outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options and shares issuable upon conversion thereof have been excluded from our computation of net loss per common share for the six months ended June 30, 2022 and 2021.
June 30, 2022 | June 30, 2021 | |||||||
| Stock options | ||||||||
| Warrant | ||||||||
| Convertible debt | ||||||||
| Total | ||||||||
| 10 |
Deferred Revenue
Deferred
revenue primarily consists of billings or payments received from customers in advance of revenue recognized for the services provided
to our customers or annual licenses and is recognized as services are performed or ratably over the life of the license. We generally
invoice customers in advance or in milestone-based installments. Deferred revenue of $
Deferred revenue consisted of the following:
June 30, 2022 | December 31, 2021 | |||||||
| Security managed services | $ | $ | ||||||
| Professional services | ||||||||
| Total deferred revenue | $ | $ | ||||||
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, including tax loss and credit carry forwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. We account for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. At June 30, 2022 and December 31, 2021, our net deferred tax asset has been fully reserved.
For uncertain tax positions that meet a “more likely than not” threshold, we recognize the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. Our practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is made that such expense is likely.
Recently Issued Accounting Standards
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force). The ASU requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the ASU, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. We adopted the standard on January 1, 2022, and management noted that there is no material impact to the unaudited condensed consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in business combinations to be recognized in accordance with ASC Topic 606 as if the acquirer had originated the contracts. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that adopting this standard will have on the unaudited condensed consolidated financial statements.
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to us.
| 11 |
NOTE 3 – ACQUISITIONS
True Digital Security, Inc.
On
January 5, 2022, we entered into the True Digital Stock Purchase Agreement with certain stockholders of True Digital and the True
Digital Merger Agreement with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated
by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a
wholly owned subsidiary of our company (the “True Digital Acquisition”). True Digital’s outstanding common stock
was exchanged for the right to receive an aggregate of $
Subsequent to the issuance of these financial statements, we expect to obtain a third-party valuation on the fair value of the assets acquired, including identifiable intangible assets and the liabilities assumed for use in the purchase price allocation.
The following table summarizes the preliminary allocation of the purchase price to the fair values of the assets acquired and the liabilities assumed as of the transaction date:
| Consideration | $ | |||
| Tangible assets acquired: | ||||
| Cash | ||||
| Accounts receivable | ||||
| Contract assets | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Other assets | ||||
| Total tangible assets | ||||
| Estimated intangible assets acquired | ||||
| Assumed liabilities: | ||||
| Accounts payable and accrued expenses | ||||
| Deferred revenue | ||||
| Line of credit | ||||
| Loans payable | ||||
| Loans payable - shareholder | ||||
| Total assumed liabilities | ||||
| Net assets acquired | ||||
| Goodwill (a) | $ |
| (a) |
| 12 |
Creatrix, Inc.
On June 1, 2022, we entered into a stock purchase agreement with the stockholders of Creatrix, pursuant to which Creatrix became our wholly owned subsidiary. We anticipate that this will expand our professional services offerings and capabilities. Creatrix offers recognized expertise in identity management as wells as systems integration and software engineering and specializes in biometrics, vetting, credentialing, and case management.
Subsequent to the issuance of these financial statements, we expect to obtain a third-party valuation on the fair value of the assets acquired, including identifiable intangible assets and the liabilities assumed for use in the purchase price allocation.
The aggregate purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimate fair values as of the acquisition date, with the excess recorded to goodwill. During the measurement period, which will not exceed one year from closing, we will continue to obtain information to assist us in finalizing the acquisition date fair values. Any qualifying changes to our preliminary estimates will be recorded as adjustments to the respective assets and liabilities, with any residual amounts allocated to goodwill.
The following table summarizes the preliminary estimated acquisition date fair values of the assets acquired and liabilities assumed:
| Consideration paid | $ | |||
| Tangible assets acquired: | ||||
| Cash | ||||
| Accounts receivable | ||||
| Contract assets | ||||
| Prepaid expenses and other current assets | ||||
| Total tangible assets | ||||
| Estimated intangible assets acquired | ||||
| Assumed liabilities: | ||||
| Accounts payable and accrued expenses | ||||
| Loans payable | ||||
| Total assumed liabilities | ||||
| Net assets acquired | ||||
| Goodwill (a) | $ |
| (a) |
Pro forma financial information is not presented because the acquisitions were not material to our financial statements, individually or in the aggregate.
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of:
June 30, 2022 | December 31, 2021 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Deferred cost of sales | ||||||||
| Prepaid taxes | ||||||||
| Prepaid insurance | ||||||||
| Deferred interest | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
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NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
June 30, 2022 | December 31, 2021 | |||||||
| Computer equipment | $ | $ | ||||||
| Building | ||||||||
| Leasehold improvements | ||||||||
| Vehicles | ||||||||
| 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 six months ended June 30, 2022:
| Balance December 31, 2021 | $ | |||
| Acquisition of goodwill | ||||
| Foreign currency translation adjustment | ( | ) | ||
| Ending balance, June 30, 2022(1) | $ |
| (1) |
The following table summarizes the identifiable intangible assets as of June 30, 2022 and December 31, 2021:
| Useful life | June 30, 2022 | December 31, 2021 | ||||||||
| Tradenames – trademarks | $ | $ | ||||||||
| Tradenames – trademarks | ||||||||||
| Customer base | ||||||||||
| Non-compete agreements | ||||||||||
| Intellectual property/technology | ||||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||||
| Total | $ | $ | ||||||||
The
weighted average remaining useful life of identifiable amortizable intangible assets remaining is
Amortization
of identifiable intangible assets for the three months ended June 30, 2022 and 2021 was $
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The below table summarizes the future amortization expense for the remainder of 2022 and the next four years thereafter:
| 2022 (remainder of) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| $ |
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following amounts:
June 30, 2022 | December 31, 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll | ||||||||
| Accrued expenses | ||||||||
| Accrued commissions | ||||||||
| Accrued interest – related party | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
NOTE 8 – RELATED PARTY TRANSACTIONS
Independent Consulting Agreement with Stephen Scott
In
August 2020, we entered into an Independent Consulting Agreement with Stephen Scott, a Director of our company, with respect to advisory
and consulting services relating to our strategic and business development, and sales and marketing. Mr. Scott
receives a consulting fee of $
Managed Services Agreement with Hensley Beverage Company – Related Party
In
July 2021, we entered into a 1-year Managed Services Agreement with Hensley Beverage Company to provide secured managed services. We
also may be engaged by Hensley Beverage Company from time to time to provide other related services outside the scope of the Managed
Services Agreement. While the agreement provides for a term through December 31, 2021, the agreement will continue until terminated
by either party. For the three and six months ended June 30, 2022, we received $
Note Receivable – Related Party
Arkavia
provided cash infusions to a related party to fund an intended wholly owned subsidiary, Arkavia Peru, for start-up and operational costs.
As of June 30, 2022, the subsidiary has yet to be incorporated and as such, Arkavia has recorded the amount as a receivable. The amount
outstanding at June 30, 2022 is $
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NOTE 9 – STOCKHOLDERS’ EQUITY
On June 14, 2022, our Board of Directors approved and recommended that our stockholders approve (i) an amended and restated certificate of incorporation to, among other things, (1) increase our authorized shares of common stock from to
Options
We granted stock options vesting solely upon the continued service of the recipient. We recognize the accounting grant date fair value of equity-based awards as compensation expense over the required service period of each award.
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2022 | $ | - | - | |||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Expired or cancelled | ( | ) | - | - | ||||||||||||
| Outstanding at June 30, 2022 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2022 | $ | $ | ||||||||||||||
Total compensation expense related to the options was $ and $ for the three months ended June 30, 2022 and 2021, respectively, and $ and $ for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there was future compensation expense of $ with a weighted average recognition period of years related to the options.
Warrant Activity Summary
The following table summarizes warrant activity:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2022 | $ | - | ||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired or cancelled | - | - | ||||||||||||||
| Outstanding at June 30, 2022 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2022 | $ | $ | ||||||||||||||
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NOTE 10 – COMMITMENTS AND CONTINGENCIES
Maxim Settlement Agreement
On
October 27, 2020, we entered into an advisory agreement (the “Advisory Agreement”) with Maxim Group LLC (“Maxim”),
pursuant to which the parties agreed to certain compensation obligations in the form of our common stock, cash and future rights. Certain
disputes arose between the parties regarding the duties and obligations pursuant to the Advisory Agreement, resulting in the parties
entering into a settlement and release agreement on January 13, 2022. As a result, we recorded a settlement liability at December
31, 2021 of $
Legal Claims
There are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our directors, officers or affiliates, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.
Indirect Taxes
We are subject to indirect taxation in some, but not all, of the various states and foreign jurisdictions in which we conduct business. Laws and regulations attempting to subject commerce conducted over the Internet to various indirect taxes are becoming more prevalent, both in the U.S. and internationally, and may impose additional burdens on us in the future. Increased regulation could negatively affect our business directly, as well as the business of our customers. Taxing authorities may impose indirect taxes on the Internet-related revenue we generated based on regulations currently being applied to similar, but not directly comparable industries. There are many transactions and calculations where the ultimate indirect tax determination is uncertain. In addition, domestic and international indirect taxation laws are complex and subject to change. We may be audited in the future, which could result in changes to our indirect tax estimates. We continually evaluate those jurisdictions in which nexus exists, and believe we maintain adequate indirect tax accruals.
As
of June 30, 2022 and December 31, 2021, our accrual for estimated indirect tax liabilities was $
NOTE 11 – LOANS PAYABLE AND LINES OF CREDIT
Loans Payable
Loans payable was as follows:
| Interest Rate | Maturities | June 30, 2022 | December 31, 2021 | |||||||||||
| Term loans (US dollar denominated) | $ | $ | ||||||||||||
| Term loans (Chilean peso denominated) | ||||||||||||||
| Less current portion | ( | ) | ( | ) | ||||||||||
| Long term loans payable | $ | $ | ||||||||||||
In
June 2022, we entered into bridge loans, secured by substantially all of our assets, in the principal amount of $
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Various
subsidiaries in the United States are borrowers under certain term loans. These term loans require monthly principal and interest payments.
These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense of these term loans
of $
Our
Chilean subsidiary, Arkavia, is the borrower under certain term loans denominated in Chilean Pesos. These term loans require monthly
principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest
expense on these term loans of $
Debt Assumed through Acquisition
As
part of the True Digital Acquisition, we assumed $
Convertible Notes Payable
In
October 2021, we issued a convertible note in the principal amount of $
In
June 2022, we entered into an unsecured convertible note in the principal amount of $
Future minimum payments under the above line of credit and loans payable due as of June 30, 2022 were as follows:
| 2022 (remainder of) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total future minimum payments | ||||
| Less: discount | ( | ) | ||
| Less: current | ( | ) | ||
| $ |
NOTE 12 – LEASES
All of our leases are classified as operating leases. With the adoption of Topic 842, operating lease agreements are required to be recognized on the condensed consolidated balance sheet as Right of Use (“ROU”) assets and corresponding lease liabilities.
On
January 19, 2022, we recognized additional ROU assets and lease liabilities of $
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ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that we will exercise that option.
When
measuring lease liabilities for leases that were classified as operating leases, we discounted lease payments using our estimated incremental
borrowing rate at January 1, 2022. The weighted average incremental borrowing rate applied was
Operating leases are included in the unaudited condensed consolidated balance sheets as follows:
| Classification | June 30, 2022 | December 31, 2021 | ||||||||
| Lease assets | ||||||||||
| Operating lease cost ROU assets | Assets | $ | $ | |||||||
| Total lease assets | $ | $ | ||||||||
| Lease liabilities | ||||||||||
| Operating lease liabilities, current | Current liabilities | $ | $ | |||||||
| Operating lease liabilities, non-current | Liabilities | |||||||||
| Total lease liabilities | $ | $ | ||||||||
The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations, were as follows:
Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Leases costs | ||||||||
| Operating lease costs | $ | $ | ||||||
| Total lease costs | $ | $ | ||||||
Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the six months ended June 30, 2022 were as follows:
| Fiscal Year | Operating Leases | |||
| (Unaudited) | ||||
| 2022 (remainder of) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total future minimum lease payments | ||||
| Amount representing interest | ( | ) | ||
| Present value of net future minimum lease payments | $ | |||
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NOTE 13 – GEOGRAPHIC INFORMATION
Revenue by geography is based on the customer’s billing address and was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| U.S. | $ | $ | $ | $ | ||||||||||||
| Chile | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Property and equipment, net by geography was as follows:
June 30, 2022 | December 31, 2021 | |||||||
| U.S. | $ | $ | ||||||
| Chile | ||||||||
| $ | $ | |||||||
No other international country represented more than 10% of property and equipment, net in any period presented.
NOTE 14 – SUBSEQUENT EVENTS
Acquisitions
In July 2022, we entered into a stock purchase agreement with CyberViking and its interest holders, pursuant to which we acquired all of the issued and outstanding units of CyberViking (the “CyberViking Acquisition”). We funded the acquisition through the issuance of shares of our common stock.
The purchase price of the CyberViking Acquisition will be allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values at the acquisition date. We are currently preparing the valuations and other procedures necessary to determine the purchase price allocation and will record our initial fair value estimates during the three months ending September 30, 2022.
CyberViking is a company specializing in application security services, incident response, and threat hunting as well as the creation and management of security operation centers.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation (“Cerberus”), and its wholly owned subsidiaries, including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”), Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT”), Southford Equities, Inc., a British Virgin Islands company (“Arkavia”), True Digital Security, Inc., a Delaware corporation (“True Digital”), RED74 LLC, a New Jersey limited liability company (“RED74”), Atlantic Technology Systems, Inc., a New Jersey corporation (“ATS”), Atlantic Technology Enterprises, Inc., a New Jersey corporation (“ATE” and together with ATS, “Atlantic”), Creatrix, Inc., a Maryland corporation (“Creatrix”), and CyberViking, LLC, an Oregon limited liability company (“CyberViking”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.
Second Quarter 2022 Highlights
Our operating results for the three months ended June 30, 2022 included the following:
| ● | Total revenue increased by $8.3 million to $11.2 million for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021. | |
| ● | Total gross profit increased to $0.8 million for the three months ended June 30, 2022, as compared to the six months ended June 30, 2021. | |
| ● | Cash used in operating activities decreased to $0.6 million for the three months ended June 30, 2022, as compared to $3.0 million for the three months ended March 31, 2022. | |
| ● | We closed $6.0 million of short-term bridge loans in June 2022. | |
| ● | We acquired Creatrix, which became our wholly owned subsidiary. |
On June 14, 2022, we filed a Registration Statement on Form S-3 (as amended by Amendment No. 1 to Form S-3 filed with the U.S. Securities and Exchange Commission (“SEC”) on June 24, 2022, the “S-3 Registration Statement”) with the SEC, which was declared effective on June 27, 2022. The S-3 Registration Statement contains two prospectuses:
| ● | A base prospectus that covers the potential offering, issuance, and sale from time to time of our common stock, preferred stock, warrants, debt securities, and units in one or more offerings with a total value of up to $300,000,000; and | |
| ● | A sales agreement prospectus covering the potential offering, issuance, and sale from time to time of our common stock having an aggregate gross sales price of up to $100,000,000 pursuant to a sales agreement with B. Riley Securities, Inc., Stifel, Nicolaus & Company, Incorporated, and Boustead Securities, LLC. |
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Results of Operations
Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021
Our financial results for the three months ended June 30, 2022 are summarized as follows in comparison to the three months ended June 30, 2021:
Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | Variance | ||||||||||
| Revenue: | ||||||||||||
| Security managed services | $ | 10,376,169 | $ | 2,077,351 | $ | 8,298,818 | ||||||
| Professional services | 851,776 | 872,326 | (20,550 | ) | ||||||||
| Total revenue | 11,227,945 | 2,949,677 | 8,278,268 | |||||||||
| Cost of revenue: | ||||||||||||
| Security managed services | 3,765,426 | 340,460 | 3,424,966 | |||||||||
| Professional services | 163,152 | 139,973 | 23,179 | |||||||||
| Cost of payroll | 4,707,984 | 1,531,910 | 3,176,074 | |||||||||
| Stock based compensation | 1,825,890 | 197,848 | 1,628,042 | |||||||||
| Total cost of revenue | 10,462,452 | 2,210,191 | 8,252,261 | |||||||||
| Total gross profit | 765,493 | 739,486 | 26,007 | |||||||||
| Operating expenses: | ||||||||||||
| Professional fees | 945,148 | 244,261 | 700,887 | |||||||||
| Advertising and marketing | 240,504 | 172,468 | 68,036 | |||||||||
| Selling, general, and administrative | 4,468,415 | 1,682,879 | 2,785,536 | |||||||||
| Stock-based compensation | 2,404,049 | 693,278 | 1,710,771 | |||||||||
| Total operating expenses | 8,058,116 | 2,792,886 | 5,265,230 | |||||||||
| Loss from operations | (7,292,623 | ) | (2,053,400 | ) | (5,239,223 | ) | ||||||
| Other income (expense): | ||||||||||||
| Other income | 17,425 | 2,179 | 15,246 | |||||||||
| Interest expense, net | (64,648 | ) | (65,641 | ) | 993 | |||||||
| Total other income (expense) | (47,223 | ) | (63,462 | ) | 16,239 | |||||||
| Net loss | (7,339,846 | ) | (2,116,862 | ) | (5,222,984 | ) | ||||||
| Foreign currency translation adjustment | (2,200,710 | ) | - | (2,200,710 | ) | |||||||
| Comprehensive loss | $ | (9,540,556 | ) | $ | (2,116,862 | ) | $ | (7,423,694 | ) | |||
Revenue
Security managed services revenue increased by $8,298,818, or 399%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due primarily to revenue acquired through our completion of six acquisitions over the last 12 months and new and existing customer revenue growth.
Professional services revenue decreased by $20,550, or 2%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due primarily to two large one-time projects in the three months ended June 30, 2021, offset by acquisition and organic revenue growth of approximately $134,000.
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Expenses
Cost of Revenue
Security managed services cost of revenue increased by $3,424,966, or 1,006%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to our completion of six acquisitions over the last 12 months, which increased our revenues from hardware and software sales and their related costs.
Professional services cost of revenue increased by $23,179, or 17%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to our increase in revenue from professional services from acquisitions completed over the last 12 months.
Cost of payroll cost of revenue increased by $3,176,074, or 207%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to headcount added primarily through our completion of six acquisitions over the last 12 months.
Stock-based compensation expenses increased by $1,628,042, or 823%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to an increase of stock options awarded to our growing base of revenue generating employees.
Operating Expenses
Professional fees increased by $700,887, or 287%, for the three months ended June 30, 2022 as compared to three months ended June 30, 2021, due to an increase in accounting, legal, and other professional fees incurred related to our periodic SEC filings and our efforts to raise additional capital.
Advertising and marketing expenses increased by $68,036, or 39%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to our current marketing campaign initiatives to stimulate organic revenue growth.
Selling, general, and administrative expenses increased by $2,785,536, or 166%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to headcount added through our completion of six acquisitions over the last 12 months and hiring of back office personnel to meet the current and expected growth needs of our business.
Stock based compensation expenses increased by $1,710,771, or 247%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to an increase in stock options awarded to employees as we continue to scale our back office to meet the growth needs of our business and shares issued to consultants for marketing services provided.
Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021
Our financial results for the six months ended June 30, 2022 are summarized as follows in comparison to the six months ended June 30, 2021:
Six Months Ended June 30, | ||||||||||||
| 2022 | 2021 | Variance | ||||||||||
| Revenue: | ||||||||||||
| Security managed services | $ | 18,428,394 | $ | 3,967,055 | $ | 14,461,339 | ||||||
| Professional services | 2,128,961 | 1,542,400 | 586,561 | |||||||||
| Total revenue | 20,557,355 | 5,509,455 | 15,047,900 | |||||||||
| Cost of revenue: | ||||||||||||
| Security managed services | 6,368,350 | 534,127 | 5,834,223 | |||||||||
| Professional services | 273,489 | 257,767 | 15,722 | |||||||||
| Cost of payroll | 9,153,834 | 2,959,612 | 6,194,222 | |||||||||
| Stock based compensation | 3,947,473 | 380,924 | 3,566,549 | |||||||||
| Total cost of revenue | 19,743,146 | 4,132,430 | 15,610,716 | |||||||||
| Total gross profit | 814,209 | 1,377,025 | (562,816 | ) | ||||||||
| Operating expenses: | ||||||||||||
| Professional fees | 1,568,209 | 401,615 | 1,166,594 | |||||||||
| Advertising and marketing | 395,845 | 217,695 | 178,150 | |||||||||
| Selling, general, and administrative | 9,171,958 | 3,170,520 | 6,001,438 | |||||||||
| Stock-based compensation | 4,969,559 | 1,348,964 | 3,620,595 | |||||||||
| Total operating expenses | 16,105,571 | 5,138,794 | 10,966,777 | |||||||||
| Loss from operations | (15,291,362 | ) | (3,761,769 | ) | (11,529,593 | ) | ||||||
| Other income (expense): | ||||||||||||
| Other income | 29,968 | 2,384 | 27,584 | |||||||||
| Interest expense, net | (108,233 | ) | (134,336 | ) | 26,103 | |||||||
| Total other income (expense) | (78,265 | ) | (131,952 | ) | 53,687 | |||||||
| Net loss | (15,369,627 | ) | (3,893,721 | ) | (11,475,906 | ) | ||||||
| Foreign currency translation adjustment | (1,298,269 | ) | - | (1,298,269 | ) | |||||||
| Comprehensive loss | $ | (16,667,896 | ) | $ | (3,893,721 | ) | $ | (12,774,175 | ) | |||
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Revenue
Security managed services revenue increased by $14,461,339, or 365%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due primarily to revenue acquired through our completion of six acquisitions over the last 12 months and new and existing customer revenue growth.
Professional services revenue increased by $586,561, or 38%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to revenue acquired through our completion of six acquisitions over the last 12 months and new and existing customer revenue growth.
Expenses
Cost of Revenue
Security managed services cost of revenue increased by $5,834,223, or 1,092%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due primarily to our completion of six acquisitions over the last 12 months, which increased our revenues from hardware and software sales and their related costs.
Professional services cost of revenue increased by 15,722, or 6%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to our increase in revenue from professional services from acquisitions completed over the last 12 months.
Cost of payroll cost of revenue increased by $6,194,222, or 209%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to headcount added primarily through our completion of six acquisitions over the last 12 months.
Stock-based compensation expenses increased by $3,566,549, or 936%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to an increase of stock options awarded to our growing base of revenue generating employees.
Operating Expenses
Professional fees increased by $1,166,594, or 290%, for the six months ended June 30, 2022 as compared to six months ended June 30, 2021, due to an increase in accounting, legal, and other professional fees incurred related to our periodic SEC filings and our efforts to raise additional capital.
Advertising and marketing expenses increased by $178,150, or 82%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to our current marketing campaign initiatives to stimulate organic revenue growth.
Selling, general, and administrative expenses increased by $6,001,438, or 189%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to headcount added through our completion of six acquisitions over the last 12 months and hiring of back office personnel to meet the current and expected growth needs of our business.
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Stock based compensation expenses increased by $3,620,595, or 268%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to an increase in stock options awarded to employees as we continue to scale our back office to meet the growth needs of our business and shares issued to consultants for marketing services provided.
Liquidity and Capital Resources
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At June 30, 2022, we had an accumulated deficit of $59,382,049 and working capital deficit of $768,309. For the six months ended June 30, 2022, we had a loss from operations of $15,369,627 and negative cash flows from operations of $3,574,474. Although we are showing positive revenue, gross profit is trending negatively primarily due to increased stock compensation related to sales activity. We expect to incur further losses through the end of 2022.
To date we have funded operations primarily through the sale of equity in private placements, debt, and revenue generated by our services. During the six months ended June 30, 2022, we received $9,521,798 from our public offering of our common stock, $5,975,000 in net proceeds from our bridge loans, and $277,712 from the exercise of stock options. On June 27, 2022, our Registration Statement on Form S-3 was declared effective, and we may offer and sell from time to time, in one or more series, any of our securities, for total gross proceeds up to $300,000,000. As of June 30, 2022, we had not sold any securities under our S-3 Registration Statement.
We believe that we have sufficient liquidity and capital resources to meet our requirements for at least the next 12 months from the filing date of this Quarterly Report on Form 10-Q, as well as our longer-term expected future cash requirements and obligations.
Our future capital requirements, both near-term and long-term, will depend on many factors, in addition to our recurring operating expenses, including our growth rate, the continued expansion of sales and marketing activities, the introduction of new and enhanced products and service offerings, and the costs of any future acquisitions in complementary businesses and technologies. To the extent existing cash and cash equivalents are not sufficient to fund future activities, we will seek to raise additional funds through equity, equity-linked, or debt financings. Any additional equity financing may be dilutive to our existing stockholders. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results, and financial condition would be adversely affected.
Working Capital (Deficit)/Surplus
Our working capital deficit as of June 30, 2022, in comparison to our working capital surplus as of December 31, 2021, is summarized as follows:
| As of | ||||||||
June 30, 2022 | December 31, 2021 | |||||||
| Current assets | $ | 18,547,284 | $ | 9,807,301 | ||||
| Current liabilities | 19,315,593 | 5,141,561 | ||||||
| Working capital (deficit)/surplus | $ | (768,309 | ) | $ | 4,665,740 | |||
The increase in current assets is primarily due to an increase in cash and cash equivalents and prepaid expenses and other current assets of $6,043,485 and $2,131,480, respectively. The increase in current liabilities is primarily due to the increase in accounts payable and accrued expense, deferred revenue, loans payable, current portion, and convertible notes payable of $2,675,346, $438,672, $6,067,789, and $1,016,667, respectively.
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Cash Flows
Our cash flows for the six months ended June 30, 2022, in comparison to our cash flows for the six months ended June 30, 2021, can be summarized as follows:
Six Months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (3,574,474 | ) | $ | (2,646,739 | ) | ||
| Net cash used in investing activities | (5,114,700 | ) | - | |||||
| Net cash provided by financing activities | 14,781,284 | 3,174,458 | ||||||
| Effect of exchange rates on cash and cash equivalents | (48,625 | ) | - | |||||
| Increase in cash | $ | 6,043,485 | $ | 527,719 | ||||
Operating Activities
Net cash used in operating activities was $3,574,474 for the six months ended June 30, 2022 and was primarily due to cash used to fund a net loss of $15,369,627, adjusted for non-cash expenses in the aggregate of $10,206,845 and additional cash outlaid by changes in the levels of operating assets and liabilities, primarily as a result of an increase in current assets, and accounts payable and accrued liabilities. Net cash used in operating activities was $2,646,739 for the six months ended June 30, 2021 and was primarily due to cash used to fund a net loss of $3,893,721, adjusted for non-cash expenses in the aggregate of $2,013,960, partially offset by cash generated by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts payable.
Investing Activities
Net cash used in investing activities of $5,114,700 for the six months ended June 30, 2022 and was primarily due to net cash paid in the True Digital acquisition. There was no cash used in investing activities for the six months ended June 30, 2021.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2022 was $14,781,284, which was primarily due to cash received from the sale of our common stock in our public offering of $9,521,798 and $5,975,000 in net proceeds from our bridge loans. Net cash provided by financing activities for the six months ended June 30, 2021 was $3,174,458 and was primarily due to cash received from the sale of our common stock of $3,250,000.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenue, or operating results during the periods presented.
Critical Accounting Policies and Estimates
Our critical accounting policies are more fully described in the notes to our condensed consolidated financial statements included herein for the quarter and six months ended June 30, 2022 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on April 15, 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at dates of the financial statements and the reported amounts of revenue and expenses during the periods. Our significant estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, and the valuation allowance related to our deferred tax assets. Certain of our estimates, including the carrying amount of intangible assets and goodwill, could be affected by external conditions, including those unique to us and general economic conditions. It is reasonably possible that these external factors could have an effect on our estimates and could cause actual results to differ from those estimates.
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Fair Value Measurement
The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Business Combination
We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
Intangible Assets
Intangible assets are comprised of trademarks, customer bases, non-compete agreements, and intellectual property with original estimated useful lives with a range of 2 to 10 years. Once placed into service, we amortize the cost of intangible assets over their estimated useful lives on a straight-line basis.
Goodwill
Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually at year end or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.
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Impairment of Long-lived Assets
We will 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.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. Awards granted to directors are treated on the same basis as awards granted to employees.
Revenue Recognition
Our agreements with clients are primarily service contracts that range in duration from a few months to one year. We recognize revenue when control of these services is transferred to the client for an amount, referred to as the transaction price, which reflects the consideration to which we are expected to be entitled in exchange for those goods or services.
A contract with a client exists only when:
| ● | the parties to the contract have approved it and are committed to perform their respective obligations; | |
| ● | we can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”); | |
| ● | we can determine the transaction price for the services to be transferred; and | |
| ● | the contract has commercial substance, and it is probable that we will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the client. |
For the majority of our contracts, we receive non-refundable upfront payments. We do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between the time of transfer of the promised goods or services to the client and the time the client pays for these goods or services to be generally one year or less. Our credit terms to clients generally average 30 days, although in some cases payments are required in 15 days.
We do not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:
Security Managed Services.
Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.
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Professional Services.
Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.
New and Recently Adopted Accounting Pronouncements
Any new and recently adopted accounting pronouncements are more fully described in Note 2 to our unaudited condensed consolidated financial statements herein for the quarter ended June 30, 2022.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Because we are a smaller reporting company, we are not required to provide the information called for by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below. Thus there remains a reasonable possibility that a material misstatement of our interim financial statements will not be prevented or detected on a timely basis. This does not include an evaluation by our registered public accounting firm regarding our internal control over financial reporting. Accordingly, we cannot provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, to allow our principal financial and executive officers to make timely decisions regarding required disclosures as of June 30, 2022.
Our management’s evaluation was based on the following material weaknesses in our internal control over financial reporting which, existed as of December 31, 2021 and which continue to exist, as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021:
| ● | Lack of risk assessment procedures on internal controls to detect financial reporting risks in a timely manner; and |
| ● | Lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives. |
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A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As a company with limited accounting resources, a significant amount of management’s time and attention has been and will be diverted from our business to ensure compliance with these regulatory requirements.
Management’s Plan to Remediate the Material Weaknesses
We are implementing measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:
| ● | Identifying gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and |
| ● | Developing policies and procedures on internal control over financial reporting and monitoring the effectiveness of operations on existing controls and procedures. |
We will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis, and we are committed to taking further action and implementing additional enhancements or improvements, as necessary and in accordance with financial and budgetary considerations.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2022, other than those noted above, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 1A. Risk Factors
Economic conditions in the U.S and international economies may adversely impact our business operating on operating results.
We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 15, 2022, risk factors that materially affect our business, financial condition, or results of operations. There have been no material changes from the risk factors previously disclosed, except as follows:
General macro-economic conditions, such as a rise in interest rates, inflation in the cost of goods and services including labor, a recession or an economic slowdown in the United States or internationally, including as a result of continuing uncertainty from the COVID-19 pandemic or the Russia-Ukraine military conflict, could adversely affect demand for our services and make it difficult to accurately forecast and plan our future business activities. U.S. and global markets have recently been experiencing volatility and disruption due to new interest rate and inflation increases as well as the continued escalation of geopolitical tensions. For example, inflation in the United States began to rise in the second half of 2021 and has continued to rise in the first half of 2022. Although our business has not yet been materially negatively impacted by such inflationary pressures, we cannot be certain that neither we nor our customers will be materially impacted by continued pressures. Additionally, on February 24, 2022, Russian troops engaged in a full-scale military invasion of Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, it could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. Additionally, the military conflict in Ukraine has led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia, and other potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds. We do not have employees or facilities in Russia or Ukraine, nor do we have customers and contractors in these locations. Our business has not yet been materially negatively impacted by this military conflict to date. However, we cannot be certain that this will not impact our position in the credit market or our ability to acquire cybersecurity businesses in the short and long term.
To the extent conditions in the domestic and global economy change, our business could be harmed as current and potential customers may reduce or postpone spending or choose not to purchase or renew our services, which they may consider discretionary. If our customers face decreased consumer demand, increased regulatory burdens, or more limited access to international markets, we may face a decline in the demand for our services and our operating results could be adversely impacted.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit | Incorporated by Reference | |||||||
Number |
Exhibit Description | Form | Exhibit | Filing Date | ||||
| 3.1* | Amended and Restated Certificate of Incorporation of the Registrant | |||||||
| 10.3#* | 2019 Equity Incentive Plan, as amended | |||||||
| 31.1* | Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer | |||||||
| 31.2* | Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer | |||||||
| 32.1 | Section 1350 Certification of Principal Executive Officer | |||||||
| 32.2 | Section 1350 Certification of Principal Financial Officer | |||||||
| 101.INS* | Inline XBRL Instance Document | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
*Filed herewith.
#Management contracts and compensatory plans and arrangements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CERBERUS CYBER SENTINEL CORPORATION
| By: | /s/ David G. Jemmett | |
| David G. Jemmett | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 12, 2022 | ||
| By: | /s/ Debra L. Smith | |
| Debra L. Smith | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| Date: August 12, 2022 |
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