CISO Global, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _________ to _________

Commission file number: 001-41227

CERBERUS CYBER SENTINEL CORPORATION

(Exact name of registrant as specified in its charter)

(480) 389-3444

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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

CERBERUS CYBER SENTINEL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022

TABLE OF CONTENTS

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:

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.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated Balance Sheets

(Unaudited)

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

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

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

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

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

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation (“Cerberus”), and its wholly owned subsidiaries, including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”), Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT”), Ocean Point Equities, Inc., a British Virgin Islands company (“Arkavia”), True Digital Security, Inc., a Delaware corporation (“True Digital”), RED74 LLC, a New Jersey limited liability company (“RED74”), Atlantic Technology Systems, Inc., a New Jersey corporation (“ATS”), Atlantic Technology Enterprises, Inc., a New Jersey corporation (“ATE” and together with ATS, “Atlantic”), Creatrix, Inc., a Maryland corporation (“Creatrix”), CyberViking, LLC, an Oregon limited liability company (“CyberViking”), Servicios Informaticos CUATROi, S.P.A., a Chilean corporation, Comercializadora CUATROi S.P.A., a Chilean corporation CUATROi Peru, S.A.C., a Peruvian corporation, and CUATROi S.A.S., a Colombian corporation (collectively “CUARTOi”), NLT Networks, S.P.A., a Chilean corporation; NLT Tecnologias, Limitada, a Chilean corporation, and NLT Servicios Profesionales, S.P.A., a Chilean corporation (collectively “NLT”), White and Blue Solutions, LLC, a Florida limited liability company (“W&B” and together with NLT, “NLT Secure”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

NOTE 1 –ORGANIZATION AND BACKGROUND

Description of the Business

We are a cybersecurity and compliance company comprised of highly trained and seasoned security professionals who work with clients to enhance or create a better cyber posture in their organization. We provide a full range of cybersecurity consulting and related services, encompassing all three pillars of compliance, cybersecurity, and culture. Our services include secured managed services, compliance services, security operations center (“SOC”) services, virtual Chief Information Security Officer (“vCISO”) services, incident response, certified forensics, technical assessments, and cybersecurity training.

On January 5, 2022, we entered into a stock purchase agreement (the “True Digital Stock Purchase Agreement”) with certain stockholders of True Digital and an agreement and plan of merger (the “True Digital Merger Agreement”) with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company.

On January 18, 2022, we completed a $10,300,000 underwritten public offering of shares of our common stock, pursuant to which an aggregate of 2,060,000 shares of our common stock were issued. In addition, we granted the underwriter warrants to purchase an aggregate of 144,200 shares of our common stock. We used the net proceeds from the offering to fund acquisitions, sales, marketing, and general corporate purposes. In connection with the public offering, our common stock was listed on The Nasdaq Stock Market LLC.

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

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

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

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

Basis of Presentation

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

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

Reclassifications

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

Use of Estimates

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

We believe the critical accounting policies discussed below affects our more significant judgments and estimates used in the preparation of the accompanying unaudited condensed consolidated financial statements. Significant estimates include the allowance for doubtful accounts, the carrying value of intangible assets and goodwill, deferred tax asset and valuation allowance, the estimated fair value of assets acquired, liabilities assumed and stock issued in business combinations, and assumptions used in the Black-Scholes option pricing model, such as expected volatility, risk-free interest rate, share price, and expected dividend rate.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue

Our revenue is derived from two major types of services to clients: security managed services and professional services. With respect to security managed services, we provide culture education and enablement, tools and technology provisioning, data and privacy monitoring, regulations and compliance monitoring, remote infrastructure administration, and cybersecurity services, including, but not limited to, antivirus and patch management. With respect to professional services, we provide cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.

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

Security Managed Services

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

Professional Services

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

Accounts Receivable

Accounts receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. We periodically assess our accounts and other receivables for collectability on a specific identification basis. We provide for allowances for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. Payments are generally due within 30 days of invoice. We write off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of September 30, 2022 and December 31, 2021, our allowance for doubtful accounts was $308,560 and $77,811, respectively.

Inventory

Inventory consists of software licenses and computer equipment for sale to customers. Inventory is measured using the first-in, first-out method and stated at lower of cost or net realizable value as of September 30, 2022 and December 31, 2021. The value of inventories is reduced for excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and adjust the value of inventory when required. We recorded no inventory impairment losses for the nine months ended September 30, 2022 and 2021.

Fair Value Measurements

As defined in ASC (“Accounting Standards Codification”) 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

Net Loss per Common Share

Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. For dilutive securities, all outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options and shares issuable upon conversion thereof have been excluded from our computation of net loss per common share for the nine months ended September 30, 2022 and 2021.

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

SUMMARY OF SECURITIES EXCLUDED FROM DILUTED PER SHARE 

Deferred Revenue

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

Deferred revenue consisted of the following:

SCHEDULE OF 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 September 30, 2022 and December 31, 2021, our net deferred tax asset has been fully reserved.

For uncertain tax positions that meet a “more likely than not” threshold, we recognize the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. Our practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is made that such expense is likely.

Recently Issued Accounting Standards

In May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force). The ASU requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the ASU, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. We adopted the standard on January 1, 2022, and management noted that there is no material impact to the unaudited condensed consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in business combinations to be recognized in accordance with ASC Topic 606 as if the acquirer had originated the contracts. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that adopting this standard will have on the unaudited condensed consolidated financial statements.

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

NOTE 3 – ACQUISITIONS

True Digital Security, Inc.

On January 5, 2022, we entered into the True Digital Stock Purchase Agreement with certain stockholders of True Digital and the True Digital Merger Agreement with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company (the “True Digital Acquisition”). True Digital’s outstanding common stock was exchanged for $6,153,000 in cash and 8,229,000 shares of our common stock.

The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and the liabilities assumed as of the transaction date:

SUMMARY OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES  

Creatrix, Inc.

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

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

SUMMARY OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES 

CyberViking, LLC.

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

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

CUATROi.

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

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

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

SUMMARY OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES 

NLT Secure

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

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

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

SUMMARY OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES 

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:

SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS 

NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT 

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

NOTE 6 – INTANGIBLE ASSETS AND GOODWILL

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

SCHEDULE OF CHANGES IN GOODWILL 

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

SUMMARY OF IDENTIFIABLE INTANGIBLE ASSETS 

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

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

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

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

SCHEDULE OF FUTURE AMORTIZATION EXPENSE 

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following amounts:

SCHEDULE OF 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 $11,500 per month for such services. During the three and nine months ended September 30, 2022, we paid consulting fees to Mr. Scott in the amount of $34,500 and $103,500, respectively.

Managed Services Agreement with Hensley Beverage Company – Related Party

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

Note Receivable – Related Party

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

Note 9 – STOCKHOLDERS’ EQUITY

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

Options

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

The following table summarizes stock option activity:

SCHEDULE OF STOCK OPTIONS ACTIVITY 

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

Warrant Activity Summary

The following table summarizes warrant activity:

 SCHEDULE OF STOCK WARRANT ACTIVITY

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Maxim Settlement Agreement

On October 27, 2020, we entered into an advisory agreement (the “Advisory Agreement”) with Maxim Group LLC (“Maxim”), pursuant to which the parties agreed to certain compensation obligations in the form of our common stock, cash and future rights. Certain disputes arose between the parties regarding the duties and obligations pursuant to the Advisory Agreement, resulting in the parties entering into a settlement and release agreement on January 13, 2022. As a result, we recorded a settlement liability at December 31, 2021 of $470,000 and issued 400,000 shares of our common stock to Maxim, pursuant to the settlement. During the nine months ended September 30, 2022, we paid $470,000 in cash to Maxim.

Legal Claims

There are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our directors, officers or affiliates, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.

Indirect Taxes

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

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

NOTE 11 – LOANS PAYABLE AND LINES OF CREDIT

Loans Payable

Loans payable was as follows:

 SCHEDULE OF LOAN PAYABLE

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

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

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

Debt Assumed through Acquisition

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

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

Convertible Notes Payable

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

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

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

SCHEDULE OF FUTURE MINIMUM PAYMENTS FOR LONG TERM DEBT

NOTE 12 – LEASES

All of our leases are classified as operating leases. With the adoption of Topic 842, operating lease agreements are required to be recognized on the condensed consolidated balance sheet as Right of Use (“ROU”) assets and corresponding lease liabilities.

On January 19, 2022, we recognized additional ROU assets and lease liabilities of $226,942 from the True Digital Acquisition. We elected to not recognize ROU assets and lease liabilities arising from office leases with initial terms of 12 months or less (deemed immaterial) on the unaudited condensed consolidated balance sheets.

ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that we will exercise that option.

When measuring lease liabilities for leases that were classified as operating leases, we discounted lease payments using our estimated incremental borrowing rate at January 1, 2022. The weighted average incremental borrowing rate applied was 6.00%. As of September 30, 2022, our leases had a remaining weighted average term of 2.45 years.

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

 SCHEDULE OF LEASE COST AND OTHER SUPPLEMENT LEASE INFORMATION

The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations, were as follows:

 SCHEDULE OF LEASE COST

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

 SCHEDULE OF FUTURE MINIMUM UNDER NON-CANCELLABLE LEASES FOR OPERATING LEASES

NOTE 13 – GEOGRAPHIC INFORMATION

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

 SCHEDULE OF REVENUE BY GEOGRAPHY IS BASED ON CUSTOMERS BILLING ADDRESS

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

Property and equipment, net by geography was as follows:

 SCHEDULE OF PROPERTY AND EQUIPMENT, NET BY GEOGRAPHIC AREAS

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

NOTE 14 – SUBSEQUENT EVENTS

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

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

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

Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation (“Cerberus”), and its wholly owned subsidiaries, including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”), Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT”), Ocean Point Equities, Inc., a British Virgin Islands company (“Arkavia”), True Digital Security, Inc., a Delaware corporation (“True Digital”), RED74 LLC, a New Jersey limited liability company (“RED74”), Atlantic Technology Systems, Inc., a New Jersey corporation (“ATS”), Atlantic Technology Enterprises, Inc., a New Jersey corporation (“ATE” and together with ATS, “Atlantic”), Creatrix, Inc., a Maryland corporation (“Creatrix”), CyberViking, LLC, an Oregon limited liability company (“CyberViking”), Servicios Informaticos CUATROi, S.P.A., a Chilean corporation, Comercializadora CUATROi S.P.A., a Chilean corporation CUATROi Peru, S.A.C., a Peruvian corporation, and CUATROi S.A.S., a Colombian corporation (collectively “CUARTOi”), NLT Networks, S.P.A., a Chilean corporation, NLT Tecnologias, Limitada, a Chilean corporation and NLT Servicios Profesionales, S.P.A., a Chilean corporation (collectively “NLT”), White and Blue Solutions, LLC, a Florida limited liability company (“W&B” and together with NLT, “NLT Secure”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

Third Quarter 2022 Highlights

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

Results of Operations

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

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

Revenue

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

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

Expenses

Cost of Revenue

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

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

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

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

Operating Expenses

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

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

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

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

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

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