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 $10,300,000 underwritten public offering of shares of our common stock, pursuant to which an aggregate
of 2,060,000 shares of our common stock were issued (see Note 9). In addition, we granted the underwriter warrants to purchase an aggregate
of 144,200 shares of our common stock (see Note 9). We intend to use the net proceeds from the offering to fund acquisitions, sales,
marketing, and general corporate purposes. In connection with the public offering, our common stock was listed on The Nasdaq Stock Market
LLC.
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.
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 $180,691
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 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 no inventory impairment losses for the six months ended June 30, 2022 and 2021.
Fair
Value Measurements
As
defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes
a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs
(Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
Level
1: |
Quoted
prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in
which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing
basis. |
|
|
Level
2: |
Pricing
inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as
of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities,
time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant
economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument,
can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. |
|
|
Level
3: |
Pricing
inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally
developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in
the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash
flow methodologies and similar techniques. |
Net
Loss per Common Share
Net
loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
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.
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
| |
June
30, 2022 | | |
June
30, 2021 | |
Stock
options | |
| 36,114,487 | | |
| 25,843,700 | |
Warrant | |
| 144,200 | | |
| - | |
Convertible
debt | |
| 430,718 | | |
| 1,500,000 | |
Total | |
| 36,689,405 | | |
| 27,343,700 | |
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 six months ended
June 30, 2022, which was included in the deferred revenue balance as of December 31, 2021. As of June 30, 2022, deferred revenue related
to such customer payments was $2,351,477, 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
| |
June
30, 2022 | | |
December
31, 2021 | |
Security
managed services | |
$ | 2,172,302 | | |
$ | 52,824 | |
Professional
services | |
| 179,175 | | |
| - | |
Total
deferred revenue | |
$ | 2,351,477 | | |
$ | 52,824 | |
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, including tax
loss and credit carry forwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
We
utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. We account
for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and
the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than
not” that a deferred tax asset will not be realized. At 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.
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 $6,153,000
in cash and 8,229,000
shares of our common stock, subject to a 10%
holdback. In the event that no claim is made by a Cerberus Indemnitee (as defined in the True Digital Merger Agreement) within one
year from closing, then we shall pay the entire amount of the 10%
holdback to the shareholders of True Digital.
Subsequent
to the issuance of these financial statements, we expect to obtain a third-party valuation on the fair value of the assets acquired,
including identifiable intangible assets and the liabilities assumed for use in the purchase price allocation.
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:
SUMMARY
OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES
| |
| | |
Consideration | |
$ | 40,879,380 | |
| |
| | |
Tangible
assets acquired: | |
| | |
Cash | |
| 485,232 | |
Accounts
receivable | |
| 1,404,386 | |
Contract
assets | |
| 131,342 | |
Prepaid
expenses and other current assets | |
| 196,825 | |
Property
and equipment | |
| 906,006 | |
Other
assets | |
| 17,505 | |
Total
tangible assets | |
| 3,141,296 | |
| |
| | |
Estimated
intangible assets acquired | |
| 1,913,800 | |
| |
| | |
Assumed
liabilities: | |
| | |
Accounts
payable and accrued expenses | |
| 1,283,003 | |
Deferred
revenue | |
| 1,956,600 | |
Line of credit | |
| 283,244 | |
Loans
payable | |
| 181,741 | |
Loans
payable - shareholder | |
| 543,581 | |
Total
assumed liabilities | |
| 4,248,169 | |
| |
| | |
Net
assets acquired | |
| 806,927 | |
| |
| | |
Goodwill
(a) | |
$ | 40,072,453 | |
(a) | Goodwill
and intangibles are not deductible for tax purposes. |
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:
SUMMARY
OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES
| |
| | |
Consideration
paid | |
$ | 3,630,000 | |
| |
| | |
Tangible
assets acquired: | |
| | |
Cash | |
| 3,572 | |
Accounts
receivable | |
| 125,908 | |
Contract
assets | |
| 33,965 | |
Prepaid
expenses and other current assets | |
| 3,597 | |
Total
tangible assets | |
| 167,042 | |
| |
| | |
Estimated
intangible assets acquired | |
| 720,400 | |
| |
| | |
Assumed
liabilities: | |
| | |
Accounts
payable and accrued expenses | |
| 48,001 | |
Loans
payable | |
| 56,687 | |
Total
assumed liabilities | |
| 104,688 | |
| |
| | |
Net
assets acquired | |
| 782,754 | |
| |
| | |
Goodwill
(a) | |
$ | 2,847,246 | |
(a) |
Goodwill
and intangibles are not deductible for tax purposes. |
Pro
forma financial information is not presented because the acquisitions were not material to our financial statements, individually or
in the aggregate.
NOTE
4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consisted of:
SCHEDULE
OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
June
30, 2022 | | |
December
31, 2021 | |
Prepaid
expenses | |
$ | 1,653,815 | | |
$ | 441,259 | |
Deferred
cost of sales | |
| 729,664 | | |
| 12,239 | |
Prepaid
taxes | |
| 126,675 | | |
| 231,014 | |
Prepaid
insurance | |
| 391,194 | | |
| 46,751 | |
Deferred
interest | |
| 184,715 | | |
| 229,702 | |
Total
prepaid expenses and other current assets | |
$ | 3,086,063 | | |
$ | 960,965 | |
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| |
June
30, 2022 | | |
December
31, 2021 | |
Computer
equipment | |
$ | 612,612 | | |
$ | 495,235 | |
Building | |
| 1,107,769 | | |
| 1,047,020 | |
Leasehold
improvements | |
| 94,739 | | |
| 109,626 | |
Vehicles | |
| 63,052 | | |
| 63,052 | |
Furniture
and fixtures | |
| 45,835 | | |
| 33,358 | |
Software | |
| 1,529,412 | | |
| 748,599 | |
Property and equipment gross | |
| 3,453,419 | | |
| 2,496,890 | |
Less:
accumulated depreciation | |
| (484,633 | ) | |
| (102,466 | ) |
Property
and equipment, net | |
$ | 2,968,786 | | |
$ | 2,394,424 | |
Total
depreciation expense was $178,309 and $4,424 for the three months ended June 30, 2022 and 2021, respectively, and was $332,383 and $8,848
for the six months ended June 30, 2022, and 2021, respectively.
NOTE
6 – INTANGIBLE ASSETS AND GOODWILL
The
following table summarizes the changes in goodwill during the six months ended June 30, 2022:
SCHEDULE
OF CHANGES IN GOODWILL
Balance
December 31, 2021 | |
$ | 16,792,535 | |
Acquisition of goodwill | |
| 42,919,699 | |
Foreign
currency translation adjustment | |
| (1,196,975 | ) |
Ending
balance, June 30, 2022(1) | |
$ | 58,515,259 | |
(1) |
As
of June 30, 2022, we had not obtained a third-party valuation for the acquisitions of True Digital and Creatrix. As such, the purchase
price allocation disclosed in this Quarterly Report for True Digital and Creatrix may change, and, therefore, goodwill from the acquisitions
may change. |
The
following table summarizes the identifiable intangible assets as of June 30, 2022 and December 31, 2021:
SUMMARY
OF IDENTIFIABLE INTANGIBLE ASSETS
| |
Useful
life | |
June
30, 2022 | | |
December
31, 2021 | |
Tradenames
– trademarks | |
Indefinite | |
$ | 1,211,800 | | |
$ | 1,211,800 | |
Tradenames
– trademarks | |
5
years | |
| 3,136,872 | | |
| 1,798,300 | |
Customer
base | |
5
- 10 years | |
| 1,836,606 | | |
| 1,650,000 | |
Non-compete
agreements | |
2
- 5 years | |
| 806,900 | | |
| 675,500 | |
Intellectual
property/technology | |
5
- 10 years | |
| 2,264,939 | | |
| 1,528,000 | |
Identifiable intangible assets | |
| |
| 9,257,117 | | |
| 6,863,600 | |
Less
accumulated amortization | |
| |
| (1,100,951 | ) | |
| (323,331 | ) |
Total | |
| |
$ | 8,156,166 | | |
$ | 6,540,269 | |
The
weighted average remaining useful life of identifiable amortizable intangible assets remaining is 4.47 years.
Amortization
of identifiable intangible assets for the three months ended June 30, 2022 and 2021 was $512,503 and $34,994, respectively, and was $817,467
and $69,988 for the six months ended June 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
| |
| | |
2022
(remainder of) | |
$ | 860,974 | |
2023 | |
| 1,704,567 | |
2024 | |
| 1,427,546 | |
2025 | |
| 1,377,196 | |
2026 | |
| 1,276,628 | |
Thereafter | |
| 297,455 | |
Finite-lived intangible assets, net | |
$ | 6,944,366 | |
NOTE
7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following amounts:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
June
30, 2022 | | |
December
31, 2021 | |
Accounts
payable | |
$ | 3,163,498 | | |
$ | 1,700,260 | |
Accrued
payroll | |
| 1,470,348 | | |
| 482,588 | |
Accrued
expenses | |
| 2,391,785 | | |
| 513,718 | |
Accrued
commissions | |
| 465,416 | | |
| - | |
Accrued
interest – related party | |
| 12,500 | | |
| 12,500 | |
Total
accounts payable and accrued expenses | |
$ | 7,503,547 | | |
$ | 2,709,066 | |
NOTE
8 – RELATED PARTY TRANSACTIONS
Independent
Consulting Agreement with Stephen Scott
In
August 2020, we entered into an Independent Consulting Agreement with Stephen Scott, a Director of our company, with respect to advisory
and consulting services relating to our strategic and business development, and sales and marketing. Mr. Scott
receives a consulting fee of $11,500 per month for such services. During the three and six months ended June 30, 2022, we paid consulting
fees to Mr. Scott in the amount of $34,500 and $69,000, 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 six months ended June 30, 2022, we received $206,202
and $373,008
from Hensley Beverage Company for contracted services and had an outstanding receivable balance of $11,132
as of June 30, 2022.
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 $1,006,848 and is considered short-term and non-interest bearing.
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 250,000,000
to 300,000,000
and (2) authorize the issuance of 50,000,000
shares of preferred stock, par value $0.00001
per share; and (ii) 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 and such equity plan amendment will not become effective until
at least 20 calendar days following the date on which an information statement informing stockholders of the Written Consent is
first mailed to our stockholders of record. As such, no effect of such amendments is shown on the accompanying financial
statements.
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
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life
(in years) | | |
Aggregate Intrinsic Value | |
Outstanding
at January 1, 2022 | |
| 31,372,148 | | |
$ | 1.84 | | |
| - | | |
| - | |
Granted | |
| 8,635,213 | | |
| 3.62 | | |
| - | | |
| - | |
Exercised | |
| (454,111 | ) | |
| 0.61 | | |
| - | | |
| - | |
Expired
or cancelled | |
| (3,438,763 | ) | |
| 2.56 | | |
| - | | |
| - | |
Outstanding
at June 30, 2022 | |
| 36,114,487 | | |
$ | 2.25 | | |
| 5.69 | | |
$ | 61,600,311 | |
Exercisable
at June 30, 2022 | |
| 18,472,112 | | |
$ | 0.84 | | |
| 3.32 | | |
$ | 51,129,643 | |
Total
compensation expense related to the options was $3,572,189 and $891,126 for the three months ended June 30, 2022 and 2021, respectively,
and $8,179,332 and $1,729,888 for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there was future compensation
expense of $44,979,761 with a weighted average recognition period of 2.11 years related to the options.
Warrant
Activity Summary
The
following table summarizes warrant activity:
SCHEDULE
OF STOCK WARRANT ACTIVITY
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life (in
years) | | |
Aggregate Intrinsic Value | |
Outstanding
at January 1, 2022 | |
| - | | |
$ | - | | |
| - | | |
| - | |
Granted | |
| 144,200 | | |
| 5.00 | | |
| 4.51 | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Expired
or cancelled | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding at June
30, 2022 | |
| 144,200 | | |
$ | 5.00 | | |
| 4.51 | | |
$ | - | |
Exercisable at June
30, 2022 | |
| 144,200 | | |
$ | 5.00 | | |
| 4.51 | | |
$ | - | |
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 six months ended
June 30, 2022, we paid $470,000 in cash.
Legal
Claims
There
are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our directors, officers
or affiliates, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party
adverse to us or has a material interest adverse to us.
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 $633,672 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
| |
Interest
Rate | |
Maturities | | |
June
30, 2022 | | |
December
31, 2021 | |
| |
| |
| | |
| | |
| |
Term
loans (US dollar denominated) | |
5.00%
– 6.00% | |
| 2023
- 2027 | | |
$ | 5,397,470 | | |
$ | 478,712 | |
Term
loans (Chilean peso denominated) | |
3.48%
- 7.14% | |
| 2023
- 2029 | | |
| 3,977,673 | | |
| 5,018,788 | |
| |
| |
| | | |
| 9,375,143 | | |
| 5,497,500 | |
Less
current portion | |
| |
| | | |
| (6,280,988 | ) | |
| (213,199 | ) |
Long
term loans payable | |
| |
| | | |
$ | 3,094,155 | | |
$ | 5,284,301 | |
In
June 2022, we entered into bridge loans, secured by substantially all of our assets, in the principal amount of $5,000,000 bearing an
interest rate of 4.00% per annum payable monthly with a maturity date of December 14, 2022. These bridge loans are guaranteed by our assets.
We recorded interest expense of $8,889 during the three and six months ended June 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 $11,358 and $51,987 for the three and six months ended June 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 $58,400 and $61,885 for the three and six months ended June 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 two of the four term loans during the six months ended
June 30, 2022. The line of credit matured and was repaid in full on August 9, 2022, and the outstanding term loans mature in May 2024
and February 2027. The line of credit had an interest rate 3.25% per annum.
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 March 10, 2022, we entered into an amendment to the note pursuant to which the maturity date was extended to October
27, 2022. The outstanding principal of this note was $1,500,000
at June 30, 2022. At June 30, 2022 and December 31, 2021, we recorded interest expense and accrued interest of $49,486
and $12,500, respectively,
with respect to this note. We recorded interest expense of $18,493
and $36,986
during the three and six months ended June 30, 2022, respectively.
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%. At June 30, 2022, we recorded interest expense and accrued interest of
$3,194 during the three and six months ended.
Future
minimum payments under the above line of credit and loans payable due as of June 30, 2022 were as follows:
SCHEDULE
OF FUTURE MINIMUM PAYMENTS FOR LONG TERM DEBT
| |
| | |
2022
(remainder of) | |
$ | 7,309,895 | |
2023 | |
| 2,167,354 | |
2024 | |
| 909,814 | |
2025 | |
| 871,572 | |
2026 | |
| 507,925 | |
Thereafter | |
| 928,676 | |
Total
future minimum payments | |
| 12,695,236 | |
Less:
discount | |
| (54,166 | ) |
Long
term debt | |
| 12,641,070 | |
Less:
current | |
| (9,344,478 | ) |
Long
term debt, net of current portion | |
$ | 3,296,592 | |
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 June 30, 2022, our leases had
a remaining weighted average term of 1.00 years.
Operating
leases are included in the unaudited condensed consolidated balance sheets as follows:
SCHEDULE OF LEASE COST AND OTHER SUPPLEMENT LEASE INFORMATION
| |
Classification | |
June
30,
2022 | | |
December
31,
2021 | |
Lease
assets | |
| |
| | | |
| | |
Operating
lease cost ROU assets | |
Assets | |
$ | 245,426 | | |
$ | 277,578 | |
Total
lease assets | |
| |
$ | 245,426 | | |
$ | 277,578 | |
| |
| |
| | | |
| | |
Lease
liabilities | |
| |
| | | |
| | |
Operating
lease liabilities, current | |
Current
liabilities | |
$ | 116,091 | | |
$ | 196,472 | |
Operating
lease liabilities, non-current | |
Liabilities | |
| 135,380 | | |
| 88,040 | |
Total
lease liabilities | |
| |
$ | 251,471 | | |
$ | 284,512 | |
The
components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations,
were as follows:
SCHEDULE
OF LEASE COST
| |
| | | |
| | |
| |
Six
Months Ended June 30, | |
| |
2022 | | |
2021 | |
Leases
costs | |
| | | |
| | |
Operating
lease costs | |
$ | 226,079 | | |
$ | 54,376 | |
Total
lease costs | |
$ | 226,079 | | |
$ | 54,376 | |
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:
SCHEDULE OF FUTURE MINIMUM UNDER NON-CANCELLABLE LEASES FOR OPERATING LEASES
| |
| |
Fiscal
Year | |
Operating
Leases | |
| |
(Unaudited) | |
2022
(remainder of) | |
$ | 83,892 | |
2023 | |
| 77,091 | |
2024 | |
| 57,605 | |
2025 | |
| 54,389 | |
Total
future minimum lease payments | |
| 272,977 | |
Amount
representing interest | |
| (21,506 | ) |
Present
value of net future minimum lease payments | |
$ | 251,471 | |
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
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
Months Ended June 30, | | |
Six
Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
U.S. | |
$ | 9,358,105 | | |
$ | 2,949,677 | | |
$ | 17,764,335 | | |
$ | 5,509,455 | |
Chile | |
| 1,869,840 | | |
| - | | |
| 2,793,020 | | |
| - | |
Revenue | |
$ | 11,227,945 | | |
$ | 2,949,677 | | |
$ | 20,557,355 | | |
$ | 5,509,455 | |
Property
and equipment, net by geography was as follows:
SCHEDULE
OF PROPERTY AND EQUIPMENT, NET BY GEOGRAPHIC AREAS
| |
June
30, 2022 | | |
December
31, 2021 | |
| |
| | |
| |
U.S. | |
$ | 1,034,958 | | |
$ | 95,069 | |
Chile | |
| 1,933,828 | | |
| 2,299,355 | |
Property and equipment
net | |
$ | 2,968,786 | | |
$ | 2,394,424 | |
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 499,000 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.