The accompanying footnotes are an integral part of
these condensed consolidated financial statements.
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.
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 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
| |
September 30, 2022 | | |
September 30, 2021 | |
Stock options | |
| 34,856,288 | | |
| 27,680,040 | |
Warrant | |
| 144,200 | | |
| - | |
Convertible debt | |
| 430,718 | | |
| 1,500,000 | |
Total | |
| 35,431,206 | | |
| 29,180,040 | |
Deferred
Revenue
Deferred
revenue primarily consists of billings or payments received from customers in advance of revenue recognized for the services provided
to our customers or annual licenses and is recognized as services are performed or ratably over the life of the license. We generally
invoice customers in advance or in milestone-based installments. Deferred revenue of $52,824 was recognized for the nine months ended
September 30, 2022, which was included in the deferred revenue balance as of December 31, 2021. As of September 30, 2022, deferred revenue
related to such customer payments was $3,074,173, all of which is expected to be recognized during the succeeding 12-month period and
is therefore presented as current.
Deferred
revenue consisted of the following:
SCHEDULE
OF DEFERRED REVENUE
| |
September 30, 2022 | | |
December 31, 2021 | |
Security managed services | |
$ | 2,038,072 | | |
$ | 52,824 | |
Professional services | |
| 1,036,101 | | |
| - | |
Total deferred revenue | |
$ | 3,074,173 | | |
$ | 52,824 | |
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, including tax
loss and credit carry forwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
We
utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. We account
for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and
the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than
not” that a deferred tax asset will not be realized. At September 30, 2022 and December 31, 2021, our net deferred tax asset has
been fully reserved.
For
uncertain tax positions that meet a “more likely than not” threshold, we recognize the benefit of uncertain tax positions
in the unaudited condensed consolidated financial statements. Our practice is to recognize interest and penalties, if any, related to
uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is
made that such expense is likely.
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
| |
| | |
Consideration | |
$ | 40,879,380 | |
| |
| | |
Tangible assets acquired: | |
| | |
Cash | |
| 485,232 | |
Accounts receivable | |
| 1,404,386 | |
Contract assets | |
| 131,342 | |
Prepaid expenses and other current assets | |
| 196,825 | |
Property and equipment | |
| 906,006 | |
Other assets | |
| 17,505 | |
Total tangible assets | |
| 3,141,296 | |
| |
| | |
Intangible assets acquired: | |
| | |
Tradename - trademarks | |
| 1,744,200 | |
Intellectual property | |
| 1,137,000 | |
Non-competes | |
| 124,900 | |
Total intangible assets | |
| 3,006,100 | |
| |
| | |
Assumed liabilities: | |
| | |
Accounts payable and accrued expenses | |
| 1,283,003 | |
Deferred revenue | |
| 1,956,600 | |
Line of credit | |
| 283,244 | |
Loans payable | |
| 181,741 | |
Loans payable - shareholder | |
| 543,581 | |
Total assumed liabilities | |
| 4,248,169 | |
| |
| | |
Net assets acquired | |
| 1,899,227 | |
| |
| | |
Goodwill (a) | |
$ | 38,980,153 | |
| (a) | Goodwill
and intangibles are not deductible for tax purposes. |
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
| |
| | |
Consideration paid | |
$ | 3,630,000 | |
| |
| | |
Tangible assets acquired: | |
| | |
Cash | |
| 3,572 | |
Accounts receivable | |
| 125,908 | |
Contract assets | |
| 33,965 | |
Prepaid expenses and other current assets | |
| 3,597 | |
Total tangible assets | |
| 167,042 | |
| |
| | |
Assumed liabilities: | |
| | |
Accounts payable and accrued expenses | |
| 48,001 | |
Loans payable | |
| 56,687 | |
Total assumed liabilities | |
| 104,688 | |
| |
| | |
Net assets acquired | |
| 62,354 | |
| |
| | |
Goodwill (a) | |
$ | 3,567,646 | |
(a) | Goodwill is not
deductible for tax purposes. |
CyberViking,
LLC.
On
July 1, 2022, we entered into a stock purchase agreement with CyberViking and its interest holders, pursuant
to which we acquired all of the issued and outstanding units of CyberViking, with CyberViking becoming a wholly owned subsidiary of our
company. We anticipate that this will expand our professional services offerings and capabilities. CyberViking specializes in application
security services, incident response, and threat hunting as well as the creation and management of security operation centers.
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
| |
| | |
Consideration paid | |
$ | 6,847,474 | |
| |
| | |
Tangible assets acquired: | |
| | |
Cash | |
| 77,804 | |
Accounts receivable | |
| 478,210 | |
Prepaid expenses and other current assets | |
| 51,464 | |
Property and equipment | |
| 434,816 | |
Total tangible assets | |
| 1,042,294 | |
| |
| | |
Assumed liabilities: | |
| | |
Accounts payable and accrued expenses | |
| 242,830 | |
Loans payable | |
| 850,199 | |
Total assumed liabilities | |
| 1,093,029 | |
| |
| | |
Net liabilities assumed | |
| 50,735 | |
| |
| | |
Goodwill (a) | |
$ | 6,898,209 | |
| (a) | Goodwill
and intangibles are not deductible for tax purposes. |
NLT
Secure
On
September 1, 2022, we entered into a stock purchase agreement with NLT Secure and its interest holders, pursuant to which we
acquired all of the issued and outstanding units of NLT Secure with them becoming a wholly owned subsidiary of our company. We
anticipate that this will expand our professional services offerings and capabilities. NLT Secure provides a broad range of security
solutions and managed services to organizations throughout South America.
The
aggregate purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimate
fair values as of the acquisition date, with the excess recorded to goodwill. During the measurement period, which will not exceed one
year from closing, we will continue to obtain information to assist us in finalizing the acquisition date fair values. Any qualifying
changes to our preliminary estimates will be recorded as adjustments to the respective assets and liabilities, with any residual amounts
allocated to goodwill.
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 | |
$ | 6,919,597 | |
| |
| | |
Tangible assets acquired: | |
| | |
Cash | |
| 48,858 | |
Accounts receivable | |
| 66,972 | |
Prepaid expenses and other current assets | |
| 154,300 | |
Property and equipment | |
| 1,071,401 | |
Total tangible assets | |
| 1,341,531 | |
| |
| | |
Assumed liabilities: | |
| | |
Accounts payable and accrued expenses | |
| 791,228 | |
Loans payable | |
| 1,778,591 | |
Total assumed liabilities | |
| 2,569,819 | |
| |
| | |
Net liabilities assumed | |
| 1,228,288 | |
| |
| | |
Goodwill (a) | |
$ | 8,147,885 | |
(a) | Goodwill
and intangibles are not deductible for tax purposes. |
Pro
forma financial information is not presented because the acquisitions were not material to our financial statements, individually or
in the aggregate.
NOTE
4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consisted of:
SCHEDULE
OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
September 30, 2022 | | |
December 31, 2021 | |
Prepaid expenses | |
$ | 1,363,761 | | |
$ | 441,259 | |
Deferred cost of sales | |
| 1,090,066 | | |
| 12,239 | |
Prepaid taxes | |
| 347,189 | | |
| 231,014 | |
Prepaid insurance | |
| 333,635 | | |
| 46,751 | |
Deferred interest | |
| 321,749 | | |
| 229,702 | |
Total prepaid expenses and other current assets | |
$ | 3,456,400 | | |
$ | 960,965 | |
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| |
September 30, 2022 | | |
December 31, 2021 | |
Computer equipment | |
$ | 1,068,918 | | |
$ | 495,235 | |
Building | |
| 2,111,698 | | |
| 1,047,020 | |
Leasehold improvements | |
| 85,800 | | |
| 109,626 | |
Vehicles | |
| 87,323 | | |
| 63,052 | |
Furniture and fixtures | |
| 140,008 | | |
| 33,358 | |
Software | |
| 1,591,450 | | |
| 748,599 | |
Property and equipment gross | |
| 5,085,197 | | |
| 2,496,890 | |
Less: accumulated depreciation | |
| (624,434 | ) | |
| (102,466 | ) |
Property and equipment, net | |
$ | 4,460,763 | | |
$ | 2,394,424 | |
Total
depreciation expense was $186,738 and $6,989 for the three months ended September 30, 2022 and 2021, respectively, and was $519,121 and
$15,837 for the nine months ended September 30, 2022, and 2021, respectively.
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
Balance December 31, 2021 | |
$ | 16,792,535 | |
Acquisition of goodwill | |
| 59,430,213 | |
Foreign currency translation adjustment | |
| (2,127,968 | ) |
Ending balance, September 30, 2022(1) | |
$ | 74,094,780 | |
(1) | As of September
30, 2022, we had not obtained a third-party valuation for the acquisitions of CUATROi and NLT Secure. As such, the purchase price allocation
disclosed in this Quarterly Report for CUATROi and NLT Secure may change, and, therefore, goodwill from the acquisitions may change. |
The
following table summarizes the identifiable intangible assets as of September 30, 2022 and December 31, 2021:
SUMMARY
OF IDENTIFIABLE INTANGIBLE ASSETS
| |
Useful life | |
September 30, 2022 | | |
December 31, 2021 | |
Tradenames – trademarks | |
1-5 years | |
$ | 4,649,220 | | |
$ | 3,010,100 | |
Customer base | |
5 - 10 years | |
| 1,522,131 | | |
| 1,650,000 | |
Non-compete agreements | |
2 - 5 years | |
| 759,850 | | |
| 675,500 | |
Intellectual property/technology | |
5 - 10 years | |
| 2,605,406 | | |
| 1,528,000 | |
Identifiable intangible assets | |
| |
| 9,536,607 | | |
| 6,863,600 | |
Less: accumulated amortization | |
| |
| (1,886,457 | ) | |
| (323,331 | ) |
Total | |
| |
$ | 7,650,150 | | |
$ | 6,540,269 | |
The
weighted average remaining useful life of identifiable amortizable intangible assets remaining is 4.23 years.
During
the third quarter of 2022, as the result of rebranding and expected future marketing of our products and services, we made the
decision to phase out certain indefinite-lived tradenames from acquired subsidiaries. We believe the phase-out and integration of the
rebranding and marketing will be completed no later than June 30, 2024, and expect to recognize $1,211,800 of amortization expense from
tradenames previously held as indefinite-lived.
Amortization
of identifiable intangible assets for the three months ended September 30, 2022 and 2021 was $797,703 and $40,506, respectively, and
was $1,615,170 and $110,495 for the nine months ended September 30, 2022 and 2021, respectively.
The
below table summarizes the future amortization expense for the remainder of 2022 and the next four years thereafter:
SCHEDULE
OF FUTURE AMORTIZATION EXPENSE
| |
| | |
2022 (remainder of) | |
$ | 667,397 | |
2023 | |
| 2,341,057 | |
2024 | |
| 1,623,017 | |
2025 | |
| 1,434,081 | |
2026 | |
| 1,334,585 | |
Thereafter | |
| 250,013 | |
Finite-lived intangible assets, net | |
$ | 7,650,150 | |
NOTE
7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following amounts:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
September 30, 2022 | | |
December 31, 2021 | |
Accounts payable | |
$ | 4,309,601 | | |
$ | 1,700,260 | |
Accrued payroll | |
| 1,040,353 | | |
| 482,588 | |
Accrued expenses | |
| 1,016,663 | | |
| 513,718 | |
Accrued commissions | |
| 320,904 | | |
| - | |
Accrued interest – related party | |
| 12,500 | | |
| 12,500 | |
Total accounts payable and accrued expenses | |
$ | 6,700,021 | | |
$ | 2,709,066 | |
Note
8 – RELATED PARTY TRANSACTIONS
Independent
Consulting Agreement with Stephen Scott
In
August 2020, we entered into an Independent Consulting Agreement with Stephen Scott, a Director of our company, with respect to advisory
and consulting services relating to our strategic and business development, and sales and marketing. Mr. Scott receives a consulting
fee of $11,500 per month for such services. During the three and nine months ended September 30, 2022, we paid consulting fees to Mr.
Scott in the amount of $34,500 and $103,500, respectively.
Managed
Services Agreement with Hensley Beverage Company – Related Party
In
July 2021, we entered into a 1-year Managed Services Agreement with Hensley Beverage Company to provide secured managed services. We
also may be engaged by Hensley Beverage Company from time to time to provide other related services outside the scope of the Managed
Services Agreement. While the agreement provides for a term through December 31, 2021, the agreement will continue until terminated by
either party. For the three and nine months ended September 30, 2022, we received $206,818 and $579,826 from Hensley Beverage Company
for contracted services and had an outstanding receivable balance of $39,615 as of September 30, 2022.
Note
Receivable – Related Party
Arkavia
provided cash infusions to a related party to fund a wholly owned subsidiary, Arkavia Peru, for start-up and operational costs. The subsidiary
is incorporated and as such, the assets, liabilities and operation results of Arkavia Peru are included in the condensed consolidated
financial statements. At September 30, 2022, no amount remains outstanding.
Note
9 – STOCKHOLDERS’ EQUITY
On
June 14, 2022, our Board of Directors approved and recommended that our stockholders approve (a) an amended and restated certificate
of incorporation to, among other things, (i) increase our authorized shares of common stock from 250,000,000 to 300,000,000 and (ii)
authorize the issuance of 50,000,000 shares of preferred stock, par value $0.00001 per share; and (b) increase the number of shares authorized
for issuance under our 2019 Equity Incentive Plan from 25,000,000 to 60,000,000. On June 27, 2022, stockholders holding approximately
61.96% of our outstanding voting stock executed a written consent in lieu of a special meeting of stockholders approving such amended
and restated certificate of incorporation and equity plan amendment (the “Written Consent”). Pursuant to Rule 14c-2 of the
Exchange Act, such amended and restated certificate of incorporation became effective on August 8, 2022 and such equity plan amendment
became effective on August 7, 2022.
Options
We
granted stock options vesting solely upon the continued service of the recipient. We recognize the accounting grant date fair value of
equity-based awards as compensation expense over the required service period of each award.
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 | |
| 13,745,513 | | |
| 3.40 | | |
| - | | |
| - | |
Exercised | |
| (2,459,809 | ) | |
| 0.55 | | |
| - | | |
| - | |
Expired or cancelled | |
| (7,801,564 | ) | |
| 3.12 | | |
| - | | |
| - | |
Outstanding at September 30, 2022 | |
| 34,856,288 | | |
| 2.30 | | |
| 5.74 | | |
| 39,981,362 | |
Exercisable at September 30, 2022 | |
| 18,189,900 | | |
$ | 1.05 | | |
| 3.55 | | |
$ | 35,988,384 | |
Total
compensation expense related to the options was $2,252,716 and $1,251,635 for the three months ended September 30, 2022 and 2021, respectively,
and $10,432,048 and $2,981,523 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, there was future
compensation expense of $49,608,286 with a weighted average recognition period of 3.12 years related to the options.
Warrant
Activity Summary
The
following table summarizes warrant activity:
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 | | |
| 4.26 | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Expired or cancelled | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding at September 30, 2022 | |
| 144,200 | | |
| 5.00 | | |
| 4.26 | | |
| - | |
Exercisable at September 30, 2022 | |
| 144,200 | | |
$ | 5.00 | | |
| 4.26 | | |
$ | - | |
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Maxim
Settlement Agreement
On
October 27, 2020, we entered into an advisory agreement (the “Advisory Agreement”) with Maxim Group LLC (“Maxim”),
pursuant to which the parties agreed to certain compensation obligations in the form of our common stock, cash and future rights. Certain
disputes arose between the parties regarding the duties and obligations pursuant to the Advisory Agreement, resulting in the parties
entering into a settlement and release agreement on January 13, 2022. As a result, we recorded a settlement liability at December 31,
2021 of $470,000 and issued 400,000 shares of our common stock to Maxim, pursuant to the settlement. During the nine months ended September
30, 2022, we paid $470,000 in cash to Maxim.
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
| |
Interest Rate | |
Maturities | | |
September 30, 2022 | | |
December 31, 2021 | |
| |
| |
| | |
| | |
| |
Term loans (US dollar denominated) | |
5.00% – 6.00 | % |
| 2023 - 2027 | | |
$ | 5,639,096 | | |
$ | 478,712 | |
Term loans (Chilean peso denominated) | |
3.48% - 19.20 | % |
| 2022 - 2031 | | |
| 6,061,500 | | |
| 5,018,788 | |
| |
| |
| | | |
| 11,700,596 | | |
| 5,497,500 | |
Less current portion | |
| |
| | | |
| (7,235,352 | ) | |
| (213,199 | ) |
Long term loans payable | |
| |
| | | |
$ | 4,465,244 | | |
$ | 5,284,301 | |
In
June 2022, we entered into bridge loans, secured by substantially all of our assets, in the principal amount of $5,000,000 bearing an
interest rate of 4.00% per annum payable monthly with a maturity date of December 14, 2022. These bridge loans are guaranteed by our
assets. We recorded interest expense of $51,111 and $60,000 during the three and nine months ended September 30, 2022, respectively.
Various
subsidiaries in the United States are borrowers under certain term loans. These term loans require monthly principal and interest payments.
These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense of these term loans
of $13,985 and $65,972 for the three and nine months ended September 30, 2022, respectively.
Our
Chilean subsidiary, Arkavia, is the borrower under certain term loans denominated in Chilean Pesos. These term loans require monthly
principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest
expense on these term loans of $40,711 and $102,596 for the three and nine months ended September 30, 2022, respectively.
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
| |
| | |
2022 (remainder of) | |
$ | 5,815,709 | |
2023 | |
| 4,341,115 | |
2024 | |
| 1,231,461 | |
2025 | |
| 1,007,017 | |
2026 | |
| 601,371 | |
Thereafter | |
| 1,253,923 | |
Total future minimum payments | |
| 14,250,596 | |
Less: current | |
| (8,285,352 | ) |
Long
term debt, net of current portion | |
$ | 5,965,244 | |
NOTE
12 – LEASES
All
of our leases are classified as operating leases. With the adoption of Topic 842, operating lease agreements are required to be recognized
on the condensed consolidated balance sheet as Right of Use (“ROU”) assets and corresponding lease liabilities.
On
January 19, 2022, we recognized additional ROU assets and lease liabilities of $226,942 from the True Digital Acquisition. We elected
to not recognize ROU assets and lease liabilities arising from office leases with initial terms of 12 months or less (deemed immaterial)
on the unaudited condensed consolidated balance sheets.
ROU
assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum
lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate
the lease if it is reasonably certain that we will exercise that option.
When
measuring lease liabilities for leases that were classified as operating leases, we discounted lease payments using our estimated incremental
borrowing rate at January 1, 2022. The weighted average incremental borrowing rate applied was 6.00%. As of September 30, 2022, our leases
had a remaining weighted average term of 2.45 years.
Operating
leases are included in the unaudited condensed consolidated balance sheets as follows:
SCHEDULE OF LEASE COST AND OTHER SUPPLEMENT LEASE INFORMATION
| |
Classification | |
September 30, 2022 | | |
December 31, 2021 | |
Lease assets | |
| |
| | | |
| | |
Operating lease cost ROU assets | |
Assets | |
$ | 316,698 | | |
$ | 277,578 | |
Total lease assets | |
| |
$ | 316,698 | | |
$ | 277,578 | |
| |
| |
| | | |
| | |
Lease liabilities | |
| |
| | | |
| | |
Operating lease liabilities, current | |
Current liabilities | |
$ | 163,233 | | |
$ | 196,472 | |
Operating lease liabilities, non-current | |
Liabilities | |
| 167,462 | | |
| 88,040 | |
Total lease liabilities | |
| |
$ | 330,695 | | |
$ | 284,512 | |
The
components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations,
were as follows:
SCHEDULE
OF LEASE COST
| |
2022 | | |
2021 | |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
Leases costs | |
| | | |
| | |
Operating lease costs | |
$ | 277,842 | | |
$ | 54,376 | |
Total lease costs | |
$ | 277,842 | | |
$ | 54,376 | |
Future
minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the nine months ended
September 30, 2022 were as follows:
SCHEDULE
OF FUTURE MINIMUM UNDER NON-CANCELLABLE LEASES FOR OPERATING LEASES
| |
| |
Fiscal Year | |
Operating Leases | |
2022 (remainder of) | |
$ | 61,394 | |
2023 | |
| 120,268 | |
2024 | |
| 106,639 | |
2025 | |
| 64,332 | |
Total future minimum lease payments | |
| 352,633 | |
Amount representing interest | |
| (21,938 | ) |
Present value of net future minimum lease payments | |
$ | 330,695 | |
NOTE
13 – GEOGRAPHIC INFORMATION
Revenue
by geography is based on the customer’s billing address and was as follows:
SCHEDULE
OF REVENUE BY GEOGRAPHY IS BASED ON CUSTOMERS BILLING ADDRESS
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
U.S. | |
$ | 9,000,560 | | |
$ | 3,745,008 | | |
$ | 26,764,895 | | |
$ | 9,254,583 | |
Chile | |
| 2,148,503 | | |
| - | | |
| 4,941,523 | | |
| - | |
All other countries | |
| 103,969 | | |
| - | | |
| 103,969 | | |
| - | |
Revenue | |
$ | 11,253,032 | | |
$ | 3,745,008 | | |
$ | 31,810,387 | | |
$ | 9,254,583 | |
No other international country represented more than 10% of revenue in
any period presented.
Property
and equipment, net by geography was as follows:
SCHEDULE
OF PROPERTY AND EQUIPMENT, NET BY GEOGRAPHIC AREAS
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
U.S. | |
$ | 1,164,643 | | |
$ | 95,069 | |
Chile | |
| 3,294,765 | | |
| 2,299,355 | |
All other countries | |
| 1,355 | | |
| - | |
Property and equipment
net | |
$ | 4,460,763 | | |
$ | 2,394,424 | |
No
other international country represented more than 10% of property and equipment, net in any period presented.
NOTE
14 – SUBSEQUENT EVENTS
On October 21, 2022, we entered
into an amendment on our convertible note with an outstanding balance of $1,500,000, pursuant to which the maturity date was extended
to December 31, 2023.