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 SeptemberJune 30, 20222023

 

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 CORPORATIONCISO GLOBAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 83-4210278

(State or other Jurisdiction of

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

6900 E. Camelback Road, Suite 240900, Scottsdale, Arizona 85251
(Address of Principal Executive Offices) (Zip Code)

 

(480) 389-3444

(Registrant’s telephone number, including area code)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.00001 par value CISO The Nasdaq Stock Market LLC

 

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.

 

Large accelerated filer☐Accelerated filer☐
    
Non-accelerated filer☒Smaller reporting company☒
    
  Emerging growth company☒

 

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

 

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

 

As of November 14, 2022,August 7, 2023, there were 146,253,545178,006,398 shares of the registrant’s common stock outstanding.

 

 

 

 

CERBERUS CYBER SENTINEL CORPORATIONCISO GLOBAL, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20222023

TABLE OF CONTENTS

 

Page
PART I. FINANCIAL INFORMATION45
ITEM 1.Financial Statements (unaudited)45
Condensed Consolidated Balance Sheets45
Condensed Consolidated Statements of Operations and Comprehensive Loss56
Condensed Consolidated Statements of Changes in Stockholders’ Equity67
Condensed Consolidated Statements of Cash Flows78
Notes to Condensed Consolidated Financial Statements89
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2320
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk3127
ITEM 4.Controls and Procedures3128
PART II. OTHER INFORMATION3229
ITEM 1.Legal Proceedings3229
ITEM 1A.Risk Factors3229
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds3329
ITEM 3.Defaults Upon Senior Securities3329
ITEM 4.Mine Safety Disclosures3329
ITEM 5.Other Information3329
ITEM 6.Exhibits3429
SIGNATURES3530

 

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FORWARD-LOOKING STATEMENTS

ThisThe information contained in this report should be read in conjunction with the financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q includes a number of forward-looking10-Q. Certain statements made in this report are “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 materiallysignificantly 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.

Forward-looking statements made in this Quarterly Report on Form 10-Q include statements about:

●our ability to achieve and sustain profitability of our existing lines of business and through our wholly-owned subsidiaries;
●our ability to raise sufficient capital to continue to acquire cybersecurity companies;
●our ability to attract and retain qualified cybersecurity talent;
●our ability to identify potential acquisition targets within predetermined parameters;
●our ability to successfully execute acquisitions, integrate the acquired businesses, and create synergies as a global cybersecurity consolidator;
●our ability to attract and retain qualified key technology or management personnel and to expand our management team;
●the accuracy of estimates regarding expenses, future revenue, capital requirements, profitability, and needs for additional financing;
●our dependence on establishing and maintaining a strong brand;
●the occurrence of service interruptions and security or privacy breaches and related remediation efforts and fines;
●system failures or capacity constraints;
●our ability to efficiently acquire customers and maintain high client retention rates;
●the impact of fluctuations in foreign currency exchange rates on our business and our ability to effectively manage the exposure to such fluctuations;
●our ability to maintain our relationships with our partners;
●adverse consequences of our substantial level of indebtedness and our ability to repay our debt;
●our ability to maintain, protect and enhance our intellectual property;
●our ability to maintain or improve our market shares;
●business interruptions resulting from geo-political actions, including war, terrorism, and disease outbreaks (such as COVID-19, the war in Ukraine, and geopolitical tensions involving China);
●sufficiency of cash and cash equivalents to meet our needs for at least the next 12 months;
●our ability to grow internationally;
●beliefs and objectives for future operations;
●our ability to stay in compliance with laws and regulations currently applicable to, or which may become applicable to our business both in the United States and internationally;
●economic and industry trends or trend analysis;
●anticipated income tax rates, tax estimates and tax standards;

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●expectations regarding the impact of inflation, action taken by central banks to counter inflation, rising interest rates, and changes in foreign exchange rates on our business and financial results;
●the future trading price of our common stock;
●our ability to maintain an effective system of internal controls and accurately report our financial results and remediate material weaknesses;
●our expectation regarding the outcome of any regulator investigation or litigation;
●the potential impact of shareholder activism on our business and operations;
●our ability to navigate through the increasingly complex cybersecurity regulatory environment; and
●any other statements regarding our future operations, financial condition, growth prospects and business strategies.

These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks detailed from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, any of which may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. These risks may cause our or our industry’s actual results, levels of activity, or performance to be materially different from any future results, levels of activity, or performance expressed or implied by these forward-looking statements.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

 

Forward-looking statements made in this Quarterly Report on Form 10-Q include statements about:

●our ability to achieve and sustain profitability of our existing lines of business and through our wholly owned subsidiaries;
●our ability to raise sufficient capital to continue to acquire cybersecurity companies;
●our ability to attract and retain cybersecurity talent;
●our ability to identify potential acquisition targets within predetermined parameters;
●our ability to successfully execute acquisitions, integrate the acquired businesses, and create synergies as a global cybersecurity consolidator;
●our ability to attract and retain key technology or management personnel and to expand our management team;
●the rate of growth and anticipated trends and challenges in our business and in the market for our services;
●our future financial performance, including our expectations regarding our revenue, cost of revenue, operating expenses, and our ability to achieve and maintain future profitability;
●sufficiency of cash and cash equivalent to meet our needs for at least the next 12 months;
●our ability to attract and retain clients;
●our ability to expand our professional services offerings and capabilities;
●our ability to generate revenue and gross profit;
●our ability to navigate through the increasingly complex cybersecurity regulatory environment;
●beliefs and objectives for future operations;
●our ability to stay in compliance with laws and regulations currently applicable to, or which may become applicable to, our business both in the United States and internationally;
●economic and industry trends or trend analysis;
●our beliefs regarding the timing of rebranding and marketing efforts;
●our beliefs regarding the sufficiency of our liquidity and capital resources; and
●anticipated income tax rates, tax estimates and tax standards.

Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur, and actual results could differ materially and adversely from those implied in our forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or events and circumstances described in the forward-looking statements will be achieved or occur. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Except as required by law, we undertake no obligation to update any forward-looking statements after the date of this report to conform these statements to actual results. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which are only predictions and speak only as of the date hereof.

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 4

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CERBERUS CYBER SENTINEL CORPORATIONCISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated Balance Sheets

(Unaudited)

 

 September 30, December 31,  June 30, December 31, 
 2022  2021  2023 2022 
          
ASSETS                
                
Current Assets:                
Cash and cash equivalents $4,888,333  $2,725,035  $1,872,175  $1,833,163 
Accounts receivable, net  5,763,431   4,840,802   8,657,543   7,862,297 
Notes receivable, related party  -   1,090,903 
Inventory  336,527   189,596   57,232   11,803 
Prepaid cost of revenue  2,807,001   2,634,667 
Prepaid expenses and other current assets  3,456,400   960,965   2,252,813   1,724,650 
Contract asset  495,374   -   376,022   332,215 
Total Current Assets  14,940,065   9,807,301   16,022,786   14,398,795 
                
Property and equipment, net  4,460,763   2,394,424   4,486,787   4,680,495 
Right of use asset, net  316,698   277,578   889,010   255,687 
Intangible assets, net  7,650,150   6,540,269   4,300,724   8,475,229 
Goodwill  74,094,780   16,792,535   37,343,368   76,664,017 
Other assets  17,068   -   18,597   22,592 
                
Total Assets $101,479,524  $35,812,107  $63,061,272  $104,496,815 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                
Current Liabilities:                
Accounts payable and accrued expenses $6,700,021  $2,709,066  $13,258,971  $8,310,337 
Deferred revenue  3,074,173   52,824   5,049,998   4,472,140 
Settlement liability  -   470,000 
Lease liability  163,233   196,472   191,995   121,731 
Loans payable  7,235,352   213,199   3,593,253   7,758,831 
Convertible notes payable  1,050,000   1,500,000   1,050,000   2,550,000 
Total Current Liabilities  18,222,779   5,141,561   23,144,217   23,213,039 
                
Long-term Liabilities:                
Loans payable, net of current portion  4,465,244   5,284,301   3,745,586   4,243,802 
Convertible notes payable, related party  5,000,000   - 
Lease liability, net of current portion  167,462   88,040   732,675   159,205 
Convertible notes payable, net of current portion  1,500,000   - 
Deferred tax liability  -   435,678 
                
Total Liabilities  24,355,485   10,513,902   32,622,478   28,051,724 
                
Commitments and Contingencies  -   -   -   - 
                
Stockholders’ Equity:                
Common stock, $.00001 par value; 300,000,000 shares authorized; 145,945,679 and 125,852,971 shares issued and outstanding on September 30, 2022 and December 31, 2021, respectively  1,459   1,258 
Preferred stock, $.00001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding on September 30, 2022 and December 31, 2021  -   - 
Common stock, $.00001 par value; 300,000,000 shares authorized; 178,006,398 and 146,395,807 issued and outstanding at June 30, 2023 and December 31, 2022, respectively  1,777   1,464 
Preferred stock, $.00001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding on June 30, 2023 and December 31, 2022, respectively  -   - 
Additional paid-in capital  147,215,998   69,309,369   169,712,000   153,168,984 
Accumulated translation adjustment  (2,207,256)  -   2,682,973   1,062,247 
Accumulated deficit  (67,886,162)  (44,012,422)  (141,957,956)  (77,787,604)
Total Stockholders’ Equity  77,124,039   25,298,205   30,438,794   76,445,091 
                
Total Liabilities and Stockholders’ Equity $101,479,524  $35,812,107  $63,061,272  $104,496,815 

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

 

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 5

CERBERUS CYBER SENTINEL CORPORATIONCISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

  September 30, 2022  September 30, 2021  September 30, 2022  September 30, 2021 
  Three Months Ended  Nine Months Ended 
  September 30, 2022  September 30, 2021  September 30, 2022  September 30, 2021 
             
Revenue:                
Security managed services $10,061,304  $3,099,753  $28,489,698  $6,979,146 
Professional services  1,191,728   645,255   3,320,689   2,275,437 
Total revenue  11,253,032   3,745,008   31,810,387   9,254,583 
                 
Cost of revenue:                
Security managed services  4,310,378   650,955   10,678,728   1,326,788 
Professional services  182,413   234,326   455,902   350,388 
Cost of payroll  4,978,768   2,093,072   14,132,602   5,052,684 
Stock based compensation  857,950   312,909   4,805,423   745,381 
Total cost of revenue  10,329,509   3,291,262   30,072,655   7,475,241 
Total gross profit  923,523   453,746   1,737,732   1,779,342 
                 
Operating expenses:                
Professional fees  624,391   293,408   2,192,600   695,023 
Advertising and marketing  245,495   254,026   641,340   471,721 
Selling, general and administrative  6,684,747   2,125,984   15,856,705   5,296,623 
Stock based compensation  1,791,724   938,726   6,761,283   2,236,142 
Total operating expenses  9,346,357   3,612,144   25,451,928   8,699,509 
                 
Loss from operations  (8,422,834)  (3,158,398)  (23,714,196)  (6,920,167)
                 
Other income (expense):                
Other income  29,968   169   134,447   2,553 
Interest expense, net  (108,233)  (75,470)  (293,991)  (209,806)
PPP loan forgiveness  -   980,800   -   980,800 
                 
Total other income (expense)  (78,265)  905,499   (159,544)  773,547 
                 
Net loss  (8,501,099)  (2,252,899)  (23,873,740)  (6,146,620)
Foreign currency translation adjustment  (908,987)  -   (2,207,256)  - 
                 
Comprehensive loss $(9,410,086) $(2,252,899) $(26,080,996) $(6,146,620)
                 
Net loss per common share - basic and diluted $(0.06) $(0.02) $(0.17) $(0.05)
                 
Weighted average shares outstanding - basic  142,295,780   117,729,971   136,764,168   117,081,360 

  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
  Three Months Ended  Six Months Ended 
  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
             
Revenue:                
Security managed services $13,590,505  $10,376,169  $25,356,638  $18,428,394 
Professional services  1,934,489   851,776   3,895,037   2,128,961 
Total revenue  15,524,994   11,227,945   29,251,675   20,557,355 
                 
Cost of revenue:                
Security managed services  7,309,461   3,765,426   12,870,024   6,368,350 
Professional services  250,740   163,152   449,033   273,489 
Cost of payroll  5,255,778   4,707,984   11,056,435   9,153,834 
Stock based compensation  1,697,181   1,825,890   3,465,265   3,947,473 
Total cost of revenue  14,513,160   10,462,452   27,840,757   19,743,146 
Total gross profit  1,011,834   765,493   1,410,918   814,209 
                 
Operating expenses:                
Professional fees  663,552   945,148   2,340,939   1,568,209 
Advertising and marketing  53,776   240,504   169,170   395,845 
Selling, general and administrative  6,112,875   4,468,415   15,621,641   9,171,958 
Stock based compensation  2,115,039   2,404,049   5,744,014   4,969,559 
Impairment of goodwill  20,838,804   -   41,038,172   - 
Total operating expenses  29,784,046   8,058,116   64,913,936   16,105,571 
                 
Loss from operations  (28,772,212)  (7,292,623)  (63,503,018)  (15,291,362)
                 
Other income (expense):                
Other income  209,639   17,425   53,219   29,968 
Interest expense, net  (766,090)  (64,648)  (1,156,231)  (108,233)
                 
Total other income (expense)  (556,451)  (47,223)  (1,103,012)  (78,265)
                 
Loss before income taxes  (29,328,663)  (7,339,846)  (64,606,030)  (15,369,627)
Benefit from income taxes  -   -   (435,678)  - 
                 
Net loss  (29,328,663)  (7,339,846)  (64,170,352)  (15,369,627)
Foreign currency translation adjustment  (416,236)  (2,200,710)  1,620,726   (1,298,269)
                 
Comprehensive loss $(29,744,899) $(9,540,556) $(62,549,626) $(16,667,896)
                 
Net loss per common share - basic and diluted $(0.18) $(0.05) $(0.42) $(0.11)
                 
Weighted average shares outstanding - basic  165,105,048   136,127,157   151,406,985   134,738,684 
Weighted average shares outstanding - diluted  165,105,048   136,127,157   151,406,985   134,738,684 

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

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CISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

  Shares  Amount  Shares  Amount  Capital  Gain/(Loss)  Deficit  Total 
                 Accumulated       
              Additional  Other       
  Common Stock  Preferred Stock  Paid-in  Comprehensive  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Gain/(Loss)  Deficit  Total 
                         
Balance at January 1, 2023  146,395,807  $1,464       -          -  $  153,168,984  $1,062,247  $(77,787,604) $76,445,091 
                                 
Stock based compensation - stock options  -   -   -   -   8,635,778   -   -   8,635,778 
Stock based compensation - common stock  3,500,000   35   -   -   733,465   -   -   733,500 
Stock issued for cash  26,739,853   268   -   -   6,681,930   -   -   6,682,198 
Exercise of options  1,040,817   10   -   -   491,843   -   -   491,853 
Foreign currency translation  -   -   -   -   -   1,620,726   -   1,620,726 
Net loss  -   -   -   -   -   -   (64,170,352)  (64,170,352)
Balance at June 30, 2023  177,676,477  $1,777   -  $-  $169,712,000  $2,682,973  $(141,957,956) $30,438,794 
                                 
Balance at January 1, 2022  125,852,971  $1,258   -   -  $69,309,369  $-  $(44,012,422) $25,298,205 
Balance  125,852,971  $1,258   -   -  $69,309,369  $-  $(44,012,422) $25,298,205 
                                 
Stock based compensation - stock options  -   -   -   -   8,179,332   -   -   8,179,332 
Stock based compensation - common stock  434,000   4   -   -   737,696   -   -   737,700 
Exercise of options  454,111   5   -   -   277,707   -   -   277,712 
Stock issued for cash in public offering  2,060,000   21   -   -   9,521,777   -   -   9,521,798 
Stock issued for True Digital acquisition  7,406,100   74   -   -   34,726,306   -   -   34,726,380 
Stock issued for VelocIT acquisition  256,678   3   -   -   (3)  -   -   - 
Stock issued for Red74 acquisition  34,000   -   -   -   -   -   -   - 
Stock issued for Creatrix acquisition  600,000   6   -   -   3,629,994   -   -   3,630,000 
Foreign currency translation  -   -   -   -   -   (1,298,269)  -   (1,298,269)
Net loss  -   -   -   -   -   -   (15,369,627)  (15,369,627)
Balance at June 30, 2022  137,097,860  $1,371   -  $-  $126,382,178  $(1,298,269) $(59,382,049) $65,703,231 
Balance  137,097,860  $1,371   -  $-  $126,382,178  $(1,298,269) $(59,382,049) $65,703,231 

 

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

 

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CERBERUS CYBER SENTINEL CORPORATIONCISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITYOF CASH FLOWS

(Unaudited)

                          
                  Accumulated       
               Additional  Other       
  Common Stock  Preferred Stock  Paid-in  Comprehensive  Accumulated    
  Shares  Amount  Shares   Amount  Capital  Gain/(Loss)  Deficit  Total 
                           
Balance at January 1, 2022  125,852,971  $1,258        -   -  $69,309,369  $-  $(44,012,422) $25,298,205 
                                 
Stock based compensation - stock options  -   -   -   -   10,432,048   -   -   10,432,048 
Stock based compensation - common stock  736,819   7   -   -   1,592,977   -   -   1,592,984 
Stock issued for cash  304,608   3   -   -   1,040,962   -   -   1,040,965 
Exercise of options  2,459,809   25   -   -   1,359,239   -   -   1,359,264 
Stock issued for cash in public offering  2,060,000   21   -   -   9,521,777   -   -   9,521,798 
Stock issued for True Digital acquisition  8,229,000   82   -   -   34,726,298   -   -   34,726,380 
Stock issued for VelocIT acquisition  256,678   3   -   -   (3)  -   -   - 
Stock issued for Red74 acquisition ��34,000   -   -   -   -   -   -   - 
Stock issued for Creatrix acquisition  600,000   6   -   -   3,629,994   -   -   3,630,000 
Stock issued for CyberViking acquisition  499,000   5   -   -   1,836,315   -   -   1,836,320 
Stock issued for CUATROi acquisition  2,166,922   22   -   -   6,847,452   -   -   6,847,474 
Stock issued for NLT acquisition  2,745,872   27   -   -   6,919,570   -   -   6,919,597 
Foreign currency translation  -   -   -   -   -   (2,207,256)  -   (2,207,256)
Net loss  -   -   -  -   -   -   (23,873,740)  (23,873,740)
Balance at September 30, 2022  145,945,679  $1,459   - $-  $147,215,998  $(2,207,256) $(67,886,162) $77,124,039 
                                 
Balance at January 1, 2021  116,104,971  $1,161   -   -  $12,607,074   -  $(4,866,772) $7,741,463 
                                 
Stock based compensation - stock options  -   -   -   -   1,729,888   -   -   1,729,888 
Stock based compensation - common stock  232,900   2   -   -   -   -   -   2 
Stock issued for cash  1,625,000   16   -   -   3,249,984   -   -   3,250,000 
Stock issued for VelocIT acquisition  2,310,100   23   -   -   13,603,924   -   -   13,603,947 
Replacement options issued in VelocIT acquisition  -   -   -   -   6,861,203   -   -   6,861,203 
Net loss  -   -   -   -   -   -   (6,146,620)  (6,146,620)
Balance at September 30, 2021  120,272,971  $1,202   - $-  $38,052,073  $-  $(11,013,392) $27,039,883 
  June 30, 2023  June 30, 2022 
  Six Months Ended 
  June 30, 2023  June 30, 2022 
Cash flows from operating activities:        
Net loss $(64,170,352) $(15,369,627)
Adjustments to reconcile net loss to net cash used in operating activities:        
Stock based compensation - stock options  8,635,778   8,179,332 
Stock based compensation - common stock  573,501   737,700 
Depreciation and amortization  1,813,305   1,163,463 
Right of use amortization  100,460   127,805 
Other  43,750   (1,455)
Impairment of intangible assets  3,116,039   - 
Impairment of goodwill  41,038,172   - 
Changes in operating assets and liabilities:        
Accounts receivable, net  (617,138)  1,416,754 
Inventory  (46,776)  (199,559)
Contract assets  (43,807)  (261,961)
Prepaids and other current assets  (252,169)  (2,131,480)
Accounts payable and accrued expenses  4,172,201   2,675,346 
Lease liability  (90,049)  120,536 
Settlement liability  -   (470,000)
Deferred revenue  408,125   438,672 
         
Net cash used in operating activities  (5,318,960)  (3,574,474)
         
Cash flows from investing activities:        
         
Purchases of property and equipment  (148,866)  (200,504)
Cash (paid)/acquired in acquisitions, net  -   (4,914,196)
         
Net cash (used in)/provided by investing activities  (148,866)  (5,114,700)
         
Cash flows from financing activities:        
Proceeds from sale of common stock  6,682,198   9,521,798 
Proceeds from stock option exercise  491,853   277,712 
Proceeds from loan payable  2,210,022   5,000,000 
Proceeds from convertible notes payable, related party  5,000,000   - 
Proceeds from convertible note payable  1,050,000   1,000,000 
Proceeds from line of credit  144,307   86,585 
Payment on line of credit  (149,693)  - 
Payment on loans payable  (7,297,980)  (895,053)
Payment on notes payable, related party  -   (184,758)
Payment of convertible note payable  (2,550,000)  - 
Payment of debt issuance cost  (87,500)  (25,000)
         
Net cash provided by financing activities  5,493,207   14,781,284 
         
Effect of exchange rates on cash and cash equivalents  13,631   (48,625)
         
Net increase in cash and cash equivalents  39,012   6,043,485 
         
Cash and cash equivalents - beginning of the period  1,833,163   2,725,035 
         
Cash and cash equivalents - end of the period $1,872,175  $8,768,520 
         
Supplemental cash flow information:        
Cash paid for:        
Interest $926,441  $91,234 
Income taxes $-  $- 
Supplemental disclosure of non-cash transactions:        
Operating lease assets obtained in exchange for operating lease obligations $733,782  $226,941 
Common stock issued in True Digital acquisition $-  $34,726,380 
Common stock issued in Creatrix acquisition $-  $3,630,000 

 

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

 

68

 

CERBERUS CYBER SENTINEL CORPORATIONCISO GLOBAL, INC. and subsidiaries

CONDENSED Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

  September 30, 2022  September 30, 2021 
Cash flows from operating activities:        
Net loss $(23,873,740) $(6,146,620)
Adjustments to reconcile net loss to net cash used in operating activities:        
Stock based compensation - stock options  10,432,048   2,981,523 
Loss on write-off of accounts receivable  -   55,528 
Issuance of common stock for services  1,134,658   313,395 
Non-cash interest expense  60,651   54,792 
Depreciation and amortization  2,138,493   131,403 
Right of use amortization  184,167   75,842 
Gain on disposal of property and equipment  12,000   - 
Forgiveness of PPP Loan  -   (980,800)
Gain on termination of operating lease  (22,289)  - 
Changes in operating assets and liabilities:        
Accounts receivable, net  887,816   (355,946)
Inventory  (106,246)  - 
Contract assets  (330,067)  - 
Prepaids and other current assets  (1,952,488)  (305,532)
Accounts payable and accrued expenses  3,003,623   (66,311)
Lease liability  (154,816)  (69,586)
Settlement liability  (470,000)  - 
Deferred revenue  1,205,893   - 
         
Net cash used in operating activities  (7,850,297)  (4,312,312)
         
Cash flows from investing activities:        
         
Purchases of property and equipment  (510,973)  - 
Cash (paid)/acquired in acquisitions, net  (5,533,244)  662,176 
         
Net cash (used in)/provided by investing activities  (6,044,217)  662,176 
         
Cash flows from financing activities:        
Proceeds from sale of common stock  10,562,763   3,250,000 
Proceeds from stock option exercise  1,359,264   - 
Proceeds from loan payable  5,000,000   - 
Proceeds from convertible note payable  1,000,000   - 
Proceeds from line of credit  86,585   221,346 
Payment on line of credit  (369,829)  (224,346)
Payment on loans payable  (1,575,510)  (2,004,528)
Payment on notes payable, related party  -   (59,787)
Payment of debt issuance cost  (25,000)  - 
         
Net cash provided by financing activities  16,038,273   1,182,685 
         
Effect of exchange rates on cash and cash equivalents  19,539   - 
         
Net increase in cash and cash equivalents  2,163,298   (2,467,451)
         
Cash and cash equivalents - beginning of the period  2,725,035   5,197,030 
         
Cash and cash equivalents - end of the period $4,888,333  $2,729,579 
         
Supplemental cash flow information:        
Cash paid for:        
Interest $224,813  $91,490 
Income taxes $-  $- 
Non-cash investing and financing activities:        
Right of use asset and lease liability recorded upon adoption of ASC 842 $476,986  $330,512 
Forgiveness of PPP Loan $-  $980,800 
Common stock issued in VelocIT acquisition $-  $13,603,947 
Common stock issued in RED 74 acquisition $-  $- 
Common stock issued in True Digital acquisition $34,726,380  $- 
Common stock issued in Creatrix acquisition $3,630,000  $- 
Common stock issued in CyberViking acquisition $1,836,320  $- 
Common stock issued in CUATROi acquisition $6,847,474  $- 
Common stock issued in NLT Secure acquisition $6,919,597  $- 

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

7

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation,CISO Global, Inc., 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”).subsidiaries. Unless otherwise specified, all dollar amounts are expressed in United States dollars.

 

NOTE 1 –ORGANIZATION OF BUSINESS AND BACKGROUNDGOING CONCERN

 

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 inimprove their organization.cybersecurity posture. We provide a full range of cybersecurity consulting and related services, encompassing all three pillars of compliance, cybersecurity,strategy and culture.risk, cyber defense operations, architecture and engineering, and readiness and resiliency. Our services include secured managed services, compliance services, security operations center (“SOC”) services, virtual Chief Information Security Officer (“vCISO”) services, incident response, certifieddigital forensics, technical assessments, and cybersecurity training.

On January 5, 2022, We believe that culture is the foundation of every successful cybersecurity and compliance program. To deliver that outcome, we entered intodeliver a stock purchase agreement (the “True Digital Stock Purchase Agreement”)holistic solution that provides these services in a unified way from a dedicated team of subject matter experts. In contrast to the majority of cybersecurity firms that are focused on a specific technology or service, we seek to differentiate ourselves by remaining technology agnostic, focusing on aggregating teams of highly sought-after practitioners. We continually seek to identify and acquire cybersecurity talent to expand our service scope and geographical coverage to provide the best possible service for our clients. We believe that bringing together a world-class team of technological experts with 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 recognizedmulti-faceted expertise in identity management as well as systems integrationthe critical aspects of cybersecurity is key to providing technology to our clients in a business environment that is experiencing challenges attracting and software engineering,retaining cybersecurity talent, thereby setting us apart from competitors and specializes in biometrics, vetting, credentialing, and case management.

On July 1, 2022, we entered intoin-house security teams. Our goal is to create 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 managementculture of security operation centers.

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On August 25, 2022, we entered intoand to help quantify, define, and capture a stock purchase agreement with CUATROireturn on investment from information technology and its partners, pursuant to which we acquired all ofcybersecurity spending. Our brand rallies around the issued and outstanding units of CUATROi, with CUATROi becoming a wholly owned subsidiary of our company. CUATROibattle cry: “Cyber security is a cloud, managed services provider & cybersecurity company with offices in South America.

On September 1, 2022, we entered intoCulture, not 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.Product.”

 

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, 2022.2023. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2021.2022.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the six months ended June 30, 2023, we incurred a net loss of $64,170,352 and had negative cash flows from operations of $5,318,960. At June 30, 2023, we had total current assets of $16,022,786 and total current liabilities of $23,144,217, resulting in a working capital deficit of $7,121,431. At June 30, 2023, we had cash and cash equivalents of $1,872,175.

Based on our current business plan, we believe our cash balance as of the date of this filing, together with anticipated revenues, will be sufficient to meet our anticipated cash requirement for the near term. However, there can be no assurance that the current business plan will be achievable. Such conditions raise substantial doubts about our ability to continue as a going concern for one year from the date the unaudited condensed consolidated financial statements are issued.

9

Our existence is dependent upon our ability to develop profitable operations. We are devoting substantially all of our efforts to developing our business, reducing overhead costs, and raising capital, although there can be no assurance that our efforts will be successful. No assurance can be given that our actions will result in profitable operations or the resolution of liquidity problems. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result should we be unable to continue as a going concern.

In order to improve our liquidity, in addition to a planned reduction in overhead costs, we are actively pursuing additional debt and/or equity financing through discussions with investment bankers and private investors. There can be no assurance that we will be successful in our efforts to secure additional financing.

The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Reclassifications

Certain reclassificationsReclassifications of certain immaterial prior period amounts 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.current period presentation.

Use of Estimates

 

GAAP requires management to make estimates and assumptions that affect the reported amounts in our unaudited condensed consolidated 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 unaudited condensed consolidated statement of operations as follows:

9

 

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.

 

10

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 identificationcurrent expected credits loss 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 SeptemberJune 30, 20222023 and December 31, 2021,2022, our allowance for doubtful accounts was $308,560287,780 and $77,811270,011, 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 SeptemberJune 30, 20222023 and December 31, 2021.2022. 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 ninethree and six months ended SeptemberJune 30, 20222023 and 2021.2022.

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.

10

 

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 ninethree and six months ended SeptemberJune 30, 20222023 and 2021.2022.

 

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  June 30, 2023  December 31, 2022 
Stock options  34,856,288   27,680,040   34,874,530   36,397,521 
Warrant  144,200   -   744,200   144,200 
Convertible debt  430,718   1,500,000   4,166,667   430,718 
Total  35,431,206   29,180,040   39,785,397   36,972,439 

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 $52,8242,835,291 was recognized as revenue for the ninesix months ended SeptemberJune 30, 2022,2023, which was included in the deferred revenue balance as of December 31, 2021.2022. As of SeptemberJune 30, 2022,2023, 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.

 

11

Deferred revenue consisted of the following:

SCHEDULE OF DEFERRED REVENUE

 September 30, 2022  December 31, 2021  June 30, 2023  December 31, 2022 
Security managed services $2,038,072  $52,824  $4,089,323  $3,609,087 
Professional services  1,036,101   -   960,675   863,053 
Total deferred revenue $3,074,173  $52,824  $5,049,998  $4,472,140 

 

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 SeptemberJune 30, 2022 and December 31, 2021,2023, our net deferred tax asset has been fully reserved.reserved due to our current period impairment, we expect to be in a net deferred tax asset position in Chile, and a valuation allowance has been recorded for this jurisdiction during the current period.

 

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.

11

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.

12

Creatrix, Inc.

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

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.

13

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.

14

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 43 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of:of the following:

SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

September 30,

2022

 

December 31,

2021

  

June 30,

2023

  

December 31,

2022

 
Prepaid expenses $1,363,761  $441,259  $1,444,642  $987,651 
Deferred cost of sales  1,090,066   12,239 
Prepaid taxes  347,189   231,014   729,944   572,645 
Prepaid insurance  333,635   46,751   78,227   164,354 
Deferred interest  321,749   229,702 
Total prepaid expenses and other current assets $3,456,400  $960,965  $2,252,813  $1,724,650 

NOTE 54 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT

 

September 30,

2022

 

December 31,

2021

  

June 30,

2023

  

December 31,

2022

 
Computer equipment $1,068,918  $495,235  $1,333,443  $1,264,713 
Building  2,111,698   1,047,020   1,877,281   1,776,040 
Leasehold improvements  85,800   109,626   574,901   541,647 
Vehicles  87,323   63,052   25,230   28,229 
Furniture and fixtures  140,008   33,358   164,279   151,142 
Software  1,591,450   748,599   1,808,339   1,667,283 
Property and equipment gross  5,085,197   2,496,890   5,783,473   5,429,054 
Less: accumulated depreciation  (624,434)  (102,466)  (1,296,686)  (748,559)
Property and equipment, net $4,460,763  $2,394,424  $4,486,787  $4,680,495 

Total depreciation expense was $186,738236,106 and $6,989178,309 for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, and was $519,121541,811 and $15,837332,383 for the ninesix months ended SeptemberJune 30, 2022,2023 and 2021,2022, respectively.

15
12 

NOTE 65 –INTANGIBLE ASSETS AND GOODWILL

Goodwill

During the quarterly period ended June 30, 2023, our share price reduction was determined to be an indicator of impairment under ASC 350 of our two reporting units, United States and Latin America. We performed an ongoing assessment to consider whether events or circumstances had occurred that could more likely than not reduce the fair value of a reporting unit below its carrying value. The valuation limitation from our recent share price decline caused us to perform an interim goodwill impairment test as of June 30, 2023.

Based on the results of this testing, we recorded a $16,330,838 and $4,507,966 pre-tax, non-cash impairment charge related to the United States reporting unit and Latin America reporting unit, respectively, for the three-months ended June 30, 2023. For the six-months ended June 30, 2023, we recorded $31,776,819 and $9,261,353 of pre-tax, non-cash impairment charges related to the United States reporting unit and Latin America reporting units, respectively. This charge is recorded as Impairment of goodwill on the Consolidated Statements of Operations and Comprehensive Loss. The overall enterprise fair value was limited by the recent decline in our share price. The reduction in fair value for the reporting units, and corresponding impairment charge, was primarily driven by increase in the discount rate arising from higher equity premiums that reflect significant uncertainty surrounding our company and a decrease in forecasted near-term cashflows of our reporting units.

As part of our quantitative testing process for goodwill of the reporting units, we estimated fair values using a revenue multiple analysis, a form of the income approach, from the perspective of a market participant. Significant assumptions used in the revenue multiple approach are revenue growth rates and revenue multiples of key comparable companies within our industry.

The following table summarizes the changes in goodwill during the ninesix months ended SeptemberJune 30, 2022:2023:

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.
Balance December 31, 2022 $76,664,017 
Impairment  (41,038,172)
Foreign currency translation adjustment  1,717,523 
Ending balance, June 30, 2023 $37,343,368 

 

The following table summarizesremaining balance of goodwill for the identifiablereporting units continue to be at risk for future impairment. There continues to be uncertainty surrounding the factors impacting our business, and a sustained downturn, significantly extended recovery, or a change in long-term revenue growth or profitability for our reporting units could increase the likelihood of an additional future impairment. Additionally, changes in market participant assumptions or further share price reductions could increase the likelihood of further future impairment.

Intangible Assets

We performed an interim impairment test of our intangible assets based upon the conditions that precipitated the interim goodwill impairment test described above.

Based on the results of this testing, we recorded pre-tax, non-cash impairment charges totaling zero and $3,116,039 for the three and six-months ended June 30, 2023, respectively, related to our customer base, intellectual property, tradenames-trademarks and non-compete, which is included in the net carry amount of intangibles in the table below. These charges were recorded in Selling, general and administrative expenses on the Consolidated Statement of Operations and Comprehensive Loss.

Fair values used in testing for potential impairment of our intangible assets are calculated using a discounted cash flows method by applying estimated cash flows from our forecasted revenue and expenses of the business that utilize those assets. The assumed cash flows from this calculation are discounted at a rate based on a market participant discount rate.

13

There is uncertainty surrounding the revenue growth factors for these assets and a change in the long-term revenue growth rate or increase in the discount rate assumption could increase the likelihood of a future impairment.

Following the recognition of the impairment losses, the affected assets had an aggregate carrying value of $540,192as of SeptemberJune 30, 2022 and December 31, 2021:2023.

Intangible assets, net are summarized as follows:

SUMMARY OF IDENTIFIABLE INTANGIBLE ASSETS

 Gross Carrying Amount  Accumulated Amortization  Net Carrying Amount 
 June 30, 2023 
 Useful life September 30, 2022  December 31, 2021  Gross Carrying Amount  Accumulated Amortization  Net Carrying Amount 
Tradenames – trademarks 1-5 years $4,649,220  $3,010,100  $4,056,997  $(1,943,623) $2,113,374 
Customer base 5 - 10 years  1,522,131   1,650,000   1,198,533   (628,257)  570,276 
Non-compete agreements 2 - 5 years  759,850   675,500   704,157   (562,893)  141,264 
Intellectual property/technology 5 - 10 years  2,605,406   1,528,000   2,327,291   (851,481)  1,475,810 
Identifiable intangible assets   9,536,607   6,863,600 
Less: accumulated amortization  (1,886,457)  (323,331)
Total $7,650,150  $6,540,269 
Intangible Asset $8,286,978  $(3,986,254) $4,300,724 

  Gross Carrying Amount  Accumulated Amortization  Net Carrying Amount 
  December 31, 2022 
  Gross Carrying Amount  Accumulated Amortization  Net Carrying Amount 
Tradenames – trademarks $4,744,409  $(1,167,476) $3,576,933 
Customer base  2,949,143   (449,565)  2,499,578 
Non-compete agreements  796,583   (436,611)  359,972 
Intellectual property/technology  2,659,391   (620,645)  2,038,746 
Intangible Asset $11,149,526  $(2,674,297) $8,475,229 

 

The weighted average remaining useful life of identifiable amortizable intangible assets remaining is 4.233.50 years.

During the third quarteryears as 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.2023.

 

Amortization of identifiable intangible assets for the three months ended SeptemberJune 30, 20222023 and 20212022 was $797,703524,602 and $40,506512,503, respectively, and was $1,615,1701,271,774 and $110,495817,467 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.

 

The below table summarizesBased on the balance of intangible assets at June 30, 2023, expected future amortization expense for the remainder of 2022 and the next four years thereafter:is as follows:

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 

16
      
2023 (remainder of)  $753,416 
2024   1,235,989 
2025   1,047,053 
2026   971,298 
2027   292,968 
Future Amortization Expense  $4,300,724 

NOTE 76 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following amounts:

SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES

  June 30, 2023  December 31, 2022 
Accounts payable $8,975,026  $5,267,492 
Accrued payroll and bonuses  1,717,757   1,274,919 
Accrued expenses  2,332,842   1,296,382 
Accrued commissions  83,800   305,768 
Accrued interest  149,546   165,776 
Total accounts payable and accrued expenses $13,258,971  $8,310,337 

 

  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 
14

 

Note 87 – RELATED PARTY TRANSACTIONS

 

Independent Consulting Agreement with Stephen Scott

 

In August 2020, we entered into an Independent Consulting Agreement with Stephen Scott, a Directorthen 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 ninesix months ended SeptemberJune 30, 2022,2023, we paid consulting fees to Mr. Scott in the amount of $34,500 and $103,50069,000, respectively. Mr. Scott resigned from his position as a director of our company in May 2023. Mr. Scott remains a significant stockholder of our company due to his beneficial ownership.

In July 2023, we entered into an Independent Consulting Agreement with Mr. Scott to provide, on a non-exclusive basis, advisory and consulting services relating to our strategic and business development, intellectual property development, banking relationships, and strategic M&A for a period of one year. Mr. Scott will receive a consulting fee of $15,000 per month for such services under the terms of this agreement.

 

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 ninesix months ended SeptemberJune 30, 2022,2023, we received $206,818295,086 and $579,826507,092, respectively, from Hensley Beverage Company for contracted services, and had an outstanding receivable balance of $39,615139,097 and $11,132 as of SeptemberJune 30, 2022.2023 and 2022, respectively. Andy McCain, a director of our company, is President and Chief Operating Officer of Hensley & Company, the parent company of Hensley Beverage Company.

 

Convertible Note Receivable – Related PartyPayable with Hensley & Company

 

Arkavia provided cash infusionsIn March 2023, we issued an unsecured convertible note 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 includedHensley & Company in the condensed consolidated financial statements.principal amount of $5,000,000 bearing an interest rate of 10.00% per annum. The principal amount, together with accrued and unpaid interest is due on March 20, 2025. At Septemberany time prior to or on the maturity date, Hensley & Company is permitted to convert all or any portion of the outstanding principal amount and all accrued but unpaid interest thereon into shares of our common stock at a conversion price of $1.20 per share. During the three and six months ended June 30, 2022, 2023, we recorded interest expense of $no125,000 amount remains outstanding.and $138,888, respectively. At June 30, 2023, we had accrued interest of $138,888. Mr. McCain, a director of our company, is President and Chief Operating Officer of Hensley & Company.

 

Note 98 – STOCKHOLDERS’ EQUITY

 

On June 14, 2022, our BoardIn May 2023, we completed a $4,000,000 registered direct offering 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 our common stock, frompursuant to which an aggregate 250,000,000 to 300,000,000 and (ii) authorize the issuance of 50,000,00020,000,000 shares of preferredour common stock par value $were issued. In addition, we granted the placement agent warrants to purchase 0.00001600,000 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 common stock. We have used the net proceeds from the offering to repay $2.0 million in outstanding voting stock executed a written consent in lieuprincipal of a special meeting of stockholders approving such amendedshort-term indebtedness 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.for general corporate purposes.

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.

 

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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

  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   -  $- 
Outstanding at January 1, 2023  36,397,521  $2.45   -           - 
Granted  13,745,513   3.40   -   -   3,636,656   0.40   -   - 
Exercised  (2,459,809)  0.55   -   -   (1,040,817)  0.48   -   - 
Expired or cancelled  (7,801,564)  3.12   -   -   (4,118,830)  3.13   -   - 
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 
Outstanding at June 30, 2023  34,874,530  $2.20   5.44  $- 
Exercisable at June 30, 2023  21,316,650  $1.76   3.68  $- 

 

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Total compensation expense related to the options was $2,252,7163,363,719 and $1,251,6353,572,189 for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, and $10,432,0488,635,778 and $2,981,5238,179,332 for the ninesix months ended SeptemberJune 30 20222023 and 2021,2022, respectively. As of SeptemberJune 30, 2022,2023, there was future compensation expense of $49,608,28627,068,138 with a weighted average recognition period of 3.122.35 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

  Shares  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life

(in years)

  

Aggregate

Intrinsic

Value

 
Outstanding at January 1, 2022  -  $-   -  $       - 
Outstanding at January 1, 2023  144,200  $5.00   4.06  $        - 
Granted  144,200   5.00   4.26   -   600,000   0.25   5.00   - 
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  $- 
Outstanding at June 30, 2023  744,200  $1.17   4.37  $- 
Exercisable at June 30, 2023  744,200  $1.17   4.37  $- 

 

NOTE 109 – 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.

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Legal Claims

 

There are no material pending legal proceedings in which we or any of our subsidiaries isare 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.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 StatesStates. 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 SeptemberJune 30, 20222023 and December 31, 2021,2022, our accrual for estimated indirect tax liabilities was $216,906819,959 and $99,088409,187, 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.

Material Agreements

We entered into a consulting agreement in May 2023 with Trending Equities Corp. to provide investor relations and capital introductions to us. The contract requires us to pay a minimum marketing spend of $1,100,000 over the term of the consulting agreement that terminates in November 2023. As of June 30, 2023, our remaining contractual obligation under this agreement was $950,000.

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NOTE 1110 – 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  Interest Rate   Maturities  June 30, 2023  December 31, 2022 
              
Term loans (US dollar denominated) 5.00% – 6.00% 2023 - 2027  $5,639,096  $478,712  5.00% – 155.11%   2023 - 2027  $1,368,439  $5,461,520 
Term loans (Chilean peso denominated) 3.48% - 19.20% 2022 - 2031   6,061,500   5,018,788  3.48% - 7.14%  2023 - 2029   5,970,400   6,541,113 
        11,700,596   5,497,500         7,338,839   12,002,633 
Less current portion        (7,235,352)  (213,199)
Less, current portion         (3,593,253)  (7,758,831)
Long term loans payable       $4,465,244  $5,284,301         $3,745,586  $4,243,802 

 

In June 2022, we entered into a bridge loans,loan, secured by substantially all of our assets, in the principal amount of $5,000,000 bearing an interest rate of 4.00%4.00% per annum payable monthly with a maturity date of December 14, 2022, which was extended to March 14, 2023. We did not repay this bridge loan on the maturity date, which resulted in an event of default under the terms thereof. As a result, the interest rate applicable to amounts due under this bridge loan increased from 4.00% to 7.50%. TheseThis bridge loans are guaranteed by our assets.loan was repaid in full on March 20, 2023. We recorded interest expense of $51,111zero and $60,000116,667 during the three months and ninesix months ended SeptemberJune 30, 2022,2023, 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 ofon these term loans of $13,98532,257 and $65,97238,479 for the three and ninesix months ended SeptemberJune 30, 2022,2023, respectively. Accrued interest as of June 30, 2023 was zero. The aggregate effective interest rate of the term loans is 9.87%.

 

Our Chilean subsidiary, Arkavia, isLatin America subsidiaries are the borrowerborrowers 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 $40,711119,494 and $102,596255,410 for the three and ninesix months ended SeptemberJune 30, 2022, respectively.2023. Accrued interest as of June 30, 2023 was zero. The aggregate effective interest rate of the term loans is 8.17%.

 

In March 2023, we entered into a Cash Advance Agreement, pursuant to which we received gross proceeds of $2,000,000

19

and paid $87,500

Debt Assumed through Acquisition

As part in upfront fees. The terms of the True Digital Acquisition,Cash Advance Agreement call for us to remit aggregate weekly payments of $99,398 until such time as we assumedhave repaid $1,008,5662,870,000 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. The effective interest rate 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 rateCash Advance Agreement is 3.25%155.11 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%. This Cash Advance Agreement is secured by the assetsaccounts receivable of CUATROiCISO Global Inc. and NLT Secure. These loans mature through November 2031our wholly-owned subsidiaries, Talatek, LLC and hadTrue Digital Security, Inc. We recorded interest rates between expense of $3.48%497,525 and $19.20%584,053. for the three and six months ended June 30, 2023, respectively.

 

Convertible Notes Payable

 

In October 2021, we issued a convertible note to Neil Stinchcombe in the principal amount of $1,500,000 bearing an interest rate of 5.00%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,March 10, 2022, we entered into an amendment to the note pursuant to which the maturity date was extended to DecemberOctober 27, 2022. In March 2023, we entered into a letter agreement with Neil Stinchcombe to resolve certain payment terms of his convertible note. We agreed to repay the principal amount of the note in three equal installments of $500,000 on each of March 31, April 28, and May 31, 2023,. with accrued interest to be paid on May 31, 2023. The outstanding principal amount of this note, plus all accrued interest was repaid in full as of June 30, 2023. At December 31, 2022, we had accrued interest of $1,500,000119,007. We recorded interest income of $18,118 and interest expense of $632 at Septemberduring the three and six months ended June 30, 2022.2023.

17

 

In June 2022, we entered intoissued an unsecured convertible note in the principal amount of $1,000,000 bearing an interest rate of 5.00%5.00% per annum payable monthly with a maturity date of June 2023,, with a conversion price of $7.657.83 per share. The outstanding principal of this note can be redeemed at any time by us or at maturity at 105%. At maturity in June 2023, we repaid the unpaid accrued interest on this convertible note and rolled the principal amount of $1,050,000 into a new convertible note with the lender. We recorded interest expense of $9,601 and $22,101 for the three and six months ended June 30, 2023.

In June 2023, we issued an unsecured convertible note in the principal amount of $1,050,000 bearing an interest rate of 10.00% per annum payable monthly. The principal amount, together with accrued and unpaid interest is due on June 7, 2024. At anytime prior to or on the maturity date, the holder is permitted to convert all of the outstanding principal amount into 4.20% of thisthe authorized units of our wholly owned subsidiary vCISO, LLC. We recorded interest expense of $5,480 for the three and six months ended June 30, 2023.

In March 2023, we issued an unsecured convertible note wasto Hensley & Company in the principal amount of $1,000,0005,000,000 bearing an interest rate of 10.00% per annum. The principal amount, together with accrued and unpaid interest is due on March 20, 2025. At any time prior to or on the maturity date, Hensley & Company is permitted to convert all or any portion of the outstanding principal amount and all accrued but unpaid interest thereon into shares of our common stock at Septembera conversion price of $1.20 per share. During the three and six months ended June 30, 2022.2023, we recorded interest expense of $125,000 and $138,888, respectively. At June 30, 2023, we had accrued interest of $138,888. Mr. McCain, a director of our company, is President and Chief Operating Officer of Hensley & Company.

 

Future minimum payments under the above line of creditloans payable and loansconvertible notes payable due as of SeptemberJune 30, 20222023 were as follows:

SCHEDULE OF FUTURE MINIMUM PAYMENTS FOR LONG TERM DEBT

         
2022 (remainder of) $5,815,709 
2023  4,341,115 
2023 (remainder of)  $2,686,053 
2024  1,231,461    2,775,049 
2025  1,007,017    6,391,531 
2026  601,371    596,496 
2027   328,864 
Thereafter  1,253,923    654,596 
Total future minimum payments  14,250,596    13,432,589 
Less: discount   (43,750)
Total   13,388,839 
Less: current  (8,285,352)   (4,643,253)
Long term debt, net of current portion  $5,965,244   $8,745,586 

 

NOTE 1211 – LEASES

 

All of our leases are classified as operating leases. With the adoption of Topic 842,We have entered into various non-cancellable operating lease agreements are requiredfor certain offices. These leases currently have lease periods expiring between 2023 and 2028. The lease agreements may include one or more options to renew. Renewals were not assumed in our determination of the lease term unless the renewals were deemed to be recognized on the condensed consolidated balance sheet as Rightreasonably assured at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The components of Use (“ROU”) assetslease costs, weighted-average lease term, 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.discount rates are detailed below.

 

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 commencement date of each lease. The weighted average incremental borrowing rate applied was 6.00%9.78%. As of SeptemberJune 30, 2022,2023, our leases had a remaining weighted average term of 2.454.15 years.

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Operating leases are included in the unaudited condensed consolidated balance sheetsConsolidated Balance Sheets as follows:

SCHEDULE OF LEASE COST AND OTHER SUPPLEMENT LEASE INFORMATION

 Classification September 30, 2022  December 31, 2021  Classification June 30, 2023  December 31, 2022 
Lease assets                    
Operating lease cost ROU assets Assets $316,698  $277,578  Assets $889,010  $255,687 
Total lease assets   $316,698  $277,578    $889,010  $255,687 
                    
Lease liabilities                    
Operating lease liabilities, current Current liabilities $163,233  $196,472  Current liabilities $191,995  $121,731 
Operating lease liabilities, non-current Liabilities  167,462   88,040  Liabilities  732,675   159,205 
Total lease liabilities   $330,695  $284,512    $924,670  $280,936 

 

18

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

SCHEDULE OF LEASE COST

 2022  2021  2023  2022 
 Nine Months Ended September 30,  Six Months Ended June 30, 
 2022  2021  2023  2022 
Leases costs                
Operating lease costs $277,842  $54,376  $117,331  $226,079 
Short term lease cost  45,823   - 
Total lease costs $277,842  $54,376  $163,154  $226,079 

 

Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the ninesix months ended SeptemberJune 30, 20222023 were as follows:

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

   
Fiscal Year Operating Leases  Operating Leases
2022 (remainder of) $61,394 
2023  120,268 
2023 (remainder of) $153,307
2024  106,639   294,383
2025  64,332   252,513
2026  199,177
2027  205,145
Thereafter  51,661
Total future minimum lease payments  352,633   1,156,186
Amount representing interest  (21,938)  (231,516)
Present value of net future minimum lease payments $330,695  $924,670

NOTE 12 – CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Our financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Although we deposit cash with multiple banks, these deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. These deposits may generally be redeemed upon demand and bear minimal risk.

No single customer represented over 10% of our total revenue for any period presented.

 

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.

21
  2023  2022  2023  2022 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2023  2022  2023  2022 
             
U.S. $8,484,594  $9,358,105  $17,085,458  $17,764,335 
Chile  6,791,435   1,869,840   11,682,753   2,793,020 
All other countries  248,965   -   483,464   - 
Revenue $15,524,994  $11,227,945  $29,251,675  $20,557,355 

 

Property and equipment, net by geography was as follows:

SCHEDULE OF PROPERTY AND EQUIPMENT, NET BY GEOGRAPHIC AREAS

 

September 30, 2022

 

December 31, 2021

  

 

June 30, 2023

  

 

December 31, 2022

 
          
U.S. $1,164,643  $95,069  $1,177,401  $1,198,057 
Chile  3,294,765   2,299,355   3,308,253   3,480,911 
All other countries  1,355   -   1,133   1,527 
Property and equipment net $4,460,763  $2,394,424  $4,486,787  $4,680,495 

 

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

NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents AOCI activity in equity:

SCHEDULE OF ACCUMULATED OTHER COMPREHENSIVE INCOME

  

Foreign Currency

Translation

Adjustments

  Total AOCI 
       
Balance as of December 31, 2022 $1,062,247  $1,062,247 
Other comprehensive income  1,620,726   1,620,726 
Amounts reclassified from AOCI  -   - 
Balance as of June 30, 2023 $2,682,973  $2,682,973 

 

NOTE 1415 – SUBSEQUENT EVENTS

On October 21, 2022,In July 2023, we entered into an amendment on our convertible notea stock purchase agreement with an outstanding balance of $1,500,000,SB Cyber Technologies, LLC and its members, pursuant to which we acquired all of the maturity date was extended to December 31, 2023issued and outstanding units of SB Cyber Technologies, LLC..


22
19 

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, 2021.2022.

 

Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation,CISO Global Inc., 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”).subsidiaries. Unless otherwise specified, all dollar amounts are expressed in United StatesU.S. dollars.

 

ThirdFirst Quarter 20222023 Highlights

Our operating results for the threesix months ended SeptemberJune 30, 20222023 included the following:

 

●Total revenue increased by $7.5$8.7 million to $11.3$29.3 million for the threesix months ended SeptemberJune 30, 2022,2023, as compared to the threesix months ended SeptemberJune 30, 2021.2022.
●Total gross profit increased by $0.5 million to $0.9$1.4 million for the threesix months ended SeptemberJune 30, 2022,2023, as compared to $0.8 million the threesix months ended SeptemberJune 30, 2021.
●We acquired CyberViking, CUATROi, and NLT Secure, each of which became our wholly owned subsidiaries.2022.

23

 

Results of Operations

 

Comparison of the Three Months Ended SeptemberJune 30, 20222023 to the Three Months Ended SeptemberJune 30, 20212022

 

Our financial results for the three months ended SeptemberJune 30, 20222023 are summarized as follows in comparison to the three months ended SeptemberJune 30, 2021:2022:

 

 Three Months Ended September 30,     Three Months Ended June 30,    
 2022  2021  Variance  2023  2022  Variance 
Revenue:                        
Security managed services $10,061,304  $3,099,753  $6,961,551  $13,590,505  $10,376,169  $3,214,336 
Professional services  1,191,728   645,255   546,473   1,934,489   851,776   1,082,713 
Total revenue  11,253,032   3,745,008   7,508,024   15,524,994   11,227,945   4,297,049 
                        
Cost of revenue:                        
Security managed services  4,310,378   650,955   3,659,423   7,309,461   3,765,426   3,544,035 
Professional services  182,413   234,326   (51,913)  250,740   163,152   87,588 
Cost of payroll  4,978,768   2,093,072   2,885,696   5,255,778   4,707,984   547,794 
Stock based compensation  857,950   312,909   545,041   1,697,181   1,825,890   (128,709)
Total cost of revenue  10,329,509   3,291,262   7,038,247   14,513,160   10,462,452   4,050,708 
Total gross profit  923,523   453,746   469,777   1,011,834   765,493   246,341 
Operating expenses:                        
Professional fees  624,391   293,408   330,983   663,552   945,148   (281,596)
Advertising and marketing  245,495   254,026   (8,531)  53,776   240,504   (186,728)
Selling, general, and administrative  6,684,747   2,125,984   4,558,763   6,112,875   4,468,415   1,644,460 
Stock-based compensation  1,791,724   938,726   852,998 
Stock based compensation  2,115,039   2,404,049   (289,010)
Impairment of goodwill  20,838,804   -   20,838,804 
Total operating expenses  9,346,357   3,612,144   5,734,213   29,784,046   8,058,116   21,725,930 
                        
Loss from operations  (8,422,834)  (3,158,398)  (5,264,436)  (28,772,212)  (7,292,623)  (21,479,589)
Other income (expense):                        
Other income  29,968   169   29,799   209,639   17,425   192,214 
Interest expense, net  (108,233)  (75,470)  (32,763)  (766,090)  (64,648)  (701,442)
PPP loan forgiveness  -   980,800   (980,800)
            
Total other income (expense)  (78,265)  905,499   (983,764)  (556,451)  (47,223)  (509,228)
Net loss  (8,501,099)  (2,252,899)  (6,248,200)
Foreign currency translation adjustment  (908,987)  -   (908,987)
Comprehensive loss $(9,410,086) $(2,252,899) $(7,157,187)
            
Loss before income taxes $(29,328,663) $(7,339,846) $(21,988,817)

 

20

Revenue

 

Security managed services revenue increased by $6,961,551,$3,214,336, or 225%31%, for the three months ended SeptemberJune 30, 20222023 as compared to the three months ended SeptemberJune 30, 2021,2022, primarily due primarily to revenue acquired through our completion of eightthree acquisitions over the last 12 months and new and existing customer revenue growth.

 

Professional services revenue increased by $546,473,$1,082,713, or 85%127%, for the three months ended SeptemberJune 30, 20222023 as compared to the three months ended SeptemberJune 30, 2021,2022, primarily due primarily to revenue acquired through our recentcompletion of three acquisitions in Latin America.over the last 12 months and new and existing customer revenue growth.

 

Expenses

 

Cost of Revenue

 

Security managed services cost of revenue increased by $3,659,423,$3,544,035, or 562%94%, for the three months ended SeptemberJune 30, 20222023 as compared to the three months ended SeptemberJune 30, 2021,2022, primarily due to our completion of eightthree acquisitions over the last 12 months, which increased our revenues from hardware and software sales and their related costs.months.

 

Professional services cost of revenue decreasedincreased by $51,913,$87,588, or 22%54%, for the three months ended SeptemberJune 30, 20222023 as compared to the three months ended SeptemberJune 30, 2021,2022, due to our increased use of internal resources for delivery of our services.increase in revenue from professional services from three acquisitions completed over the last 12 months.

 

Cost of payroll cost of revenue increased by $2,885,696,$547,794, or 138%12%, for the three months ended SeptemberJune 30, 20222023 as compared to the three months ended SeptemberJune 30, 2021,2022, due to headcount added primarily through our completion of eightthree acquisitions over the last 12 months.

 

Stock-based compensation expenses increaseddecreased by $545,041,$128,709, or 174%7%, for the three months ended SeptemberJune 30, 20222023 as compared to the three months ended SeptemberJune 30, 2021,2022, due to an increasethe timing of stockrecognition of the reversal of expense for options awarded to our growing base of revenue generatingforfeited by former employees.

 

Operating Expenses

Professional fees decreased by $281,596, or 30%, for the three months ended June 30, 2023 as compared to three months ended June 30, 2022, due to a decrease in accounting, legal, and other professional fees incurred related to our Form S-3 filing in June 2022 which did not recur in 2023.

Advertising and marketing expenses decreased by $186,728, or 78%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, due to utilization of more internal marketing resources.

Selling, general, and administrative expenses increased by $1,644,460, or 37%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, primarily due to headcount added through our completion of three acquisitions over the last 12 months.

Stock based compensation expenses decreased by $289,010, or 12%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees.

Impairment of goodwill increased by $20,838,804, or 100%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, due to our analysis of our carrying amount of goodwill being impaired.

2421

Comparison of the Six Months Ended June 30, 2023 to the Three Months Ended June 30, 2022

Our financial results for the six months ended June 30, 2023 are summarized as follows in comparison to the three months ended June 30, 2022:

  Six Months Ended June 30,    
  2023  2022  Variance 
Revenue:            
Security managed services $25,356,638  $18,428,394  $6,928,244 
Professional services  3,895,037   2,128,961   1,766,076 
Total revenue  29,251,675   20,557,355   8,694,320 
             
Cost of revenue:            
Security managed services  12,870,024   6,368,350   6,501,674 
Professional services  449,033   273,489   175,544 
Cost of payroll  11,056,435   9,153,834   1,902,601 
Stock based compensation  3,465,265   3,947,473   (482,208)
Total cost of revenue  27,840,757   19,743,146   8,097,611 
Total gross profit  1,410,918   814,209   596,709 
Operating expenses:            
Professional fees  2,340,939   1,568,209   772,730 
Advertising and marketing  169,170   395,845   (226,675)
Selling, general, and administrative  15,621,641   9,171,958   6,449,683 
Stock based compensation  5,744,014   4,969,559   774,455 
Impairment of goodwill  41,038,172   -   41,038,172 
Total operating expenses  64,913,936   16,105,571   48,808,365 
             
Loss from operations  (63,503,018)  (15,291,362)  (48,211,656)
Other income (expense):            
Other income  53,219   29,968   23,251 
Interest expense, net  (1,156,231)  (108,233)  (1,047,998)
             
Total other income (expense)  (1,103,012)  (78,265)  (1,024,747)
             
Loss before income taxes $(64,606,030) $(15,369,627) $(49,236,403)

Revenue

Security managed services revenue increased by $6,928,244, or 38%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to revenue acquired through our completion of three acquisitions over the last 12 months and new and existing customer revenue growth.

Professional services revenue increased by $1,766,076, or 83%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to revenue acquired through our completion of three acquisitions over the last 12 months and new and existing customer revenue growth.

 22

Expenses

Cost of Revenue

Security managed services cost of revenue increased by $6,501,674, or 102%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to our completion of three acquisitions over the last 12 months.

Professional services cost of revenue increased by $175,544, or 64%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, due to our increase in revenue from professional services from three acquisitions completed over the last 12 months.

Cost of payroll increased by $1,902,601, or 21%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, due to headcount added primarily through our completion of three acquisitions over the last 12 months.

Stock-based compensation expenses decreased by $482,208, or 12%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, due to the timing of recognition of the reversal of expense for options forfeited by former employees.

 

Operating Expenses

 

Professional fees increased by $330,983,$772,730, or 113%49%, for the threesix months ended SeptemberJune 30, 20222023 as compared to threesix months ended SeptemberJune 30, 2021,2022, 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,$226,675, or 3%57%, for the threesix months ended SeptemberJune 30, 20222023 as compared to the threesix months ended SeptemberJune 30, 2021,2022, due to our increased useutilization of more internal resources for advertising and marketing activities.resources.

 

Selling, general, and administrative expenses increased by $4,558,763,$6,449,683, or 214%70%, for the threesix months ended SeptemberJune 30, 20222023 as compared to the threesix months ended SeptemberJune 30, 2021,2022, primarily due to our analysis of our carrying amount of intangible assets being impaired and headcount added through our completion of eightthree acquisitions over the last 12 months.

 

Stock-basedStock based compensation expensesexpense increased by $852,998,$774,455, or 91%16%, for the threesix months ended SeptemberJune 30, 20222023 as compared to the threesix months ended SeptemberJune 30, 2021,2022, due to an increase in stock options awarded to employees through the completion of eightthree acquisitions overin 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, 2021an increase in headcount in administration positions.

 

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:

  Nine Months Ended September 30,    
  2022  2021  Variance 
Revenue:            
Security managed services $28,489,698  $6,979,146  $21,510,552 
Professional services  3,320,689   2,275,437   1,045,252 
Total revenue  31,810,387   9,254,583   22,555,804 
             
Cost of revenue:            
Security managed services  10,678,728   1,326,788   9,351,940 
Professional services  455,902   350,388   105,514 
Cost of payroll  14,132,602   5,052,684   9,079,918 
Stock based compensation  4,805,423   745,381   4,060,042 
Total cost of revenue  30,072,655   7,475,241   22,597,414 
Total gross profit  1,737,732   1,779,342   (41,610)
Operating expenses:            
Professional fees  2,192,600   695,023   1,497,577 
Advertising and marketing  641,340   471,721   169,619 
Selling, general, and administrative  15,856,705   5,296,623   10,560,082 
Stock-based compensation  6,761,283   2,236,142   4,525,141 
Total operating expenses  25,451,928   8,699,509   16,752,419 
             
Loss from operations  (23,714,196)  (6,920,167)  (16,794,029)
Other income (expense):            
Other income  134,447   2,553   131,894 
Interest expense, net  (293,991)  (209,806)  (84,185)
PPP loan forgiveness  -   980,800  (980,800)
Total other income (expense)  (159,544)  773,547  (933,091)
Net loss  (23,873,740)  (6,146,620)  (17,727,120)
Foreign currency translation adjustment  (2,207,256)  -   (2,207,256)
Comprehensive loss $(26,080,996) $(6,146,620) $(19,934,376)

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Revenue

Security managed services revenueImpairment of goodwill increased by $21,510,552,$41,038,172, or 308%100%, for the ninesix months ended SeptemberJune 30, 20222023 as compared to the ninesix months ended SeptemberJune 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 $1,045,252, or 46%, for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, due to revenue acquired through our completion of eight acquisitions over the last 12 months.

Expenses

Cost of Revenue

Security managed services cost of revenue increased by $9,351,940, or 705%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due primarily 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 increased by $105,514, or 30%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to our increase in revenue from professional services from acquisitions completed over the last 12 months.

Costanalysis of payroll costour carrying amount of revenue increased by $9,079,918, or 180%, for the nine months ended September 30, 2022 as compared to the nine 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 $4,060,042, or 545%, for the nine months ended September 30, 2022 as compared to the nine 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 $1,497,577, or 215%, for the nine months ended September 30, 2022 as compared to nine 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 increased by $169,619, or 36%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to our current marketing campaign initiatives to stimulate organic revenue growth, and an increased effort to utilize more internal resources for advertising and marketing activities.

Selling, general, and administrative expenses increased by $10,560,082, or 199%, for the nine months ended September 30, 2022 as compared to the nine 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 $4,525,141, or 202%, for the nine months ended September 30, 2022 as compared to the nine 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.

goodwill being impaired.

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Liquidity and Capital Resources

 

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At September 30, 2022, we had an accumulated deficit of $67,886,162 and working capital deficit of $3,282,714. For the ninesix months ended SeptemberJune 30, 2022,2023, we hadincurred a net loss from operations of $23,714,196$64,170,352 and negative cash flows from operations of $7,850,297. Although we are showing positive revenue, gross profit has remained flat primarily due to increased stock compensation related to sales activity. We$5,318,960 and expect to incur further losses through the end of 2022.2023. In the report accompanying our financial statements for the year ended December 31, 2022, our independent auditors stated that our financial statements were prepared assuming that we would continue as a going concern and that they have substantial doubt as to our ability to do so based on our recurring losses from operations and need to raise additional capital. These condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

To date we have funded operations primarily through the sale of equity in private placements, debt, and revenue generated by our services. During the nine months ended September 30, 2022, we received $10,562,763 from our public offerings of our common stock, $5,975,000 in net proceeds from our bridge loans, and $1,359,264 from the exercise of stock options. On June 27, 2022, our Registration Statement on Form S-3 was declared effective, and we may offer and sell from time to time, in one or more series, any of our securities, for total gross proceeds up to $300,000,000. As of SeptemberJune 30, 2022,2023, we had $298,921,085$291,351,048 of available funding fromunder our S-3 Registration Statement.Statement from which we may issue our securities to fund current and future operations, assuming there is adequate demand for our securities.

 

23

We believe that we have sufficient liquidity and capital resources to meet our requirements for at least the next 12 months from the filing date of this Quarterly Report on Form 10-Q, as well as our longer-term expected future cash requirements and obligations.

Our future capital requirements, both near-term and long-term, will depend on many factors, in addition to our recurring operating expenses, including our growth rate, the continued expansion of sales and marketing activities, the introduction of new and enhanced products and service offerings, and the costs of any future acquisitions in complementary businesses and technologies. To the extent existing cash and cash equivalents are not sufficient to fund future activities, we will seek to raise additional funds through equity, equity-linked, or debt financings. Any additional equity financing may be dilutive to our existing stockholders. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results, and financial condition would be adversely affected.

Working Capital (Deficit)/SurplusDeficit

 

Our working capital deficit as of SeptemberJune 30, 2022,2023, in comparison to our working capital surplusdeficit as of December 31, 2021,2022, is summarized as follows:

 

 As of  As of 
 September 30,  December 31,  June 30, December 31, 
 2022  2021  2023  2022 
Current assets $14,940,065  $9,807,301  $16,022,786  $14,398,795 
Current liabilities  18,222,779   5,141,561   23,144,217   23,213,039 
Working capital (deficit)/surplus $(3,282,714) $4,665,740 
Working capital deficit $(7,121,431) $(8,814,244)

 

The increase in current assets is primarily due to an increase in cash and cash equivalents, accounts receivable and prepaid expenses and other current assets of $2,163,298, $922,629,$795,246 and $2,495,435,$528,163, respectively. The increase in currentCurrent liabilities is primarilyremained consistent due to thean increase in accounts payable and accrued expense,expenses and deferred revenue of $4,948,634 and $577,858, respectively, offset by a decrease in loans payable current portion, and convertible notes payable of $3,990,955, $3,021,349, $7,022,153,$4,165,578 and $1,050,000,$1,500,000, respectively.

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Cash Flows

 

Our cash flows for the ninesix months ended SeptemberJune 30, 2022,2023, in comparison to our cash flows for the ninesix months ended SeptemberJune 30, 2021, can be2022, is summarized as follows:

 

 Nine Months ended September 30,  Six Months ended June 30, 
 2022  2021  2023  2022 
Net cash used in operating activities $(7,850,297) $(4,312,312) $(5,318,960) $(3,015,795)
Net cash used in investing activities  (6,044,217)  662,176   (148,866)  (5,021,626)
Net cash provided by financing activities  16,038,273   1,182,685   5,493,207   9,011,005 
Effect of exchange rates on cash and cash equivalents  19,539   -   13,631   164,288 
Increase in cash $2,163,298  $(2,467,451) $39,012  $1,137,872 

 

Operating Activities

 

Net cash used in operating activities was $7,850,297$5,318,960 for the ninesix months ended SeptemberJune 30, 20222023 and was primarily due to cash used to fund a net loss of $23,873,740,$64,170,352, adjusted for non-cash expenses in the aggregate of $13,939,728$55,321,005 and additional cash outlaidinflow by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts receivable, current assets, deferred revenue and accounts payable and accrued liabilities.expenses. Net cash used in operating activities was $4,312,312$3,574,474 for the ninesix months ended SeptemberJune 30, 20212022 and was primarily due to cash used to fund a net loss of $6,146,620,$15,369,627, adjusted for non-cash expenses in the aggregate of $2,631,683,$10,206,845, partially offset by cash generated by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts payable.

 

Investing Activities

 

Net cash used in investing activities of $6,044,217$148,866 for the ninesix months ended SeptemberJune 30, 2023 was due to purchases of property and equipment. Net cash used in investing activities of $5,114,700 for the six months ended June 30, 2022 and was primarily due to net cash paid in the acquisition of True Digital acquisition. Net cash from investing activities for the nine months ended September 30, 2021 was due to cash acquired from the VelocIT acquisition which was financed with equity consideration.Security, Inc.

 

Financing Activities

 

Net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2023 was $5,493,207, which was primarily due to cash received from the sale of our common stock of $6,682,198, $2,210,022 in net proceeds from our loans payable, and $6,050,000 in proceeds from convertible notes payable, offset by aggregate repayments on loans payable and convertible notes payable of $9,847,980. Net cash provided by financing activities for the six months ended June 30, 2022 was $16,038,273,$14,781,284, which was primarily due to cash received from the sale of our common stock in our public offeringsoffering of $10,562,763$9,521,798 and $5,975,000 in net proceeds from our bridge loans. Net

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Based on our current business plan, we believe our cash provided by financing activitiesbalance as of the date of this filing, together with anticipated revenues, will be sufficient to meet our anticipated cash requirement for the nine months ended September 30, 2021 was $1,182,685 and was primarily duenear term. However, there can be no assurance that the current business plan will be achievable. Such conditions raise substantial doubts about our ability to cash receivedcontinue as a going concern for one year from the sale of our common stock of $3,250,000, offset by $2,064,315 of loan repayments.

Effects of Inflationdate the condensed consolidated financial statements are issued.

 

Our existence is dependent upon our ability to develop profitable operations. We are devoting substantially all of our efforts to developing our business, reducing overhead costs, and raising capital, although there can be no assurance that our efforts will be successful. No assurance can be given that our actions will result in profitable operations or the resolution of liquidity problems. The accompanying condensed consolidated financial statements do not believeinclude any adjustments that inflation has hadmight result should we be unable to continue as a material impact ongoing concern.

In order to improve our business, revenue, liquidity, in addition to a planned reduction in overhead costs, we are actively pursuing additional debt and/or operating results duringequity financing through discussions with investment bankers and private investors. There can be no assurance that we will be successful in our efforts to secure additional financing.

The financial statements do not include any adjustments relating to the periods presented.recoverability of assets and the amount or classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Critical Accounting Policies and Estimates

 

Our critical accounting policies are more fully described in the notes to our condensed consolidated financial statements included herein for the quarter and ninesix months ended SeptemberJune 30, 20222023 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the SEC on April 15, 2022.March 31, 2023.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at dates of the financial statements and the reported amounts of revenue and expenses during the periods. Our significant estimates and assumptions include the recoverabilityallowance for doubtful accounts, the carrying value of intangible assets and useful lives of long-lived assets, stock-based compensation,goodwill, deferred tax asset and the valuation allowance, related to our deferred tax assets.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. Certain of our estimates, including the carrying amount of intangible assets and goodwill, could be affected by external conditions, including those unique to us and general economic conditions. It is reasonably possible that these external factors could have an effect on our estimates and could cause actual results to materially differ from those estimates.

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25 

 

Fair Value Measurement

The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

Business Combination

 

We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition.

 

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.

 

Intangible Assets

 

Intangible assets are comprised of trademarks, customer bases, non-compete agreements, and intellectual property with original estimated useful lives with a range of 12 to 10 years. Once placed into service, we amortize the cost of intangible assets over their estimated useful lives on a straight-line basis.

 

Goodwill

 

Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually at year end or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flowrevenue multiple approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.

 

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Impairment of Long-livedLong-Lived Assets

 

We will periodically evaluate the carrying value of long-lived assets to be held and used at least annually during the fourth quarter when events and circumstances warrant such a review.review and at least annually. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.

 

Stock-Based Compensation

 

We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. Awards granted to directors are treated on the same basis as awards granted to employees.

 

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Revenue Recognition

 

Our agreements with clients are primarily service contracts that range in duration from a few months to one year. We recognize revenue when control of these services is transferred to the client for an amount, referred to as the transaction price, which reflects the consideration to which we are expected to be entitled in exchange for those goods or services.

 

A contract with a client exists only when:

 

●the parties to the contract have approved it and are committed to perform their respective obligations;
●we can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”);
●we can determine the transaction price for the services to be transferred; and
●the contract has commercial substance, and it is probable that we will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the client.

 

For the majority of our contracts, we receive non-refundable upfront payments. We do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between the time of transfer of the promised goods or services to the client and the time the client pays for these goods or services to be generally one year or less. Our credit terms to clients generally average 30 days, although in some cases payments are required in 15 days.

 

We do not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.

 

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

 

Security Managed Services.Services

 

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

30

 

Professional Services.Services

 

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

New and Recently Adopted Accounting Pronouncements

Any new and recently adopted accounting pronouncements are more fully described in Note 2 to our unaudited condensed consolidated financial statements herein as of and for the quarter ended September 30, 2022.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Because we are a smaller reporting company, we are not required to provide the information called for by this Item.

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of SeptemberJune 30, 2022,2023, our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below. Thus there remains a reasonable possibility that a material misstatement of our interim financial statements will not be prevented or detected on a timely basis. This does not include an evaluation by our registered public accounting firm regarding our internal control over financial reporting. Accordingly, we cannot provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, to allow our principal financial and executive officers to make timely decisions regarding required disclosures as of SeptemberJune 30, 2022.2023.

 

Our management’s evaluation was based on the following material weaknesses in our internal control over financial reporting, which existed as of December 31, 20212022 and which continue to exist, as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021:2022:

 

●lack of risk assessment procedures on internal controls to detect financial reporting risks in a timely manner; and
●lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives.

31

 

A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As a company with limited accounting resources, a significant amount of management’s time and attention has been and will be diverted from our business to ensure compliance with these regulatory requirements.

 

Management’s Plan to Remediate the Material Weaknesses

 

We are implementing measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:

 

●identifying gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and
●developing policies and procedures on internal control over financial reporting and monitoring the effectiveness of operations on existing controls and procedures.

 

We will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis, and we are committed to taking further action and implementing additional enhancements or improvements, as necessary and in accordance with financial and budgetary considerations.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended SeptemberJune 30, 2022,2023, other than those noted above, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are currently not a party to any material legal proceedings.

 

Item 1A. Risk Factors

 

We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on April 15, 2022,March 31, 2023, risk factors that materially affect our business, financial condition, or results of operations. There have been no material changes from the risk factors previously disclosed, except as follows:disclosed.

Economic conditions in the U.S and international economies may adversely impact our business operating on operating results.

General macro-economic conditions, such as a rise in interest rates, inflation in the cost of goods and services including labor, a recession or an economic slowdown in the United States or internationally, including as a result of continuing uncertainty from the COVID-19 pandemic or the Russia-Ukraine military conflict, could adversely affect demand for our services and make it difficult to accurately forecast and plan our future business activities. U.S. and global markets have recently been experiencing volatility and disruption due to new interest rate and inflation increases as well as the continued escalation of geopolitical tensions. For example, inflation in the United States began to rise in the second half of 2021 and have remained at high levels through the third quarter 2022. Although our business has not yet been materially negatively impacted by such inflationary pressures, we cannot be certain that neither we nor our customers will be materially impacted by continued pressures. Additionally, on February 24, 2022, Russian troops engaged in a full-scale military invasion of Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, it could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. This military conflict has led to sanctions and other penalties being levied by the United States and European Union, and other countries against Russia, and other potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds. We do not have employees or facilities in Russia or Ukraine, nor do we have customers and contractors in these locations. Our business has not yet been materially negatively impacted by this military conflict to date. However, we cannot be certain that this will not impact our position in the credit market or our ability to acquire cybersecurity businesses in the short and long term.

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To the extent conditions in the domestic and global economy change, our business could be harmed as current and potential customers may reduce or postpone spending or choose not to purchase or renew our services, which they may consider discretionary. If our customers face decreased consumer demand, increased regulatory burdens, or more limited access to international markets, we may face a decline in the demand for our services and our operating results could be adversely impacted.

Uncertain and adverse economic conditions may also lead to a decline in the ability of our customers to use or access credit, which could adversely affect our business. In addition, changing economic conditions may also adversely affect third parties with which we have entered into relationships and upon which we depend in order to grow our business. As a result, we may be unable to continue to grow in the event of future economic slowdowns.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.In May 2023, we issued 3,000,000 shares of our common stock to Trending Equities Corp. in exchange for providing marketing and investor relations services.

On May 19, 2023, we issued a warrant to Titan Partners Group, LLC, the Placement Agent for our registered direct offering, to purchase 600,000 shares of our common stock at a price of $0.25 per share. The warrant is exercisable at any time on or after November 19, 2023, and expires on May 19, 2028.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.During the quarter ended June 30, 2023, no director or officer of our company adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” (in each case, defined in Item 408 of Regulation S-K).

33

 

Item 6. Exhibits

 

    Incorporated by Reference

Exhibit

Number

 Exhibit Description Form Exhibit Filing Date
3.1 Amended and Restated Certificate of Incorporation of the Registrant 10-Q 3.1 8/15/2022
10.3# 2019 Equity Incentive Plan, as amended 10-Q 10.3 8/15/2022
31.1* Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer      
31.2* Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer      
32.1 Section 1350 Certification of Principal Executive Officer      
32.2 Section 1350 Certification of Principal Financial Officer      
101.INS* Inline XBRL Instance Document      
101.SCH* Inline XBRL Taxonomy Extension Schema Document      
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document      
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document      
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document      
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document      
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)      
Exhibit   Incorporated by Reference

Number

 Exhibit Description Form Exhibit Filing Date
3.1 Amended and Restated Certificate of Incorporation of the Registrant 10-Q 3.1 05/15/2023
3.2 Amended and Restated By-Laws of the Registrant 8-K 3.2 04/10/2023
4.1 Form of Placement Agent Warrant 8-K 4.1 05/17/2023
10.1 Form of Securities Purchase Agreement, dated May 16, 2023, by and between the Registrant and each Purchaser thereto 8-K 10.1 05/17/2023
10.2 Placement Agency Agreement, dated May 16, 2023, by and between the Registrant and each Purchaser thereto 8-K 10.1 05/17/2023
31.1* Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer      
31.2* Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer      
32.1 Section 1350 Certification of Principal Executive Officer      
32.2 Section 1350 Certification of Principal Financial Officer      
101.INS* Inline XBRL Instance Document      
101.SCH* Inline XBRL Taxonomy Extension Schema Document      
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document      
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document      
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document      
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document      
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)      

*Filed herewith.

#Management contracts and compensatory plans and arrangements.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CERBERUS CYBER SENTINEL CORPORATION

CISO GLOBAL, INC.
By:/s/ David G. Jemmett
 David G. Jemmett 
 Chief Executive Officer 
 (Principal Executive Officer) 
Date:November 14, 2022August 9, 2023 

By:/s/ Debra L. Smith
 Debra L. Smith 
 Chief Financial Officer 
 (Principal Financial Officer and Principal Accounting Officer) 
Date:November 14, 2022August 9, 2023 

 

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