UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended March 31, 2021

 

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: 000-56059

 

CERBERUS CYBER SENTINEL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		83-4210278
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

6900 E. Camelback Road, Suite 240, Scottsdale, AZ		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 exchange on which registered
None		N/A		N/A

 

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 [X] 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 [X] 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	[X]	Smaller reporting company	[X]
		Emerging growth company	[X]

 

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 [X]

 

As of May 12, 2021, there were 117,729,971 shares of the registrant’s common stock outstanding.

 

 

 

CERBERUS CYBER SENTINEL CORPORATION

FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

 

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	33
ITEM 4.	Controls and Procedures	33
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	34
ITEM 1A.	Risk Factors	34
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
ITEM 3.	Defaults Upon Senior Securities	34
ITEM 4.	Mine Safety Disclosures	34
ITEM 5.	Other Information	34
ITEM 6.	Exhibits	35
SIGNATURES		36

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated Balance Sheets

 

		March 31,				December 31,
		2021				2020
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	7,326,609			$	5,197,030
Accounts receivable, net of allowances for doubtful accounts of $40,000			1,183,318				1,006,834
Prepaid expenses and other current assets			155,570				142,144
Total Current Assets			8,665,497				6,346,008
Property and equipment, net of accumulated depreciation of $18,897 and $14,473, respectively			76,206				80,630
Right of use asset			175,927				13,426
Intangible assets, net of accumulated amortization of $151,462 and $116,468, respectively			2,070,438				2,105,432
Goodwill			4,101,369				4,101,369
Total Assets		$	15,089,437			$	12,646,865
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	747,638			$	809,804
Stock payable			48,000				46,000
Lease liability			101,828				8,989
Loans payable			9,451				9,405
Line of credit			33,358				3,000
Convertible note payable, net of debt discount, related party			2,944,706				2,926,609
Note payable - related party			59,787				59,787
Total Current Liabilities			3,944,768				3,863,594
Long-term Liabilities:
Loans payable, net of current portion			1,016,463				1,037,115
Lease liability, net of current portion			74,840				4,693
Total Liabilities			5,036,071				4,905,402
Commitments and Contingencies
Stockholders’ Equity:
Common stock, $.00001 par value; 250,000,000 shares authorized; 117,729,971 and 116,104,971 shares issued and outstanding, respectively			1,177				1,161
Additional paid-in capital			16,695,820				12,607,074
Accumulated deficit			(6,643,631	)			(4,866,772	)
Total Stockholders’ Equity			10,053,366				7,741,463
Total Liabilities and Stockholders’ Equity		$	15,089,437			$	12,646,865

 

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

 

 

CERBERUS CYBER SENTINEL CORPORATION

CONDENSED Consolidated STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended
		March 31, 2021				March 31, 2020
Revenue:
Managed services		$	440,417			$	137,913
Consulting services			2,119,361				930,308
Total revenue			2,559,778				1,068,221
Cost of revenue:
Managed services			193,667				18,970
Consulting services			117,794				115,847
Cost of payroll			1,427,702				640,424
Total cost of revenue			1,739,163				775,241
Total gross profit			820,615				292,980
Operating expenses:
Professional fees			157,354				196,354
Advertising and marketing			45,227				27,862
Selling, general and administrative			1,487,641				580,198
Stock based compensation			838,762				325,429
Total operating expenses			2,528,984				1,129,843
Loss from operations			(1,708,369	)			(836,863	)
Other expense:
Other income			205				-
Interest expense, net			(68,695	)			(2,281	)
Total other expense			(68,490	)			(2,281	)
Loss before provision for income taxes			(1,776,859	)			(839,144	)
Provision for income taxes			-				-
Net loss		$	(1,776,859	)		$	(839,144	)
Net loss per common share - basic		$	(0.02	)		$	(0.01	)
Net loss per common share - diluted		$	(0.02	)		$	(0.01	)
Weighted average shares outstanding - basic			116,418,173				108,082,222
Weighted average shares outstanding - diluted			116,418,173				108,082,222

 

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

 

 

CERBERUS CYBER SENTINEL CORPORATION

CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

										Additional
		Common Stock								Paid-in				Retained				Treasury
		Shares				Amount				Capital				Earnings				Stock				Total
Balance at January 1, 2021			116,104,971			$	1,161			$	12,607,074			$	(4,866,772	)		$	-			$	7,741,463
Stock based compensation - stock options			-				-				838,762				-				-				838,762
Stock issued for cash			1,625,000				16				3,249,984				-				-				3,250,000
Net loss			-				-				-				(1,776,859	)			-				(1,776,859	)
Balance as of March 31, 2021			117,729,971			$	1,177			$	16,695,820			$	(6,643,631	)		$	-			$	10,053,366
Balance at January 1, 2020			107,912,500			$	1,139			$	7,770,902			$	(1,453,510	)		$	(2,400,000	)		$	3,918,531
Stock based compensation - stock options			-				-				325,429				-				-				325,429
Stock issued for cash			350,000				4				139,996				-				-				140,000
Return of treasury stock to authorized capital			-				(60	)			(2,399,940	)			-				2,400,000				-
Net loss			-				-				-				(839,144	)			-				(839,144	)
Balance as of March 31, 2020			108,262,500			$	1,083			$	5,836,387			$	(2,292,654	)		$	-			$	3,544,816

 

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

 

 

CERBERUS CYBER SENTINEL CORPORATION

CONDENSED Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

 

		March 31, 2021				March 31, 2020
Cash flows from operating activities:
Net loss		$	(1,776,859	)		$	(839,144	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation - stock options			838,762				325,429
Issuance of common stock for services			2,000				10,000
Depreciation and amortization			57,515				16,619
Right of use amortization			13,257				-
Changes in operating assets and liabilities:
Accounts receivable, net			(176,484	)			(52,762	)
Other current assets			(13,426	)			(46,200	)
Accounts payable and accrued expenses			(62,166	)			142,120
Lease liability			(12,772	)			-
Net cash used in operating activities			(1,130,173	)			(443,938	)
Cash flows from financing activities:
Proceeds from sale of common stock			3,250,000				140,000
Proceeds from line of credit			221,346				-
Payment on line of credit			(190,988	)			-
Payment on loans payable			(20,606	)			-
Net cash provided by financing activities			3,259,752				140,000
Net increase (decrease) in cash			2,129,579				(303,938	)
Cash and cash equivalents - beginning of the period			5,197,030				1,876,645
Cash and cash equivalents - end of the period		$	7,326,609			$	1,572,707
Supplemental cash flow information:
Cash paid for:
Interest		$	34,163			$	-
Income taxes		$	-			$	5,882
Non-cash investing and financing activities:
Right of use asset and lease liability recorded upon adoption of ASC 842		$	175,758			$	-

 

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

 

 

CERBERUS CYBER SENTINEL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS

 

Corporate History

 

Cerberus Cyber Sentinel Corporation (“Cerberus Sentinel,” “Cerberus,” or the “Company”) was formed on March 5, 2019 as a Delaware corporation. The Company’s principal offices are located at 6900 E. Camelback Road, Suite 240, Scottsdale, AZ 85258.

 

Effective May 25, 2020, the Company entered into a Stock Purchase Agreement with Technologyville, Inc., an Illinois corporation (“Techville”), and its sole shareholder, pursuant to which Techville became a wholly owned subsidiary of the Company (the “Techville Acquisition”). Under the terms of the Techville Acquisition, all issued and outstanding common stock of Techville was exchanged for an aggregate of 3,392,271 shares of the Company’s common stock.

 

Effective August 1, 2020, the Company entered into a Stock Purchase Agreement with Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), and its equity holders, pursuant to which Clear Skies became a wholly owned subsidiary of the Company (the “Clear Skies Acquisition”). Under the terms of the Clear Skies Acquisition, all issued and outstanding equity securities in Clear Skies were exchanged for an aggregate of 2,330,000 shares of the Company’s common stock.

 

Effective December 16, 2020, the Company entered into an Agreement and Plan of Merger with Alpine Security, LLC, an Illinois limited liability company (“Alpine”), and its sole member, pursuant to which Alpine became a wholly owned subsidiary of the Company (the “Alpine Acquisition”). Under the terms of the Alpine Acquisition, all issued and outstanding membership units in Alpine were exchanged for an aggregate of 900,000 shares of the Company’s common stock.

 

Nature of the Business

 

Cerberus Sentinel is a security services company comprised of security professionals who work with clients throughout the United States to create a continuously aware security culture. We do not sell cybersecurity products. We position the Company as a trusted cybersecurity advisor and are committed to delivering tailored security solutions to organizations of different sizes and across all geographies and industries to fit their budgetary needs and limit their cyber threat exposure.

 

We currently provide a multitude of cybersecurity services including managed security service, cybersecurity consulting, technology consulting, compliance auditing, vulnerability assessment, penetration testing, security remediation, Security Operations Center (“SOC”) set-up and consulting and cybersecurity training. We differentiate ourselves from our competitors by staying technology agnostic. We believe that many cybersecurity service providers in the market today are committed to a specific technology solution which limits their service scope and ability to quickly respond to any emerging cybersecurity challenges. In addition, as we continue to serve our clients within our existing capacities, we plan to continue making strategic acquisitions of small-to-medium-sized engineer-led cybersecurity service firms to continue to expand our service scope and geographical coverage. We believe that having a world-class technology team with multi-faceted expertise is key to providing technology agnostic solutions to our clients and maximizing their return on investment from information technology (“IT”) and cybersecurity spending.

 

Liquidity

 

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At March 31, 2021, the Company had an accumulated deficit of approximately $6,644,000 and working capital surplus of approximately $4,721,000. For the three months ended March 31, 2021, the Company had a loss from operations of approximately $1,708,000 and negative cash flows from operations of approximately $1,130,000. Although the Company is showing positive revenues and gross profit trends, the Company expects to incur further losses through the end of 2021.

 

 

To date the Company has been funding operations primarily through the sale of equity in private placements and revenues generated by the Company’s services. During the three months ended March 31, 2021, the Company received $3,250,000 from private placements to accredited investors of the Company’s common stock.

 

Based on its current cash resources and commitments, the Company believes it will be able to maintain its current planned development and corresponding level of expenditure for at least twelve months from the date of the issuance of these unaudited condensed consolidated financial statements, although no assurance can be given that it will not need additional funds prior to such time.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial information as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such dates and the operating results and cash flows for such periods. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission, or the SEC. These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2021.

 

Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, GenResults, TalaTek, Techville, Clear Skies, and Alpine. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain reclassifications have been made to the financial statements for the three months ended March 31, 2020 to conform to the financial statements presentation for the three months ended March 31, 2021. These reclassifications had no effect on net loss or cash flows as previously reported.

 

Use of Estimates

 

Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The Company believes the critical accounting policies discussed below affect its 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-Merton pricing model, such as expected volatility, risk-free interest rate, and expected divided rate.

 

 

Revenue

 

The Company’s revenues are derived from two major types of services to clients: Managed Services and Consulting Services. With respect to Managed Services, the Company provides 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 Consulting Services, the Company provides cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.

 

Practical Expedients

 

As part of Accounting Standards Codification (“ASC”) 606, the Company has adopted several practical expedients including the following: (i) the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less and (ii) the Company recognizes any incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.

 

Disaggregated Revenues

 

Revenue consists of the following by service offering for the three months ended March 31, 2021:

 

		Managed Services				Consulting Services				Total
Primary Sector Markets
Public		$	-			$	980,280			$	980,280
Private			407,493				1,120,486				1,527,979
Not-for-Profit			32,924				18,595				51,519
		$	440,417			$	2,119,361			$	2,559,778
Major Service Lines
Gap and Risk Assessment		$	-			$	1,989,888			$	1,989,888
Tech Connect			440,417				-				440,417
Hardware			-				127,553				127,553
Other			-				1,920				1,920
		$	440,417			$	2,119,361			$	2,559,778

 

Revenue consists of the following by service offering for the three months ended March 31, 2020:

 

		Managed Services				Consulting Services				Total
Primary Sector Markets
Public		$	-			$	705,125			$	705,125
Private			137,913				225,183				363,096
Not-for-Profit			-				-				-
		$	137,913			$	930,308			$	1,068,221
Major Service Lines
Gap and Risk Assessment		$	-			$	930,308			$	930,308
Managed Security Services			137,913				-				137,913
		$	137,913			$	930,308			$	1,068,221

 

 

Contract Modifications

 

There were no contract modifications during the three months ended March 31, 2021. Contract modifications are not routine in the performance of the Company’s contracts.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. The Company periodically assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides 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. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of March 31, 2021, and December 31, 2020, the Company’s allowance for doubtful accounts was $40,000.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally between three and five years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Computer equipment costs for the Company are capitalized, as incurred, and depreciated on a straight-line basis over three years. TalaTek capitalizes all equipment costs over $5,000, as incurred, and depreciates these costs on a straight-line basis over three years.

 

Maintenance and repairs are charged to expense as incurred. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation is removed from the accounts and the resulting gain or loss, if any, is reflected in results of operations.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. During the three months ended March 31, 2021, the Company did not record a loss on impairment.

 

Intangible Assets

 

The Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. Finite lived intangible assets are amortized over their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.

 

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 least annually at year end, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit level (See Note 5).

 

 

Advertising and Marketing Costs

 

The Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $45,227 and $27,862 for the three months ended March 31, 2021 and 2020, respectively, and are recorded in operating expenses on the unaudited condensed consolidated statements of operations.

 

Fair Value Measurements

 

As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

 

Level 1:	Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:	Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Level 3:	Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques.

 

Net Loss per Common Share

 

Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All vested outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options have been excluded from the Company’s computation of net loss per common share for the three months ended March 31, 2021 and 2020.

 

 

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 the Company’s net loss position even though the exercise price could be less than the average market price of the common shares:

 

		March 31, 2021				March 31, 2020
Stock Options			25,404,533				19,615,000
Convertible Debt			1,500,000				-
Total			26,904,533				19,615,000

 

Stock-based Compensation

 

The Company applies the provisions of ASC 718, Compensation - Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements of operations.

 

For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes-Merton option pricing model. The use of the Black-Scholes-Merton option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised. Due to the Company’s limited history and lack of public market for its common stock, the Company used the average of historical share prices of similar companies within its industry to calculate volatility for use in the Black-Scholes-Merton option pricing model.

 

Pursuant to Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance with ASC 718. The Company uses valuation methods and assumptions to value the stock options that are in line with the process for valuing employee stock options noted above.

 

Leases

 

Leases in which the Company is the lessee are comprised of corporate offices and property and equipment. All of the leases are classified as operating leases. The Company leases multiple office spaces with a remaining weighted average term of 1.67 years. The Company leases a vehicle with a remaining term of 1.25 years.

 

In accordance with ASC 842, Leases, the Company recognized a right-of-use (“ROU”) asset and corresponding lease liability on its unaudited condensed consolidated balance sheet for long-term office leases and a vehicle operating lease agreement. See Note 12 – Leases for further discussion, including the impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities 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.

 

The Company utilizes 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. The Company accounts 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 March 31, 2021 and December 31, 2020, the Company’s net deferred tax asset has been fully reserved.

 

 

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

 

Recently Issued Accounting Standards

 

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

 

NOTE 3 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of:

 

		March 31, 2021				December 31, 2020
Prepaid expenses		$	145,570			$	142,144
Other current assets			10,000				-
Total prepaid expenses and other current assets		$	155,570			$	142,144

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

		March 31, 2021				December 31, 2020
Computer equipment		$	15,735			$	15,735
Vehicle			63,052				63,052
Furniture and fixtures			6,224				6,224
Software			10,092				10,092
			95,103				95,103
Less: accumulated depreciation			(18,897	)			(14,473	)
Property and equipment, net		$	76,206			$	80,630

 

Total depreciation expense was $4,424 and $971 for the three months ended March 31, 2021 and 2020, respectively.

 

NOTE 5 – INTANGIBLE ASSETS AND GOODWILL

 

The following table summarizes the changes in goodwill during the three months ended March 31, 2021:

 

Balance December 31, 2020(1)		$	4,101,369
Acquisition of goodwill			-
Impairment			-
Ending balance, March 31, 2021(1)		$	4,101,369

 

⁽¹⁾       As of March 31, 2021, the Company has not attained a third-party valuation for the December 16, 2020 acquisition of Alpine. As such, the purchase price allocation disclosed in the Company’s Annual Report in Form 10-K for December 31, 2020, filed on March 31, 2021, may change and, therefore, goodwill resulting from the acquisition may change.

 

 

The following table summarizes the identifiable intangible assets as of March 31, 2021 and December 31, 2020:

 

		Useful life		2021				2020
Tradenames – trademarks (1)		Indefinite		$	1,094,500			$	1,094,500
Customer base (1)		15 years			370,000				370,000
Non-compete agreements (1)		5 years			236,400				236,400
Intellectual property/technology (1)		10 years			521,000				521,000
					2,221,900				2,221,900
Less accumulated amortization					(151,462	)			(116,468	)
Total				$	2,070,438			$	2,105,432

 

⁽¹⁾       These intangible assets were acquired in the acquisitions of TalaTek, Techville and Clear Skies.

 

The weighted average useful life of identifiable amortizable intangible assets remaining is 8.31 years.

 

Amortization of identifiable intangible assets for the three months ended March 31, 2021 and 2020, was $34,994 and $15,648, respectively.

 

The below table summarizes the future amortization expense for the remainder of 2021 following March 31, 2021, and the next four years thereafter:

 

Remainder of 2021		$	104,983
2022			127,027
2023			113,427
2024			104,262
2025			76,767
Thereafter			449,472
		$	975,938

 

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following amounts:

 

		March 31, 2021				December 31, 2020
Accounts payable		$	211,120			$	328,368
Accrued payroll			95,682				39,670
Accrued expenses			418,419				417,832
Accrued interest – related party			22,417				23,934
Total accounts payable and accrued expenses		$	747,638			$	809,804

 

Note 7 - Related Party Transactions

 

Note Payable – Related Party

 

On December 31, 2018, GenResults entered into an unsecured note payable with Jemmett Enterprises, LLC, an entity controlled by the Company’s majority stockholder, in the orginal principal amount of $200,000. The note has a maturity date of June 15, 2021, and bears an interest rate of 6% per annum. The outstanding principal balance of this loan was $59,787 as of March 31, 2021 and December 31, 2020. See Note 11. At March 31, 2021 and December 31, 2020, the Company has recorded accrued interest of $22,417 and $23,934, respectively, with respect to this note payable. The Company has recorded interest expense of $2,983 and $2,275 during the three months ended March 31, 2021 and 2020, respectively.

 

 

Convertible Note Payable – Related Party

 

On December 23, 2020, the Company issued to a related party a convertible note in the principal amount of $3,000,000 bearing an interest rate at 6% per annum payable at maturity with a maturity date of December 31, 2021, with a conversion price of $2.00 per share. The outstanding principal balance of this loan was $3,000,000 at March 31, 2021 and December 31, 2020, respectively. See Note 11 for additional details.

 

Agreement with Eventus Consulting, P.C.

 

On November 8, 2019, the Company entered into a financial consulting agreement with Eventus Consulting, P.C., an Arizona corporation, (“Eventus”), of which Neil Reithinger, Chief Financial Officer advisor to the Company, is the sole shareholder, pursuant to which Eventus is to provide financial and accounting consulting services to the Company. In consideration for Eventus’ services, the Company agreed to pay Eventus according to its standard hourly rate structure. The term of the agreement is perpetual unless otherwise terminated upon thirty days’ notice by either Eventus or the Company. For the three months ended March 31, 2021, Eventus was paid $59,893 and was owed $134 for accrued and unpaid services under the financial consulting agreement at March 31, 2021.

 

Note 8 - Stockholders’ Equity

 

Equity Transactions During the Period

 

During the three months ended March 31, 2021, the Company issued an aggregate of 1,625,000 shares of common stock with a fair value of $2.00 per share, respectively, to investors for cash proceeds of $3,250,000.

 

Stock Payable

 

On January 16, 2020, the Company entered into a consulting agreement, with Eskenzi PR Limited (“Eskenzi”). As per the agreement, Eskenzi will provide various marketing and public relations services to the Company. The initial term of the agreement was for twelve months and automatically renews for an additional twelve months unless either the Company or Eskenzi provides at least three months advance written notice of termination.

 

Upon execution of the agreement the Company was to issue 120,000 shares of the Company’s restricted common stock, valued at $48,000 to Eskenzi. As of March 31, 2021, these shares have yet to be issued. As such, the Company recorded a stock payable in the amount of $48,000 and $46,000 representing the fair value of services performed through the three months and year ended March 31, 2020 and December 31, 2020, respectively.

 

See Note 9 for disclosure of additional equity related transactions.

 

Note 9 – StocK-BASED COMPENSATION

 

The Company accounts for its stock-based compensation in accordance with the fair value recognition provisions of ASC 718.

 

2019 Equity Incentive Plan

 

The Board of Directors approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) on June 6, 2019 and the stockholders of the Company holding a majority of the outstanding shares of common stock of the Company approved and adopted the 2019 Plan. The maximum number of shares of the Company’s common stock that may be issued under the Company’s 2019 Plan is 25,000,000 shares. The 2019 Plan has a term of ten years from the date it was adopted. Shares issued under the 2019 Plan shall be made available from (i) authorized but unissued shares of common stock, (ii) common stock held in treasury of the Company, or (iii) previously issued shares of common stock reacquired by the Company, including shares purchased on the open market.

 

 

Options

 

The Company granted options for the purchase of 900,000 shares of common stock during the three months ended March 31, 2021.

 

The Company granted options for the purchase of 2,570,000 shares of common stock during the three months ended March 31, 2020.

 

The weighted average grant date fair value of options issued and vested during the three months ended March 31, 2021 was $652,458 and $142,436, respectively. The weighted average grant date fair value of non-vested options was $8,011,337 at March 31, 2021.

 

The weighted average grant date fair value of options issued during the three months ended March 31, 2020 was $140,235. The weighted average non-vested grant date fair value of non-vested options was $1,766,067 at March 31, 2020.

 

Compensation-based stock option activity for qualified and unqualified stock options is summarized as follows:

 

						Weighted
						Average
		Shares				Exercise Price
Outstanding at January 1, 2021			24,573,700			$	0.86
Granted			900,000				2.00
Exercised			-				-
Expired or cancelled			(69,167	)			2.00
Outstanding at March 31, 2021			25,404,533			$	0.89

 

The following table summarizes information about options to purchase shares of the Company’s common stock outstanding and exercisable at March 31, 2021:

 

								Weighted-				Weighted-
								Average				Average
				Outstanding				Remaining Life				Exercise				Number
Exercise Prices				Options				In Years				Price				Exercisable
$	0.38				3,000,000				3.37			$	0.38				2,166,667
	0.40				3,600,000				3.31				0.40				2,375,000
	0.50				11,626,000				3.94				0.50				5,001,667
	2.00				5,838,533				4.58				1.98				-
	2.05				1,340,000				4.67				2.05				-
					25,404,533				3.97			$	0.89				9,543,334

 

The compensation expense attributed to the issuance of the options is recognized ratably over the vesting period.

 

Options granted under the 2019 Plan are exercisable for a specified period, generally five to ten years from the grant date and generally vest over three to four years from the grant date.

 

Total compensation expense related to the options was $838,762 and $325,429 for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was future compensation expense of $6,976,048 with a weighted average recognition period of 1.99 years related to the options.

 

 

The aggregate intrinsic value totaled $29,383,893 and $15,289,667, for total outstanding and exerciseable options, respectively, and was based on the Company’s estimated fair value of the common stock of $2.05 as of March 31, 2021, which is the aggregate fair value of the common stock that would have been received by the option holders had all option holders exercised their options as of that date, net of the aggregate exercise price.

 

On February 1, 2021, the Company granted options to purchase 500,000 shares of the Company’s common stock to an employee, with an exercise price of $2.00 per share. The options for 30% of the shares vest on the one-year anniversary of the grant date and then monthly over the subsequent two-year period. The options issued were valued using the Black-Scholes-Merton option pricing model under the following assumptions: stock price - $2.05; strike price - $2.00; expected volatility – 74%; risk free interest rate – 0.42%; dividend rate – 0%; and expected term – 3.53 years.

 

On February 1, 2021, the Company granted options to purchase 200,000 shares of the Company’s common stock to a board member, with an exercise price of $2.00 per share. The options vest monthly over a two-year period. The options issued were valued using the Black-Scholes-Merton option pricing model under the following assumptions: stock price - $2.05; strike price - $2.00; expected volatility – 74%; risk free interest rate – 0.42%; dividend rate – 0%; and expected term – 3.25 years.

 

On February 8, 2021, the Company granted options to purchase 500,000 shares of the Company’s common stock to an employee, with an exercise price of $2.00 per share. The options for 30% of the shares vest on the one-year anniversary of the grant date and then monthly over the subsequent two-year period. The options issued were valued using the Black-Scholes-Merton option pricing model under the following assumptions: stock price - $2.05; strike price - $2.00; expected volatility – 74%; risk free interest rate – 0.48%; dividend rate – 0%; and expected term – 3.53 years.

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

Legal Claims

 

There are no material pending legal proceedings in which the Company or any of its subsidiaries is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of its voting securities, or security holder is a party adverse to us or has a material interest adverse to the Company.

 

NOTE 11 – LOANS PAYABLE AND LINES OF CREDIT

 

Lines of Credit

 

TalaTek, Inc.

 

On July 29, 2019, TalaTek entered into a secured line of credit with SunTrust Bank (“SunTrust”) for $500,000. The line of credit bears interest at LIBOR plus 2.25%. The line of credit is an open-end revolving line of credit and may be terminated at any time by SunTrust without notice to TalaTek. At March 31, 2021, no amounts were drawn on the line of credit.

 

Technologyville, Inc.

 

On August 24, 2017, Techville entered into a secured revolving line of credit with Wintrust Bank (“Wintrust”) for $75,000. The line of credit bears interest at 1.99% for the first twelve (12) months, then Prime plus 2%, with a floor rate of 6% and a maturity date of August 24, 2021. The interest rate at March 31, 2021 was 6%. The line of credit is collateralized by all of Techville’s assets. There are no financial covenants requiring the Company to maintain specific financial ratios. During the three months ended March 31, 2021 Techville drew $221,346 against the line of credit and made payments of $190,988. At March 31, 2021 and December 31, 2020 there was $33,358 and $3,000 outstanding.

 

 

Loans Payable

 

Technologyville, Inc.

 

On April 29, 2019, Techville entered into a note payable with VCI Account Services, that subsequently was assigned to U.S. Bancorp, in the original principal amount of $59,905. The note has a maturity date of May 12, 2025 and bears an interest rate of 5.77% per annum. During the three months ended March 31, 2021, the Company made cash payments of $989, of which $767 and $222 was attributed to principal and interest, respectively. The loan is collateralized by a vehicle. There are no financial covenants requiring the Company to maintain specific financial ratios. At March 31, 2021, $45,114 was outstanding.

 

On June 22, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Techville entered into a note payable with a financial institution for $179,600 at an interest rate of 1% per annum and a maturity date of June 22, 2025. Pursuant to the note, principal and interest payments are deferred for ten months, which, at that time Techville may apply for loan forgiveness. If Techville does not apply for loan forgiveness Techville will be required to make monthly payments of $3,819 starting on October 1, 2021. All remaining principal and interest is due and payable at the maturity date. As of March 31, 2021, Techville has not applied for loan forgiveness. At any time during the term of the note, the note holder may call all remaining amounts owed in full. At March 31, 2021, $179,600 was outstanding.

 

Cerberus Cyber Sentinel Corporation

 

On December 31, 2018, GenResults entered into an unsecured note payable with Jemmett Enterprises, LLC, an entity controlled by the Company’s majority stockholder, in the orginal principal amount of $200,000. The note has a maturity date of June 15, 2021, and bears an interest rate of 6% per annum. The outstanding principal balance of this loan was $59,787 as of March 31, 2021 and December 31, 2020. At March 31, 2021 and December 31, 2020, the Company has recorded accrued interest of $22,417 and $23,934, respectively, with respect to this note payable. The Company has recorded interest expense of $2,983 and $2,275 during the three months ended March 31, 2021 and 2020, respectively.

 

On April 17, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Cerberus entered into a note payable with a financial institution for $530,000 at an interest rate of 1% per annum and a maturity date of April 17, 2022. Pursuant to the note, principal and interest payments are deferred for six months. Cerberus has 24 weeks, or until October 2, 2021, to apply for loan forgiveness. If Cerberus does not apply for loan forgiveness Cerberus will be required to make monthly payments of $29,678 starting on August 10, 2021. As of March 31, 2021, the Company has not applied for loan forgiveness. All remaining principal and interest is due and payable at the maturity date. At any time during the term of the note, the note holder may call the remaining amounts owed in full. At March 31, 2021, $530,000 was outstanding.

 

Clear Skies Security LLC

 

On May 8, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Clear Skies entered into a loan payable with a financial institution for $134,200 at an interest rate of 1% per annum and a maturity date of May 8, 2022. Pursuant to the loan, principal and interest payments are deferred for six months. The Company may apply for loan forgiveness at any time during the 24-week period beginning on November 5, 2020. If the Company does not apply for loan forgiveness the Company will be required to make monthly payments of $5,650 starting on December 8, 2020. As of March 31, 2021, Clear Skies has not applied for loan forgiveness. All remaining principal and interest is due and payable at the maturity date. At any time during the term of the loan, the loan holder may call all remaining amounts owed in full. At March 31, 2021, $134,200 was outstanding.

 

Alpine Security, LLC

 

On April 18, 2020, under the U.S. Small Business Administration’s Paycheck Protection Program, Alpine entered into a loan payable with a financial institution for $137,000 at an interest rate of 1% per annum and a maturity date of April 8, 2022. Pursuant to the loan, principal and interest payments are deferred for six months. Alpine may apply for loan forgiveness at any time during the ten-month period after October 18, 2020. If the Company does not apply for loan forgiveness the Company will be required to make monthly payments of $7,672 starting on August 18, 2021. As of March 31, 2021, Alpine has not applied for loan forgiveness. All remaining principal and interest is due and payable at the maturity date. At any time during the term of the loan, the loan holder may call all remaining amounts owed in full. At March 31, 2021, $137,000 was outstanding.

 

 

Convertible Note Payable

 

On December 23, 2020, the Company issued to a related party lender a convertible note payable in the principal amount of $3,000,000. The convertible note bears interest at 6% per annum, with an effective interest rate, due to the if converted value of the note, of 8.5% per annum, payable at maturity with a maturity date of December 31, 2021. Amounts due under the note may be converted into shares of the Company’s common stock, $0.00001 par value, at any time at the option of the Holder, at a conversion price of $2.00 per share. At December 31, 2020, the if converted value of the note, at the market price of $2.05 per share, would be $3,075,000. The issuance of the note resulted in a discount from the beneficial conversion feature totaling $75,000. Total straight-line amortization of this discount totaled $18,097 during the three months ended March 31, 2021 and has a remaining amortization period of .75 years. Total interest expense on the note was $45,000 for the three months ended March 31, 2021.

 

Future minimum payments under the above notes payable following the three months ended March 31, 2021, are as follows:

 

2021		$	3,069,238
2022			1,016,463
Total future minimum payments			4,085,701
Less: discount			(55,294	)
			4,030,407
Less: current			(3,013,944	)
		$	1,016,463

 

NOTE 12 – LEASES

 

A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.

 

All of the Company’s leases are classified as operating leases. With the adoption of Topic 842, operating lease agreements are required to be recognized on the condensed consolidated balance sheet as ROU assets and corresponding lease liabilities.

 

On January 1, 2021 and February 1, 2021, the Company recognized additional ROU assets and lease liabilities of $37,932 and $137,826, respectively. The Company elected to not recognize ROU assets and lease liabilities arising from office leases with initial terms of twelve 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 the Company will exercise that option.

 

When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated incremental borrowing rate at January 1, 2021. The weighted average incremental borrowing rate applied was 6%. As of March 31, 2021, the Company’s leases had a remaining weighted average term of 1.64 years.

 

 

The following table presents net lease cost and other supplemental lease information:

 

		Three Months Ended March 31, 2021
Lease cost
Operating lease cost (cost resulting from lease payments)		$	14,194
Short term lease cost			4,336
Net lease cost		$	18,530
Operating lease – operating cash flows (fixed payments)		$	14,194
Operating lease – operating cash flows (liability reduction)		$	12,772
Non-current leases – right of use assets		$	175,927
Current liabilities – operating lease liabilities		$	101,828
Non-current liabilities – operating lease liabilities		$	74,840

 

Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the three months ended March 31, 2021, are as follows:

 

Fiscal Year		Operating Leases
2021 (excluding the three months ended March 31, 2021)		$	81,930
2022			104,371
Total future minimum lease payments			186,301
Amount representing interest			(9,633	)
Present value of net future minimum lease payments		$	176,668

 

NOTE 13 – CONCENTRATION OF CREDIT RISK

 

Cash Deposits

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of March 31, 2021, and December 31, 2020, the Company had approximately $6,527,000 and $4,252,000, respectively, in excess of the FDIC insured limit.

 

Revenues

 

One client accounted for 32% of revenue for the three months ended March 31, 2021.

 

Two clients accounted for 92% of revenue for the three months ended March 31, 2020, as set forth below:

 

Client A			65	%
Client B			27	%

 

Accounts Receivable

 

One client accounted for 20% of the accounts receivable as of March 31, 2021.

 

Two clients accounted for 83% of the accounts receivable as of March 31, 2020, as set forth below:

 

Client A			45	%
Client B			38	%

 

 

Accounts Payable

 

Three vendors accounted for 39% of the accounts payable as of March 31, 2021, as set forth below:

 

Vendor A			15	%
Vendor B			12	%
Vendor C			12	%

 

One vendor accounted for 25% of the accounts payable as of March 31, 2020.

 

NOTE 14 – SUBSEQUENT EVENTS

 

Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855, from the balance sheet date through the date the financial statements were available to be issued, and has determined that no material events have occurred.

 

 

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

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes a number of forward-looking statements that reflect management’s current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2021, any of which may cause our company’s 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 in our forward-looking statements. These risks and factors include, by way of example and without limitation:

 

●	our ability to achieve and sustain profitability of the existing lines of business through expansion;
●	our ability to raise sufficient capital to acquire world-class engineer-owned cybersecurity companies;
●	our ability to attract and retain world-class 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 nationwide cybersecurity consolidator;
●	our ability to attract and retain 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;
●	business interruptions resulting from geo-political actions, including war, and terrorism or disease outbreaks (such as the recent outbreak of COVID-19);
●	our ability to attract and retain clients; and
●	our ability to navigate through the increasingly complex cybersecurity regulatory environment.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. 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.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in the future operating results over time, except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.

 

As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms “Company,” “we,” “us,” and “our” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation, 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”), and Alpine Security, LLC, an Illinois limited liability company (“Alpine”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

 

 

Corporate History

 

Cerberus Cyber Sentinel Corporation (“Cerberus Sentinel”) was formed on March 5, 2019 as a Delaware corporation. Our principal offices are located at 6900 E. Camelback Road, Suite 240, Scottsdale, AZ 85251.

 

Effective May 25, 2020, we entered into a Stock Purchase Agreement with Techville and its sole shareholder, pursuant to which Techville became a wholly owned subsidiary of the Company (the “Techville Acquisition”). Under the terms of the Techville Acquisition, all issued and outstanding common stock of Techville was exchanged for an aggregate of 3,392,271 shares of the Company’s common stock.

 

Effective August 1, 2020, we entered into a Stock Purchase Agreement with Clear Skies and its equity holders, pursuant to which Clear Skies became a wholly owned subsidiary of the Company (the “Clear Skies Acquisition”). Under the terms of the Clear Skies Acquisition, all issued and outstanding equity securities in Clear Skies were exchanged for an aggregate of 2,330,000 shares of the Company’s common stock.

 

On December 16, 2020, we entered into an Agreement and Plan of Merger pursuant to which Alpine became a wholly owned subsidiary of the Company. All units representing membership interests of Alpine issued and outstanding were converted into 900,000 shares of our common stock.

 

Our Business

 

We are a security services company comprised of highly trained security professionals who work with clients to create a continuously aware security culture. We do not sell cybersecurity products. We position ourselves as a trusted cybersecurity advisor and are committed to delivering tailored security solutions to organizations of different sizes and across all geographies and industries to fit their budgetary needs and limit their cyber threat exposure.

 

We currently provide a multitude of cybersecurity services including managed security service, cybersecurity consulting, technology consulting, compliance auditing, vulnerability assessment, penetration testing, security remediation, Security Operations Center (“SOC”) set-up and consulting and cybersecurity training. We differentiate ourselves from competitors by staying technology agnostic. We believe that many cybersecurity service providers in the market today are committed to a specific technology solution which limits their service scope and ability to quickly respond to any emerging cybersecurity challenges. In addition, as we continue to serve our clients within our existing capacities, we plan to continue making strategic acquisitions of small-to-medium-sized engineer-led cybersecurity service businesses to continue to expand our service scope and geographical coverage. We believe that having a world-class technology team with multi-faceted expertise is key to providing technology agnostic solutions to our clients and maximizing their return on investment from cybersecurity and information technology (“IT”) spending.

 

Cybersecurity Market

 

As the world has become increasingly connected through the Internet and the Internet of Things (“IoT”), cyberattacks have prevailed and evolved over the years, in different forms, causing uncontainable threats to the integrity and privacy of enterprise and personal data and resulted in significant economic losses globally.

 

In response to the increasing economic damage caused by heightened cybersecurity risks, regulatory bodies have pushed the implementation of new cybersecurity legislations, and cyber insurance companies have increased minimum cybersecurity requirements. We believe that we are well positioned in a fast-growing industry to provide businesses with a wide scope of cybersecurity services and with significant opportunities for growth.

 

Service Offering

 

We currently offer two major types of services to clients: Managed Services and Consulting Services.

 

 

Managed Services

 

Our Managed Services focus on a holistic approach to cybersecurity based on an upfront gap analysis of our clients’ existing cybersecurity practices. We provide multiple offerings in the service portfolio including the following:

 

●	CISO-as-a-service: Many companies are in need of cybersecurity services but do not have the capital resources or knowledge base to hire a Chief Information Security Officer (“CISO”). We offer this service to companies on an ongoing consulting basis as a resource to augment their management team. CISO-as-a-service includes road mapping the future needs for the client and providing our knowledge and expertise to help them achieve their security needs;
●	Culture education and enablement offering: This targets the root cause for approximately 75% of cyber breach events by starting with a culture of security-forward thinking;
●	Tools and technology provisioning offering: We provide technology-agnostic solutions catering to a client’s existing products and to enhance the cyber defense system by making carefully selected additions without bias and to fit their financial profile;
●	Data and privacy offering: This ensures that a client’s data security and privacy are properly managed to alleviate risks of data loss and breach;
●	Regulations and compliance offering: We evaluate a client’s policies and procedures and implement the appropriate compliance framework based on the latest industry regulations and obligations; and
●	SOC services: We offer SOC-as-a-service, which is a subscription-based service that manages and monitors client’s logs, devices, clouds, network and assets for possible cyber threats. This service provides the clients with the knowledge and skills necessary to combat cybersecurity threats.

 

Consulting Services

 

Our consulting services include a wide array of tailored solutions for organizations of all sizes. Our in-depth industry expertise allows us to act as the trusted advisor of our clients to help them lower their risk profile, minimize cost impact to organizations and meet regulatory compliance demands. We specialize in:

 

●

Cybersecurity consulting: Bringing the culture of cybersecurity to a client’s leadership team and penetrating throughout the organization is a critical first step of building any cybersecurity system. Through our consulting service, we dive in both at the cultural and technical aspects of cybersecurity within the organization. We help our clients build effective policies and best practices, design or enhance a cybersecurity system and train the executive management team so that the culture at the top is set to facilitate diligent implementation of cybersecurity awareness.

 

●	Compliance auditing: We provide auditing services under several compliance frameworks as follows:

 

○

Service Organization 2 – This is an auditing procedure that focuses on a business’ non-financial reporting controls related to security, availability, processing, integrity, confidentiality, and privacy of a system;

○

Payment Card Industry Data Security Standard– This is a standard administered by the Payment Card Industry Security Standards Council;

○

Health Insurance Portability and Accountability Act of 1996 and The Health Information Technology for Economic and Clinical Health Act of 2009 – These are laws regulated by the Department of Health and Human Services to secure the privacy and confidentiality of protected health information;

○

HITRUST CSF – This is a comprehensive security framework developed by the Health Information Trust Alliance in collaboration with healthcare, technology and information security leaders, to create, access, store and exchange sensitive and/or regulated data; and

○

The National Institute of Standards and Technology – This was formally known as the National Bureau of Standards, which is a federal agency that promotes and maintains measurement standards while encouraging and assisting industry and science to develop and use these standards.

 

 

●

Gap and risk assessment: We perform security risk gap analysis and advanced threat intelligence and analytics to identify potential areas of security risk and monitor potential breaches on a frequent basis. Evaluating all aspects of the business from executive management, finance, legal, human resources, compliance, operations and then IT. This is to ensure the organization has a holistic understanding of their company’s security posture.

 

●

Penetration testing: We offer network and application-level penetration testing performed through industry tools and verified by certified security experts. At the network level, we conduct network scans for clients at pre-defined intervals based on their preference. Subsequent automatic scans are performed at the same IP address. We also make further attempts to exploit any vulnerability found by the network scan to eliminate false positives. At the application level, we utilize techniques such as parameter tampering, cookie poisoning, session hijacking, user privilege escalation, credential manipulation, forceful browsing, backdoors and debug options, configuration subversion, input validation bypass, SQL injection, and cross-site scripting to assess the application for known vulnerabilities.

 

Significant Developments During the Quarter

 

Appointment of Director

 

On February 1, 2021, our Board of Directors appointed Sandra Morgan as a director. Ms. Morgan, 42, has served as Chairwoman of the Nevada Gaming Control Board from January 2019 to November 2020 and as Commissioner of the Nevada Gaming Commission from May 2018 to Jan 2019. She also served as Director of External Affairs at AT&T from January 2016 to January 2018. Ms. Morgan also currently serves on the Board of Directors at Fidelity National Financial and holds a Juris Doctor, Law from UNLV. Ms. Morgan is qualified for service as a director of the Company due to her experience with regulatory and compliance issues.

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020

 

Our financial results for the three months ended March 31, 2021 are summarized as follows in comparison to the three months ended March 31, 2020:

 

For the Three Months Ended March 31, 2021

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Revenue		$	437,760			$	984,434			$	570,290			$	567,294			$	2,559,778
Cost of revenue			497,847				640,662				323,957				276,697				1,739,163
Gross profit			(60,087	)			343,772				246,333				290,597				820,615
Operating expenses			1,669,064				435,706				265,339				158,875				2,528,984
Operating income (loss)			(1,729,151	)			(91,934	)			(19,006	)			131,722				(1,708,369	)
Other income (expense)			(66,750	)			6				(409	)			(1,337	)			(68,490	)
Loss before income taxes		$	(1,795,901	)		$	(91,928	)		$	(19,415	)			130,385			$	(1,776,859	)

 

For the Three Months Ended March 31, 2020

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Revenue		$	347,716			$	720,505			$	-			$	-			$	1,068,221
Cost of revenue			234,807				540,434				-				-				775,241
Gross profit			112,909				180,071				-				-				292,980
Operating expenses			834,883				294,960				-				-				1,129,843
Operating loss			(721,974	)			(114,889	)			-				-				(836,863	)
Other income (expense)			(2,319	)			38				-				-				(2,281	)
Loss before income taxes		$	(724,293	)		$	(114,851	)		$	-			$	-			$	(839,144	)

 

 

Variance

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Revenue		$	90,044			$	263,929			$	570,290			$	567,294			$	1,491,557
Cost of revenue			263,040				100,228				323,957				276,697				963,922
Gross profit			(172,996	)			163,701				246,333				290,597				527,635
Operating expenses			834,181				140,746				265,339				158,875				1,399,141
Operating loss			(1,007,177	)			22,955				(19,006	)			131,722				(871,506	)
Other expense			(64,431	)			(32	)			(409	)			(1,337	)			(66,209	)
Loss before income taxes		$	(1,071,608	)		$	22,923			$	(19,415	)		$	130,385			$	(937,715	)

 

(1)	Based on the insignificant nature of the operational activities of Clear Skies and Alpine in comparison to the entity as a whole during the three months ended March 31, 2021, the Company has combined them into one category, titled Other, for the purposes of this presentation.

 

Revenues

 

For the Three Months Ended March 31, 2021

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Managed services		$	-			$	99			$	440,318			$	-			$	440,417
Consulting services			437,760				984,335				129,972				567,294				2,119,361
Total revenue		$	437,760			$	984,434			$	570,290			$	567,294			$	2,559,778

 

For the Three Months Ended March 31, 2020

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Managed services		$	137,812			$	101			$	-			$	-			$	137,913
Consulting services			209,904				720,404				-				-				930,308
Total revenue		$	347,716			$	720,505			$	-			$	-			$	1,068,221

 

Variance

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Managed services		$	(137,812	)		$	(2	)		$	440,318			$	-			$	302,504
Consulting services			227,856				263,931				129,972				567,294				1,189,053
Total revenue		$	90,044			$	263,929			$	570,290			$	567,294			$	1,491,557

 

(1)	Based on the insignificant nature of the operational activities of Clear Skies and Alpine in comparison to the entity as a whole during the three months ended March 31, 2021, the Company has combined them into one category, titled Other, for the purposes of this presentation.

 

 

Revenues increased for Cerberus by $90,044, or 26%, for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, due to an increase in customers as compared to the three months ended March 31, 2020.

 

Revenues increased for TalaTek by $263,929, or 37%, for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, as a result of (i) an increase in contract revenue from a significant client of approximately $111,000 and (ii) various contracts that were active during the three months ended March 31, 2021 that were entered into subsequent to March 31, 2020.

 

Revenues for Techville were $570,290 for the three months ended March 31, 2021. We did not recognize any revenue attributable to Techville during the three months ended March 31, 2020, because of the acquisition consummated on May 25, 2020. Approximately $440,000 was a result of Techville’s managed service offerings and approximately $130,000 was a result of Techville’s miscellaneous hardware sales associated with Techville’s consulting service offerings.

 

Revenues for Clear Skies and Alpine were $567,294 for the three months ended March 31, 2021. We did not recognize any revenue attributable to Clear Skies or Alpine during the three months ended March 31, 2020, because of the acquisitions consummated on August 1, 2020 and December 16, 2020, repsectively. Virtually all of these revenues were a result of Clear Skies’ and Alpine’s gap and risk assessment offerings.

 

Expenses

 

Cost of Revenues

 

For the Three Months Ended March 31, 2021

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Managed services		$	-			$	-			$	193,667			$	-			$	193,667
Consulting services			59,470				34,992				-				23,332				117,794
Cost of payroll			438,377				605,670				130,290				253,365				1,427,702
Total cost of revenue		$	497,847			$	640,662			$	323,957			$	276,697			$	1,739,163

 

For the Three Months Ended March 31, 2020

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Managed services		$	18,970			$	-			$	-			$	-			$	18,970
Consulting services			26,486				89,361				-				-				115,847
Cost of payroll			189,351				451,073				-				-				640,424
Total cost of revenue		$	234,807			$	540,434			$	-			$	-			$	775,241

 

Variance

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Managed services		$	(18,970	)		$	-			$	193,667			$	-			$	174,697
Consulting services			32,984				(54,369	)			-				23,332				1,947
Cost of payroll			249,026				154,597				130,290				253,365				787,278
Total cost of revenue		$	263,040			$	100,228			$	323,957			$	279,697			$	963,922

 

(1)

Based on the insignificant nature of the operational activities of Clear Skies and Alpine in comparison to the entity as a whole during the three months ended March 31, 2021, the Company has combined them into one category, titled Other, for the purposes of this presentation.

 

 

Cost of revenues increased for Cerberus by $263,040, or 112%, for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, and was primarily the result of an increase in employees due to Alpine’s employees being transferred to Cerberus during the three months ended March 31, 2021.

 

Cost of revenues increased for TalaTek by $100,228, or 19%, for the three months ended March 31,2021, as compared to the three months ended March 31, 2020, as a result of an increase in employees resulting in an increase in salaries.

 

Cost of revenues for Techville were $323,957 for the three months ended March 31, 2021. We did not recognize any cost of revenues for Techville for the three months ended March 31, 2020, because the acquisition, was consummated on May 25, 2020.

 

Cost of revenues for Clear Skies and Alpine were $279,697 for the three months ended March 31, 2021. We did not recognize any costs of revenues for Clear Skies or Alpine for the three months ended March 31, 2020, because the acquisitions were consummated on August 1, 2020 and December 16, 2020, repsectively.

 

Operating Expenses

 

For the Three Months Ended March 31, 2021

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Professional fees		$	135,364			$	361			$	4,655			$	16,974			$	157,354
Advertising and marketing			8,430				28,881				1,351				6,565				45,227
Selling, general and administrative			686,508				406,464				259,333				135,336				1,487,641
Stock based compensation			838,762				-				-				-				838,762
Total operating expenses		$	1,669,064			$	435,706			$	265,339			$	158,875			$	2,528,984

 

For the Three Months Ended March 31, 2020

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Professional fees		$	195,251			$	1,103			$	-			$	-			$	196,354
Advertising and marketing			5,438				22,424				-				-				27,862
Selling, general and administrative			308,765				271,433				-				-				580,198
Stock based compensation			325,429				-				-				-				325,429
Total operating expenses		$	834,883			$	294,960			$	-			$	-			$	1,129,843

 

Variance

 

		Cerberus				TalaTek				Techville				Other(1)				Total
Professional fees		$	(59,887	)		$	(742	)		$	4,655			$	16,974			$	(39,000	)
Advertising and marketing			2,992				6,457				1,351				6,565				17,365
Selling, general and administrative			377,743				135,031				259,333				135,336				907,443
Stock based compensation			513,333				-				-				-				513,333
Total operating expenses		$	834,181			$	140,746			$	265,339			$	158,875			$	1,399,141

 

(1)	Based on the insignificant nature of the operational activities of Clear Skies and Alpine in comparison to the entity as a whole during the three months ended March 31, 2021, the Company has combined them into one category, titled Other, for the purposes of this presentation.

 

 

Operating expenses increased for Cerberus by $834,181 or 100%, for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, primarily as a result of (i) an increase in payroll due to Alpine’s employees being transferred to Cerberus during the three months ended March 31, 2021, and (ii) an increase in stock-based compensation of $513,333 due to an increase in stock option grants as a result of the Techville, Clear Skies, and Alpine acquisitions.

 

Operating expenses increased for TalaTek by $140,746, or 48%, for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, as a result of an increase in employees resulting in an increase in salaries.

 

Operating expenses for Techville were $265,339 for the three months ended March 31, 2021. We did not recognize any operating expenses for Techville for the three months ended March 31, 2020, because the acquisition was consummated on May 25, 2020. Approximately $259,000 was attributable to Techville’s administrative payroll and benefits.

 

Operating expenses for Clear Skies and Alpine were $158,875 for the three months ended March 31, 2021. We did not recognize any operating expenses for Clear Skies or Alpine for the three months ended March 31, 2020, because the acquisitions were consummated on August 1, 2020 and December 16, 2020, repsectively. Approximately $135,000 was attributable to Clear Skies’ administrative payroll and benefits.

 

Working Capital Surplus

 

Our working capital surplus as of March 31, 2021, in comparison to our working capital surplus as of December 31, 2020, is summarized as follows:

 

		As of
		March 31,				December 31,
		2021				2020
Current assets		$	8,665,497			$	6,346,008
Current liabilities			3,944,768				3,863,594
Working capital surplus		$	4,720,729			$	2,482,414

 

The increase in current assets is primarily due to increases in cash and cash equivalents and accounts receivable of $2,129,579 and $176,484, respectively. The increase in current liabilities is primarily due to the increase in the current portion of lease liabilities of $92,839.

 

Cash Flows

 

Our cash flows for the three months ended March 31, 2021, in comparison to our cash flows for the three months ended March 31, 2020, can be summarized as follows:

 

		Three months ended March 31,
		2021				2020
Net cash used in operating activities		$	(1,130,173	)		$	(443,938	)
Net cash provided by investing activities			-				-
Net cash provided by financing activities			3,259,752				140,000
Increase (decrease) in cash		$	2,129,579			$	(303,938	)

 

Operating Activities

 

Net cash used in operating activities was $1,130,173 for the three months ended March 31, 2021 and was primarily due to cash used to fund a net loss of $1,776,859, adjusted for non-cash expenses in the aggregate of $911,534 and additional cash outlaid by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts receivable. Net cash used in operating activities was $443,938 for the three months ended March 31, 2020 and was primarily due to cash used to fund a net loss of $839,144, adjusted for non-cash expenses in the aggregate of $352,048, 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.

 

 

Financing Activities

 

Net cash provided by financing activities for the three months ended March 31, 2021 was $3,259,752, which was primarily due to cash received from the sale of the Company’s common stock of $3,250,000. Net cash provided by financing activities for the three months ended March 31, 2020 was $140,000 and was due to cash received from the sale of the Company’s common stock of $140,000.

 

Liquidity

 

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At March 31, 2021, the Company had an accumulated deficit of approximately $6,644,000 and working capital surplus of approximately $4,721,000. For the three months ended March 31, 2021, the Company had a loss from operations of approximately $1,708,000 and negative cash flows from operations of approximately $1,130,000. Although the Company is showing positive revenues and gross profit trends, the Company expects to incur further losses through the end of 2021.

 

To date the Company has been funding operations primarily through the sale of equity in private placements and revenues generated by the Company’s services. During the three months ended March 31, 2021, the Company received $3,250,000 from private placements to accredited investors of the Company’s common stock.

 

Based on its current cash resources and commitments, the Company believes it will be able to maintain its current planned development and corresponding level of expenditure for at least twelve months from the date of the issuance of these unaudited condensed consolidated financial statements, although no assurance can be given that it will not need additional funds prior to such time.

 

Effects of Inflation

 

We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.

 

Significant Accounting Policies and Estimates

 

Our significant accounting policies are more fully described in the notes to our financial statements included herein for the quarter ended March 31, 2021 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 31, 2021.

 

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

 

The Company allocates 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. The Company includes the results of operations of the business that it has acquired in its 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.

 

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

 

Impairment of Long-lived Assets

 

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

 

Revenue Recognition

 

The Company’s agreements with its clients are primarily service contracts that range in duration from a few months to one year. The Company recognizes 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 the Company is 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;

●	the Company can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”);

●	the Company can determine the transaction price for the services to be transferred; and

 

 

●	the contract has commercial substance and it is probable that the Company 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 its contracts, the Company receives non-refundable upfront payments. The Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, 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. The Company’s credit terms to clients generally average thirty days, although in some cases there are payments required in 15 days.

 

The Company does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.

 

Disaggregation of Revenue

 

Revenue consists of the following by service offering for the three months ended March 31, 2021:

 

		Managed Services				Consulting Services				Total
Primary Sector Markets
Public		$	-			$	980,280			$	980,280
Private			407,493				1,120,486				1,527,979
Not-for-Profit			32,294				18,595				51,519
		$	440,417			$	2,119,361			$	2,559,778
Major Service Lines
Gap and Risk Assessment		$	-			$	1,989,888			$	1,989,888
Tech Connect			440,417				-				440,417
Hardware			-				127,553				127,553
Other			-				1,920				1,920
		$	440,417			$	2,119,361			$	2,559,778

 

Revenue consists of the following by service offering for the three months ended March 31, 2020:

 

		Managed Services				Consulting Services				Total
Primary Sector Markets
Public		$	-			$	705,125			$	705,125
Private			137,913				225,183				363,096
Not-for-Profit			-				-				-
		$	137,913			$	930,308			$	1,068,221
Major Goods/Service Lines
Gap and Risk Assessment			-				930,308				930,308
Managed Security Services			137,913				-				137,913
		$	137,913			$	930,308			$	1,068,221

 

Practical Expedients

 

As part of ASC 606, the Company has adopted several practical expedients including the following: (i) the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less and (ii) the Company recognizes any incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.

 

 

Reimbursed Expenses

 

The Company includes reimbursed expenses in revenues and costs of revenue as the Company is primarily responsible for fulfilling the promise to provide the specified service, including the integration of the related services into a combined output to the client, which are inseparable from the integrated service. These costs include such items as consumables, transportation and travel expenses, over which the Company has discretion in establishing prices.

 

Costs of Revenue

 

Costs of revenue include (i) compensation and benefits for billable employees and consultants directly involved with delivering services offerings and engagements; (ii) consumables used for the services; and (iii) other expenses directly related to service contracts such as professional services, meals and travel expenses.

 

Volatility in Stock-Based Compensation

 

The volatility is based on historical volatilities of companies in comparable stages as well as the historical volatility of companies in the industry and, by statistical analysis of the daily share-pricing model. The volatility of stock-based compensation at any point in time is based on historical volatility of similar companies in the industry for the last two to five years.

 

New and Recently Adopted Accounting Pronouncements

 

Any new and recently adopted accounting pronouncements are more fully described in Note 2 to our unaudited condensed consolidated financial statements herein for the quarter ended March 31, 2021.

 

Off-Balance Sheet Arrangements

 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable. As a smaller reporting company, we are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure 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 who is also our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.

 

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 and subject to the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective due to the material weakness(es) in internal control over financial reporting disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2020.

 

 

Our management 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 is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended March 31, 2021, we hired additional finance and accounting staff that has positively impacted or segregation of duties. In addition, during the quarter ended March 31, 2021, we established an audit committee.

 

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 March 31, 2021, other than those noted above, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors

 

An investment in our common stock involves a number of very significant risks. You should carefully consider the risk factors included in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 31, 2021, in addition to other information contained in those reports and in this quarterly report in evaluating the Company and its business before purchasing shares of our common stock. The Company’s business, operating results and financial condition could be adversely affected due to any of those risks.

 

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

 

The following disclosures set forth certain information with respect to all securities sold by the Company during the three months ended March 31, 2021 without registration under the Securities Act of 1933 (the “Securities Act”):

 

During the three months ended March 31, 2021, the Company issued an aggregate of 1,625,000 shares of common stock with a fair value of $2.00 per share to investors for cash proceeds of $3,250,000. The proceeds are being used for working capital.

 

The above transactions did not involve any underwriters, underwriting discounts or commissions, or any public offering. The Company relied upon the exemption from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof and/or Regulation D promulgated by the SEC under the Securities Act.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

				Incorporated by Reference
Exhibit Number		Exhibit Description		Form		Exhibit		Filing Date
3.1		Certificate of Incorporation of Cerberus Cyber Sentinel Corporation filed March 5, 2019		10-12G		3.1		10/2/2019
3.2		Certificate of Amendment of Certificate of Incorporation of Cerberus Cyber Sentinel Corporation filed April 17, 2019		10-12G		3.2		10/2/2019
3.3		Certificate of Amendment of Certificate of Incorporation of the Registrant effective September 26, 2019		10-12G		3.3		10/2/2019
3.4		By-laws of the Registrant		10-12G		3.4		10/2/2019
4.1		Form of Common Stock Certificate of the Registrant		10-K		4.1		3/30/20
4.2		Description of Securities Registered under Section 12 of the Exchange Act		10-K		4.2		3/30/20
31.1*		Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer
32.1**		Section 1350 Certification of Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

**In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

# Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to Item 15(b) of this report

 

 

SIGNATURES

 

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

 

CERBERUS CYBER SENTINEL CORPORATION
By:	/s/ David G. Jemmett
	David G. Jemmett
	Chief Executive Officer
	(Principal Executive Officer and Principal Financial Officer)
	Date: May 17, 2021