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 September 30, 2020

 

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.)

 

7333 E. Doubletree Ranch Road, Suite D270 Scottsdale, Arizona		85258
(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	[  ]	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 November 16, 2020, there were 115,034,771 shares of the registrant’s common stock outstanding.

 

 

 

CERBERUS CYBER SENTINEL CORPORATION

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

 

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	39
ITEM 4.	Controls and Procedures	39
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	39
ITEM 1A.	Risk Factors	40
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
ITEM 3.	Defaults Upon Senior Securities	40
ITEM 4.	Mine Safety Disclosures	40
ITEM 5.	Other Information	40
ITEM 6.	Exhibits	41
SIGNATURES		42

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CERBERUS CYBER SENTINEL CORPORATION and subsidiaries

CONDENSED Consolidated Balance Sheets

 

		September 30,				December 31,
		2020				2019
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	2,416,007			$	1,876,645
Accounts receivable, net of allowances for doubtful accounts of $70,847 and $40,000 , respectively			978,362				531,965
Prepaid expenses and other current assets			147,360				70,277
Total Current Assets			3,541,729				2,478,887
Property and equipment, net of accumulated depreciation of $9,426 and $758, respectively			61,172				10,900
Right of use asset			15,664				-
Intangible assets, net of accumulated amortization of $62,592 and $15,648, respectively			1,037,908				1,084,852
Goodwill			3,008,186				922,579
Total Assets		$	7,664,659			$	4,497,218
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	974,071			$	468,900
Stock payable			34,000				-
Lease liability			2,167				-
Loans payable			853,070				-
Note payable - related party			109,787				109,787
Total Current Liabilities			1,973,095				578,687
Long-term Liabilities:
Loans payable, net of current portion			38,889				-
Lease liability, net of current portion			13,682				-
Total Liabilities			2,025,666				578,687
Commitments and Contingencies
Stockholders’ Equity:
Common stock, $.00001 par value; 250,000,000 shares authorized; 114,309,771 and 113,912,500 shares issued and 114,309,771 and 107,912,500 outstanding at September 30, 2020 and December 31, 2019, respectively			1,143				1,139
Additional paid-in capital			9,511,806				7,770,902
Accumulated deficit			(3,873,956	)			(1,453,510	)
			5,638,993				6,318,531
Treasury stock			-				(2,400,000	)
Total Stockholders’ Equity			5,638,993				3,918,531
Total Liabilities and Stockholders’ Equity		$	7,664,659			$	4,497,218

 

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

 

 

CERBERUS CYBER SENTINEL CORPORATION

CONDENSED Consolidated STATEMENTS OF OPERATIONS

(Unaudited)

 

		For The Three Months Ended								For The Nine Months Ended
		September 30, 2020				September 30, 2019				September 30, 2020				September 30, 2019
Revenue:
Managed services		$	593,181			$	112,250			$	1,347,438			$	334,700
Consulting services			1,416,416				169,003				3,280,867				298,684
Total revenue			2,009,597				281,253				4,628,305				633,384
Cost of revenue:
Managed services			211,060				67,120				256,197				97,880
Consulting services			231,685				28,723				553,409				129,416
Cost of payroll			868,810				95,329				2,135,691				95,329
Total cost of revenue			1,311,555				191,172				2,945,297				322,625
Total gross profit			698,042				90,081				1,683,008				310,759
Operating expenses:
Professional fees			284,511				137,653				685,821				498,324
Salaries and benefits			716,396				129,391				1,525,067				129,391
Advertising and marketing			30,488				11,500				104,058				22,840
Selling, general and administrative			304,369				59,133				709,974				138,182
Stock-based compensation			392,661				323,808				1,062,000				511,498
Loss on write-off of account receivable			-				-				15,000				-
Total operating expenses			1,728,425				661,485				4,101,920				1,300,235
Loss from operations			(1,030,383	)			(571,404	)			(2,418,912	)			(989,476	)
Other income (expense):
Interest expense, net			(5,567	)			(3,318	)			(12,285	)			(9,385	)
Other income			751				-				10,751				-
Total other income (expense)			(4,816	)			(3,318	)			(1,534	)			(9,385	)
Loss before provision for income taxes			(1,035,199	)			(574,722	)			(2,420,446	)			(998,861	)
Provision for income taxes			-				-				-				-
Net loss		$	(1,035,199	)		$	(574,722	)		$	(2,420,446	)		$	(998,861	)
Net loss per common share - basic		$	(0.01	)		$	(0.01	)		$	(0.02	)		$	(0.01	)
Net loss per common share - diluted		$	(0.01	)		$	(0.01	)		$	(0.02	)		$	(0.01	)
Weighted average shares outstanding - basic			113,174,336				101,738,587				110,305,671				91,287,818
Weighted average shares outstanding - diluted			113,174,336				101,738,587				110,305,671				91,287,818

 

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				Accumulated				Treasury
		Shares				Amount				Capital				Deficit				Stock				Total
Balance at January 1, 2019			70,000,000			$	700			$	9,990			$	25,438			$	-			$	36,128
Distributions to member			-				-				-				(125,270	)			-				(125,270	)
Net income			-				-				-				99,142				-				99,142
Balance as of March 31, 2019			70,000,000				700				9,990				(690	)			-				10,000
Stock based compensation - common stock			30,000,000				300				187,390				-				-				187,690
Stock issued in VCAB merger			2,000,000				20				12,440				-				-				12,460
Stock issued for cash			1,000,000				10				399,990				-				-				400,000
Net loss			-				-				-				(523,281	)			-				(523,281	)
Balance as of June 30, 2019			103,000,000				1,030				609,810				(523,971	)			-				86,869
Stock issued for cash			525,000				5				209,995				-				-				210,000
Treasury stock			(6,000,000	)			-				2,399,940				-				(2,400,000	)			(60	)
Stock based compensation - options			-				-				83,808				-				-				83,808
Stock based compensation - common stock			600,000				6				239,994				-				-				240,000
Net loss			-				-				-				(574,722	)			-				(574,722	)
Balance as of September 30, 2019			98,125,000			$	1,041			$	3,543,547			$	(1,098,693	)		$	(2,400,000	)		$	45,895
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			-				-				325,429				-				-				325,429
Common shares 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
Stock based compensation			-				-				343,910				-				-				343,910
Stock issued for Technologyville acquisition			3,392,271				34				1,356,874				-				-				1,356,908
Net loss			-				-				-				(546,103	)			-				(546,103	)
Balance as of June 30, 2020			111,654,771				1,117				7,537,171				(2,838,757	)			-				4,699,531
Stock based compensation			-				-				392,661				-				-				392,661
Common shares issued for cash			325,000				3				649,997				-				-				650,000
Stock issued for Clear Skies acquisition			2,330,000				23				931,977				-				-				932,000
Net loss			-				-				-				(1,035,199	)			-				(1,035,199	)
Balance as of September 30, 2020			114,309,771			$	1,143			$	9,511,806			$	(3,873,956	)		$	-			$	5,638,993

 

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)

 

		For the Nine Months Ended
		September 30, 2020				September 30, 2019
Cash flows from operating activities:
Net loss		$	(2,420,446	)		$	(998,861	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock based compensation - stock options			1,062,000				523,658
Loss on write-off of accounts receivable			15,000				-
Depreciation and amortization			55,365				282
Issuance of common stock for services			34,000				-
ROU amortization			3,729				-
Changes in operating assets and liabilities:
Accounts receivable, net			(191,958	)			34,164
Prepaid expenses and other current assets			(77,083	)			(21,733	)
Accounts payable and accrued expenses			364,961				483,460
Lease liability			(3,544	)			-
Other current liabilities			-				10,601
Net cash provided by (used in) operating activities			(1,157,976	)			31,571
Cash flows from investing activities:
Purchases of property and equipment			-				(3,386	)
Cash acquired in acquisitions			254,180				-
Net cash provided by (used in) investing activities			254,180				(3,386	)
Cash flows from financing activities:
Distributions to member			(20,000	)			(125,270	)
Proceeds from PPP loans			709,600				-
Proceeds from sale of common stock			790,000				610,300
Proceeds from line of credit			60,000				-
Purchase of treasury stock			-				(60	)
Payment on loans payable			(2,737	)			(60,213	)
Payment on line of credit			(93,705	)			-
Net cash provided by financing activities			1,443,158				424,757
Net increase in cash and cash equivalents			539,362				452,942
Cash and cash equivalents - beginning of period			1,876,645				80,006
Cash and cash equivalents - end of period		$	2,416,007			$	532,948
Supplemental cash flow information:
Cash paid for:
Interest		$	169			$	-
Income taxes		$	5,882			$	-
Non-cash investing and financing activities:
Right of use asset and lease liability recorded upon adoption of ASC 842		$	19,393			$	-
Common shares issued in Technologyville acquisition		$	1,356,908			$	-
Common shares issued in Clear Skies acquisition		$	932,000			$	-
Stock contribution		$	-			$	2,400,000
Treasury stock purchase		$	-			$	2,399,940

 

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 7333 E. Doubletree, Suite D270, Scottsdale, Arizona 85258.

 

On April 12, 2019, Cerberus acquired GenResults, LLC, an Arizona limited liability company (“GenResults”), which became a wholly owned subsidiary. GenResults was established on June 22, 2015. Prior to the Company’s acquisition of GenResults, GenResults was wholly-owned by an entity affiliated with David G. Jemmett, Cerberus’ Chief Executive Officer and a director of the Company. Due to the companies being under common control, the Company accounted for the acquisition as a reorganization.

 

Effective October 1, 2019, the Company entered into an Agreement and Plan of Merger (the “TalaTek Merger Agreement”) pursuant to which TalaTek, LLC, a Virginia limited liability company (“TalaTek”), became a wholly owned subsidiary of the Company. Under the TalaTek Merger Agreement, all issued and outstanding units representing membership interests in TalaTek were converted into an aggregate of 6,200,000 shares of the Company’s common stock.

 

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.

 

Nature of the Business

 

Cerberus Sentinel is a security services company comprised of security professionals who work with clients 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 September 30, 2020, the Company had an accumulated deficit of approximately $3,870,000 and working capital surplus of approximately $1,569,000. For the nine months ended September 30, 2020, the Company had a loss from operations of approximately $2,420,000 and negative cash flows from operations of approximately $1,158,000. Although the Company is showing positive revenues and gross profit trends, the Company expects to incur further losses through the end of 2020.

 

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 nine months ended September 30, 2020, the Company received $790,000 from private placements to accredited investors of the Company’s common stock and approximately $710,000 from a loan through the U.S. Small Business Administration’s Paycheck Protection Program.

 

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 financial information as of and for the three and nine months ended September 30, 2020 and 2019 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 nine months ended September 30, 2020 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, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2020.

 

Consolidation

 

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

 

Reclassifications

 

Certain reclassifications have been made to the financial statements for the three and nine months ended September 30, 2019 to conform to the financial statements presentation for the three and nine months ended September 30, 2020. 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 following critical accounting policies 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 nine months ended September 30, 2020:

 

		Managed Services				Consulting Services				Total
Primary Sector Markets
Public		$	6,500			$	2,496,939			$	2,503,439
Private			1,296,124				730,368				2,026,492
Not-for-Profit			44,814				53,560				98,374
		$	1,347,438			$	3,280,867			$	4,628,305
Major Service Lines
CISO as a Service		$	26,950			$	-			$	26,950
Gap and Risk Assessment			-				2,916,511				2,916,511
Managed Security Services			932,722				-				932,722
Tech Connect Pro			358,146				-				358,146
Tech Connect Cloud			-				86,583				86,583
Tech Connect Security			29,197				-				29,197
Hardware			-				159,856				159,856
Other			423				117,917				118,340
		$	1,347,438			$	3,280,867			$	4,628,305

 

 

Revenue consists of the following by service offering for the nine months ended September 30, 2019:

 

		Managed Services				Consulting Services				Total
Primary Sector Markets
Public		$	-			$	-			$	-
Private			334,700				273,939				608,639
Not-for-Profit			-				24,745				24,745
		$	334,700			$	298,684			$	633,384
Major Service Lines
CISO as a Service		$	208,000			$	-			$	208,000
Gap and Risk Assessment			-				298,684				298,684
Managed Security Services			126,700				-				126,700
Tech Connect Pro			-				-				-
Tech Connect Cloud			-				-				-
Tech Connect Security			-				-				-
Hardware			-				-				-
Other			-				-				-
		$	334,700			$	298,684			$	633,384

 

Contract Modifications

 

There were no contract modifications during the nine months ended September 30, 2020. 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 September 30, 2020, and December 31, 2019, the Company’s allowance for doubtful accounts was $70,847 and $40,000, respectively.

 

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 will be removed from the accounts and the resulting gain or loss, if any, will be reflected in 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 and nine months ended September 30, 2020, 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 Notes 3 and 6).

 

Advertising and Marketing Costs

 

The Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $30,488 and $104,058 for the three and nine months ended September 30, 2020, respectively, and $11,500 and $22,840 for the three and nine months ended September 30, 2019, 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 and nine months ended September 30, 2020 and 2019.

 

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:

 

		September 30, 2020				September 30, 2019
Stock Options			21,435,700				14,745,000
Total			21,435,700				14,745,000

 

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 office space monthly with no long term agreements. The Company leases a vehicle with a remaining term of three 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 its vehicle operating lease agreement. See Note 13 – 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 September 30, 2020 and December 31, 2019, 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 – ACQUISITIONS

 

Clear Skies Security LLC Acquisition

 

Effective August 1, 2020, the Company entered into a Stock Purchase Agreement (the “SPA”) with Clear Skies, and its equity holders, pursuant to which Clear Skies became a wholly owned subsidiary of the Company (the “Clear Skies Acquisition”). At the effective time of the Clear Skies Acquisition, Clear Skies’ outstanding equity securities was exchanged for 2,330,000 shares of the Company’s common stock.

 

Immediately following the Clear Skies Acquisition, the Company had 113,984,771 shares of common stock issued and outstanding. The pre-acquisition stockholders of the Company retained an aggregate of 111,654,771 shares, representing approximately 98% ownership of the post-acquisition company. Therefore, upon consummation of the Clear Skies Acquisition, there was no change in control.

 

The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations. Assets and liabilities of the acquired business were included in the unaudited condensed consolidated balance sheet as of September 30, 2020, based on the estimated fair value on the date of acquisition as determined in a purchase price allocation using available information and making assumptions management believes are reasonable.

 

Per ASC 805, Business Combinations, the measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination. The measurement period shall not exceed one year from the acquisition date. The Company has identified the acquisition date as August 1, 2020. Subsequent to the issuance of these financial statements, the Company expects to obtain a third-party valuation on the fair value of the assets acquired and the liabilities assumed for use in the purchase price allocation.

 

 

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

 

Consideration paid		$	932,000
Tangible assets acquired:
Cash			189,143
Accounts receivable			189,150
Total tangible assets			378,293
Assumed liabilities:
Accounts payable			21,340
Loan payable			134,200
Member distributions			20,000
Total assumed liabilities			175,540
Net assets acquired			202,753
Goodwill (a.)(b.)		$	729,247

 

a. Goodwill is the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets. In accordance with applicable accounting standards, goodwill is not amortized but instead is tested for impairment at least annually or more frequently if certain indicators are present. Goodwill and intangibles are not deductible for tax purposes.

 

b. Goodwill represents expected synergies from the merger of operations and intangible assets that do not qualify for separate recognition. Cerberus and Clear Skies are both cybersecurity service providers. The acquisition of Clear Skies provided Cerberus potential sales synergies resulting from Cerberus’ access to Clear Skies’ current client-base to offer additional services. Goodwill also represents Clear Skies’ customer list as well as the value of a non-competition agreement of one of the principals of Clear Skies, to which the Company is currently unable to assign a fair value. These items will be assigned a fair value upon the completion of the third-party valuation.

 

NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of:

 

		September 30, 2020				December 31, 2019
Prepaid expenses		$	124,121			$	57,351
Employee advances			4,500				7,150
Other current assets			18,739				5,776
Total prepaid expenses and other current assets		$	147,360			$	70,277

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

		September 30, 2020				December 31, 2019
Computer equipment		$	11,905			$	11,658
Vehicle			58,693				-
			70,598				11,658
Less: accumulated depreciation			(9,426	)			(758	)
Property and equipment, net		$	61,172			$	10,900

 

Total depreciation expense was $5,361 and $8,668 for the three and nine months ended September 30, 2020, respectively and $225 and $282 for the three and nine months ended September 30, 2019, respectively.

 

 

NOTE 6 – INTANGIBLE ASSETS AND GOODWILL

 

The following table summarizes the changes in goodwill during the nine months ended September 30, 2020:

 

Balance December 31, 2019		$	922,579
Acquisition of goodwill			2,085,607
Impairment			-
Ending balance, September 30, 2020		$	3,008,186

 

The following table summarizes the identifiable intangible assets as of September 30, 2020 and December 31, 2019:

 

		Useful life		2020				2019
Tradenames – trademarks (1)		Indefinite		$	589,200			$	589,200
Customer base (1)		15 years			206,000				206,000
Non-compete agreements (1)		5 years			183,300				183,300
Intellectual property/technology (1)		10 years			122,000				122,000
First priority option to acquire SaaS product (the “SaaS Option”) (1)					-				100,000
					1,100,500				1,200,500
Less accumulated amortization					(62,592	)			(15,648	)
Less impairment charge (2)					-				(100,000	)
Total				$	1,037,908			$	1,084,852

 

(1)	These intangible assets were acquired in the acquisition of TalaTek.

 

(2)	The Company concluded that the carrying amount of the SaaS Option would not be recoverable and, as a result, fully impaired the asset at December 31, 2019.

 

The weighted average useful life remaining of identifiable amortizable intangible assets remaining is 9.00 years.

 

Amortization of identifiable intangible assets for the three and nine months ended September 30, 2020 was $15,648 and $46,944, respectively.

 

The below table summarizes the future amortization expense for the fourth quarter of 2020, the next four years and thereafter:

 

2020		$	15,649
2021			62,593
2022			62,593
2023			62,593
2024			53,428
Thereafter			191,852
		$	448,708

 

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following amounts:

 

		September 30, 2020				December 31, 2019
Accounts payable		$	359,671			$	119,339
Accrued payroll			262,340				274,508
Accrued expenses			331,580				63,931
Accrued interest – related party			20,480				11,122
Total accounts payable and accrued expenses		$	974,071			$	468,900

 

 

Note 8 - 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 had a maturity date of June 30, 2020, and bears an interest rate of 6% per annum. On June 30, 2020, the maturity date of the note was extended to June 15, 2021. The outstanding principal balance of this loan was $109,787 as of September 30, 2020 and December 31, 2019. At September 30, 2020 and December 31, 2019, the Company has recorded accrued interest of $20,480 and $11,122, respectively, with respect to this note payable. The Company has recorded interest expense of $3,669 and $2,805 during the three months ended September 30, 2020 and 2019, respectively, and $9,358 and $8,881 during the nine months ended September 30, 2020 and 2019, respectively, related to the note.

 

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 and nine months ended September 30, 2020, Eventus was paid $78,033 and $125,851 and was owed $15,000 for accrued and unpaid services under the financial consulting agreement at September 30, 2020.

 

On January 1, 2020, the Company issued Mr. Reithinger options to purchase 720,000 shares of the Company’s common stock at an exercise price of $0.50 per share (See Note 10).

 

Note 9 - Stockholders’ Equity

 

Equity Transactions During the Period

 

During the nine months ended September 30, 2020, the Company issued an aggregate of 350,000 and 325,000 shares of common stock with a fair value of $0.40 and $2.00 per share, respectively, to investors for cash proceeds of $790,000.

 

On May 25, 2020, the Company issued 3,392,271 shares of common stock with a fair value of $0.40 per share pursuant to the Techville acquisition.

 

On August 1, 2020, the Company issued 2,330,000 shares of common stock with a fair value of $0.40 per share pursuant to the Clear Skies Acquisition (See Note 3).

 

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 in advance of at least three months.

 

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 September 30, 2020, these shares had yet to be issued. As such, the Company recorded a stock payable in the amount of $34,000 representing the fair value of services performed during the nine months ended September 30, 2020.

 

See Note 10 for disclosure of additional equity related transactions.

 

 

Note 10 – 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 4,390,700 shares of common stock during the nine months ended September 30, 2020.

 

The Company granted options for the purchase of 14,745,000 shares of common stock during the nine months ended September 30, 2019.

 

The weighted average grant date fair value of options issued and vested during the nine months ended September 30, 2020 was $157,384 and $802,587, respectively. The weighted average grant date fair value of non-vested options was $990,894 at September 30, 2020.

 

The weighted average grant date fair value of options issued during the nine months ended September 30, 2019 was $1,871,528.

 

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

 

						Weighted
						Average
		Shares				Exercise Price
Outstanding at January 1, 2020			17,245,000			$	0.46
Granted			4,390,700				0.72
Exercised			-				-
Expired or cancelled			(200,000	)			0.50
Outstanding at September 30, 2020			21,435,700			$	0.51

 

The following table summarizes information about options to purchase shares of the Company’s common stock outstanding and exercisable at September 30, 2020:

 

								Weighted-				Weighted-
								Average				Average
				Outstanding				Remaining Life				Exercise				Number
Exercise Prices				Options				In Years				Price				Exercisable
$	0.38				3,000,000				3.87			$	0.38				1,166,667
	0.40				3,600,000				3.81				0.40				1,625,000
	0.50				14,220,000				4.36				0.50				3,285,278
	2.00				615,700				4.85				2.00				-
					21,435,700				4.22			$	0.51				6,076,945

 

 

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 $392,661 and $1,062,000 for the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, there was future compensation expense of $2,425,902 with a weighted average recognition period of 2.01 years related to the options.

 

The aggregate intrinsic value totaled $31,950,000 and was based on the Company’s estimated fair value of the common stock of $2.00 as of September 30, 2020, respectively, 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 January 1, 2020, the Company granted options to purchase 720,000 shares of the Company’s common stock to Mr. Reithinger, with an exercise price of $0.50 per share. The options vest monthly over a three-year period. The options issued were valued using the Black-Scholes-Merton option pricing model under the following assumptions: stock price - $0.40; strike price - $0.50; expected volatility – 72%; risk free interest rate – 1.67%; dividend rate – 0%; and expected term – 5.75 years.

 

On January 1, 2020, the Company granted options to purchase 50,000 shares of the Company’s common stock to an employee, with an exercise price of $0.50 per share. The options for 33% 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 - $0.40; strike price - $0.50; expected volatility – 72%; risk free interest rate – 1.59%; dividend rate – 0%; and expected term – 3.49 years.

 

On January 29, 2020, the Company granted options to purchase 1,000,000 shares of the Company’s common stock to William Santos, Chief Operating Officer, with an exercise price of $0.50 per share. The options for 33% 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 - $0.40; strike price - $0.50; expected volatility – 72%; risk free interest rate – 1.41%; dividend rate – 0%; and expected term – 3.49 years.

 

On January 29, 2020, the board of directors approved the issuance of options to purchase an aggregate of 600,000 shares of the Company’s common stock to three members of the board, with an exercise price of $0.50 per share. The options for 50% of the shares vest on the one-year anniversary of the grant date and then monthly over the subsequent one-year period. The options issued were valued using the Black-Scholes-Merton option pricing model under the following assumptions: stock price - $0.40; strike price - $0.50; expected volatility – 72%; risk free interest rate – 1.41%; dividend rate – 0%; and expected term – 3.25 years.

 

On February 13, 2020, the Company granted 200,000 options to an employee, with an exercise price of $0.50 per share. The options for 33% of the shares vest on the one-year anniversary of the grant date and then monthly over the subsequent two-year period. The Company terminated the employee in March 2020 and, as a result, no stock-based compensation was recorded relating to these options.

 

On June 9, 2020, the Company granted options to purchase an aggregate of 1,205,000 shares of the Company’s common stock to various employees, with an exercise price of $0.50 per share. The options for 33% 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 - $0.40; strike price - $0.50; expected volatility – 74%; risk free interest rate – 0.40%; dividend rate – 0%; and expected term – 3.49 years.

 

 

On July 27, 2020, the Company granted options to purchase an aggregate of 50,000 shares of the Company’s common stock to an employee, with an exercise price of $2.00 per share. The options for 25% of the shares vest on the one-year anniversary of the grant date and then monthly over the subsequent four-year period. The options issued were valued using the Black-Scholes-Merton option pricing model under the following assumptions: stock price - $0.40; strike price - $2.00; expected volatility – 73%; risk free interest rate – 0.30%; dividend rate – 0%; and expected term – 3.94 years.

 

On July 27, 2020, the Company granted options to purchase an aggregate of 95,700 shares of the Company’s common stock to an employee, with an exercise price of $2.00 per share. The options for 33% 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 - $0.40; strike price - $2.00; expected volatility – 73%; risk free interest rate – 0.30%; dividend rate – 0%; and expected term – 3.49 years.

 

On July 31, 2020, the Company granted options to purchase an aggregate of 250,000 shares of the Company’s common stock to an employee, with an exercise price of $2.00 per share. The options for 25% of the shares vest on the one-year anniversary of the grant date and then monthly over the subsequent three-year period. The options issued were valued using the Black-Scholes-Merton option pricing model under the following assumptions: stock price - $0.40; strike price - $2.00; expected volatility – 73%; risk free interest rate – 0.21%; dividend rate – 0%; and expected term – 3.49 years.

 

On August 17, 2020, the Company granted options to purchase an aggregate of 175,000 shares of the Company’s common stock to various employees, with an exercise price of $2.00 per share. The options for 25% of the shares vest on the one-year anniversary of the grant date and then monthly over the subsequent three-year period. The options issued were valued using the Black-Scholes-Merton option pricing model under the following assumptions: stock price - $0.40; strike price - $2.00; expected volatility – 74%; risk free interest rate – 0.29%; dividend rate – 0%; and expected term – 3.75 years.

 

On August 17, 2020, the Company granted options to purchase an aggregate of 45,000 shares of the Company’s common stock to an employee, with an exercise price of $2.00 per share. The options for 33% 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 - $0.40; strike price - $2.00; expected volatility – 74%; risk free interest rate – 0.29%; dividend rate – 0%; and expected term – 3.75 years.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

Compensatory Arrangements of Certain Officers

 

Employment Agreement with Brad MacKenzie

 

On July 31, 2020, the Company entered into an Employment Agreement with Brad Mackenzie (the “MacKenzie Agreement”), pursuant to which he serves as a Managing Director of the Company.

 

Under the terms of the MacKenzie Agreement, Mr. MacKenzie will earn a base salary of $200,000. In addition, Mr. MacKenzie’s salary may be increased in accordance with the Company’s policies from time to time. Mr. MacKenzie also received options, under the Company’s 2019 Plan, to purchase 250,000 shares of the Company’s common stock, with an exercise price of $2.00. The options for one-fourth of the shares will vest on the one-year anniversary of the grant date and then in a series of thirty-six successive equal monthly installments, provided that Mr. MacKenzie is employed by the Company on each such vesting date.

 

Employment Agreement with Brian Yelm

 

On May 25, 2020, the Company entered into an Employment Agreement with Brian Yelm (the “Yelm Agreement”), pursuant to which he serves as a Managing Director of the Company.

 

 

Under the terms of the Yelm Agreement, Mr. Yelm will earn an initial base salary of $300,000. In addition, Mr. Yelm’s salary may be increased in accordance with the Company’s policies from time to time. He is entitled to receive a guaranteed quarterly bonus of $22,000 by retaining Techville’s existing customer base and/or growing current revenues. Mr. Yelm is also eligible to receive annual bonuses in the amount of up to 20% of his base salary, at the discretion of the Board of Directors and based on mutually agreed upon performance and company objectives. Mr. Yelm also received options, under the Company’s 2019 Plan, to purchase 500,000 shares of the Company’s common stock, with an exercise price of $0.50. The options for one-third of the shares will vest on the one-year anniversary of the grant date and then in a series of twenty-four successive equal monthly installments, provided that Mr. Yelm is employed by the Company on each such vesting date.

 

Employment Agreement with William Santos

 

On May 15, 2019, the Company entered into an Employment Agreement with William Santos (the “Santos Agreement”), pursuant to which he serves as the Company’s Chief Operating Officer.

 

Under the terms of the Santos Agreement, Mr. Santos will earn an initial base salary of $185,000, which may be increased to $245,000 at such time as the Company achieves $20,000,000 of gross revenue in any calendar year. Mr. Santos’ base salary may be increased again to $300,000 at such time as the Company achieves $40,000,000 of gross revenue in any calendar year. In addition, Mr. Santos’ salary may be increased in accordance with the Company’s policies from time to time. He is entitled to receive annual bonuses in an amount up to 100% of his base salary, at the discretion of the Board of Directors and based on the recommendation by the Company’s Chief Executive Officer. Mr. Santos will also receive stock options, under the Company’s 2019 Plan, to purchase 3,000,000 shares of the Company’s common stock, with an exercise price equal to the fair market value of the Company’s common stock on the grant date. The options for one-third of the shares will vest on the one-year anniversary of the grant date and then in a series of twelve successive equal monthly installments, provided that Mr. Santos is employed by the Company on each such vesting date.

 

Employment Agreement with David Jemmett

 

On September 30, 2019, the Company entered into an Employment Agreement with David Jemmett (the “Jemmett Agreement”), pursuant to which he serves as the Company’s Chief Executive Officer.

 

Under the terms of the Jemmett Agreement, Mr. Jemmett will earn an initial base salary of $225,000, which increased to $250,000 at such time the Company achieves a public listing and can satisfactorily budget the salary without risk to the financial stability of the Company. In addition, Mr. Jemmett’s salary may be increased in accordance with the Company’s policies from time to time. He is entitled to receive annual bonuses in an amount up to 100% of his base salary, at the discretion of the Board of Directors.

 

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 12 – 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 September 30, 2020, 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, the Prime plus 2%, with a floor rate of 6% and a maturity date of August 24, 2020. The interest rate at June 30, 2020 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 and nine months ended September 30, 2020 Techville drew $60,000 against the line of credit and made payments of $93,705. At September 30, 2020, no amounts were 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 nine months ended September 30, 2020, the Company made cash payments of $3,151, of which $2,737 and $414 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 September 30, 2020, $48,159 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. At any time during the term of the note, the note holder may call all remaining amounts owed in full. At September 30, 2020, $179,600 was outstanding.

 

Cerberus Cyber Sentinel Corporation

 

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, 2020, 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. 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 September 30, 2020, $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 May 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. 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 September 30, 2020, $134,200 was outstanding.

 

NOTE 13 – 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. On January 1, 2020, the Company adopted ASC 842 and it primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

 

 

All of the Company’s leases are classified as operating leases, and as such, were previously not recognized on the Company’s unaudited condensed consolidated balance sheet. 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 May 25, 2020, the Company recognized ROU assets of $19,393 and lease liabilities of approximately $19,393. The Company elected to not recognize ROU assets and lease liabilities arising from short-term office leases, 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 May 25, 2020. The weighted average incremental borrowing rate applied was 5.77%. As of September 30, 2020, the Company’s leases had a remaining weighted average term of 1.75 years.

 

Rent expense amounted to $15,057 and $28,309 for the three and nine months ended September 30, 2020, respectively, and $6,646 and $13,063 for the three and nine months ended September 30, 2019, respectively.

 

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

 

		Nine Months Ended September 30, 2020
Lease cost
Operating lease cost (cost resulting from lease payments)		$	3,976
Short term lease cost			24,333
Sublease income			-
Net lease cost		$	28,309
Operating lease – operating cash flows (fixed payments)		$	3,976
Operating lease – operating cash flows (liability reduction)		$	3,544
Non-current leases – right of use assets		$	15,664
Current liabilities – operating lease liabilities		$	2,167
Non-current liabilities – operating lease liabilities		$	13,682

 

Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the nine months ended September 30, 2020, are as follows:

 

Fiscal Year		Operating Leases
2020 (excluding the nine months ended September 30, 2020)		$	2,386
2021			9,543
2022			4,772
Total future minimum lease payments			16,701
Amount representing interest			(852	)
Present value of net future minimum lease payments		$	15,849

 

 

NOTE 14 – 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 September 30, 2020, and December 31, 2019, the Company had approximately $1,637,000 and $1,377,000, respectively, in excess of the FDIC insured limit.

 

Revenues

 

Two clients accounted for 68% of revenue for the nine months ended September 30, 2020, as set forth below:

 

Client A			52	%
Client B			16	%

 

Two clients accounted for 81% of revenue for the nine months ended September 30, 2019.

 

Client A			55	%
Client B			26	%

 

Accounts Receivable

 

Two clients accounted for 56% of the accounts receivable as of September 30, 2020, as set forth below:

 

Client A			29	%
Client B			27	%

 

Three clients accounted for 100% of the accounts receivable as of September 30, 2019, as set forth below:

 

Client A			63	%
Client B			23	%
Client C			14	%

 

Accounts Payable

 

Two vendors accounted for 40% of the accounts payable as of September 30, 2020, as set forth below:

 

Vendor A			26	%
Vendor B			14	%

 

Two vendors accounted for 73% of the accounts payable as of September 30, 2019, as set forth below:

 

Vendor A			40	%
Vendor B			33	%

 

NOTE 15 – SUBSEQUENT EVENTS

 

On October 28, 2020, the Company issued an 300,000 shares of common stock, with a fair value of $2.00 per share, to a consutlant for services rendered.

 

On October 28, 2020, the Company issued 425,000 shares, with a fair value of $2.00 per share, to Neil Reithinger, Chief Financial Officer advisor to the Company, for services rendered.

 

During November 2020, pursuant to corresponding securities purchase agreements, the Company received $291,010 from several investors for an aggregate total of 145,505 share of common stock at a fair value of $2.00 per share. As of the date of this report the shares have not been issued.

 

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which continues to spread throughout the United States and the World. The Company continues to monitor the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread, in addition to the impact on its employees. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on the Company’s operations and liquidity is uncertain as of the date of this report. While there could ultimately be a material impact on operations and liquidity of the Company, at the time of issuance, the impact could not be determined.

 

 

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, 2019, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 30, 2020, 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, or the novel coronavirus);
●	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”), and Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

 

 

Corporate History

 

Cerberus Cyber Sentinel Corporation was formed on March 5, 2019 as a Delaware corporation. Our principal offices are located at 7333 E. Doubletree, Suite D270, Scottsdale, Arizona 85258.

 

Effective April 1, 2019, we acquired GenResults, which became our wholly owned subsidiary. GenResults was established on June 22, 2015. Prior to our acquisition of GenResults, GenResults was wholly owned by an entity affiliated with David G. Jemmett, our Chief Executive Officer and a director of the Company. Due to the companies being under common control, the Company accounted for the acquisition as a reorganization.

 

On April 12, 2019, we consummated a transaction whereby VCAB Six Corporation, a Texas corporation (“VCAB”), merged with and into us (the “VCAB Merger”). At the time of the VCAB Merger, VCAB was subject to a bankruptcy proceeding and had minimal assets, no equity owners and no liabilities, except for approximately 1,500 holders of Class 5 Allowed General Unsecured Claims and a holder of allowed administrative expenses (collectively the “Claim Holders”). Pursuant to the terms of the VCAB Merger, and in accordance with the bankruptcy plan, we issued an aggregate of 2,000,000 shares of our common stock (the “Plan Shares”) to the Claim Holders as full settlement and satisfaction of their respective claims. As provided in the bankruptcy plan, the Plan Shares were issued pursuant to Section 1145 of the United States Bankruptcy Code. As a result of the VCAB Merger, the separate corporate existence of VCAB was terminated. We entered into the merger in order to increase our shareholder base and in order to, among other things, assist us in satisfying the listing standards of a national securities exchange.

 

Effective as of October 1, 2019, we entered into an Agreement and Plan of Merger (the “TalaTek Merger”) pursuant to which TalaTek became our wholly owned subsidiary. Under the TalaTek Merger, all issued and outstanding units representing membership interests in TalaTek were converted into an aggregate of 6,200,000 shares of our common stock.

 

Effective May 25, 2020, the Company entered into a Stock Purchase Agreement with Techville, 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 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 was exchanged for an aggregate of 2,330,000 shares of the Company’s common stock.

 

Business Overview

 

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 information technology (“IT”) and cybersecurity spending.

 

 

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 offer multiple modules 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 state for the client and providing our knowledge and expertise to help them achieve their security needs;
●	Culture education and enablement module: This targets the root cause for 75% of cyber breach events by starting with a culture of security-forward thinking;
●	Tools and technology provisioning module: We provide technology-agnostic solutions catering to a client’s existing products and enhances the cyber defense system by making carefully selected additions without bias and to fit their financial profile;
●	Data and privacy module: This ensures that a client’s data security and privacy are properly managed to alleviate risks of data loss and breach; and
●	Regulations and compliance module: We evaluate a client’s policies and procedures and implement the appropriate compliance framework based on the latest industry regulations and obligations.

 

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 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:

 

	o	Service Organization 2 (“SOC 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;
	o	Payment Card Industry Data Security Standard (“PCI DSS”) – This is a standard administered by the Payment Card Industry Security Standards Council;
	o	Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) – These are laws regulated by the Department of Health and Human Services (“HHS”) to secure the privacy and confidentiality of protected health information (“PHI”);
	o	HITRUST CSF – This is a comprehensive security framework (“CSF”) developed by the Health Information Trust Alliance (“HITRUST”) in collaboration with healthcare, technology and information security leaders, to create, access, store and exchange sensitive and/or regulated data; and
	o	The National Institute of Standards and Technology (“NIST”) – 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.
●	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.

 

Results of Operations

 

Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019

 

Our financial results for the nine months ended September 30, 2020 are summarized as follows in comparison to the nine months ended September 30, 2019:

 

For the Nine Months Ended September 30, 2020

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Revenue		$	1,223,496			$	2,514,694			$	748,790			$	141,325			$	4,628,305
Cost of revenue			822,043				1,778,350				251,358				93,546				2,945,297
Gross profit			401,453				736,344				497,432				47,779				1,683,008
Operating expenses			2,582,951				818,477				572,240				128,252				4,101,920
Operating loss			(2,181,498	)			(82,133	)			(74,808	)			(80,473	)			(2,418,912	)
Other income (expense)			664				836				(3,045	)			11				(1,534	)
Loss before income taxes		$	(2,180,834	)		$	(81,297	)		$	(77,853	)			(80,462	)		$	(2,420,446	)

 

For the Nine Months Ended September 30, 2019

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Revenue		$	633,384			$	-			$	-			$	-			$	633,384
Cost of revenue			322,625				-				-				-				322,625
Gross profit			310,759				-				-				-				310,759
Operating expenses			1,300,235				-				-				-				1,300,235
Operating loss			(989,476	)			-				-				-				(989,476	)
Other expense			(9,385	)			-				-				-				(9,385	)
Loss before income taxes		$	(998,861	)		$	-			$	-			$	-			$	(998,861	)

 

 

Variance

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Revenue		$	590,112			$	2,514,694			$	748,790			$	141,325			$	3,994,921
Cost of revenue			499,418				1,778,350				251,358				93,546				2,622,672
Gross profit			90,694				736,344				497,432				47,779				1,372,249
Operating expenses			1,282,716				818,477				572,240				128,252				2,801,685
Operating loss			(1,192,022	)			(82,133	)			(74,808	)			(80,473	)			(1,429,436	)
Other expense			10,049				836				(3,045	)			11				7,851
Loss before income taxes		$	(1,181,973	)		$	(81,297	)		$	(77,853	)		$	(80,462	)		$	(1,421,585	)

 

Revenues

 

For the Nine Months Ended September 30, 2020

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	962,582			$	423			$	384,433			$	-			$	1,347,438
Consulting services			260,915				2,514,270				364,357				141,325				3,280,867
Total revenue		$	1,223,497			$	2,514,693			$	748,790			$	141,325			$	4,628,305

 

For the Nine Months Ended September 30, 2019

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	334,700			$	-			$	-			$	-			$	334,700
Consulting services			298,684				-				-				-				298,684
Total revenue		$	633,384			$	-			$	-			$	-			$	633,384

 

Variance

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	627,882			$	423			$	384,433			$	-			$	1,012,738
Consulting services			(37,769	)			2,514,270				364,357				141,325				2,982,183
Total revenue		$	590,113			$	2,514,693			$	748,790			$	141,325			$	3,994,921

 

Revenues increased for Cerberus by $590,113, or 93%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the Company having an increase of approximately $382,000 in managed security services to a major customer.

 

Revenues increased for TalaTek by $2,514,693, or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on October 1, 2019. Approximately $2,400,000 of the increase was a result of TalaTek’s gap and risk assessment services that is attributable to one major customer.

 

Revenues increased for Techville by $748,790, or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on May 25, 2020. Approximately $358,000 is a result of Techville’s managed service offering, Tech Connect Pro, approximately $87,000 was a result of Techville’s consulting service offering Tech Connect Cloud and approximately $160,000 was a result of miscellaneous hardware sales associated with Techville’s consulting service offerings.

 

Revenues increased for Clear Skies by $141,325, or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on August 1, 2020. Approximately $141,000 is a result of Clear Skies’ gap and risk assessment service offering.

 

 

Expenses

 

Cost of Revenues

 

For the Nine Months Ended September 30, 2020

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	4,839			$	-			$	251,358			$	-			$	256,197
Consulting services			223,068				330,341				-				-				553,409
Cost of payroll			594,135				1,448,010				-				93,546				2,135,691
Total cost of revenue		$	822,042			$	1,778,351			$	251,358			$	93,546			$	2,945,297

 

For the Nine Months Ended September 30, 2019

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	97,880			$	-			$	-			$	-			$	97,880
Consulting services			129,416				-				-				-				129,416
Cost of payroll			95,329				-				-				-				95,329
Total cost of revenue		$	322,625			$	-			$	-			$	-			$	322,625

 

Variance

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	(93,041	)		$	-			$	251,358			$	-			$	158,317
Consulting services			93,652				330,341				-				-				423,993
Cost of payroll			498,806				1,448,010				-				93,546				2,040,362
Total cost of revenue		$	499,417			$	1,778,351			$	251,358			$	93,546			$	2,622,672

 

Cost of revenues increased for Cerberus by $499,417, or 155%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, and was primarily the result of an increase in payroll related costs of $498,806 due to an increase in employee and contractual labor after the reorganization.

 

Cost of revenues increased for TalaTek by $1,778,351 or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on October 1, 2019. Approximately, $1,450,000 was attributable to TalaTek’s payroll and related services.

 

Cost of revenues increased for Techville by $251,358 or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on May 25, 2020.

 

Cost of revenues increased for Clear Skies by $93,546 or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on August 1, 2020.

 

 

Operating Expenses

 

For the Nine Months Ended September 30, 2020

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Professional fees		$	637,591			$	3,500			$	39,655			$	5,075			$	685,821
Salaries and benefits			521,543				485,645				453,036				64,843				1,525,067
Advertising and marketing			26,351				77,707				-				-				104,058
Selling, general and administrative			320,466				251,625				79,549				58,334				709,974
Stock based compensation			1,062,000				-				-				-				1,062,000
Loss on write-off of account receivable			15,000				-				-				-				15,000
Total operating expenses		$	2,582,951			$	818,477			$	572,240			$	128,252			$	4,101,920

 

For the Nine Months Ended September 30, 2019

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Professional fees		$	498,324			$	-			$	-			$	-			$	498,324
Salaries and benefits			129,391				-				-				-				129,391
Advertising and marketing			22,840				-				-				-				22,840
Selling, general and administrative			138,182				-				-				-				138,132
Stock based compensation			511,498				-				-				-				511,498
Loss on write-off of account receivable			-				-				-				-				-
Total operating expenses		$	1,300,235			$	-			$	-			$	-			$	1,300,235

 

Variance

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Professional fees		$	139,267			$	3,500			$	39,655			$	5,075			$	187,497
Salaries and benefits			392,152				485,645				453,036				64,843				1,395,676
Advertising and marketing			3,511				77,707				-				-				81,218
Selling, general and administrative			182,284				251,625				79,549				58,334				571,792
Stock based compensation			550,502				-				-				-				550,502
Loss on write-off of account receivable			15,000				-				-				-				15,000
Total operating expenses		$	1,282,716			$	818,477			$	572,240			$	128,252			$	2,801,685

 

Operating expenses increased for Cerberus by $1,282,716, or 99%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, primarily as a result of (i) an increase of $392,152 in payroll and related benefits as a result of the increase in employees after the reorganization, (ii) an increase in stock-based compensation of $550,502 due to an increase in stock option grants as a result of the TalaTek, Techville and Clear Skies acquisitions, (iii) an increase of $139,267 in professional fees due to additional accounting and legal fees as a result of the TalaTek, Techville and Clear Skies acquisitions, and (iv) an increase in selling, general and administrative fees of $182,284 primarily due to an increase of approximately $95,000 in software and computer supplies expense.

 

Operating expenses increased for TalaTek by $818,477, or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on October 1, 2019. Approximately $486,000 was attributable to TalaTek’s administrative payroll and benefits. Operating expenses increased for Techville by $572,240, or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on May 25, 2020. Approximately $453,000 was attributable to Techville’s administrative payroll and benefits.

 

 

Operating expenses increased for Clear Skies by $128,252, or 100%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, as a result of the acquisition, which was consummated on August 1, 2020. Approximately $65,000 was attributable to Techville’s administrative payroll and benefits.

 

Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019

 

Our financial results for the three months ended September 30, 2020 are summarized as follows in comparison to the three months ended September 30, 2019:

 

For the Three Months Ended September 30, 2020

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Revenue		$	336,999			$	937,615			$	593,658			$	141,325			$	2,009,597
Cost of revenue			310,176				696,772				211,061				93,546				1,311,555
Gross profit			26,823				240,843				382,597				47,779				698,042
Operating expenses			920,412				257,894				421,867				128,252				1,728,425
Operating loss			(893,589	)			(17,051	)			(39,270	)			(80,473	)			(1,030,383	)
Other income (expense)			(3,646	)			763				(1,944	)			11				(4,816	)
Loss before income taxes		$	(897,235	)		$	(16,288	)		$	(41,214	)			(80,462	)		$	(1,035,199	)

 

For the Three Months Ended September 30, 2019

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Revenue		$	281,253			$	-			$	-			$	-			$	281,253
Cost of revenue			191,172				-				-				-				191,172
Gross profit			90,081				-				-				-				90,081
Operating expenses			661,485				-				-				-				661,485
Operating loss			(571,404	)			-				-				-				(571,404	)
Other expense			(3,318	)			-				-				-				(3,318	)
Loss before income taxes		$	(574,722	)		$	-			$	-			$	-			$	(574,722	)

 

Variance

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Revenue		$	55,746			$	937,615			$	593,658			$	141,325			$	1,728,344
Cost of revenue			119,004				696,772				211,061				93,546				1,120,383
Gross profit			(63,258	)			240,843				382,597				47,779				607,961
Operating expenses			258,927				257,894				421,867				128,252				1,066,940
Operating loss			(322,185	)			(17,051	)			(39,270	)			(80,473	)			(458,979	)
Other expense			(328	)			763				(1,944	)			11				(1,498	)
Loss before income taxes		$	(322,513	)		$	(16,288	)		$	(41,214	)		$	(80,462	)		$	(460,477	)

 

 

Revenues

 

For the Three Months Ended September 30, 2020

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	303,194			$	163			$	289,824			$	-			$	593,181
Consulting services			33,806				937,451				303,834				141,325				1,416,416
Total revenue		$	337,000			$	937,614			$	593,658			$	141,325			$	2,009,597

 

For the Three Months Ended September 30, 2019

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	112,250			$	-			$	-			$	-			$	112,250
Consulting services			169,003				-				-				-				169,003
Total revenue		$	281,253			$	-			$	-			$	-			$	281,253

 

Variance

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	190,944			$	163			$	289,824			$	-			$	480,931
Consulting services			(135,197	)			937,451				303,834				141,325				1,247,413
Total revenue		$	55,747			$	937,614			$	593,658			$	141,325			$	1,728,344

 

Revenues increased for Cerberus by $55,747, or 20%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the Company shifting its service offerings more towads managed services during the period.

 

Revenues increased for TalaTek by $937,614, or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on October 1, 2019. Approximately $843,000 was a result of TalaTek’s gap and risk assessment services that was attributable to one major customer.

 

Revenues increased for Techville by $593,658, or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on May 25, 2020. Approximately $269,000 was a result of Techville’s managed service offering Tech Connect Pro, approximately $64,000 was a result of Techville’s consulting service offering Tech Connect Cloud and approximately $160,000 was a result of miscellaneous hardware sales associated with Techville’s consulting service offerings.

 

Revenues increased for Clear Skies by $141,325, or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on August 1, 2019. Approximately $141,000 was a result of Clear Skies’ gap and risk assessment offerings.

 

 

Expenses

 

Cost of Revenues

 

For the Three Months Ended September 30, 2020

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	-			$	-			$	211,060			$	-			$	211,060
Consulting services			73,603				158,082				-				-				231,685
Cost of payroll			236,574				538,690				-				93,546				868,810
Total cost of revenue		$	310,177			$	696,772			$	211,060			$	93,546			$	1,311,555

 

For the Three Months Ended September 30, 2019

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	67,120			$	-			$	-			$	-			$	67,120
Consulting services			28,723				-				-				-				28,723
Cost of payroll			95,329				-				-				-				95,329
Total cost of revenue		$	191,172			$	-			$	-			$	-			$	191,172

 

Variance

		Cerberus				TalaTek				Techville				Clear Skies				Total
Managed services		$	(67,120	)		$	-			$	211,060			$	-			$	143,940
Consulting services			44,880				158,082				-				-				202,962
Cost of payroll			141,245				538,690				-				93,546				773,481
Total cost of revenue		$	119,005			$	696,772			$	211,060			$	93,546			$	1,120,383

 

Cost of revenues increased for Cerberus by $119,005, or 62%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, and was primarily the result of an increase in payroll related costs of $141,245 due to an increase in employee and contractual labor after the reorganization.

 

Cost of revenues increased for TalaTek by $696,772, or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on October 1, 2019. Approximately, $539,000 was attributable to TalaTek’s payroll and related services.

 

Cost of revenues increased for Techville by $211,060 or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on May 25, 2020.

 

Cost of revenues increased for Clear Skies by $93,546 or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on August 1, 2020.

 

Operating Expenses

 

For the Three Months Ended September 30, 2020

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Professional fees		$	255,836			$	495			$	23,105			$	5,075			$	284,511
Salaries and benefits			147,874				164,307				339,372				64,843				716,396
Advertising and marketing			4,889				25,599				-				-				30,488
Selling, general and administrative			119,154				67,493				59,388				58,334				304,369
Stock based compensation			392,661				-				-				-				392,661
Loss on write-off of account receivable			-				-				-				-				-
Total operating expenses		$	920,414			$	257,894			$	421,865			$	128,252			$	1,728,425

 

 

For the Three Months Ended September 30, 2019

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Professional fees		$	137,653			$	-			$	-			$	-			$	137,653
Salaries and benefits			129,391				-				-				-				129,391
Advertising and marketing			11,500				-				-				-				11,500
Selling, general and administrative			59,133				-				-				-				59,133
Stock based compensation			323,808				-				-				-				323,808
Loss on write-off of account receivable			-				-				-				-				-
Total operating expenses		$	661,485			$	-			$	-			$	-			$	661,485

 

Variance

 

		Cerberus				TalaTek				Techville				Clear Skies				Total
Professional fees		$	118,183			$	495			$	23,105			$	5,075			$	146,858
Salaries and benefits			18,483				164,307				339,372				64,843				587,005
Advertising and marketing			(6,611	)			25,599				-				-				18,988
Selling, general and administrative			60,021				67,493				59,388				58,334				245,236
Stock based compensation			68,853				-				-				-				68,853
Loss on write-off of account receivable			-				-				-				-				-
Total operating expenses		$	258,929			$	257,894			$	421,865			$	128,252			$	1,066,940

 

Operating expenses increased for Cerberus by $258,929 or 39%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, primarily as a result of (i) an increase of $118,183 in professional fees due to auditing and accounting consulting fees, and (ii) an increase in stock-based compensation of $68,853 due to an increase in stock option grants as a result of the Clear Skies acquisition.

 

Operating expenses increased for TalaTek by $257,894, or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on October 1, 2019. Approximately $164,000 was attributable to TalaTek’s administrative payroll and benefits. Approximately $26,000 was attributable an increase in TiGRIS program spending and approximately $16,000 was attributable to amortization expense related to intangible assets.

 

Operating expenses increased for Techville by $421,865, or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on May 25, 2020. Approximately $339,000 was attributable to Techville’s administrative payroll and benefits.

 

Operating expenses increased for Clear Skies by $128,252, or 100%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, as a result of the acquisition, which was consummated on August 1, 2020. Approximately $65,000 was attributable to Clear Skies’ administrative payroll and benefits.

 

 

Working Capital Surplus

 

Our working capital surplus as of September 30, 2020, in comparison to our working capital surplus as of December 31, 2019, is summarized as follows:

 

		As of
		September 30,				December 31,
		2020				2019
Current assets		$	3,541,729			$	2,478,887
Current liabilities			1,973,095				578,687
Working capital surplus		$	1,568,634			$	1,900,200

 

The increase in current assets is primarily due to increases in cash and cash equivalents, accounts receivable and prepaid expenses and other current assets of $539,362, $446,397 and $77,083, respectively. The increase in current liabilities is primarily due to increases in accounts payable and accrued expenses and loans payable of $505,171 and $853,070, respectively.

 

Cash Flows

 

Our cash flows for the nine months ended September 30, 2020, in comparison to our cash flows for the nine months ended September 30, 2019, can be summarized as follows:

 

		Nine Months Ended September 30,
		2020				2019
Net cash provided by (used in) operating activities		$	(1,157,976	)		$	31,571
Net cash provided by (used in) investing activities			254,180				(3,386	)
Net cash provided by financing activities			1,443,158				424,757
Increase in cash		$	539,362			$	452,942

 

Operating Activities

 

Net cash used in operating activities was $1,157,976 for the nine months ended September 30, 2020 and was primarily due to the net loss of $2,420,446 and an increase in accounts receivable of approximately $192,000. This was partially offset by non-cash expenses of approximately $1,062,000 related to stock-based compensation and an increase in accounts payable and accrued expenses of approximately $365,000. Net cash provided by operating activities was $31,571 for the nine months ended September 30, 2019, primarily due to net loss of $998,861, which was partially offset by non-cash expenses of approximately $524,000 related to stock-based compensation and an increase in accounts payable and accrued expenses of $483,460.

 

Investing Activities

 

Net cash provided by investing activities of $254,180 for the nine months ended September 30, 2020 was due to cash acquired in the Techville and Clear Skies Acquisitions. Net cash used in investing activities of $3,386 for the nine months ended September 30, 2019 was due to purchases of computer equipment.

 

Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2020 was $1,443,158, which was primarily due to cash received from the sale of the Company’s common stock of $790,000 and cash received as loans from the U.S. Small Business Administration’s Paycheck Protection Program of $709,600. Net cash provided by financing activities for the nine months ended September 30, 2019 was $424,757 and was due to cash received from the sale of the Company’s common stock of $610,300, which was offset by cash distributions to member of $125,270.

 

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 September 30, 2020 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 30, 2020.

 

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 nine months ended September 30, 2020:

 

		Managed Services				Consulting Services				Total
Primary Sector Markets
Public		$	6,500			$	2,496,939			$	2,503,439
Private			1,296,124				730,368				2,026,492
Not-for-Profit			44,814				53,560				98,374
		$	1,347,438			$	3,280,867			$	4,628,305
Major Service Lines
CISO as a Service		$	26,950			$	-			$	26,950
Gap and Risk Assessment			-				2,916,511				2,916,511
Managed Security Services			932,722				-				932,722
Tech Connect Pro			358,146				-				358,146
Tech Connect Cloud			-				86,583				86,583
Tech Connect Security			29,197				-				29,197
Hardware			-				159,856				159,856
Other			423				117,917				118,340
		$	1,347,438			$	3,280,867			$	4,628,305

 

 

Revenue consists of the following by service offering for the nine months ended September 30, 2019:

 

		Managed Services				Consulting Services				Total
Primary Sector Markets
Public		$	-			$	-			$	-
Private			334,700				273,939				608,639
Not-for-Profit			-				24,745				24,745
		$	334,700			$	298,684			$	633,384
Major Goods/Service Lines
CISO as a Service		$	208,000			$	-			$	208,000
Gap and Risk Assessment			-				298,684				298,684
Managed Security Services			126,700				-				126,700
Tech Connect Pro			-				-				-
Tech Connect Cloud			-				-				-
Tech Connect Security			-				-				-
Hardware			-				-				-
Other			-				-				-
		$	334,700			$	298,684			$	633,384

 

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 September 30, 2020.

 

 

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 and 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, 2019.

 

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

 

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 September 30, 2020 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, 2019, as filed with the SEC on March 30, 2020, 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. In addition:

 

A pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business.

 

If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or elsewhere, our business may be adversely affected. The spread of COVID-19 has caused many countries around the world to impose quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. Employers (including us) are also required to prepare and increase, as much as possible, the capacity and arrangement for employees to work remotely. In addition, on March 11, 2020, the President of the United States issued a proclamation to restrict travel to the United States from foreign nationals who have recently been in certain European countries. We are still assessing the effect on our business, from the spread of COVID-19 and the actions implemented by the government of the United States and elsewhere across the globe.

 

The spread of an infectious disease, including COVID-19, may also result in a period of business disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. The extent to which COVID-19 impacts our business, and the business of our clients, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.

 

The COVID-19 outbreak and mitigation measures also have had and may continue to have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts our business and operations will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

 

We will need to grow the size and capabilities of our organization, and we may experience difficulties in managing this growth.

 

As our business plan and strategies develop, we must add additional managerial, operational, financial and other personnel. Future growth will impose significant added responsibilities on members of management, including:

 

●	identifying, recruiting, integrating, maintaining, and motivating additional personnel;
●	managing our internal development efforts effectively, including those of our current and future acquirees, while complying with our contractual obligations to contractors and other third parties; and
●	improving our operational, financial and management controls, reporting systems, and procedures.

 

Our future financial performance will depend, in part, on our ability to effectively manage any future growth, which might be impacted by the COVID-19 outbreak, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities. This lack of long-term experience working together may adversely impact our senior management team’s ability to effectively manage our business and growth.

 

We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and consultants to provide certain services. There can be no assurance that the services of these independent organizations, advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, we may not be able to advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, if at all. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further scale our business or effectively integrate acquisitions.

 

These and other risks associated with our operations may materially adversely affect our ability to attain or maintain profitable operations.

 

Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds

 

Except as described below, there were no sales of equity securities during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.

 

During the nine months ended September 30, 2020, the Company issued an aggregate of 350,000 and 325,000 shares of common stock with a fair value of $0.40 and $2.00 per share, respectively, to investors for cash proceeds of $790,000.

 

The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe is exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof.

 

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 Amendment of Certificate of Incorporation of the Registrant effective September 26, 2019		10-12G		3.3		10/2/2019
3.2		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		3/30/2020
4.2		Description of Securities Registered under Section 12 of the Exchange Act		10-K		4.2		3/30/2020
10.1		Agreement for the Purchase and Sale of Limited Liability Company Interests of GenResults, LLC effective April 12, 2019		10-12G		10.1		10/2/2019
10.2		Agreement and Plan of Merger by and among the Registrant, TalaTek, LLC, TalaTek Merger Sub and Baan Alsinawi effective September 23, 2019		10-K		10.2		3/30/2020
10.3		Unsecured Note Agreement between the Registrant and Jemmett Enterprises, LLC effective December 31, 2018		10-K		10.3		3/30/2020
10.4		Stock Repurchase Agreement between the Registrant and Alan Kierman effective September 1, 2019		10-K		10.4		3/30/2020
10.5		2019 Equity Incentive Plan		10-K		10.5		3/30/2020
10.6		Employment Agreement between the Registrant and David G. Jemmett effective September 30, 2019		10-12G		10.2		10/2/2019
10.7		Employment Agreement between the Registrant and William Santos effective August 13, 2019		10-12G		10.3		10/2/2019
10.8		Engagement for Financial Services dated November 8, 2019 between the Registrant and Eventus Consulting, P.C.		10-K		10.8		3/30/2020
10.9		Stock Purchase Agreement by and among the Registrant, Technologyville, Inc. and Brian Yelm, effective May 25, 2020		8-K		10.1		5/29/2020
10.10		Share Purchase Agreement among the Registrant, Clear Skies Security, LLC and all of its Members, effective July 31, 2020		8-K		10.1		8/6/2020
31.1*		Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
32.1**		Section 1350 Certification of Chief Executive 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, Exhibit 32.1 is being furnished and not filed.

 

 

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: November 16, 2020