UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the Quarterly Period Ended
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Commission
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CERBERUS CYBER SENTINEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
TABLE OF CONTENTS
| 2 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that reflect management’s current views with respect to future events and financial performance. These statements are based upon beliefs of, and information currently available to, us as of the date hereof, as well as estimates and assumptions made by us. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ materially from those anticipated, believed, estimated, expected, intended, or planned.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Forward-looking statements made in this Quarterly Report on Form 10-Q include statements about:
| ● | our ability to achieve and sustain profitability of our existing lines of business and through our wholly owned subsidiaries; |
| ● | our ability to raise sufficient capital to continue to acquire cybersecurity companies; |
| ● | our ability to attract and retain cybersecurity talent; |
| ● | our ability to identify potential acquisition targets within predetermined parameters; |
| ● | our ability to successfully execute acquisitions, integrate the acquired businesses, and create synergies as a global cybersecurity consolidator; |
| ● | our ability to attract and retain key technology or management personnel and to expand our management team; |
| ● | the rate of growth and anticipated trends and challenges in our business and in the market for our services; |
| ● | our future financial performance, including our expectations regarding our revenue, cost of revenue, operating expenses, and our ability to achieve and maintain future profitability; |
| ● | sufficiency of cash and cash equivalent to meet our needs for at least the next 12 months; |
| ● | our ability to attract and retain clients; |
| ● | our ability to generate revenue and gross profit; |
| ● | our ability to navigate through the increasingly complex cybersecurity regulatory environment; |
| ● | beliefs and objectives for future operations; |
| ● | our ability to stay in compliance with laws and regulations currently applicable to, or which may become applicable to, our business both in the United States and internationally; |
| ● | economic and industry trends or trend analysis; and |
| ● | anticipated income tax rates, tax estimates and tax standards. |
Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur, and actual results could differ materially and adversely from those implied in our forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or events and circumstances described in the forward-looking statements will be achieved or occur. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Except as required by law, we undertake no obligation to update any forward-looking statements after the date of this report to conform these statements to actual results. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which are only predictions and speak only as of the date hereof.
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated Balance Sheets
(Unaudited)
| June 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Notes receivable, related party | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Contract asset | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred revenue | ||||||||
| Settlement liability | ||||||||
| Lease liability | ||||||||
| Loans payable | ||||||||
| Line of credit | ||||||||
| Convertible notes payable | ||||||||
| Note payable, related party | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities: | ||||||||
| Loans payable, net of current portion | ||||||||
| Lease liability, net of current portion | ||||||||
| Note payable, related party, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding on June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated translation adjustment | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Revenue: | ||||||||||||||||
| Security managed services | $ | $ | $ | $ | ||||||||||||
| Professional services | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of revenue: | ||||||||||||||||
| Security managed services | ||||||||||||||||
| Professional services | ||||||||||||||||
| Cost of payroll | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| Total cost of revenue | ||||||||||||||||
| Total gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Advertising and marketing | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding - basic | ||||||||||||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS of CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Gain/(Loss) | Deficit | Total | |||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock based compensation - stock options | - | |||||||||||||||||||||||
| Stock based compensation - common stock | ||||||||||||||||||||||||
| Exercise of options | ||||||||||||||||||||||||
| Stock issued for cash in public offering | ||||||||||||||||||||||||
| Stock issued for True Digital acquisition | ||||||||||||||||||||||||
| Stock issued for VelocIT acquisition | ( | ) | ||||||||||||||||||||||
| Stock issued for Red74 acquisition | ||||||||||||||||||||||||
| Stock issued for Creatrix acquisition | ||||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2022 | | $ | $ | | $ | ( | ) | $ | ( | ) | $ | | ||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Stock based compensation - stock options | - | |||||||||||||||||||||||
| Stock issued for cash | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
CONDENSED Consolidated STATEMENTS OF CASH FLOWS
(Unaudited)
| June 30, 2022 | June 30, 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation - stock options | ||||||||
| Loss on write-off of accounts receivable | ||||||||
| Issuance of common stock for services | ||||||||
| Non-cash interest expense | ||||||||
| Depreciation and amortization | ||||||||
| Right of use amortization | ||||||||
| Amortization of debt discount | ||||||||
| Gain on termination of operating lease | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Prepaids and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Lease liability | ( | ) | ||||||
| Settlement liability | ( | ) | ||||||
| Deferred revenue | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ||||||
| Cash paid in acquisitions, net | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from stock option exercise | ||||||||
| Proceeds from loan payable | ||||||||
| Proceeds from convertible note payable | ||||||||
| Proceeds from line of credit | ||||||||
| Payment on line of credit | ( | ) | ||||||
| Payment on loans payable | ( | ) | ( | ) | ||||
| Payment on notes payable, related party | ( | ) | ( | ) | ||||
| Payment of debt issuance cost | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rates on cash and cash equivalents | ( | ) | ||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents - beginning of the period | ||||||||
| Cash and cash equivalents - end of the period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Right of use asset and lease liability recorded upon adoption of ASC 842 | $ | $ | ||||||
| Common stock issued in True Digital acquisition | $ | $ | ||||||
| Common stock issued in Creatrix acquisition | $ | $ | ||||||
| Common stock issued in VelocIT acquisition | $ | $ | ||||||
| Common stock issued in RED 74 acquisition | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
CERBERUS CYBER SENTINEL CORPORATION and subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation (“Cerberus”), and its wholly owned subsidiaries, including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”), Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT”), Southford Equities, Inc., a British Virgin Islands company (“Arkavia”), True Digital Security, Inc., a Delaware corporation (“True Digital”), RED74 LLC, a New Jersey limited liability company (“RED74”), Atlantic Technology Systems, Inc., a New Jersey corporation (“ATS”), Atlantic Technology Enterprises, Inc., a New Jersey corporation (“ATE” and together with ATS, “Atlantic”), Creatrix, Inc., a Maryland corporation (“Creatrix”), and CyberViking, LLC, an Oregon limited liability company (“CyberViking”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.
NOTE 1 –ORGANIZATION AND BACKGROUND
Description of the Business
We are a cybersecurity and compliance company comprised of highly trained and seasoned security professionals who work with clients to enhance or create a better cyber posture in their organization. We provide a full range of cybersecurity consulting and related services, encompassing all three pillars of compliance, cybersecurity, and culture. Our services include secured managed services, compliance services, security operations center (“SOC”) services, virtual Chief Information Security Officer (“vCISO”) services, incident response, certified forensics, technical assessments, and cybersecurity training.
On January 5, 2022, we entered into a stock purchase agreement (the “True Digital Stock Purchase Agreement”) with certain stockholders of True Digital and an agreement and plan of merger (the “True Digital Merger Agreement”) with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company.
On
January 18, 2022, we completed a $ underwritten public offering of shares of our common stock, pursuant to which an aggregate
of
On June 1, 2022, we entered into a stock purchase agreement with the stockholders of Creatrix, pursuant to which Creatrix became our wholly owned subsidiary. Creatrix offers recognized expertise in identity management as well as systems integration and software engineering, and specializes in biometrics, vetting, credentialing, and case management.
Basis of Presentation
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include our accounts and the accounts of our subsidiaries. All material intercompany accounts and transactions have been eliminated.
Our interim financial statements are unaudited, and in our opinion, include all adjustments of a normal recurring nature necessary for the fair presentation of the periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for any subsequent period or for the year ending December 31, 2022. These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2021.
| 8 |
Reclassifications
Certain reclassifications have been made to the financial statements for the six months ended June 30, 2021 to conform to the financial statements presentation for the six months ended June 30, 2022. These reclassifications had no effect on net loss or cash flows as previously reported.
Use of Estimates
GAAP requires management to make estimates and assumptions that affect the reported amounts in our financial statements. We periodically evaluate our estimates and adjust prospectively, if necessary. We believe our estimates and assumptions are reasonable; however, actual results could materially differ.
We believe the critical accounting policies discussed below affects our more significant judgments and estimates used in the preparation of the accompanying unaudited condensed consolidated financial statements. Significant estimates include the allowance for doubtful accounts, the carrying value of intangible assets and goodwill, deferred tax asset and valuation allowance, the estimated fair value of assets acquired, liabilities assumed and stock issued in business combinations, and assumptions used in the Black-Scholes option pricing model, such as expected volatility, risk-free interest rate, share price, and expected dividend rate.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Our revenue is derived from two major types of services to clients: security managed services and professional services. With respect to security managed services, we provide culture education and enablement, tools and technology provisioning, data and privacy monitoring, regulations and compliance monitoring, remote infrastructure administration, and cybersecurity services, including, but not limited to, antivirus and patch management. With respect to professional services, we provide cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.
Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:
Security Managed Services
Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.
Professional Services
Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.
Accounts Receivable
Accounts
receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. We periodically assess
our accounts and other receivables for collectability on a specific identification basis. We provide for allowances for doubtful receivables
based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate.
Payments are generally due within 30 days of invoice. We write off accounts receivable against the allowance for doubtful accounts when
a balance is determined to be uncollectible. As of June 30, 2022 and December 31, 2021, our allowance for doubtful accounts was $
| 9 |
Inventory
Inventory
consists of software licenses and computer equipment for sale to customers. Inventory is measured using the first-in, first-out method
and stated at lower of cost or net realizable value as of June 30, 2022 and December 31, 2021. The value of inventories is reduced for
excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and
adjust the value of inventory when required. We recorded
Fair Value Measurements
As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
| Level 1: | Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
| Level 2: | Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. |
| Level 3: | Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The significant unobservable inputs used in the fair value measurement for nonrecurring fair value measurements of long-lived assets include pricing models, discounted cash flow methodologies and similar techniques. |
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. For dilutive securities, all outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options and shares issuable upon conversion thereof have been excluded from our computation of net loss per common share for the six months ended June 30, 2022 and 2021.
June 30, 2022 | June 30, 2021 | |||||||
| Stock options | ||||||||
| Warrant | ||||||||
| Convertible debt | ||||||||
| Total | ||||||||
| 10 |
Deferred Revenue
Deferred
revenue primarily consists of billings or payments received from customers in advance of revenue recognized for the services provided
to our customers or annual licenses and is recognized as services are performed or ratably over the life of the license. We generally
invoice customers in advance or in milestone-based installments. Deferred revenue of $
Deferred revenue consisted of the following:
June 30, 2022 | December 31, 2021 | |||||||
| Security managed services | $ | $ | ||||||
| Professional services | ||||||||
| Total deferred revenue | $ | $ | ||||||
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, including tax loss and credit carry forwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. We account for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. At June 30, 2022 and December 31, 2021, our net deferred tax asset has been fully reserved.
For uncertain tax positions that meet a “more likely than not” threshold, we recognize the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. Our practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is made that such expense is likely.
Recently Issued Accounting Standards
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force). The ASU requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the ASU, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. We adopted the standard on January 1, 2022, and management noted that there is no material impact to the unaudited condensed consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in business combinations to be recognized in accordance with ASC Topic 606 as if the acquirer had originated the contracts. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that adopting this standard will have on the unaudited condensed consolidated financial statements.
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to us.
| 11 |
NOTE 3 – ACQUISITIONS
True Digital Security, Inc.
On
January 5, 2022, we entered into the True Digital Stock Purchase Agreement with certain stockholders of True Digital and the True
Digital Merger Agreement with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated
by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a
wholly owned subsidiary of our company (the “True Digital Acquisition”). True Digital’s outstanding common stock
was exchanged for the right to receive an aggregate of $
Subsequent to the issuance of these financial statements, we expect to obtain a third-party valuation on the fair value of the assets acquired, including identifiable intangible assets and the liabilities assumed for use in the purchase price allocation.
The following table summarizes the preliminary allocation of the purchase price to the fair values of the assets acquired and the liabilities assumed as of the transaction date:
| Consideration | $ | |||
| Tangible assets acquired: | ||||
| Cash | ||||
| Accounts receivable | ||||
| Contract assets | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Other assets | ||||
| Total tangible assets | ||||
| Estimated intangible assets acquired | ||||
| Assumed liabilities: | ||||
| Accounts payable and accrued expenses | ||||
| Deferred revenue | ||||
| Line of credit | ||||
| Loans payable | ||||
| Loans payable - shareholder | ||||
| Total assumed liabilities | ||||
| Net assets acquired | ||||
| Goodwill (a) | $ |
| (a) |
| 12 |
Creatrix, Inc.
On June 1, 2022, we entered into a stock purchase agreement with the stockholders of Creatrix, pursuant to which Creatrix became our wholly owned subsidiary. We anticipate that this will expand our professional services offerings and capabilities. Creatrix offers recognized expertise in identity management as wells as systems integration and software engineering and specializes in biometrics, vetting, credentialing, and case management.
Subsequent to the issuance of these financial statements, we expect to obtain a third-party valuation on the fair value of the assets acquired, including identifiable intangible assets and the liabilities assumed for use in the purchase price allocation.
The aggregate purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimate fair values as of the acquisition date, with the excess recorded to goodwill. During the measurement period, which will not exceed one year from closing, we will continue to obtain information to assist us in finalizing the acquisition date fair values. Any qualifying changes to our preliminary estimates will be recorded as adjustments to the respective assets and liabilities, with any residual amounts allocated to goodwill.
The following table summarizes the preliminary estimated acquisition date fair values of the assets acquired and liabilities assumed:
| Consideration paid | $ | |||
| Tangible assets acquired: | ||||
| Cash | ||||
| Accounts receivable | ||||
| Contract assets | ||||
| Prepaid expenses and other current assets | ||||
| Total tangible assets | ||||
| Estimated intangible assets acquired | ||||
| Assumed liabilities: | ||||
| Accounts payable and accrued expenses | ||||
| Loans payable | ||||
| Total assumed liabilities | ||||
| Net assets acquired | ||||
| Goodwill (a) | $ |
| (a) |
Pro forma financial information is not presented because the acquisitions were not material to our financial statements, individually or in the aggregate.
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of:
June 30, 2022 | December 31, 2021 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Deferred cost of sales | ||||||||
| Prepaid taxes | ||||||||
| Prepaid insurance | ||||||||
| Deferred interest | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
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NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
June 30, 2022 | December 31, 2021 | |||||||
| Computer equipment | $ | $ | ||||||
| Building | ||||||||
| Leasehold improvements | ||||||||
| Vehicles | ||||||||
| Furniture and fixtures | ||||||||
| Software | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Total
depreciation expense was $
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the changes in goodwill during the six months ended June 30, 2022:
| Balance December 31, 2021 | $ | |||
| Acquisition of goodwill | ||||
| Foreign currency translation adjustment | ( | ) | ||
| Ending balance, June 30, 2022(1) | $ |
| (1) |
The following table summarizes the identifiable intangible assets as of June 30, 2022 and December 31, 2021:
| Useful life | June 30, 2022 | December 31, 2021 | ||||||||
| Tradenames – trademarks | $ | $ | ||||||||
| Tradenames – trademarks | ||||||||||
| Customer base | ||||||||||
| Non-compete agreements | ||||||||||
| Intellectual property/technology | ||||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||||
| Total | $ | $ | ||||||||
The
weighted average remaining useful life of identifiable amortizable intangible assets remaining is
Amortization
of identifiable intangible assets for the three months ended June 30, 2022 and 2021 was $
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The below table summarizes the future amortization expense for the remainder of 2022 and the next four years thereafter:
| 2022 (remainder of) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| $ |
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following amounts:
June 30, 2022 | December 31, 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll | ||||||||
| Accrued expenses | ||||||||
| Accrued commissions | ||||||||
| Accrued interest – related party | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
NOTE 8 – RELATED PARTY TRANSACTIONS
Independent Consulting Agreement with Stephen Scott
In
August 2020, we entered into an Independent Consulting Agreement with Stephen Scott, a Director of our company, with respect to advisory
and consulting services relating to our strategic and business development, and sales and marketing. Mr. Scott
receives a consulting fee of $
Managed Services Agreement with Hensley Beverage Company – Related Party
In
July 2021, we entered into a 1-year Managed Services Agreement with Hensley Beverage Company to provide secured managed services. We
also may be engaged by Hensley Beverage Company from time to time to provide other related services outside the scope of the Managed
Services Agreement. While the agreement provides for a term through December 31, 2021, the agreement will continue until terminated
by either party. For the three and six months ended June 30, 2022, we received $
Note Receivable – Related Party
Arkavia
provided cash infusions to a related party to fund an intended wholly owned subsidiary, Arkavia Peru, for start-up and operational costs.
As of June 30, 2022, the subsidiary has yet to be incorporated and as such, Arkavia has recorded the amount as a receivable. The amount
outstanding at June 30, 2022 is $
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NOTE 9 – STOCKHOLDERS’ EQUITY
On June 14, 2022, our Board of Directors approved and recommended that our stockholders approve (i) an amended and restated certificate of incorporation to, among other things, (1) increase our authorized shares of common stock from to
Options
We granted stock options vesting solely upon the continued service of the recipient. We recognize the accounting grant date fair value of equity-based awards as compensation expense over the required service period of each award.
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2022 | $ | - | - | |||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Expired or cancelled | ( | ) | - | - | ||||||||||||
| Outstanding at June 30, 2022 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2022 | $ | $ | ||||||||||||||
Total compensation expense related to the options was $ and $ for the three months ended June 30, 2022 and 2021, respectively, and $ and $ for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there was future compensation expense of $ with a weighted average recognition period of years related to the options.
Warrant Activity Summary
The following table summarizes warrant activity:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2022 | $ | - | ||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired or cancelled | - | - | ||||||||||||||
| Outstanding at June 30, 2022 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2022 | $ | $ | ||||||||||||||
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NOTE 10 – COMMITMENTS AND CONTINGENCIES
Maxim Settlement Agreement
On
October 27, 2020, we entered into an advisory agreement (the “Advisory Agreement”) with Maxim Group LLC (“Maxim”),
pursuant to which the parties agreed to certain compensation obligations in the form of our common stock, cash and future rights. Certain
disputes arose between the parties regarding the duties and obligations pursuant to the Advisory Agreement, resulting in the parties
entering into a settlement and release agreement on January 13, 2022. As a result, we recorded a settlement liability at December
31, 2021 of $
Legal Claims
There are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our directors, officers or affiliates, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.
Indirect Taxes
We are subject to indirect taxation in some, but not all, of the various states and foreign jurisdictions in which we conduct business. Laws and regulations attempting to subject commerce conducted over the Internet to various indirect taxes are becoming more prevalent, both in the U.S. and internationally, and may impose additional burdens on us in the future. Increased regulation could negatively affect our business directly, as well as the business of our customers. Taxing authorities may impose indirect taxes on the Internet-related revenue we generated based on regulations currently being applied to similar, but not directly comparable industries. There are many transactions and calculations where the ultimate indirect tax determination is uncertain. In addition, domestic and international indirect taxation laws are complex and subject to change. We may be audited in the future, which could result in changes to our indirect tax estimates. We continually evaluate those jurisdictions in which nexus exists, and believe we maintain adequate indirect tax accruals.
As
of June 30, 2022 and December 31, 2021, our accrual for estimated indirect tax liabilities was $
NOTE 11 – LOANS PAYABLE AND LINES OF CREDIT
Loans Payable
Loans payable was as follows:
| Interest Rate | Maturities | June 30, 2022 | December 31, 2021 | |||||||||||
| Term loans (US dollar denominated) | $ | $ | ||||||||||||
| Term loans (Chilean peso denominated) | ||||||||||||||
| Less current portion | ( | ) | ( | ) | ||||||||||
| Long term loans payable | $ | $ | ||||||||||||
In
June 2022, we entered into bridge loans, secured by substantially all of our assets, in the principal amount of $
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Various
subsidiaries in the United States are borrowers under certain term loans. These term loans require monthly principal and interest payments.
These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense of these term loans
of $
Our
Chilean subsidiary, Arkavia, is the borrower under certain term loans denominated in Chilean Pesos. These term loans require monthly
principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest
expense on these term loans of $
Debt Assumed through Acquisition
As
part of the True Digital Acquisition, we assumed $
Convertible Notes Payable
In
October 2021, we issued a convertible note in the principal amount of $
In
June 2022, we entered into an unsecured convertible note in the principal amount of $
Future minimum payments under the above line of credit and loans payable due as of June 30, 2022 were as follows:
| 2022 (remainder of) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total future minimum payments | ||||
| Less: discount | ( | ) | ||
| Less: current | ( | ) | ||
| $ |
NOTE 12 – LEASES
All of our leases are classified as operating leases. With the adoption of Topic 842, operating lease agreements are required to be recognized on the condensed consolidated balance sheet as Right of Use (“ROU”) assets and corresponding lease liabilities.
On
January 19, 2022, we recognized additional ROU assets and lease liabilities of $
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ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that we will exercise that option.
When
measuring lease liabilities for leases that were classified as operating leases, we discounted lease payments using our estimated incremental
borrowing rate at January 1, 2022. The weighted average incremental borrowing rate applied was
Operating leases are included in the unaudited condensed consolidated balance sheets as follows:
| Classification | June 30, 2022 | December 31, 2021 | ||||||||
| Lease assets | ||||||||||
| Operating lease cost ROU assets | Assets | $ | $ | |||||||
| Total lease assets | $ | $ | ||||||||
| Lease liabilities | ||||||||||
| Operating lease liabilities, current | Current liabilities | $ | $ | |||||||
| Operating lease liabilities, non-current | Liabilities | |||||||||
| Total lease liabilities | $ | $ | ||||||||
The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations, were as follows:
Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Leases costs | ||||||||
| Operating lease costs | $ | $ | ||||||
| Total lease costs | $ | $ | ||||||
Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the six months ended June 30, 2022 were as follows:
| Fiscal Year | Operating Leases | |||
| (Unaudited) | ||||
| 2022 (remainder of) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total future minimum lease payments | ||||
| Amount representing interest | ( | ) | ||
| Present value of net future minimum lease payments | $ | |||
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NOTE 13 – GEOGRAPHIC INFORMATION
Revenue by geography is based on the customer’s billing address and was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| U.S. | $ | $ | $ | $ | ||||||||||||
| Chile | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Property and equipment, net by geography was as follows:
June 30, 2022 | December 31, 2021 | |||||||
| U.S. | $ | $ | ||||||
| Chile | ||||||||
| $ | $ | |||||||
No other international country represented more than 10% of property and equipment, net in any period presented.
NOTE 14 – SUBSEQUENT EVENTS
Acquisitions
In July 2022, we entered into a stock purchase agreement with CyberViking and its interest holders, pursuant to which we acquired all of the issued and outstanding units of CyberViking (the “CyberViking Acquisition”). We funded the acquisition through the issuance of shares of our common stock.
The purchase price of the CyberViking Acquisition will be allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values at the acquisition date. We are currently preparing the valuations and other procedures necessary to determine the purchase price allocation and will record our initial fair value estimates during the three months ending September 30, 2022.
CyberViking is a company specializing in application security services, incident response, and threat hunting as well as the creation and management of security operation centers.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Unless otherwise indicated or the context requires otherwise, the terms “we,” “us,” “our,” and “our company” refer to Cerberus Cyber Sentinel Corporation, a Delaware corporation (“Cerberus”), and its wholly owned subsidiaries, including GenResults, LLC, an Arizona limited liability company (“GenResults”), TalaTek, LLC, a Virginia limited liability company (“TalaTek”), Technologyville, Inc., an Illinois corporation (“Techville”), Clear Skies Security, LLC, a Georgia limited liability company (“Clear Skies”), Alpine Security, LLC, an Illinois limited liability company (“Alpine”), Catapult Acquisition Corporation, a New Jersey corporation (“VelocIT”), Southford Equities, Inc., a British Virgin Islands company (“Arkavia”), True Digital Security, Inc., a Delaware corporation (“True Digital”), RED74 LLC, a New Jersey limited liability company (“RED74”), Atlantic Technology Systems, Inc., a New Jersey corporation (“ATS”), Atlantic Technology Enterprises, Inc., a New Jersey corporation (“ATE” and together with ATS, “Atlantic”), Creatrix, Inc., a Maryland corporation (“Creatrix”), and CyberViking, LLC, an Oregon limited liability company (“CyberViking”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.
Second Quarter 2022 Highlights
Our operating results for the three months ended June 30, 2022 included the following:
| ● | Total revenue increased by $8.3 million to $11.2 million for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021. | |
| ● | Total gross profit increased to $0.8 million for the three months ended June 30, 2022, as compared to the six months ended June 30, 2021. | |
| ● | Cash used in operating activities decreased to $0.6 million for the three months ended June 30, 2022, as compared to $3.0 million for the three months ended March 31, 2022. | |
| ● | We closed $6.0 million of short-term bridge loans in June 2022. | |
| ● | We acquired Creatrix, which became our wholly owned subsidiary. |
On June 14, 2022, we filed a Registration Statement on Form S-3 (as amended by Amendment No. 1 to Form S-3 filed with the U.S. Securities and Exchange Commission (“SEC”) on June 24, 2022, the “S-3 Registration Statement”) with the SEC, which was declared effective on June 27, 2022. The S-3 Registration Statement contains two prospectuses:
| ● | A base prospectus that covers the potential offering, issuance, and sale from time to time of our common stock, preferred stock, warrants, debt securities, and units in one or more offerings with a total value of up to $300,000,000; and | |
| ● | A sales agreement prospectus covering the potential offering, issuance, and sale from time to time of our common stock having an aggregate gross sales price of up to $100,000,000 pursuant to a sales agreement with B. Riley Securities, Inc., Stifel, Nicolaus & Company, Incorporated, and Boustead Securities, LLC. |
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Results of Operations
Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021
Our financial results for the three months ended June 30, 2022 are summarized as follows in comparison to the three months ended June 30, 2021:
Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | Variance | ||||||||||
| Revenue: | ||||||||||||
| Security managed services | $ | 10,376,169 | $ | 2,077,351 | $ | 8,298,818 | ||||||
| Professional services | 851,776 | 872,326 | (20,550 | ) | ||||||||
| Total revenue | 11,227,945 | 2,949,677 | 8,278,268 | |||||||||
| Cost of revenue: | ||||||||||||
| Security managed services | 3,765,426 | 340,460 | 3,424,966 | |||||||||
| Professional services | 163,152 | 139,973 | 23,179 | |||||||||
| Cost of payroll | 4,707,984 | 1,531,910 | 3,176,074 | |||||||||
| Stock based compensation | 1,825,890 | 197,848 | 1,628,042 | |||||||||
| Total cost of revenue | 10,462,452 | 2,210,191 | 8,252,261 | |||||||||
| Total gross profit | 765,493 | 739,486 | 26,007 | |||||||||
| Operating expenses: | ||||||||||||
| Professional fees | 945,148 | 244,261 | 700,887 | |||||||||
| Advertising and marketing | 240,504 | 172,468 | 68,036 | |||||||||
| Selling, general, and administrative | 4,468,415 | 1,682,879 | 2,785,536 | |||||||||
| Stock-based compensation | 2,404,049 | 693,278 | 1,710,771 | |||||||||
| Total operating expenses | 8,058,116 | 2,792,886 | 5,265,230 | |||||||||
| Loss from operations | (7,292,623 | ) | (2,053,400 | ) | (5,239,223 | ) | ||||||
| Other income (expense): | ||||||||||||
| Other income | 17,425 | 2,179 | 15,246 | |||||||||
| Interest expense, net | (64,648 | ) | (65,641 | ) | 993 | |||||||
| Total other income (expense) | (47,223 | ) | (63,462 | ) | 16,239 | |||||||
| Net loss | (7,339,846 | ) | (2,116,862 | ) | (5,222,984 | ) | ||||||
| Foreign currency translation adjustment | (2,200,710 | ) | - | (2,200,710 | ) | |||||||
| Comprehensive loss | $ | (9,540,556 | ) | $ | (2,116,862 | ) | $ | (7,423,694 | ) | |||
Revenue
Security managed services revenue increased by $8,298,818, or 399%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due primarily to revenue acquired through our completion of six acquisitions over the last 12 months and new and existing customer revenue growth.
Professional services revenue decreased by $20,550, or 2%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due primarily to two large one-time projects in the three months ended June 30, 2021, offset by acquisition and organic revenue growth of approximately $134,000.
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Expenses
Cost of Revenue
Security managed services cost of revenue increased by $3,424,966, or 1,006%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to our completion of six acquisitions over the last 12 months, which increased our revenues from hardware and software sales and their related costs.
Professional services cost of revenue increased by $23,179, or 17%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to our increase in revenue from professional services from acquisitions completed over the last 12 months.
Cost of payroll cost of revenue increased by $3,176,074, or 207%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to headcount added primarily through our completion of six acquisitions over the last 12 months.
Stock-based compensation expenses increased by $1,628,042, or 823%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to an increase of stock options awarded to our growing base of revenue generating employees.
Operating Expenses
Professional fees increased by $700,887, or 287%, for the three months ended June 30, 2022 as compared to three months ended June 30, 2021, due to an increase in accounting, legal, and other professional fees incurred related to our periodic SEC filings and our efforts to raise additional capital.
Advertising and marketing expenses increased by $68,036, or 39%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to our current marketing campaign initiatives to stimulate organic revenue growth.
Selling, general, and administrative expenses increased by $2,785,536, or 166%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to headcount added through our completion of six acquisitions over the last 12 months and hiring of back office personnel to meet the current and expected growth needs of our business.
Stock based compensation expenses increased by $1,710,771, or 247%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, due to an increase in stock options awarded to employees as we continue to scale our back office to meet the growth needs of our business and shares issued to consultants for marketing services provided.
Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021
Our financial results for the six months ended June 30, 2022 are summarized as follows in comparison to the six months ended June 30, 2021:
Six Months Ended June 30, | ||||||||||||
| 2022 | 2021 | Variance | ||||||||||
| Revenue: | ||||||||||||
| Security managed services | $ | 18,428,394 | $ | 3,967,055 | $ | 14,461,339 | ||||||
| Professional services | 2,128,961 | 1,542,400 | 586,561 | |||||||||
| Total revenue | 20,557,355 | 5,509,455 | 15,047,900 | |||||||||
| Cost of revenue: | ||||||||||||
| Security managed services | 6,368,350 | 534,127 | 5,834,223 | |||||||||
| Professional services | 273,489 | 257,767 | 15,722 | |||||||||
| Cost of payroll | 9,153,834 | 2,959,612 | 6,194,222 | |||||||||
| Stock based compensation | 3,947,473 | 380,924 | 3,566,549 | |||||||||
| Total cost of revenue | 19,743,146 | 4,132,430 | 15,610,716 | |||||||||
| Total gross profit | 814,209 | 1,377,025 | (562,816 | ) | ||||||||
| Operating expenses: | ||||||||||||
| Professional fees | 1,568,209 | 401,615 | 1,166,594 | |||||||||
| Advertising and marketing | 395,845 | 217,695 | 178,150 | |||||||||
| Selling, general, and administrative | 9,171,958 | 3,170,520 | 6,001,438 | |||||||||
| Stock-based compensation | 4,969,559 | 1,348,964 | 3,620,595 | |||||||||
| Total operating expenses | 16,105,571 | 5,138,794 | 10,966,777 | |||||||||
| Loss from operations | (15,291,362 | ) | (3,761,769 | ) | (11,529,593 | ) | ||||||
| Other income (expense): | ||||||||||||
| Other income | 29,968 | 2,384 | 27,584 | |||||||||
| Interest expense, net | (108,233 | ) | (134,336 | ) | 26,103 | |||||||
| Total other income (expense) | (78,265 | ) | (131,952 | ) | 53,687 | |||||||
| Net loss | (15,369,627 | ) | (3,893,721 | ) | (11,475,906 | ) | ||||||
| Foreign currency translation adjustment | (1,298,269 | ) | - | (1,298,269 | ) | |||||||
| Comprehensive loss | $ | (16,667,896 | ) | $ | (3,893,721 | ) | $ | (12,774,175 | ) | |||
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Revenue
Security managed services revenue increased by $14,461,339, or 365%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due primarily to revenue acquired through our completion of six acquisitions over the last 12 months and new and existing customer revenue growth.
Professional services revenue increased by $586,561, or 38%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to revenue acquired through our completion of six acquisitions over the last 12 months and new and existing customer revenue growth.
Expenses
Cost of Revenue
Security managed services cost of revenue increased by $5,834,223, or 1,092%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due primarily to our completion of six acquisitions over the last 12 months, which increased our revenues from hardware and software sales and their related costs.
Professional services cost of revenue increased by 15,722, or 6%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to our increase in revenue from professional services from acquisitions completed over the last 12 months.
Cost of payroll cost of revenue increased by $6,194,222, or 209%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to headcount added primarily through our completion of six acquisitions over the last 12 months.
Stock-based compensation expenses increased by $3,566,549, or 936%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to an increase of stock options awarded to our growing base of revenue generating employees.
Operating Expenses
Professional fees increased by $1,166,594, or 290%, for the six months ended June 30, 2022 as compared to six months ended June 30, 2021, due to an increase in accounting, legal, and other professional fees incurred related to our periodic SEC filings and our efforts to raise additional capital.
Advertising and marketing expenses increased by $178,150, or 82%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to our current marketing campaign initiatives to stimulate organic revenue growth.
Selling, general, and administrative expenses increased by $6,001,438, or 189%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to headcount added through our completion of six acquisitions over the last 12 months and hiring of back office personnel to meet the current and expected growth needs of our business.
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Stock based compensation expenses increased by $3,620,595, or 268%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, due to an increase in stock options awarded to employees as we continue to scale our back office to meet the growth needs of our business and shares issued to consultants for marketing services provided.
Liquidity and Capital Resources
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At June 30, 2022, we had an accumulated deficit of $59,382,049 and working capital deficit of $768,309. For the six months ended June 30, 2022, we had a loss from operations of $15,369,627 and negative cash flows from operations of $3,574,474. Although we are showing positive revenue, gross profit is trending negatively primarily due to increased stock compensation related to sales activity. We expect to incur further losses through the end of 2022.
To date we have funded operations primarily through the sale of equity in private placements, debt, and revenue generated by our services. During the six months ended June 30, 2022, we received $9,521,798 from our public offering of our common stock, $5,975,000 in net proceeds from our bridge loans, and $277,712 from the exercise of stock options. On June 27, 2022, our Registration Statement on Form S-3 was declared effective, and we may offer and sell from time to time, in one or more series, any of our securities, for total gross proceeds up to $300,000,000. As of June 30, 2022, we had not sold any securities under our S-3 Registration Statement.
We believe that we have sufficient liquidity and capital resources to meet our requirements for at least the next 12 months from the filing date of this Quarterly Report on Form 10-Q, as well as our longer-term expected future cash requirements and obligations.
Our future capital requirements, both near-term and long-term, will depend on many factors, in addition to our recurring operating expenses, including our growth rate, the continued expansion of sales and marketing activities, the introduction of new and enhanced products and service offerings, and the costs of any future acquisitions in complementary businesses and technologies. To the extent existing cash and cash equivalents are not sufficient to fund future activities, we will seek to raise additional funds through equity, equity-linked, or debt financings. Any additional equity financing may be dilutive to our existing stockholders. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results, and financial condition would be adversely affected.
Working Capital (Deficit)/Surplus
Our working capital deficit as of June 30, 2022, in comparison to our working capital surplus as of December 31, 2021, is summarized as follows:
| As of | ||||||||
June 30, 2022 | December 31, 2021 | |||||||
| Current assets | $ | 18,547,284 | $ | 9,807,301 | ||||
| Current liabilities | 19,315,593 | 5,141,561 | ||||||
| Working capital (deficit)/surplus | $ | (768,309 | ) | $ | 4,665,740 | |||
The increase in current assets is primarily due to an increase in cash and cash equivalents and prepaid expenses and other current assets of $6,043,485 and $2,131,480, respectively. The increase in current liabilities is primarily due to the increase in accounts payable and accrued expense, deferred revenue, loans payable, current portion, and convertible notes payable of $2,675,346, $438,672, $6,067,789, and $1,016,667, respectively.
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Cash Flows
Our cash flows for the six months ended June 30, 2022, in comparison to our cash flows for the six months ended June 30, 2021, can be summarized as follows:
Six Months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (3,574,474 | ) | $ | (2,646,739 | ) | ||
| Net cash used in investing activities | (5,114,700 | ) | - | |||||
| Net cash provided by financing activities | 14,781,284 | 3,174,458 | ||||||
| Effect of exchange rates on cash and cash equivalents | (48,625 | ) | - | |||||
| Increase in cash | $ | 6,043,485 | $ | 527,719 | ||||
Operating Activities
Net cash used in operating activities was $3,574,474 for the six months ended June 30, 2022 and was primarily due to cash used to fund a net loss of $15,369,627, adjusted for non-cash expenses in the aggregate of $10,206,845 and additional cash outlaid by changes in the levels of operating assets and liabilities, primarily as a result of an increase in current assets, and accounts payable and accrued liabilities. Net cash used in operating activities was $2,646,739 for the six months ended June 30, 2021 and was primarily due to cash used to fund a net loss of $3,893,721, adjusted for non-cash expenses in the aggregate of $2,013,960, partially offset by cash generated by changes in the levels of operating assets and liabilities, primarily as a result of an increase in accounts payable.
Investing Activities
Net cash used in investing activities of $5,114,700 for the six months ended June 30, 2022 and was primarily due to net cash paid in the True Digital acquisition. There was no cash used in investing activities for the six months ended June 30, 2021.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2022 was $14,781,284, which was primarily due to cash received from the sale of our common stock in our public offering of $9,521,798 and $5,975,000 in net proceeds from our bridge loans. Net cash provided by financing activities for the six months ended June 30, 2021 was $3,174,458 and was primarily due to cash received from the sale of our common stock of $3,250,000.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenue, or operating results during the periods presented.
Critical Accounting Policies and Estimates
Our critical accounting policies are more fully described in the notes to our condensed consolidated financial statements included herein for the quarter and six months ended June 30, 2022 and in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on April 15, 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at dates of the financial statements and the reported amounts of revenue and expenses during the periods. Our significant estimates and assumptions include the recoverability and useful lives of long-lived assets, stock-based compensation, and the valuation allowance related to our deferred tax assets. Certain of our estimates, including the carrying amount of intangible assets and goodwill, could be affected by external conditions, including those unique to us and general economic conditions. It is reasonably possible that these external factors could have an effect on our estimates and could cause actual results to differ from those estimates.
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Fair Value Measurement
The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the fair value measurement guidance are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Business Combination
We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. We include the results of operations of the business that we have acquired in our consolidated results prospectively from the date of acquisition.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss.
Intangible Assets
Intangible assets are comprised of trademarks, customer bases, non-compete agreements, and intellectual property with original estimated useful lives with a range of 2 to 10 years. Once placed into service, we amortize the cost of intangible assets over their estimated useful lives on a straight-line basis.
Goodwill
Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually at year end or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment at the reporting level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash 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.
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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.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. Awards granted to directors are treated on the same basis as awards granted to employees.
Revenue Recognition
Our agreements with clients are primarily service contracts that range in duration from a few months to one year. We recognize revenue when control of these services is transferred to the client for an amount, referred to as the transaction price, which reflects the consideration to which we are expected to be entitled in exchange for those goods or services.
A contract with a client exists only when:
| ● | the parties to the contract have approved it and are committed to perform their respective obligations; | |
| ● | we can identify each party’s rights regarding the distinct services to be transferred (“performance obligations”); | |
| ● | we can determine the transaction price for the services to be transferred; and | |
| ● | the contract has commercial substance, and it is probable that we will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the client. |
For the majority of our contracts, we receive non-refundable upfront payments. We do not adjust the promised amount of consideration for the effects of a significant financing component since we expect, at contract inception, that the period between the time of transfer of the promised goods or services to the client and the time the client pays for these goods or services to be generally one year or less. Our credit terms to clients generally average 30 days, although in some cases payments are required in 15 days.
We do not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:
Security Managed Services.
Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.
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Professional Services.
Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.
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 June 30, 2022.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Because we are a smaller reporting company, we are not required to provide the information called for by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below. Thus there remains a reasonable possibility that a material misstatement of our interim financial statements will not be prevented or detected on a timely basis. This does not include an evaluation by our registered public accounting firm regarding our internal control over financial reporting. Accordingly, we cannot provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, to allow our principal financial and executive officers to make timely decisions regarding required disclosures as of June 30, 2022.
Our management’s evaluation was based on the following material weaknesses in our internal control over financial reporting which, existed as of December 31, 2021 and which continue to exist, as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021:
| ● | Lack of risk assessment procedures on internal controls to detect financial reporting risks in a timely manner; and |
| ● | Lack of documentation on policies and procedures that are critical to the accomplishment of financial reporting objectives. |
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A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As a company with limited accounting resources, a significant amount of management’s time and attention has been and will be diverted from our business to ensure compliance with these regulatory requirements.
Management’s Plan to Remediate the Material Weaknesses
We are implementing measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:
| ● | Identifying gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and |
| ● | Developing policies and procedures on internal control over financial reporting and monitoring the effectiveness of operations on existing controls and procedures. |
We will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis, and we are committed to taking further action and implementing additional enhancements or improvements, as necessary and in accordance with financial and budgetary considerations.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2022, other than those noted above, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 1A. Risk Factors
Economic conditions in the U.S and international economies may adversely impact our business operating on operating results.
We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 15, 2022, risk factors that materially affect our business, financial condition, or results of operations. There have been no material changes from the risk factors previously disclosed, except as follows:
General macro-economic conditions, such as a rise in interest rates, inflation in the cost of goods and services including labor, a recession or an economic slowdown in the United States or internationally, including as a result of continuing uncertainty from the COVID-19 pandemic or the Russia-Ukraine military conflict, could adversely affect demand for our services and make it difficult to accurately forecast and plan our future business activities. U.S. and global markets have recently been experiencing volatility and disruption due to new interest rate and inflation increases as well as the continued escalation of geopolitical tensions. For example, inflation in the United States began to rise in the second half of 2021 and has continued to rise in the first half of 2022. Although our business has not yet been materially negatively impacted by such inflationary pressures, we cannot be certain that neither we nor our customers will be materially impacted by continued pressures. Additionally, on February 24, 2022, Russian troops engaged in a full-scale military invasion of Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, it could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. Additionally, the military conflict in Ukraine has led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia, and other potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds. We do not have employees or facilities in Russia or Ukraine, nor do we have customers and contractors in these locations. Our business has not yet been materially negatively impacted by this military conflict to date. However, we cannot be certain that this will not impact our position in the credit market or our ability to acquire cybersecurity businesses in the short and long term.
To the extent conditions in the domestic and global economy change, our business could be harmed as current and potential customers may reduce or postpone spending or choose not to purchase or renew our services, which they may consider discretionary. If our customers face decreased consumer demand, increased regulatory burdens, or more limited access to international markets, we may face a decline in the demand for our services and our operating results could be adversely impacted.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit | Incorporated by Reference | |||||||
Number |
Exhibit Description | Form | Exhibit | Filing Date | ||||
| 3.1* | Amended and Restated Certificate of Incorporation of the Registrant | |||||||
| 10.3#* | 2019 Equity Incentive Plan, as amended | |||||||
| 31.1* | Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer | |||||||
| 31.2* | Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer | |||||||
| 32.1 | Section 1350 Certification of Principal Executive Officer | |||||||
| 32.2 | Section 1350 Certification of Principal Financial Officer | |||||||
| 101.INS* | Inline XBRL Instance Document | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
*Filed herewith.
#Management contracts and compensatory plans and arrangements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CERBERUS CYBER SENTINEL CORPORATION
| By: | /s/ David G. Jemmett | |
| David G. Jemmett | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 12, 2022 | ||
| By: | /s/ Debra L. Smith | |
| Debra L. Smith | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| Date: August 12, 2022 |
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Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION
OF
CERBERUS CYBER SENTINEL CORPORATION
The corporation was incorporated under the name “Cerberus Cyber Sentinel Corporation” by the filing of its original certificate of incorporation with the Secretary of State of the State of Delaware on March 5, 2019. This Amended and Restated Certificate of Incorporation of the corporation, which both restates and further amends the provisions of the corporation’s certificate of incorporation, was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware and by the written consent of its stockholders in accordance with Section 228 of the General Corporation Law of the State of Delaware. The certificate of incorporation of the corporation is hereby amended and restated to read in its entirety as follows:
FIRST. The name of the corporation is Cerberus Cyber Sentinel Corporation (the “Corporation”).
SECOND. The address of the Corporation’s registered office in the State of Delaware is 108 Lakeland Avenue, Dover, Kent County, Delaware 19901. The name of its registered agent at such address is Capitol Services, Inc.
THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (as the same exists or may hereafter be amended, the “General Corporation Law”).
FOURTH.
A. Capital Stock. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is Three Hundred Fifty Million (350,000,000) shares, divided into: (i) Three Hundred Million (300,000,000) shares, par value $0.00001 per share, of common stock (the “Common Stock”); and (ii) Fifty Million (50,000,000) shares, par value $0.00001 per share, of preferred stock (the “Preferred Stock”).
B. Common Stock.
1. Dividends. Subject to applicable law and the rights, if any, of the holders of any series of Preferred Stock then outstanding, dividends may be declared and paid on the Common Stock at such times and in such amounts as the Board of Directors of the Corporation (the “Board of Directors”) in its discretion shall determine.
2. Voting Rights. Except as otherwise provided by or pursuant to the provisions of this certificate of incorporation (including any certificate filed with the Secretary of State of the State of Delaware establishing a series of Preferred Stock) (as the same may be amended or amended and restated, this “Certificate of Incorporation”) or by applicable law, each holder of Common Stock, as such, shall be entitled to one (1) vote for each share of Common Stock held of record by such holder on all matters on which stockholders generally are entitled to vote.
3. Liquidation Rights. Subject to applicable law and the rights, if any, of the holders of any series of Preferred Stock then outstanding, in the event of any liquidation, dissolution, or winding up of the Corporation, the holders of the Common Stock shall be entitled to receive the assets of the Corporation available for distribution to its stockholders ratably in proportion to the number of shares of Common Stock held by them. A merger or consolidation of the Corporation with or into any other corporation or other entity, or a sale or conveyance of all or any part of the assets of the Corporation (which shall not in fact result in the liquidation, dissolution, or winding up of the Corporation and the distribution of assets to its stockholders) shall not be deemed to be a liquidation, dissolution, or winding up of the Corporation within the meaning of this Section 3.
C. Preferred Stock. The Board of Directors is hereby expressly authorized, by resolution or resolutions thereof, to provide from time to time out of the unissued shares of Preferred Stock for one or more series of Preferred Stock, and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the powers (including voting powers), if any, of the shares of such series and the preferences and relative, participating, optional, special, or other rights, if any, and the qualifications, limitations, or restrictions, if any, of the shares of such series. The designations, powers (including voting powers), preferences and relative, participating, optional, special, and other rights of each series of Preferred Stock, if any, and the qualifications, limitations, or restrictions thereof, if any, may differ from those of any and all other series of Preferred Stock at any time outstanding. Except as may otherwise be provided in this Certificate of Incorporation or by applicable law, no holder of any series of Preferred Stock then outstanding, as such, shall be entitled to any voting powers in respect thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority in voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote irrespective of Section 242(b)(2) of the General Corporation Law, without the separate vote of the holders of the Preferred Stock as a class.
FIFTH. Board of Directors.
A. Management; Election of Directors. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
B. Removal of Directors. Any director or the entire Board of Directors may be removed, solely by the affirmative vote of the holders of at least a majority of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class.
C. Vacancies. Subject to the rights, if any, of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from an increase in the authorized number of directors or any vacancies on the Board of Directors resulting from the death, resignation, disqualification, removal, or other cause shall be filled solely and exclusively by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. Any director so elected shall hold office until the expiration of the term of office of the director whom he or she has replaced and until his or her successor shall be elected and qualified, subject to such director’s earlier death, resignation, disqualification, or removal. No decrease in the number of directors shall shorten the term of any incumbent director.
D. No Written Ballot. Unless and except to the extent that the by-laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot.
E. Amendment of By-laws. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to make, alter, amend, and repeal the by-laws of the Corporation.
F. Special Meetings of Stockholders. Except as otherwise provided by or pursuant to the provisions of this Certificate of Incorporation, special meetings of stockholders for any purpose or purposes may be called at any time, but only by (a) the Chief Executive Officer or (b) the Board of Directors, and shall be called by the Chief Executive Officer at the request of the holders of not less than one-tenth of all outstanding shares of the corporation entitled to vote at the meeting. Except as provided in the foregoing sentence, special meetings of stockholders may not be called by another person or persons. Any meeting of stockholders may be postponed by action of the Board of Directors or by the person calling such meeting (if other than the Board of Directors) at any time in advance of such meeting.
SIXTH. A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law. Any amendment, modification, or repeal of the foregoing sentence shall not adversely affect any right or protection of a director of the Corporation hereunder in respect of any act or omission occurring prior to the time of such amendment, modification or repeal.
SEVENTH. The Corporation reserves the right at any time, and from time to time, to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by applicable law; and all rights, preferences, and privileges of whatsoever nature conferred upon stockholders, directors, or any other persons whomsoever by and pursuant to this Certificate of Incorporation are granted subject to the rights reserved in this Article SEVENTH.
EIGHTH. Unless the Corporation consents in writing to the selection of an alternative forum, the United States District Court for the District of Arizona or, if such court lacks jurisdiction, the state district court of the Maricopa County, Arizona, shall, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (A) any derivative action or proceeding asserting a claim on behalf of the Corporation, (B) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, employee, or agent of the Corporation to the Corporation or the Corporation’s stockholders, (C) any action or proceeding asserting a claim against the Corporation or any director, officers, or other employee of the Corporation pursuant to any provision of the Delaware General Corporation Law, this Certificate of Incorporation, or the by-laws of the Corporation, or (D) any action or proceeding asserting a claim against the Corporation or any director, officers, or other employee governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to (i) the provisions of this Article EIGHTH and (ii) jurisdiction and venue in the United States District Court for the District of Arizona and the state district court of Maricopa County, Arizona. If any action within the scope of this Article EIGHTH is filed by or in the name of any party subject to this Article EIGHTH (a “Violating Party”) in violation of this Article EIGHTH (a “Violating Action”), the Violating Party shall be deemed to have consented to (A) the personal jurisdiction of Arizona federal and state courts in connection with any action brought in any such court to enforce this Article EIGHTH and (B) having services of process made upon the Violating Party in any such action by service upon the Violating Party’s counsel in the Violating Action as agent for such shareholder.
[signature page follows]
IN WITNESS WHEREOF, the undersigned has executed and acknowledged this Amended and Restated Certificate of Incorporation this 8th day of August, 2022.
| /s/ David G. Jemmett | ||
| Name: | David G. Jemmett | |
| Title: | Chief Executive Officer |
Exhibit 10.3
CERBERUS CYBER SENTINEL CORPORATION
2019 EQUITY INCENTIVE PLAN
(As of August 7, 2022)
1. PURPOSES. The purposes of the Plan are to (a) attract and retain for the Company and its Affiliates the best available personnel, (b) provide additional incentive to Employees, Directors and Consultants and to increase their interest in the Company’s welfare, and (c) promote the success of the business of the Company and its Affiliates.
2. DEFINITIONS. As used herein, unless the context requires otherwise, the following terms shall have the meanings indicated below:
(a) “Affiliate” means (i) any corporation, partnership or other entity which owns, directly or indirectly, a majority of the voting equity securities of the Company, (ii) any corporation, partnership or other entity of which a majority of the voting equity securities or equity interest is owned, directly or indirectly, by the Company, and (iii) with respect to an Option that is intended to be an Incentive Stock Option, (A) any “parent corporation” of the Company, as defined in Section 424(e) of the Code or (B) any “subsidiary corporation” of the Company as defined in Section 424(f) of the Code, any other entity that is taxed as a corporation under Section 7701(a)(3) of the Code and is a member of the “affiliated group” as defined in Section 1504(a) of the Code of which the Company is the common parent, and any other entity as may be permitted from time to time by the Code or by the Internal Revenue Service to be an employer of Employees to whom Incentive Stock Options may be granted; provided, however, that in each case the Affiliate must be consolidated in the Company’s financial statements.
(b) “Award” means any right granted under the Plan, whether granted singly or in combination, to a Grantee pursuant to the terms, conditions and limitations that the Committee may establish.
(c) “Award Agreement” means a written agreement with a Grantee with respect to any Award, including any amendments thereto.
(d) “Board” means the Board of Directors of the Company.
(e) “Bonus Stock Agreement” means a written agreement with a Grantee with respect to a Bonus Stock Award, including any amendments thereto.
(f) “Bonus Stock Award” means an Award granted under Section 8 of the Plan.
(g) “Change in Control” of the Company means the occurrence of any of the following events: (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50 percent or more of the combined voting power of the Company’s then outstanding securities, except any such person who is a beneficial owner of securities in excess of such amount as of the date of adoption of the Plan; (ii) as a result of, or in connection with, any tender offer or exchange offer, merger, or other business combination (a “Transaction”), the persons who were directors of the Company immediately before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; (iii) the Company is merged or consolidated with another entity and as a result of the merger or consolidation less than 50 percent of the voting power of the outstanding voting securities of the surviving or resulting corporation shall then be owned in the aggregate by the former shareholders of the Company; (iv) a tender offer or exchange offer is made and consummated for the ownership of securities of the Company representing 50 percent or more of the combined voting power of the Company’s then outstanding voting securities; or (v) the Company transfers substantially all of its assets to another entity which is not controlled by the Company.
(h) “Code “means the Internal Revenue Code of 1986, as amended, and any successor statute. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any Treasury regulations promulgated under such section.
(i) “Committee” means the committee (or committees), as constituted from time to time, of the Board that is appointed by the Board to administer the Plan, or if no such committee is appointed (or no such committee shall be in existence at any relevant time), the term “Committee” for purposes of the Plan shall mean the Board. Within the scope of such authority, the Board or the Committee may (i) delegate to a committee of one or more members of the Board who are not Outside Directors the authority to grant Awards to eligible persons who are either (A) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Awards, or (B) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code, and/or (ii) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. The Board may assume any or all of the powers and responsibilities prescribed for the Committee, and to the extent it does so, the term “Committee” as used herein shall also be applicable to the Board.
(j) “Common Stock” means the Common Stock, $0.0001 par value per share, of the Company or the common stock that the Company may in the future be authorized to issue (as long as the common stock varies from that currently authorized, if at all, only in amount of par value) in replacement or substitution thereof.
(k) “Company” means Cerberus Cyber Sentinel Corporation, a Delaware corporation.
(l) “Consultant” means any person (other than an Employee or a Director, solely with respect to rendering services in such person’s capacity as a Director) who is engaged by the Company or any Affiliate to render consulting or advisory services to the Company or such Affiliate and who is a “consultant or advisor” within the meaning of Rule 701 promulgated under the Securities Act or Form S-8 promulgated under the Securities Act, including any foreign national who, but for the laws of his country, would be an employee of the Company or an Affiliate.
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(m) “Continuous Service” means that the provision of services to the Company or an Affiliate in any capacity of Employee, Director or Consultant is not interrupted or terminated. Except as otherwise provided in the Award Agreement, service shall not be considered interrupted or terminated for this purpose in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Affiliate, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or an Affiliate in any capacity of Employee, Director or Consultant. An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. For purposes of each Incentive Stock Option, if such leave exceeds ninety (90) days, and re-employment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Non-Qualified Stock Option on the day that is three (3) months and one (1) day following the expiration of such ninety (90)-day period.
(n) “Covered Employee” means the chief executive officer and the other most highly compensated officers of the Company for whom total compensation is required to be reported to shareholders under Regulation S-K, as determined for purposes of Section 162(m) of the Code.
(o) “Director” means a member of the Board.
(p) “Disability” means the “disability” of a person (i) as defined in a then effective written employment agreement between a person and the Company, or (ii) if such person is not covered by a written employment agreement with the Company, as defined in a then effective long-term disability plan maintained by the Company that covers such person, or (iii) if neither a written employment agreement or a plan exists at any relevant time, “Disability” means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. For purposes of determining the time during which an Incentive Stock Option may be exercised under the terms of an Option Agreement, “Disability” means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. Section 22(e)(3) of the Code provides that an individual is totally and permanently disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months.
(q) “Employee” means any person, including an Officer or Director, who is employed, within the meaning of Section 3401 of the Code, by the Company or an Affiliate. The provision of compensation by the Company or an Affiliate to a Director solely with respect to such individual rendering services in the capacity of a Director, however, shall not be sufficient to constitute “employment” by the Company or that Affiliate.
(r) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor statute. Reference in the Plan to any section of the Exchange Act shall be deemed to include any amendments or successor provisions to such section and any rules and regulations relating to such section.
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(s) “Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange, the Fair Market Value of a share of Common Stock shall be the closing sales price for such a share of Common Stock (or the closing bid, if no sales were reported) as quoted on such exchange (or if the Common Stock is listed or traded on more than one exchange, the exchange with the greatest volume of trading in the Common Stock) on the day of determination (or if no such price or bid is reported on that day, on the last market trading day prior to the day of determination), as reported by the applicable exchange or such other source as the Committee deems reliable. If the relevant date does not fall on a day on which the Common Stock has traded on such securities exchange, the date on which the Fair Market Value shall be established shall be the last day on which the Common Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion consistent with Section 409A of the Code.
(ii) If the Common Stock is quoted on the OTC Markets, Fair Market Value of a share of Common Stock shall be the last trade reported on the OTC Markets on the day of determination (or if no such trade is reported on that day, on the last market day prior to the day of determination).
(iii) In the absence of any such established market for the Common Stock, the Fair Market Value shall be determined in good faith by the reasonable application by the Committee of a reasonable valuation method in accordance with Section 409A of the Code.
(t) “Grantee” means an Employee, Director or Consultant to whom an Award has been granted under the Plan.
(u) “Incentive Stock Option” means an Option granted to an Employee under the Plan that meets the requirements of Section 422 of the Code.
(v) “Non-Employee Director” means a Director of the Company who either (i) is not an Employee or Officer, does not receive compensation (directly or indirectly) from the Company or an Affiliate in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K or (ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.
(w) “Non-Qualified Stock Option” means an Option granted under the Plan that is not intended to be an Incentive Stock Option.
(x) “Officer” means a person who is an “officer” of the Company or any Affiliate within the meaning of Section 16 of the Exchange Act (whether or not the Company is subject to the requirements of the Exchange Act).
(y) “Option” means an Award in the form of a stock option granted pursuant to Section 7 of the Plan to purchase a specified number of shares of Common Stock, whether granted as an Incentive Stock Option or as a Non-Qualified Stock Option.
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(z) “Option Agreement” means the written agreement evidencing the grant of an Option executed by the Company and the Optionee, including any amendments thereto.
(aa) “Optionee” means an individual to whom an Option has been granted under the Plan.
(bb) “OTC Markets” means any tier of quotation service operated by the OTC Markets Group, Inc.
(cc) “Outside Director” means a Director who either (i) is not a current employee of the Company or an “affiliated corporation” (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an “affiliated corporation” receiving compensation for prior services (other than benefits under a tax qualified pension plan), has not been an officer of the Company or an “affiliated corporation” at any time and is not currently receiving (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code) direct or indirect remuneration from the Company or an “affiliated corporation” for services in any capacity other than as a Director, or (ii) is otherwise considered an “outside director” for purposes of Section 162(m) of the Code.
(dd) “Plan” means this Cerberus Cyber Sentinel Corporation 2019 Equity Incentive Plan, as effective June 6, 2019, as set forth herein and as it may be amended from time to time.
(ee) “Qualifying Shares” means shares of Common Stock which either (i) have been owned by the Optionee and have been “paid for” for more than six (6) months within the meaning of Rule 144 promulgated under the Securities Act, or (ii) were obtained by the Optionee in the public market.
(ff) “Regulation S-K” means Regulation S-K promulgated under the Securities Act, as it may be amended from time to time, and any successor to Regulation S-K. Reference in the Plan to any item of Regulation S-K shall be deemed to include any amendments or successor provisions to such item.
(gg) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act, as it may be amended from time to time, and any successor to Rule 16b-3.
(hh) “Section” means a section of the Plan unless otherwise stated or the context otherwise requires.
(ii) “Securities Act” means the Securities Act of 1933, as amended, and any successor statute. Reference in the Plan to any section of the Securities Act shall be deemed to include any amendments or successor provisions to such section and any rules and regulations relating to such section.
(jj) “Ten Percent Shareholder” means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) at the time an Option is granted stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates.
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3. TYPES OF AWARDS AVAILABLE UNDER THE PLAN. Awards granted under this Plan may be (a) Incentive Stock Options, (b) Non-Qualified Stock Options, and (c) Bonus Stock Awards, as designated at the time of grant. The shares of stock that may be purchased upon exercise of Options granted under this Plan or that may be awarded under a Bonus Stock Award under this Plan are shares of Common Stock.
4. SHARES SUBJECT TO PLAN. Subject to adjustment pursuant to Section 12(a) hereof, the aggregate number of shares of Common Stock that may be issued pursuant to Options granted under this Plan or Bonus Stock Awards under this Plan shall not exceed 60,000,000 shares. At all times during the term of the Plan, the Company shall reserve and keep available such number of shares of Common Stock as will be required to satisfy the requirements of outstanding Awards under the Plan. The number of shares reserved for issuance under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued in connection with the exercise or settlement of an Award. Any shares of Common Stock covered by an Award (or a portion of an Award) that is forfeited or canceled or that expires shall be deemed not to have been issued for purposes of determining the maximum aggregate number of shares of Common Stock which may be issued under the Plan and shall again be available for Awards under the Plan. Nothing in this Section 4 shall impair the right of the Company to reduce the number of outstanding shares of Common Stock pursuant to repurchases, redemptions, or otherwise; provided, however, that no reduction in the number of outstanding shares of Common Stock shall (a) impair the validity of any outstanding Award, whether or not that Award is fully vested or exercisable, or (b) impair the status of any shares of Common Stock previously issued pursuant to an Award as duly authorized, validly issued, fully paid, and nonassessable. The shares to be delivered under the Plan shall be made available from (a) authorized but unissued shares of Common Stock, (b) Common Stock held in the treasury of the Company, or (c) previously issued shares of Common Stock reacquired by the Company, including shares purchased on the open market, in each situation as the Committee may determine from time to time in its sole discretion.
5. ELIGIBILITY. Awards other than Incentive Stock Options may be granted to Employees, Officers, Directors, and Consultants. Incentive Stock Options may be granted only to Employees (including Officers and Directors who are also Employees), as limited by clause (iii) of Section 2(a). The Committee in its sole discretion shall select the recipients of Awards. A Grantee may be granted more than one Award under the Plan, and Awards may be granted at any time or times during the term of the Plan. The grant of an Award to an Employee, Officer, Director or Consultant shall not be deemed either to entitle that individual to, or to disqualify that individual from, participation in any other grant of Awards under the Plan.
6. Limitation on Individual AWARDS. Any and all shares available for Awards under the Plan may be granted by way of Incentive Stock Options, Non-Qualified Stock Options, or Bonus Stock Awards to any one person. To the extent consistent with applicable law, compensation generated under the Plan is intended to constitute “performance-based” compensation for purposes of Section 162(m) of the Code.
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7. OPTIONS.
(a) Grant of Options. An Option is a right to purchase shares of Common Stock during the option period for a specified exercise price. The Committee shall determine (i) whether each Option shall be granted as an Incentive Stock Option or as a Non-Qualified Stock Option and (ii) the provisions, terms, and conditions of each Option including, but not limited to, the vesting schedule, the number of shares of Common Stock subject to the Option, the exercise price of the Option, the period during which the Option may be exercised, forfeiture provisions, methods of payment, and all other terms and conditions of the Option.
(b) Limitations on Incentive Stock Options. The aggregate Fair Market Value (determined as of the date of grant of an Option) of Common Stock which any Employee is first eligible to purchase during any calendar year by exercise of Incentive Stock Options granted under the Plan and by exercise of incentive stock options (within the meaning of Section 422 of the Code) granted under any other incentive stock option plan of the Company or an Affiliate shall not exceed $100,000. If the Fair Market Value of stock with respect to which all incentive stock options described in the preceding sentence held by any one Optionee are exercisable for the first time by such Optionee during any calendar year exceeds $100,000, the Options (that are intended to be Incentive Stock Options on the date of grant thereof) for the first $100,000 worth of shares of Common Stock to become exercisable in such year shall be deemed to constitute incentive stock options within the meaning of Section 422 of the Code and the Options (that are intended to be Incentive Stock Options on the date of grant thereof) for the shares of Common Stock in the amount in excess of $100,000 that become exercisable in that calendar year shall be treated as Non-Qualified Stock Options. If the Code or the Treasury regulations promulgated thereunder are amended after the effective date of the Plan to provide for a different limit than the one described in this Section 7(b), such different limit shall be incorporated herein and shall apply to any Options granted after the effective date of such amendment.
(c) Acquisitions and Other Transactions. Notwithstanding the provisions of Section 9(g), in the case of an Option issued or assumed pursuant to Section 9(g), the exercise price and number of shares for the Option shall be determined in accordance with the principles of Sections 409A and 424(a) of the Code and the Treasury regulations promulgated thereunder. The Committee may, from time to time, assume outstanding options granted by another entity, whether in connection with an acquisition of such other entity or otherwise, by either (i) granting an Option under the Plan in replacement of or in substitution for the option assumed by the Company, or (ii) treating the assumed option as if it had been granted under the Plan if the terms of such assumed option could be applied to an Option granted under the Plan. Such assumption shall be permissible if the holder of the assumed option would have been eligible to be granted an Option hereunder if the other entity had applied the rules of the Plan to such grant. The Committee also may grant Options under the Plan in settlement of, or substitution for, outstanding options or obligations to grant future options in connection with the Company or an Affiliate acquiring another entity, an interest in another entity or an additional interest in an Affiliate whether by merger, stock purchase, asset purchase or other form of transaction.
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(d) Payment or Exercise. Payment for the shares of Common Stock to be purchased upon exercise of an Option may be made in cash (by check or electronic funds transfer) or, if elected by the Optionee in one or more of the following methods stated in the Option Agreement (at the date of grant with respect to any Option granted as an Incentive Stock Option) and where permitted by law: (i) if a public market for the Common Stock exists, through a “same day sale” arrangement between the Optionee and a broker-dealer that is a member of the Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the shares of Common Stock so purchased to pay for the exercise price and whereby the FINRA Dealer irrevocably commits upon receipt of such shares of Common Stock to forward the exercise price directly to the Company; (ii) if a public market for the Common Stock exists, through a “margin” commitment from the Optionee and a FINRA Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the shares of Common Stock so purchased to the FINRA Dealer in a margin account as security for a loan from the FINRA Dealer in the amount of the exercise price, and whereby the FINRA Dealer irrevocably commits upon receipt of such shares of Common Stock to forward the exercise price directly to the Company; or (iii) by surrender to the Company of Qualifying Shares at the Fair Market Value per share at the time of exercise (provided that such surrender does not result in an accounting charge for the Company). No shares of Common Stock may be issued until full payment of the purchase price therefor has been made.
(e) Modification, Extension and Renewal of Options. The Committee shall have the power to modify, cancel, extend or renew outstanding Options and to authorize the grant of new Options and/or Bonus Stock Awards in substitution therefor (regardless of whether any such action would be treated as a repricing for financial accounting or other purposes), provided that (except as permitted by Section 12(a) of the Plan) any such action may not, without the written consent of any Optionee, (i) impair any rights under any Option previously granted to such Optionee, (ii) cause the Option or the Plan to become subject to Section 409A of the Code, or (iii) cause any Option to lose its status as “performance-based” compensation under Section 162(m) of the Code. Any outstanding Incentive Stock Option that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code.
8. BONUS STOCK AWARDS.
(a) Bonus Stock Awards. A Bonus Stock Award is a grant of shares of Common Stock for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions and other terms and conditions as are established by the Committee. Each Bonus Stock Award shall be in such form and shall contain such terms and conditions as the Committee shall deem appropriate. The terms and conditions of such Bonus Stock Agreement may change from time to time, and the terms and conditions of separate Bonus Stock Agreements need not be identical, but each such Bonus Stock Agreement shall be subject to the conditions of this Section 8.
(b) Forfeiture Restrictions. Shares of Common Stock that are the subject of a Bonus Stock Award may be subject to restrictions on disposition by the Grantee and to an obligation of the Grantee to forfeit and surrender the shares to the Company under certain circumstances (the “Forfeiture Restrictions”). The Forfeiture Restrictions shall be determined by the Committee in its sole discretion, and the Committee may provide that the Forfeiture Restrictions shall lapse on the passage of time, the attainment of one or more performance targets established by the Committee, or the occurrence of such other event or events determined to be appropriate by the Committee. The Forfeiture Restrictions, if any, applicable to a particular Bonus Stock Award (which may differ from any other such Bonus Stock Award) shall be stated in the Bonus Stock Agreement.
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(c) Rights as Shareholder. Shares of Common Stock awarded pursuant to a Bonus Stock Award shall be represented by a stock certificate registered in the name of the Grantee of such Bonus Stock Award, or by a book-entry account with the Company’s transfer agent. The Grantee shall have the right to receive dividends with respect to the shares of Common Stock subject to a Bonus Stock Award, to vote the shares of Common Stock subject thereto and to enjoy all other shareholder rights with respect to the shares of Common Stock subject thereto, except that, unless provided otherwise in this Plan, or in the Bonus Stock Agreement, (i) the Grantee shall not be entitled to delivery of the shares of Common Stock except as the Forfeiture Restrictions expire, (ii) the Company or an escrow agent shall retain custody of the shares of Common Stock until the Forfeiture Restrictions expire, or the Company shall cause its transfer agent to place restrictions on any such shares in such book-entry account, (iii) the Grantee may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the shares of Common Stock until the Forfeiture Restrictions expire, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Bonus Stock Agreement shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Bonus Stock Awards, including rules pertaining to the termination of the Grantee’s Continuous Service (by retirement, Disability, death or otherwise) prior to expiration of the Forfeiture Restrictions. Such additional terms, conditions or restrictions shall also be set forth in a Bonus Stock Agreement made in connection with the Bonus Stock Award.
(d) Stock Delivery. One or more stock certificates representing shares of Common Stock, free of Forfeiture Restrictions, shall be delivered to the Grantee promptly after, and only after, the Forfeiture Restrictions have expired, or the Company shall cause the records of the Company’s transfer agent to reflect the same, if such shares are reflected by book-entry account. The Grantee, by his acceptance of the Bonus Stock Award, irrevocably grants to the Company a power of attorney to transfer any shares so forfeited to the Company, agrees to execute any documents requested by the Company in connection with such forfeiture and transfer, and agrees that such provisions regarding transfers of forfeited shares shall be specifically performable by the Company in a court of equity or law.
(e) Payment for Bonus Stock. The Committee shall determine the amount and form of any payment for shares of Common Stock received pursuant to a Bonus Stock Award. In the absence of such a determination, the Grantee shall not be required to make any payment for shares of Common Stock received pursuant to a Bonus Stock Award, except to the extent otherwise required by law.
(f) Forfeiture of Bonus Stock. Unless otherwise provided in a Bonus Stock Agreement, on termination of the Grantee’s Continuous Service prior to lapse of the Forfeiture Restrictions, the shares of Common Stock which are still subject to the Forfeiture Restrictions under Bonus Stock Award shall be forfeited by the Grantee. Upon any forfeiture, all rights of the Grantee with respect to the forfeited shares of the Common Stock subject to the Bonus Stock Award shall cease and terminate, without any further obligation on the part of the Company except to repay any purchase price per share paid by the Grantee for the shares forfeited. The Committee will have discretion to determine whether the Continuous Service of a Grantee has terminated and the date on which such Continuous Service terminates and whether the Grantee’s Continuous Service terminated as a result of the Disability of the Grantee.
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(g) Lapse of Forfeiture Restrictions in Certain Events; Committee’s Discretion. Notwithstanding the provisions of Section 8(f) or any other provision in the Plan to the contrary, the Committee may, in its discretion and as of a date determined by the Committee, fully vest any or all Common Stock awarded to the Grantee pursuant to a Bonus Stock Award, and upon such vesting, all Forfeiture Restrictions applicable to such Bonus Stock Award shall lapse or terminate. Any action by the Committee pursuant to this Section 8(g) may vary among individual Grantees and may vary among the Bonus Stock Awards held by any individual Grantee. Notwithstanding the preceding provisions of this Section 8(g), the Committee may not take any action described in this Section 8(g) with respect to a Bonus Stock Award that has been granted to a Covered Employee if such Award has been designed to meet the exception for performance-based compensation under Section 162(m) of the Code.
(h) Notice of Election Under 83(b). Each Grantee making an election under Section 83(b) of the Code shall provide a copy thereof to the Company within thirty (30) days of the filing of such election with the Internal Revenue Service.
9. GENERAL PROVISIONS REGARDING AWARDS.
(a) Form of Award Agreement. Each Award granted under the Plan shall be evidenced by a written Award Agreement in such form (which need not be the same for each Grantee) as the Committee from time to time approves, but which is not inconsistent with the Plan, including any provisions that may be necessary to assure that any Option that is intended to be an Incentive Stock Option will comply with Section 422 of the Code.
(b) Awards Criteria. In determining the amount and value of Awards to be granted, the Committee may take into account the responsibility level, performance, potential, other Awards and such other considerations with respect to a Grantee as it deems appropriate. The terms of an Award Agreement may provide that the amount payable as an Award may be adjusted for dividends or dividend equivalent.
(c) Date of Grant. The date of grant of an Award will be the date specified by the Committee as the effective date of the grant of an Award or, if the Committee does not so specify, will be the date on which the Committee makes the determination to grant such Award. The Award Agreement evidencing the Award will be delivered to the Grantee with a copy of the Plan and other relevant Award documents within a reasonable time after the date of grant.
(d) Stock Price. The exercise price or other measurement of stock value relative to any Award shall be the price determined by the Committee (but, if required by applicable law, shall be not less than the par value of the shares of Common Stock on the date of grant of the Award). Unless otherwise determined by the Committee, the exercise price of any Option shall not be less than 100% of the Fair Market Value of the shares of Common Stock for the date of grant of the Option; provided, however, the exercise price of any Incentive Stock Option granted to a Ten Percent Shareholder shall not be less than 110% of the Fair Market Value of the shares of Common Stock for the date of grant of the Option.
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(e) Period of Award. Awards shall be exercisable or payable within the time or times or upon the event or events determined by the Committee and set forth in the Award Agreement. Unless otherwise provided in an Option Agreement, Options shall terminate on (and no longer be exercisable or payable after) the earlier of: (i) ten (10) years from the date of grant of the Option; (ii) for an Incentive Stock Option granted to a Ten Percent Shareholder, five (5) years from the date of grant of the Option; (iii) three (3) months after the Optionee is no longer serving in any capacity as an Employee, Consultant or Director of the Company for a reason other than the death or Disability of the Optionee; (iv) one (1) year after death of the Optionee; or (v) one (1) year after Disability of the Optionee.
(f) Transferability of Awards. Awards granted under the Plan, and any interest therein, shall not be transferable or assignable by the Grantee, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution, and shall be exercisable or payable during the lifetime of the Grantee only by the Grantee; provided, that the Grantee may designate persons who or which may exercise or receive his Awards following his death. Notwithstanding the preceding sentence, Awards other than Incentive Stock Options may be transferred to such family members, family member trusts, family limited partnerships and other family member entities as the Committee, in its sole discretion, may approve prior to any such transfer. No such transfer will be approved by the Committee if the Common Stock issuable under such transferred Award would not be eligible to be registered on Form S-8 promulgated under the Securities Act.
(g) Acquisitions and Other Transactions. The Committee may, from time to time, approve the assumption of outstanding awards granted by another entity, whether in connection with an acquisition of such other entity or otherwise, by either (i) granting an Award under the Plan in replacement of or in substitution for the awards assumed by the Company, or (ii) treating the assumed award as if it had been granted under the Plan if the terms of such assumed award could be applied to an Award granted under the Plan. Such assumption shall be permissible if the holder of the assumed award would have been eligible to be granted an Award hereunder if the other entity had applied the rules of this Plan to such grant.
(h) Notice. If an Award involves an exercise, it may be exercised only by delivery to the Company of a written exercise agreement approved by the Committee (which need not be the same for each Grantee), stating the number of shares of Common Stock being purchased, the method of payment, and such other matters as may be deemed appropriate by the Company in connection with the issuance of shares upon exercise of the Award, together with payment in full of any exercise price for any shares of Common Stock being purchased. Such exercise agreement may be part of a Grantee’s Award Agreement.
(i) Withholding Taxes. The Committee may establish such rules and procedures as it considers desirable in order to satisfy any obligation of the Company to withhold the statutory prescribed minimum amount of federal or state income taxes or other taxes with respect to the grant, exercise or payment of any Award under the Plan, including procedures for a Grantee to have shares of Common Stock withheld from the total number of shares of Common Stock to be issued or purchased upon grant or exercise of an Award. Prior to issuance of any shares of Common Stock, the Grantee shall pay or make adequate provision acceptable to the Committee for the satisfaction of the statutory minimum prescribed amount of any federal or state income or other tax withholding obligations of the Company, if applicable. Upon grant, exercise or payment of an Award, the Company shall withhold or collect from the Grantee an amount sufficient to satisfy such tax withholding obligations.
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(j) Exercise of Award Following Termination of Continuous Service.
(i) An Award may not be exercised after the expiration date of such Award set forth in the Award Agreement and may be exercised following the termination of a Grantee’s Continuous Service only to the extent provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee’s Continuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of the original term of the Award, whichever occurs first.
(iii) Any Option designated as an Incentive Stock Option, to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of an Optionee’s Continuous Service, shall convert automatically to a Non-Qualified Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Option Agreement.
(iv) The Committee shall have discretion to determine whether the Continuous Service of a Grantee has terminated and the effective date on which such Continuous Service terminates and whether the Grantee’s Continuous Service terminated as a result of the Disability of the Grantee.
(k) Limitations on Exercise.
(i) The Committee may specify a reasonable minimum number of shares of Common Stock or a percentage of the shares subject to an Award that may be purchased on any exercise of an Award; provided, that such minimum number will not prevent a Grantee from exercising the full number of shares of Common Stock as to which the Award is then exercisable.
(ii) The obligation of the Company to issue any shares of Common Stock pursuant to the exercise of any Award or otherwise make payments hereunder shall be subject to the condition that such exercise and the issuance and delivery of such shares and other actions pursuant thereto comply with Section 409A of the Code, the Securities Act, all applicable state securities and other laws and the requirements of any stock exchange or national market system upon which the shares of Common Stock may then be listed or quoted, as in effect on the date of exercise. The Company shall be under no obligation to register the shares of Common Stock with the Securities and Exchange Commission or to effect compliance with the registration, qualification or listing requirements of any state securities laws or stock exchange or quotation service, and the Company shall have no liability for any inability or failure to do so.
(iii) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares of Common Stock if, in the opinion of counsel for the Company, such a representation is required by any securities or other applicable laws.
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(l) Performance-Based Compensation. The Committee may designate any Award as “qualified performance-based compensation” for purposes of Section 162(m) of the Code. Any Awards designated as “qualified performance-based compensation” shall be conditioned on the achievement of any one or more performance criteria, and the measurement may be stated in absolute terms or relative to individual performances, comparable companies, peer or industry groups or other standard indexes, and in terms of Company-wide objectives or in terms of absolute or comparative objectives that relate to the performance of divisions, affiliates, departments or functions within the Company or an Affiliate. Notwithstanding any other provision of the Plan, the Committee may grant an Award that is not contingent on performance goals or is contingent on performance goals other than the performance criteria, so long as the Committee has determined that such Award is not intended to satisfy the requirements for “qualified performance-based compensation” within the meaning of Section 162(m) of the Code.
10. PRIVILEGES OF STOCK OWNERSHIP. Except as provided in the Plan with respect to Bonus Stock Awards, no Grantee will have any of the rights of a shareholder with respect to any shares of Common Stock subject to an Award until such Award is properly exercised and the purchased or awarded shares are issued and delivered to the Grantee, as evidenced by an appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to such date of issuance and delivery, except as provided in the Plan.
11. BREACH; ADDITIONAL TERMS. A breach of the terms and conditions of this Plan or established by the Committee pursuant to the Award Agreement shall cause a forfeiture of the Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to the Award, including provisions pertaining to the termination of the Grantee’s employment (by retirement, Disability, death or otherwise) prior to expiration of Forfeiture Restrictions or other vesting provisions. Without limitation of the foregoing, the Committee has discretion to suspend vesting during a leave of absence. Absent action by the Committee or to the extent otherwise required by law, vesting will be suspended during an unpaid leave of absence. Such additional terms, conditions or restrictions shall also be set forth in an Award Agreement made in connection with the Award.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION AND CORPORATE EVENTS.
(a) Capital Adjustments. The number of shares of Common Stock (i) covered by each outstanding Award granted under the Plan, the exercise, target or purchase price of each such outstanding Award, and any other terms of the Award that the Committee determines requires adjustment and (ii) available for issuance under Section 4 shall be adjusted to reflect, as deemed appropriate by the Committee, any increase or decrease in the number of shares of Common Stock resulting from a stock dividend, stock split, reverse stock split, combination, reclassification or similar change in the capital structure of the Company without receipt of consideration, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that a fractional share will not be issued upon exercise of any Award, and either (i) the value of any fraction of a share of Common Stock that would have resulted will be cashed out at Fair Market Value and applied toward the payment of the exercise price pursuant to Section 7(d) or, if applicable, toward the withholding due under Section 9(i), or (ii) the number of shares of Common Stock issuable under the Award will be rounded up to the nearest whole number, as determined by the Committee; and provided further that the exercise, target or purchase price may not be decreased to below the par value, if any, for the shares of Common Stock as adjusted pursuant to this Section 12(a). Except as the Committee determines, no issuance by the Company of shares of capital stock of any class, or securities convertible into shares of capital stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award. Notwithstanding the foregoing provisions of this Section 12(a), no adjustment may be made by the Committee with respect to an outstanding Award that would cause such Award and/or the Plan to become subject to Section 409A of the Code.
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| 2019 Equity Incentive Plan | Page 13 |
(b) Dissolution or Liquidation. The Committee shall notify the Grantee at least twenty (20) days prior to any proposed dissolution or liquidation of the Company. Unless specifically provided otherwise in an individual Award or Award Agreement or in a then-effective written employment agreement between the Grantee and the Company or an Affiliate, to the extent that an Award has not been previously exercised, if applicable, such Award shall terminate immediately prior to consummation of such dissolution or liquidation.
(c) Change in Control. Unless specifically provided otherwise with respect to Change in Control events in an individual Award or Award Agreement or in a then-effective written employment agreement between the Grantee and the Company or an Affiliate, if, during the effectiveness of the Plan, a Change in Control occurs, the surviving entity or purchaser described in Section 2(g), the “Purchaser”, shall either assume the obligations of the Company under the outstanding Awards or convert the outstanding Awards into awards of at least equal value as to capital stock of the Purchaser. In the event such Purchaser refuses to assume or substitute Awards pursuant to a Change in Control, each Award which is at the time outstanding under the Plan shall (i) except as provided otherwise in an individual Award or Award Agreement, automatically become, subject to all other terms of the Award or Award Agreement, fully vested and exercisable or payable, as appropriate, and be released from any repurchase or forfeiture provisions, immediately prior to the specified effective date of such Change in Control, for all of the shares of Common Stock at the time represented by such Award, (ii) the Forfeiture Restrictions applicable to all outstanding Bonus Stock Awards shall lapse and shares of Common Stock subject to such Bonus Stock Awards shall be released from escrow, if applicable, and delivered to the Grantees of the Awards free of any Forfeiture Restriction, and (iii) notwithstanding any contrary terms in the Award or Award Agreement, expire on a date at least twenty (20) days after the Committee gives written notice to Grantees specifying the terms and conditions of such termination.
To the extent that a Grantee exercises an Award before or on the effective date of the Change in Control, the Company shall issue all Common Stock purchased by exercise of that Award (subject to the Grantee’s satisfaction of the requirements of Section 9(i)), and those shares of Common Stock shall be treated as issued and outstanding for purposes of the Change in Control. Upon a Change in Control, when the outstanding Awards are not assumed by the Purchaser, the Plan shall terminate and any unexercised Awards outstanding under the Plan at that date shall terminate.
13. SHAREHOLDER APPROVAL. The Company shall obtain the approval of the Plan by the Company’s shareholders to the extent required to satisfy Sections 162(m) or 422 of the Code or to satisfy or comply with any applicable laws or the rules of any stock exchange or quotation service on which the Common Stock may be listed or quoted. No Award that is granted as a result of any increase in the number of shares of Common Stock authorized to be issued under the Plan may be exercised or forfeiture restrictions lapse prior to the time such increase has been approved by the shareholders of the Company.
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14. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall interpret the Plan and any Awards granted pursuant to the Plan and shall prescribe such rules and regulations in connection with the operation of the Plan as it determines to be advisable for the administration of the Plan. The Committee may rescind and amend its rules and regulations from time to time. The interpretation by the Committee of any of the provisions of the Plan or any Award granted under the Plan shall be final and binding upon the Company and all persons having an interest in any Award or any shares of Common Stock purchased or other payments received pursuant to an Award. Notwithstanding the authority hereby delegated to the Committee to grant Awards to Employees, Directors and Consultants under the Plan, the Board shall have full authority, subject to the express provisions of the Plan, to grant Awards to Employees, Directors and Consultants under the Plan, to interpret the Plan, to provide, modify and rescind rules and regulations relating to it, to determine the terms and provision of Awards granted to Employees, Directors and Consultants under the Plan and to make all other determinations and perform such actions as the Board deems necessary or advisable to administer the Plan. No member of the Committee or the Board shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award granted hereunder.
15. EFFECT OF PLAN. Neither the adoption of the Plan nor any action of the Board or the Committee shall be deemed to give any Employee, Director or Consultant any right to be granted an Award or any other rights except as may be evidenced by the Award Agreement, or any amendment thereto, duly authorized by the Committee and executed on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The existence of the Plan and the Awards granted hereunder shall not affect in any way the right of the Board, the Committee or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation or other transaction involving the Company, any issue of bonds, debentures, or shares of preferred stock ranking prior to or affecting the Common Stock or the rights thereof, the dissolution or liquidation of the Company or any sale or transfer of all or any part of the Company’s assets or business, or any other corporate act or proceeding by or for the Company. Nothing contained in the Plan or in any Award Agreement or in other related documents shall confer upon any Employee, Director or Consultant any right with respect to such person’s Continuous Service or interfere or affect in any way with the right of the Company or an Affiliate to terminate such person’s Continuous Service at any time, with or without cause.
16. NO EFFECT ON RETIREMENT AND OTHER BENEFIT PLANS. Except as specifically provided in a retirement or other benefit plan of the Company or an Affiliate, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or an Affiliate, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a “Retirement Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.
17. AMENDMENT OR TERMINATION OF PLAN. The Committee in its discretion may, at any time or from time to time after the date of adoption of the Plan, terminate or amend the Plan in any respect, including amendment of any form of Award Agreement, exercise agreement, or instrument to be executed pursuant to the Plan; provided, however, to the extent necessary to comply with the Code, including Sections 162(m) and 422 of the Code, other applicable laws, or the applicable requirements of any stock exchange or quotation service, the Company shall obtain shareholder approval of any Plan amendment in such manner and to such a degree as required. No Award may be granted after termination of the Plan. Any amendment or termination of the Plan shall not affect Awards previously granted, and such Awards shall otherwise remain in full force and effect as if the Plan had not been amended or terminated, unless mutually agreed otherwise in a writing (including an Award Agreement) signed by the Grantee and the Company.
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| 2019 Equity Incentive Plan | Page 15 |
18. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective June 6, 2019, which is the date of adoption of the Plan by the Board. The Plan shall continue in effect for a term of ten (10) years from June 6, 2019 and terminate on June 5, 2029, unless sooner terminated by action of the Board.
19. SEVERABILITY AND REFORMATION. The Company intends all provisions of the Plan to be enforced to the fullest extent permitted by law. Accordingly, should a court of competent jurisdiction determine that the scope of any provision of the Plan is too broad to be enforced as written, the court should reform the provision to such narrower scope as it determines to be enforceable. If, however, any provision of the Plan is held to be wholly illegal, invalid, or unenforceable under present or future law, such provision shall be fully severable and severed, and the Plan shall be construed and enforced as if such illegal, invalid, or unenforceable provision were never a part hereof, and the remaining provisions of the Plan shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance.
20. GOVERNING LAW. The Plan and all issues or matters relating to the Plan shall be governed by, determined and enforced under, and construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to the conflict of law principles thereof.
21. INTERPRETIVE MATTERS. Whenever required by the context, pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, or neuter, and the singular shall include the plural, and visa versa. The term “include” or “including” does not denote or imply any limitation. The captions and headings used in the Plan are inserted for convenience and shall not be deemed a part of the Plan for construction or interpretation.
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Exhibit 31.1
CERBERUS CYBER SENTINEL CORPORATION
CERTIFICATE PURSUANT TO SECTION 302
I, David G. Jemmett, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Cerberus Cyber Sentinel Corporation; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have: | |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |
| By: | /s/ David G. Jemmett | |
| David G. Jemmett | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 12, 2022 |
Exhibit 31.2
CERBERUS CYBER SENTINEL CORPORATION
CERTIFICATE PURSUANT TO SECTION 302
I, Debra L. Smith, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Cerberus Cyber Sentinel Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |
| By: | /s/ Debra L. Smith | |
| Debra L. Smith | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| Date: August 12, 2022 |
Exhibit 32.1
CERBERUS CYBER SENTINEL CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of Cerberus Cyber Sentinel Corporation (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
| By: | /s/ David G. Jemmett | |
| David G. Jemmett | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 12, 2022 |
This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cerberus Cyber Sentinel Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERBERUS CYBER SENTINEL CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of Cerberus Cyber Sentinel Corporation (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to her knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
| By: | /s/ Debra L. Smith | |
| Debra L. Smith | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| Date: August 12, 2022 |
This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cerberus Cyber Sentinel Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares |
Jun. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common stock, par value | $ 0.00001 | $ 0.00001 |
| Common stock, shares authorized | 250,000,000 | 250,000,000 |
| Common stock, shares issued | 137,097,860 | 125,852,971 |
| Common stock, shares outstanding | 137,097,860 | 125,852,971 |
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Revenue: | ||||
| Total revenue | $ 11,227,945 | $ 2,949,677 | $ 20,557,355 | $ 5,509,455 |
| Cost of revenue: | ||||
| Total cost of revenue | 10,462,452 | 2,210,191 | 19,743,146 | 4,132,430 |
| Total gross profit | 765,493 | 739,486 | 814,209 | 1,377,025 |
| Operating expenses: | ||||
| Professional fees | 945,148 | 244,261 | 1,568,209 | 401,615 |
| Advertising and marketing | 240,504 | 172,468 | 395,845 | 217,695 |
| Selling, general and administrative | 4,468,415 | 1,682,879 | 9,171,958 | 3,170,520 |
| Stock based compensation | 2,404,049 | 693,278 | 4,969,559 | 1,348,964 |
| Total operating expenses | 8,058,116 | 2,792,886 | 16,105,571 | 5,138,794 |
| Loss from operations | (7,292,623) | (2,053,400) | (15,291,362) | (3,761,769) |
| Other income (expense): | ||||
| Other income | 17,425 | 2,179 | 29,968 | 2,384 |
| Interest expense, net | (64,648) | (65,641) | (108,233) | (134,336) |
| Total other income (expense) | (47,223) | (63,462) | (78,265) | (131,952) |
| Net loss | (7,339,846) | (2,116,862) | (15,369,627) | (3,893,721) |
| Foreign currency translation adjustment | (2,200,710) | (1,298,269) | ||
| Comprehensive loss | $ (9,540,556) | $ (2,116,862) | $ (16,667,896) | $ (3,893,721) |
| Net loss per common share - basic and diluted | $ (0.05) | $ (0.02) | $ (0.11) | $ (0.03) |
| Weighted average shares outstanding - basic | 136,127,157 | 117,729,971 | 134,738,684 | 117,081,360 |
| Security Managed Services [Member] | ||||
| Revenue: | ||||
| Total revenue | $ 10,376,169 | $ 2,077,351 | $ 18,428,394 | $ 3,967,055 |
| Cost of revenue: | ||||
| Total cost of revenue | 3,765,426 | 340,460 | 6,368,350 | 534,127 |
| Professional Services [Member] | ||||
| Revenue: | ||||
| Total revenue | 851,776 | 872,326 | 2,128,961 | 1,542,400 |
| Cost of revenue: | ||||
| Total cost of revenue | 163,152 | 139,973 | 273,489 | 257,767 |
| Cost of Payroll [Member] | ||||
| Cost of revenue: | ||||
| Total cost of revenue | 4,707,984 | 1,531,910 | 9,153,834 | 2,959,612 |
| Stock Based Compensation [Member] | ||||
| Cost of revenue: | ||||
| Total cost of revenue | $ 1,825,890 | $ 197,848 | $ 3,947,473 | $ 380,924 |
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - USD ($) |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
AOCI Attributable to Parent [Member] |
Retained Earnings [Member] |
Total |
|---|---|---|---|---|---|
| Beginning balance, value at Dec. 31, 2020 | $ 1,161 | $ 12,607,074 | $ (4,866,772) | $ 7,741,463 | |
| Beginning balance, shares at Dec. 31, 2020 | 116,104,971 | ||||
| Stock based compensation - stock options | 1,729,888 | 1,729,888 | |||
| Stock issued for cash | $ 16 | 3,249,984 | 3,250,000 | ||
| Stock issued for cash, shares | 1,625,000 | ||||
| Foreign currency translation | |||||
| Net loss | (3,893,721) | (3,893,721) | |||
| Ending balance, value at Jun. 30, 2021 | $ 1,177 | 17,586,946 | (8,760,493) | 8,827,630 | |
| Ending balance, shares at Jun. 30, 2021 | 117,729,971 | ||||
| Beginning balance, value at Dec. 31, 2020 | $ 1,161 | 12,607,074 | (4,866,772) | 7,741,463 | |
| Beginning balance, shares at Dec. 31, 2020 | 116,104,971 | ||||
| Ending balance, value at Dec. 31, 2021 | $ 1,258 | 69,309,369 | (44,012,422) | 25,298,205 | |
| Ending balance, shares at Dec. 31, 2021 | 125,852,971 | ||||
| Stock based compensation - stock options | 8,179,332 | 8,179,332 | |||
| Stock based compensation - common stock | $ 4 | 737,696 | 737,700 | ||
| Stock based compensation - common stock, shares | 434,000 | ||||
| Exercise of options | $ 5 | 277,707 | $ 277,712 | ||
| Exercise of options, shares | 454,111 | 454,111 | |||
| Stock issued for cash in public offering | $ 21 | 9,521,777 | $ 9,521,798 | ||
| Stock issued for cash in public offering, shares | 2,060,000 | ||||
| Stock issued for True Digital acquisition | $ 74 | 34,726,306 | 34,726,380 | ||
| Stock issued for True Digital acquisition, shares | 7,406,100 | ||||
| Stock issued for VelocIT acquisition | $ 3 | (3) | |||
| Stock issued for VelocIT acquisition, shares | 256,678 | ||||
| Stock issued for Red74 acquisition | |||||
| Stock issued for Red74 acquisition, shares | 34,000 | ||||
| Stock issued for Creatrix acquisition | $ 6 | 3,629,994 | 3,630,000 | ||
| Stock issued for Creatrix acquisition, shares | 600,000 | ||||
| Foreign currency translation | (1,298,269) | (1,298,269) | |||
| Net loss | (15,369,627) | (15,369,627) | |||
| Ending balance, value at Jun. 30, 2022 | $ 1,371 | $ 126,382,178 | $ (1,298,269) | $ (59,382,049) | $ 65,703,231 |
| Ending balance, shares at Jun. 30, 2022 | 137,097,860 |
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
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| Cash flows from operating activities: | ||
| Net loss | $ (15,369,627) | $ (3,893,721) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Stock based compensation - stock options | 8,179,332 | 1,729,888 |
| Loss on write-off of accounts receivable | 15,264 | |
| Issuance of common stock for services | 737,700 | 114,750 |
| Non-cash interest expense | 20,834 | |
| Depreciation and amortization | 1,163,463 | 78,836 |
| Right of use amortization | 127,805 | 39,029 |
| Amortization of debt discount | 36,193 | |
| Gain on termination of operating lease | (22,289) | |
| Changes in operating assets and liabilities: | ||
| Accounts receivable, net | 1,416,754 | (617,769) |
| Inventory | (199,559) | |
| Contract assets | (261,961) | |
| Prepaids and other current assets | (2,131,480) | (160,527) |
| Accounts payable and accrued expenses | 2,675,346 | 48,760 |
| Lease liability | 120,536 | (37,442) |
| Settlement liability | (470,000) | |
| Deferred revenue | 438,672 | |
| Net cash used in operating activities | (3,574,474) | (2,646,739) |
| Cash flows from investing activities: | ||
| Purchases of property and equipment | (200,504) | |
| Cash paid in acquisitions, net | (4,914,196) | |
| Net cash used in investing activities | (5,114,700) | |
| Cash flows from financing activities: | ||
| Proceeds from sale of common stock | 9,521,798 | 3,250,000 |
| Proceeds from stock option exercise | 277,712 | |
| Proceeds from loan payable | 5,000,000 | |
| Proceeds from convertible note payable | 1,000,000 | |
| Proceeds from line of credit | 86,585 | 221,346 |
| Payment on line of credit | (224,346) | |
| Payment on loans payable | (895,053) | (22,542) |
| Payment on notes payable, related party | (184,758) | (50,000) |
| Payment of debt issuance cost | (25,000) | |
| Net cash provided by financing activities | 14,781,284 | 3,174,458 |
| Effect of exchange rates on cash and cash equivalents | (48,625) | |
| Net increase in cash and cash equivalents | 6,043,485 | 527,719 |
| Cash and cash equivalents - beginning of the period | 2,725,035 | 5,197,030 |
| Cash and cash equivalents - end of the period | 8,768,520 | 5,724,749 |
| Cash paid for: | ||
| Interest | 91,234 | 91,490 |
| Income taxes | ||
| Non-cash investing and financing activities: | ||
| Right of use asset and lease liability recorded upon adoption of ASC 842 | 226,941 | 175,759 |
| Common stock issued in True Digital acquisition | 34,726,380 | |
| Common stock issued in Creatrix acquisition | 3,630,000 | |
| Common stock issued in VelocIT acquisition | ||
| Common stock issued in RED 74 acquisition | ||
ORGANIZATION AND BACKGROUND |
6 Months Ended |
|---|---|
Jun. 30, 2022 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| ORGANIZATION AND BACKGROUND | NOTE 1 –ORGANIZATION AND BACKGROUND
Description of the Business
We are a cybersecurity and compliance company comprised of highly trained and seasoned security professionals who work with clients to enhance or create a better cyber posture in their organization. We provide a full range of cybersecurity consulting and related services, encompassing all three pillars of compliance, cybersecurity, and culture. Our services include secured managed services, compliance services, security operations center (“SOC”) services, virtual Chief Information Security Officer (“vCISO”) services, incident response, certified forensics, technical assessments, and cybersecurity training.
On January 5, 2022, we entered into a stock purchase agreement (the “True Digital Stock Purchase Agreement”) with certain stockholders of True Digital and an agreement and plan of merger (the “True Digital Merger Agreement”) with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company.
On January 18, 2022, we completed a $ underwritten public offering of shares of our common stock, pursuant to which an aggregate of 2,060,000 shares of our common stock were issued (see Note 9). In addition, we granted the underwriter warrants to purchase an aggregate of shares of our common stock (see Note 9). We intend to use the net proceeds from the offering to fund acquisitions, sales, marketing, and general corporate purposes. In connection with the public offering, our common stock was listed on The Nasdaq Stock Market LLC.
On June 1, 2022, we entered into a stock purchase agreement with the stockholders of Creatrix, pursuant to which Creatrix became our wholly owned subsidiary. Creatrix offers recognized expertise in identity management as well as systems integration and software engineering, and specializes in biometrics, vetting, credentialing, and case management.
Basis of Presentation
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include our accounts and the accounts of our subsidiaries. All material intercompany accounts and transactions have been eliminated.
Our interim financial statements are unaudited, and in our opinion, include all adjustments of a normal recurring nature necessary for the fair presentation of the periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for any subsequent period or for the year ending December 31, 2022. These unaudited financial statements and related notes should be read in conjunction with our audited financial statements for the year ended December 31, 2021.
Reclassifications
Certain reclassifications have been made to the financial statements for the six months ended June 30, 2021 to conform to the financial statements presentation for the six months ended June 30, 2022. These reclassifications had no effect on net loss or cash flows as previously reported.
Use of Estimates
GAAP requires management to make estimates and assumptions that affect the reported amounts in our financial statements. We periodically evaluate our estimates and adjust prospectively, if necessary. We believe our estimates and assumptions are reasonable; however, actual results could materially differ.
We believe the critical accounting policies discussed below affects our more significant judgments and estimates used in the preparation of the accompanying unaudited condensed consolidated financial statements. Significant estimates include the allowance for doubtful accounts, the carrying value of intangible assets and goodwill, deferred tax asset and valuation allowance, the estimated fair value of assets acquired, liabilities assumed and stock issued in business combinations, and assumptions used in the Black-Scholes option pricing model, such as expected volatility, risk-free interest rate, share price, and expected dividend rate.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Our revenue is derived from two major types of services to clients: security managed services and professional services. With respect to security managed services, we provide culture education and enablement, tools and technology provisioning, data and privacy monitoring, regulations and compliance monitoring, remote infrastructure administration, and cybersecurity services, including, but not limited to, antivirus and patch management. With respect to professional services, we provide cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.
Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:
Security Managed Services
Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.
Professional Services
Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. We periodically assess our accounts and other receivables for collectability on a specific identification basis. We provide for allowances for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. Payments are generally due within 30 days of invoice. We write off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of June 30, 2022 and December 31, 2021, our allowance for doubtful accounts was $180,691 and $77,811, respectively.
Inventory
Inventory consists of software licenses and computer equipment for sale to customers. Inventory is measured using the first-in, first-out method and stated at lower of cost or net realizable value as of June 30, 2022 and December 31, 2021. The value of inventories is reduced for excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and adjust the value of inventory when required. We recorded no inventory impairment losses for the six months ended June 30, 2022 and 2021.
Fair Value Measurements
As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. For dilutive securities, all outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options and shares issuable upon conversion thereof have been excluded from our computation of net loss per common share for the six months ended June 30, 2022 and 2021.
Deferred Revenue
Deferred revenue primarily consists of billings or payments received from customers in advance of revenue recognized for the services provided to our customers or annual licenses and is recognized as services are performed or ratably over the life of the license. We generally invoice customers in advance or in milestone-based installments. Deferred revenue of $52,824 was recognized for the six months ended June 30, 2022, which was included in the deferred revenue balance as of December 31, 2021. As of June 30, 2022, deferred revenue related to such customer payments was $2,351,477, all of which is expected to be recognized during the succeeding 12-month period and is therefore presented as current.
Deferred revenue consisted of the following:
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, including tax loss and credit carry forwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. We account for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. At June 30, 2022 and December 31, 2021, our net deferred tax asset has been fully reserved.
For uncertain tax positions that meet a “more likely than not” threshold, we recognize the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. Our practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is made that such expense is likely.
Recently Issued Accounting Standards
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force). The ASU requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the ASU, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. We adopted the standard on January 1, 2022, and management noted that there is no material impact to the unaudited condensed consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in business combinations to be recognized in accordance with ASC Topic 606 as if the acquirer had originated the contracts. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that adopting this standard will have on the unaudited condensed consolidated financial statements.
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to us.
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ACQUISITIONS |
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| Business Combination and Asset Acquisition [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACQUISITIONS | NOTE 3 – ACQUISITIONS
True Digital Security, Inc.
On January 5, 2022, we entered into the True Digital Stock Purchase Agreement with certain stockholders of True Digital and the True Digital Merger Agreement with True Digital and certain of its other stockholders. On January 19, 2022, the transactions contemplated by the True Digital Stock Purchase Agreement and the True Digital Merger Agreement were consummated, with True Digital becoming a wholly owned subsidiary of our company (the “True Digital Acquisition”). True Digital’s outstanding common stock was exchanged for the right to receive an aggregate of $6,153,000 in cash and shares of our common stock, subject to a 10% holdback. In the event that no claim is made by a Cerberus Indemnitee (as defined in the True Digital Merger Agreement) within one year from closing, then we shall pay the entire amount of the 10% holdback to the shareholders of True Digital.
Subsequent to the issuance of these financial statements, we expect to obtain a third-party valuation on the fair value of the assets acquired, including identifiable intangible assets and the liabilities assumed for use in the purchase price allocation.
The following table summarizes the preliminary allocation of the purchase price to the fair values of the assets acquired and the liabilities assumed as of the transaction date:
Creatrix, Inc.
On June 1, 2022, we entered into a stock purchase agreement with the stockholders of Creatrix, pursuant to which Creatrix became our wholly owned subsidiary. We anticipate that this will expand our professional services offerings and capabilities. Creatrix offers recognized expertise in identity management as wells as systems integration and software engineering and specializes in biometrics, vetting, credentialing, and case management.
Subsequent to the issuance of these financial statements, we expect to obtain a third-party valuation on the fair value of the assets acquired, including identifiable intangible assets and the liabilities assumed for use in the purchase price allocation.
The aggregate purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimate fair values as of the acquisition date, with the excess recorded to goodwill. During the measurement period, which will not exceed one year from closing, we will continue to obtain information to assist us in finalizing the acquisition date fair values. Any qualifying changes to our preliminary estimates will be recorded as adjustments to the respective assets and liabilities, with any residual amounts allocated to goodwill.
The following table summarizes the preliminary estimated acquisition date fair values of the assets acquired and liabilities assumed:
Pro forma financial information is not presented because the acquisitions were not material to our financial statements, individually or in the aggregate.
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PREPAID EXPENSES AND OTHER CURRENT ASSETS |
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| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PREPAID EXPENSES AND OTHER CURRENT ASSETS | NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of:
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PROPERTY AND EQUIPMENT |
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| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT | NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Total depreciation expense was $178,309 and $4,424 for the three months ended June 30, 2022 and 2021, respectively, and was $332,383 and $8,848 for the six months ended June 30, 2022, and 2021, respectively.
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INTANGIBLE ASSETS AND GOODWILL |
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INTANGIBLE ASSETS AND GOODWILL | NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
The following table summarizes the changes in goodwill during the six months ended June 30, 2022:
The following table summarizes the identifiable intangible assets as of June 30, 2022 and December 31, 2021:
The weighted average remaining useful life of identifiable amortizable intangible assets remaining is 4.47 years.
Amortization of identifiable intangible assets for the three months ended June 30, 2022 and 2021 was $512,503 and $34,994, respectively, and was $817,467 and $69,988 for the six months ended June 30, 2022 and 2021, respectively.
The below table summarizes the future amortization expense for the remainder of 2022 and the next four years thereafter:
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
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| Payables and Accruals [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACCOUNTS PAYABLE AND ACCRUED EXPENSES | NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following amounts:
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RELATED PARTY TRANSACTIONS |
6 Months Ended |
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Jun. 30, 2022 | |
| Related Party Transactions [Abstract] | |
| RELATED PARTY TRANSACTIONS | NOTE 8 – RELATED PARTY TRANSACTIONS
Independent Consulting Agreement with Stephen Scott
In August 2020, we entered into an Independent Consulting Agreement with Stephen Scott, a Director of our company, with respect to advisory and consulting services relating to our strategic and business development, and sales and marketing. Mr. Scott receives a consulting fee of $11,500 per month for such services. During the three and six months ended June 30, 2022, we paid consulting fees to Mr. Scott in the amount of $34,500 and $69,000, respectively.
Managed Services Agreement with Hensley Beverage Company – Related Party
In July 2021, we entered into a 1-year Managed Services Agreement with Hensley Beverage Company to provide secured managed services. We also may be engaged by Hensley Beverage Company from time to time to provide other related services outside the scope of the Managed Services Agreement. While the agreement provides for a term through December 31, 2021, the agreement will continue until terminated by either party. For the three and six months ended June 30, 2022, we received $206,202 and $373,008 from Hensley Beverage Company for contracted services and had an outstanding receivable balance of $11,132 as of June 30, 2022.
Note Receivable – Related Party
Arkavia provided cash infusions to a related party to fund an intended wholly owned subsidiary, Arkavia Peru, for start-up and operational costs. As of June 30, 2022, the subsidiary has yet to be incorporated and as such, Arkavia has recorded the amount as a receivable. The amount outstanding at June 30, 2022 is $1,006,848 and is considered short-term and non-interest bearing.
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STOCKHOLDERS’ EQUITY |
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| STOCKHOLDERS’ EQUITY | NOTE 9 – STOCKHOLDERS’ EQUITY
On June 14, 2022, our Board of Directors approved and recommended that our stockholders approve (i) an amended and restated certificate of incorporation to, among other things, (1) increase our authorized shares of common stock from to
Options
We granted stock options vesting solely upon the continued service of the recipient. We recognize the accounting grant date fair value of equity-based awards as compensation expense over the required service period of each award.
Total compensation expense related to the options was $ and $ for the three months ended June 30, 2022 and 2021, respectively, and $ and $ for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there was future compensation expense of $ with a weighted average recognition period of years related to the options.
Warrant Activity Summary
The following table summarizes warrant activity:
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COMMITMENTS AND CONTINGENCIES |
6 Months Ended |
|---|---|
Jun. 30, 2022 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| COMMITMENTS AND CONTINGENCIES | NOTE 10 – COMMITMENTS AND CONTINGENCIES
Maxim Settlement Agreement
On October 27, 2020, we entered into an advisory agreement (the “Advisory Agreement”) with Maxim Group LLC (“Maxim”), pursuant to which the parties agreed to certain compensation obligations in the form of our common stock, cash and future rights. Certain disputes arose between the parties regarding the duties and obligations pursuant to the Advisory Agreement, resulting in the parties entering into a settlement and release agreement on January 13, 2022. As a result, we recorded a settlement liability at December 31, 2021 of $470,000 and issued shares of our common stock to Maxim, pursuant to the settlement. During the six months ended June 30, 2022, we paid $470,000 in cash.
Legal Claims
There are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our directors, officers or affiliates, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.
Indirect Taxes
We are subject to indirect taxation in some, but not all, of the various states and foreign jurisdictions in which we conduct business. Laws and regulations attempting to subject commerce conducted over the Internet to various indirect taxes are becoming more prevalent, both in the U.S. and internationally, and may impose additional burdens on us in the future. Increased regulation could negatively affect our business directly, as well as the business of our customers. Taxing authorities may impose indirect taxes on the Internet-related revenue we generated based on regulations currently being applied to similar, but not directly comparable industries. There are many transactions and calculations where the ultimate indirect tax determination is uncertain. In addition, domestic and international indirect taxation laws are complex and subject to change. We may be audited in the future, which could result in changes to our indirect tax estimates. We continually evaluate those jurisdictions in which nexus exists, and believe we maintain adequate indirect tax accruals.
As of June 30, 2022 and December 31, 2021, our accrual for estimated indirect tax liabilities was $633,672 and $99,088, respectively, reflecting our best estimate of the potential liability based on an analysis of our business activities, revenues subject to indirect taxes, and applicable regulations. Although we believe our indirect tax estimates and associated liabilities are reasonable, the final determination of indirect tax audits, litigation, or settlements could be materially different than the amounts established for indirect tax contingencies.
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LOANS PAYABLE AND LINES OF CREDIT |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LOANS PAYABLE AND LINES OF CREDIT | NOTE 11 – LOANS PAYABLE AND LINES OF CREDIT
Loans Payable
Loans payable was as follows:
In June 2022, we entered into bridge loans, secured by substantially all of our assets, in the principal amount of $5,000,000 bearing an interest rate of 4.00% per annum payable monthly with a maturity date of December 14, 2022. These bridge loans are guaranteed by our assets. We recorded interest expense of $8,889 during the three and six months ended June 30, 2022, respectively.
Various subsidiaries in the United States are borrowers under certain term loans. These term loans require monthly principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense of these term loans of $11,358 and $51,987 for the three and six months ended June 30, 2022, respectively.
Our Chilean subsidiary, Arkavia, is the borrower under certain term loans denominated in Chilean Pesos. These term loans require monthly principal and interest payments. These term loans are secured by various assets owned by our subsidiaries. We recorded aggregate interest expense on these term loans of $58,400 and $61,885 for the three and six months ended June 30, 2022, respectively.
Debt Assumed through Acquisition
As part of the True Digital Acquisition, we assumed $1,008,566 of debt previously held by True Digital. This debt was comprised of a revolving line of credit and four separate term loans. We repaid two of the four term loans during the six months ended June 30, 2022. The line of credit matured and was repaid in full on August 9, 2022, and the outstanding term loans mature in May 2024 and February 2027. The line of credit had an interest rate 3.25% per annum.
Convertible Notes Payable
In October 2021, we issued a convertible note in the principal amount of $1,500,000 bearing an interest rate of 5.00% per annum payable at maturity with a maturity date of January 27, 2022, with a conversion price of $5.00 per share. On March 10, 2022, we entered into an amendment to the note pursuant to which the maturity date was extended to October 27, 2022. The outstanding principal of this note was $1,500,000 at June 30, 2022. At June 30, 2022 and December 31, 2021, we recorded interest expense and accrued interest of $49,486 and $12,500, respectively, with respect to this note. We recorded interest expense of $18,493 and $36,986 during the three and six months ended June 30, 2022, respectively.
In June 2022, we entered into an unsecured convertible note in the principal amount of $1,000,000 bearing an interest rate of 5.00% per annum payable monthly with a maturity date of June 2023, with a conversion price of $7.65 per share. The outstanding principal of this note can be redeemed at any time by us or at maturity at 105%. At June 30, 2022, we recorded interest expense and accrued interest of $3,194 during the three and six months ended.
Future minimum payments under the above line of credit and loans payable due as of June 30, 2022 were as follows:
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LEASES |
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEASES | NOTE 12 – LEASES
All of our leases are classified as operating leases. With the adoption of Topic 842, operating lease agreements are required to be recognized on the condensed consolidated balance sheet as Right of Use (“ROU”) assets and corresponding lease liabilities.
On January 19, 2022, we recognized additional ROU assets and lease liabilities of $226,942 from the True Digital Acquisition. We elected to not recognize ROU assets and lease liabilities arising from office leases with initial terms of 12 months or less (deemed immaterial) on the unaudited condensed consolidated balance sheets.
ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that we will exercise that option.
When measuring lease liabilities for leases that were classified as operating leases, we discounted lease payments using our estimated incremental borrowing rate at January 1, 2022. The weighted average incremental borrowing rate applied was 6.00%. As of June 30, 2022, our leases had a remaining weighted average term of 1.00 years.
Operating leases are included in the unaudited condensed consolidated balance sheets as follows:
The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations, were as follows:
Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the six months ended June 30, 2022 were as follows:
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GEOGRAPHIC INFORMATION |
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GEOGRAPHIC INFORMATION | NOTE 13 – GEOGRAPHIC INFORMATION
Revenue by geography is based on the customer’s billing address and was as follows:
Property and equipment, net by geography was as follows:
No other international country represented more than 10% of property and equipment, net in any period presented.
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SUBSEQUENT EVENTS |
6 Months Ended |
|---|---|
Jun. 30, 2022 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 14 – SUBSEQUENT EVENTS
Acquisitions
In July 2022, we entered into a stock purchase agreement with CyberViking and its interest holders, pursuant to which we acquired all of the issued and outstanding units of CyberViking (the “CyberViking Acquisition”). We funded the acquisition through the issuance of shares of our common stock.
The purchase price of the CyberViking Acquisition will be allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values at the acquisition date. We are currently preparing the valuations and other procedures necessary to determine the purchase price allocation and will record our initial fair value estimates during the three months ending September 30, 2022.
CyberViking is a company specializing in application security services, incident response, and threat hunting as well as the creation and management of security operation centers. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | Revenue
Our revenue is derived from two major types of services to clients: security managed services and professional services. With respect to security managed services, we provide culture education and enablement, tools and technology provisioning, data and privacy monitoring, regulations and compliance monitoring, remote infrastructure administration, and cybersecurity services, including, but not limited to, antivirus and patch management. With respect to professional services, we provide cybersecurity consulting, compliance auditing, vulnerability assessment and penetration testing, and disaster recovery and data backup solutions.
Our revenue is categorized and disaggregated as reflected in our statement of operations as follows:
Security Managed Services
Security managed services revenue primarily consist of compliance, security managed services, SOC managed services, and vCISO. We considered these services to be a single performance obligation, and revenue is recognized as services and materials are provided to the customer.
Professional Services
Professional services revenue primarily consists of technical assessments, incident response and forensics, training, and other cybersecurity services. We considered these services to be a single performance obligation, and revenue is recognized in the period in which the performance obligations are satisfied.
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| Accounts Receivable | Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. We periodically assess our accounts and other receivables for collectability on a specific identification basis. We provide for allowances for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. Payments are generally due within 30 days of invoice. We write off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of June 30, 2022 and December 31, 2021, our allowance for doubtful accounts was $180,691 and $77,811, respectively.
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| Inventory | Inventory
Inventory consists of software licenses and computer equipment for sale to customers. Inventory is measured using the first-in, first-out method and stated at lower of cost or net realizable value as of June 30, 2022 and December 31, 2021. The value of inventories is reduced for excess and obsolete inventories. We monitor inventory to identify events that would require impairment due to obsolete inventory and adjust the value of inventory when required. We recorded no inventory impairment losses for the six months ended June 30, 2022 and 2021.
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| Fair Value Measurements | Fair Value Measurements
As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
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| Net Loss per Common Share |
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. For dilutive securities, all outstanding options are considered potentially outstanding common stock. The dilutive effect, if any, of stock options is calculated using the treasury stock method. All outstanding convertible notes are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the options and shares issuable upon conversion thereof have been excluded from our computation of net loss per common share for the six months ended June 30, 2022 and 2021.
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| Deferred Revenue | Deferred Revenue
Deferred revenue primarily consists of billings or payments received from customers in advance of revenue recognized for the services provided to our customers or annual licenses and is recognized as services are performed or ratably over the life of the license. We generally invoice customers in advance or in milestone-based installments. Deferred revenue of $52,824 was recognized for the six months ended June 30, 2022, which was included in the deferred revenue balance as of December 31, 2021. As of June 30, 2022, deferred revenue related to such customer payments was $2,351,477, all of which is expected to be recognized during the succeeding 12-month period and is therefore presented as current.
Deferred revenue consisted of the following:
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| Income Taxes | Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities, including tax loss and credit carry forwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. We account for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. At June 30, 2022 and December 31, 2021, our net deferred tax asset has been fully reserved.
For uncertain tax positions that meet a “more likely than not” threshold, we recognize the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. Our practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations when a determination is made that such expense is likely.
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| Recently Issued Accounting Standards | Recently Issued Accounting Standards
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force). The ASU requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the ASU, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. We adopted the standard on January 1, 2022, and management noted that there is no material impact to the unaudited condensed consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in business combinations to be recognized in accordance with ASC Topic 606 as if the acquirer had originated the contracts. The ASU is applied prospectively and is effective for us for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that adopting this standard will have on the unaudited condensed consolidated financial statements.
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to us.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SECURITIES EXCLUDED FROM DILUTED PER SHARE |
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| SCHEDULE OF DEFERRED REVENUE | Deferred revenue consisted of the following:
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ACQUISITIONS (Tables) |
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Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| True Digital Security, Inc. [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Acquisition [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES | The following table summarizes the preliminary allocation of the purchase price to the fair values of the assets acquired and the liabilities assumed as of the transaction date:
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| Creatrix, Inc. [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Acquisition [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES | The following table summarizes the preliminary estimated acquisition date fair values of the assets acquired and liabilities assumed:
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PREPAID EXPENSES AND OTHER CURRENT ASSETS (Tables) |
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS | Prepaid expenses and other current assets consisted of:
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PROPERTY AND EQUIPMENT (Tables) |
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Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF PROPERTY AND EQUIPMENT | Property and equipment consisted of the following:
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INTANGIBLE ASSETS AND GOODWILL (Tables) |
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF CHANGES IN GOODWILL | The following table summarizes the changes in goodwill during the six months ended June 30, 2022:
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| SUMMARY OF IDENTIFIABLE INTANGIBLE ASSETS | The following table summarizes the identifiable intangible assets as of June 30, 2022 and December 31, 2021:
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| SCHEDULE OF FUTURE AMORTIZATION EXPENSE | The below table summarizes the future amortization expense for the remainder of 2022 and the next four years thereafter:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payables and Accruals [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES | Accounts payable and accrued expenses consisted of the following amounts:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
STOCKHOLDERS’ EQUITY (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF STOCK OPTIONS ACTIVITY |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF STOCK WARRANT ACTIVITY | The following table summarizes warrant activity:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LOANS PAYABLE AND LINES OF CREDIT (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF LOAN PAYABLE | Loans payable was as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF FUTURE MINIMUM PAYMENTS FOR LONG TERM DEBT | Future minimum payments under the above line of credit and loans payable due as of June 30, 2022 were as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LEASES (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF LEASE COST AND OTHER SUPPLEMENT LEASE INFORMATION | Operating leases are included in the unaudited condensed consolidated balance sheets as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF LEASE COST | The components of lease costs, which are included in income from operations in our unaudited condensed consolidated statements of operations, were as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF FUTURE MINIMUM UNDER NON-CANCELLABLE LEASES FOR OPERATING LEASES | Future minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the six months ended June 30, 2022 were as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
GEOGRAPHIC INFORMATION (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF REVENUE BY GEOGRAPHY IS BASED ON CUSTOMERS BILLING ADDRESS | Revenue by geography is based on the customer’s billing address and was as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF PROPERTY AND EQUIPMENT, NET BY GEOGRAPHIC AREAS | Property and equipment, net by geography was as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ORGANIZATION AND BACKGROUND (Details Narrative) - USD ($) |
6 Months Ended | |
|---|---|---|
Jan. 18, 2022 |
Jun. 30, 2021 |
|
| Subsidiary, Sale of Stock [Line Items] | ||
| Number of shares issued, value | $ 3,250,000 | |
| IPO [Member] | ||
| Subsidiary, Sale of Stock [Line Items] | ||
| Number of shares issued, shares | 10,300,000 | |
| Number of shares issued, value | $ 2,060,000 | |
| IPO [Member] | Underwriter [Member] | ||
| Subsidiary, Sale of Stock [Line Items] | ||
| Warrants granted | 144,200 |
SUMMARY OF SECURITIES EXCLUDED FROM DILUTED PER SHARE (Details) - shares |
6 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Antidilutive securities excluded from the diluted per share calculation | 36,689,405 | 27,343,700 |
| Share-Based Payment Arrangement, Option [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Antidilutive securities excluded from the diluted per share calculation | 36,114,487 | 25,843,700 |
| Warrant [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Antidilutive securities excluded from the diluted per share calculation | 144,200 | |
| Convertible Debt [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Antidilutive securities excluded from the diluted per share calculation | 430,718 | 1,500,000 |
SCHEDULE OF DEFERRED REVENUE (Details) - USD ($) |
Jun. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Product Information [Line Items] | ||
| Total deferred revenue | $ 2,351,477 | $ 52,824 |
| Security Managed Services [Member] | ||
| Product Information [Line Items] | ||
| Total deferred revenue | 2,172,302 | 52,824 |
| Professional Services [Member] | ||
| Product Information [Line Items] | ||
| Total deferred revenue | $ 179,175 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) |
6 Months Ended | ||
|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Dec. 31, 2021 |
|
| Accounting Policies [Abstract] | |||
| Allowances for doubtful accounts | $ 180,691 | $ 77,811 | |
| Impairment charges on inventory | 0 | $ 0 | |
| Deferred revenue | 52,824 | ||
| Deferred revenue related to customer payments | $ 2,351,477 | ||
SUMMARY OF SIGNIFICANT FAIR VALUE ASSETS ACQUIRED AND LIABILITIES (Details) - USD ($) |
Jun. 02, 2022 |
Jan. 05, 2022 |
Jun. 30, 2022 |
[1] | Dec. 31, 2021 |
||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Business Acquisition [Line Items] | |||||||||||
| Goodwill | $ 58,515,259 | $ 16,792,535 | |||||||||
| True Digital Security, Inc. [Member] | |||||||||||
| Business Acquisition [Line Items] | |||||||||||
| Consideration paid | $ 40,879,380 | ||||||||||
| Cash | 485,232 | ||||||||||
| Accounts receivable | 1,404,386 | ||||||||||
| Contract assets | 131,342 | ||||||||||
| Prepaid expenses and other current assets | 196,825 | ||||||||||
| Property and equipment | 906,006 | ||||||||||
| Other assets | 17,505 | ||||||||||
| Total tangible assets | 3,141,296 | ||||||||||
| Estimated intangible assets acquired | 1,913,800 | ||||||||||
| Accounts payable and accrued expenses | 1,283,003 | ||||||||||
| Deferred revenue | 1,956,600 | ||||||||||
| Line of credit | 283,244 | ||||||||||
| Loans payable | 181,741 | ||||||||||
| Loans payable - shareholder | 543,581 | ||||||||||
| Total assumed liabilities | 4,248,169 | ||||||||||
| Net assets acquired | 806,927 | ||||||||||
| Goodwill | [2] | $ 40,072,453 | |||||||||
| Creatrix, Inc. [Member] | |||||||||||
| Business Acquisition [Line Items] | |||||||||||
| Consideration paid | $ 3,630,000 | ||||||||||
| Cash | 3,572 | ||||||||||
| Accounts receivable | 125,908 | ||||||||||
| Contract assets | 33,965 | ||||||||||
| Prepaid expenses and other current assets | 3,597 | ||||||||||
| Total tangible assets | 167,042 | ||||||||||
| Estimated intangible assets acquired | 720,400 | ||||||||||
| Accounts payable and accrued expenses | 48,001 | ||||||||||
| Loans payable | 56,687 | ||||||||||
| Total assumed liabilities | 104,688 | ||||||||||
| Net assets acquired | 782,754 | ||||||||||
| Goodwill | [3] | $ 2,847,246 | |||||||||
| |||||||||||
ACQUISITIONS (Details Narrative) - USD ($) |
6 Months Ended | |
|---|---|---|
Jan. 19, 2022 |
Jun. 30, 2022 |
|
| Business Acquisition [Line Items] | ||
| Stock issued for True Digital acquisition | $ 34,726,380 | |
| True Digital Acquisition [Member] | ||
| Business Acquisition [Line Items] | ||
| Stock issued for True Digital acquisition | $ 6,153,000 | |
| Stock issued for True Digital acquisition, shares | 8,229,000 | |
| Holdback common stock percentage | 10.00% | |
| True Digital Acquisition [Member] | Merger Agreement [Member] | ||
| Business Acquisition [Line Items] | ||
| Holdback common stock percentage | 10.00% |
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS (Details) - USD ($) |
Jun. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||
| Prepaid expenses | $ 1,653,815 | $ 441,259 |
| Deferred cost of sales | 729,664 | 12,239 |
| Prepaid taxes | 126,675 | 231,014 |
| Prepaid insurance | 391,194 | 46,751 |
| Deferred interest | 184,715 | 229,702 |
| Total prepaid expenses and other current assets | $ 3,086,063 | $ 960,965 |
SCHEDULE OF PROPERTY AND EQUIPMENT (Details) - USD ($) |
Jun. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment gross | $ 3,453,419 | $ 2,496,890 |
| Less: accumulated depreciation | (484,633) | (102,466) |
| Property and equipment, net | 2,968,786 | 2,394,424 |
| Computer Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment gross | 612,612 | 495,235 |
| Building [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment gross | 1,107,769 | 1,047,020 |
| Leasehold Improvements [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment gross | 94,739 | 109,626 |
| Vehicles [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment gross | 63,052 | 63,052 |
| Furniture and Fixtures [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment gross | 45,835 | 33,358 |
| Software Development [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment gross | $ 1,529,412 | $ 748,599 |
PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Property, Plant and Equipment [Abstract] | ||||
| Depreciation expense | $ 178,309 | $ 4,424 | $ 332,383 | $ 8,848 |
SCHEDULE OF CHANGES IN GOODWILL (Details) |
6 Months Ended | |||
|---|---|---|---|---|
|
Jun. 30, 2022
USD ($)
| ||||
| Goodwill and Intangible Assets Disclosure [Abstract] | ||||
| Goodwill, beginning balance | $ 16,792,535 | |||
| Acquisition of goodwill | 42,919,699 | |||
| Foreign currency translation adjustment | (1,196,975) | |||
| Goodwill, ending balance | $ 58,515,259 | [1] | ||
| ||||
SUMMARY OF IDENTIFIABLE INTANGIBLE ASSETS (Details) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Dec. 31, 2021 |
|
| Finite-Lived Intangible Assets [Line Items] | ||
| Identifiable intangible assets | $ 9,257,117 | $ 6,863,600 |
| Finite-lived intangible asset, useful life | 4 years 5 months 19 days | |
| Less accumulated amortization | $ (1,100,951) | (323,331) |
| Total | $ 8,156,166 | 6,540,269 |
| TalaTek, LLC [Member] | Tradenames - Trademarks [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Finite-lived intangible asset, useful life | Indefinite | |
| Identifiable intangible assets | $ 1,211,800 | 1,211,800 |
| TalaTek, LLC [Member] | Tradenames - Trademarks 1 [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Identifiable intangible assets | $ 3,136,872 | 1,798,300 |
| Finite-lived intangible asset, useful life | 5 years | |
| TalaTek, LLC [Member] | Customerbase [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Identifiable intangible assets | $ 1,836,606 | 1,650,000 |
| TalaTek, LLC [Member] | Customerbase [Member] | Minimum [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Finite-lived intangible asset, useful life | 5 years | |
| TalaTek, LLC [Member] | Customerbase [Member] | Maximum [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Finite-lived intangible asset, useful life | 10 years | |
| TalaTek, LLC [Member] | Noncompete Agreements [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Identifiable intangible assets | $ 806,900 | 675,500 |
| TalaTek, LLC [Member] | Noncompete Agreements [Member] | Minimum [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Finite-lived intangible asset, useful life | 2 years | |
| TalaTek, LLC [Member] | Noncompete Agreements [Member] | Maximum [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Finite-lived intangible asset, useful life | 5 years | |
| TalaTek, LLC [Member] | Intellectual Property/Technology [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Identifiable intangible assets | $ 2,264,939 | $ 1,528,000 |
| TalaTek, LLC [Member] | Intellectual Property/Technology [Member] | Minimum [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Finite-lived intangible asset, useful life | 5 years | |
| TalaTek, LLC [Member] | Intellectual Property/Technology [Member] | Maximum [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Finite-lived intangible asset, useful life | 10 years |
SCHEDULE OF FUTURE AMORTIZATION EXPENSE (Details) |
Jun. 30, 2022
USD ($)
|
|---|---|
| Goodwill and Intangible Assets Disclosure [Abstract] | |
| 2022 (remainder of) | $ 860,974 |
| 2023 | 1,704,567 |
| 2024 | 1,427,546 |
| 2025 | 1,377,196 |
| 2026 | 1,276,628 |
| Thereafter | 297,455 |
| Finite-lived intangible assets, net | $ 6,944,366 |
INTANGIBLE ASSETS AND GOODWILL (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||||
| Weighted average remaining useful life | 4 years 5 months 19 days | |||
| Amortization of identifiable intangible assets | $ 512,503 | $ 34,994 | $ 817,467 | $ 69,988 |
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Details) - USD ($) |
Jun. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Payables and Accruals [Abstract] | ||
| Accounts payable | $ 3,163,498 | $ 1,700,260 |
| Accrued payroll | 1,470,348 | 482,588 |
| Accrued expenses | 2,391,785 | 513,718 |
| Accrued commissions | 465,416 | |
| Accrued interest – related party | 12,500 | 12,500 |
| Total accounts payable and accrued expenses | $ 7,503,547 | $ 2,709,066 |
RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|---|
Aug. 31, 2020 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Related Party Transaction [Line Items] | |||||
| Consulting fees | $ 945,148 | $ 244,261 | $ 1,568,209 | $ 401,615 | |
| Note Receivable - Related Party | 1,006,848 | 1,006,848 | |||
| Independent Consulting Agreement [Member] | Stephen Scott [Member] | |||||
| Related Party Transaction [Line Items] | |||||
| Consulting fees | $ 11,500 | 34,500 | 69,000 | ||
| 1- Year Managed Services Agreement [Member] | Hensley Beverage Company [Member] | |||||
| Related Party Transaction [Line Items] | |||||
| Cash received from related parties | 206,202 | 373,008 | |||
| Outstanding receivable related parties | $ 11,132 | $ 11,132 | |||
SCHEDULE OF STOCK OPTIONS ACTIVITY (Details) |
6 Months Ended |
|---|---|
|
Jun. 30, 2022
USD ($)
$ / shares
shares
| |
| Equity [Abstract] | |
| Shares, Outstanding beginning | shares | 31,372,148 |
| Weighted Average Exercise Price Outstanding, beginning | $ / shares | $ 1.84 |
| Shares, Granted | shares | 8,635,213 |
| Weighted Average Exercise Price, Granted | $ / shares | $ 3.62 |
| Shares, Exercised | shares | (454,111) |
| Weighted Average Exercise Price, Exercised | $ / shares | $ 0.61 |
| Shares, Expired or cancelled | shares | (3,438,763) |
| Weighted Average Exercise Price, Expired or cancelled | $ / shares | $ 2.56 |
| Shares, Outstanding ending | shares | 36,114,487 |
| Weighted Average Exercise Price Outstanding, ending | $ / shares | $ 2.25 |
| Weighted average remaining contractual life Outstanding, ending | 5 years 8 months 8 days |
| Aggregate intrinsic value outstanding ending | $ | $ 61,600,311 |
| Exercisable ending balance, shares | shares | 18,472,112 |
| weighted average exercise price, exercisable ending | $ / shares | $ 0.84 |
| Weighted average remaining contractual life, exercisable ending | 3 years 3 months 25 days |
| Aggregate intrinsic value exercisable ending | $ | $ 51,129,643 |
SCHEDULE OF STOCK WARRANT ACTIVITY (Details) - Warrant [Member] |
6 Months Ended |
|---|---|
|
Jun. 30, 2022
USD ($)
$ / shares
shares
| |
| Accumulated Other Comprehensive Income (Loss) [Line Items] | |
| Number of warrants outstanding, beginning balance | shares | |
| Weighted average exercise price, outstanding beginning balance | $ / shares | |
| Aggregate intrinsic value outstanding, beginning | $ | |
| Number of warrants, granted | shares | 144,200 |
| Weighted average exercise price, granted | $ / shares | $ 5.00 |
| Weighted average remaining contractual life, granted | 4 years 6 months 3 days |
| Number of warrants, exercised | shares | |
| Weighted average exercise price, exercised | $ / shares | |
| Number of warrants, expired or cancelled | shares | |
| Weighted average exercise price, expired or cancelled | $ / shares | |
| Number of warrants outstanding, ending balance | shares | 144,200 |
| Weighted average exercise price, outstanding ending balance | $ / shares | $ 5.00 |
| Weighted average remaining contractual life, outstanding ending | 4 years 6 months 3 days |
| Aggregate intrinsic value outstanding, ending | $ | |
| Number of warrants exercisable, ending balance | shares | 144,200 |
| Weighted average exercise price, exercisable ending | $ / shares | $ 5.00 |
| Weighted average remaining contractual life, exercisable ending | 4 years 6 months 3 days |
| Aggregate intrinsic value exercisable, ending | $ |
STOCKHOLDERS’ EQUITY (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | |||||
|---|---|---|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 14, 2022 |
Jun. 13, 2022 |
Dec. 31, 2021 |
|
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |||||||
| Common stock, shares authorized | 250,000,000 | 250,000,000 | 300,000,000 | 250,000,000 | 250,000,000 | ||
| Preferred stock, shares authorized | 50,000,000 | ||||||
| Preferred stock, par value | $ 0.00001 | ||||||
| Stock based compensation | $ 3,572,189 | $ 891,126 | $ 8,179,332 | $ 1,729,888 | |||
| Unrecognized stock-based compensation expense | $ 44,979,761 | $ 44,979,761 | |||||
| Unrecognized stock-based compensation expense, recognition period | 2 years 1 month 9 days | ||||||
| Stockholders [Member] | |||||||
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |||||||
| Ownership percentage | 61.96% | ||||||
| 2019 Equity Incentive Plan [Member] | |||||||
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |||||||
| Number of shares authorized for issuance | 60,000,000 | 25,000,000 | |||||
COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($) |
6 Months Ended | 12 Months Ended |
|---|---|---|
Jun. 30, 2022 |
Dec. 31, 2021 |
|
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||
| Settlement liabilities | $ 470,000 | |
| Deferred tax liabilities | 633,672 | 99,088 |
| Maxim Settlement Agreement [Member] | ||
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||
| Settlement liabilities | $ 470,000 | |
| Number of shares issued, shares | 400,000 | |
| Repayment of debt | $ 470,000 |
SCHEDULE OF LOAN PAYABLE (Details) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Dec. 31, 2021 |
|
| Short-Term Debt [Line Items] | ||
| Loans payable | $ 9,375,143 | $ 5,497,500 |
| Less current portion | (6,280,988) | (213,199) |
| Long term loans payable | 3,094,155 | 5,284,301 |
| Term Loans 1 [Member] | ||
| Short-Term Debt [Line Items] | ||
| Loans payable | $ 5,397,470 | 478,712 |
| Term Loans 1 [Member] | Minimum [Member] | ||
| Short-Term Debt [Line Items] | ||
| Line of credit facility interest rate percentage | 5.00% | |
| Line of credit maturity description | 2023 | |
| Term Loans 1 [Member] | Maximum [Member] | ||
| Short-Term Debt [Line Items] | ||
| Line of credit facility interest rate percentage | 6.00% | |
| Line of credit maturity description | 2027 | |
| Term Loans 2 [Member] | ||
| Short-Term Debt [Line Items] | ||
| Loans payable | $ 3,977,673 | $ 5,018,788 |
| Term Loans 2 [Member] | Minimum [Member] | ||
| Short-Term Debt [Line Items] | ||
| Line of credit facility interest rate percentage | 3.48% | |
| Line of credit maturity description | 2023 | |
| Term Loans 2 [Member] | Maximum [Member] | ||
| Short-Term Debt [Line Items] | ||
| Line of credit facility interest rate percentage | 7.14% | |
| Line of credit maturity description | 2029 |
SCHEDULE OF FUTURE MINIMUM PAYMENTS FOR LONG TERM DEBT (Details) - Line of Credit & Loans Payable [Member] |
Jun. 30, 2022
USD ($)
|
|---|---|
| Debt Instrument [Line Items] | |
| 2022 (remainder of) | $ 7,309,895 |
| 2023 | 2,167,354 |
| 2024 | 909,814 |
| 2025 | 871,572 |
| 2026 | 507,925 |
| Thereafter | 928,676 |
| Total future minimum payments | 12,695,236 |
| Less: discount | (54,166) |
| Long term debt | 12,641,070 |
| Less: current | (9,344,478) |
| Long term debt, net of current portion | $ 3,296,592 |
LOANS PAYABLE AND LINES OF CREDIT (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | 6 Months Ended | |||||
|---|---|---|---|---|---|---|---|---|
Mar. 10, 2022 |
Oct. 31, 2021 |
Jun. 30, 2022 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Dec. 31, 2021 |
|
| Line of Credit Facility [Line Items] | ||||||||
| Interest expense | $ 64,648 | $ 65,641 | $ 108,233 | $ 134,336 | ||||
| True Digital Acquisition [Member] | ||||||||
| Line of Credit Facility [Line Items] | ||||||||
| Debt instrument interest rate stated percentage | 3.25% | 3.25% | 3.25% | |||||
| Debt assumed | $ 1,008,566 | $ 1,008,566 | $ 1,008,566 | |||||
| Term Loans 1 [Member] | ||||||||
| Line of Credit Facility [Line Items] | ||||||||
| Interest expense | 11,358 | 51,987 | ||||||
| Term Loans 2 [Member] | ||||||||
| Line of Credit Facility [Line Items] | ||||||||
| Interest expense | 58,400 | 61,885 | ||||||
| Convertible Note Payable [Member] | ||||||||
| Line of Credit Facility [Line Items] | ||||||||
| Debt instrument face amount | $ 1,500,000 | |||||||
| Debt instrument interest rate stated percentage | 5.00% | |||||||
| Debt instrument maturity date | Oct. 27, 2022 | Jan. 27, 2022 | ||||||
| Debt instrument convertible conversion price | $ 5.00 | |||||||
| Convertible notes payable | 1,500,000 | 1,500,000 | 1,500,000 | |||||
| Accrued interest | 49,486 | 49,486 | 49,486 | $ 12,500 | ||||
| Interest expense debt | 18,493 | 36,986 | ||||||
| Unsecured Convertible Note Payable [Member] | ||||||||
| Line of Credit Facility [Line Items] | ||||||||
| Debt instrument face amount | $ 1,000,000 | $ 1,000,000 | $ 1,000,000 | |||||
| Debt instrument interest rate stated percentage | 5.00% | 5.00% | 5.00% | |||||
| Debt instrument convertible conversion price | $ 7.65 | $ 7.65 | $ 7.65 | |||||
| Accrued interest | $ 3,194 | $ 3,194 | $ 3,194 | |||||
| Interest expense debt | 3,194 | 3,194 | ||||||
| Debt instrument maturity date, description | June 2023 | |||||||
| Debt instrument redemption, description | The outstanding principal of this note can be redeemed at any time by us or at maturity at 105% | |||||||
| Bridge Loan [Member] | ||||||||
| Line of Credit Facility [Line Items] | ||||||||
| Debt instrument face amount | $ 5,000,000 | $ 5,000,000 | $ 5,000,000 | |||||
| Debt instrument interest rate stated percentage | 4.00% | 4.00% | 4.00% | |||||
| Debt instrument maturity date | Dec. 14, 2022 | |||||||
| Interest expense | $ 8,889 | $ 8,889 | ||||||
SCHEDULE OF LEASE COST AND OTHER SUPPLEMENT LEASE INFORMATION (Details) - USD ($) |
Jun. 30, 2022 |
Jan. 19, 2022 |
Dec. 31, 2021 |
|---|---|---|---|
| Leases | |||
| Operating lease cost ROU assets | $ 245,426 | $ 226,942 | $ 277,578 |
| Total lease assets | 245,426 | 277,578 | |
| Operating lease liabilities, current | 116,091 | $ 226,942 | 196,472 |
| Operating lease liabilities, non-current | 135,380 | 88,040 | |
| Total lease liabilities | $ 251,471 | $ 284,512 |
SCHEDULE OF LEASE COST (Details) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Leases | ||
| Operating lease costs | $ 226,079 | $ 54,376 |
| Total lease costs | $ 226,079 | $ 54,376 |
SCHEDULE OF FUTURE MINIMUM UNDER NON-CANCELLABLE LEASES FOR OPERATING LEASES (Details) - USD ($) |
Jun. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Leases | ||
| 2022 (remainder of) | $ 83,892 | |
| 2023 | 77,091 | |
| 2024 | 57,605 | |
| 2025 | 54,389 | |
| Total future minimum lease payments | 272,977 | |
| Amount representing interest | (21,506) | |
| Total lease liabilities | $ 251,471 | $ 284,512 |
LEASES (Details Narrative) - USD ($) |
Jun. 30, 2022 |
Jan. 19, 2022 |
Dec. 31, 2021 |
|---|---|---|---|
| Leases | |||
| Operating lease right-of-use assets | $ 245,426 | $ 226,942 | $ 277,578 |
| Operating lease liabilities | $ 116,091 | $ 226,942 | $ 196,472 |
| Weighted average discount rate | 6.00% | ||
| Weighted average remaining lease term | 1 year |
SCHEDULE OF REVENUE BY GEOGRAPHY IS BASED ON CUSTOMERS BILLING ADDRESS (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
| Revenue | $ 11,227,945 | $ 2,949,677 | $ 20,557,355 | $ 5,509,455 |
| UNITED STATES | ||||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
| Revenue | 9,358,105 | 2,949,677 | 17,764,335 | 5,509,455 |
| CHILE | ||||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
| Revenue | $ 1,869,840 | $ 2,793,020 | ||
SCHEDULE OF PROPERTY AND EQUIPMENT, NET BY GEOGRAPHIC AREAS (Details) - USD ($) |
Jun. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Property and equipment net | $ 2,968,786 | $ 2,394,424 |
| UNITED STATES | ||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Property and equipment net | 1,034,958 | 95,069 |
| CHILE | ||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Property and equipment net | $ 1,933,828 | $ 2,299,355 |
SUBSEQUENT EVENTS (Details Narrative) |
1 Months Ended |
|---|---|
|
Jul. 30, 2022
shares
| |
| Subsequent Event [Member] | Stock Purchase Agreement [Member] | |
| Subsequent Event [Line Items] | |
| Stock issued for acquisition, shares | 499,000 |