10-Q 1 ctek_10q.htm CYNERGISTEK, INC. 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-27507

CYNERGISTEK, INC.

(Exact name of registrant as specified in its charter)

Delaware	37-1867101
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

11940 Jollyville Road, Suite 300-N

Austin, Texas 78759

(Address of principal executive offices, zip code)

(949) 614-0700

(Issuer’s telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $.001 par value per share	CTEK	NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicated by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer þ	Smaller reporting company þ
Emerging growth company ¨

Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act).

Yes ¨ No þ.

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

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of May 13, 2021, was 12,120,698.

CYNERGISTEK, INC.

FORM 10-Q

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION	4
ITEM 1. FINANCIAL STATEMENTS.	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	26
ITEM 4. CONTROLS AND PROCEDURES.	26
PART II - OTHER INFORMATION	26
ITEM 1A. RISK FACTORS.	26
ITEM 6. EXHIBITS.	27

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2021 (unaudited)	December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	`$4,443,140`	`$5,613,654`
Accounts receivable, net of allowance for doubtful accounts	`1,949,858`	`2,063,136`
Unbilled services	`557,487`	`566,713`
Prepaid and other current assets	`1,806,340`	`2,032,420`
Income taxes receivable	`1,952,532`	`1,680,866`
Total current assets	`10,709,357`	`11,956,789`

Property and equipment, net	`380,843`	`541,525`
Deposits	`64,586`	`64,586`
Deferred income taxes	`4,995,830`	`4,959,125`
Intangible assets, net	`5,723,089`	`6,063,617`
Goodwill	`8,394,483`	`8,394,483`
Total assets	`$30,268,188`	`$31,980,125`
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	`$930,937`	`$1,326,919`
Accrued compensation and benefits	`531,524`	`814,830`
Deferred revenue	`1,208,074`	`1,265,864`
Current portion of promissory note to related parties	`562,500`	`562,500`
Current portion of operating lease liability	`129,233`	`252,398`
Total current liabilities	`3,362,268`	`4,222,511`

Long-term liabilities:
Earnout liability	`1,300,000`	`1,300,000`
Promissory note to related party, less current portion	`-`	`140,625`
Paycheck Protection Program loan	`2,825,500`	`2,825,500`
Operating lease liability, less current portion	`15,002`	`40,031`
Total long-term liabilities	`4,140,502`	`4,306,156`
Commitments and contingencies
Stockholders’ equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 12,120,698 shares issued and outstanding at March 31, 2021 and 12,024,967 shares issued and outstanding at December 31, 2020	`12,120`	`12,024`
Additional paid-in capital	`38,792,861`	`38,564,520`
Accumulated deficit	`(16,039,563)`	`(15,125,086)`
Total stockholders’ equity	`22,765,418`	`23,451,458`
Total liabilities and stockholders’ equity	`$30,268,188`	`$31,980,125`

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

Table of Contents

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended March 31,
	2021	2020
Net revenues	`$4,173,520`	`$5,115,827`
Cost of revenues	`2,090,834`	`3,423,532`
Gross profit	`2,082,686`	`1,692,295`
Operating expenses:
Sales and marketing expenses	`1,212,379`	`1,487,347`
General and administrative expenses	`1,676,658`	`2,104,844`
Depreciation	`47,696`	`47,600`
Amortization of acquisition-related intangibles	`340,528`	`416,191`
Total operating expenses	`3,277,261`	`4,055,982`
Loss from operations	`(1,194,575)`	`(2,363,687)`
Other (expense) income:
Interest income	`-`	`6,068`
Interest expense	`(20,001)`	`(24,288)`
Total other expense	`(20,001)`	`(18,220)`

Loss before income tax benefit	`(1,214,576)`	`(2,381,907)`
Income tax benefit	`300,099`	`531,284`
Net loss	`(914,477)`	`(1,850,623)`
Deemed dividends from warrant anti-dilution provisions	`(5,834)`	`-`
Net loss attributable to common shareholders	`$(920,311)`	`$(1,850,623)`

Net loss per share:
Basic	`$(0.08)`	`$(0.18)`
Diluted	`$(0.08)`	`$(0.18)`

Number of weighted average shares outstanding:
Basic	`12,041,074`	`10,374,497`
Diluted	`12,041,074`	`10,374,497`

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

Table of Contents

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2021 and 2020

(UNAUDITED)

			Additional		Total
	Common Stock		Paid-in	Accumulated	Stockholders’
	Shares	Amount	Capital	Deficit	Equity
Balance at December 31, 2020	`12,024,967`	`$12,024`	`$38,564,520`	`$(15,125,086)`	`$23,451,458`
Stock compensation expense for equity awards granted to employees and directors	`-`	`-`	`228,437`	`-`	`228,437`
Restricted stock units exercised	`95,731`	`96`	`(96)`	`-`	`-`
Deemed dividend	`-`	`-`	`-`	`-`	`-`
Net income	`-`	`-`	`-`	`(914,477)`	`(914,477)`
Balance at March 31, 2021	`12,120,698`	`$12,120`	`$38,792,861`	`$(16,039,563)`	`$22,765,418`

			Additional		Total
	Common Stock		Paid-in	Retained	Stockholders’
	Shares	Amount	Capital	Earnings	Equity
Balance at December 31, 2019	`10,359,164`	`$10,359`	`$34,821,863`	`$3,343,402`	`$38,175,624`
Stock compensation expense for equity awards granted to employees and directors	`-`	`-`	`411,007`	`-`	`411,007`
Restricted stock units exercised	`20,000`	`20`	`(20)`	`-`	`-`
Net income	`-`	`-`	`-`	`(1,850,623)`	`(1,850,623)`
Balance at March 31, 2020	`10,379,164`	`$10,379`	`$35,232,850`	`$1,492,779`	`$36,736,008`

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

Table of Contents

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
	2021	2020
Cash flows from operating activities:
Net loss	`$(914,477)`	`$(1,850,623)`
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation	`47,696`	`47,600`
Amortization of intangible assets	`340,528`	`416,191`
Change in net deferred tax assets	`(36,705)`	`(21,806)`
Bad debt expense	`-`	`30,000`
Stock compensation for equity awards granted to employees and directors	`228,437`	`411,007`
Other	`(15,500)`	`(12,149)`
Changes in operating assets and liabilities:
Accounts receivable	`113,278`	`(151,100)`
Unbilled services	`9,226`	`(77,651)`
Prepaid and other current assets	`226,080`	`(447,636)`
Income taxes receivable	`(271,666)`	`(456,128)`
Accounts payable and accrued expenses	`(395,982)`	`36,950`
Accrued compensation and benefits	`(283,306)`	`(613,183)`
Deferred revenue	`(57,790)`	`650,047`
Income taxes payable	`-`	`(31,976)`
Net cash used for operating activities	`(1,010,181)`	`(2,070,457)`
Cash flows from investing activities:
Purchases of property and equipment	`(19,708)`	`(51,912)`
Net cash used for investing activities	`(19,708)`	`(51,912)`
Cash flows from financing activities:
Payments on promissory note to related parties	`(140,625)`	`(140,625)`
Payments on capital leases	`-`	`(4)`
Net cash used for financing activities	`(140,625)`	`(140,629)`
Net change in cash and cash equivalents	`(1,170,514)`	`(2,262,998)`
Cash and cash equivalents, beginning of period	`5,613,654`	`5,328,726`
Cash and cash equivalents, end of period	`$4,443,140`	`$3,065,728`

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

Table of Contents

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

	Three Months Ended March 31,
	2021	2020
Supplemental disclosure of cash flow information:
Interest paid	`$12,914`	`$84,606`
Income taxes paid	`$8,272`	`$209,834`

Non-cash investing and financing activities:
Capitalized right-to-use asset resulting from an extension of an operating lease commitment	`$-`	`$185,454`
Capitalized operating lease liability resulting from an extension of an operating lease commitment	`$-`	`$185,454`

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

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(UNAUDITED)

1.BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of CynergisTek, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “CynergisTek”) have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission (“SEC”) on March 25, 2021.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly our financial position and results of operations as of and for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full year.

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

The accompanying unaudited condensed consolidated financial statements include the accounts of CynergisTek and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Based on our integration strategies, and an analysis of how our Chief Operating Decision Makers review, manage and are compensated, we have determined that the Company operates as one segment. For the periods presented, all revenues were derived from domestic operations.

We have performed an evaluation of subsequent events through the date of filing these unaudited condensed consolidated financial statements with the SEC.

Liquidity and Capital Resources

As of March 31, 2021, our cash balance was $4.4 million, current assets minus current liabilities was positive $7.3 million and our non-current debt and lease obligations, excluding contingent earnout liability of $1.3 million, totaled $2.8 million. This $2.8 million of debt is related to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program loan (the “PPP Loan”), received pursuant to the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), that we anticipate will be fully forgiven as described in Note 9. The level of additional cash needed to fund operations and our ability to conduct business for the next twelve months will be influenced primarily by the following factors:

·our ability to manage our operating expenses and maintain gross margins while attracting, recruiting and retaining cybersecurity privacy professionals;

·demand for our services from healthcare providers; the near-term impact of the COVID-19 on our customers allocation of time and resources to security and privacy, and their ability to pay for existing services as well as enter into new contractual arrangements during a period of crisis;

·general economic conditions and changes in healthcare reimbursement and regulatory environment, including effects of the COVID-19 epidemic; and

	March 31, 2021	December 31, 2020
Trade receivables	`$1,970,483`	`$2,083,761`
Allowance for doubtful accounts	`(20,625)`	`(20,625)`
Total accounts receivable, net	`$1,949,858`	`$2,063,136`

	March 31, 2021	December 31, 2020
Furniture and fixtures	`$235,245`	`$235,245`
Computers and office equipment	`797,932`	`792,181`
Right of use assets	`1,499,394`	`1,843,818`
Property and equipment at cost	`2,532,571`	`2,871,244`
Less accumulated depreciation and amortization	`(2,151,728)`	`(2,329,719)`
	`$380,843`	`$541,525`

	Operating Leases
2021 (remaining fiscal year)	$ 108,280
2022	41,690
Total lease payments	149,970
Less imputed interest	(5,735)
Total lease liabilities	144,235
Less current portion of lease liabilities	(129,233)
Long-term lease liabilities	$ 15,002

	March 31, 2021			December 31, 2020
	Carrying Amount	Accumulated Amortization and Impairment	Net Book Value	Carrying Amount	Accumulated Amortization and Impairment	Net Book Value
Acquired technology	`$10,100,000`	`$(5,154,662)`	`$4,945,338`	`$10,100,000`	`$(4,934,720)`	`$5,165,280`
Customer relationships	`4,650,000`	`(4,463,088)`	`186,912`	`4,650,000`	`(4,445,000)`	`205,000`
Trademarks	`2,300,000`	`(1,709,161)`	`590,839`	`2,300,000`	`(1,606,663)`	`693,337`
Total	`$17,050,000`	`$(11,326,911)`	`$5,723,089`	`$17,050,000`	`$(10,986,383)`	`$6,063,617`

Warrants	Shares	Weighted Average Exercise Price	Weighted Average Remaining Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2020	577,779	`$2.57`	8.29	`$-`
Granted	18,915	`$2.41`	9.00	`$-`
Exercised	-	`-`
Cancelled	-	`-`
Outstanding at March 31, 2021	596,694	`$2.49`	8.07	`$-`
Exercisable at March 31, 2021	596,694	`$2.49`	8.07	`$-`

Options	Number of Shares	Weighted Average Exercise Price	Weighted Average Remaining Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2020	1,040,839	`$3.27`	9.66	`$46,750`
Granted	100,000	`$2.75`
Exercised	-	`-`
Cancelled	(12,833)	`1.77`
Outstanding at March 31, 2021	1,128,006	`$3.25`	8.15	`$-`
Exercisable at March 31, 2021	304,673	`$3.95`	5.79	`$-`

Restricted Stock Units	Shares	Weighted Average Grant Date Fair Value per Share	Weighted Average Vesting Period in Years
Non-vested at December 31, 2020	555,350	`$3.38`	1.24
Granted	285,000	`2.37`
Vested	(30,000)	`3.01`
Cancelled and forfeited	(42,500)	`3.35`
Non-vested at March 31, 2021	767,850	`$3.02`	1.05

	Three Months Ended March 31,
	2021	2020
Cost of revenues	$ (42,193)	$ 79,282
Sales and marketing	28,981	77,293
General and administrative expense	241,649	254,432
Total stock-based compensation expense	$ 228,437	$ 411,007

	Payments Due by Period
	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Promissory notes	`$590,733`	`$590,733`	`$-`	`$-`	`$-`
Paycheck Protection Program loan	`2,870,121`	`2,634,559`	`235,562`	`-`	`-`
Operating leases	`149,970`	`133,294`	`16,676`	`-`	`-`
Total	`$3,610,824`	`$3,358,586`	`$252,238`	`$-`	`$-`

No.		Item
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. †
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. †
32.1		Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. +
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

	CYNERGISTEK, INC.


Date: May 13, 2021	By:	/s/ Caleb Barlow
		Caleb Barlow
		President and Chief Executive Officer (Principal Executive Officer)

Date: May 13, 2021	By:	/s/ Paul T. Anthony
		Paul T. Anthony
		Chief Financial Officer (Principal Accounting Officer)

SEC Form 10-Q filed by CynergisTek, Inc.