CYNERGISTEK, INC. - Form 10-Q SEC filing

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-27507

CYNERGISTEK, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		37-1867101
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification Number)

11940 Jollyville Road, Suite 300-N Austin, Texas		78759
(Address of Principal Executive Offices)		(Zip Code)

(949) 614-0700

(Registrant’s telephone number, including area code)

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

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $.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 ☑
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 November 11, 2021, was 13,186,048.

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.	21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	31
ITEM 4. CONTROLS AND PROCEDURES.	31
PART II - OTHER INFORMATION	31
ITEM 1A. RISK FACTORS.	31
ITEM 5. OTHER INFORMATION.	32
ITEM 6. EXHIBITS.	33

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2021 (unaudited)	December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	`$5,088,141`	`$5,613,654`
Accounts receivable, net of allowance for doubtful accounts	`1,773,227`	`2,063,136`
Unbilled services	`648,968`	`566,713`
Prepaid and other current assets	`1,392,791`	`2,032,420`
Income taxes receivable	`1,845,502`	`1,680,866`
Total current assets	`10,748,629`	`11,956,789`

Property and equipment, net	`283,966`	`541,525`
Deposits	`34,310`	`64,586`
Deferred income taxes	`6,003,866`	`4,959,125`
Intangible assets, net	`5,042,021`	`6,063,617`
Goodwill	`8,394,483`	`8,394,483`
Total assets	`$30,507,275`	`$31,980,125`
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	`$766,006`	`$1,326,919`
Accrued compensation and benefits	`1,153,093`	`814,830`
Deferred revenue	`1,671,922`	`1,265,864`
Current portion of earnout liability	`200,000`	`-`
Current portion of promissory note to related party	`281,250`	`562,500`
Current portion of operating lease liability	`84,009`	`252,398`
Total current liabilities	`4,156,280`	`4,222,511`

Long-term liabilities:
Earnout liability, less current portion	`50,000`	`1,300,000`
Promissory note to related party, less current portion	`-`	`140,625`
Paycheck Protection Program loan	`-`	`2,825,500`
Operating lease liability, less current portion	`-`	`40,031`
Total long-term liabilities	`50,000`	`4,306,156`
Commitments and contingencies
Stockholders’ equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 12,882,997 shares issued and outstanding at September 30, 2021, and 12,024,967 shares issued and outstanding at December 31, 2020	`12,883`	`12,024`
Additional paid-in capital	`41,154,149`	`38,564,520`
Accumulated deficit	`(14,866,037)`	`(15,125,086)`
Total stockholders’ equity	`26,300,995`	`23,451,458`
Total liabilities and stockholders’ equity	`$30,507,275`	`$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 September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Net revenues	$ 3,825,679	$ 4,502,909	$ 11,874,343	$ 14,176,307
Cost of revenues	1,972,545	2,909,788	6,146,436	9,679,816
Gross profit	1,853,134	1,593,121	5,727,907	4,496,491
Operating expenses:
Sales and marketing	1,092,906	1,325,965	3,547,525	4,490,797
General and administrative	2,646,064	1,480,597	5,793,316	5,381,929
Change in valuation of contingent earn-out	250,000	-	(1,050,000)	-
Depreciation	48,383	48,296	144,265	141,668
Amortization of acquisition-related intangibles	340,539	416,191	1,021,596	1,248,574
Finance cost for equity commitment	-	-	-	390,000
Total operating expenses	4,377,892	3,271,049	9,456,702	11,652,968
Loss from operations	(2,524,758)	(1,677,928)	(3,728,795)	(7,156,477)
Other income (expense):
Gain on forgiveness of PPP loan and other income and expense	2,843,254	-	2,843,266	-
Interest income	-	1,867	-	9,545
Interest expense	(9,982)	(26,046)	(47,322)	(77,654)
Total other income (expense)	2,833,272	(24,179)	2,795,944	(68,109)

Income (loss) before provision for income taxes	308,514	(1,702,107)	(932,851)	(7,224,586)
Income tax benefit	911,900	425,708	1,191,900	1,642,902
Net income (loss)	1,220,414	(1,276,399)	259,049	(5,581,684)
Deemed dividends from warrant anti-dilution provisions	(8,343)	-	(14,177)	-
Net income (loss) attributable to common shareholders	$ 1,212,071	$ (1,276,399)	$ 244,872	$ (5,581,684)

Net income (loss) per share:
Basic	$ 0.10	$ (0.12)	$ 0.02	$ (0.53)
Diluted	$ 0.10	$ (0.12)	$ 0.02	$ (0.53)

Number of weighted average shares outstanding:
Basic	12,141,088	10,597,024	12,101,466	10,486,334
Diluted	12,610,443	10,597,024	12,573,978	10,486,334

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 AND NINE MONTHS ENDED SEPTEMBER 30, 2021

(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	-	`-`	`228,437`	`-`	`228,437`
Restricted stock units exercised	95,731	`96`	`(96)`	`-`	`-`
Deemed dividend	-	`-`	`-`	`-`	`-`
Net loss	-	`-`	`-`	`(914,477)`	`(914,477)`
Balance at March 31, 2021	12,120,698	`12,120`	`38,792,861`	`(16,039,563)`	`22,765,418`
Stock compensation expense	-	`-`	`338,272`	`-`	`338,272`
Net loss	-	`-`	`-`	`(46,888)`	`(46,888)`
Balance at June 30, 2021	12,120,698	`12,120`	`39,131,133`	`(16,086,451)`	`23,056,802`
Net common stock sold	762,299	`763`	`1,351,064`	`-`	`1,351,827`
Stock compensation expense	-	`-`	`671,952`	`-`	`671,952`
Deemed dividend	-	`-`	`-`	`-`	`-`
Net income	-	`-`	`-`	`1,220,414`	`1,220,414`
Balance at September 30, 2021	12,882,997	`$12,883`	`$41,154,149`	`$`(14,866,037)	`$26,300,995`

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

	Nine Months Ended September 30,
	2021	2020
Cash flows from operating activities:
Net income (loss)	`$259,049`	`$(5,581,684)`
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation	`144,265`	`141,668`
Amortization of intangible assets	`1,021,596`	`1,248,574`
Change in net deferred tax assets	`(1,044,741)`	`(113,458)`
Bad debt expense	`-`	`56,489`
Stock compensation for equity awards granted to employees and directors	`1,238,661`	`1,395,349`
Change in valuation of contingent earn-out	`(1,050,000)`	`-`
Finance cost for equity commitment	`-`	`390,000`
Paycheck Protection Program loan forgiveness	`(2,825,500)`	`-`
Other	`(17,912)`	`(36,445)`
Changes in operating assets and liabilities:
Accounts receivable	`289,909`	`1,255,803`
Unbilled services	`(82,255)`	`(157,787)`
Prepaid and other current assets	`639,629`	`(171,859)`
Income taxes receivable	(164,636)	(1,478,933)
Deposits	`30,276`	`7,900`
Accounts payable and accrued expenses	`(560,913)`	`163,138`
Accrued compensation and benefits	`338,263`	`(522,358)`
Deferred revenue	`406,058`	`117,418`
Income taxes payable	`-`	`(31,976)`
Net cash used for operating activities	`(1,378,251)`	`(3,318,161)`
Cash flows from investing activities:
Purchases of property and equipment	`(77,214)`	`(127,028)`
Net cash used for investing activities	`(77,214)`	`(127,028)`
Cash flows from financing activities:
Proceeds from Paycheck Protection Program loan	`-`	`2,825,500`
Payments on promissory note to related party	`(421,875)`	`(421,875)`
Net proceeds from sale of common stock	`1,351,827`	`-`
Net cash provided by financing activities	`929,952`	`2,403,625`
Net change in cash and cash equivalents	`(525,513)`	`(1,041,564)`
Cash and cash equivalents, beginning of period	`5,613,654`	`5,328,726`
Cash and cash equivalents, end of period	`$5,088,141`	`$4,287,162`

	September 30, 2021	December 31, 2020
Trade receivables	$ 1,773,227	$ 2,083,761
Allowance for doubtful accounts	-	(20,625)
Total accounts receivable, net	$ 1,773,227	$ 2,063,136

	September 30, 2021	December 31, 2020
Furniture and fixtures	$ 235,245	$ 235,245
Computers and office equipment	855,438	792,181
Right of use assets	214,935	1,843,818
Property and equipment at cost	1,305,618	2,871,244
Less accumulated depreciation and amortization	(1,021,652)	(2,329,719)
	$ 283,966	$ 541,525

	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Operating lease cost	`$72,196`	`$171,220`	`$338,731`	`$550,467`
Sublet income	`-`	`(116,299)`	`(148,491)`	`(348,546)`
Net operating lease cost	`$72,196`	`$54,921`	`$190,240`	`$201,921`

	Operating Leases
2021 (remaining fiscal year)	`$39,754`
2022	`46,603`
Total lease payments	`86,357`
Less imputed interest	`(2,348)`
Total lease liabilities	`84,009`
Less current portion of lease liabilities	`(84,009)`
Long-term lease liabilities	`$-`

	September 30, 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	$ (5,594,544)	$ 4,505,456	$ 10,100,000	$ (4,934,720)	$ 5,165,280
Customer relationships	4,650,000	(4,499,265)	150,735	4,650,000	(4,445,000)	205,000
Trademarks	2,300,000	(1,914,170)	385,830	2,300,000	(1,606,663)	693,337
Total	$ 17,050,000	$ (12,007,979)	$ 5,042,021	$ 17,050,000	$ (10,986,383)	$ 6,063,617

	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Managed services	$ 2,210,910	$ 2,732,612	$ 6,819,570	$ 8,672,377
Consulting and professional services	1,614,769	1,770,297	5,054,773	5,503,930
Net revenues	$ 3,825,679	$ 4,502,909	$ 11,874,343	$ 14,176,307

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	24,170	$ 2.38	8.51	$ -
Exercised	-	-
Cancelled	-	-
Outstanding at September 30, 2021	601,949	$ 2.39	7.58	$ -
Exercisable at September 30, 2021	601,949	$ 2.39	7.58	$ -

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	(47,334)	1.94
Outstanding at September 30, 2021	1,093,505	$ 3.29	7.77	$ -
Exercisable at September 30, 2021	510,172	$ 4.66	6.72	$ -

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	300,000	2.39
Vested	(255,000)	2.45
Cancelled and forfeited	(116,000)	3.41
Non-vested at September 30, 2021	484,350	$ 3.23	0.62

	Payments Due by Period
	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Promissory note	$ 290,000	$ 290,000	$ -	$ -	$ -
Operating leases	86,000	86,000	-	-	-
Total	$ 376,000	$ 376,000	$ -	$ -	$ -

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*
104		Cover Page Interactive Data File (embedded within the Inline XBRL document). †

	CYNERGISTEK, INC.


Date: November 11, 2021	By:	/s/ Michael McMillan
		Michael McMillan
		President and Chief Executive Officer (Principal Executive Officer)

Date: November 11, 2021	By:	/s/ Paul T. Anthony
		Paul T. Anthony
		Chief Financial Officer (Principal Accounting Officer)

SEC Form 10-Q filed by CynergisTek, Inc.