10-Q Q3 2019

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 September 30, 2019

[  ] 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)

(512) 402-8550

(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 Shares, $.001 par value

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 and posted on its corporate Web site, if any, 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 oAccelerated filer o

Non-accelerated filer þSmaller 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 o 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 10, 2019, was 10,337,711.



CYNERGISTEK, INC.

FORM 10-Q

TABLE OF CONTENTS

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018

3

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)

4

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 (unaudited)

5

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2018 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)

7

Notes to Condensed Consolidated Financial Statements (unaudited)

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

Item 4.

Controls and Procedures

30

PART –II – OTHER INFORMATION

Item 1a.

Risk Factors

30

Item 6.

Exhibits

31

Signatures

32


2


TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2019 (unaudited)

December 31, 2018

ASSETS

Current assets:

Cash and cash equivalents

$10,183,214

$6,571,381 

Accounts receivable, net

3,485,943

5,572,467 

Prepaid and other current assets

4,058,218

1,425,858 

Refundable income taxes

-

472,059 

Current assets held for sale

201,965

8,427,408 

Total current assets

17,929,340

22,469,173 

Property and equipment, net

757,066

887,874 

Deposits

79,710

87,778 

Deferred income taxes

1,615,173

2,146,020 

Intangible assets, net

7,731,787

9,089,989 

Goodwill

17,008,189

17,008,189 

Noncurrent assets held for sale

-

1,844,349 

Total assets

$45,121,265

$53,533,372 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$215,631

$1,370,336 

Accrued compensation and benefits

920,014

1,592,765 

Deferred revenue

1,468,472

918,165 

Income taxes payable

4,016,534

Note payable

-

343,750 

Current portion of long-term liabilities

866,594

3,271,052 

Current liabilities held for sale

-

7,299,561 

Total current liabilities

7,487,245

14,795,629 

Long-term liabilities:

Term loan, less current portion

-

12,851,617 

Promissory notes to related parties, less current portion

843,750

5,015,625 

Capital lease obligations, less current portion

-

1,570 

Operating lease liability, less current portion

199,349

436,805 

Noncurrent liabilities held for sale

-

58,967 

Total long-term liabilities

1,043,099

18,364,584 

Commitments and contingencies

Stockholders’ equity:

Common stock, par value at $0.001, 33,333,333 shares authorized, 9,795,147 shares issued and outstanding at September 30, 2019, and 9,630,050 shares issued and outstanding at December 31, 2018

9,795

9,630 

Additional paid-in capital

32,935,601

31,910,831 

Accumulated earnings (deficit)

3,645,525

(11,547,302)

Total stockholders’ equity

36,590,921

20,373,159 

Total liabilities and stockholders’ equity

$45,121,265

$53,533,372 

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


3


TABLE OF CONTENTS


CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

Net revenues

$4,766,000 

$5,655,738 

$15,597,117 

$14,338,322 

Cost of revenues

3,165,502 

2,898,273 

9,613,777 

7,783,317 

Gross profit

1,600,498 

2,757,465 

5,983,340 

6,555,005 

Operating expenses:

Sales and marketing

1,090,733 

1,193,878 

3,907,847 

3,885,948 

General and administrative

1,689,012 

1,350,855 

4,807,789 

4,888,377 

Change in valuation of contingent earn-out

(178,269)

(178,269)

Depreciation

47,775 

36,853 

135,875 

107,833 

Amortization of acquisition-related intangibles

452,734 

452,734 

1,358,202 

1,358,202 

Total operating expenses

3,101,985 

3,034,320 

10,031,444 

10,240,360 

Loss from operations

(1,501,487)

(276,855)

(4,048,104)

(3,685,355)

Other income (expense):

Other income

18 

26 

47 

Interest income

41,438 

58,076 

Interest expense

(30,459)

(352,754)

(439,909)

(1,094,066)

Loss on disposition of fixed assets

(2,188)

(2,188)

Total other income (expense)

8,791 

(352,736)

(383,995)

(1,094,019)

Loss before benefit for income taxes

(1,492,696)

(629,591)

(4,432,099)

(4,779,374)

Income tax benefit

236,040 

225,426 

746,778 

844,430 

Net loss from continuing operations

(1,256,656)

(404,165)

(3,685,321)

(3,934,944)

Income (loss) from discontinued operations, including gain on sale, net of tax

(6,500)

1,558,291 

18,878,149 

4,502,860 

Net income (loss)

$(1,263,156)

$1,154,126 

$15,192,828 

$567,916 

Net income (loss) per share:

From continuing operations:

Basic

$(0.13)

$(0.04)

$(0.38)

$(0.41)

Diluted

$(0.13)

$(0.04)

$(0.38)

$(0.41)

From discontinued operations:

Basic

$(0.00)

$0.16 

$1.94 

$0.47 

Diluted

$(0.00)

$0.16 

$1.90 

$0.46 

Net income (loss):

Basic

$(0.13)

$0.12 

$1.56 

$0.06 

Diluted

$(0.13)

$0.12 

$1.53 

$0.06 

Number of weighted average shares outstanding:

Basic

9,795,147 

9,616,133 

9,754,014 

9,605,536 

Diluted

9,795,147 

9,762,370 

9,910,107 

9,813,098 

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


4


TABLE OF CONTENTS


CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

(UNAUDITED)

Additional

Accumulated

Total

Common Stock

Paid-in

(Deficit)

Stockholders’

Shares

Amount

Capital

Earnings

Equity

Balance at December 31, 2018

9,630,050

$9,630

$31,910,831 

$(11,547,302)

$20,373,159 

Stock compensation expense for options and warrants granted to employees and directors

-

-

11,286 

11,286 

Stock compensation expense for restricted stock units granted to employees

-

-

395,406 

395,406 

Restricted stock units exercised

70,000

70

(70)

Stock options exercised

23,015

23

2,505 

2,528 

Net income

-

-

17,547,431 

17,547,431 

Balance at March 31, 2019

9,723,065

$9,723

$32,319,958 

$6,000,129 

$38,329,810 

Stock compensation expense for options and warrants granted to employees and directors

-

-

993 

993 

Stock compensation expense for restricted stock units granted to employees

-

-

280,169 

280,169 

Restricted stock units exercised

47,455

47

(47)

Stock options exercised

24,627

25

8,928 

8,953 

Net loss

-

-

(1,091,448)

(1,091,448)

Balance at June 30, 2019

9,795,147

$9,795

$32,610,001 

$4,908,681 

$37,528,477 

Stock compensation expense for options and warrants granted to employees and directors

-

-

59,110 

59,110 

Stock compensation expense for restricted stock units granted to employees

-

-

266,490 

266,490 

Net loss

-

-

(1,263,156)

(1,263,156)

Balance at September 30, 2019

9,795,147

$9,795

$32,935,601 

$3,645,525 

$36,590,921 

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


5


TABLE OF CONTENTS


CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018

(UNAUDITED)

Additional

Accumulated

Total

Common Stock

Paid-in

(Deficit)

Stockholders’

Shares

Amount

Capital

Earnings

Equity

Balance at December 31, 2017

9,576,028

$9,576

$31,156,362 

$(14,320,560)

$16,845,378 

Stock compensation expense for options and warrants granted to employees and directors

-

-

11,516 

11,516 

Stock compensation expense for restricted stock units granted to employees

-

-

176,746 

176,746 

Stock options exercised

16,519

17

(17)

Cumulative effect of adoption of revenue recognition standard ASC 606

-

-

879,666 

879,666 

Net loss

-

-

(707,343)

(707,343)

Balance at March 31, 2018

9,592,547

$9,593

$31,344,607 

$(14,148,237)

$17,205,963 

Stock compensation expense for options and warrants granted to employees and directors

-

-

9,188 

9,188 

Stock compensation expense for restricted stock units granted to employees

-

-

104,684 

104,684 

Stock options exercised

23,586

23

(23)

Net income

-

-

121,133 

121,133 

Balance at June 30, 2018

9,616,133

$9,616

$31,458,456 

$(14,027,104)

$17,440,968 

Stock compensation expense for options and warrants granted to employees and directors

-

-

8,292 

8,292 

Stock compensation expense for restricted stock units granted to employees

-

-

152,972 

152,972 

Stock options exercised

-

-

Net income

-

-

1,154,126 

1,154,126 

Balance at September 30, 2018

9,616,133

$9,616

$31,619,720 

$(12,872,978)

$18,756,358 

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


6


TABLE OF CONTENTS


CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended September 30,

2019

2018

Cash flows from operating activities:

Net income

$15,192,828 

$567,916 

Adjustments to reconcile net income to net cash (used for) provided by operating activities:

Depreciation

172,510 

265,424 

Amortization of intangible assets

1,358,202