10-Q

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 June 30, 2022

OR

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

For the transition period from to

Commission File Number: 000-27507

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 ☒     No ☐.

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 ☒      No ☐.

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	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

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. ☐

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

Yes ☐     No ☒.

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of August 15, 2022, was 13,256,570.

CYNERGISTEK, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS.	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	18
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	28
ITEM 4.	CONTROLS AND PROCEDURES.	29
PART II - OTHER INFORMATION		30
ITEM 1A.	RISK FACTORS.	30
ITEM 5.	OTHER INFORMATION.	31
ITEM 6.	EXHIBITS.	32

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2022 (unaudited)			December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	1,412,979		$	3,575,682
Accounts receivable, net of allowance for doubtful accounts		2,409,539			2,007,136
Unbilled services		731,018			542,952
Prepaid and other current assets		1,322,880			1,840,178
Income taxes receivable		50,920			1,484,851
Total current assets		5,927,335			9,450,799
Property and equipment, net		164,697			243,791
Deposits		34,310			34,310
Deferred income taxes		-			6,060,129
Intangible assets, net		4,175,430			4,701,491
Goodwill		8,394,483			8,394,483
Total assets	$	18,696,255		$	28,885,003
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,283,937		$	1,453,454
Accrued compensation and benefits		426,287			1,189,472
Deferred revenue		1,618,072			1,663,719
Earnout liability		184,556			432,000
Promissory note to related party		-			140,625
Operating lease liability		-			45,233
Total current liabilities		3,512,852			4,924,503
Commitments and contingencies
Stockholders’ equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 13,256,570 shares issued and outstanding at June 30, 2022, and 13,248,024 shares issued and outstanding at December 31, 2021		13,256			13,248
Additional paid-in capital		41,688,485			41,318,917
Accumulated deficit		(26,518,338	)		(17,371,665	)
Total stockholders’ equity		15,183,403			23,960,500
Total liabilities and stockholders’ equity	$	18,696,255		$	28,885,003

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

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CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net revenues	$	3,943,394		$	3,875,143		$	8,603,962		$	8,048,664
Cost of revenues		2,636,086			2,083,056			5,428,651			4,173,890
Gross profit		1,307,308			1,792,087			3,175,311			3,874,774
Operating expenses:
Sales and marketing expenses		1,186,407			1,242,240			2,363,739			2,454,620
General and administrative expenses		1,745,609			1,470,593			3,269,688			3,147,251
Change in valuation of contingent earn-out		-			(1,300,000	)		-			(1,300,000	)
Depreciation		37,130			48,186			85,352			95,882
Amortization of acquisition-related intangibles		263,031			340,528			526,061			681,056
Total operating expenses		3,232,177			1,801,547			6,244,840			5,078,809
Loss from operations		(1,924,869	)		(9,460	)		(3,069,529	)		(1,204,035	)
Other (expense) income:
Other (expense) income		(195	)		11			(195	)		11
Interest expense		-			(17,339	)		(1,819	)		(37,340	)
Total other (expense) income		(195	)		(17,328	)		(2,014	)		(37,329	)
Loss before provision for income taxes		(1,925,064	)		(26,788	)		(3,071,543	)		(1,241,364	)
Income tax (expense) benefit		(6,351,130	)		(20,100	)		(6,075,130	)		279,999
Net loss	$	(8,276,194	)	$	(46,888	)	$	(9,146,673	)	$	(961,365	)
Net loss per share:
Basic	$	(0.62	)	$	(0.00	)	$	(0.69	)	$	(0.08	)
Diluted	$	(0.62	)	$	(0.00	)	$	(0.69	)	$	(0.08	)
Number of weighted average shares outstanding:
Basic		13,256,570			12,120,698			13,253,551			12,081,328
Diluted		13,256,570			12,120,698			13,253,551			12,081,328

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

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CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2022 and 2021

(UNAUDITED)

					Additional						Total
	Common Stock				Paid-in			Accumulated			Stockholders’
	Shares		Amount		Capital			Deficit			Equity
Balance at December 31, 2021		13,248,024	$	13,248	$	41,318,917		$	(17,371,665	)	$	23,960,500
Stock compensation expense for equity awards granted to employees and directors		-		-		191,161			-			191,161
Restricted stock units exercised		8,546		8		(8	)		-			-
Net loss		-		-		-			(870,479	)		(870,479	)
Balance at March 31, 2022		13,256,570	$	13,256	$	41,510,070		$	(18,242,144	)	$	23,281,182
Stock compensation expense for equity awards granted to employees and directors		-		-		178,415			-			178,415
Net loss		-		-		-			(8,276,194	)		(8,276,194	)
Balance at June 30, 2022		13,256,570	$	13,256	$	41,688,485		$	(26,518,338	)	$	15,183,403

					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	)		-			-
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 for equity awards granted to employees and directors		-		-		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

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

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CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net loss	$	(9,146,673	)	$	(961,365	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation		85,352			95,882
Amortization of intangible assets		526,061			681,056
Change in net deferred tax assets		6,060,129			(66,420	)
Bad debt expense		-			20,625
Stock compensation for equity awards granted to employees and directors		369,576			566,709
Change in valuation of contingent earn-out		-			(1,300,000	)
Other		-			(17,911	)
Changes in operating assets and liabilities:
Accounts receivable		(402,403	)		71,954
Unbilled services		(188,066	)		17,682
Prepaid and other current assets		517,299			361,721
Income taxes receivable		1,433,931			(236,590	)
Deposits		-			17,210
Accounts payable and accrued expenses		(169,517	)		(465,474	)
Accrued compensation and benefits		(763,185	)		(312,117	)
Deferred revenue		(45,647	)		259,157
Earnout liability		(247,444	)		-
Net cash used for operating activities		(1,970,587	)		(1,267,881	)
Cash flows from investing activities:
Purchases of property and equipment		(51,491	)		(38,696	)
Net cash used for investing activities		(51,491	)		(38,696	)
Cash flows from financing activities:
Payments on promissory note to related party		(140,625	)		(281,250	)
Net cash used for financing activities		(140,625	)		(281,250	)
Net change in cash and cash equivalents		(2,162,703	)		(1,587,827	)
Cash and cash equivalents, beginning of period		3,575,682			5,613,654
Cash and cash equivalents, end of period	$	1,412,979		$	4,025,827

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

6

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

	Six Months Ended June 30,
	2022			2021
Supplemental disclosure of cash flow information:
Interest paid	$	1,818		$	23,209
Income taxes (refunded) paid	$	(1,418,931	)	$	23,012

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(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 (the “Commission” or the “SEC”). 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, 2021, as filed with the SEC on March 28, 2022.

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.

On May 23, 2022, we entered into the Merger Agreement (defined below) as described in Note 2 to the condensed consolidated financial statements below.

Liquidity and Capital Resources

As of June 30, 2022, our cash balance was $1.4 million, current assets minus current liabilities was positive $2.4 million and we have no long-term liabilities. In April of 2022 we received a $1.4 million tax refund and in August of 2022 we delivered a revolving promissory note to Clearwater (defined below) in the principal amount not to exceed $750,000 in connection with the Clearwater Revolving Loan (defined below), as described in Note 10 to the condensed consolidated financial statements below. 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:

· The pace at which we choose to invest resources in growing our business, both organically and through acquisition or other transactions;

· 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 lingering economic effects of the COVID-19 pandemic 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; and

8

· The continued economic uncertainty, including related to the COVID-19 pandemic, the conflict in Ukraine and related sanctions against Russia and Belarus, and inflationary pressures (including specifically, but not limited to, human capital costs which are essential to CynergisTek’s business), as well as the impact that such uncertainty has had, and could continue to have, on CynergisTek’s customers and industry and business and operating results.

· The success or failure to complete the Merger and the potential impact that the Merger Agreement may be terminated under certain circumstances that requires us to pay Clearwater a termination fee of $710,000; the outcome of any legal proceedings that may be instituted against us and others related to the Merger Agreement; risks that the proposed Merger disrupts our current operations or affects our ability to retain or recruit key employees; the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger; risks related to the Merger diverting management’s or employees’ attention from ongoing business operations; risks that our stock price may decline significantly if the Merger is not completed.

We have historically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with cash from operations, proceeds from the issuances of our common stock and other financing arrangements. As of the date of this Report on Form 10-Q, we are generating negative cash from operations and our overall revenue and business levels have been impacted by the COVID-19 pandemic over the past twenty-four months. Our customer base is heavily concentrated in the healthcare provider space. The healthcare industry has experienced financial and operational disruption due to the pandemic. Sales cycles are longer, cybersecurity projects have been delayed and budgets have been constrained as healthcare providers focus on patient care and navigating the pandemic. If the pandemic continues or there are resurgences in 2022 and beyond that impact our customers’ operations and resources available for cybersecurity and privacy projects, our cash flows, financial position and operating results for fiscal year 2022 and beyond could be negatively impacted.

During 2020 and 2021, we took actions to reduce expenses, conserve cash, and raise additional capital. During 2021, we raised $1.4 million in additional capital through an “at-the-market” or ATM offering. In addition, we received a $2.8 million PPP Loan (as described in Note 9 to the condensed consolidated financial statements below) which was fully forgiven in August 2021. We also received approximately $0.7 million per quarter in employee retention tax credits in the first three quarters of 2021 and a $1.4 million tax refund in April 2022. With the proceeds from the tax refund, PPP Loan and the employee retention tax credits, we were able to minimize staff reductions in the areas of Sales and Delivery, our primary customer facing roles, to lessen the impact to our customers during this time of heightened security risks for the healthcare industry. If necessary, we could further reduce personnel and other variable and semi-variable costs to conserve cash and operate as a going concern. However, those actions if required, could negatively impact our ability to grow the business as well as the overall long-term outlook of the business.

We recently delivered a revolving promissory note in the principal amount up to $750,000 to Clearwater which allows the Company to draw upon the available credit in increments of at least $50,000 as and when needed, as described in Note 10 to the condensed consolidated financial statements below.

We believe that our existing sources of liquidity, including cash and cash equivalents, the ability to raise equity under our effective Registration Statement on Form S-3, the $750,000 Clearwater Revolving Loan as well as our ability to manage the business to decrease expenses, if necessary, will be sufficient to meet our projected capital needs for at least the next twelve months. If the Merger does not consummate in the short-term, as we execute our plans over the next twelve months, we intend to carefully monitor the impact of growth initiatives on our operating expenses, working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. Based on the Company’s current liquidity, and its potential merger-related costs, including payments which would be accelerated under the revolving promissory note if the merger were not consummated, it is anticipated that the Company would be required to raise additional capital to meet its obligations and such capital may not be available, or may not be available on acceptable terms at that time. In the event that capital is not available, we may then have to scale back operations, reduce expenses, and/or curtail future plans to manage our liquidity and capital resources. However, we cannot provide assurance that we will be able to raise additional capital. The lingering impact of the COVID-19 pandemic, the conflict in Ukraine and related sanctions against Russia and Belarus, and inflationary pressures (including specifically, but not limited to, human capital costs which are essential to CynergisTek’s business), as well as the impact that such uncertainty has had, and could continue to have, on CynergisTek’s customers and industry and business and operating results create uncertainty and volatility in the financial markets which may impact our operations and our ability to access capital and/or the terms under which we can do so.

9

The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

2. PENDING MERGER WITH CLEARWATER COMPLIANCE LLC

On May 23, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clearwater Compliance LLC, a Tennessee limited liability company ( “Clearwater”), and Clearwater Compliance Acquisition Company I, a Delaware corporation and a wholly owned subsidiary of the Clearwater (the “Merger Sub”). Clearwater is a portfolio company of funds affiliated with Altaris Capital Partners, LLC. The Merger Agreement provides, subject to its terms and conditions, for the acquisition of the Company by Clearwater through the merger of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Clearwater (the “Merger”).

As a result of the Merger, each share of common stock of the Company (“Common Stock”) that is issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares owned by any subsidiary of the Company, the Merger Sub, Clearwater or any other subsidiary of Clearwater immediately prior to the Effective Time (all of which will be canceled) and shares held by any holder who is entitled to, and who has perfected, appraisal rights under Delaware law) will be automatically converted into the right to receive cash in an amount of $1.25 per share, without interest, subject to any required withholding of taxes (the “Merger Consideration”). Additionally, each outstanding and unexercised Company stock option at the Effective Time shall vest in full and automatically be canceled and converted into the right to receive the excess, if any, of the Merger Consideration over the exercise price per share of such stock option; provided that, in the event that the exercise price of any such stock option is equal to or greater than the Merger Consideration, such stock option will be canceled, without any consideration being payable in respect thereof and have no further force or effect; and each Company restricted stock unit that is then outstanding and unvested shall vest in full and automatically be canceled and converted into the right to receive the Merger Consideration. Also, at or prior to the Effective Time, any outstanding but unexercised warrants to purchase Common Stock shall be canceled and, in certain circumstances, payment therefor will be paid to such warrant holders in accordance with the terms of their respective warrants.

In connection with the negotiation and execution of the Merger Agreement, the Company has incurred legal, consulting and accounting fees of approximately $406,000 through the quarter ended June 30, 2022.

A special meeting of stockholders of the Company will be held at 3:00 p.m. Central Time on August 31, 2022, to approve and adopt the Merger Agreement and approve the Merger, among other matters.

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an amendment to the guidance on the measurement of credit losses on financial instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured and amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The guidance is effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for annual periods after December 15, 2018. Management does not expect the impact from this guidance will have a material impact on our consolidated financial statements.

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4. DEFERRED COMMISSIONS

Our incremental costs of obtaining a contract, which consist of sales commissions, are deferred and amortized over the period of contract performance. Deferred commissions are included in prepaid and other current assets in our consolidated balance sheets. We had $553,000 and $760,000 of unamortized deferred commissions as of June 30, 2022, and December 31, 2021, respectively. We had $241,000 and $406,000 of commissions expense for the three and six months ended June 30, 2022, respectively. Commissions expense for the three and six months ended June 30, 2021, was $184,000 and $367,000, respectively.

5. PROPERTY AND EQUIPMENT

A summary of property and equipment follows:

	June 30, 2022			December 31, 2021
Furniture and fixtures	$	235,245		$	235,245
Computers and office equipment		955,347			903,856
Right of use assets		-			214,446
Property and equipment at cost		1,190,592			1,353,547
Less accumulated depreciation and amortization		(1,025,895	)		(1,109,756	)
	$	164,697		$	243,791

6. LEASES

We previously leased approximately 9,600 square feet of office space in Austin, Texas. In March 2020, we amended this lease reducing the office space to 5,000 square feet and extended the lease term to May 31, 2022. We extended the lease term to May 31, 2023. We leased approximately 3,700 square feet of office space in Minneapolis, Minnesota. This lease term expired on January 31, 2022 and we no longer use this office space since the employees who worked from this location are now working remote. We leased approximately 18,000 square feet of office space in Mission Viejo, California. This lease expired in April 2021. During the first quarter of 2019, we subleased this space to two subtenants. The terms of these subleases ended concurrently with the end of our lease obligation in April 2021.

We used a discount rate of 5.5% in determining our operating lease liabilities, which represented our incremental borrowing rate. Short-term leases with initial terms of twelve months or less are not capitalized.

We determine if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.

Right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. Certain lease agreements contain extension options; however, we have not included such options as part of right-of-use assets and lease liabilities because we originally did not expect to extend the leases. We measure and record a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate implicit in the lease is not known, we measure the right-of-use assets and lease liabilities using a discount rate equal to our estimated incremental borrowing rate for loans with similar collateral and duration.

For all asset classes, we elected to (i) not recognize a right-of-use asset and lease liability for leases that we leased with a term of 12 months or less and (ii) not separate non-lease components from lease components, and we have accounted for combined lease and non-lease components as a single lease component.

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Operating lease expense was comprised of the following:

	Three Months Ended June 30,					Six Months Ended June 30,
	2022		2021			2022		2021
Operating lease cost	$	38,790	$	82,740		$	78,937	$	266,536
Sublet income		-		(19,954	)		-		(148,491	)
Net operating lease cost	$	38,790	$	62,786		$	78,937	$	118,045

7. INTANGIBLE ASSETS

Intangible assets are amortized over expected useful lives ranging from 1.5 to 10 years and consist of the following:

	June 30, 2022							December 31, 2021
	Carrying Amount		Accumulated Amortization and Impairment			Net Book Value		Carrying Amount		Accumulated Amortization and Impairment			Net Book Value
Acquired technology	$	10,100,000	$	(6,254,371	)	$	3,845,629	$	10,100,000	$	(5,814,486	)	$	4,285,514
Customer relationships		4,650,000		(4,553,529	)		96,471		4,650,000		(4,517,353	)		132,647
Trademarks		2,300,000		(2,066,670	)		233,330		2,300,000		(2,016,670	)		283,330
Total	$	17,050,000	$	(12,874,570	)	$	4,175,430	$	17,050,000	$	(12,348,509	)	$	4,701,491

8. DEFERRED REVENUE

We record deferred revenues when amounts are billed to customers, or cash is received from customers, in advance of our performance. During the three months ended June 30, 2022 and 2021, $575,000 and $654,000, respectively, of managed services revenues were recognized, that were included in deferred revenue at the beginning of the respective periods. During the three months ended June 30, 2022 and 2021, $276,000 and $243,000, respectively, of consulting and professional services revenues were recognized, that were included in deferred revenue at the beginning of the respective periods.

During the six months ended June 30, 2022 and 2021, $833,000 and $798,000, respectively, of managed services revenues were recognized, that were included in deferred revenue at the beginning of the respective periods. During the six months ended June 30, 2022 and 2021, $681,000 and $260,000, respectively, of consulting and professional services revenues were recognized, that were included in deferred revenue at the beginning of the respective periods.

9. PAYCHECK PROTECTION PROGRAM LOAN

On April 20, 2020, we received $2.8 million in loan funding from the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), established pursuant to the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note issued by the Company (the “Note”) in favor of BMO Harris Bank N.A.

The Company used the PPP Loan proceeds to cover payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

Under the terms of the Note and the PPP Loan, interest accrued on the outstanding principal at the rate of 1.0% per annum. The term of the Note was two years, unless sooner provided in connection with an event of default under the Note. To the extent the PPP Loan amount was not forgiven, the Company would have been obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note, until the maturity date. The Company had not started making interest payments prior to its notice of forgiveness decision received from the SBA in August 2021. Details regarding the Note can be found in our Current Report on Form 8-K filed on April 20, 2020.

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The Company recognized interest charges of approximately $7,000 and $14,000, respectively for the three and six months ended June 30, 2021. The Company received notice from the SBA in August 2021 that the full principal balance and related interest were forgiven.

10. PROMISSORY NOTES

In connection with the acquisition of CTEK Security, Inc. (formerly CynergisTek, Inc.), we issued a promissory note totaling $4,500,000 to Michael McMillan (the “Seller Note”). In March 2018, the Company repaid $2,250,000 plus accrued interest on the Seller Note and agreed to amend and restate the Seller Note in the remaining principal amount of $2,250,000. The Seller Note bore interest at a rate of 8% per annum, provided for quarterly payments of principal and interest and matured on March 31, 2022. As of June 30, 2022, and December 31, 2021, the outstanding principal balance due under the Seller Note was $0 and $0.1 million, respectively.

Interest charges associated with the Seller Note totaled approximately $0 and $2,000, respectively for the three and six months ended June 30, 2022, and $10,000 and $23,000, respectively for the three and six months ended June 30, 2021.

In August of 2022, we issued a revolving promissory note in a principal amount of up to $750,000 to Clearwater (the “Clearwater Note”). The Clearwater Note bears interest at a rate of 10.0% per annum and provides for quarterly payments of principal and interest. CynergisTek may make advances under the Clearwater Note in such amounts and at such times as we request from time to time in increments of at least $50,000, but not more than $750,000 in the aggregate (“the Clearwater Revolving Loan”).

The Clearwater Note matures and any remaining outstanding principal balance and all accrued and unpaid interest shall become due and payable upon the earliest to occur of (i) the five-year anniversary of the date hereof, (ii) the termination of the Merger Agreement, or (iii) the incurrence by CynergisTek or any of its subsidiaries of any debt of any kind whatsoever from a third party, other than payables incurred in the ordinary course of business; provided, however, that (x) if the Merger Agreement is terminated pursuant to Sections 7.1(a), 7.1(b), 7.1(c), 7.1(d), or 7.1(g) of the Merger Agreement, then all outstanding principal and interest under the Clearwater Note shall be due and payable by the 60th day following such termination; and (y) if the Merger Agreement is terminated in connection with the entry into an Acquisition Transaction (as such term is defined in the Merger Agreement), then CynergisTek shall be required to repay all outstanding interest and principal then due under the Clearwater Note as a condition to, and prior to or concurrently with, the termination of the Merger Agreement by CynergisTek.

11. REVENUES

Below is a summary of our revenues disaggregated by revenue source.

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Managed services	$	2,152,315	$	2,184,051	$	4,503,343	$	4,608,661
Consulting and professional services		1,791,079		1,691,092		4,100,619		3,440,003
Net revenues	$	3,943,394	$	3,875,143	$	8,603,962	$	8,048,664

12. WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS

Warrant Issued for Securities Purchase Agreement

On April 3, 2020, we entered into a Securities Purchase Agreement (“Securities Purchase Agreement “) with Horton Capital Management, LLC (“Horton”) which provided that Horton was committed to purchase up to an aggregate of $2.5 million of shares of the Company’s common stock over the term of the agreement, at the election of the Company. The Stock Purchase Agreement expired on March 31, 2021. No purchases were made under the Securities Purchase Agreement.

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Upon signing the agreement, the Company issued Horton a warrant (the “Horton Warrant”) to purchase up to 500,000 shares of common stock in consideration of Horton’s obligation to purchase the shares, at an exercise price of $2.50 per share, subject to certain anti-dilution adjustments as set forth in the warrant. The fair value of this warrant of $0.4 million was determined using the Black-Scholes option-pricing model and was expensed during the second quarter of 2020.

During 2020 and 2021, the Company issued common stock under the Equity Distribution Agreement that resulted in required anti-dilution adjustments. These adjustments increased the number of shares under the Horton Warrant to 524,170 and reduced the exercise price to $2.38. The resulting difference in fair value of the Horton Warrant was $14,000, determined using the Black-Scholes option-pricing model and recorded as a deemed dividend in our consolidated statements of stockholders’ equity. As the Company has an accumulated deficit, the deemed dividends were recorded within additional paid-in capital.

The Horton Warrant provides that in the event of a fundamental transaction, including the consolidation or merger of CynergisTek with or into another person (such as the Merger as described in Note 2 to the condensed consolidated financial statements above), CynergisTek may elect to purchase the Horton Warrant from the holder thereof by paying an amount of cash equal to the Black Scholes Value (as determined based on the Black and Scholes Option Pricing Model obtained from the “OV” function on a Bloomberg Terminal as of the day of consummation of the applicable fundamental transaction, as described in the Horton Warrant) of the remaining unexercised portion of the Horton Warrant, subject to a cap of $300,000. Because the actual Black Scholes Value of the remaining unexercised portion of the Horton Warrant is projected to exceed the cap, CynergisTek will be required, prior to the Merger, to purchase or cancel the Horton Warrant in exchange for payment of $300,000. The payment of such amount for the cancellation of the Horton Warrant has been included in the overall equity value of the proposed Merger transaction.

The detailed terms and conditions of the Horton Securities Purchase Agreement and the Horton Warrant can be found in the documents, which were included as Exhibits 10.1 and 10.3, respectively, to our Current Report on Form 8-K, filed with the SEC on April 7, 2020.

Below is a summary of warrant activities during the six-month period ended June 30, 2022:

Warrants	Shares		Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2021		601,949	$	2.39		7.29	$	-
Granted		-		-		-		-
Exercised		-		-		-		-
Canceled		-		-		-		-
Outstanding at June 30, 2022		601,949	$	2.46		6.82	$	-
Exercisable at June 30, 2022		601,949	$	2.46		6.82	$	-

2020 Equity Incentive Plan

The 2020 Equity Incentive Plan provides for a total number of shares available for issuance of 3,745,621 shares of our common stock, and it provides for the granting of stock options, stock appreciation rights, restricted stock units and restricted stock to our employees, members of the Board of Directors and service providers. As of June 30, 2022, there were 211,000 shares available for issuance under the 2020 Plan.

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Below is a summary of stock option activities during the six-month period ended June 30, 2022:

Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2021		960,838		$	2.11		8.51	$	-
Granted		-			-		-		-
Exercised		(1,995	)		1.08		-		-
Canceled		(76,340	)		1.90		-		-
Outstanding at June 30, 2022		882,503		$	1.87		8.22	$	-
Exercisable at June 30, 2022		278,503		$	2.05		6.77	$	-

Each stock option (whether vested or unvested) that is outstanding as of immediately prior to the Merger as described in Note 2 to the condensed consolidated financial statements above shall vest in full effective immediately prior to the Merger and shall automatically be canceled and converted into the right to receive an amount in cash, without interest, equal to the product of (i) the total number of shares of CynergisTek common stock underlying such stock option, multiplied by (ii) the excess, if any, of the Merger Consideration over the applicable exercise price per share of such stock option. Because the applicable exercise price of all stock options is greater than the Merger Consideration, all stock options will be canceled at the time of the Merger without any consideration.

Below is a summary of restricted stock unit activity during the six-month period ended June 30, 2022:

Restricted Stock Units	Shares			Weighted Average Grant Date Fair Value per Share		Weighted Average Vesting Period in Years
Non-vested at December 31, 2021		492,500		$	2.34		0.98
Granted		75,000			1.09
Vested		(114,050	)		2.78
Canceled and forfeited		(4,000	)		2.92
Non-vested at June 30, 2022		449,450		$	1.98		1.09

There are 232,800 shares of restricted stock units which have vested but had not yet been issued as of June 30, 2022.

Each restricted stock unit that is outstanding and unvested as of immediately prior to the Merger shall vest in full, effective immediately prior to the Merger, and shall automatically be canceled and converted into the right to receive from an amount in cash, without interest, equal to the product of (i) the aggregate number of shares of CynergisTek common stock underlying the restricted stock unit multiplied by (ii) the Merger Consideration.

For the three and six months ended June 30, 2022 and 2021, stock-based compensation and other equity instrument related expenses recognized in the consolidated statements of operations were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Cost of revenues	$	46,401	$	39,002	$	86,370	$	(3,191	)
Sales and marketing expense		18,807		34,850		27,149		63,831
General and administrative expense		113,207		264,420		256,057		506,069
Total stock-based compensation expense	$	178,415	$	338,272	$	369,576	$	566,709

13. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain. A valuation allowance, in an amount equal to the net deferred tax asset of $6,853,130 as of June 30, 2022 has been established to reflect these uncertainties.

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14. BASIC AND DILUTED NET LOSS PER SHARE

Basic net loss per share is calculated using the weighted average number of shares of our common stock issued and outstanding during a certain period and is calculated by dividing net loss by the weighted average number of shares of our common stock issued and outstanding during such period. Diluted net loss per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if-converted method for secured convertible notes, and the treasury stock method for options and warrants. Diluted net loss per share does not include potentially dilutive securities because such inclusion in the computation would be anti-dilutive.

For the three and six months ended June 30, 2022, potentially dilutive securities consisted of options and warrants to purchase 1,484,452 shares of common stock at prices ranging from $1.44 to $3.30 per share. Of these potentially dilutive securities, none of the shares to purchase common stock from the options and warrants are included in the computation of diluted earnings per share, because the effect of including the remaining instruments would be anti-dilutive. Also excluded from potentially dilutive securities are 449,450 shares of non-vested restricted stock units and 232,800 shares of restricted stock units which vested but had not been issued as of June 30, 2022.

For the three and six months ended June 30, 2021, potentially dilutive securities consisted of options and warrants to purchase 1,705,199 shares of common stock at prices ranging from $1.08 to $4.86 per share. Of these potentially dilutive securities, none of the shares to purchase common stock from the options and warrants are included in the computation of diluted earnings per share, because the effect of including the remaining instruments would be anti-dilutive. Also excluded from potentially dilutive securities are 741,850 shares of non-vested restricted stock units and 125,000 shares of restricted stock units which have vested but had not been issued as of June 30, 2021.

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Numerators:
Net loss attributable to common stockholders	$	(8,276,194	)	$	(46,888	)	$	(9,146,673	)	$	(967,199	)
Denominator:
Denominator for basic calculation weighted average shares		13,256,570			12,120,698			13,253,551			12,081,328
Dilutive common stock equivalents:
Options and warrants		-			-			-			-
Restricted stock units vested but not issued		-			-			-			-
Denominator for diluted calculation weighted average shares		13,256,570			12,120,698			13,253,551			12,081,328
Net loss per share:
Basic	$	(0.62	)	$	(0.00	)	$	(0.69	)	$	(0.08	)
Diluted	$	(0.62	)	$	(0.00	)	$	(0.69	)	$	(0.08	)

15. REMAINING PERFORMANCE OBLIGATIONS

We had remaining performance obligations of approximately $17.4 million as of June 30, 2022. Our remaining performance obligations represent the amount of transaction price for which work has not been performed and revenue has not been recognized. When applying Accounting Standards Codification (“ASC”) Topic 606, with only the non-cancelable portion of these contracts included in our performance obligations we had approximately $15.3 million as of June 30, 2022. We expect to recognize revenue on approximately 94% of the remaining non-cancelable portion of these performance obligations over the next 24 months, with the balance thereafter.

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16. CONCENTRATIONS

Cash Concentrations

At times, cash balances held in financial institutions are in excess of federally insured limits. Management performs periodic evaluations of the relative credit standing of financial institutions and limits the amount of risk by selecting financial institutions with a strong credit standing.

Major Customers

Our largest customer accounted for approximately 15% and 14% of our revenues for the six months ended June 30, 2022 and 2021, respectively. Our largest customer had accounts receivable totaling approximately $164,000 and $95,000 as of June 30, 2022, and December 31, 2021, respectively.

17. EARNOUT LIABILITY – BACKBONE ENTERPRISES

On October 31, 2019, we entered into a Stock Purchase Agreement (the “Backbone Purchase Agreement”) with Backbone Enterprises Inc., a Minnesota corporation (“Backbone”), and its stockholders, (the “Stockholders”), pursuant to which we acquired 100% of the issued and outstanding shares of common stock (the “Shares”) of Backbone from the Stockholders.

Pursuant to the Backbone Purchase Agreement, the aggregate purchase price paid for the Shares consisted of (i) a cash payment of $5.5 million, less certain transaction expenses (the “Cash Consideration”), (ii) the issuance of 491,804 shares of our common stock to the Stockholders, pro rata among the Stockholders in proportion to each Stockholder’s ownership of the Shares, and (iii) an earn-out, pursuant to which the Stockholders may be entitled to an additional $4.0 million based upon the post-closing financial performance of Backbone, to be calculated annually based upon revenue generated by the Backbone business during each year of the three-year earn-out period. The Cash Consideration was subject to adjustment based on closing working capital of Backbone, and $1.5 million of the Cash Consideration was placed into a third-party escrow account by us, against a portion of which we may make claims for indemnification.

There was no earnout paid for the first year of the earnout period. We performed a valuation of the contingent earn-out and marked down the fair value balance from $2.4 million to $1.3 million based on the potential of achieving a portion of the year two and three targets. This resulted in a gain from the reduction of the contingent earnout liability of $1.1 million in 2020. We performed an updated valuation of the contingent earn-out as of June 30, 2021, which resulted in a full write-off of the previous estimate of $1.3 million.

The Company renegotiated the terms of the earnout and as a result performed an updated valuation of the contingent earn-out as of September 30, 2021, which resulted in a recovery from the previous estimate of $0.3 million. As of December 31, 2021 we updated our valuation of the contingent earn-out which resulted in an additional recovery of $0.5 million. The earnout for year two of the earnout period totaled $0.3 million. Total cumulative amount earned for the year three earnout period through June 30, 2022 totaled $359,000 with payments related to year three earnout period during the six months ended June 30, 2022 were $259,000.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, and is subject to the safe harbors created by those sections. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements.

Due to possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Quarterly Report, or to make predictions about future performance based solely on historical financial performance. We disclaim any obligation to update forward-looking statements contained in this Quarterly Report.

Readers should carefully review the risk factors described in this quarterly report and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2021. You should interpret many of the risks identified in these reports as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic and the global economic effect of ongoing geopolitical tensions and related economic sanctions. Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.CynergisTek.com, when such reports are available via the EDGAR system maintained by the SEC at www.sec.gov.

On May 23, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clearwater Compliance LLC, a Tennessee limited liability company ( “Clearwater”), and Clearwater Compliance Acquisition Company I, a Delaware corporation and a wholly owned subsidiary of Clearwater (the “Merger Sub”). Clearwater is a portfolio company of funds affiliated with Altaris Capital Partners, LLC. The Merger Agreement provides, subject to its terms and conditions, for the acquisition of the Company by Clearwater through the merger of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Clearwater (the “Merger”).

As a result of the Merger, each share of common stock of the Company (“Common Stock”) that is issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares owned by any subsidiary of the Company, the Merger Sub, Clearwater or any other subsidiary of Clearwater immediately prior to the Effective Time (all of which will be canceled) and shares held by any holder who is entitled to, and who has perfected, appraisal rights under Delaware law) will be automatically converted into the right to receive cash in an amount of $1.25 per share, without interest, subject to any required withholding of taxes (the “Merger Consideration”). Additionally, each outstanding and unexercised Company stock option at the Effective Time shall vest in full and automatically be canceled and converted into the right to receive the excess, if any, of the Merger Consideration over the exercise price per share of such stock option; provided that, in the event that the exercise price of any such stock option is equal to or greater than the Merger Consideration, such stock option will be canceled, without any consideration being payable in respect thereof and have no further force or effect; and each Company restricted stock unit that is then outstanding and unvested shall vest in full and automatically be canceled and converted into the right to receive the Merger Consideration. Also, at or prior to the Effective Time, any outstanding but unexercised warrants to purchase Common Stock shall be canceled and, in certain circumstances, payment therefor will be paid to such warrant holders in accordance with the terms of their respective warrants.

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In connection with the negotiation and execution of the Merger Agreement, the Company has incurred legal, consulting and accounting fees of approximately $406,000 through the quarter ended June 30, 2022.

A special meeting of stockholders of the Company will be held at 3:00 p.m. Central Time on August 31, 2022, to approve and adopt the Merger Agreement and approve the Merger, among other matters.

OVERVIEW

We are engaged in the business of helping U.S. based companies in highly regulated industries, including healthcare, be prepared to handle unforeseen cyber threats, comply with regulations, and gain the confidence that their efforts are strengthening their security posture and building resilience. This is achieved through our cybersecurity, privacy, compliance and audit services.

CynergisTek was born in healthcare and is one of the few consulting and advisory companies focused on converging security and privacy with a methodology to validate the rigor and effectiveness of the programs as a managed service. We believe that our years of experience of understanding our clients’ unique challenges allows us to provide our customers with services designed around industry best practices to improve security controls, policies and procedures and to protect sensitive information. Our team of subject matter experts and consultants are comprised of knowledgeable professionals who have learned their craft both in the classroom and through years of practical on-the-job experience, including as policy makers, attorneys and leaders in cybersecurity, privacy, compliance and audit.

Our services are grouped to facilitate and assist our clients in implementing their programs, those groups follow a cyclical approach: assess, build, manage, and validate. These services are designed to meet the client where they are in their security journey as recurring managed services under long-term contracts structured to provide a sustainable and growing program, or under shorter duration consulting or professional services engagements.

· Assess - identify, measure, and test security and privacy risk of an organization’s readiness and verify and validate their programs meet compliance and business objectives through IT audits, technical testing, and risk and program assessments.

· Build - develop policies and procedures and playbooks to help build out a fully comprehensive risk management program and provide resources to help organizations prioritize, implement and execute initiatives to strengthen their security and privacy programs.

· Manage - provide on-going management and oversight of specific components of an organization’s security and privacy programs to address or give alerts when an issue arises and to offer our expertise that they need to accelerate the effectiveness of their programs.

· Validate - verify the processes, people, and technology are working effectively and provide insight to the ROI of an organization’s security investment through advanced services requiring highly experienced resources and/or technology to deliver.

Impact of COVID-19 Pandemic and Recent Capital Markets Disruption

U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.

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Additionally, Russia’s prior annexation of Crimea, recent recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine have led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) payment system. Additional 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.

Additionally, the markets, and more specifically healthcare, have experienced an increase in pressures from rising inflation, rising interest rates, lowering bond rates and the impact to their revenues and operating margins. The resultant effect of these pressures is healthcare entities have slowed down their spend on things considered not mission critical or discretionary. Cybersecurity is discretionary as it relates to an organization’s propensity for managing risk, but it has a regulatory component which assures that organizations will continue to spend on cybersecurity.

The ongoing COVID-19 pandemic and ensuing governmental responses has caused significant uncertainty in the United States and global economies as well as the markets we serve has negatively impacted and could further materially adversely affect our business, financial condition and results of operations.

COVID-19 cases (including the spread of variants and mutant strains, such as the omicron variant) continue to surge in certain parts of the world and have resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. We remain unable to accurately predict the full impact that COVID-19 will have on our results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures. Our compliance with containment and mitigation measures materially impacted our day-to-day operations, and there can be no guaranty that the pandemic will not disrupt our business and operations or impair our ability to implement our business plan successfully.

More generally, the pandemic raises the possibility of an extended global economic downturn and has caused volatility in financial markets, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is contained. For example, we may be unable to collect receivables from those customers significantly impacted by COVID-19. Also, a decrease in bookings in a given period could negatively affect our revenues in future periods, particularly if experienced on a sustained basis. The pandemic may also have the effect of heightening many of the other risks described in these Risk Factors and the Risk Factors set forth in the Company’s 2021 Form 10-K, particularly those risks associated with our customers.

Our current and potential customers’ businesses, specifically in the healthcare industry, have been directly impacted both financially and operationally in many ways by the pandemic. During this time, cybersecurity risks in healthcare have increased particularly with increased adoption of remote access and increased adoption of telehealth, as well as decreased budgets, diversion of resources and focus from all areas not directly related to patient care. In the current periods, the pandemic has led to customers delaying or deferring cybersecurity buying decisions, has limited our ability to visit customers and potential customers, and has resulted in an overall decrease in our orders, bookings and revenues in 2022 and 2021.

We took steps to reduce expenses throughout the Company over the past twenty-four months, including workforce reductions, substantially reducing Company travel, trade shows and other business meetings and decreasing expenditures. We have modified our business practices and implemented certain policies at our offices in accordance with best practices to accommodate, and at times mandate, remote work practices, including restricting employee travel, modifying employee work locations, and cancelling attendance at events and conferences. In addition, we have adapted new processes for interactions with our customers to safely manage our operations. Many of our customers have made similar modifications. If necessary, we may take further actions in the best interests of our employees, customers, partners and suppliers. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19, in which case our employees may become sick, our ability to perform critical functions could be harmed, and our business and operations could be negatively impacted.

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With less resources allocated to cybersecurity in healthcare over the past twenty-four months, we believe risks are increasing and expect the industry will need to increase attention and spend on cybersecurity in the near future. However, the ultimate duration and impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is uncertain. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business, and we anticipate that our results of operations in future periods may continue to be adversely impacted by the COVID-19 pandemic and its negative effects on global economic conditions.

As we expect the industry to begin emerging from the pandemic, we have begun to increase our sales and marketing efforts and building our sales and operational teams for growth. However, our current and potential customers’ businesses could continue to be disrupted or they could seek to limit spending due to decreased budgets, reduced access to credit or various other factors, any of which could negatively impact the willingness or ability of such customers to order new, or any, services with us and ultimately adversely affect our revenues, as well as negatively impact the payment of accounts receivable and collections and potentially lead to write-downs or write-offs.

The ultimate duration and impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which remain uncertain and cannot be predicted at this time. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable.

Impact if the Merger Agreement is Not Approved by Stockholders or if the Merger is Not Completed for Any Other Reason

If the Merger Agreement is not approved and adopted by stockholders and the Merger is not approved by stockholders, or if the Merger is not completed for any other reason:

· CynergisTek may be required to repay the full outstanding amount of the principal and interest owing under the Clearwater Revolving Loan concurrent with the termination of the Merger Agreement or within 60 days thereafter (depending on the circumstances of such termination).

· under certain specified circumstances, CynergisTek will be required to pay Clearwater a termination fee of $710,000, upon the termination of the Merger Agreement;

· (a) CynergisTek will remain an independent public company; (b) CynergisTek common stock will continue to be listed and traded on NYSE American and registered under the Exchange Act; and (c) CynergisTek will continue to file periodic reports with the SEC;

· the stockholders of CynergisTek will not be entitled to, nor will they receive, any payment for their respective shares of CynergisTek common stock pursuant to the Merger Agreement;

· the price of CynergisTek common stock may decline significantly, and if that were to occur, it is uncertain when, if ever, the price of CynergisTek common stock would return to the price at which it trades as of the date of this report;

· we anticipate that (a) management will operate the business in a manner similar to that in which it is being operated today and (b) stockholders will be subject to similar types of risks and uncertainties as those to which they are currently subject, some of which have been described in this quarterly report, and in CynergisTek’s filings with the SEC, including in our most recent filing on Form 10-K, as amended, including, but not limited to, risks and uncertainties with respect to CynergisTek’s business, prospects and results of operations, as such may be affected by, among other things, the highly competitive industry in which CynergisTek operates and economic conditions;

· the CynergisTek Board of Directors will continue to evaluate and review CynergisTek’s business operations, strategic direction and capitalization, among other things, and will make such changes as are deemed appropriate; irrespective of these efforts, it is possible that no other transaction acceptable to the CynergisTek Board of Directors will be offered or that CynergisTek’s business, prospects and results of operations will be adversely impacted.

Our common stock currently trades on the NYSE American exchange under the stock symbol “CTEK”.

Where appropriate, references to “CynergisTek,” the “Company,” “Redspin,” “we,” “us,” or “our” include CynergisTek, Inc., a Delaware corporation and its wholly-owned subsidiaries, CTEK Solutions, Inc., a California corporation, CTEK Security, Inc., a Texas corporation, Delphiis, Inc., a California corporation and, Backbone Enterprises, Inc., a Minnesota corporation.

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RESULTS OF OPERATIONS

For the Three Months Ended June 30, 2022, Compared to the Three Months Ended June 30, 2021

Revenue

Revenue increased $0.1 million to $3.9 million for the three months ended June 30, 2022, as compared to the same period in 2021. Managed Services revenue was comparable at $2.1 million and Consulting and professional services increased $0.1 million to $1.8 million due to certain projects being completed during the quarter. The Company is starting to see extended sales cycles and delays in renewals as a result of recent economic conditions that could negatively impact future revenue growth.

Cost of Revenue

Cost of revenue consists primarily of salaries and related expenses of direct labor and indirect support staff. Cost of revenue was $2.6 million for the three months ended June 30, 2022, as compared to $2.1 million for the same period in 2021. The increase was due to the prior year benefitting from the $0.5 million employee retention credit provided under the CARES Act.

Gross margin was down 13% to 33% of revenue for the three months ended June 30, 2022. After adjusting for the prior year benefit from the employee retention tax credit, gross margin was comparable at 33% for the same period in 2021.

Sales and Marketing

Sales and marketing expenses include salaries, commissions and expenses for sales and marketing personnel, travel and entertainment, and other selling and marketing costs. Sales and marketing expenses were flat at $1.2 million for the three months ended June 30, 2022 and 2021. This was due to $0.1 million in lower marketing expenses in 2022 offsetting $0.1 million of employee retention tax credits provided under the CARES Act for 2021.

General and Administrative

General and administrative expenses include personnel costs for finance, administration, information systems, general management, facilities expenses, professional fees, legal expenses and other administrative costs including those required to be a publicly traded company. General and administrative expenses increased to $1.7 million for the three months ended June 30, 2022, compared to $1.5 million for the three months ended June 30, 2021. The increase is due to prior year benefitting from a $0.1 million employee retention tax credit, an additional $0.1 million in additional payroll and benefits offset by $0.2 million lower stock-based compensation and $0.2 million increase in professional fees related to the Merger transaction (as described in Note 2 to the condensed consolidated financial statements).

Change in Valuation of Contingent Earn-out

We performed a valuation of the contingent earn-out to the sellers of Backbone Enterprises, Inc. as of June 30, 2021 which resulted in a reduction of the previous estimate of $1,300,000 related to the potential for payout for not meeting earn-out criteria in the final two years of the annual earn-out measurement periods.

Depreciation

Depreciation expense was $37,000 for the three months ended June 30, 2022, compared to $48,000 for the same period in 2021.

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Amortization of Acquisition-Related Intangibles

Amortization of acquisition-related intangibles was $0.3 million for the three months ended June 30, 2022 and 2021.

Net Interest Expense

Net interest expense for the three months ended June 30, 2022, was $0, compared to net interest expense of $17,000 for the same period in 2021. The decrease was due to a lower outstanding debt balance.

Income Tax

Income tax expense for the three months ended June 30, 2022, was $6.4 million, compared to $20,000 for the same period in 2021. The expense in 2022 is a result of the recording of a valuation allowance against our deferred tax assets from timing differences on recognizing future deductions against taxable income, including NOL carryforwards. Management recorded the valuation allowance given recent consecutive years of losses and its determination that it is more likely that such assets will not be realized in future periods. 2021 amount was based on estimated annual income tax rates we anticipated for the year.

For the Six Months Ended June 30, 2022, Compared to the Six Months Ended June 30, 2021

Revenue

Revenue increased $0.5 million to $8.6 million for the six months ended June 30, 2022, as compared to the same period in 2021. Managed Services revenue was down $0.1 million to $4.5 million. Consulting and professional services increased $0.6 million primarily due to a larger number of consulting projects being completed during this period. The Company is starting to see extended sales cycles and delays in renewals as a result of recent economic conditions that could negatively impact future revenue growth.

Cost of Revenue

Cost of revenue was $5.4 million for the six months ended June 30, 2022, as compared to $4.2 million for the same period in 2021. The increase was due to the prior year benefitting from the $1.0 million employee retention credit provided under the CARES Act, an additional $0.1 million in additional stock compensation and $0.1 million in higher costs associated with third party tools required to deliver our services.

Gross margin was 37% of revenue for the six months ended June 30, 2022. After adjusting for the benefit from the employee retention tax credit, gross margin would have been 38% for the same period in 2021.

Sales and Marketing

Sales and marketing expenses decreased to $2.4 million for the six months ended June 30, 2022, as compared to $2.5 million for the same period in 2021. This was due to $0.2 million of employee retention tax credits benefit provided under the CARES Act for 2021 offset by $0.1 million in lower recruiting costs and $0.2 million in lower marketing and other expenses as we looked to cut costs in 2022.

General and Administrative

General and administrative expenses increased $0.2 million to $3.3 million for the six months ended June 30, 2022, compared to $3.1 million for the same period in 2021. The increase is due to $0.2 million higher in professional fees due to the Merger transaction (as described in Note 2 to the condensed consolidated financial statements) and the prior year benefitting from a $0.2 million employee retention tax credit offsetting $0.2 million lower stock-based compensation.

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Change in Valuation of Contingent Earn-out

We performed a valuation of the contingent earn-out to the sellers of Backbone Enterprises, Inc. as of June 30, 2021, which resulted in a reduction of the previous estimate of $1,300,000 related to the potential for payout for not meeting earn-out criteria in the final two years of the annual earn-out measurement periods.

Depreciation

Depreciation remained relatively consistent at $85,000 for the six months ended June 30, 2022, as compared to $96,000 for the same period in 2021.

Amortization of Acquisition-Related Intangibles

Amortization of acquisition-related intangibles was $0.5 million for the six months ended June 30, 2022, compared to $0.7 million for the six months ended June 30, 2021. Amortization expense decreased over the comparable periods as a portion of the intangible assets are now fully amortized.

Net Interest Expense

Net interest expense for the six months ended June 30, 2022, was $2,000, compared to $37,000 for the same period in 2021. The decrease was due to a lower outstanding debt balance.

Income Tax

Income tax expense for the six months ended June 30, 2022, was $6.1 million, compared to income tax benefit of $0.3 million for the same period in 2021. The expense in 2022 is primarily a result of the recording of a valuation allowance against our deferred tax assets from timing differences on recognizing future deductions against taxable income, including NOL carryforwards. Management recorded the valuation allowance given recent consecutive years of losses and its determination that it is more likely that such assets will not be realized in future periods.

Liquidity and Capital Resources

As of June 30, 2022, our cash balance was $1.4 million, current assets minus current liabilities was positive $2.4 million and we have no long-term liabilities. In April of 2022 we received a $1.4 million tax refund and in August of 2022 we entered in to the Clearwater Revolving Loan (defined below), which we can use to finance ongoing operations and costs related to the Merger as and when needed, as described in Note 10 to the condensed consolidated financial statements above.. 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:

· The pace at which we choose to invest resources in growing our business, both organically and through acquisition or other transactions;

· 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 lingering economic effects of the COVID-19 pandemic 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; and

· The continued economic uncertainty, including related to the COVID-19 pandemic, the conflict in Ukraine and related sanctions against Russia and Belarus, and inflationary pressures (including specifically, but not limited to, human capital costs which are essential to CynergisTek’s business), as well as the impact that such uncertainty has had, and could continue to have, on CynergisTek’s customers and industry and business and operating results.

· The success or failure to complete the Merger and the potential impact that the Merger Agreement may be terminated under certain circumstances that requires us to pay Clearwater a termination fee of $710,000; the outcome of any legal proceedings that may be instituted against us and others related to the Merger Agreement; risks that the proposed Merger disrupts our current operations or affects our ability to retain or recruit key employees; the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger; risks related to the Merger diverting management’s or employees’ attention from ongoing business operations; risks that our stock price may decline significantly if the Merger is not completed.

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We have historically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with cash from operations, proceeds from the issuances of our common stock and other financing arrangements. As of the date of this Report on Form 10-Q, we are generating negative cash from operations and our overall revenue and business levels have been impacted by the COVID-19 pandemic over the past twenty-four months. Our customer base is heavily concentrated in the healthcare provider space. The healthcare industry has experienced financial and operational disruption due to the pandemic. Sales cycles are longer, cybersecurity projects have been delayed and budgets have been constrained as healthcare providers focus on patient care and navigating the pandemic. If the pandemic continues or there are resurgences in 2022 and beyond that impact our customers’ operations and resources available for cybersecurity and privacy projects, our cash flows, financial position and operating results for fiscal year 2022 and beyond could be negatively impacted.

During 2020 and 2021, we took actions to reduce expenses, conserve cash, and raise additional capital. During 2021, we raised $1.4 million in additional capital through an “at-the-market” or ATM offering. In addition, we received a $2.8 million PPP Loan (as described in Note 9 to the condensed consolidated financial statements above) which was fully forgiven in August 2021. We also received approximately $0.7 million per quarter in employee retention tax credits in the first three quarters of 2021 and a $1.4 million tax refund in April 2022. With the proceeds from the tax refund, PPP Loan and the employee retention tax credits, we were able to minimize staff reductions in the areas of Sales and Delivery, our primary customer facing roles, to lessen the impact to our customers during this time of heightened security risks for the healthcare industry. If necessary, we could further reduce personnel and other variable and semi-variable costs to conserve cash and operate as a going concern. However, those actions if required, could negatively impact our ability to grow the business as well as the overall long-term outlook of the business.

We recently signed a $750,000 revolving loan with Clearwater related to the Merger. We issued a revolving promissory note in a principal amount of up to $750,000 to Clearwater (the “Clearwater Note”). The Clearwater Note bears interest at a rate of 10.0% per annum and provides for quarterly payments of principal and interest. CynergisTek may make advances under the Clearwater Note in such amounts and at such times as we request from time to time in increments of at least $50,000, but not more than $750,000 in the aggregate (the “Clearwater Revolving Loan”).

We believe that our existing sources of liquidity, including cash and cash equivalents, the ability to raise equity under our effective Registration Statement on Form S-3, Clearwater Revolving Loan as well as our ability to manage the business to decrease expenses, if necessary, will be sufficient to meet our projected capital needs for at least the next twelve months. If the Merger does not consummate in the short-term, as we execute our plans over the next twelve months, we intend to carefully monitor the impact of growth initiatives on our operating expenses, working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. Based on the Company’s current liquidity, and its potential merger-related costs, including payments which would be accelerated under the revolving promissory note if the merger were not consummated, it is anticipated that the Company would be required to raise additional capital to meet its obligations and such capital may not be available, or may not be available on acceptable terms at that time. In the event that capital is not available, we may then have to scale back operations, reduce expenses, and/or curtail future plans to manage our liquidity and capital resources. However, we cannot provide assurance that we will be able to raise additional capital. The lingering impact of the COVID-19 pandemic, the conflict in Ukraine and related sanctions against Russia and Belarus, and inflationary pressures (including specifically, but not limited to, human capital costs which are essential to CynergisTek’s business), as well as the impact that such uncertainty has had, and could continue to have, on CynergisTek’s customers and industry and business and operating results create uncertainty and volatility in the financial markets which may impact our operations and our ability to access capital and/or the terms under which we can do so.

The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

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Application of Critical Accounting Policies and Estimates

The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which were prepared in accordance with accounting principles generally accepted in the U.S., which is referred to as “GAAP.” The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to stock-based compensation, customer programs and incentives, bad debts, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We consider the following accounting policies to be those most important to the portrayal of our financial condition and those that require the most subjective judgment:

Revenue Recognition and Deferred Revenue

We operate under a consolidated strategy and management structure, deriving revenue from the following sources:

· Managed services

· Consulting and professional services

Revenue is recognized pursuant to Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. Accordingly, revenue is recognized at an amount that reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following 5-step process:

1.	Identify the contract with the customer - A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and the parties are committed to perform, and (iii) we determine that collection of substantially all consideration to which it will be entitled in exchange for services that will be transferred is probable based on the customer’s intent and ability to pay the promised consideration.
2.	Identify the performance obligations in the contract - Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, we apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
3.	Determine the transaction price - The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring services to the customer.

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4.

Allocate the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis. Determination of SSP requires judgment. We determine standalone selling price taking into account available information such as historical selling prices of the performance obligation, overall strategic pricing objective, market conditions and internally approved pricing guidelines related to the performance obligations.

5.

Recognize revenue when (or as) each performance obligation is satisfied - We satisfy performance obligations over time. Revenue is recognized over the time the related performance obligation is satisfied by transferring a promised service to a customer.

Managed Services

Managed services contracts are typically long-term contracts lasting three years. Revenue is earned monthly during the term of the contract, as services are provided at a fixed fee and is recognized ratably over the contract term beginning on the commencement date of the contract. Revenue related to managed services provided is recognized based on the customer utilization of such resources, which management estimates to occur ratably over the customer contract term.

Consulting and Professional Services

Consulting and professional services contracts are typically short-term, project-based services rendered on either a fixed fee or a time and materials basis. These contracts are normally for a duration of less than one year. For fixed fee arrangements, revenue is normally recognized ratably over the term of the project. For time and materials arrangements, revenues are recognized as the services are rendered.

Deferred and Unbilled Revenue

We receive payments from customers based on billing schedules established in our contracts. Deferred revenue primarily consists of billings or payments received in advance of the amount of revenue recognized and such amounts are recognized as the revenue recognition criteria are met. Unbilled revenue reflects our conditional right to receive payment from customers for our completed performance under contracts.

Accounts Receivable Valuation and Related Reserves

We estimate the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability of our customers to make required payments. Management specifically analyzes customer concentration, customer creditworthiness, current economic trends, COVID-19 developments and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We review past due accounts on a monthly basis and record an allowance for doubtful accounts where we deem appropriate.

Impairment Review of Goodwill and Intangible Assets

We periodically evaluate our intangible assets and goodwill relating to acquisitions for impairment. Goodwill is not amortized but is evaluated at least annually at year end for any impairment in the carrying value. We review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and a significant negative industry or economic trend for a sustained period. Goodwill and intangible asset impairment assessments are generally determined based on fair value techniques, including determining the estimated future discounted and undiscounted cash flows over the remaining useful life of the asset. Those models require estimates of future revenue, profits, capital expenditures and working capital for each reporting unit. We estimate these amounts by evaluating historical trends, the current state of the Company’s industries and the economy, current budgets, and operating plans. Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results. Any resulting impairment loss could have a material impact on our financial condition and results of operations.

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Stock-Based Compensation

Under the fair value recognition provisions of the authoritative guidance, stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period, which is the vesting period. Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. We currently use the Black-Scholes option pricing model to determine the fair value of stock options and warrants. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value on the date of the grant. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, stock-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting requirements and those imposed under federal and state tax laws. Deferred taxes are provided for timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes and 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. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. Realization of the deferred tax asset is largely dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Use of our net operating loss deferred assets may be limited by changes in our ownership.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Please see our audited consolidated financial statements and notes thereto which begin on page F-1 of our Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP and please refer to the disclosures in Note 1 of our consolidated financial statements for a summary of our significant accounting policies.

Reference is made to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 28, 2022, for additional discussion of our critical accounting policies and estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.

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ITEM 4. CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including each of such officers as appropriate to allow timely decisions regarding required disclosure.

No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. The Company is continually monitoring and assessing the impact of COVID-19 on its internal controls in an effort to ensure that its internal controls respond to any changes in its operating environment.

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PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS.

As of the date of this filing, except as set forth herein, there have been no material changes to the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Commission on March 28, 2022 (the “2021 Form 10-K”).

We are subject to a number of risks and uncertainties in connection with our Merger Agreement. These risks and uncertainties include the following:

· the inability to complete the Merger due to the failure to obtain stockholder approval or failure to satisfy the other conditions to the completion of the Merger;

· the risk that the Merger Agreement may be terminated under certain circumstances that require us to pay Clearwater a termination fee of $710,000;

· the outcome of any legal proceedings instituted, or that may be instituted, against us and others related to the Merger Agreement;

· risks that the proposed Merger disrupts our current operations or affects our ability to retain or recruit key employees;

· the effect of the announcement or pendency of the Merger on our business relationships, operating results and business generally;

· the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger;

· risks related to the Merger diverting management’s or employees’ attention from ongoing business operations; and

· risks that our stock price may decline significantly if the Merger is not completed.

The Risk Factors set forth herein and in the 2021 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described herein and in the 2021 Form 10-K, could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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ITEM 5. OTHER INFORMATION.

Clearwater Revolving Loan.

CynergisTek and Clearwater have entered into a Guaranty and Security Agreement (the “Security Agreement”) and Revolving Promissory Note (the “Clearwater Note”), each dated August 12, 2022, whereby Clearwater will provide a secured revolving loan of up to $750,000.00 to CynergisTek (the “Clearwater Revolving Loan”). The Security Agreement and Clearwater Note may be referred to collectively as the “Loan Documents”. The Loan Documents provide for a fixed 10.0% annual interest on sums advanced, five-year maturity date for unpaid sums loaned and unpaid interest accrued thereon, and calendar quarterly payments of accrued interest on any sums advanced under the Clearwater Revolving Loan (interest payments commencing on September 30, 2022). CynergisTek may elect to pay all of the interest that is due on any interest payment due date in-kind (which portion, if applicable, shall be added to the outstanding principal amount under the Clearwater Note) upon prior written notice of such election at least five business days prior to such interest payment due date.  Principal of the Clearwater Revolving Loan may be used for any lawful purpose, including CynergisTek’s working capital needs. CynergisTek’s obligations under the Clearwater Note are secured by a first, senior lien on all of CynergisTek’s assets and accounts receivable, as set forth in the Security Agreement.

There is no premium or penalty for pre-payment of sums owed under the Loan Documents. In the event of a default under the Loan Documents, the default interest rate is a fixed rate of 12% annual interest.

The Clearwater Note provides for certain customary events of default, including (i) CynergisTek’s failure to pay any principal amount outstanding under the Clearwater Note; any outstanding interest under the Clearwater Note; or any other amount due under the Clearwater Note, in each case, whether such amount is due by scheduled maturity, required prepayment, acceleration, demand or otherwise, subject to a five-day grace period (except in limited circumstances); (ii) CynergisTek’s breach in any material respect any representation or warranty made by CynergisTek in the Loan Documents; (iii) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed (A) against CynergisTek or any of its subsidiaries, and an adjudication or appointment is made or order for relief is entered, or such proceeding remains undismissed for a period in excess of 60 days, or (B) by CynergisTek or any of its subsidiaries; CynergisTek or any of its subsidiaries makes an assignment for the benefit of creditors; CynergisTek or any of its subsidiaries takes any action to authorize any of the foregoing; or CynergisTek or any of its subsidiaries becomes insolvent or fails generally to pay its debts as they become due; (iv) CynergisTek fails to notify Clearwater of an event of default under the Clearwater Note; or (v) CynergisTek shall, or shall attempt or purport to, revoke any of its obligations under the Clearwater Note, or CynergisTek or any of its subsidiaries shall challenge or contest, in any action, suit or proceeding, the validity or enforceability of any of the Clearwater Note or the perfection or priority of any lien granted to Clearwater. Upon and at any time following the occurrence of any of the foregoing events of default, Clearwater may, at its option, terminate CynergisTek’s right to request and receive advances under the Clearwater Note and/or declare the entire principal, interest and other amounts then outstanding under the Clearwater Note due and payable immediately without notice to CynergisTek, and Clearwater may proceed to enforce payment of the same, except that upon the occurrence of an event of default described in subparagraph (iii) above, the entire principal, interest and other amounts then outstanding under the Clearwater Note shall be due and payable immediately without notice to CynergisTek. In addition, Clearwater may exercise and pursue any and all rights and remedies available to it under the Loan Documents, and all rights and remedies available to Clearwater under applicable law.

The Clearwater Note matures and any remaining outstanding principal balance and all accrued and unpaid interest shall become due and payable upon the earliest to occur of (i) the five-year anniversary of the date thereof, (ii) the termination of the Merger Agreement, or (iii) the incurrence by CynergisTek or any of its subsidiaries of any debt of any kind whatsoever from a third party, other than payables incurred in the ordinary course of business; provided that (x) if the Merger Agreement is terminated pursuant to Sections 7.1(a), 7.1(b), 7.1(c), 7.1(d), or 7.1(g) of the Merger Agreement, then all outstanding principal and interest under the Clearwater Note shall be due and payable by the 60th day following such termination; and (y) if the Merger Agreement is terminated in connection with the entry into an Acquisition Transaction (as such term is defined in the Merger Agreement), then CynergisTek shall be required to repay all outstanding interest and principal then due under the Clearwater Note as a condition to, and prior to or concurrently with, the termination of the Merger Agreement by CynergisTek.

The above summary of the Security Agreement and Clearwater Note is qualified in its entirety by reference to the Security Agreement, which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1, and the Clearwater Note, which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.2.

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ITEM 6. EXHIBITS.

No.	Item
10.1	Guaranty and Security Agreement by and among CynergisTek, Inc., each of the other entities listed as a Grantor on the signature pages thereof as “Grantors”, and Clearwater Compliance LLC, dated August 12, 2022.** †
10.2	Revolving Promissory Note by and between CynergisTek, Inc. and Clearwater Compliance LLC, dated August 12, 2022.** †
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). †

†	Filed herewith.
+	Furnished herewith. In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
*	Pursuant to Rule 406T of Regulation S-T, this XBRL information will not be deemed “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor will it be deemed filed or made a part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or otherwise subject to liability under those sections.
**	Schedules to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and the Company agrees to furnish supplementally a copy of any omitted schedule to the staff of the SEC upon request

32

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CYNERGISTEK, INC.
Date: August 15, 2022	By:	/s/ Michael McMillan
		Michael McMillan
		President and Chief Executive Officer (Principal Executive Officer)
Date: August 15, 2022	By:	/s/ Paul T. Anthony
		Paul T. Anthony
		Chief Financial Officer (Principal Accounting Officer)

33

EX-10.1

EXHIBIT 10.1

GUARANTY AND SECURITY AGREEMENT

Dated as of August 12, 2022

among

CYNERGISTEK, INC.,

as Borrower,

Each Other Grantor

Party Hereto

and

CLEARWATER COMPLIANCE LLC,

as Secured Party

GUARANTY AND SECURITY AGREEMENT

THIS GUARANTY AND SECURITY AGREEMENT, dated as of August 12, 2022, by CynergisTek, Inc., a Delaware corporation (the “Borrower”), and each of the other entities listed as a Grantor on the signature pages hereof (together with the Borrower, the “Grantors” and each, a “Grantor”), in favor of Clearwater Compliance LLC, as Payee (in such capacity, together with its successors and permitted assigns, the “Secured Party”) under and as defined in the Note referred to below.

WITNESSETH:

WHEREAS, pursuant to the Revolving Promissory Note of even date herewith (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Note”) issued by the Borrower in favor of the Secured Party, the Secured Party has agreed to make extensions of credit to the Borrower upon the terms and subject to the conditions set forth therein;

WHEREAS, subject to the terms hereof, each Grantor (other than the Borrower) has agreed to guaranty the obligations of the Borrower under the Note; and

WHEREAS, each Grantor will derive substantial direct and indirect benefits from the making of the extensions of credit under the Note.

NOW, THEREFORE, in consideration of the premises and to induce the Secured Party to accept and agree to the Note and extend credit to the Borrower thereunder, each Grantor hereby agrees with the Secured Party as follows:

ARTICLE I

DEFINED TERMS

Section 1.1. Definitions. (a) Capitalized terms used herein without definition are used as defined in the Note.

(a) The following terms have the meanings given to them in the UCC and terms used herein without definition that are defined in the UCC have the meanings given to them in the UCC (such meanings to be equally applicable to both the singular and plural forms of the terms defined): “account”, “account debtor”, “as-extracted collateral”, “certificated securities”, “chattel paper”, “commercial tort claim”, “commodity contract”, “deposit account”, “documents” “electronic chattel paper”, “equipment”, “farm products”, “fixture”, “general intangible”, “goods”, “health-care-insurance receivable”, “instruments”, “inventory”, “investment property”, “letter-of-credit right”, “proceeds”, “record”, “securities account”, “security”, “supporting obligation” and “tangible chattel paper”.

(b) The following terms shall have the following meanings:

“Agreement” means this Guaranty and Security Agreement.

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“Applicable IP Office” means the United States Patent and Trademark Office or the United States Copyright Office.

“Cash Collateral Account” means a deposit account or securities account subject, in each instance, to a customary control Agreement.

“Closing Date” means August 12, 2022.

“Collateral” has the meaning specified in Section 3.1 hereof.

“Commodity Exchange Act” means the Commodity Exchange Act (7 U.S.C. Section 1 et seq.), as amended from time to time, and any successor statute.

“Controlled Securities Account” means each securities account (including all financial assets held therein and all certificates and instruments, if any, representing or evidencing such financial assets) that is subject to a customary control agreement.

“Copyrights” means all rights, title and interests arising under any requirement of law in copyrights, whether or not registered or published, all registrations and recordations thereof and all applications in connection therewith.

“Excluded Property” means collectively, (i) any fee-owned real Property with a fair market value less than $2,000,000 in the aggregate and all leasehold interests in real Property; (ii) commercial tort claims with a value less than $500,000 in the aggregate; (iii) pledges and security interests prohibited or restricted by any requirement of law (in each case, after giving effect to the applicable anti-assignment provisions of the UCC) or which would require governmental (including regulatory) or third-party consent, approval, license or authorization to be pledged (unless such consent, approval, license or authorization has been received (it being understood that there shall be no obligation to obtain such consent)); (iv) assets to the extent a security interest in such assets or perfection thereof would result in a material adverse tax consequence (for the avoidance of doubt, excluding any UCC or similar filing fees or taxes) as determined in good faith by the Borrower; (v) any lease, license, permit or other agreement or any property subject to such agreement, in each case, in existence on the Closing Date to the extent that a grant of a security interest therein would violate or invalidate such lease, license, permit or agreement or create a right of termination in favor of any other party thereto or otherwise require consent thereunder (unless such consent has been received (it being understood that there shall be no obligation to obtain such consent)), and such prohibition, termination right or consent requirement is not entered into in contemplation hereof, after giving effect to the applicable anti-assignment provisions of the UCC or other applicable law); (vi) assets as to which the Secured Party and Borrower reasonably determine that the cost, burden, difficulty or consequence of obtaining such a security interest therein exceeds the practical benefit to the Secured Party afforded thereby; (vii) any governmental licenses or state or local franchises, charters and authorizations, to the extent security interests in such licenses, franchises, charters or authorizations are prohibited or restricted thereby; (viii) assets that require action under the law of any non-U.S. jurisdiction to create or perfect a security interest therein; (ix) interests in joint ventures and non-wholly-owned subsidiaries which require the consent of third-parties (other than a Grantor or any of its Affiliates) in order to be pledged; (xi) Property owned by any Grantor that is subject to a purchase money lien, a capital lease or similar arrangement to the extent the granting of a security interest therein is prohibited thereby or otherwise requires the consent of any person other than the Borrower and its Affiliates (unless such consent has been obtained (it being understood that there shall be no obligation to obtain such consent)); and (xii) any “intent to use” Trademark application for which a “Statement of Use” or “Amendment to Alleged Use” has not been filed and accepted with the U.S. Patent and Trademark Office (but only until such statement is filed and accepted with the U.S. Patent and Trademark Office); provided, however, “Excluded Property” shall not include any proceeds, products, substitutions or replacements of Excluded Property (unless such proceeds, products, substitutions or replacements would otherwise constitute Excluded Property).

2

“Fraudulent Transfer Laws” has the meaning specified in Section 2.2 hereof.

“Guaranteed Obligations” has the meaning set forth in Section 2.1 hereof.

“Guarantor” means each Grantor other than the Borrower.

“Guaranty” means the guaranty of the Guaranteed Obligations made by the Guarantors as set forth in this Agreement.

“Permitted Liens” means: (i) liens for taxes, fees, assessments or other governmental charges which are not past due or remain payable without penalty; (ii) carriers’, warehousemen’s, mechanics’, landlords’, materialmen’s, repairmen’s, statutory liens in favor or suppliers or other similar liens and non‑consensual suppliers’ liens arising in the case of each of the foregoing arising in the ordinary course of business which are not delinquent for more than ninety (90) days or remain payable without penalty or which are being contested in good faith and by appropriate proceedings diligently prosecuted, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto and for which adequate reserves in accordance with GAAP are being maintained;(iii) liens (other than any lien imposed by the Employee Retirement Income Security Act of 1974 (as amended)) consisting of pledges or deposits required in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other social security legislation or to secure the performance of tenders, statutory obligations, utilities, surety, stay, customs and appeals bonds, bids, leases, governmental contract, trade contracts, performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money) or to secure liability to insurance carriers; (iv) liens consisting of judgment or judicial attachment liens, the existence of which do not constitute an Event of Default; (v) easements, covenants, conditions, land-use, rights‑of‑way, zoning and other regulations or restrictions, minor encroachments, non‑material defects or other irregularities in title (whether of record or not), and other similar encumbrances incurred in the ordinary course of business which do not in any case materially detract from the value of the property subject thereto or interfere in any material respect with the ordinary conduct of the businesses of the Grantors;(vi)any interest or title of a lessor or sublessor under any lease; (vii) liens arising from the filing of precautionary UCC financing statements with respect to any lease; (viii) licenses, sublicenses, leases or subleases granted to third parties in the ordinary course of business not interfering with the business of the Grantors; (ix) rights of setoff or bankers’ liens upon deposits of cash in favor of banks or other depository institutions; (x) liens in favor of customs and revenues authorities which secure payment of customs duties in connection with the importation of goods;(xi) liens in favor of collecting banks arising under Section 4‑210 of the UCC; (xii) liens on premium refunds granted in favor of insurance companies (or their financing affiliates) in connection with the financing of insurance premiums;(xiii) reservations in any original grants of any land or interests therein, statutory exceptions to title and reservations of mineral rights in any grants or from any predecessors in title; (xiv) undetermined or inchoate liens, arising or potentially arising under statutory provisions which have not at the time been filed or registered in accordance with applicable laws; (xv) the rights reserved to or vested in municipalities or governmental or other public authorities or agencies by statutory provisions or by the terms of leases, licenses, franchises, grants or permits, which affect any land to terminate any such leases, licenses, franchises, grants or permits or to require annual or other payments as a condition to the continuance thereof;(xvi) deposits with public utilities or to any municipalities or governmental or other public authorities when required by the utility, municipality, governmental or other public authority in connection with the supply of services or utilities to any Grantor; and (xvii) with respect to all real estate in which any Grantor owns less than a fee interest, all liens which are suffered or incurred by the fee owner, any superior lessor, sublessors or licensor, or any inferior lessee, sublessee or licensee, so long as such liens do not, individually or in the aggregate, interfere in any material respect with the ordinary conduct of the business of any Grantor or (ii) materially impair the use of the real estate;

3

“Intellectual Property” means all rights, title and interests in intellectual property arising under any requirement of law and all IP Ancillary Rights relating thereto, including all Copyrights, Patents, Trademarks, internet domain names and trade secrets and intellectual property rights licensed pursuant to Intellectual Property licenses.

“IP Ancillary Rights” means, with respect to any other Intellectual Property, as applicable, all foreign counterparts to, and all divisionals, reversions, continuations, continuations in part, reissues, reexaminations, renewals and extensions of, such Intellectual Property and all income, royalties, proceeds and liabilities at any time due or payable or asserted under or with respect to any of the foregoing or otherwise with respect to such Intellectual Property, including all rights to sue or recover at law or in equity for any past, present or future infringement, misappropriation, dilution, violation or other impairment thereof, and, in each case, all rights to obtain any of the foregoing.

“Patents” means all rights, title and interests arising under any requirement of law in letters patent and applications therefor.

“Pledged Certificated Stock” means all certificated securities and any other stock or stock equivalent of any person evidenced by a certificate, instrument or other similar document (as defined in the UCC), in each case owned by any Grantor, and any distribution of property made on, in respect of or in exchange for the foregoing from time to time, including all stock and stock equivalents listed on Schedule 5. Pledged Certificated Stock excludes any Excluded Property and any cash equivalents that are not held in Controlled Securities Accounts to the extent permitted by Section 5.9 hereof.

“Pledged Collateral” means collectively, the Pledged Stock and the Pledged Debt Instruments.

“Pledged Debt Instruments” means all right, title and interest of any Grantor in instruments evidencing any Indebtedness owed to such Grantor or other obligations, and any distribution of property made on, in respect of or in exchange for the foregoing from time to time, including all Indebtedness described on Schedule 5, issued by the obligors named therein. Pledged Debt Instruments excludes any Excluded Property and any cash equivalents that are not held in Controlled Securities Accounts to the extent permitted by Section 5.9 hereof.

4

“Pledged Investment Property” means any investment property of any Grantor, and any distribution of property made on, in respect of or in exchange for the foregoing from time to time, other than any Pledged Stock or Pledged Debt Instruments. Pledged Investment Property excludes any Excluded Property and cash equivalents that are not held in Controlled Securities Accounts to the extent permitted by Section 5.9 hereof.

“Pledged Stock” means all Pledged Certificated Stock and all Pledged Uncertificated stock.

“Pledged Uncertificated stock” means any stock or stock equivalent of any person that is not Pledged Certificated Stock, including all right, title and interest of any Grantor as a limited or general partner in any partnership not constituting Pledged Certificated Stock or as a member of any limited liability company, all right, title and interest of any Grantor in, to and under any Organization Document of any partnership or limited liability company to which it is a party, and any distribution of property made on, in respect of or in exchange for the foregoing from time to time, including in each case those interests set forth on Schedule 5, to the extent such interests are not certificated. Pledged Uncertificated stock excludes any Excluded Property and any cash equivalents that are not held in Controlled Securities Accounts to the extent permitted by Section 5.9 hereof.

“Secured Obligations” has the meaning specified in Section 3.2 hereof.

“Trademark” means, all rights, title and interests arising under any requirement of law in trademarks, trade names, corporate names, company names, business names, fictitious business names, trade dress, service marks, logos and other source or business identifiers and, in each case, all goodwill associated therewith, all registrations and recordations thereof and all applications in connection therewith, but excluding any intent-to-use trademark applications until such time as an affidavit of use or affirmation of use has been filed with and accepted by the United States Patent and Trademark Office.

“UCC” means the Uniform Commercial Code as from time to time in effect in the State of Delaware; provided, however, that, in the event that, by reason of mandatory provisions of any applicable requirement of law, any of the attachment, perfection or priority of the Secured Party’s security interest in any Collateral is governed by the Uniform Commercial Code of a jurisdiction other than the State of Delaware, “UCC” shall mean, the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of the definitions related to or otherwise used in such provisions.

“Vehicles” means all vehicles covered by a certificate of title law of any state.

ARTICLE II

GUARANTY

Section 2.1. Guaranty. To induce the Secured Party to make credit available to or for the benefit of one or more Grantors, each Guarantor hereby, jointly and severally, absolutely, unconditionally and irrevocably guarantees, as primary obligor and not merely as surety, the full and punctual payment when due, whether at stated maturity or earlier, by reason of acceleration, mandatory prepayment or otherwise in accordance with the Note, of all the obligations of the Borrower under the Note whether existing on the date hereof or hereinafter incurred or created (the “Guaranteed Obligations”). This Guaranty by each Guarantor hereunder constitutes a guaranty of payment and not of collection.

5

Section 2.2. Limitation of Guaranty. Any term or provision of this Agreement, the Note or any other agreement entered into in connection therewith to the contrary notwithstanding, the maximum aggregate amount for which any Guarantor shall be liable hereunder shall not exceed the maximum amount for which such Guarantor can be liable without rendering this Guaranty, the Note, this Agreement or any other agreement entered into in connection therewith, as it relates to such Guarantor, subject to avoidance under applicable requirements of law relating to fraudulent conveyance or fraudulent transfer requirements of law (collectively, “Fraudulent Transfer Laws”). Any analysis of the provisions of this Guaranty for purposes of Fraudulent Transfer Laws shall take into account the right of contribution established in Section 2.3 hereof and, for purposes of such analysis, give effect to any discharge of intercompany debt as a result of any payment made under the Guaranty.

Section 2.3. Contribution. To the extent that any Guarantor shall be required hereunder to pay any portion of any Guaranteed Obligation exceeding the greater of (a) the amount of the value actually received by such Guarantor and its Subsidiaries from extensions of credit under the Note and (b) the amount such Guarantor would otherwise have paid if such Guarantor had paid the aggregate amount of the Guaranteed Obligations (excluding the amount thereof repaid by the Borrower) in the same proportion as such Guarantor’s net worth on the date enforcement is sought hereunder bears to the aggregate net worth of all the Guarantors on such date, then such Guarantor shall be reimbursed by such other Guarantors for the amount of such excess, pro rata, based on the respective net worth of such other Guarantors on such date.

Section 2.4. Authorization; Other Agreements. The Secured Party is hereby authorized, without notice to or demand upon any Guarantor and without discharging or otherwise affecting the obligations of any Guarantor hereunder and without incurring any liability hereunder, from time to time, to do each of the following:

(a) (i) subject to the provisions of Section 8.5 hereof, modify, amend, supplement or otherwise change, (ii) accelerate or otherwise change the time of payment or (iii) waive or otherwise consent to noncompliance with, any Guaranteed Obligation or the Note;

(b) apply to the Guaranteed Obligations any sums by whomever paid or however realized to any Guaranteed Obligation;

(c) refund at any time any payment received in respect of any Guaranteed Obligation;

(d) (i) sell, exchange, enforce, waive, substitute, liquidate, terminate, release, abandon, fail to perfect, subordinate, accept, substitute, surrender, exchange, affect, impair or otherwise alter or release any Collateral for any Guaranteed Obligation or any other guaranty therefor in any manner, (ii) receive, take and hold additional Collateral to secure any Guaranteed Obligation, (iii) add, release or substitute any one or more other Guarantors, makers or endorsers of any Guaranteed Obligation or any part thereof and (iv) otherwise deal in any manner with the Borrower and any other Guarantor, maker or endorser of any Guaranteed Obligation or any part thereof; and

(e) settle, release, compromise, collect or otherwise liquidate the Guaranteed Obligations.

6

Section 2.5. Guaranty Absolute and Unconditional. To extent permitted by applicable requirements of law, each Guarantor hereby waives and agrees not to assert any defense (other than payment in full of the Guaranteed Obligations, or termination of such Guarantor’s Guaranty pursuant to Section 2.8 hereof), whether arising in connection with or in respect of any of the following or otherwise, and hereby agrees that its obligations under this Guaranty are irrevocable, absolute and unconditional and shall not be discharged as a result of or otherwise affected by any of the following (which may not be pleaded and evidence of which may not be introduced in any proceeding with respect to this Guaranty, in each case except as otherwise agreed in writing by the Secured Party):

(a) the invalidity or unenforceability of any obligation of the Borrower or any other Guarantor under the Note, this Agreement or any other agreement entered into in connection therewith (including any amendment, consent or waiver thereto), or any security for, or other guaranty of, any Guaranteed Obligation or any part thereof, or the lack of perfection or continuing perfection or failure of priority of any security for the Guaranteed Obligations or any part thereof;

(b) the absence of (i) any attempt to collect any Guaranteed Obligation or any part thereof from the Borrower or any other Guarantor or other action to enforce the same or (ii) any action to enforce the Note, this Agreement, any other agreement entered into in connection therewith or any lien thereunder;

(c) the failure by any person to take any steps to perfect and maintain any lien on, or to preserve any rights with respect to, any Collateral;

(d) any workout, insolvency, bankruptcy proceeding, reorganization, arrangement, liquidation or dissolution by or against the Borrower, any other Guarantor or any of the Borrower’s other Subsidiaries or any procedure, agreement, order, stipulation, election, action or omission thereunder, including any discharge or disallowance of, or bar or stay against collecting, any Guaranteed Obligation (or any interest thereon) in or as a result of any such proceeding;

(e) any foreclosure, whether or not through judicial sale, and any other sale or other disposition of any Collateral or any election following the occurrence of an Event of Default by the Secured Party to proceed separately against any Collateral in accordance with such Secured Party’s rights under any applicable requirement of law; or

(f) except to the extent prohibited by the terms of the Note, this Agreement or any other agreement entered into in connection therewith, any other defense, setoff, counterclaim or any other circumstance that might otherwise constitute a legal or equitable discharge of the Borrower, any other Guarantor or any of the Borrower’s other Subsidiaries, in each case other than the payment in full of the Guaranteed Obligations or termination of such Guarantor’s Guaranty pursuant to Section 2.8 hereof.

7

Section 2.6. Waivers. To extent permitted by applicable requirements of law, each Guarantor hereby unconditionally and irrevocably waives and agrees not to assert any claim, defense (other than payment in full of the Guaranteed Obligations and termination of the Commitments or termination of such Guarantor’s Guaranty pursuant to Section 2.8 hereof), setoff or counterclaim based on diligence, promptness, presentment, requirements for any demand or notice hereunder including any of the following: (a) any demand for payment or performance and protest and notice of protest; (b) any notice of acceptance; (c) any presentment, demand, protest or further notice or other requirements of any kind with respect to any Guaranteed Obligation (including any accrued but unpaid interest thereon) becoming immediately due and payable; and (d) any other notice in respect of any Guaranteed Obligation or any part thereof, and any defense arising by reason of any disability or other defense of the Borrower or any other Guarantor. Each Guarantor further unconditionally and irrevocably agrees not to (x) enforce or otherwise exercise any right of subrogation or any right of reimbursement or contribution or similar right against the Borrower or any other Guarantor by reason of the Note, this Agreement, any other agreement entered into in connection therewith or any payment made thereunder unless the Guaranteed Obligations have been paid in full in cash and termination of the Commitments or termination of such Guarantor’s Guaranty pursuant to Section 2.8 hereof, or (y) assert any claim, defense, setoff or counterclaim (other than payment in full of the Guaranteed Obligations and termination of the Commitments or termination of such Guarantor’s Guaranty pursuant to Section 2.8 hereof) it may have against any other Credit Party or set off any of its obligations to such other Credit Party against obligations of such Credit Party to such Guarantor. No obligation of any Guarantor hereunder shall be discharged other than pursuant to Section 2.8 hereof. Each Guarantor further waives any right such Guarantor may have under any applicable requirement of law to require the Secured Party to seek recourse first against the Borrower or any other person, or to realize upon any Collateral for any of the Obligations, as a condition precedent to enforcing such Guarantor’s liability and obligations under this Guaranty.

Section 2.7. Reliance. Each Guarantor hereby assumes responsibility for keeping itself informed of the financial condition of the Borrower, each other Guarantor and any other guarantor, maker or endorser of any Guaranteed Obligation or any part thereof, and of all other circumstances bearing upon the risk of nonpayment of any Guaranteed Obligation or any part thereof that diligent inquiry would reveal, and each Guarantor hereby agrees that the Secured Party shall not have any duty to advise any Guarantor of information known to it regarding such condition or any such circumstances. In the event the Secured Party, in its sole discretion, undertakes at any time or from time to time to provide any such information to any Guarantor, such Secured Party shall be under no obligation to (a) undertake any investigation not a part of its regular business routine, (b) disclose any information that the Secured Party wishes to maintain confidential or (c) make any future disclosures of such information or any other information to any Guarantor.

Section 2.8. Release. A Guarantor shall automatically be released from its obligations hereunder upon the payment in full of the Guaranteed Obligations and the expiration or termination of the Secured Party’s commitment to extend credit under the Note.

8

ARTICLE III

GRANT OF SECURITY INTEREST

Section 3.1. Collateral. For the purposes of this Agreement, all of the following property now owned or at any time hereafter acquired by a Grantor or in which a Grantor now has or at any time in the future may acquire any right, title or interests is collectively referred to as the “Collateral”:

(a) all accounts, chattel paper, deposit accounts, documents, equipment, general intangibles, instruments, inventory, investment property, letter-of-credit rights and any supporting obligations related to any of the foregoing;

(b) the commercial tort claims described on Schedule 1;

(c) all books and records pertaining to the other property described in this Section 3.1;

(d) all property of such Grantor held by the Secured Party, including all property of every description, in the custody of or in transit to the Secured Party for any purpose, including safekeeping, collection or pledge, for the account of such Grantor or as to which such Grantor may have any right or power, including but not limited to cash;

(e) all other goods (including but not limited to fixtures) and personal property of such Grantor, whether tangible or intangible and wherever located; and

(f) to the extent not otherwise included, all products and proceeds of any or all the foregoing;

provided that “Collateral”, for the avoidance of doubt, shall not consist of Excluded Property.

Section 3.2. Grant of Security Interest in Collateral. Each Grantor, as collateral security for the prompt and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of the obligations under the Note and/or Guaranteed Obligations of such Grantor (the “Secured Obligations”), hereby pledges to the Secured Party, and grants to the Secured Party a lien on and security interest in, all of its right, title and interest in, to and under the Collateral of such Grantor; provided, however, notwithstanding the foregoing, no lien or security interest is hereby granted on any Excluded Property and the term “Collateral” shall not include such assets and none of the covenants or representations and warranties herein shall be deemed to apply to any assets constituting Excluded Property; provided, further, that if and when any property shall cease to be Excluded Property, a lien on and security in such property shall be deemed granted therein and the term “Collateral” shall include such assets.

Section 3.3. Consent to and Acknowledgement of Security Interest in Pledged Stock. Each of each Grantor’s subsidiaries party hereto acknowledges and consents to the grant of the security interest in and the exercise of the rights and remedies under and in accordance with Article VI in relation to the applicable Pledged Stock of such subsidiary to the Secured Party pursuant to this Agreement, notwithstanding anything to the contrary contained in the Organization Documents of such subsidiary.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES

To induce the Secured Party to enter into the Note, each Grantor hereby represents and warrants to the Secured Party on the date hereof as follows (and each request for an Advance under the Note will be deemed a representation and warranty by each Grantor of the date of such Advance that):

Section 4.1. Corporate Representations. (a) it and each of its subsidiaries is duly incorporated and is in good standing under the laws of their jurisdiction of organization;

(b) it has full power, authority and legal right to enter into this Agreement and to perform all of its obligations hereunder;

(c) the execution, delivery and performance of this Agreement (i) are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of the terms of its organizational documents, (ii) will not conflict with or violate, in any material respect, any law or regulation applicable to it, or any material agreement or material order by which it or its property is bound, and (iii) will not require the consent of any governmental authority;

(d) this Agreement has been duly executed and delivered by it, and this Agreement constitutes its legal, valid and binding obligation, enforceable in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors’ rights generally and general principles of equity; and

(e) no Event of Default has occurred and is continuing or would result by the execution, delivery or performance of this Agreement

Section 4.2 Title; No Other Liens. Except for the lien granted to the Secured Party pursuant to this Agreement and other Permitted Liens, such Grantor owns each item of the Collateral free and clear of any and all liens. Such Grantor (a) is the record and beneficial owner of the Collateral pledged by it hereunder constituting instruments or certificates and (b) has rights in or the power to transfer each other item of Collateral in which a lien is granted by it hereunder, free and clear of any lien (other than Permitted Liens).

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Section 4.3. Perfection and Priority. The security interest granted pursuant to this Agreement constitutes a valid and continuing perfected (to the extent a security interest in any particular Collateral can be perfected and, with respect to any Collateral consisting of Intellectual Property, to the extent perfection may be achieved by filings under the UCC, or at the Applicable IP Office) security interest in favor of the Secured Party in all Collateral subject, for the following Collateral, to the occurrence of the following: (i) in the case of all Collateral in which a security interest may be perfected by filing a financing statement under the UCC, the completion of the filings and other actions which as of the Closing Date are specified on Schedule 2 (which, in the case of all filings and other documents referred to on such schedule, have been delivered to the Secured Party in completed and duly authorized form), (ii) with respect to any deposit account (other than any account maintained at the Secured Party), the execution of customary control agreements, (iii) in the case of all United States registered Copyrights and Copyright applications, United States federal Trademarks registrations and applications, and United States issued Patents and Patent applications for which UCC filings are insufficient, all appropriate filings having been made with the Applicable IP Office and (iv) in the case of electronic chattel paper, the completion of all steps necessary to grant control to the Secured Party over such electronic chattel paper. Such security interest shall be prior to all other liens on the Collateral except for Permitted Liens having priority over the Secured Party’s lien by operation of law upon (i) in the case of all Pledged Certificated Stock, Pledged Debt Instruments and Pledged Investment Property, the delivery thereof to the Secured Party of such Pledged Certificated Stock, Pledged Debt Instruments and Pledged Investment Property consisting of instruments and certificates, in each case properly endorsed for transfer to the Secured Party or in blank, (ii) in the case of all Pledged Investment Property not in certificated form, the execution of customary Control agreements with respect to such investment property and (iii) in the case of all other instruments and tangible chattel paper that are not Pledged Certificated Stock, Pledged Debt Instruments or Pledged Investment Property, the delivery thereof to the Secured Party of such instruments and tangible chattel paper. Except with respect to Excluded Property and except as set forth in this Section 4.3, this Agreement or any other agreement entered into in connection therewith, all actions by each Grantor necessary to protect and perfect the lien (only if, and to the extent, a security interest in any particular Collateral can be perfected by the filings or by the delivery of share certificates required hereunder) granted hereunder on the Collateral have been duly taken. Notwithstanding the foregoing, the Grantors will not be required to take any action to perfect a security interest in (x) letter of credit rights (other than to the extent such rights can be perfected by filing a UCC-1 financing statement), (y) Vehicles, airplanes and other assets subject to a certificate of title and (z) any asset where the Secured Party and Borrower reasonably determine that the cost, burden, difficulty or consequence of perfection exceeds the practical benefit to the Secured Party afforded thereby.

Section 4.4. Jurisdiction of Organization; Chief Executive Office. Such Grantor’s jurisdiction of organization, legal name and organizational identification number, if any, and the location of such Grantor’s chief executive office or sole place of business, in each case as of the Closing Date, is specified on Schedule 3 and such Schedule 3 also lists all jurisdictions of incorporation, legal names, trade names and similar appellations and locations of such Grantor’s chief executive office or sole place of business for the five years preceding the Closing Date.

Section 4.5. Locations of Inventory, Equipment and Books and Records. As of the Closing Date, such Grantor’s inventory and equipment (other than inventory or equipment in transit, out for repair, out at trade shows or out with decorators or in possession of employees, a warehouseman or a bailee agent, to the extent the aggregate value of such inventory and equipment in possession of employees, warehousemen or bailee agents does not exceed $500,000) and books and records concerning the Collateral are kept at the locations listed on Schedule 4 and such Schedule 4 also lists all locations where any such inventory and equipment was held during the four months preceding the Closing Date.

Section 4.6. Pledged Collateral. (a) The Pledged Stock pledged by such Grantor hereunder (i) as of the Closing Date, is listed on Schedule 5 and constitutes that percentage of the issued and outstanding equity of all classes of each issuer thereof as set forth on Schedule 5, (ii) has been duly authorized, validly issued and is fully paid and nonassessable (other than Pledged Stock in limited liability companies and partnerships) and (iii) constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability.

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(b) All Pledged Collateral (other than Pledged Uncertificated stock) and all Pledged Investment Property consisting of instruments and certificates have been (or will be) delivered to the Secured Party in accordance with Section 5.3(a) hereof.

(c) Subject to Section 6.3 hereof, upon the occurrence and during the continuance of an Event of Default, the Secured Party shall be entitled to exercise all of the rights of the Grantor granting the security interest in any Pledged Stock, and a transferee or assignee of such Pledged Stock shall become a holder of such Pledged Stock to the same extent as such Grantor and be entitled to participate in the management of the issuer of such Pledged Stock and, upon the transfer of the entire interest of such Grantor, such Grantor shall, by operation of law, cease to be a holder of such Pledged Stock.

Section 4.7. Instruments and Tangible Chattel Paper Formerly Accounts. No amount payable to such Grantor under or in connection with any account is evidenced by any instrument or tangible chattel paper that has not been delivered to the Secured Party, properly endorsed for transfer, to the extent delivery is required by Section 5.6(a) hereof.

Section 4.8. Intellectual Property. Schedule 6 sets forth as of the Closing Date a true and complete list of the Intellectual Property such Grantor owns that is registered or subject to applications for registration.On the Closing Date, all Intellectual Property that constitutes Collateral, owned by such Grantor and registered with the Applicable IP Office, to such Grantor’s knowledge, (i) is valid, in full force and effect, subsisting, unexpired and enforceable, and (ii) has not been abandoned. The consummation of the transactions contemplated by any Note shall not result in any breach or default of any material Intellectual Property license or the limitation or impairment of the ownership, use, validity or enforceability of, or any rights of such Grantor in, any Intellectual Property. Except as set forth in Schedule 6, as of the Closing Date, there are no pending (or, to the knowledge of such Grantor, threatened) actions, investigations, suits, proceedings, claims, demands, orders or disputes challenging the ownership, use, validity, enforceability of, or such Grantor’s rights in, any Intellectual Property owned by such Grantor (other than office actions issued in the ordinary course of prosecution of any pending applications for patents or applications for registration of other Intellectual Property). Except as set forth in Schedule 6, as of the Closing Date, to such Grantor’s knowledge, no person is infringing, misappropriating, diluting, violating or otherwise impairing any Intellectual Property owned by such Grantor. To such Grantor’s knowledge, such Grantor and each other party thereto, is not in breach or default of any material Intellectual Property license.

Section 4.9. Commercial Tort Claim. The only commercial tort claims with an aggregate value in excess of $500,000 of any Grantor existing on the Closing Date are those listed on Schedule 1, which sets forth such information separately for each Grantor.

Section 4.10. Specific Collateral. None of the Collateral is, or is proceeds or products of, farm products, as-extracted collateral or timber to be cut.

Section 4.11. Enforcement. No Permit, notice to or filing with any Governmental Authority or any other person or any consent from any person is required for the exercise by the Secured Party of its rights (including voting rights) provided for in this Agreement or the enforcement of remedies in respect of the Collateral pursuant to this Agreement, including the transfer of any Collateral, except (i) as may be required in connection with the disposition of any portion of the Pledged Collateral by laws affecting the offering and sale of securities generally, (ii) any approvals that may be required to be obtained from any bailees or landlords to collect the Collateral or (iii) any approvals necessary or appropriate for the assignment to or the benefit of the Secured Party of any contractual obligations, including any IP license.

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ARTICLE V

COVENANTS

Each Grantor agrees with the Secured Party to the following, until payment in full of the obligations under the Note:

Section 5.1. Maintenance of Perfected Security Interest; Further Documentation and Consents.

(a) Generally. Such Grantor shall (i) not use or knowingly permit any Collateral to be used unlawfully or in violation of any provision of the Note, this Agreement, any other agreement entered into in connection therewith or, except as would not reasonably be expected to have, individually or in the aggregate, a material adverse effect, any requirement of law or any policy of insurance covering the Collateral and (ii) not enter into any contractual obligation or undertaking restricting the right or ability of such Grantor or the Secured Party to sell, assign, convey or transfer any Collateral if such restriction would reasonably be expected to have, either individually or in the aggregate, a material adverse effect.

(b) Except with respect to Excluded Property, such Grantor shall maintain the security interest created by this Agreement as a perfected (only if, and to the extent, such security interest may be perfected by filings and delivery of share certificates and other instruments required hereunder and subject to the qualifications set forth in Section 4.3) security interest having at least the priority described in Section 4.3 hereof and shall use its commercially reasonable efforts to defend such security interest and such priority against the claims and demands of all persons, subject to the rights of such Grantor to dispose of the Collateral and liens in any manner not in contravention of the Note, this Agreement or any other agreement entered into in connection therewith.

(c) Such Grantor shall furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other documents in connection with the Collateral as the Secured Party may reasonably request in writing, which requests shall be made no more frequently than once per calendar quarter except after the occurrence and during the continuance of an Event of Default, all in reasonable detail and in form reasonably satisfactory to the Secured Party.

(d) At any time and from time to time, upon the reasonable written request of the Secured Party, such Grantor shall, for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, (i) promptly and duly execute and deliver, and have recorded, such further documents, including an authorization to file (or, as applicable, the filing) of any financing statement or amendment under the UCC (or other filings under similar requirements of law) in effect in any appropriate jurisdiction with respect to the security interest created hereby and (ii) take such further action as the Secured Party may reasonably request, including (A) using its commercially reasonable efforts to secure all approvals reasonably necessary for the assignment to or for the benefit of the Secured Party of any contractual obligation, including any Intellectual Property license, held by such Grantor and to enforce the security interests granted hereunder (provided that such Grantor shall not be required to pay any additional consideration for such approvals) and (B) executing and delivering any customary control agreements with respect to deposit accounts and securities accounts.

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Section 5.2. Changes in Locations, Name, Etc. Except upon ten (10) days’ prior written notice to the Secured Party (or such shorter period as the Secured Party may approve in its reasonable discretion) and delivery to the Secured Party of (a) all documents reasonably requested by the Secured Party to maintain the validity, perfection (subject to the qualifications set forth in Section 4.3) and priority of the security interests provided for herein and (b) if applicable, a written supplement to Schedule 4 showing any additional locations at which inventory or equipment shall be kept, such Grantor shall not do any of the following:

(i) permit any inventory or equipment to be kept at a location other than those listed on Schedule 4, except for inventory or equipment in transit, out for repair, out at trade shows or out with decorators or in possession of employees, a warehouseman or a bailee agent to the extent the aggregate value of such inventory and equipment in possession of employees, warehousemen or bailee agents does not exceed $500,000;

(ii) change its jurisdiction of organization or locations of Collateral, in each case from that referred to in Section 4.4 and Section 4.5 hereof; or

(iii) change its legal name or organizational identification number, if any, or corporation, limited liability company, partnership or other organizational structure to such an extent that any financing statement filed in connection with this Agreement would become misleading.

Section 5.3. Pledged Collateral.

(a) Delivery of Pledged Collateral. Within five business days of the Closing Date (or by such later date as the Secured Party shall agree in its sole discretion), such Grantor shall (i) deliver to the Secured Party, in suitable form for transfer and in form and substance reasonably satisfactory to the Secured Party, (A) all Pledged Certificated Stock, (B) all Pledged Debt Instruments in excess of $500,000 in the aggregate and (C) all certificates and instruments evidencing Pledged Investment Property and (ii) maintain all other Pledged Investment Property in a Controlled Securities Account to the extent required by Section 5.9 hereof.

(b) Event of Default. During the continuance of an Event of Default, subject to the provisions of Section 6.3(a) herein, the Secured Party shall have the right, at any time in its discretion, to (i) transfer to or to register in its name or in the name of its nominees any Pledged Collateral or any Pledged Investment Property and (ii) exchange any certificate or instrument representing or evidencing any Pledged Collateral or any Pledged Investment Property for certificates or instruments of smaller or larger denominations.

(c) Cash Distributions with Respect to Pledged Collateral. Except as provided in Article VI, such Grantor shall be entitled to receive all cash distributions paid in respect of the Pledged Collateral.

(d) Voting Rights. Except as provided in Article VI, such Grantor shall be entitled to exercise all voting, consent and corporate, partnership, limited liability company and similar rights with respect to the Pledged Collateral; provided, however, that no vote shall be cast, consent given or right exercised or other action taken by such Grantor that would result in any violation of any provision of the Note, this Agreement or any other agreement entered into in connection therewith.

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Section 5.4. Accounts. Such Grantor shall not, other than in the ordinary course of business or in its reasonable business judgment, (i) grant any extension of the time of payment of any account, (ii) compromise or settle any account for less than the full amount thereof, (iii) release, wholly or partially, any person liable for the payment of any account, (iv) allow any credit or discount on any account or (v) amend, supplement or modify any account in any manner that could materially adversely affect the value thereof.

Section 5.5. [Reserved].

Section 5.6. Delivery of Instruments and Tangible Chattel Paper and Control of Investment Property, Letter-of-Credit Rights and Electronic Chattel Paper.

(a) If any amount in excess of $500,000 payable under or in connection with any Collateral owned by such Grantor shall be or become evidenced by an instrument or tangible chattel paper other than such instrument delivered in accordance with Section 5.3(a) hereof and in the possession of the Secured Party, such Grantor shall mark all such instruments and tangible chattel paper with the following legend: “This writing and the obligations evidenced or secured hereby are subject to the security interest of Clearwater Compliance LLC, as Secured Party” and, at the request of the Secured Party, shall immediately deliver such instrument or tangible chattel paper to the Secured Party, duly indorsed in a manner reasonably satisfactory to the Secured Party.

(b) Except as otherwise permitted by this Agreement, the Note or any other agreement entered into in connection therewith, such Grantor shall not grant “control” (within the meaning of such term under Article 9‑106 of the UCC) over any investment property constituting Collateral to any person other than the Secured Party.

(c) If such Grantor is or becomes the beneficiary of a letter of credit that is (i) not a supporting obligation of any Collateral and (ii) in excess of $500,000, such Grantor shall promptly, and in any event within five (5) Business Days after becoming a beneficiary, notify the Secured Party thereof and enter into a contractual obligation with the Secured Party, the issuer of such letter of credit or any nominated person with respect to the letter-of-credit rights under such letter of credit. Such contractual obligation shall assign such letter-of-credit rights to the Secured Party and such assignment shall be sufficient to grant control for the purposes of Section 9-107 of the UCC (or any similar section under any equivalent UCC). Such contractual obligation shall also direct all payments thereunder to a Cash Collateral Account. The provisions of the contractual obligation shall be in form and substance reasonably satisfactory to the Secured Party.

(d) If any amount in excess of $500,000 payable under or in connection with any Collateral owned by such Grantor shall be or become evidenced by electronic chattel paper, such Grantor shall take all steps necessary to grant the Secured Party control of all such electronic chattel paper for the purposes of Section 9-105 of the UCC (or any similar section under any equivalent UCC) and all “transferable records” as defined in each of the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act.

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Section 5.7. Intellectual Property. (a) [Reserved].

(b) Such Grantor shall (and shall use commercially reasonable efforts to cause all its licensees to), except as shall be consistent with commercially reasonable business judgment, (i) (1) continue to use each Trademark owned by such Grantor and maintain such Trademark in full force and effect with respect to each class of goods for which such Trademark is currently used, free from any claim of abandonment for non-use, (2) maintain standards of quality of products and services offered under such Trademark sufficient to maintain the validity and enforceability of the registrations for such Trademark, (3) use such Trademark with the appropriate notice of registration and all other notices and legends required by applicable requirements of law, (4) not adopt or use any other Trademark that is confusingly similar or a colorable imitation of such Trademark unless the Secured Party shall obtain a perfected security interest in such other Trademark pursuant to this Agreement, and (5) not knowingly do any act or knowingly omit to do any act whereby such Trademark (or any goodwill associated therewith) may become destroyed, invalidated, impaired or harmed in any way, and (ii) not knowingly do any act or knowingly omit to do any act whereby (x) any Patent owned by such Grantor may become forfeited, misused, unenforceable, abandoned or dedicated to the public, (y) any portion of the Copyrights owned by such Grantor may become invalidated, otherwise impaired or fall into the public domain, or (z) any trade secret owned by such Grantor may become publicly available or otherwise unprotectable.

(c) Such Grantor shall notify the Secured Party promptly if it knows that any application or registration for any Intellectual Property owned by such Grantor may become forfeited, misused, unenforceable, abandoned or dedicated to the public, or of any adverse determination or development regarding the validity or enforceability or such Grantor’s ownership of, interest in, right to use, register, own or maintain any such Intellectual Property (other than (i) office actions issued in the ordinary course of prosecution of any pending applications for patents or applications for registration of other Intellectual Property and (ii) the expiration of Patents at the end of their statutory terms). Except as shall be consistent with commercially reasonable business judgment, such Grantor shall take all actions that are necessary or reasonably requested by the Secured Party to maintain and pursue each application (and to obtain the relevant registration or recordation) and to maintain each registration and recordation owned by Grantor included in the Intellectual Property.

(d) Such Grantor shall not knowingly do any act with the intent to infringe, misappropriate, dilute, violate or otherwise impair the Intellectual Property of any other person. In the event that any Material Intellectual Property owned by such Grantor is or has been infringed, misappropriated, violated, diluted or otherwise impaired by a third party, such Grantor shall take such action as it reasonably deems appropriate under the circumstances in response thereto.

(e) Subject to Section 4.3, upon Secured Party’s reasonable request, such Grantor shall execute and deliver to the Secured Party in form and substance reasonably acceptable to the Secured Party and suitable for filing in the Applicable IP Office, short-form intellectual property security agreements for all Copyrights, Trademarks and Patents owned by such Grantor.

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Section 5.8. [Reserved]

Section 5.9. Controlled Securities Account. To the extent the Secured Party has requested that any Grantor establish a Controlled Securities Account, such Grantor shall from the date that is 30 days following the date of such request (or such later date as the Secured Party shall agree in its sole discretion) deposit all of its cash equivalents in securities accounts that are Controlled Securities Accounts except for cash equivalents the aggregate value of which does not exceed $500,000. The Secured Party agrees that it shall not exercise its right of exclusive control over any Controlled Security Account or Cash Collateral Account unless an Event of Default has occurred and is continuing.

Section 5.10. Post-Closing MattersError! Bookmark not defined.. Each applicable Grantor shall cause the release of any lien on any item of Collateral other than Permitted Liens that is identified by the Secured Party during its ongoing due diligence or otherwise, within 30 days of such Grantor having knowledge of such lien (as such later date as the Secured Party shall agree in its sole discretion).

ARTICLE VI

REMEDIAL PROVISIONS

Section 6.1. Code and Other Remedies.

(a) UCC Remedies. During the continuance of an Event of Default, the Secured Party may exercise, in addition to all other rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to any Secured Obligation, all rights and remedies of a secured party under the UCC or any other applicable law.

(b) Disposition of Collateral. Without limiting the generality of the foregoing, the Secured Party may, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other person (all and each of which demands, defenses, advertisements and notices are hereby waived), during the continuance of any Event of Default (personally or through its agents or attorneys), (i) enter upon the premises where any Collateral is located, without any obligation to pay rent, through self-help, without judicial process, without first obtaining a final judgment or giving any Grantor or any other person notice or opportunity for a hearing on the Secured Party’s claim or action, (ii) collect, receive, appropriate and realize upon any Collateral and (iii) sell, assign, convey, transfer, grant option or options to purchase and deliver any Collateral (enter into contractual obligations to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of the Secured Party or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Secured Party shall have the right, upon any such public sale or sales and, to the extent permitted by the UCC and other applicable requirements of law, upon any such private sale, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption of any Grantor, which right or equity is hereby waived and released. Notwithstanding anything to the contrary herein, the Secured Party shall not assign or otherwise dispose of any Trademark owned by any Grantor without assigning the assets and goodwill of the business associated therewith and any such assignment shall be null and void.

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(c) Management of the Collateral. Each Grantor further agrees, that, during the continuance of any Event of Default, (i) at the Secured Party’s request, it shall assemble the tangible Collateral and make it available to the Secured Party at places that the Secured Party shall reasonably select, whether at such Grantor’s premises or elsewhere, (ii) without limiting the foregoing, the Secured Party also has the right to require that each Grantor store and keep any tangible Collateral pending further action by the Secured Party and, while any such Collateral is so stored or kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain such Collateral in good condition, (iii) until the Secured Party is able to sell, assign, convey or transfer any Collateral, the Secured Party shall have the right to hold or use such Collateral (with respect to Intellectual Property, subject to and pursuant to Section 6.1(g) of this Agreement) to the extent that it deems appropriate for the purpose of preserving the Collateral or its value or for any other purpose deemed appropriate by the Secured Party and (iv) the Secured Party may, if it so elects, seek the appointment of a receiver or keeper to take possession of any Collateral and to enforce any of the Secured Party’s remedies, with respect to such appointment without prior notice or hearing as to such appointment. The Secured Party shall not have any obligation to any Grantor to maintain or preserve the rights of any Grantor as against third parties with respect to any Collateral while such Collateral is in the possession of the Secured Party.

(d) Application of Proceeds. The Secured Party shall apply the cash proceeds of any action taken by it pursuant to this Section 6.1, after deducting all reasonable and documented out-of-pocket costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any Collateral or in any way relating to the Collateral or the rights of the Secured Party hereunder, including reasonable and documented out-of-pocket attorneys’ fees and disbursements, to the payment in whole or in part of the Secured Obligations, as set forth in the Note, and only after such application and after the payment by the Secured Party of any other amount required by any requirement of law, need the Secured Party account for the surplus, if any, to any Grantor.

(e) Direct Obligation. The Secured Party shall not be required to make any demand upon, or pursue or exhaust any right or remedy against, any Grantor, any other Credit Party or any other person with respect to the payment of the Obligations or to pursue or exhaust any right or remedy with respect to any Collateral therefor or any direct or indirect guaranty thereof. All of the rights and remedies of the Secured Party under any the Note, this Agreement and any other agreement entered into in connection therewith shall be cumulative, may be exercised individually or concurrently and not exclusive of any other rights or remedies provided by any requirement of law. To the extent it may lawfully do so under applicable requirements of law, each Grantor absolutely and irrevocably waives and relinquishes the benefit and advantage of, and covenants not to assert against the Secured Party, any valuation, stay, appraisement, extension, redemption or similar laws and any and all rights or defenses it may have as a surety, now or hereafter existing, arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of any Collateral shall be required by law, to the extent permitted by applicable requirements of law such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition.

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(f) Commercially Reasonable. To the extent that applicable requirements of law impose duties on the Secured Party to exercise remedies in a commercially reasonable manner, each Grantor acknowledges and agrees that it is not commercially unreasonable for the Secured Party to do any of the following:

(i) fail to incur significant costs, expenses or other Liabilities reasonably deemed as such by the Secured Party to prepare any Collateral for disposition or otherwise to complete raw material or work in process into finished goods or other finished products for disposition;

(ii) fail to obtain Permits, or other consents, for access to any Collateral to sell or for the collection or sale of any Collateral, or, if not required by other requirements of law, fail to obtain Permits or other consents for the collection or disposition of any Collateral;

(iii) fail to exercise remedies against account debtors or other persons obligated on any Collateral or to remove liens on any Collateral or to remove any adverse claims against any Collateral;

(iv) advertise dispositions of any Collateral through publications or media of general circulation, whether or not such Collateral is of a specialized nature, or to contact other persons, whether or not in the same business as any Grantor, for expressions of interest in acquiring any such Collateral;

(v) exercise collection remedies against account debtors and other persons obligated on any Collateral, directly or through the use of collection agencies or other collection specialists, hire one or more professional auctioneers to assist in the disposition of any Collateral, whether or not such Collateral is of a specialized nature, or, to the extent deemed appropriate by the Secured Party, obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Secured Party in the collection or disposition of any Collateral, or utilize internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capacity of doing so, or that match buyers and sellers of assets to dispose of any Collateral;

(vi) dispose of assets in wholesale rather than retail markets;

(vii) disclaim disposition warranties, such as title, possession or quiet enjoyment; or

(viii) purchase insurance or credit enhancements to insure the Secured Party against risks of loss, collection or disposition of any Collateral or to provide to the Secured Party a guaranteed return from the collection or disposition of any Collateral.

Each Grantor acknowledges that the purpose of this Section 6.1 is to provide a non-exhaustive list of actions or omissions that are commercially reasonable when exercising remedies against any Collateral and that other actions or omissions by the Secured Parties shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 6.1. Without limitation upon the foregoing, nothing contained in this Section 6.1 shall be construed to grant any rights to any Grantor or to impose any duties on the Secured Party that would not have been granted or imposed by this Agreement or by applicable requirements of law in the absence of this Section 6.1.

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(g) Intellectual Property Licenses. For the sole purpose of enabling the Secured Party to exercise rights and remedies under this Section 6.1 (including in order to take possession of, collect, receive, assemble, process, appropriate, remove, realize upon, sell, assign, convey, transfer or grant options to purchase any Collateral) solely at such time as the Secured Party shall be lawfully entitled to exercise such rights and remedies, each Grantor hereby grants to the Secured Party, (i) an irrevocable, nonexclusive, worldwide license (exercisable without payment of royalty or other compensation to such Grantor), including in such license the right to sublicense, use and practice any Intellectual Property now owned or hereafter acquired by such Grantor constituting Collateral and access to all media in which any of the licensed items may be recorded or stored and, to the extent permitted under any applicable license, access to all Software and programs constituting Collateral used for the compilation or printout thereof and (ii) except to the extent, if any, prohibited by any applicable contractual obligation, an irrevocable license (without payment of rent or other compensation to such Grantor) to use, operate and occupy all real Property owned, operated, leased, subleased or otherwise occupied by such Grantor constituting Collateral; provided, however, that all of the foregoing rights of Secured Party to use such licenses, sublicenses, leases, subleases, and other rights, and (to the extent permitted by the terms of such licenses, sublicenses, leases and subleases) all licenses, sublicenses, leases and subleases granted thereunder, shall be exercised by Secured Party solely during the continuance of an Event of Default, and nothing in this Section 6.1(g) shall require Grantors to grant any license or lease that is prohibited by any rule of law, statute or regulation, or is prohibited by, or constitutes a breach or default under or results in the termination of any contract, license, agreement, instrument, lease, sublease or other document evidencing, giving rise to or theretofore granted, including any future contract license, agreement, instrument, sublease or other document entered into by the Grantor in accordance with this Agreement and the Note.

Section 6.2. Accounts and Payments in Respect of General Intangibles. (a) If required by the Secured Party and to the extent the Secured Party has requested that the Grantors establish a Cash Collateral Account at least 30 days prior to such request, at any time during the continuance of an Event of Default any payment of accounts or payment in respect of general intangibles, when collected by any Grantor, shall be promptly (and, in any event, within two (2) Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Secured Party, in a Cash Collateral Account, subject to withdrawal by the Secured Party as provided in Section 6.4 hereof. Until so turned over, such payment shall be held by such Grantor, to the extent possible under applicable requirements of law, in trust for the Secured Party, segregated from other funds of such Grantor. Each such deposit of proceeds of accounts and payments in respect of general intangibles shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.

(b) At any time after the occurrence and during the continuance of an Event of Default:

(i) each Grantor shall, upon the Secured Party’s request, deliver to the Secured Party all original (but to the extent originals are not available, copies of such documents) and other documents evidencing, and relating to, the contractual obligations and transactions that gave rise to any account or any payment in respect of general intangibles, including all original orders (but to the extent originals are not available, copies of such documents), invoices and shipping receipts and notify account debtors that the accounts or general intangibles have been collaterally assigned to the Secured Party and that payments in respect thereof shall be made directly to the Secured Party;

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(ii) the Secured Party may, without notice, at any time during the continuance of an Event of Default, limit or terminate the authority of a Grantor to collect its accounts or amounts due under general intangibles or any thereof and, in its own name or in the name of others, upon prior notice to such Grantor, communicate with account debtors to verify with them to the Secured Party’s satisfaction the existence, amount and terms of any account or amounts due under any general intangible. In addition, the Secured Party may at any time during the continuance of an Event of Default enforce such Grantor’s rights against such account debtors and obligors of general intangibles; and

(iii) if requested by Secured Party, each Grantor shall take all actions, deliver all documents and provide all information necessary or reasonably requested by Secured Party to register any Internet Domain Name.

(c) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each account and each payment in respect of general intangibles to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. The Secured Party shall not have any obligation or liability under any agreement giving rise to an account or a payment in respect of a general intangible by reason of or arising out of the Note, this Agreement, any other agreement entered into in connection therewith or the receipt by the Secured Party of any payment relating thereto, nor shall the Secured Party be obligated in any manner to perform any obligation of any Grantor under or pursuant to any agreement giving rise to an account or a payment in respect of a general intangible, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts that may have been assigned to it or to which it may be entitled at any time or times.

Section 6.3. Pledged Collateral.

(a) Voting Rights. During the continuance of an Event of Default, upon two (2) Business Days’ prior written notice by the Secured Party to the relevant Grantor or Grantors, the Secured Party or its nominee may exercise (i) any voting, consent, corporate and other right pertaining to the Pledged Collateral at any meeting of shareholders, partners or members, as the case may be, of the relevant issuer or issuers of Pledged Collateral or otherwise and (ii) any right of conversion, exchange and subscription and any other right, privilege or option pertaining to the Pledged Collateral as if it were the absolute owner thereof (including the right to exchange at its discretion any Pledged Collateral upon the merger, amalgamation, consolidation, reorganization, recapitalization or other fundamental change in the corporate or equivalent structure of any issuer of Pledged Stock, the right to deposit and deliver any Pledged Collateral with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Secured Party may determine), all without liability except to account for property actually received by it; provided, however, that (A) the Secured Party shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing and (B) if such Event of Default has been cured or waived in accordance with the Note, any such voting, consent or corporate rights shall automatically revert to the Grantor.

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(b) Proxies. In order to permit the Secured Party to exercise the voting and other consensual rights that it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions that it may be entitled to receive hereunder during the continuance of an Event of Default, to the extent permitted by applicable requirements of law, (i) each Grantor shall promptly execute and deliver (or cause to be executed and delivered) to the Secured Party all such proxies, dividend payment orders and other instruments as the Secured Party may from time to time reasonably request and (ii) without limiting the effect of clause (i) above and subject to Section 6.3(a) herein, such Grantor hereby grants to the Secured Party an IRREVOCABLE proxy to vote all or any part of the Pledged Collateral and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Collateral would be entitled (including giving or withholding written consents of shareholders, partners or members, as the case may be, calling special meetings of shareholders, partners or members, as the case may be, and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Collateral on the record books of the issuer thereof) by any other person (including the issuer of such Pledged Collateral or any officer or agent thereof) during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations.

(c) Authorization of Issuers. Each Grantor hereby expressly irrevocably authorizes and instructs, without any further instructions from such Grantor, each issuer of any Pledged Collateral pledged hereunder by such Grantor to (i) comply with any instruction received by it from the Secured Party in writing that states that an Event of Default is continuing and is otherwise in accordance with the terms of this Agreement and each Grantor agrees that such issuer shall be fully protected from liabilities to such Grantor in so complying and (ii) unless otherwise expressly permitted hereby or the Note, pay any dividend or make any other payment with respect to the Pledged Collateral directly to the Secured Party.

Section 6.4. Proceeds to Be Turned over to and Held by Secured Party. Upon the occurrence and during the continuation of an Event of Default, if the Secured Party gives notice of the exercise of its rights pursuant to this Section 6.4 to the relevant Grantor or Grantors, all proceeds of any Collateral received by any Grantor hereunder in cash or cash equivalents shall be held by such Grantor in trust for the Secured Party, segregated from other funds of such Grantor, and shall, at Secured Party’s election, promptly upon receipt by any Grantor, be turned over to the Secured Party in the exact form received (with any necessary endorsement). All such proceeds of Collateral and any other proceeds of any Collateral received by the Secured Party in cash or cash equivalents shall be held by the Secured Party in a Cash Collateral Account. All proceeds being held by the Secured Party in a Cash Collateral Account (or by such Grantor in trust for the Secured Party) shall continue to be held as collateral security for the Secured Obligations and shall not constitute payment thereof until applied as provided in the Note.

Section 6.5. Sale of Pledged Collateral. (a) Each Grantor recognizes that the Secured Party may be unable to effect a public sale of any Pledged Collateral by reason of certain prohibitions contained in the Securities Act and applicable state or foreign securities laws or otherwise or may determine, acting in good faith, that a public sale is impracticable, not desirable or not commercially reasonable and, accordingly, may resort to one or more private sales thereof to a restricted group of purchasers that shall be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Secured Party shall be under no obligation to delay a sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register such securities for public sale under the Securities Act or under applicable state securities laws even if such issuer would agree to do so.

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(b) Each Grantor agrees to use its commercially reasonable efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of any portion of the Pledged Collateral pursuant to Section 6.1 hereof and this Section 6.5 valid and binding and in compliance with all applicable requirements of law (other than any applicable securities laws in respect of any public sale). Each Grantor further agrees that a breach of any covenant contained herein will cause irreparable injury to the Secured Party, that the Secured Party has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained herein shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defense against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing under the Note or that all Secured Obligations have been paid in full in cash. Each Grantor waives any and all rights of contribution or subrogation upon the sale or disposition of all or any portion of the Pledged Collateral by Secured Party.

Section 6.6. Deficiency. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of any Collateral are insufficient to pay the Secured Obligations.

ARTICLE VII

THE SECURED PARTY

Section 7.1. Secured Party’s Appointment as Attorney-in-Fact. (a) After the occurrence and during the continuance of an Event of Default, each Grantor hereby irrevocably constitutes and appoints the Secured Party (which appointment shall automatically terminate when such Event of Default is cured or waived), with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any appropriate action and to execute any document or instrument that may be reasonably necessary or customary to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Secured Party the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any of the following, to the extent permitted by applicable requirements of law (in the case of licensed Intellectual Property, subject to the terms, conditions and limitations of any contract or agreement to which any such Grantor is a party with respect to such Collateral or any part thereof) when an Event of Default shall be continuing:

(i) in the name of such Grantor, in its own name or otherwise, take possession of and indorse and collect any check, draft, note, acceptance or other instrument for the payment of moneys due under any account or general intangible or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Secured Party for the purpose of collecting any such moneys due under any account or general intangible or with respect to any other Collateral whenever payable;

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(ii) in the case of any Intellectual Property owned by or licensed to the Grantors constituting Collateral, execute, deliver and have recorded any document that the Secured Party may request to evidence, effect, publicize or record the Secured Party’s security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby;

(iii) pay or discharge taxes and liens levied or placed on or threatened against any Collateral (other than Permitted Liens), effect any repair of any Collateral or pay any insurance with respect to any Collateral deemed reasonable by the Secured Party;

(iv) execute, in connection with any sale provided for in Section 6.1 or Section 6.5 hereof, any document to effect or otherwise necessary or appropriate in relation to evidence the sale of any Collateral; or

(v) (A) direct any party liable for any payment under any Collateral to make payment of any moneys due or to become due thereunder directly to the Secured Party or as the Secured Party shall direct, (B) ask or demand for, and collect and receive payment of and receipt for, any moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral, (C) sign and indorse any invoice, freight or express bill, bill of lading, storage or warehouse receipt, draft against debtors, assignment, verification, notice and other document in connection with any Collateral, (D) commence and prosecute any suit, action or proceeding at law or in equity in any court of competent jurisdiction to collect any Collateral and to enforce any other right in respect of any Collateral, (E) defend any actions, suits, proceedings, audits, claims, demands, orders or disputes brought against such Grantor with respect to any Collateral, (F) settle, compromise or adjust any such actions, suits, proceedings, audits, claims, demands, orders or disputes and, in connection therewith, give such discharges or releases as the Secured Party may deem appropriate, (G) assign any Intellectual Property constituting Collateral owned by the Grantors or, to the extent permitted under the applicable agreement, any Intellectual Property licenses constituting Collateral of the Grantors throughout the world on such terms and conditions and in such manner as the Secured Party shall in its sole discretion determine (in the case of licensed Intellectual Property, subject to the terms, conditions and limitations of any intellectual property license to which the Grantor is a party with respect to Collateral or any part thereof), including the execution and filing of any document necessary to effectuate or record such assignment and (H) generally, sell, assign, convey, transfer or grant a lien on, make any contractual obligation with respect to and otherwise deal with, any Collateral as fully and completely as though the Secured Party were the absolute owner thereof for all purposes and do, at the Secured Party’s option, at any time or from time to time, all acts and things that the Secured Party deems necessary to protect, preserve or realize upon any Collateral and the Secured Party’s security interests therein and to effect the intent of the Note and this Agreement, all as fully and effectively as such Grantor might do.

(b) The reasonable and documented out-of-pocket expenses of the Secured Party incurred in connection with actions undertaken as provided in this Section 7.1, together with interest thereon at the Default Rate if required by the Secured Party, five (5) Business Days from the date of demand by Secured Party to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Secured Party on demand.

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(c) Each Grantor hereby ratifies, to the maximum extent permitted by applicable law, all that said attorneys shall lawfully do or cause to be done by virtue of this Section 7.1. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable after the occurrence and during the continuance of an Event of Default until this Agreement is terminated and the security interests created hereby are released.

Section 7.2. Authorization to File Financing Statements. Each Grantor authorizes the Secured Party and its representatives, at any time and from time to time, to file or record financing statements, amendments thereto, and other filing or recording documents or instruments with respect to any Collateral in such form and in such offices as the Secured Party reasonably determines appropriate to perfect the security interests of the Secured Party under this Agreement (only if, and to the extent, such security interests may be perfected by the filing of financing statements, filings, recording documents or other instruments), and such financing statements and amendments may describe the Collateral covered thereby as “all assets of the debtor”. A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction.

Section 7.4. Duty; Obligations and Liabilities.

(a) Duty of Secured Party. The Secured Party’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession shall be to deal with it in the same manner as the Secured Party deals with similar property for its own account. The powers conferred on the Secured Party hereunder are solely to protect the Secured Party’s interest in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers. The Secured Party shall be accountable only for amounts that it receives as a result of the exercise of such powers, and neither it nor any of its representatives shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. In addition, the Secured Party shall not be liable or responsible for any loss or damage to any Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehousemen, carrier, forwarding agency, consignee or other bailee if such person has been selected by the Secured Party in good faith.

(b) Obligations and Liabilities with Respect to Collateral. Neither the Secured Party nor any Representative thereof shall be liable for failure to demand, collect or realize upon any Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other person or to take any other action whatsoever with regard to any Collateral.

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ARTICLE VIII

MISCELLANEOUS

Section 8.1. Reinstatement. Each Grantor agrees that, if any payment made by any Credit Party or other person and applied to the Secured Obligations is at any time annulled, avoided, set aside, rescinded, invalidated, declared to be fraudulent or preferential or otherwise required to be refunded or repaid, or the proceeds of any Collateral are required to be returned by the Secured Party to such Credit Party, its estate, trustee, receiver or any other party, including any Grantor, under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, any lien or other Collateral securing such liability shall be and remain in full force and effect, as fully as if such payment had never been made. If, prior to any of the foregoing, (a) any lien or other Collateral securing such Grantor’s liability hereunder shall have been released or terminated by virtue of the foregoing or (b) any provision of the Guaranty hereunder shall have been terminated, cancelled or surrendered, such lien, other Collateral or provision shall be reinstated in full force and effect and such prior release, termination, cancellation or surrender shall not diminish, release, discharge, impair or otherwise affect the obligations of any such Grantor in respect of any lien or other Collateral securing such obligation or the amount of such payment.

Section 8.2. Release of Collateral. Upon termination and repayment in full of all amounts outstanding under the Note, the Collateral shall automatically be released from the lien created hereby and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Secured Party and each Grantor hereunder shall automatically terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall automatically revert to the Grantors. Each Grantor is hereby authorized to file UCC amendments at such time evidencing the termination of the liens so released. At the request of any Grantor following any such termination, the Secured Party shall promptly deliver to such Grantor any Collateral of such Grantor held by the Secured Party hereunder and promptly execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination.

Section 8.3. Independent Obligations. The obligations of each Grantor hereunder are independent of and separate from the Secured Obligations and the Guaranteed Obligations. If any Secured Obligation or Guaranteed Obligation is not paid when due (after giving effect to any grace period), or upon the occurrence and during the continuance of any Event of Default, the Secured Party may, at its sole election, proceed directly and at once, without notice (except as set forth herein), against any Grantor and any Collateral to collect and recover the full amount of any Secured Obligation or Guaranteed Obligation then due, without first proceeding against any other Grantor or any other Collateral and without first joining any other Grantor in any proceeding.

Section 8.4. No Waiver by Course of Conduct. The Secured Party shall not by any act (except by a written instrument pursuant to Section 8.5 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy that the Secured Party would otherwise have on any future occasion.

Section 8.5. Modifications. Any modification or waiver of any provision of this Agreement, or any consent to any departure by any party from the terms hereof, shall not be effective in any event unless the same is in writing and signed by each Grantor and the Secured Party.

Section 8.6. [Reserved].

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Section 8.7. Notices. All notices, requests and demands to or upon the Secured Party or any Grantor hereunder shall be effected in the manner provided for in Section 10 of the Note; provided, however, that any such notice, request or demand to or upon any Grantor shall be addressed to the Borrower’s notice address set forth in such Section 10.

Section 8.8. Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of each Secured Party and their successors and permitted assigns; provided, however, that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Secured Party.

Section 8.9. Counterparts. This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, and all of which taken together shall be considered one and the same Note.

Section 8.10. [Reserved].

Section 8.11. Governing Law. This Agreement will be governed by and construed in accordance with the domestic laws of the State of Delaware, without giving effect to such state’s choice of law or conflict of law provisions or rules.

Section 8.12. Waiver of Jury Trial. ALL DISPUTES ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN THE STATE OF DELAWARE, AND APPELLATE COURTS HAVING JURISDICTION OF SUCH STATE AND FEDERAL COURTS AND EACH PARTY WAIVES ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN. EACH GRANTOR WAIVES IN ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE.

Section 8.13. Jury Trial Waiver. EACH PARTY HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW]

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In Witness Whereof, each of the undersigned has caused this Guaranty and Security Agreement to be duly executed and delivered as of the date first above written.

Grantors:
CYNERGISTEK, INC.
By:	/s/ Paul Anthony
Name:	Paul Anthony
Title:	Chief Financial Officer
CTEK SECURITY, INC.
By:	/s/ Paul Anthony
Name:	Paul Anthony
Title:	Chief Financial Officer

BACKBONE ENTERPRISES INC.
By:	/s/ Paul Anthony
Name:	Paul Anthony
Title:	Chief Financial Officer

CTEK SOLUTIONS, INC.
By:	/s/ Paul Anthony
Name:	Paul Anthony
Title:	Chief Financial Officer

DELPHIIS, INC.
By:	/s/ Paul Anthony
Name:	Paul Anthony
Title:	Chief Financial Officer

[SIGNATURE PAGE TO GUARANTY AND SECURITY AGREEMENT]

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Accepted and Agreed as of the

date first above written:

CLEARWATER COMPLIANCE LLC, as Secured Party
By:	/s/ Steven Cagle
Name:	Steven Cagle
Title:	Chief Executive Officer

[SIGNATURE PAGE TO GUARANTY AND SECURITY AGREEMENT]

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EX-10.2

EXHIBIT 10.2

REVOLVING PROMISSORY NOTE

$750,000.00 August 12, 2022

FOR VALUE RECEIVED, the undersigned CynergisTek, Inc., a Delaware corporation (“Borrower”), hereby promises to pay to the order of Clearwater Compliance LLC, a Tennessee limited liability company (“Payee”), the principal sum of Seven Hundred Fifty Thousand Dollars and 00/100 ($750,000.00), or so much thereof as shall be advanced (each, an “Advance” and collectively, the “Advances”) and as evidenced by inscriptions made on Schedule A attached hereto (the “Schedule”), together with interest thereon, in each case subject to and in accordance with the provisions of this Revolving Promissory Note (this “Note”).

SECTION 1. INTEREST RATE AND PAYMENTS.

(a) Interest Rate and Computation. Interest shall accrue on the unpaid principal amount Advanced hereunder (including interest added to such principal amount) from the date of each Advance at the fixed rate of 10.0% per annum. Such interest shall be calculated on the basis of actual days elapsed in a year of 365 days.

(b) Payment of Interest. Subject to Section 1(c), Borrower shall pay to Payee interest accrued on the outstanding principal amount of this Note on the last day of each calendar quarter, commencing September 30, 2022 (each an “Interest Payment Date”). In addition, accrued and unpaid interest shall be payable by Borrower on the maturity of this Note and on the date of any prepayments on the principal amount then being prepaid (as further described herein). Without limiting any other rights and remedies of Payee (including as specified in Section 8 below), interest on any amounts that are due but not paid hereunder shall accrue at a per annum rate equal to 2.00% above the per annum rate otherwise applicable to amounts outstanding under this Note (the “Default Rate”).

(c) PIK Interest. Borrower may elect to pay all of the interest that is due on any Interest Payment Date in-kind (which portion, if applicable, shall be added to the outstanding principal amount under this Note) upon prior written notice of such election at least five Business Days (as such term is defined in the Merger Agreement, defined below) prior to such Interest Payment Date.

SECTION 2. PAYMENTS OF PRINCIPAL; PAYMENTS GENERALLY.

(a) Optional Prepayments. Borrower may at any time and from time to time, without premium or penalty, on at least two Business Days’ prior written notice, prepay all or any portion of the outstanding amount of this Note. Any amount prepaid shall be applied first to accrued and unpaid interest and then to the unpaid principal amount.

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(b) Payment at Maturity. This Note shall mature, and the remaining outstanding principal balance and all accrued and unpaid interest shall become due and payable, and Borrower’s right to request and receive Advances hereunder shall terminate, in each case, upon the earliest to occur of (i) the five-year anniversary of the date hereof, (ii) the termination for any reason of that certain Merger Agreement, dated as of May 23, 2022, among Borrower, Payee and Clearwater Compliance Acquisition Company I (such agreement, as may be amended from time to time, the “Merger Agreement”), or (iii) the incurrence by Borrower or any of its subsidiaries of any debt of any kind whatsoever from a third party, other than payables incurred in the ordinary course of business; provided, however, that (x) if the Merger Agreement is terminated pursuant to Sections 7.1(a), 7.1(b), 7.1(c), 7.1(d), or 7.1(g) of the Merger Agreement, then all outstanding principal and interest under this Note shall be due and payable by the 60th day following such termination; and (y) if the Merger Agreement is terminated in connection with the entry into an Acquisition Transaction (as such term is defined in the Merger Agreement), then Borrower shall be required to repay all outstanding interest and principal then due under this Note as a condition to, and prior to or concurrently with, the termination of the Merger Agreement by Borrower.

(c) Payments Generally. Any payment of interest or principal due on a date that is not a Business Day shall be paid on the next following Business Day. All payments made to Payee pursuant to this Note shall be made in lawful money of the United States and in immediately available funds by wire transfer of funds to an account designated by Payee.

SECTION 3. ADVANCES; SCHEDULE ENTRIES.

(a) Advances; Schedule Entries. Payee may make Advances under this Note in such amounts and at such times as Borrower shall request from time to time in accordance with the terms hereof in increments of at least $50,000, but not more than $750,000 in the aggregate. For the avoidance of doubt, any prepayments of principal under this Note shall not be subject to further Advances under this Note. Payee shall make entries on the Schedule from time to time to reflect the making of Advances (and Borrower’s initials on the Schedule shall be prima facie evidence of such Advance) and any reduction of the principal balance hereunder as a result of payment received by Payee. The principal amount outstanding shown on the Schedule shall be prima facie evidence of the principal amount owing and unpaid on this Note. The failure to record the date and amount of any Advance on the Schedule shall not, however, limit or otherwise affect the obligations of Borrower under this Note to repay the principal amount of the Advances together with all interest accruing thereon.

(b) Conditions to Advances. The making of any Advance shall be conditioned upon satisfaction of each of the following conditions precedent (as determined by Payee): (i) no Event of Default shall have occurred and be continuing or shall occur as a result of such Advance, (ii) the representations and warranties of Borrower contained in this Note shall be true and correct on and as of the date of such Advance as though made on and as of such date, and (iii) Payee shall have received—at least two Business Days prior to the date such Advance is to be made—written notice executed by Borrower specifying the principal amount and requested date of such Advance.

SECTION 4. SECURITY AGREEMENT. This Note and Borrower’s performance of its obligations hereunder are secured by, and entitled to the benefits of, that certain Guaranty and Security Agreement dated as of the date hereof made by Borrower in favor of Payee (as amended, restated, supplemented or otherwise modified from time to time, the “Security Agreement”). Reference is made to the Security Agreement for a statement concerning the terms and conditions governing the collateral security for the obligations of Borrower under this Note.

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SECTION 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Payee on the date hereof as follows (and each request for an Advance will be deemed a representation and warranty by Borrower of the date of such Advance that):

(a) it and each of its subsidiaries is duly incorporated and is in good standing under the laws of their jurisdiction of organization;

(b) it has full power, authority and legal right to enter into this Note and to perform all of its obligations hereunder;

(c) the execution, delivery and performance of this Note (i) are within Borrower’s corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of the terms of Borrower’s organizational documents, (ii) will not conflict with or violate, in any material respect, any law or regulation applicable to Borrower, or any material agreement or material order by which Borrower or Borrower’s property is bound, and (iii) will not require the consent of any governmental authority;

(d) this Note has been duly executed and delivered by Borrower, and this Note constitutes the legal, valid and binding obligation of Borrower enforceable in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors’ rights generally and general principles of equity; and

(e) no Event of Default has occurred and is continuing or would result by the execution, delivery or performance of this Note.

SECTION 6. EVENTS OF DEFAULT. The occurrence of any one or more of the following events or conditions (for whatever reason) shall constitute an “Event of Default” hereunder:

(a) Failure to Pay. Borrower fails to pay (i) any principal amount outstanding under this Note within five days of the date that such amount is due; (ii) any outstanding interest under this Note within five days of the date such amount is due; or (iii) any other amount due hereunder within five days of the date such amount is due, in each case, whether such amount is due by scheduled maturity, required prepayment, acceleration, demand or otherwise; provided, however, that notwithstanding the foregoing, any amounts becoming due hereunder pursuant to Section 2(b)(y) above shall not be subject to the five day grace period set forth above and shall instead be due as a condition to, and prior to or concurrently with, the termination of the Merger Agreement by Borrower. For the avoidance of doubt, during the pendency of an Event of Default under this Section 6(a), all outstanding amounts due hereunder shall accrue interest at the Default Rate; provided, that in no event shall the incurrence of the Default Rate limit Payee’s rights and remedies hereunder, as provided in Section 8.

- 3 -

(b) Breach of Representations and Warranties. Any breach in any material respect of any representation or warranty made by Borrower herein or in the Security Agreement.

(c) Bankruptcy; Insolvency. (i) A proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed (A) against Borrower or any of its subsidiaries, and an adjudication or appointment is made or order for relief is entered, or such proceeding remains undismissed for a period in excess of 60 days, or (B) by Borrower or any of its subsidiaries; (ii) Borrower or any of its subsidiaries makes an assignment for the benefit of creditors; (iii) Borrower or any of its subsidiaries takes any action to authorize any of the foregoing; or (iv) Borrower or any of its subsidiaries becomes insolvent or fails generally to pay its debts as they become due.

(d) Failure to Give Notice. Borrower fails to give the notice of Event of Default specified in Section 7.

(e) Revocation. Borrower shall, or shall attempt or purport to, revoke any of its obligations under this Note, or Borrower or any of its subsidiaries shall challenge or contest, in any action, suit or proceeding, the validity or enforceability of any of this Note or the perfection or priority of any lien granted to Payee.

SECTION 7. NOTICE OF EVENT OF DEFAULT. As soon as possible after it becomes aware that an Event of Default has occurred, and in any event within two Business Days of such occurrence, Borrower shall notify Payee in writing of the nature and extent of such Event of Default and the action, if any, it has taken or proposes to take with respect to such Event of Default.

SECTION 8. REMEDIES. Upon and at any time following the occurrence of any Event of Default, Payee may, at its option, terminate Borrower’s right to request and receive Advances under this Note and/or declare the entire principal, interest and other amounts then outstanding under this Note due and payable immediately without notice to Borrower, and Payee may proceed to enforce payment of the same, except that upon the occurrence of an Event a Default described in Section 6(c), the entire principal, interest and other amounts then outstanding under this Note shall be due and payable immediately without notice to Borrower. In addition, Payee may exercise and pursue any and all rights and remedies available to it under this Note, the Security Agreement and all other documents, instruments and agreements entered into with, or executed or delivered to, Payee in connection with any of the foregoing (collectively, the “Loan Documents”), and all rights and remedies available to Payee under applicable law. The rights and remedies provided under this Note and the other Loan Documents are cumulative and may be exercised singly or concurrently and are not exclusive of any rights and remedies provided by law or equity.

SECTION 9. REGISTER. To ensure that the obligations evidenced by this Note are treated as in “registered form” within the meaning of Section 163(f) of the Internal Revenue Code of 1986, as amended, Borrower shall maintain, at its address for receipt of notices pursuant to Section 10 a register (the “Register”) for the recordation of the name and address of each endorsee, assignee or other transferee of interests, rights, and obligations hereunder and the commitment of, and principal amount of the loan owing to, Payee. No endorsement, assignment, or other transfer of interests, rights, and obligations hereunder shall be effective unless such transfer is recorded in the Register and Borrower shall have received timely notice of the information required to be recorded in the Register pertaining to such transfer.

- 4 -

SECTION 10. NOTICE. Whenever this Note requires or permits any notice, approval, request or demand from one party to another, the notice, approval, request or demand must be in writing and shall be deemed to have been given (a) when personally delivered, (b) on the date of successful transmission if sent via e-mail during normal business hours of the recipient during a Business Day, otherwise on the next Business Day, (c) three Business Days after deposit in the United States mails, or (d) one Business Day after deposited with a reputable overnight courier with all charges prepaid, and addressed to the party to be notified at the following address (or at such other address as may have been designated by written notice):

Payee:	Clearwater Compliance LLC 40 Burton Hills Blvd., Suite 200 Nashville, TN 37215 Attn: Steve Cagle Email: steve.cagle@clearwatercompliance.com
	with a copy (which shall not constitute notice) to:
	ArentFox Schiff LLP 233 S. Wacker Drive, Suite 7100 Chicago, IL 60606 Attn: Steve Isaacs, Esq. Email: steve.isaacs@afslaw.com
Borrower:
	CynergisTek, Inc. 11940 Jollyville Road, Suite 300-N Austin, TX 78759 Attention: Paul Anthony E-mail: Paul.Anthony@cynergistek.com with a copy (which shall not constitute notice) to: Holland & Hart LLP 222 South Main Street, Suite 2200 Salt Lake City, UT 84101 Attention: S. Chase Dowden, Esq. E-mail: SCDowden@hollandhart.com

SECTION 11. MODIFICATIONS. Any modification or waiver of any provision of this Note, or any consent to any departure by any party from the terms hereof, shall not be effective in any event unless the same is in writing and signed by Borrower and Payee.

- 5 -

SECTION 12. ASSIGNMENT. This Note may not be assigned, in whole or in part for any purpose (including in connection with a change in control of Borrower or any of its subsidiaries, whether by sale of a majority of stock or all or substantially all assets or by operation of law) by Borrower without the prior written consent of Payee granted in Payee’s sole discretion, and any attempted assignment of this Note or any right or obligation hereunder shall be null and void ab initio. This Note may be assigned or transferred by Payee to any individual or entity in its sole discretion.

SECTION 13. EXPENSES. Each of Borrower and Payee shall be responsible for its own costs and expenses incurred in connection with the negotiation, drafting, execution, delivery and/or administration of the Loan Documents.

SECTION 14. SEVERABILITY. To the fullest extent permitted by law, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note.

SECTION 15. ENTIRE AGREEMENT. This Note and the Security Agreement constitute the entire contract among the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof (including, for the avoidance of doubt, that certain Summary of Terms and Conditions between the parties).

SECTION 16. GOVERNING LAW. This Note will be governed by and construed in accordance with the domestic laws of the State of Delaware, without giving effect to such state’s choice of law or conflict of law provisions or rules.

SECTION 17. CONSENT TO JURISDICTION. ALL DISPUTES ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THIS NOTE, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN THE STATE OF DELAWARE, AND APPELLATE COURTS HAVING JURISDICTION OF SUCH STATE AND FEDERAL COURTS AND EACH PARTY WAIVES ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN. BORROWER WAIVES IN ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE.

SECTION 18. JURY TRIAL WAIVER. EACH PARTY HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE.

SECTION 19. COUNTERPARTS. This Note may be executed in multiple original counterparts, each of which shall be deemed an original, and all of which taken together shall be considered one and the same Note.

[Page intentionally left blank]

- 6 -

IN WITNESS WHEREOF, this Note has been duly executed and delivered by Borrower on the date first above written.

BORROWER:
CYNERGISTEK, INC.
By:	/s/ Paul Anthony
Name:	Paul Anthony
Title:	Chief Financial Officer
ACCEPTED and AGREED:
CLEARWATER COMPLIANCE LLC
By:	/s/ Steven Cagle
Name:	Steven Cagle
Title:	Chief Executive Officer

- 7 -

EX-31.1

EXHIBIT 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

I, Michael McMillan, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of CynergisTek, Inc. (the “Registrant”);
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(s) 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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(s) 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.

Dated: August 15, 2022

/s/ Michael McMillan

Michael McMillan,

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 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

I, Paul T. Anthony, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of CynergisTek, Inc. (the “Registrant”);
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(s) 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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(s) 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.

Dated: August 15, 2022

/s/ Paul T. Anthony

Paul Anthony,

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER 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

In connection with the Quarterly Report of CynergisTek, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Michael McMillan, Chief Executive Officer and Paul T. Anthony, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of the dates presented and the results of operations of the Company for the periods presented.

Date: August 15, 2022

By:	/s/ Michael McMillan
	Michael McMillan,
	Chief Executive Officer
By:	/s/ Paul T. Anthony
	Paul Anthony,
	Chief Financial Officer

A signed original of this written statement required by section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Quarterly Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.

XML

Cover - shares	6 Months Ended
	Jun. 30, 2022	Aug. 15, 2022
Cover [Abstract]
Entity Registrant Name	CYNERGISTEK, INC.
Entity Central Index Key	0001011432
Document Type	10-Q
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Current Reporting Status	Yes
Document Period End Date	Jun. 30, 2022
Entity Filer Category	Non-accelerated Filer
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2022
Entity Common Stock Shares Outstanding		13,256,570
Document Quarterly Report	true
Document Transition Report	false
Entity File Number	000-27507
Entity Incorporation State Country Code	DE
Entity Tax Identification Number	37-1867101
Entity Address Address Line 1	11940 Jollyville Road
Entity Address Address Line 2	Suite 300-N
Entity Address City Or Town	Austin
Entity Address State Or Province	TX
Entity Address Postal Zip Code	78759
City Area Code	949
Local Phone Number	614-0700
Security 12b Title	Common Stock, $.001 par value per share
Trading Symbol	CTEK
Security Exchange Name	NYSE
Entity Interactive Data Current	Yes

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Jun. 30, 2022	Dec. 31, 2021
Current Assets:
Cash And Cash Equivalents	$ 1,412,979	$ 3,575,682
Accounts Receivable, Net Of Allowance For Doubtful Accounts	2,409,539	2,007,136
Unbilled Services	731,018	542,952
Prepaid And Other Current Assets	1,322,880	1,840,178
Income Taxes Receivable	50,920	1,484,851
Total Current Assets	5,927,335	9,450,799
Property And Equipment, Net	164,697	243,791
Deposits	34,310	34,310
Deferred Income Taxes	0	6,060,129
Intangible Assets, Net	4,175,430	4,701,491
Goodwill	8,394,483	8,394,483
Total Assets	18,696,255	28,885,003
Current Liabilities:
Accounts Payable And Accrued Expenses	1,283,937	1,453,454
Accrued Compensation And Benefits	426,287	1,189,472
Deferred Revenue	1,618,072	1,663,719
Earnout Liability	184,556	432,000
Promissory Note To Related Parties	0	140,625
Operating Lease Liability	0	45,233
Total Current Liabilities	3,512,852	4,924,503
Stockholders' Equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 13,256,570 shares issued and outstanding at June 30, 2022, and 13,248,024 shares issued and outstanding at December 31, 2021	13,256	13,248
Additional Paid-in Capital	41,688,485	41,318,917
Accumulated Deficit	(26,518,338)	(17,371,665)
Total Stockholders' Equity	15,183,403	23,960,500
Total Liabilities And Stockholders' Equity	$ 18,696,255	$ 28,885,003

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Jun. 30, 2022	Dec. 31, 2021
CONDENSED CONSOLIDATED BALANCE SHEETS
Common Stock, Par Or Stated Value Per Share	$ 0.001	$ 0.001
Common Stock, Shares Authorized	33,333,333	33,333,333
Common Stock, Shares, Issued	13,256,570	13,248,024
Common Stock, Shares, Outstanding	13,256,570	13,248,024

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Net revenues	$ 3,943,394	$ 3,875,143	$ 8,603,962	$ 8,048,664
Cost of revenues	2,636,086	2,083,056	5,428,651	4,173,890
Gross profit	1,307,308	1,792,087	3,175,311	3,874,774
Operating expenses:
Sales and marketing expenses	1,186,407	1,242,240	2,363,739	2,454,620
General and administrative expenses	1,745,609	1,470,593	3,269,688	3,147,251
Change in valuation of contingent earn-out	0	(1,300,000)	0	(1,300,000)
Depreciation	37,130	48,186	85,352	95,882
Amortization of acquisition-related intangibles	263,031	340,528	526,061	681,056
Total operating expenses	3,232,177	1,801,547	6,244,840	5,078,809
Loss from operations	(1,924,869)	(9,460)	(3,069,529)	(1,204,035)
Other (expense) income:
Other (expense) income	(195)	11	(195)	11
Interest expense	0	(17,339)	(1,819)	(37,340)
Total other (expense) income	(195)	(17,328)	(2,014)	(37,329)
Loss before provision for income taxes	(1,925,064)	(26,788)	(3,071,543)	(1,241,364)
Income tax (expense) benefit	(6,351,130)	(20,100)	(6,075,130)	279,999
Net loss	$ (8,276,194)	$ (46,888)	$ (9,146,673)	$ (961,365)
Net loss per share:
earning Basic	$ (0.62)	$ (0.00)	$ (0.69)	$ (0.08)
earning Diluted	$ (0.62)	$ (0.00)	$ (0.69)	$ (0.08)
Number of weighted average shares outstanding:
Basic	13,256,570	12,120,698	13,253,551	12,081,328
Diluted	13,256,570	12,120,698	13,253,551	12,081,328

XML

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (UNAUDITED) - USD ($)	Total	Retained Earnings (Accumulated Deficit)	Additional Paid-in Capital	Common Stock
Balance, shares at Dec. 31, 2020				12,024,967
Balance, amount at Dec. 31, 2020	$ 23,451,458	$ (15,125,086)	$ 38,564,520	$ 12,024
Stock compensation expense for equity awards granted to employees and directors	228,437	0	228,437	$ 0
Restricted stock units exercised, shares				95,731
Restricted stock units exercised, amount	0	0	(96)	$ 96
Net loss	(914,477)	(914,477)	0	$ 0
Balance, shares at Mar. 31, 2021				12,120,698
Balance, amount at Mar. 31, 2021	22,765,418	(16,039,563)	38,792,861	$ 12,120
Balance, shares at Dec. 31, 2020				12,024,967
Balance, amount at Dec. 31, 2020	23,451,458	(15,125,086)	38,564,520	$ 12,024
Net loss	(961,365)
Balance, shares at Jun. 30, 2021				12,120,698
Balance, amount at Jun. 30, 2021	23,056,802	(16,086,451)	39,131,133	$ 12,120
Balance, shares at Mar. 31, 2021				12,120,698
Balance, amount at Mar. 31, 2021	22,765,418	(16,039,563)	38,792,861	$ 12,120
Stock compensation expense for equity awards granted to employees and directors	338,272	0	338,272	0
Net loss	(46,888)	(46,888)	0	$ 0
Balance, shares at Jun. 30, 2021				12,120,698
Balance, amount at Jun. 30, 2021	23,056,802	(16,086,451)	39,131,133	$ 12,120
Balance, shares at Dec. 31, 2021				13,248,024
Balance, amount at Dec. 31, 2021	23,960,500	(17,371,665)	41,318,917	$ 13,248
Stock compensation expense for equity awards granted to employees and directors	191,161	0	191,161	$ 0
Restricted stock units exercised, shares				8,546
Restricted stock units exercised, amount	0	0	(8)	$ 8
Net loss	(870,479)	(870,479)	0	$ 0
Balance, shares at Mar. 31, 2022				13,256,570
Balance, amount at Mar. 31, 2022	23,281,182	(18,242,144)	41,510,070	$ 13,256
Balance, shares at Dec. 31, 2021				13,248,024
Balance, amount at Dec. 31, 2021	23,960,500	(17,371,665)	41,318,917	$ 13,248
Net loss	(9,146,673)
Balance, shares at Jun. 30, 2022				13,256,570
Balance, amount at Jun. 30, 2022	15,183,403	(26,518,338)	41,688,485	$ 13,256
Balance, shares at Mar. 31, 2022				13,256,570
Balance, amount at Mar. 31, 2022	23,281,182	(18,242,144)	41,510,070	$ 13,256
Stock compensation expense for equity awards granted to employees and directors	178,415	0	178,415	0
Net loss	(8,276,194)	(8,276,194)	0	$ 0
Balance, shares at Jun. 30, 2022				13,256,570
Balance, amount at Jun. 30, 2022	$ 15,183,403	$ (26,518,338)	$ 41,688,485	$ 13,256

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)	6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021
Cash flows from operating activities:
Net loss	$ (9,146,673)	$ (961,365)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation	85,352	95,882
Amortization of intangible assets	526,061	681,056
Change in net deferred tax assets	6,060,129	(66,420)
Bad debt expense	0	20,625
Stock compensation for equity awards granted to employees and directors	369,576	566,709
Change in valuation of contingent earn-out	0	(1,300,000)
Other	0	(17,911)
Changes in operating assets and liabilities:
Accounts receivable	(402,403)	71,954
Unbilled services	(188,066)	17,682
Prepaid and other current assets	517,299	361,721
Income taxes receivable	1,433,931	(236,590)
Deposits	0	17,210
Accounts payable and accrued expenses	(169,517)	(465,474)
Accrued compensation and benefits	(763,185)	(312,117)
Deferred revenue	(45,647)	259,157
Earnout liability	(247,444)	0
Net cash used for operating activities	(1,970,587)	(1,267,881)
Cash flows from investing activities:
Purchases of property and equipment	(51,491)	(38,696)
Net cash used for investing activities	(51,491)	(38,696)
Cash flows from financing activities:
Payments on promissory note to related party	(140,625)	(281,250)
Net cash used for financing activities	(140,625)	(281,250)
Net change in cash and cash equivalents	(2,162,703)	(1,587,827)
Cash and cash equivalents, beginning of period	3,575,682	5,613,654
Cash and cash equivalents, end of period	1,412,979	4,025,827
Supplemental disclosure of cash flow information:
Interest paid	1,818	23,209
Income taxes (refunded) paid	$ (1,418,931)	$ 23,012

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BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2022

BASIS OF PRESENTATION

1. BASIS OF PRESENTATION

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 (the “Commission” or the “SEC”). 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, 2021, as filed with the SEC on March 28, 2022.

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.

On May 23, 2022, we entered into the Merger Agreement (defined below) as described in Note 2 to the condensed consolidated financial statements below.

Liquidity and Capital Resources

As of June 30, 2022, our cash balance was $1.4 million, current assets minus current liabilities was positive $2.4 million and we have no long-term liabilities. In April of 2022 we received a $1.4 million tax refund and in August of 2022 we delivered a revolving promissory note to Clearwater (defined below) in the principal amount not to exceed $750,000 in connection with the Clearwater Revolving Loan (defined below), as described in Note 10 to the condensed consolidated financial statements below. 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:

· The pace at which we choose to invest resources in growing our business, both organically and through acquisition or other transactions;

· 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 lingering economic effects of the COVID-19 pandemic 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; and

· The continued economic uncertainty, including related to the COVID-19 pandemic, the conflict in Ukraine and related sanctions against Russia and Belarus, and inflationary pressures (including specifically, but not limited to, human capital costs which are essential to CynergisTek’s business), as well as the impact that such uncertainty has had, and could continue to have, on CynergisTek’s customers and industry and business and operating results.

· The success or failure to complete the Merger and the potential impact that the Merger Agreement may be terminated under certain circumstances that requires us to pay Clearwater a termination fee of $710,000; the outcome of any legal proceedings that may be instituted against us and others related to the Merger Agreement; risks that the proposed Merger disrupts our current operations or affects our ability to retain or recruit key employees; the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger; risks related to the Merger diverting management’s or employees’ attention from ongoing business operations; risks that our stock price may decline significantly if the Merger is not completed.

We have historically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with cash from operations, proceeds from the issuances of our common stock and other financing arrangements. As of the date of this Report on Form 10-Q, we are generating negative cash from operations and our overall revenue and business levels have been impacted by the COVID-19 pandemic over the past twenty-four months. Our customer base is heavily concentrated in the healthcare provider space. The healthcare industry has experienced financial and operational disruption due to the pandemic. Sales cycles are longer, cybersecurity projects have been delayed and budgets have been constrained as healthcare providers focus on patient care and navigating the pandemic. If the pandemic continues or there are resurgences in 2022 and beyond that impact our customers’ operations and resources available for cybersecurity and privacy projects, our cash flows, financial position and operating results for fiscal year 2022 and beyond could be negatively impacted.

During 2020 and 2021, we took actions to reduce expenses, conserve cash, and raise additional capital. During 2021, we raised $1.4 million in additional capital through an “at-the-market” or ATM offering. In addition, we received a $2.8 million PPP Loan (as described in Note 9 to the condensed consolidated financial statements below) which was fully forgiven in August 2021. We also received approximately $0.7 million per quarter in employee retention tax credits in the first three quarters of 2021 and a $1.4 million tax refund in April 2022. With the proceeds from the tax refund, PPP Loan and the employee retention tax credits, we were able to minimize staff reductions in the areas of Sales and Delivery, our primary customer facing roles, to lessen the impact to our customers during this time of heightened security risks for the healthcare industry. If necessary, we could further reduce personnel and other variable and semi-variable costs to conserve cash and operate as a going concern. However, those actions if required, could negatively impact our ability to grow the business as well as the overall long-term outlook of the business.

We recently delivered a revolving promissory note in the principal amount up to $750,000 to Clearwater which allows the Company to draw upon the available credit in increments of at least $50,000 as and when needed, as described in Note 10 to the condensed consolidated financial statements below.

We believe that our existing sources of liquidity, including cash and cash equivalents, the ability to raise equity under our effective Registration Statement on Form S-3, the $750,000 Clearwater Revolving Loan as well as our ability to manage the business to decrease expenses, if necessary, will be sufficient to meet our projected capital needs for at least the next twelve months. If the Merger does not consummate in the short-term, as we execute our plans over the next twelve months, we intend to carefully monitor the impact of growth initiatives on our operating expenses, working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. Based on the Company’s current liquidity, and its potential merger-related costs, including payments which would be accelerated under the revolving promissory note if the merger were not consummated, it is anticipated that the Company would be required to raise additional capital to meet its obligations and such capital may not be available, or may not be available on acceptable terms at that time. In the event that capital is not available, we may then have to scale back operations, reduce expenses, and/or curtail future plans to manage our liquidity and capital resources. However, we cannot provide assurance that we will be able to raise additional capital. The lingering impact of the COVID-19 pandemic, the conflict in Ukraine and related sanctions against Russia and Belarus, and inflationary pressures (including specifically, but not limited to, human capital costs which are essential to CynergisTek’s business), as well as the impact that such uncertainty has had, and could continue to have, on CynergisTek’s customers and industry and business and operating results create uncertainty and volatility in the financial markets which may impact our operations and our ability to access capital and/or the terms under which we can do so.

The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

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PENDING MERGER WITH CLEARWATER COMPLIANCE LLC

6 Months Ended

Jun. 30, 2022

PENDING MERGER WITH CLEARWATER COMPLIANCE LLC

2. PENDING MERGER WITH CLEARWATER COMPLIANCE LLC

2. PENDING MERGER WITH CLEARWATER COMPLIANCE LLC

On May 23, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clearwater Compliance LLC, a Tennessee limited liability company ( “Clearwater”), and Clearwater Compliance Acquisition Company I, a Delaware corporation and a wholly owned subsidiary of the Clearwater (the “Merger Sub”). Clearwater is a portfolio company of funds affiliated with Altaris Capital Partners, LLC. The Merger Agreement provides, subject to its terms and conditions, for the acquisition of the Company by Clearwater through the merger of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Clearwater (the “Merger”).

As a result of the Merger, each share of common stock of the Company (“Common Stock”) that is issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares owned by any subsidiary of the Company, the Merger Sub, Clearwater or any other subsidiary of Clearwater immediately prior to the Effective Time (all of which will be canceled) and shares held by any holder who is entitled to, and who has perfected, appraisal rights under Delaware law) will be automatically converted into the right to receive cash in an amount of $1.25 per share, without interest, subject to any required withholding of taxes (the “Merger Consideration”). Additionally, each outstanding and unexercised Company stock option at the Effective Time shall vest in full and automatically be canceled and converted into the right to receive the excess, if any, of the Merger Consideration over the exercise price per share of such stock option; provided that, in the event that the exercise price of any such stock option is equal to or greater than the Merger Consideration, such stock option will be canceled, without any consideration being payable in respect thereof and have no further force or effect; and each Company restricted stock unit that is then outstanding and unvested shall vest in full and automatically be canceled and converted into the right to receive the Merger Consideration. Also, at or prior to the Effective Time, any outstanding but unexercised warrants to purchase Common Stock shall be canceled and, in certain circumstances, payment therefor will be paid to such warrant holders in accordance with the terms of their respective warrants.

In connection with the negotiation and execution of the Merger Agreement, the Company has incurred legal, consulting and accounting fees of approximately $406,000 through the quarter ended June 30, 2022.

A special meeting of stockholders of the Company will be held at 3:00 p.m. Central Time on August 31, 2022, to approve and adopt the Merger Agreement and approve the Merger, among other matters.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

6 Months Ended

Jun. 30, 2022

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an amendment to the guidance on the measurement of credit losses on financial instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured and amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The guidance is effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for annual periods after December 15, 2018. Management does not expect the impact from this guidance will have a material impact on our consolidated financial statements.

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DEFERRED COMMISSIONS

6 Months Ended

Jun. 30, 2022

DEFERRED COMMISSIONS

4. DEFERRED COMMISSIONS

4. DEFERRED COMMISSIONS

Our incremental costs of obtaining a contract, which consist of sales commissions, are deferred and amortized over the period of contract performance. Deferred commissions are included in prepaid and other current assets in our consolidated balance sheets. We had $553,000 and $760,000 of unamortized deferred commissions as of June 30, 2022, and December 31, 2021, respectively. We had $241,000 and $406,000 of commissions expense for the three and six months ended June 30, 2022, respectively. Commissions expense for the three and six months ended June 30, 2021, was $184,000 and $367,000, respectively.

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PROPERTY AND EQUIPMENT

6 Months Ended

Jun. 30, 2022

PROPERTY AND EQUIPMENT

5. PROPERTY AND EQUIPMENT

5. PROPERTY AND EQUIPMENT

A summary of property and equipment follows:

	June 30, 2022			December 31, 2021
Furniture and fixtures	$	235,245		$	235,245
Computers and office equipment		955,347			903,856
Right of use assets		-			214,446
Property and equipment at cost		1,190,592			1,353,547
Less accumulated depreciation and amortization		(1,025,895	)		(1,109,756	)
	$	164,697		$	243,791

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LEASES

6 Months Ended

Jun. 30, 2022

LEASES

6. LEASES

6. LEASES

We previously leased approximately 9,600 square feet of office space in Austin, Texas. In March 2020, we amended this lease reducing the office space to 5,000 square feet and extended the lease term to May 31, 2022. We extended the lease term to May 31, 2023. We leased approximately 3,700 square feet of office space in Minneapolis, Minnesota. This lease term expired on January 31, 2022 and we no longer use this office space since the employees who worked from this location are now working remote. We leased approximately 18,000 square feet of office space in Mission Viejo, California. This lease expired in April 2021. During the first quarter of 2019, we subleased this space to two subtenants. The terms of these subleases ended concurrently with the end of our lease obligation in April 2021.

We used a discount rate of 5.5% in determining our operating lease liabilities, which represented our incremental borrowing rate. Short-term leases with initial terms of twelve months or less are not capitalized.

We determine if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.

Right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. Certain lease agreements contain extension options; however, we have not included such options as part of right-of-use assets and lease liabilities because we originally did not expect to extend the leases. We measure and record a right-of-use asset and lease liability based on the discount rate implicit in the lease, if known. In cases where the discount rate implicit in the lease is not known, we measure the right-of-use assets and lease liabilities using a discount rate equal to our estimated incremental borrowing rate for loans with similar collateral and duration.

For all asset classes, we elected to (i) not recognize a right-of-use asset and lease liability for leases that we leased with a term of 12 months or less and (ii) not separate non-lease components from lease components, and we have accounted for combined lease and non-lease components as a single lease component.

Operating lease expense was comprised of the following:

	Three Months Ended June 30,					Six Months Ended June 30,
	2022		2021			2022		2021
Operating lease cost	$	38,790	$	82,740		$	78,937	$	266,536
Sublet income		-		(19,954	)		-		(148,491	)
Net operating lease cost	$	38,790	$	62,786		$	78,937	$	118,045

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INTANGIBLE ASSETS

6 Months Ended

Jun. 30, 2022

INTANGIBLE ASSETS

7. INTANGIBLE ASSETS

7. INTANGIBLE ASSETS

Intangible assets are amortized over expected useful lives ranging from 1.5 to 10 years and consist of the following:

	June 30, 2022							December 31, 2021
	Carrying Amount		Accumulated Amortization and Impairment			Net Book Value		Carrying Amount		Accumulated Amortization and Impairment			Net Book Value
Acquired technology	$	10,100,000	$	(6,254,371	)	$	3,845,629	$	10,100,000	$	(5,814,486	)	$	4,285,514
Customer relationships		4,650,000		(4,553,529	)		96,471		4,650,000		(4,517,353	)		132,647
Trademarks		2,300,000		(2,066,670	)		233,330		2,300,000		(2,016,670	)		283,330
Total	$	17,050,000	$	(12,874,570	)	$	4,175,430	$	17,050,000	$	(12,348,509	)	$	4,701,491

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DEFERRED REVENUE

6 Months Ended

Jun. 30, 2022

DEFERRED REVENUE

8. DEFERRED REVENUE

8. DEFERRED REVENUE

We record deferred revenues when amounts are billed to customers, or cash is received from customers, in advance of our performance. During the three months ended June 30, 2022 and 2021, $575,000 and $654,000, respectively, of managed services revenues were recognized, that were included in deferred revenue at the beginning of the respective periods. During the three months ended June 30, 2022 and 2021, $276,000 and $243,000, respectively, of consulting and professional services revenues were recognized, that were included in deferred revenue at the beginning of the respective periods.

During the six months ended June 30, 2022 and 2021, $833,000 and $798,000, respectively, of managed services revenues were recognized, that were included in deferred revenue at the beginning of the respective periods. During the six months ended June 30, 2022 and 2021, $681,000 and $260,000, respectively, of consulting and professional services revenues were recognized, that were included in deferred revenue at the beginning of the respective periods.

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PAYCHECK PROTECTION PROGRAM LOAN

6 Months Ended

Jun. 30, 2022

PAYCHECK PROTECTION PROGRAM LOAN

9. PAYCHECK PROTECTION PROGRAM LOAN

9. PAYCHECK PROTECTION PROGRAM LOAN

On April 20, 2020, we received $2.8 million in loan funding from the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), established pursuant to the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note issued by the Company (the “Note”) in favor of BMO Harris Bank N.A.

The Company used the PPP Loan proceeds to cover payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

Under the terms of the Note and the PPP Loan, interest accrued on the outstanding principal at the rate of 1.0% per annum. The term of the Note was two years, unless sooner provided in connection with an event of default under the Note. To the extent the PPP Loan amount was not forgiven, the Company would have been obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note, until the maturity date. The Company had not started making interest payments prior to its notice of forgiveness decision received from the SBA in August 2021. Details regarding the Note can be found in our Current Report on Form 8-K filed on April 20, 2020.

The Company recognized interest charges of approximately $7,000 and $14,000, respectively for the three and six months ended June 30, 2021. The Company received notice from the SBA in August 2021 that the full principal balance and related interest were forgiven.

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PROMISSORY NOTES

6 Months Ended

Jun. 30, 2022

PROMISSORY NOTES

10. PROMISSORY NOTES

10. PROMISSORY NOTES

In connection with the acquisition of CTEK Security, Inc. (formerly CynergisTek, Inc.), we issued a promissory note totaling $4,500,000 to Michael McMillan (the “Seller Note”). In March 2018, the Company repaid $2,250,000 plus accrued interest on the Seller Note and agreed to amend and restate the Seller Note in the remaining principal amount of $2,250,000. The Seller Note bore interest at a rate of 8% per annum, provided for quarterly payments of principal and interest and matured on March 31, 2022. As of June 30, 2022, and December 31, 2021, the outstanding principal balance due under the Seller Note was $0 and $0.1 million, respectively.

Interest charges associated with the Seller Note totaled approximately $0 and $2,000, respectively for the three and six months ended June 30, 2022, and $10,000 and $23,000, respectively for the three and six months ended June 30, 2021.

In August of 2022, we issued a revolving promissory note in a principal amount of up to $750,000 to Clearwater (the “Clearwater Note”). The Clearwater Note bears interest at a rate of 10.0% per annum and provides for quarterly payments of principal and interest. CynergisTek may make advances under the Clearwater Note in such amounts and at such times as we request from time to time in increments of at least $50,000, but not more than $750,000 in the aggregate (“the Clearwater Revolving Loan”).

The Clearwater Note matures and any remaining outstanding principal balance and all accrued and unpaid interest shall become due and payable upon the earliest to occur of (i) the five-year anniversary of the date hereof, (ii) the termination of the Merger Agreement, or (iii) the incurrence by CynergisTek or any of its subsidiaries of any debt of any kind whatsoever from a third party, other than payables incurred in the ordinary course of business; provided, however, that (x) if the Merger Agreement is terminated pursuant to Sections 7.1(a), 7.1(b), 7.1(c), 7.1(d), or 7.1(g) of the Merger Agreement, then all outstanding principal and interest under the Clearwater Note shall be due and payable by the 60th day following such termination; and (y) if the Merger Agreement is terminated in connection with the entry into an Acquisition Transaction (as such term is defined in the Merger Agreement), then CynergisTek shall be required to repay all outstanding interest and principal then due under the Clearwater Note as a condition to, and prior to or concurrently with, the termination of the Merger Agreement by CynergisTek.

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REVENUES

6 Months Ended

Jun. 30, 2022

REVENUES

11. REVENUES

11. REVENUES

Below is a summary of our revenues disaggregated by revenue source.

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Managed services	$	2,152,315	$	2,184,051	$	4,503,343	$	4,608,661
Consulting and professional services		1,791,079		1,691,092		4,100,619		3,440,003
Net revenues	$	3,943,394	$	3,875,143	$	8,603,962	$	8,048,664

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WARRANTS OPTIONS AND RESTRICTED STOCK UNITS

6 Months Ended

Jun. 30, 2022

DEFERRED REVENUE

12. WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS

12. WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS

Warrant Issued for Securities Purchase Agreement

On April 3, 2020, we entered into a Securities Purchase Agreement (“Securities Purchase Agreement “) with Horton Capital Management, LLC (“Horton”) which provided that Horton was committed to purchase up to an aggregate of $2.5 million of shares of the Company’s common stock over the term of the agreement, at the election of the Company. The Stock Purchase Agreement expired on March 31, 2021. No purchases were made under the Securities Purchase Agreement.

Upon signing the agreement, the Company issued Horton a warrant (the “Horton Warrant”) to purchase up to 500,000 shares of common stock in consideration of Horton’s obligation to purchase the shares, at an exercise price of $2.50 per share, subject to certain anti-dilution adjustments as set forth in the warrant. The fair value of this warrant of $0.4 million was determined using the Black-Scholes option-pricing model and was expensed during the second quarter of 2020.

During 2020 and 2021, the Company issued common stock under the Equity Distribution Agreement that resulted in required anti-dilution adjustments. These adjustments increased the number of shares under the Horton Warrant to 524,170 and reduced the exercise price to $2.38. The resulting difference in fair value of the Horton Warrant was $14,000, determined using the Black-Scholes option-pricing model and recorded as a deemed dividend in our consolidated statements of stockholders’ equity. As the Company has an accumulated deficit, the deemed dividends were recorded within additional paid-in capital.

The Horton Warrant provides that in the event of a fundamental transaction, including the consolidation or merger of CynergisTek with or into another person (such as the Merger as described in Note 2 to the condensed consolidated financial statements above), CynergisTek may elect to purchase the Horton Warrant from the holder thereof by paying an amount of cash equal to the Black Scholes Value (as determined based on the Black and Scholes Option Pricing Model obtained from the “OV” function on a Bloomberg Terminal as of the day of consummation of the applicable fundamental transaction, as described in the Horton Warrant) of the remaining unexercised portion of the Horton Warrant, subject to a cap of $300,000. Because the actual Black Scholes Value of the remaining unexercised portion of the Horton Warrant is projected to exceed the cap, CynergisTek will be required, prior to the Merger, to purchase or cancel the Horton Warrant in exchange for payment of $300,000. The payment of such amount for the cancellation of the Horton Warrant has been included in the overall equity value of the proposed Merger transaction.

The detailed terms and conditions of the Horton Securities Purchase Agreement and the Horton Warrant can be found in the documents, which were included as Exhibits 10.1 and 10.3, respectively, to our Current Report on Form 8-K, filed with the SEC on April 7, 2020.

Below is a summary of warrant activities during the six-month period ended June 30, 2022:

Warrants	Shares		Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2021		601,949	$	2.39		7.29	$	-
Granted		-		-		-		-
Exercised		-		-		-		-
Canceled		-		-		-		-
Outstanding at June 30, 2022		601,949	$	2.46		6.82	$	-
Exercisable at June 30, 2022		601,949	$	2.46		6.82	$	-

2020 Equity Incentive Plan

The 2020 Equity Incentive Plan provides for a total number of shares available for issuance of 3,745,621 shares of our common stock, and it provides for the granting of stock options, stock appreciation rights, restricted stock units and restricted stock to our employees, members of the Board of Directors and service providers. As of June 30, 2022, there were 211,000 shares available for issuance under the 2020 Plan.

Below is a summary of stock option activities during the six-month period ended June 30, 2022:

Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2021		960,838		$	2.11		8.51	$	-
Granted		-			-		-		-
Exercised		(1,995	)		1.08		-		-
Canceled		(76,340	)		1.90		-		-
Outstanding at June 30, 2022		882,503		$	1.87		8.22	$	-
Exercisable at June 30, 2022		278,503		$	2.05		6.77	$	-

Each stock option (whether vested or unvested) that is outstanding as of immediately prior to the Merger as described in Note 2 to the condensed consolidated financial statements above shall vest in full effective immediately prior to the Merger and shall automatically be canceled and converted into the right to receive an amount in cash, without interest, equal to the product of (i) the total number of shares of CynergisTek common stock underlying such stock option, multiplied by (ii) the excess, if any, of the Merger Consideration over the applicable exercise price per share of such stock option. Because the applicable exercise price of all stock options is greater than the Merger Consideration, all stock options will be canceled at the time of the Merger without any consideration.

Below is a summary of restricted stock unit activity during the six-month period ended June 30, 2022:

Restricted Stock Units	Shares			Weighted Average Grant Date Fair Value per Share		Weighted Average Vesting Period in Years
Non-vested at December 31, 2021		492,500		$	2.34		0.98
Granted		75,000			1.09
Vested		(114,050	)		2.78
Canceled and forfeited		(4,000	)		2.92
Non-vested at June 30, 2022		449,450		$	1.98		1.09

There are 232,800 shares of restricted stock units which have vested but had not yet been issued as of June 30, 2022.

Each restricted stock unit that is outstanding and unvested as of immediately prior to the Merger shall vest in full, effective immediately prior to the Merger, and shall automatically be canceled and converted into the right to receive from an amount in cash, without interest, equal to the product of (i) the aggregate number of shares of CynergisTek common stock underlying the restricted stock unit multiplied by (ii) the Merger Consideration.

For the three and six months ended June 30, 2022 and 2021, stock-based compensation and other equity instrument related expenses recognized in the consolidated statements of operations were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Cost of revenues	$	46,401	$	39,002	$	86,370	$	(3,191	)
Sales and marketing expense		18,807		34,850		27,149		63,831
General and administrative expense		113,207		264,420		256,057		506,069
Total stock-based compensation expense	$	178,415	$	338,272	$	369,576	$	566,709

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Income Taxes

6 Months Ended

Jun. 30, 2022

Income Taxes

13. Income Taxes

13. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain. A valuation allowance, in an amount equal to the net deferred tax asset of $6,853,130 as of June 30, 2022 has been established to reflect these uncertainties.

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BASIC AND DILUTED NET LOSS PER SHARE

6 Months Ended

Jun. 30, 2022

Net loss per share:

14. BASIC AND DILUTED NET LOSS PER SHARE

14. BASIC AND DILUTED NET LOSS PER SHARE

Basic net loss per share is calculated using the weighted average number of shares of our common stock issued and outstanding during a certain period and is calculated by dividing net loss by the weighted average number of shares of our common stock issued and outstanding during such period. Diluted net loss per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if-converted method for secured convertible notes, and the treasury stock method for options and warrants. Diluted net loss per share does not include potentially dilutive securities because such inclusion in the computation would be anti-dilutive.

For the three and six months ended June 30, 2022, potentially dilutive securities consisted of options and warrants to purchase 1,484,452 shares of common stock at prices ranging from $1.44 to $3.30 per share. Of these potentially dilutive securities, none of the shares to purchase common stock from the options and warrants are included in the computation of diluted earnings per share, because the effect of including the remaining instruments would be anti-dilutive. Also excluded from potentially dilutive securities are 449,450 shares of non-vested restricted stock units and 232,800 shares of restricted stock units which vested but had not been issued as of June 30, 2022.

For the three and six months ended June 30, 2021, potentially dilutive securities consisted of options and warrants to purchase 1,705,199 shares of common stock at prices ranging from $1.08 to $4.86 per share. Of these potentially dilutive securities, none of the shares to purchase common stock from the options and warrants are included in the computation of diluted earnings per share, because the effect of including the remaining instruments would be anti-dilutive. Also excluded from potentially dilutive securities are 741,850 shares of non-vested restricted stock units and 125,000 shares of restricted stock units which have vested but had not been issued as of June 30, 2021.

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Numerators:
Net loss attributable to common stockholders	$	(8,276,194	)	$	(46,888	)	$	(9,146,673	)	$	(967,199	)
Denominator:
Denominator for basic calculation weighted average shares		13,256,570			12,120,698			13,253,551			12,081,328
Dilutive common stock equivalents:
Options and warrants		-			-			-			-
Restricted stock units vested but not issued		-			-			-			-
Denominator for diluted calculation weighted average shares		13,256,570			12,120,698			13,253,551			12,081,328
Net loss per share:
Basic	$	(0.62	)	$	(0.00	)	$	(0.69	)	$	(0.08	)
Diluted	$	(0.62	)	$	(0.00	)	$	(0.69	)	$	(0.08	)

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REMAINING PERFORMANCE OBLIGATIONS

6 Months Ended

Jun. 30, 2022

BASIS OF PRESENTATION

15. REMAINING PERFORMANCE OBLIGATIONS

15. REMAINING PERFORMANCE OBLIGATIONS

We had remaining performance obligations of approximately $17.4 million as of June 30, 2022. Our remaining performance obligations represent the amount of transaction price for which work has not been performed and revenue has not been recognized. When applying Accounting Standards Codification (“ASC”) Topic 606, with only the non-cancelable portion of these contracts included in our performance obligations we had approximately $15.3 million as of June 30, 2022. We expect to recognize revenue on approximately 94% of the remaining non-cancelable portion of these performance obligations over the next 24 months, with the balance thereafter.

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CONCENTRATIONS

6 Months Ended

Jun. 30, 2022

CONCENTRATIONS

16. CONCENTRATIONS

16. CONCENTRATIONS

Cash Concentrations

At times, cash balances held in financial institutions are in excess of federally insured limits. Management performs periodic evaluations of the relative credit standing of financial institutions and limits the amount of risk by selecting financial institutions with a strong credit standing.

Major Customers

Our largest customer accounted for approximately 15% and 14% of our revenues for the six months ended June 30, 2022 and 2021, respectively. Our largest customer had accounts receivable totaling approximately $164,000 and $95,000 as of June 30, 2022, and December 31, 2021, respectively.

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EARNOUT LIABILITY BACKBONE ENTERPRISES

6 Months Ended

Jun. 30, 2022

EARNOUT LIABILITY BACKBONE ENTERPRISES

17. EARNOUT LIABILITY - BACKBONE ENTERPRISES

17. EARNOUT LIABILITY – BACKBONE ENTERPRISES

On October 31, 2019, we entered into a Stock Purchase Agreement (the “Backbone Purchase Agreement”) with Backbone Enterprises Inc., a Minnesota corporation (“Backbone”), and its stockholders, (the “Stockholders”), pursuant to which we acquired 100% of the issued and outstanding shares of common stock (the “Shares”) of Backbone from the Stockholders.

Pursuant to the Backbone Purchase Agreement, the aggregate purchase price paid for the Shares consisted of (i) a cash payment of $5.5 million, less certain transaction expenses (the “Cash Consideration”), (ii) the issuance of 491,804 shares of our common stock to the Stockholders, pro rata among the Stockholders in proportion to each Stockholder’s ownership of the Shares, and (iii) an earn-out, pursuant to which the Stockholders may be entitled to an additional $4.0 million based upon the post-closing financial performance of Backbone, to be calculated annually based upon revenue generated by the Backbone business during each year of the three-year earn-out period. The Cash Consideration was subject to adjustment based on closing working capital of Backbone, and $1.5 million of the Cash Consideration was placed into a third-party escrow account by us, against a portion of which we may make claims for indemnification.

There was no earnout paid for the first year of the earnout period. We performed a valuation of the contingent earn-out and marked down the fair value balance from $2.4 million to $1.3 million based on the potential of achieving a portion of the year two and three targets. This resulted in a gain from the reduction of the contingent earnout liability of $1.1 million in 2020. We performed an updated valuation of the contingent earn-out as of June 30, 2021, which resulted in a full write-off of the previous estimate of $1.3 million.

The Company renegotiated the terms of the earnout and as a result performed an updated valuation of the contingent earn-out as of September 30, 2021, which resulted in a recovery from the previous estimate of $0.3 million. As of December 31, 2021 we updated our valuation of the contingent earn-out which resulted in an additional recovery of $0.5 million. The earnout for year two of the earnout period totaled $0.3 million. Total cumulative amount earned for the year three earnout period through June 30, 2022 totaled $359,000 with payments related to year three earnout period during the six months ended June 30, 2022 were $259,000.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Policies)

6 Months Ended

Jun. 30, 2022

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an amendment to the guidance on the measurement of credit losses on financial instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured and amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The guidance is effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for annual periods after December 15, 2018. Management does not expect the impact from this guidance will have a material impact on our consolidated financial statements.

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PROPERTY AND EQUIPMENT (Tables)

6 Months Ended

Jun. 30, 2022

PROPERTY AND EQUIPMENT

Schedule Of Property And Equipment

	June 30, 2022			December 31, 2021
Furniture and fixtures	$	235,245		$	235,245
Computers and office equipment		955,347			903,856
Right of use assets		-			214,446
Property and equipment at cost		1,190,592			1,353,547
Less accumulated depreciation and amortization		(1,025,895	)		(1,109,756	)
	$	164,697		$	243,791

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LEASES (Tables)

6 Months Ended

Jun. 30, 2022

LEASES

Schedule Of Operating Lease Expenses

	Three Months Ended June 30,					Six Months Ended June 30,
	2022		2021			2022		2021
Operating lease cost	$	38,790	$	82,740		$	78,937	$	266,536
Sublet income		-		(19,954	)		-		(148,491	)
Net operating lease cost	$	38,790	$	62,786		$	78,937	$	118,045

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INTANGIBLE ASSETS (Tables)

6 Months Ended

Jun. 30, 2022

INTANGIBLE ASSETS

Schedule Of Amortization Of Intangible Assets

	June 30, 2022							December 31, 2021
	Carrying Amount		Accumulated Amortization and Impairment			Net Book Value		Carrying Amount		Accumulated Amortization and Impairment			Net Book Value
Acquired technology	$	10,100,000	$	(6,254,371	)	$	3,845,629	$	10,100,000	$	(5,814,486	)	$	4,285,514
Customer relationships		4,650,000		(4,553,529	)		96,471		4,650,000		(4,517,353	)		132,647
Trademarks		2,300,000		(2,066,670	)		233,330		2,300,000		(2,016,670	)		283,330
Total	$	17,050,000	$	(12,874,570	)	$	4,175,430	$	17,050,000	$	(12,348,509	)	$	4,701,491

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REVENUES (Tables)

6 Months Ended

Jun. 30, 2022

REVENUES (Tables)

Summary Of Revenue Disaggregated By Revenue Source

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Managed services	$	2,152,315	$	2,184,051	$	4,503,343	$	4,608,661
Consulting and professional services		1,791,079		1,691,092		4,100,619		3,440,003
Net revenues	$	3,943,394	$	3,875,143	$	8,603,962	$	8,048,664

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WARRANTS OPTIONS AND RESTRICTED STOCK UNIT (Tables)

6 Months Ended

Jun. 30, 2022

DEFERRED REVENUE

Summary Of Warrant Activities

Warrants	Shares		Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2021		601,949	$	2.39		7.29	$	-
Granted		-		-		-		-
Exercised		-		-		-		-
Canceled		-		-		-		-
Outstanding at June 30, 2022		601,949	$	2.46		6.82	$	-
Exercisable at June 30, 2022		601,949	$	2.46		6.82	$	-

Summary Of Stock Option

Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2021		960,838		$	2.11		8.51	$	-
Granted		-			-		-		-
Exercised		(1,995	)		1.08		-		-
Canceled		(76,340	)		1.90		-		-
Outstanding at June 30, 2022		882,503		$	1.87		8.22	$	-
Exercisable at June 30, 2022		278,503		$	2.05		6.77	$	-

Summary Of Restricted Stock

Restricted Stock Units	Shares			Weighted Average Grant Date Fair Value per Share		Weighted Average Vesting Period in Years
Non-vested at December 31, 2021		492,500		$	2.34		0.98
Granted		75,000			1.09
Vested		(114,050	)		2.78
Canceled and forfeited		(4,000	)		2.92
Non-vested at June 30, 2022		449,450		$	1.98		1.09

Schedule Of Stock Based Compensation And Other Equity Instrument Related Expenses

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Cost of revenues	$	46,401	$	39,002	$	86,370	$	(3,191	)
Sales and marketing expense		18,807		34,850		27,149		63,831
General and administrative expense		113,207		264,420		256,057		506,069
Total stock-based compensation expense	$	178,415	$	338,272	$	369,576	$	566,709

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BASIC AND DILUTED NET LOSS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2022

Net loss per share:

Schedule Of Earnings Per Share, Basic And Diluted

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Numerators:
Net loss attributable to common stockholders	$	(8,276,194	)	$	(46,888	)	$	(9,146,673	)	$	(967,199	)
Denominator:
Denominator for basic calculation weighted average shares		13,256,570			12,120,698			13,253,551			12,081,328
Dilutive common stock equivalents:
Options and warrants		-			-			-			-
Restricted stock units vested but not issued		-			-			-			-
Denominator for diluted calculation weighted average shares		13,256,570			12,120,698			13,253,551			12,081,328
Net loss per share:
Basic	$	(0.62	)	$	(0.00	)	$	(0.69	)	$	(0.08	)
Diluted	$	(0.62	)	$	(0.00	)	$	(0.69	)	$	(0.08	)

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BASIS OF PRESENTATION (Details Narrative)	6 Months Ended
	Jun. 30, 2022 USD ($)
BASIS OF PRESENTATION
Cash And Cash Equivalents At Carrying Value, Rounded	$ 1,400,000
Working Capital Deficit	(2,400,000)
Tax Refund Amount Received	1,400,000
Aggregate amount of loan	750,000
Additional Capital Through ATM	1,400,000
PPP Loan Received	2,800,000
Employee Retention Tax Credits Received	700,000
Termination fee	710,000
Principal amount	750,000
Available credit	$ 50,000

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PENDING MERGER WITH CLEARWATER COMPLIANCE LLC (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2022	Mar. 31, 2022
PENDING MERGER WITH CLEARWATER COMPLIANCE LLC
Cash amount		$ 1.25
Consulting and accounting fees	$ 406,000

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DEFERRED COMMISSIONS (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
DEFERRED COMMISSIONS (Details Narrative)
Commissions Expense	$ 241,000	$ 184,000	$ 406,000	$ 367,000
Unamortized Deferred Commissions	$ 553,000		$ 553,000		$ 760,000

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PROPERTY AND EQUIPMENT (Details) - USD ($)	Jun. 30, 2022	Dec. 31, 2021
Property, Plant And Equipment, Gross	$ 1,190,592	$ 1,353,547
Less Accumulated Depreciation And Amortization	(1,025,895)	(1,109,756)
Property And Equipment, Net	164,697	243,791
Furniture and Fixtures [Member]
Property, Plant And Equipment, Gross	235,245	235,245
Computers and Office Equipment [Member]
Property, Plant And Equipment, Gross	955,347	903,856
Right of Use Assets [Member]
Property, Plant And Equipment, Gross	$ 0	$ 214,446

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LEASES (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
LEASES
Operating Lease Cost	$ 38,790	$ 82,740	$ 78,937	$ 266,536
Sublet Income	0	(19,954)	0	(148,491)
Net Operating Lease Cost	$ 38,790	$ 62,786	$ 78,937	$ 118,045

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LEASES (Details Narrative)	6 Months Ended
	Jun. 30, 2021	Jun. 30, 2022
LEASES
Description Of Area Of Leases	leased approximately 9,600 square feet of office space in Austin, Texas. In March 2020, we amended this lease reducing the office space to 5,000 square feet and extended the lease term to May 31, 2022. We extended the lease term to May 31, 2023. We leased approximately 3,700 square feet of office space in Minneapolis, Minnesota. This lease term expired on January 31, 2022 and we no longer use this office space since the employees who worked from this location are now working remote. We leased approximately 18,000 square feet of office space in Mission Viejo, California. This lease expired in April 2021
Discount Rate		5.50%

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INTANGIBLE ASSETS (Details) - USD ($)	Jun. 30, 2022	Dec. 31, 2021
Gross Carrying Amount	$ 17,050,000	$ 17,050,000
Accumulated Amortization And Impairment	(12,874,570)	(12,348,509)
Net Book Value	4,175,430	4,701,491
Trademarks [Member]
Gross Carrying Amount	2,300,000	2,300,000
Accumulated Amortization And Impairment	(2,066,670)	(2,016,670)
Net Book Value	233,330	283,330
Customer Relationships [Member]
Gross Carrying Amount	4,650,000	4,650,000
Accumulated Amortization And Impairment	(4,553,529)	(4,517,353)
Net Book Value	96,471	132,647
Acquired technology
Gross Carrying Amount	10,100,000	10,100,000
Accumulated Amortization And Impairment	(6,254,371)	(5,814,486)
Net Book Value	$ 3,845,629	$ 4,285,514

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INTANGIBLE ASSETS (Details Narrative)	6 Months Ended
	Jun. 30, 2022
Maximum [Member]
Intangible Assets Expected Useful Lives	10 years
Minimum [Member]
Intangible Assets Expected Useful Lives	1 year 6 months

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DEFERRED REVENUE (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Managed services revenues
Deferred Revenue	$ 575,000	$ 654,000	$ 833,000	$ 798,000
Consulting and professional services revenues
Deferred Revenue	$ 276,000	$ 243,000	$ 681,000	$ 260,000

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PAYCHECK PROTECTION PROGRAM LOAN (Details Narrative) - USD ($)	1 Months Ended	3 Months Ended		6 Months Ended
	Apr. 30, 2020	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Interest Charges		$ 0	$ 10,000	$ 2,000	$ 23,000
SBAPPP
Interest Charges			$ 7,000		$ 14,000
Debt Instrument, Interest Rate, Stated Percentage		1.00%		1.00%
Proceeds From Loans	$ 2,800,000

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PROMISSORY NOTES (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
Interest Charges	$ 0	$ 10,000	$ 2,000	$ 23,000
Available credit	50,000		50,000
Principal amount	750,000		750,000
Aggregate amount of loan	750,000		750,000
Seller Notes | Michael Mcmillan
Interest Charges			2,250,000
Debt Instrument, Face Amount	$ 4,500,000,000,000		$ 4,500,000,000,000
Debt Instrument, Interest Rate, Stated Percentage	8.00%		8.00%
Repayments Of Debt			$ 2,250,000
Outstanding Principal Balance Due	$ 0		$ 0		$ 100,000
Debt Instrument, Maturity Date			Mar. 31, 2022
August 2022 [Member]
Debt Instrument, Interest Rate, Stated Percentage	10.00%		10.00%
Available credit	$ 50,000		$ 50,000
Principal amount	750,000		750,000
Aggregate amount of loan	$ 750,000		$ 750,000

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REVENUES (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Net Revenues	$ 3,943,394	$ 3,875,143	$ 8,603,962	$ 8,048,664
Managed Services
Net Revenues	2,152,315	2,184,051	4,503,343	4,608,661
Consulting and Professional Services
Net Revenues	$ 1,791,079	$ 1,691,092	$ 4,100,619	$ 3,440,003

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WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS (Details) - $ / shares	6 Months Ended	12 Months Ended
	Jun. 30, 2022	Dec. 31, 2021
WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS (Details)
Warrants, Outstanding, Beginning Balance	601,949
Warrants, Outstanding, Ending Balance	601,949	601,949
Warrants Outstanding Exercisable	601,949
Weighted Average Exercise Price, Beginning Balance	$ 2.39
Granted, Weighted Average Exercise Price	0
Exercised, Weighted Average Exercise Price	0
Cancelled, Weighted Average Exercise Price	0
Weighted Average Exercise Price, Ending Balance	2.46	$ 2.39
Weighted Average Exercise Price, Exercisable Balance	$ 2.46
Outstanding, Weighted Average Remaining Contractual Life	6 years 9 months 25 days	7 years 3 months 14 days
Exercisable, Weighted Average Remaining Contractual Life	6 years 9 months 25 days

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WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS (Details 1) - $ / shares	6 Months Ended	12 Months Ended
	Jun. 30, 2022	Dec. 31, 2021
Warrants, Outstanding, Beginning Balance	601,949
Warrants, Outstanding, Ending Balance	601,949	601,949
Warrants Outstanding Exercisable	601,949
Weighted Average Exercise Price, Beginning Balance	$ 2.39
Granted, Weighted Average Exercise Price	0
Exercised, Weighted Average Exercise Price	0
Cancelled, Weighted Average Exercise Price	0
Weighted Average Exercise Price, Ending Balance	2.46	$ 2.39
Weighted Average Exercise Price, Exercisable Balance	$ 2.46
Outstanding, Weighted Average Remaining Contractual Life	6 years 9 months 25 days	7 years 3 months 14 days
Exercisable, Weighted Average Remaining Contractual Life	6 years 9 months 25 days
2020 Equity Incentive Plan
Warrants, Outstanding, Beginning Balance	960,838
Exercised	1,995
Cancelled	(76,340)
Warrants, Outstanding, Ending Balance	882,503	960,838
Warrants Outstanding Exercisable	278,503
Weighted Average Exercise Price, Beginning Balance	$ 2.11
Granted, Weighted Average Exercise Price	0
Exercised, Weighted Average Exercise Price	1.08
Cancelled, Weighted Average Exercise Price	1.90
Weighted Average Exercise Price, Ending Balance	1.87	$ 2.11
Weighted Average Exercise Price, Exercisable Balance	$ 2.05
Outstanding, Weighted Average Remaining Contractual Life	8 years 2 months 19 days	8 years 6 months 3 days
Exercisable, Weighted Average Remaining Contractual Life	6 years 9 months 7 days

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WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS (Details 2) - Restricted Stock Units (RSUs) [Member] - $ / shares	6 Months Ended	12 Months Ended
	Jun. 30, 2022	Dec. 31, 2021
Non-vested, Shares Beginning Balance	492,500
Granted	75,000
Vested	114,050
Cancelled And Forfeited	4,000
Non-vested, Shares Ending Balance	449,450	492,500
Weighted Average Grant Date Fair Value Per Share, Beginning Balance	$ 2.34
Weighted Average Grant Date Fair Value Per Share, Granted	1.09
Weighted Average Grant Date Fair Value Per Share, Vested	2.78
Weighted Average Grant Date Fair Value Per Share, Cancelled And Forfeited	2.92
Weighted Average Grant Date Fair Value Per Share, Ending Balance	$ 1.98	$ 2.34
Weighted Average Vesting Period Inyears	1 year 1 month 2 days	11 months 23 days

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WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS (Details 3) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS (Details)
Cost Of Revenues	$ 46,401	$ 39,002	$ 86,370	$ (3,191)
Sales And Marketing	18,807	34,850	27,149	63,831
General And Administrative Expense	113,207	264,420	256,057	506,069
Total Stock-based Compensation Expense	$ 178,415	$ 338,272	$ 369,576	$ 566,709

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WARRANTS, OPTIONS AND RESTRICTED STOCK UNITS (Details Narrative) - USD ($)		3 Months Ended	12 Months Ended
	Apr. 03, 2020	Mar. 31, 2022	Dec. 31, 2021	Jun. 30, 2022
Stock vested but not issued		232,800
Horton Warrant
Exercise Price	$ 2.50		$ 2.38
Remaining unexercised portion			$ 300,000
Warrants Issued	500,000		524,170
Fair Value Of Warrants	$ 400,000		$ 14,000
Exchange for payment			$ 300,000
Securities Purchase Agreement
Fair Value Of Warrants	$ 2,500,000
2020 Equity Incentive Plan
Issuance Of Common Stock, Shares				211,000
2020 Equity Incentive Plan | Board of Directors [Member]
Issuance Of Common Stock, Shares				3,745,621

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Income Taxes (Details Narrative) $ in Millions	Jun. 30, 2022 USD ($)
Income Taxes
Net deferred tax asset	$ 685,313.0

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BASIC AND DILUTED NET LOSS PER SHARE (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
BASIC AND DILUTED NET LOSS PER SHARE (Details)
Net Loss Attributable To Common Shareholders	$ (8,276,194)	$ (46,888)	$ (9,146,673)	$ (967,199)
Denominator:
Denominator For Basic Calculation Weighted Average Shares	13,256,570	12,120,698	13,253,551	12,081,328
Dilutive Common Stock Equivalents:
Denominator For Diluted Calculation Weighted Average Shares	13,256,570	12,120,698	13,253,551	12,081,328
Net Loss Per Share:
Basic	$ (0.62)	$ (0.00)	$ (0.69)	$ (0.08)
Diluted	$ (0.62)	$ (0.00)	$ (0.69)	$ (0.08)

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BASIC AND DILUTED NET LOSS PER SHARE (Details Narrative) - $ / shares	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Potentially Dilutive Securities	449,450	741,850	449,450	741,850
Options And Warrants
Potentially Dilutive Securities	1,484,452	1,705,199	1,484,452	1,705,199
Options And Warrants | Minimum
Share-based Compensation Arrangement By Share-based Payment Award, Fair Value Assumptions, Exercise Price	$ 1.44	$ 1.08	$ 1.44	$ 1.08
Options And Warrants | Maximum
Share-based Compensation Arrangement By Share-based Payment Award, Fair Value Assumptions, Exercise Price	$ 3.30	$ 4.86	$ 3.30	$ 4.86
Restricted Stock Units (RSUs) [Member]
Potentially Dilutive Securities	232,800	125,000	232,800	125,000

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REMAINING PERFORMANCE OBLIGATIONS (Details Narrative) $ in Millions	6 Months Ended
	Jun. 30, 2022 USD ($)
Performance Obligations Percent	94.00%
Remaining Performance Obligations	$ 17.4
Performance Obligations Explanation	over the next 24 months
ASU Topic 606
Remaining Performance Obligations	$ 15.3

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CONCENTRATIONS (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Dec. 31, 2021
CONCENTRATIONS (Details Narrative)
Concentration Risk, Percentage	15.00%	14.00%
Accounts Receivable, Net Of Allowance For Doubtful Accounts	$ 164,000		$ 95,000

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EARNOUT LIABILITY - BACKBONE ENTERPRISE (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2022	Dec. 31, 2021	Sep. 30, 2021
EARNOUT LIABILITY - BACKBONE ENTERPRISE (Details Narrative)
Total Cumulative Amount Earned	$ 359,000
Payment For Earout Liability Period	$ 259,000
Description Of Agreement Aggregate Purchase Price	the Shares consisted of (i) a cash payment of $5.5 million, less certain transaction expenses (the “Cash Consideration”), (ii) the issuance of 491,804 shares of our common stock to the Stockholders, pro rata among the Stockholders in proportion to each Stockholder’s ownership of the Shares, and (iii) an earn-out, pursuant to which the Stockholders may be entitled to an additional $4.0 million based upon the post-closing financial performance of Backbone, to be calculated annually based upon revenue generated by the Backbone business during each year
Cash Consideration	$ 1,500,000
Contingent Earnout Liability	1,100,000
Contingent Earn-out Estimate Full Write-off	1,300,000
Valuation Of Contingent Earn-out Estimate Previous		$ 500,000	$ 300,000
Estimated Fair Value Of Earnout	1,300,000
Fair Value Balance Ear-out	$ 2,400,000