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