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.