Document and Entity Information
Document and Entity Information - shares | 9 Months Ended | |
Sep. 30, 2019 | Nov. 10, 2019 | |
Document and Entity Information: | ||
Entity Registrant Name | CYNERGISTEK, INC. | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2019 | |
Amendment Flag | false | |
Entity Central Index Key | 0001011432 | |
Current Fiscal Year End Date | --12-31 | |
Entity Common Stock, Shares Outstanding | 10,337,711 | |
Entity's Reporting Status Current | No | |
Entity Filer Category | Non-accelerated Filer | |
Entity Emerging Growth Company | false | |
Entity Small Business | true | |
Entity Shell Company | false | |
Entity Interactive Data Current | Yes | |
Document Fiscal Year Focus | 2019 | |
Document Fiscal Period Focus | Q3 | |
Entity File Number | 000-27507 | |
Tax Identification Number (TIN) | 37-1867101 | |
Entity Incorporation, State Country Code | DE | |
Entity Address, Address Line One | 11940 Jollyville Road | |
Entity Address, Address Line Two | Suite 300-N, Austin | |
Entity Address, State or Province | TX | |
Entity Address, Postal Zip Code | 78759 | |
City Area Code | 512 | |
Local Phone Number | 402-8550 |
CONDENSED CONSOLIDATED BALANCE
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($) | Sep. 30, 2019 | Dec. 31, 2018 |
Current assets: | ||
Cash and cash equivalents | $ 10,183,214 | $ 6,571,381 |
Accounts receivable, net | 3,485,943 | 5,572,467 |
Prepaid and other current assets | 4,058,218 | 1,425,858 |
Refundable income taxes | 0 | 472,059 |
Current assets held for sale | 201,965 | 8,427,408 |
Total current assets | 17,929,340 | 22,469,173 |
Property and equipment, net | 757,066 | 887,874 |
Deposits | 79,710 | 87,778 |
Deferred income taxes | 1,615,173 | 2,146,020 |
Intangible assets, net | 7,731,787 | 9,089,989 |
Goodwill | 17,008,189 | 17,008,189 |
Noncurrent assets held for sale | 0 | 1,844,349 |
Total assets | 45,121,265 | 53,533,372 |
Current liabilities: | ||
Accounts payable and accrued expenses | 215,631 | 1,370,336 |
Accrued compensation and benefits | 920,014 | 1,592,765 |
Deferred revenue | 1,468,472 | 918,165 |
Income taxes payable | 4,016,534 | 0 |
Note payable | 0 | 343,750 |
Current portion of long-term liabilities | 866,594 | 3,271,052 |
Current liabilities held for sale | 0 | 7,299,561 |
Total current liabilities | 7,487,245 | 14,795,629 |
Long-term liabilities: | ||
Term loan, less current portion | 0 | 12,851,617 |
Promissory notes to related parties, less current portion | 843,750 | 5,015,625 |
Capital lease obligations, less current portion | 0 | 1,570 |
Operating lease liability, less current portion | 199,349 | 436,805 |
Noncurrent liabilities held for sale | 0 | 58,967 |
Total long-term liabilities | 1,043,099 | 18,364,584 |
Stockholders' equity: | ||
Common stock, par value at $0.001, 33,333,333 shares authorized, 9,795,147 shares issued and outstanding at September 30, 2019, and 9,630,050 shares issued and outstanding at December 31, 2018 | 9,795 | 9,630 |
Additional paid-in capital | 32,935,601 | 31,910,831 |
Accumulated earnings (deficit) | 3,645,525 | (11,547,302) |
Total stockholders' equity | 36,590,921 | 20,373,159 |
Total liabilities and stockholders' equity | $ 45,121,265 | $ 53,533,372 |
CONDENSED CONSOLIDATED BALANC_2
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - $ / shares | Sep. 30, 2019 | Dec. 31, 2018 |
Statement of Financial Position [Abstract] | ||
Common Stock, par or stated value | $ 0.001 | $ 0.001 |
Common Stock, shares authorized | 33,333,333 | 33,333,333 |
Common Stock, shares issued | 9,795,147 | 9,630,050 |
Common Stock, shares outstanding | 9,795,147 | 9,630,050 |
CONDENSED CONSOLIDATED STATEMEN
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | |
Income Statement [Abstract] | ||||
Net revenues | $ 4,766,000 | $ 5,655,738 | $ 15,597,117 | $ 14,338,322 |
Cost of revenues | 3,165,502 | 2,898,273 | 9,613,777 | 7,783,317 |
Gross profit | 1,600,498 | 2,757,465 | 5,983,340 | 6,555,005 |
Operating expenses: | ||||
Sales and marketing | 1,090,733 | 1,193,878 | 3,907,847 | 3,885,948 |
General and administrative | 1,689,012 | 1,350,855 | 4,807,789 | 4,888,377 |
Change in valuation of contingent earn-out | (178,269) | 0 | (178,269) | 0 |
Depreciation | 47,775 | 36,853 | 135,875 | 107,833 |
Amortization of acquisition-related intangibles | 452,734 | 452,734 | 1,358,202 | 1,358,202 |
Total operating expenses | 3,101,985 | 3,034,320 | 10,031,444 | 10,240,360 |
Loss from operations | (1,501,487) | (276,855) | (4,048,104) | (3,685,355) |
Other income (expense): | ||||
Other income | 0 | 18 | 26 | 47 |
Interest income | 41,438 | 0 | 58,076 | 0 |
Interest expense | (30,459) | (352,754) | (439,909) | (1,094,066) |
Loss on disposition of fixed assets | (2,188) | 0 | (2,188) | 0 |
Total other income (expense) | 8,791 | (352,736) | (383,995) | (1,094,019) |
Loss before benefit for income taxes | (1,492,696) | (629,591) | (4,432,099) | (4,779,374) |
Income tax benefit | 236,040 | 225,426 | 746,778 | 844,430 |
Net loss from continuing operations | (1,256,656) | (404,165) | (3,685,321) | (3,934,944) |
Income (loss) from discontinued operations, including gain on sale, net of tax | (6,500) | 1,558,291 | 18,878,149 | 4,502,860 |
Net income (loss) | $ (1,263,156) | $ 1,154,126 | $ 15,192,828 | $ 567,916 |
From continuing operations: | ||||
Basic | $ (0.13) | $ (0.04) | $ (0.38) | $ (0.41) |
Diluted | (0.13) | (0.04) | (0.38) | (0.41) |
From discontinued operations: | ||||
Basic | 0 | 0.16 | 1.94 | 0.47 |
Diluted | 0 | 0.16 | 1.90 | 0.46 |
Net income (loss): | ||||
Basic | (0.13) | 0.12 | 1.56 | 0.06 |
Diluted | $ (0.13) | $ 0.12 | $ 1.53 | $ 0.06 |
Number of weighted average shares outstanding: | ||||
Basic | 9,795,147 | 9,616,133 | 9,754,014 | 9,605,536 |
Diluted | 9,795,147 | 9,762,370 | 9,910,107 | 9,813,098 |
CONDENSED CONSOLIDATED STATEM_2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) - USD ($) | Common Stock | Additional Paid-In Capital | Accumulated (Deficit) Earnings | Total |
Equity Balance, beginning of period, Value at Dec. 31, 2017 | $ 9,576 | $ 31,156,362 | $ (14,320,560) | $ 16,845,378 |
Equity Balance, beginning of period, Shares at Dec. 31, 2017 | 9,576,028 | |||
Stock compensation expense for options and warrants granted to employees and directors | 11,516 | 11,516 | ||
Stock compensation expense for restricted stock units granted to employees | 176,746 | 176,746 | ||
Stock options exercised, Value | $ 17 | (17) | ||
Stock options exercised, Shares | 16,519 | |||
Cumulative effect of adoption of revenue recognition standard ASC 606 | 879,666 | 879,666 | ||
Net income (loss) | (707,343) | (707,343) | ||
Equity Balance, end of period, Value at Mar. 31, 2018 | $ 9,593 | 31,344,607 | (14,148,237) | 17,205,963 |
Equity Balance, end of period, Shares at Mar. 31, 2018 | 9,592,547 | |||
Equity Balance, beginning of period, Value at Dec. 31, 2017 | $ 9,576 | 31,156,362 | (14,320,560) | 16,845,378 |
Equity Balance, beginning of period, Shares at Dec. 31, 2017 | 9,576,028 | |||
Net income (loss) | 567,916 | |||
Equity Balance, end of period, Value at Sep. 30, 2018 | $ 9,616 | 31,619,720 | (12,872,978) | 18,756,358 |
Equity Balance, end of period, Shares at Sep. 30, 2018 | 9,616,133 | |||
Equity Balance, beginning of period, Value at Mar. 31, 2018 | $ 9,593 | 31,344,607 | (14,148,237) | 17,205,963 |
Equity Balance, beginning of period, Shares at Mar. 31, 2018 | 9,592,547 | |||
Stock compensation expense for options and warrants granted to employees and directors | 9,188 | 9,188 | ||
Stock compensation expense for restricted stock units granted to employees | 104,684 | 104,684 | ||
Stock options exercised, Value | $ 23 | (23) | ||
Stock options exercised, Shares | 23,586 | |||
Net income (loss) | 121,133 | 121,133 | ||
Equity Balance, end of period, Value at Jun. 30, 2018 | $ 9,616 | 31,458,456 | (14,027,104) | 17,440,968 |
Equity Balance, end of period, Shares at Jun. 30, 2018 | 9,616,133 | |||
Stock compensation expense for options and warrants granted to employees and directors | 8,292 | 8,292 | ||
Stock compensation expense for restricted stock units granted to employees | 152,972 | 152,972 | ||
Stock options exercised, Value | ||||
Stock options exercised, Shares | ||||
Net income (loss) | 1,154,126 | 1,154,126 | ||
Equity Balance, end of period, Value at Sep. 30, 2018 | $ 9,616 | 31,619,720 | (12,872,978) | 18,756,358 |
Equity Balance, end of period, Shares at Sep. 30, 2018 | 9,616,133 | |||
Equity Balance, beginning of period, Value at Dec. 31, 2018 | $ 9,630 | 31,910,831 | (11,547,302) | 20,373,159 |
Equity Balance, beginning of period, Shares at Dec. 31, 2018 | 9,630,050 | |||
Stock compensation expense for options and warrants granted to employees and directors | 11,286 | 11,286 | ||
Stock compensation expense for restricted stock units granted to employees | 395,406 | 395,406 | ||
Restricted stock units exercised, Value | $ 70 | (70) | ||
Restricted stock units exercised, Shares | 70,000 | |||
Stock options exercised, Value | $ 23 | 2,505 | 2,528 | |
Stock options exercised, Shares | 23,015 | |||
Net income (loss) | 17,547,431 | 17,547,431 | ||
Equity Balance, end of period, Value at Mar. 31, 2019 | $ 9,723 | 32,319,958 | 6,000,129 | 38,329,810 |
Equity Balance, end of period, Shares at Mar. 31, 2019 | 9,723,065 | |||
Equity Balance, beginning of period, Value at Dec. 31, 2018 | $ 9,630 | 31,910,831 | (11,547,302) | 20,373,159 |
Equity Balance, beginning of period, Shares at Dec. 31, 2018 | 9,630,050 | |||
Net income (loss) | 15,192,828 | |||
Equity Balance, end of period, Value at Sep. 30, 2019 | $ 9,795 | 32,935,601 | 3,645,525 | 36,590,921 |
Equity Balance, end of period, Shares at Sep. 30, 2019 | 9,795,147 | |||
Equity Balance, beginning of period, Value at Mar. 31, 2019 | $ 9,723 | 32,319,958 | 6,000,129 | 38,329,810 |
Equity Balance, beginning of period, Shares at Mar. 31, 2019 | 9,723,065 | |||
Stock compensation expense for options and warrants granted to employees and directors | 993 | 993 | ||
Stock compensation expense for restricted stock units granted to employees | 280,169 | 280,169 | ||
Restricted stock units exercised, Value | $ 47 | (47) | ||
Restricted stock units exercised, Shares | 47,455 | |||
Stock options exercised, Value | $ 25 | 8,928 | 8,953 | |
Stock options exercised, Shares | 24,627 | |||
Net income (loss) | (1,091,448) | (1,091,448) | ||
Equity Balance, end of period, Value at Jun. 30, 2019 | $ 9,795 | 32,610,001 | 4,908,681 | 37,528,477 |
Equity Balance, end of period, Shares at Jun. 30, 2019 | 9,795,147 | |||
Stock compensation expense for options and warrants granted to employees and directors | 59,110 | 59,110 | ||
Stock compensation expense for restricted stock units granted to employees | 266,490 | 266,490 | ||
Net income (loss) | (1,263,156) | (1,263,156) | ||
Equity Balance, end of period, Value at Sep. 30, 2019 | $ 9,795 | $ 32,935,601 | $ 3,645,525 | $ 36,590,921 |
Equity Balance, end of period, Shares at Sep. 30, 2019 | 9,795,147 |
CONDENSED CONSOLIDATED STATEM_3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($) | 9 Months Ended | |
Sep. 30, 2019 | Sep. 30, 2018 | |
Cash flows from operating activities: | ||
Net income | $ 15,192,828 | $ 567,916 |
Adjustments to reconcile net income to net cash (used for) provided by operating activities: | ||
Depreciation | 172,510 | 265,424 |
Amortization of intangible assets | 1,358,202 | 1,358,201 |
Deferred income taxes | 530,847 | 190,259 |
Bad debts | 0 | 109,673 |
Stock compensation expense for warrants and options granted to employees and directors | 71,389 | 28,996 |
Stock compensation expense for restricted stock units granted to employees and directors | 942,065 | 434,402 |
Change in valuation of contingent earn-out | 178,269 | 0 |
Note payable issued in consideration of severance pay | 0 | 343,750 |
Interest expense related to loan acquisition costs | 85,883 | 17,450 |
Gain on sale of discontinued operations before income taxes | (23,689,269) | 0 |
Changes in operating assets and liabilities: | ||
Accounts receivable | 919,551 | 3,765,243 |
Supplies | 50,632 | 112,042 |
Prepaid and other current assets | 1,021,784 | (146,370) |
Deposits | 8,068 | (402) |
Accounts payable and accrued expenses | (389,684) | (2,500,201) |
Income taxes payable | 4,488,594 | 258,204 |
Accrued compensation and benefits | (1,897,809) | 80,965 |
Deferred revenue | 608,047 | (281,266) |
Net cash (used for) provided by operating activities | (348,093) | 4,604,286 |
Cash flows used for investing activities: | ||
Proceeds from sale of net assets of discontinued operations | 24,070,554 | 0 |
Purchases of property and equipment | (182,698) | (82,535) |
Net cash provided by (used for) investing activities | 23,887,856 | (82,535) |
Cash flows from financing activities: | ||
Proceeds from term loan | 0 | 17,250,000 |
Loan acquisition fees paid | 0 | (111,250) |
Payments on term loan | (15,401,786) | (12,434,404) |
Payments on promissory notes to related parties | (4,515,625) | (7,031,250) |
Payments on capital leases | (22,000) | (91,480) |
Proceeds from issuance of common stock through stock options and warrants | 11,481 | 0 |
Net cash used for financing activities | (19,927,930) | (2,418,384) |
Net increase in cash and cash equivalents | 3,611,833 | 2,103,367 |
Cash and cash equivalents, beginning of period | 6,571,381 | 4,252,060 |
Cash and cash equivalents, end of period | 10,183,214 | 6,355,427 |
Supplemental disclosure of cash flow information: | ||
Interest paid | 619,780 | 1,214,439 |
Income taxes paid | 124,861 | 226,170 |
Non-cash investing and financing activities: | ||
Capitalized right-to-use asset resulting from the adoption of ASC 842 | 0 | 683,797 |
Capitalized operating lease liability resulted from the adoption of ASC 842 | $ 0 | $ 808,841 |
1. BASIS OF PRESENTATION
1. BASIS OF PRESENTATION | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
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. 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, 2018, as filed with the Securities and Exchange Commission (“SEC”) on March 27, 2019. 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. As described in Note 17, we sold the assets used in our managed print services business division (the “MPS Business”) on March 20, 2019. 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. Certain balances have been reclassified to conform to current period presentation. |
2. RECENTLY ISSUED ACCOUNTING P
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS | 9 Months Ended |
Sep. 30, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS | 2 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard on leasing. The new standard requires companies to record most leased assets and liabilities on the balance sheet, and also proposed a dual model for recognizing expense. The Company adopted the standard as of January 1, 2019, with retroactive reporting for prior periods (the comparative option). Adoption of the new standard resulted in the recording of operating lease right-of-use ("ROU") assets and operating lease liabilities of $683,797 and $,808,841 respectively, as of January 1, 2018, with the difference due to deferred rents that were reclassified to the ROU asset value. The standard did not affect our consolidated net income or cash flows. See Note 6 for further details. In August 2016, the FASB issued a new accounting standard which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. Adoption of these accounting changes did not have a material impact on our consolidated financial statements. In January 2017, the FASB issued a new accounting standard which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance was effective for the Company beginning in 2019. Adoption of these accounting changes did not have a material impact on our consolidated financial statements. In January 2017, the FASB issued a new accounting standard simplifying the test for goodwill impairment. Currently, the fair value of the reporting unit is compared with the carrying value of the reporting unit (identified as "Step 1"). If the fair value of the reporting unit is lower than its carrying amount, then the implied fair value of goodwill is calculated. If the implied fair value of goodwill is lower than the carrying value of goodwill an impairment is recognized (identified as "Step 2"). The new standard eliminates Step 2 from the impairment test; therefore, a goodwill impairment will be recognized as the difference of the fair value and the carrying value. The new standard becomes effective on January 1, 2020, with early adoption permitted. We adopted this standard on January 1, 2019. This new standard had no impact on our consolidated financial position, results of operations and cash flows. In May 2017, the FASB issued a new accounting standard which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance is effective for the Company beginning in 2019. Adoption of these accounting changes did not have a material impact on our consolidated financial statements. In June 2018, the FASB issued a new accounting standard which provides guidance that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The new guidance is effective for the Company beginning in 2019, with early adoption permitted. Adoption of these accounting changes did not have a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In August 2018, the FASB issued a new accounting standard which modifies the disclosure requirements on fair value measurements. This guidance will be effective for fiscal years beginning after December 15, 2019. The amendments related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this guidance and delay adoption of the additional disclosures until their effective date. We do not anticipate adoption to have a material impact on our consolidated financial statements. |
3. ACCOUNTS RECEIVABLE
3. ACCOUNTS RECEIVABLE | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
3. ACCOUNTS RECEIVABLE | 3. ACCOUNTS RECEIVABLE A summary of accounts receivable is as follows: September 30, 2019 December 31, 2018 Trade receivables $ 3,485,943 $ 5,572,467 Allowance for doubtful accounts — — Total accounts receivable, net $ 3,485,943 $ 5,572,467 |
4. DEFERRED COMMISSIONS
4. DEFERRED COMMISSIONS | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
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. Effective January 1, 2018, we adopted the modified retrospective method of the new revenue recognition pronouncement. Deferred commissions are included in prepaid and other current assets in our consolidated balance sheets. We had $870,911 and $991,175 of unamortized deferred commissions as of September 30, 2019 and December 31, 2018, respectively. We had $206,730 and $669,450 of commissions expense for the three and nine months ended September 30, 2019, respectively. Commissions expense for the three and nine months ended September 30, 2018 were $205,515 and $616,262, respectively. |
5. PROPERTY AND EQUIPMENT
5. PROPERTY AND EQUIPMENT | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
5. PROPERTY AND EQUIPMENT | 5. PROPERTY AND EQUIPMENT A summary of property and equipment follows: September 30, 2019 December 31, 2018 Furniture and fixtures $ 195,586 $ 195,586 Computers and office equipment 719,594 563,856 Right of use assets 683,797 683,797 Property and equipment at cost 1,598,977 1,443,239 Less accumulated depreciation and amortization (841,911 ) (555,365 ) $ 757,066 $ 887,874 |
6. LEASES
6. LEASES | 9 Months Ended |
Sep. 30, 2019 | |
Leases [Abstract] | |
6. LEASES | 6. LEASES We lease approximately 17,000 square feet of office space at 27271 Las Ramblas, Suite 200, Mission Viejo, California. This lease terminates in April 2021. During the first quarter of 2019, we subleased this space to two subtenants. The terms of these subleases end concurrently with the end of our lease obligation in April 2021.We also lease approximately 3,600 square feet of office space at 11410 Jollyville Road, Suite 2201, Austin, Texas. This lease terminated in September 2019. During the first quarter of 2018, we subleased this space to a subtenant. The terms of this sublease ended concurrently with the end of our lease obligation in September 2019. We also lease approximately 9,600 square feet of office space at 11940 Jollyville Road, Austin, Texas. This lease terminates in May 2020. We used a discount rate of 5.5% as of January 1, 2018 in determining our operating lease liability. This rate represented our incremental borrowing rate at that time. 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 of the leases contain extension options; however, we have not included such options as part of right-of-use assets and lease liabilities because we do 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. We elected to not apply the recognition requirements of Topic 842 to leases of all classes of underlying assets that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, lease payments for such short-term leases are recognized in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. We also lease certain office equipment under a finance lease arrangement. Operating lease expense is comprised of the following: Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Operating lease cost $ 78,008 $ 80,078 $ 253,857 $ 278,829 Sublet income (13,877 ) (30,416 ) (62,868 ) (77,298 ) Net operating lease cost $ 64,131 $ 49,662 $ 190,989 $ 201,531 Maturities of lease liabilities are as follows: Operating Leases Finance Leases 2019 $ 147,009 $ 4 2020 512,632 — 2021 132,926 — Total lease payments 792,567 4 Less imputed interest (289,118 ) — Total lease liabilities 503,449 4 Less current portion of lease liabilities (305,315 ) (4 ) Long-term lease liabilities $ 198,134 $ — |
7. INTANGIBLE ASSETS
7. INTANGIBLE ASSETS | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
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: September 30, 2019 December 31, 2018 Carrying Accumulated Net Book Carrying Accumulated Net Book Amount Amortization Value Amount Amortization Value Acquired technology $ 9,220,608 $ (2,874,870 ) $ 6,345,738 $ 9,220,608 $ (2,202,291 ) $ 7,018,317 Customer relationships 2,933,257 (2,261,382 ) 671,875 2,933,257 (1,858,257 ) 1,075,000 Trademarks 1,693,978 (996,478 ) 697,500 1,693,978 (763,978 ) 930,000 Non-compete agreements 264,243 (247,569 ) 16,674 264,243 (197,571 ) 66,672 Total $ 14,112,086 $ (6,380,299 ) $ 7,731,787 $ 14,112,086 $ (5,022,097 ) $ 9,089,989 |
8. DEFERRED REVENUE
8. DEFERRED REVENUE | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
8. Deferred Revenue | 8. DEFERRED REVENUE We record deferred revenues when amounts are billed to customers in advance of our performance. $783,807 and $578,725 of managed services revenues were recognized during the nine months ended September 30, 2019 and 2018, respectively, that was included in deferred revenue at the beginning of the respective periods. $67,507 and $523,505 of consulting and professional services revenues were recognized during the nine months ended September 30, 2019 and 2018, respectively, that was included in deferred revenue at the beginning of the respective periods. |
9. LINE OF CREDIT AND TERM LOAN
9. LINE OF CREDIT AND TERM LOAN | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
9. Line of Credit and Term Loan | 9. LINE OF CREDIT AND TERM LOAN On January 13, 2017, as part of the acquisition of CTEK Security, Inc. (formerly CynergisTek, Inc.), we entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”). The A&R Credit Agreement amended a loan and security agreement originally entered into on May 4, 2012, as amended by several amendments. Under the A&R Credit Agreement, the term of the revolving line-of-credit was available through January 13, 2019, at an interest rate of prime plus 1.0% per annum. The amount available to us at any given time was the lesser of (a) $5.0 million, or (b) the amount available under our borrowing base (80% of our eligible accounts receivable, minus (1) accrued client lease payables, and minus (2) accrued equipment pool liability). The A&R Credit Agreement provided a term loan facility for $14,000,000. There were no borrowings on the line of credit in 2018. Interest charges associated with this term loan totaled $133,914 for the nine months ended September 30, 2018. Debt Restructuring On March 12, 2018, we entered into a Credit Agreement (together with the other related documents defined therein, the “Credit Agreement”) with BMO Harris Bank N.A., a national banking association (“Bank”), as lender (the “BMO Loan”). The purposes of the BMO Loan were (1) to refinance and replace the facilities under the A&R Credit Agreement, thus terminating that agreement as of March 12, 2018, (2) to refinance $2,250,000 of a promissory note held by Michael McMillan (the “McMillan Seller Note”), (3) to finance payments to Michael Hernandez, including the full repayment of a promissory note held by Hernandez (the “Hernandez Seller Note”) in the original principal amount of $4,500,000, issued as part of the acquisition of CTEK Security, Inc., (4) to finance working capital, (5) for general corporate purposes and (6) to fund certain fees and expenses associated with the closing of the BMO Loan. Loan Facilities Term Loan: Pursuant to the Credit Agreement, the Bank agreed to provide a term loan in the amount of $17,250,000 to the Company, which was paid in accordance with the purpose of the BMO Loan as described above. Pursuant to the Credit Agreement, the Company could elect that the term loan be outstanding as Base Rate Loans or Eurodollar Loans. The term loan was payable in principal payment installments on the last day of each fiscal quarter, commencing on June 30, 2018. All principal and interest not sooner paid on the term loan was due and payable on September 12, 2022, the final maturity thereof. Revolving Line of Credit: Additionally, pursuant to the Credit Agreement, the Bank agreed to provide a revolving loan or loans to the Company in an aggregate amount of up to $5,000,000 with a $500,000 sublimit for the issuance of letters of credit. Pursuant to the Credit Agreement, the Company could elect that each borrowing of revolving loans be either Base Rate Loans or Eurodollar Loans. Each revolving loan, both for principal and interest then outstanding, matured and was due and payable on March 12, 2020, or such earlier date on which the Revolving Credit Commitment (as defined in the Credit Agreement) was terminated in whole pursuant to the Credit Agreement. There were no borrowings on the line of credit in 2019 or 2018. Beginning June 30, 2018, we were required to maintain certain financial covenants in connection with this credit agreement, including a total leverage ratio, a senior leverage ratio, and a fixed charge coverage ratio. These covenants contain ratios which changed over relevant periods of the credit agreement and could be found in Section 7.13 of the Credit Agreement. On March 12, 2018, we paid a $86,250 commitment fee associated with the term loan and a $25,000 revolving loan commitment fee associated with the line of credit. On March 20, 2019, we used a portion of the proceeds from the sale of the assets of the MPS Business to fully repay the balance of the term loan in the amount of $15,401,786 plus interest of $52,760. At that time, the Revolving Line of Credit was terminated. Interest charges associated with the BMO term loan totaled $0 and $207,903, respectively, for the three and nine months ended September 30, 2019, and $234,989 and $521,785, respectively, for the three and nine months ended September 30, 2018. |
10. PROMISSORY NOTES
10. PROMISSORY NOTES | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
10. Promissory Notes | 10. PROMISSORY NOTES In connection with the acquisition of CTEK Security, Inc. (formerly CynergisTek, Inc.), we issued two promissory notes totaling $9,000,000 to Michael Hernandez and Michael McMillan (respectively, the “Hernandez Seller Note” and the “McMillan Seller Note”; and together the “Seller Notes”), with each of the Seller Notes having an initial principal amount of $4,500,000. These Seller Notes bear interest at 8% per annum, require quarterly interest-only payments during the first 12 months, quarterly payments of principal and interest during the last 24 months, using a 36-month amortization period commencing from that point, with a balloon payment due on the maturity date. The Company had the right to prepay all or any portion of the outstanding principal balance of the Seller Notes, provided that such prepayment is accompanied by accrued interest on the amount of principal prepaid, calculated to the date of such prepayment. On March 12, 2018, the Company fully repaid the $4,500,000 plus accrued interest on the Hernandez Seller Note. As part of the debt restructuring with BMO Harris Bank N.A., on March 12, 2018, the Company repaid $2,250,000 plus accrued interest on the McMillan Seller Note. The Company and Mr. McMillan agreed to amend and restate the McMillan Seller Note pursuant an amended and restated promissory note (the “A&R McMillan Seller Note”). The A&R McMillan Seller Note is in the principal amount of $2,250,000, bears interest at a rate of 8% per annum, provides for quarterly payments of principal and interest and matures on March 31, 2022. As of September 30, 2019 and December 31, 2018, the outstanding principal balance due under the A&R McMillan Seller Note was $1,406,250 and $1,828,125, respectively. Amounts due and owing under the A&R McMillan Seller Note were subordinate to the right of payment due under the BMO Loan pursuant to a Subordination Agreement among the Company, the Bank and Mr. McMillan. Interest charges associated with the Seller Notes totaled $30,267 and $98,106, respectively for the three and nine months ended September 30, 2019, and $41,610 and $234,986, respectively for the three and nine months ended September 30, 2018. Pursuant to a separation agreement among the Company, CTEK Security, Inc. and Michael Hernandez (the “Separation Agreement”), in lieu of any earn-out payments due pursuant to the purchase agreement related to the acquisition of CTEK Security, Inc. (the “Original SPA”) that could be earned by Hernandez under the Original SPA, the Company agreed to pay Hernandez the amount of $3,750,000 in the form of a promissory note (the “Earn-out Note”). The Earn-out Note provided for (i) a maturity date of March 12, 2023, at which all principal and accrued and unpaid interest was due, (ii) a simple interest rate of 5% per annum commencing on January 1, 2018, and compounding annually, and (iii) the right of the Company to prepay all or any portion of the Earn-out Note without premium or penalty. On March 26, 2019, we used a portion of the proceeds from the sale of the assets of MPS Business to fully repay the Earn-out Note with interest of $234,293. Interest charges associated with the Earn-out Note totaled $0 and $45,858, respectively, for the three and nine months ended September 30, 2019, and $47,195 and $140,721, respectively, for the three and nine months ended September 30, 2018. Pursuant to the Separation Agreement, the Company also issued a Severance Payment Note to Hernandez in the original principal amount of $343,750 (the “Severance Payment Note”). The Severance Payment Note bears interest at a rate of 5% per annum, compounded annually, allowed for prepayment by the Company and matured on January 10, 2019, at which time all principal and accrued and unpaid interest was due. All principal and interest due under the Severance Payment Note was repaid on March 27, 2019. Interest charges associated with the Severance Payment Note totaled $494 and $494, respectively, for the three and nine months ended September 30, 2019 and $4,332 and $12,808, respectively for the three and nine months ended September 30, 2018. |
11. REVENUES
11. REVENUES | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
11. Revenues | 11. REVENUES Below is a summary of our revenues disaggregated by revenue source: Three Months Ended Nine Months Ended 2019 2018 2019 2018 Managed services $ 3,045,868 $ 2,683,025 $ 8,673,336 $ 7,512,688 Consulting and professional services 1,662,751 2,911,982 6,807,170 6,708,121 Hardware and software resales 57,381 60,731 116,611 117,513 Net revenues $ 4,766,000 $ 5,655,738 $ 15,597,117 $ 14,338,322 |
12. OPTIONS, WARRANTS AND RESTR
12. OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
12. Options, Warrants And Restricted Stock Units | 12. OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS Below is a summary of stock option, warrant and restricted stock unit activity during the nine-month period ended September 30, 2019: Options Shares Weighted Average Exercise Price Weighted Average Remaining Term in Years Aggregate Outstanding at December 31, 2018 539,593 $ 2.97 Granted 500,000 4.86 Exercised (47,642 ) 3.19 Cancelled (136,795 ) 3.34 Outstanding at September 30, 2019 855,156 $ 4.01 4.81 $ 122,387 Exercisable at September 30, 2019 354,599 $ 2.80 2.30 $ 122,387 Warrants Shares Weighted Average Exercise Price Weighted Average Remaining Term in Years Aggregate Outstanding at December 31, 2018 77,779 $ 3.03 Granted — — Exercised — — Cancelled — — Outstanding at September 30, 2019 77,779 $ 3.03 3.30 $ 3,889 Exercisable at September 30, 2019 77,779 $ 3.03 3.30 $ 3,889 Restricted Stock Units Shares Weighted Average Price Weighted Average Remaining Term in Years Outstanding at December 31, 2018 810,000 $ 3.67 Granted 53,500 4.49 Vested (47,455 ) 3.42 Cancelled (56,045 ) 3.95 Outstanding at September 30, 2019 760,000 $ 3.72 1.37 For the three months and nine months ended September 30, 2019 and 2018, stock-based compensation expense recognized in the consolidated statements of operations as follows: Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Cost of revenues $ 40,989 $ 21,148 $ 257,294 $ 82,173 Sales and marketing 53,234 42,625 187,200 87,875 General and administrative 231,377 97,492 568,960 293,350 Total stock-based compensation expense $ 325,600 $ 161,265 $ 1,013,454 $ 463,398 |
13. NET INCOME (LOSS) PER SHARE
13. NET INCOME (LOSS) PER SHARE | 9 Months Ended |
Sep. 30, 2019 | |
Net income (loss): | |
13. Net Income (Loss) Per Share | 13. NET INCOME (LOSS) PER SHARE Basic net (loss) income 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) income by the weighted average number of shares of our common stock issued and outstanding during such period. Diluted net (loss) income 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) income per share does not include potentially dilutive securities because such inclusion in the computation would be anti-dilutive. For the three months ended September 30, 2019, potentially dilutive securities consisted of options and warrants to purchase 432,378 shares of common stock at prices ranging from $2.28 to $4.05 per share and 760,000 shares of restricted stock units. Of these potentially dilutive securities, none of the shares to purchase common stock from the options and warrants and none of the shares related to the restricted stock units are included in the computation of diluted earnings per share because the effect of including these instruments would be anti-dilutive. For the nine months ended September 30, 2019, potentially dilutive securities consisted of options and warrants to purchase 432,378 shares of common stock at prices ranging from $2.28 to $4.05 per share and 760,000 shares of restricted stock units. Of these potentially dilutive securities, only 156,093 of the shares to purchase common stock from the options and warrants and none of shares related to the restricted stock units are included in the computation of diluted earnings per share because the effect of including these instruments would be anti-dilutive. For the three months ended September 30, 2018, potentially dilutive securities consisted of options and warrants to purchase 656,318 shares of common stock at prices ranging from $0.90 to $6.45 per share and 441,000 shares of restricted stock units. Of these potentially dilutive securities, only 146,237 of the shares to purchase common stock from the options and warrants and none of the shares related to the restricted stock units are included in the computation of diluted earnings per share because the effect of including these instruments would be anti-dilutive. For the nine months ended September 30, 2018, potentially dilutive securities consisted of options and warrants to purchase 656,318 shares of common stock at prices ranging from $0.90 to $6.45 per share and 441,000 shares of restricted stock units. Of these potentially dilutive securities, only 207,562 of the shares to purchase common stock from the options and warrants and none of the shares related to the restricted stock units are included in the computation of diluted earnings per share because the effect of including these instruments would be anti-dilutive. Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Numerators: Net loss from continuing operations $ (1.256,656 ) $ (404,165 ) $ (3,685,321 ) $ (3,934,944 ) Net income (loss) from discontinued operations $ (6,500 ) $ 1,558,291 $ 18,878,149 $ 4,502,859 Net income (loss) $ (1,263,156 ) $ 1,154,126 $ 15,192,828 $ 567,916 Denominator: Denominator for basic calculation weighted average shares 9,795,147 9,613,133 9,754,014 9,605,536 Dilutive common stock equivalents: Options and warrants — 146,237 156,093 207,562 Denominator for diluted calculation weighted average shares 9,795,147 9,762,370 9,910,107 9,813,098 Net income (loss) per share: Basic $ (0.13 ) $ (0.04 ) $ (0.38 ) $ (0.41 ) Diluted $ (0.13 ) $ (0.04 ) $ (0.38 ) $ (0.41 ) From discontinued operations Basic $ (0.00 ) $ 0.16 $ 1.94 $ 0.47 Diluted $ (0.00 ) $ 0.16 $ 1.90 $ 0.46 Net income (loss) Basic $ (0.13 ) $ 0.12 $ 1.56 $ 0.06 Diluted $ (0.13 ) $ 0.12 $ 1.53 $ 0.06 |
14. REMAINING PERFORMANCE OBLIG
14. REMAINING PERFORMANCE OBLIGATIONS | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
14. Remaining Performance Obligations | 14. REMAINING PERFORMANCE OBLIGATIONS Remaining performance obligations represent the amount of revenue from fixed-fee contracts, including those which have potential early cancellation provisions, for which work has not been performed. As of September 30, 2019, approximately $23,000,000 of revenue from fixed-fee contracts is expected to be recognized from these remaining performance obligations. We expect to recognize revenue on approximately 88% of these remaining performance obligations over the next 24 months, with the balance thereafter. We elected to utilize the practical expedient exemption to exclude from this disclosure the amount of revenue from contracts which are not fixed-fee and where we do not have the right to invoice until the services have been performed. |
15. EMPLOYMENT AGREEMENTS
15. EMPLOYMENT AGREEMENTS | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
15. Employment Agreements | 15. EMPLOYMENT AGREEMENTS Michael H. McMillan In January 2017, we entered into an employment agreement with Michael H. McMillan (“McMillan”) (the “McMillan Employment Agreement”), pursuant to which we employed McMillan as President and Chief Strategy Officer of the Company. The initial term of the McMillan Employment Agreement is 36 months and will automatically renew for subsequent 12-month terms unless either party provides written notice to the other party of a desire to not renew the agreement. Pursuant to the McMillan Employment Agreement, the Company has the right to terminate McMillan’s employment without cause at any time on thirty (30) days’ advance written notice to McMillan. Additionally, McMillan has the right to resign for “Good Reason” (as defined in the McMillan Employment Agreement) on thirty (30) days’ written notice. In the event of (i) such termination without cause, or (ii) McMillan’s inability to perform the essential functions of his position due to a mental or physical disability or his death, or (iii) McMillan’s resignation for Good Reason, McMillan is entitled to receive the base salary then in effect and full target annual bonus, prorated to the date of termination, and a “Severance Payment” equivalent to (a) payment of compensation for an additional twelve months, payable as a lump sum, and (b) the acceleration of all unvested stock options and warrants then held by McMillan, subject to certain conditions set forth in the McMillan Employment Agreement. If McMillan resigns for other than Good Reason, he will be entitled to receive the base salary for the thirty (30) day written notice period, but no other amounts. On October 2, 2017, the Board appointed McMillan as Chief Executive Officer and his base salary was increased to $325,000. In February 2018, the Company amended the McMillan Employment Agreement to extend the term thereof through December 31, 2020 and increased his base salary to $334,700 for 2018, $359,700 for 2019, and the 2020 base salary to be determined by the Board of Directors at the end of the 2019 calendar year. He will also be eligible for a bonus of up to $219,375 and $242,798 in 2018 and 2019, respectively, and his 2020 bonus will be up to 67.5% of his base salary. The foregoing is a summary of the McMillan Employment Agreement which is included as Exhibit 99.6 to our Current Report on Form 8-K filed with the SEC on January 17, 2017, and the amendment to the McMillan Employment Agreement, which is found as Exhibit 10.44 to our Annual Report on Form 10-K filed with the SEC on March 28, 2018. On July 15, 2019, McMillan notified the Board of Directors of his decision to retire from the Company effective December 31, 2019. In connection with his planned retirement, McMillan also submitted his resignation as President and Chief Executive Officer of the Company, effective July 31, 2019. McMillan will continue to serve as a director of the Company and will remain employed by the Company through his retirement date in order to assist with the transition. Mr. McMillan was given the honorary title of President and CEO Emeritus by the Board. Paul T. Anthony Effective January 1, 2016, we entered into an employment agreement with Paul T. Anthony (the “Anthony Agreement”). The Anthony Agreement provides that Mr. Anthony will continue to serve as our Executive Vice President, CFO and Corporate Secretary. The Anthony Agreement has a term of two years and provides for an annual base salary of $245,000. The Anthony Agreement will automatically renew for subsequent twelve (12) month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve (12) months. Mr. Anthony also receives the customary employee benefits available to our employees. Mr. Anthony was also entitled to receive a bonus of up to $132,000 per year, the achievement of which is based on Company performance metrics. We may terminate Mr. Anthony’s employment under the Anthony Agreement without cause at any time on thirty (30) days advance written notice, at which time Mr. Anthony would receive severance pay for twelve months and be fully vested in all options and warrants granted to date. In February 2018, the Company amended the Anthony Agreement to extend the term thereof through December 31, 2020 and increased his base salary to $284,700 for 2018, and $309,700 for 2019, with the 2020 base salary to be determined by the Board of Directors at the end of the 2019 calendar year. He will also be eligible for a bonus of up to $209,047 in 2019, and his 2020 bonus will be up to 67.5% of his base salary. The foregoing are summaries of the Anthony Agreement and the amendment to the Anthony Agreement, which are included as Exhibit 10.32 to our Annual Report on Form 10-K filed with the SEC on March 30, 2016, and Exhibit 10.45 to our Annual Report on Form 10-K filed with the SEC on March 28, 2018, respectively. Caleb Barlow Effective August 1, 2019, we entered into an employment agreement with Caleb Barlow (the “Barlow Agreement”) pursuant to which he will serve as President and Chief Executive Officer and will have the duties and responsibilities as are commensurate with the positions of President and Chief Executive Officer. The initial term of the Barlow Agreement is 36 months and will automatically renew for subsequent 12-month terms unless either party provides written notice to the other party of a desire not to renew employment. Mr. Barlow’s base salary is $350,000. He is entitled to incentive bonus compensation that offers the potential to receive a discretionary bonus up to 100% of his base salary. For 2019, his discretionary bonus will total up to a maximum of $85,000. The incentive bonus plan is based on a number of factors established by the Board. In addition, he receives a retention bonus totaling $500,000, with $200,000 paid on August 1, 2019, $150,000 payable on January 1, 2020 and $150,000 payable on January 2021. Mr. Barlow also received equity compensation consisting of an option to purchase up to 500,000 shares of the Company’s common stock, subject to vesting, and 50,000 shares of restricted stock units. The options are nonqualified, and the grant was made outside of the Company's 2011 Stock Incentive Plan. We may terminate Mr. Barlow’s employment without cause at any time on thirty (30) days’ advance written notice to Mr. Barlow at which time Mr. Barlow is entitled to receive (a) his annual base salary then in effect, and full target annual bonus, each prorated to the date of termination, (b) payment of base salary compensation for an additional twelve months, payable as a lump sum, (c) acceleration and payment of the unpaid portion of the sign-on and retention bonus, and (d) the acceleration of all unvested stock options, warrants and restricted stock units then held by Mr. Barlow, subject to certain conditions set forth in the Barlow Agreement. If Mr. Barlow resigns for any reason other than Good Reason, he will be entitled to receive his base salary for the thirty (30) day written notice period, but no other amounts. The foregoing is a summary of the Barlow Agreement, which is included as Exhibit 10.1 to our Form 8-K filed with the SEC on July 16, 2019. |
16. CONCENTRATIONS
16. CONCENTRATIONS | 9 Months Ended |
Sep. 30, 2019 | |
Disclosure Text Block [Abstract] | |
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 17% and 20% of our revenues for the nine months ended September 30, 2019 and 2018, respectively. Our largest customer had accounts receivable totaling approximately $700,000 and $400,000 as of September 30, 2019 and December 31, 2018, respectively. |
17. DISCONTINUED OPERATIONS
17. DISCONTINUED OPERATIONS | 9 Months Ended |
Sep. 30, 2019 | |
Discontinued Operations and Disposal Groups [Abstract] | |
17. DISCONTINUED OPERATIONS | 17. DISCONTINUED OPERATIONS On March 20, 2019, we, along with our wholly-owned subsidiary, CTEK Solutions, Inc., entered into an Asset Purchase Agreement (together with the other related documents defined therein, the “Purchase Agreement”) with Vereco, LLC, a Delaware limited liability company (“Buyer”). Pursuant to the Purchase Agreement, we sold our assets used in the provision of our managed print services business division (the “MPS Business”), which had been primarily conducted by CTEK Solutions, Inc. Buyer also assumed certain liabilities relating to the MPS Business. The purchase price paid to us by Buyer pursuant to the Purchase Agreement was $30,000,000, $5,000,000 of which was placed in escrow by Buyer, the release of which is contingent upon certain events and conditions specified in the Purchase Agreement. On June 20, 2019, a contingent event had not occurred and per the terms of the Purchase Agreement, $1,500,000 of the $5,000,000 was removed as a contingent escrow balance receivable and we will no longer be able to earn this amount. The purchase price is subject to adjustment based on closing working capital results of the MPS Business. The initial working capital adjustment reduced the cash received by $629,746. The following is the summary of the transaction selling the MPS Business: Initial cash received $ 24,370,254 Escrow balance receivable 3,500,000 Working capital adjustment (1,566,753 ) Book value of net assets disposed (2,614,232 ) Gain before provision for income taxes 23,689,269 Income tax expense (5,622,617 ) Net gain from sale of discontinued operations $ 18,066,652 The following are the carrying amounts of assets and liabilities included as part of held for sale on the balance sheet: September 30, 2019 December 31, 2018 Accounts receivable, net $ 201,965 $ 5,124,270 Prepaid and other current assets — 2,118,664 Supplies — 1,184,474 Currents assets held for sale $ 201,965 $ 8,427,408 Property and equipment, net $ — $ 327,332 Goodwill — 1,517,017 Noncurrent assets held for sale $ — $ 1,844,349 Accounts payable and accrued expenses $ — $ 5,098,179 Accrued compensation and benefits — 1,225,057 Deferred revenue — 888,467 Current portion of long-term liabilities — 87,857 Current liabilities held for sale $ — $ 7,299,561 Operating lease liability $ — $ 58,567 Noncurrent liabilities held for sale $ — $ 58,967 The following is a composition of the line items constituting net income (loss) from discontinued operations: Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Net revenues $ — $ 13,560,328 $ 12,096,885 $ 38,197,995 Cost of revenues — (10,530,558 ) (10,060,414 ) (30,348,300 ) Sales and marketing (4,981 ) (119,510 ) (201,295 ) (402,945 ) General and administrative expenses — (439,104 ) (676,630 ) (1,516,977 ) Depreciation — (47,987 ) (36,635 ) (157,592 ) Interest (income) expense — 4,273 (1,956 ) (9,527 ) Income (loss) before provision for income taxes (4,981 ) 2,427,443 1,119,956 5,762,653 Income tax expense (1,519 ) (869,152 ) (308,459 ) (1,259,793 ) Net (loss) income from discontinued operations $ (6,500 ) $ 1,558,291 $ 811,497 $ 4,502,860 The following is a composition of the capital expenditures, and any significant noncash operating and investing items, including depreciation, of the discontinued operations. Nine Months Ended September 30, 2019 2018 Depreciation $ 36,635 $ 157,594 Stock compensation $ 124,348 $ 40,443 Capital expenditures $ — $ 12,163 |
18. SUBSEQUENT EVENT
18. SUBSEQUENT EVENT | 9 Months Ended |
Sep. 30, 2019 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENT | 18. SUBSEQUENT EVENT Acquisition of Backbone Enterprises Inc. On October 31, 2019, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Backbone Enterprises Inc., a Minnesota corporation (“Backbone”), and their 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 (the “Backbone Transaction”). Pursuant to the Purchase Agreement, the aggregate purchase price paid for the Shares consisted of (i) a cash payment of $5,500,000, 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 an earn-out, pursuant to which the Stockholders may be entitled to an additional $4,000,000 based upon the post-closing financial performance of Backbone, to be calculated based upon revenue generated by the Backbone business during the three-year earn-out period. The Cash Consideration is subject to adjustment based on closing working capital of Backbone, and $1,500,000 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. In the Purchase Agreement, CynergisTek, Inc., Backbone and the Stockholders made customary representations and warranties and have agreed to customary covenants relating to the Backbone Transaction. Pursuant to the Purchase Agreement, Backbone and the Stockholders agreed to deliver to us certificates representing the Shares and the corporate record books of Backbone. We agreed to deliver the Cash Consideration and the Securities Consideration. Each of Zuniga, Carroll and D’Souza also entered into three-year employment agreements with us, pursuant to which each will serve as a vice president and will have the duties and responsibilities assigned to them by our executive management team. The foregoing summary of the terms and conditions of the Purchase Agreement do not purport to be complete, and are available in their entirety by reference to the full text of the Purchase Agreement, which is included in our 8-K filing on November 1, 2019 |
3. ACCOUNTS RECEIVABLE (Tables)
3. ACCOUNTS RECEIVABLE (Tables) | 9 Months Ended |
Sep. 30, 2019 | |
Table Text Block Supplement [Abstract] | |
Schedule of Accounts Receivable | A summary of accounts receivable is as follows: September 30, 2019 December 31, 2018 Trade receivables $ 3,485,943 $ 5,572,467 Allowance for doubtful accounts — — Total accounts receivable, net $ 3,485,943 $ 5,572,467 |
5. PROPERTY AND EQUIPMENT (Tabl
5. PROPERTY AND EQUIPMENT (Tables) | 9 Months Ended |
Sep. 30, 2019 | |
Table Text Block Supplement [Abstract] | |
Property, Plant and Equipment | A summary of property and equipment follows: September 30, 2019 December 31, 2018 Furniture and fixtures $ 195,586 $ 195,586 Computers and office equipment 719,594 563,856 Right of use assets 683,797 683,797 Property and equipment at cost 1,598,977 1,443,239 Less accumulated depreciation and amortization (841,911 ) (555,365 ) $ 757,066 $ 887,874 |
6. LEASES (Tables)
6. LEASES (Tables) | 9 Months Ended |
Sep. 30, 2019 | |
Leases [Abstract] | |
Operating lease expense | Operating lease expense is comprised of the following: Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Operating lease cost $ 78,008 $ 80,078 $ 253,857 $ 278,829 Sublet income (13,877 ) (30,416 ) (62,868 ) (77,298 ) Net operating lease cost $ 64,131 $ 49,662 $ 190,989 $ 201,531 |
Maturities of lease liabilities | Maturities of lease liabilities are as follows: Operating Leases Finance Leases 2019 $ 147,009 $ 4 2020 512,632 — 2021 132,926 — Total lease payments 792,567 4 Less imputed interest (289,118 ) — Total lease liabilities 503,449 4 Less current portion of lease liabilities (305,315 ) (4 ) Long-term lease liabilities $ 198,134 $ — |
7. INTANGIBLE ASSETS (Tables)
7. INTANGIBLE ASSETS (Tables) | 9 Months Ended |
Sep. 30, 2019 | |
Table Text Block Supplement [Abstract] | |
Schedule of Intangible Assets | Intangible assets are amortized over expected useful lives ranging from 1.5 to 10 years and consist of the following: September 30, 2019 December 31, 2018 Carrying Accumulated Net Book Carrying Accumulated Net Book Amount Amortization Value Amount Amortization Value Acquired technology $ 9,220,608 $ (2,874,870 ) $ 6,345,738 $ 9,220,608 $ (2,202,291 ) $ 7,018,317 Customer relationships 2,933,257 (2,261,382 ) 671,875 2,933,257 (1,858,257 ) 1,075,000 Trademarks 1,693,978 (996,478 ) 697,500 1,693,978 (763,978 ) 930,000 Non-compete agreements 264,243 (247,569 ) 16,674 264,243 (197,571 ) 66,672 Total $ 14,112,086 $ (6,380,299 ) $ 7,731,787 $ 14,112,086 $ (5,022,097 ) $ 9,089,989 |
11. REVENUES (Tables)
11. REVENUES (Tables) | 9 Months Ended |
Sep. 30, 2019 | |
Table Text Block Supplement [Abstract] | |
Schedule of Revenue | Below is a summary of our revenues disaggregated by revenue source: Three Months Ended Nine Months Ended 2019 2018 2019 2018 Managed services $ 3,045,868 $ 2,683,025 $ 8,673,336 $ 7,512,688 Consulting and professional services 1,662,751 2,911,982 6,807,170 6,708,121 Hardware and software resales 57,381 60,731 116,611 117,513 Net revenues $ 4,766,000 $ 5,655,738 $ 15,597,117 $ 14,338,322 |
12. OPTIONS, WARRANTS AND RES_2
12. OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS (Tables) | 9 Months Ended |
Sep. 30, 2019 | |
Table Text Block Supplement [Abstract] | |
Schedule of Share-based Compensation, Stock Options, Activity | Options Shares Weighted Average Exercise Price Weighted Average Remaining Term in Years Aggregate Outstanding at December 31, 2018 539,593 $ 2.97 Granted 500,000 4.86 Exercised (47,642 ) 3.19 Cancelled (136,795 ) 3.34 Outstanding at September 30, 2019 855,156 $ 4.01 4.81 $ 122,387 Exercisable at September 30, 2019 354,599 $ 2.80 2.30 $ 122,387 |
Warrant Activity | Warrants Shares Weighted Average Exercise Price Weighted Average Remaining Term in Years Aggregate Outstanding at December 31, 2018 77,779 $ 3.03 Granted — — Exercised — — Cancelled — — Outstanding at September 30, 2019 77,779 $ 3.03 3.30 $ 3,889 Exercisable at September 30, 2019 77,779 $ 3.03 3.30 $ 3,889 |
Schedule of Restricted Stock Units, Activity | Restricted Stock Units Shares Weighted Average Price Weighted Average Remaining Term in Years Outstanding at December 31, 2018 810,000 $ 3.67 Granted 53,500 4.49 Vested (47,455 ) 3.42 Cancelled (56,045 ) 3.95 Outstanding at September 30, 2019 760,000 $ 3.72 1.37 |
Schedule of stock-based compensation expense | For the three months and nine months ended September 30, 2019 and 2018, stock-based compensation expense recognized in the consolidated statements of operations as follows: Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Cost of revenues $ 40,989 $ 21,148 $ 257,294 $ 82,173 Sales and marketing 53,234 42,625 187,200 87,875 General and administrative 231,377 97,492 568,960 293,350 Total stock-based compensation expense $ 325,600 $ 161,265 $ 1,013,454 $ 463,398 |
13. NET INCOME (LOSS) PER SHA_2
13. NET INCOME (LOSS) PER SHARE (Tables) | 9 Months Ended |
Sep. 30, 2019 | |
Net income (loss): | |
Schedule of Earnings Per Share, Basic and Diluted | Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Numerators: Net loss from continuing operations $ (1.256,656 ) $ (404,165 ) $ (3,685,321 ) $ (3,934,944 ) Net income (loss) from discontinued operations $ (6,500 ) $ 1,558,291 $ 18,878,149 $ 4,502,859 Net income (loss) $ (1,263,156 ) $ 1,154,126 $ 15,192,828 $ 567,916 Denominator: Denominator for basic calculation weighted average shares 9,795,147 9,613,133 9,754,014 9,605,536 Dilutive common stock equivalents: Options and warrants — 146,237 156,093 207,562 Denominator for diluted calculation weighted average shares 9,795,147 9,762,370 9,910,107 9,813,098 Net income (loss) per share: Basic $ (0.13 ) $ (0.04 ) $ (0.38 ) $ (0.41 ) Diluted $ (0.13 ) $ (0.04 ) $ (0.38 ) $ (0.41 ) From discontinued operations Basic $ (0.00 ) $ 0.16 $ 1.94 $ 0.47 Diluted $ (0.00 ) $ 0.16 $ 1.90 $ 0.46 Net income (loss) Basic $ (0.13 ) $ 0.12 $ 1.56 $ 0.06 Diluted $ (0.13 ) $ 0.12 $ 1.53 $ 0.06 |
17. DISCONTINUED OPERATIONS (Ta
17. DISCONTINUED OPERATIONS (Tables) | 9 Months Ended |
Sep. 30, 2019 | |
Discontinued Operations and Disposal Groups [Abstract] | |
Summary of transaction selling the MPS Business | The following is the summary of the transaction selling the MPS Business: Initial cash received $ 24,370,254 Escrow balance receivable 3,500,000 Working capital adjustment (1,566,753 ) Book value of net assets disposed (2,614,232 ) Gain before provision for income taxes 23,689,269 Income tax expense (5,622,617 ) Net gain from sale of discontinued operations $ 18,066,652 |
Summary of discontinued operations | The following are the carrying amounts of assets and liabilities included as part of held for sale on the balance sheet: September 30, 2019 December 31, 2018 Accounts receivable, net $ 201,965 $ 5,124,270 Prepaid and other current assets — 2,118,664 Supplies — 1,184,474 Currents assets held for sale $ 201,965 $ 8,427,408 Property and equipment, net $ — $ 327,332 Goodwill — 1,517,017 Noncurrent assets held for sale $ — $ 1,844,349 Accounts payable and accrued expenses $ — $ 5,098,179 Accrued compensation and benefits — 1,225,057 Deferred revenue — 888,467 Current portion of long-term liabilities — 87,857 Current liabilities held for sale $ — $ 7,299,561 Operating lease liability $ — $ 58,567 Noncurrent liabilities held for sale $ — $ 58,967 The following is a composition of the line items constituting net income (loss) from discontinued operations: Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Net revenues $ — $ 13,560,328 $ 12,096,885 $ 38,197,995 Cost of revenues — (10,530,558 ) (10,060,414 ) (30,348,300 ) Sales and marketing (4,981 ) (119,510 ) (201,295 ) (402,945 ) General and administrative expenses — (439,104 ) (676,630 ) (1,516,977 ) Depreciation — (47,987 ) (36,635 ) (157,592 ) Interest (income) expense — 4,273 (1,956 ) (9,527 ) Income (loss) before provision for income taxes (4,981 ) 2,427,443 1,119,956 5,762,653 Income tax expense (1,519 ) (869,152 ) (308,459 ) (1,259,793 ) Net (loss) income from discontinued operations $ (6,500 ) $ 1,558,291 $ 811,497 $ 4,502,860 The following is a composition of the capital expenditures, and any significant noncash operating and investing items, including depreciation, of the discontinued operations. Nine Months Ended September 30, 2019 2018 Depreciation $ 36,635 $ 157,594 Stock compensation $ 124,348 $ 40,443 Capital expenditures $ — $ 12,163 |
2. RECENTLY ISSUED ACCOUNTING_2
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Details) - USD ($) | Sep. 30, 2019 | Jan. 02, 2019 | Dec. 31, 2018 |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||
Operating lease right-of-use | $ 683,797 | $ 683,797 | $ 683,797 |
Operating lease liabilities | $ 503,449 | $ 808,841 |
3. ACCOUNTS RECEIVABLE_ Schedul
3. ACCOUNTS RECEIVABLE: Schedule of Accounts Receivable (Details) - USD ($) | Sep. 30, 2019 | Dec. 31, 2018 |
Text Block [Abstract] | ||
Trade receivables | $ 3,485,943 | $ 5,572,467 |
Allowance for doubtful accounts | 0 | 0 |
Total accounts receivable, net | $ 3,485,943 | $ 5,572,467 |
4. DEFERRED COMMISSIONS (Detail
4. DEFERRED COMMISSIONS (Details) - USD ($) | 3 Months Ended | 9 Months Ended | |||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | Dec. 31, 2018 | |
Sales Commissions and Fees | $ 206,730 | $ 205,515 | $ 669,450 | $ 616,262 | |
Cost of Sales | |||||
Deferred Costs and Other Assets | $ 870,911 | $ 870,911 | $ 991,175 |
5. PROPERTY AND EQUIPMENT _ Pro
5. PROPERTY AND EQUIPMENT : Property, Plant and Equipment (Details) - USD ($) | Sep. 30, 2019 | Jan. 02, 2019 | Dec. 31, 2018 |
Right of use assets | $ 683,797 | $ 683,797 | $ 683,797 |
Property, Plant and Equipment, Gross | 1,598,977 | 1,443,239 | |
Less accumulated depreciation and amortization | (841,911) | (555,365) | |
Property and equipment, net | 757,066 | 887,874 | |
Furniture and Fixtures | |||
Property, Plant and Equipment, Gross | 195,586 | 195,586 | |
Computers and office equipment | |||
Property, Plant and Equipment, Gross | $ 719,594 | $ 563,856 |
6. LEASES (Details)
6. LEASES (Details) | 9 Months Ended |
Sep. 30, 2019 | |
Leases [Abstract] | |
Leases description | We lease approximately 17,000 square feet of office space at 27271 Las Ramblas, Suite 200, Mission Viejo, California. This lease terminates in April 2021. During the first quarter of 2019, we subleased this space to two subtenants. The terms of these subleases end concurrently with the end of our lease obligation in April 2021.We also lease approximately 3,600 square feet of office space at 11410 Jollyville Road, Suite 2201, Austin, Texas. This lease terminates in September 2019. During the first quarter of 2018, we subleased this space to a subtenant. The terms of this sublease ends concurrently with the end of our lease obligation in September 2019. We also lease approximately 9,600 square feet of office space at 11940 Jollyville Road, Austin, Texas. |
Discount rate | 5.50% |
6. LEASES_ Operating lease expe
6. LEASES: Operating lease expense (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | |
Leases [Abstract] | ||||
Operating lease cost | $ 78,008 | $ 80,078 | $ 253,857 | $ 278,829 |
Sublet income | (13,877) | (30,416) | (62,868) | (77,298) |
Net operating lease cost | $ 64,131 | $ 49,662 | $ 190,989 | $ 201,531 |
6. LEASES_ Maturities of lease
6. LEASES: Maturities of lease liabilities (Details) - USD ($) | Sep. 30, 2019 | Jan. 02, 2019 |
Operating Leases | ||
2019 | $ 147,009 | |
2020 | 512,632 | |
2021 | 132,926 | |
Total lease payments | 792,567 | |
Less imputed interest | (289,118) | |
Total lease liabilities | 503,449 | $ 808,841 |
Less current portion of lease liabilities | (305,315) | |
Long-term lease liabilities | 198,134 | |
Finance Leases | ||
2019 | 4 | |
2020 | 0 | |
2021 | 0 | |
Total lease payments | 4 | |
Less imputed interest | 0 | |
Total lease liabilities | 4 | |
Less current portion of lease liabilities | (4) | |
Long-term lease liabilities | $ 0 |
7. INTANGIBLE ASSETS (Details)
7. INTANGIBLE ASSETS (Details) | 12 Months Ended |
Dec. 31, 2018 | |
Minimum | |
Intangible Asset, Useful Life | 1 year 6 months |
Maximum | |
Intangible Asset, Useful Life | 10 years |
7. INTANGIBLE ASSETS _ Schedule
7. INTANGIBLE ASSETS : Schedule of Intangible Assets (Details) - USD ($) | Sep. 30, 2019 | Dec. 31, 2018 |
Gross Carrying Amount | $ 14,112,086 | $ 14,112,086 |
Accumulated Amortization | (6,380,299) | (5,022,097) |
Net Book Value | 7,731,787 | 9,089,989 |
Acquired technology | ||
Gross Carrying Amount | 9,220,608 | 9,220,608 |
Accumulated Amortization | (2,874,870) | (2,202,291) |
Net Book Value | 6,345,738 | 7,018,317 |
Customer Relationships | ||
Gross Carrying Amount | 2,933,257 | 2,933,257 |
Accumulated Amortization | (2,261,382) | (1,858,257) |
Net Book Value | 671,875 | 1,075,000 |
Trademarks | ||
Gross Carrying Amount | 1,693,978 | 1,693,978 |
Accumulated Amortization | (996,478) | (763,978) |
Net Book Value | 697,500 | 930,000 |
Noncompete Agreements | ||
Gross Carrying Amount | 264,243 | 264,243 |
Accumulated Amortization | (247,569) | (197,571) |
Net Book Value | $ 16,674 | $ 66,672 |
8. DEFERRED REVENUE (Details)
8. DEFERRED REVENUE (Details) - USD ($) | Sep. 30, 2019 | Sep. 30, 2018 |
Deferred Revenue | $ 23,000,000 | |
Managed services revenues | ||
Deferred Revenue | 783,807 | $ 578,725 |
Consulting and professional services revenues | ||
Deferred Revenue | $ 67,507 | $ 523,505 |
9. LINE OF CREDIT AND TERM LO_2
9. LINE OF CREDIT AND TERM LOAN (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | Dec. 31, 2018 | Jan. 17, 2017 | |
Term Loan | ||||||
Line of Credit Facility, Maximum Borrowing Capacity | $ 5,000,000 | $ 5,000,000 | ||||
Debt Instrument, Face Amount | 17,250,000 | $ 17,250,000 | ||||
Debt Instrument, Maturity Date | Sep. 12, 2022 | |||||
Interest and Debt Expense | 0 | $ 234,989 | $ 207,903 | $ 521,785 | ||
A&R Credit Agreement Term Loan | ||||||
Line of Credit Facility, Maximum Borrowing Capacity | $ 14,000,000 | |||||
Separation Agreement | ||||||
Notes Payable | 343,750 | 343,750 | ||||
Debt Instrument, Face Amount | $ 3,750,000 | $ 3,750,000 | ||||
Debt Instrument, Interest Rate, Stated Percentage | 5.00% | 5.00% | ||||
CTEK Solutions, Inc | ||||||
Interest Charges | 52,760 | |||||
Repayments of Debt | 15,401,786 | |||||
Avidbank | Line of Credit | ||||||
Long-term Line of Credit | 0 | 0 | ||||
Debt Instrument, Fee Amount | 25,000 | 25,000 | ||||
Avidbank | Term Loan | ||||||
Interest Charges | 133,914 | |||||
Debt Instrument, Fee Amount | 86,250 | 86,250 | ||||
Seller Notes | ||||||
Interest Charges | $ 30,267 | $ 41,610 | $ 98,106 | $ 234,986 | ||
Debt Instrument, Face Amount | 9,000,000 | 9,000,000 | ||||
Debt Instrument, Interest Rate, Stated Percentage | 8.00% | |||||
Seller Notes | Hernandez | ||||||
Repayments of Debt | 4,500,000 | |||||
Seller Notes | Michael Mcmillan | ||||||
Debt Instrument, Face Amount | $ 4,500,000 | $ 4,500,000 | ||||
Debt Instrument, Maturity Date | Mar. 31, 2022 | |||||
Debt Instrument, Interest Rate, Stated Percentage | 8.00% | 8.00% | ||||
Repayments of Debt | $ 2,250,000 | |||||
Loan and Security Agreement | Avidbank | ||||||
Line of Credit Facility, Borrowing Capacity, Description | The amount available to us at any given time was the lesser of (a) $5.0 million, or (b) the amount available under our borrowing base (80% of our eligible accounts receivable, minus (1) accrued client lease payables, and minus (2) accrued equipment pool liability). | |||||
Loan and Security Agreement | Avidbank | Term Loan | ||||||
Debt Instrument, Description of Variable Rate Basis | prime plus 1.0% per annum | |||||
Earn-out Note | ||||||
Debt Instrument, Face Amount | $ 3,750,000 | $ 3,750,000 |
10. PROMISSORY NOTES (Details)
10. PROMISSORY NOTES (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | Dec. 31, 2018 | Jan. 17, 2017 | |
Interest Expense | $ 30,459 | $ 352,754 | $ 439,909 | $ 1,094,066 | ||
Separation Agreement | ||||||
Debt Instrument, Face Amount | $ 3,750,000 | $ 3,750,000 | ||||
Debt Instrument, Interest Rate, Stated Percentage | 5.00% | 5.00% | ||||
Interest Expense | $ 494 | 4,332 | $ 494 | 12,808 | ||
Notes Payable | 343,750 | 343,750 | ||||
Seller Notes | ||||||
Debt Instrument, Face Amount | 9,000,000 | 9,000,000 | ||||
Debt Instrument, Interest Rate, Stated Percentage | 8.00% | |||||
Interest Charges | 30,267 | 41,610 | 98,106 | 234,986 | ||
Seller Notes | Michael Mcmillan | ||||||
Debt Instrument, Face Amount | $ 4,500,000 | $ 4,500,000 | ||||
Debt Instrument, Interest Rate, Stated Percentage | 8.00% | 8.00% | ||||
Repayments of Debt | $ 2,250,000 | |||||
Outstanding principal balance due | $ 1,406,250 | $ 1,406,250 | $ 1,828,125 | |||
Debt Instrument, Maturity Date | Mar. 31, 2022 | |||||
Seller Notes | Hernandez | ||||||
Repayments of Debt | $ 4,500,000 | |||||
Earn-out Note | ||||||
Debt Instrument, Face Amount | 3,750,000 | $ 3,750,000 | ||||
Debt Instrument, Payment Terms | (i) a maturity date of March 12, 2023, at which all principal and accrued and unpaid interest was due, (ii) a simple interest rate of 5% per annum commencing on January 1, 2018, and compounding annually, and (iii) the right of the Company to prepay all or any portion of the Earn-out Note without premium or penalty. | |||||
Interest Expense | $ 0 | $ 47,195 | $ 45,858 | $ 140,721 |
11. REVENUES_ Schedule of Reven
11. REVENUES: Schedule of Revenue (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | |
Net revenues | $ 4,766,000 | $ 5,655,738 | $ 15,597,117 | $ 14,338,322 |
Managed services revenues | ||||
Net revenues | 3,045,868 | 2,683,025 | 8,673,336 | 7,512,688 |
Consulting and professional services revenues | ||||
Net revenues | 1,662,751 | 2,911,982 | 6,807,170 | 6,708,121 |
Office equipment, hardware and software resales | ||||
Net revenues | $ 57,381 | $ 60,731 | $ 116,611 | $ 117,513 |
12. OPTIONS, WARRANTS AND RES_3
12. OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS: Schedule of Share-based Compensation, Stock Options, Activity (Details) | 9 Months Ended |
Sep. 30, 2019USD ($)$ / sharesshares | |
Text Block [Abstract] | |
Outstanding, Beginning Balance | shares | 539,593 |
Outstanding, Weighted Average Exercise Price, Beginning Balance | $ / shares | $ 2.97 |
Granted | shares | 500,000 |
Granted, Weighted Average Exercise Price | $ / shares | $ 4.86 |
Exercised | shares | (47,642) |
Exercised, Weighted Average Exercise Price | $ / shares | $ 3.19 |
Cancelled | shares | (136,795) |
Cancelled, Weighted Average Exercise Price | $ / shares | $ 3.34 |
Outstanding, Ending Balance | shares | 855,156 |
Outstanding, Weighted Average Exercise Price, Ending Balance | $ / shares | $ 4.01 |
Outstanding, Weighted Average Remaining Term in Years | 4 years 9 months 22 days |
Outstanding, Aggregate Intrinsic Value | $ | $ 122,387 |
Exercisable | shares | 354,599 |
Exercisable, Weighted Average Exercise Price | $ / shares | $ 2.80 |
Exercisable, Weighted Average Remaining Term in Years | 2 years 3 months 19 days |
Exercisable, Aggregate Intrinsic Value | $ | $ 122,387 |
12. OPTIONS, WARRANTS AND RES_4
12. OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS: Warrant Activity (Details) | 9 Months Ended |
Sep. 30, 2019USD ($)$ / sharesshares | |
Text Block [Abstract] | |
Warrants, Outstanding, Beginning Balance | shares | 77,779 |
Outstanding, Weighted Average Exercise Price, Beginning Balance | $ / shares | $ 3.03 |
Granted | shares | 0 |
Granted, Weighted Average Exercise Price | $ / shares | $ 0 |
Exercised | shares | 0 |
Exercised, Weighted Average Exercise Price | $ / shares | $ 0 |
Cancelled | shares | 0 |
Cancelled, Weighted Average Exercise Price | $ / shares | $ 0 |
Warrants, Outstanding, Ending Balance | shares | 77,779 |
Outstanding, Weighted Average Exercise Price, Ending Balance | $ / shares | $ 3.03 |
Outstanding, Weighted Average Remaining Contractual Life | 3 years 3 months 19 days |
Outstanding, Intrinsic Value | $ | $ 3,889 |
Exercisable | shares | 77,779 |
Exercisable, Weighted Average Exercise Price | $ / shares | $ 3.03 |
Exercisable, Weighted Average Remaining Contractual Life | 3 years 3 months 19 days |
Exercisable, Intrinsic Value | $ | $ 3,889 |
12. OPTIONS, WARRANTS AND RES_5
12. OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS: Schedule of Restricted Stock Units, Activity (Details) | 9 Months Ended |
Sep. 30, 2019$ / sharesshares | |
Granted | 0 |
Cancelled | 0 |
Outstanding, Weighted Average Remaining Term in Years | 3 years 3 months 19 days |
Restricted Stock Units (RSUs) | |
Outstanding, Beginning Balance | 810,000 |
Outstanding, Weighted Average Price, Beginning Balance | $ / shares | $ 3.67 |
Granted | 53,500 |
Granted, Weighted Average Price | $ / shares | $ 4.49 |
Vested | (47,455) |
Vested, Weighted Average Price | $ / shares | $ 3.42 |
Cancelled | (56,045) |
Cancelled, Weighted Average Price | 3.95 |
Outstanding, Ending Balance | 760,000 |
Outstanding, Weighted Average Price, Ending Balance | $ / shares | $ 3.72 |
Outstanding, Weighted Average Remaining Term in Years | 1 year 4 months 13 days |
12. OPTIONS, WARRANTS AND RES_6
12. OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS: Schedule of Share-based Compensation expenses (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | |
Allocated Share-based Compensation Expense | $ 325,600 | $ 161,265 | $ 1,013,454 | $ 463,398 |
Cost of Sales | ||||
Allocated Share-based Compensation Expense | 40,989 | 21,148 | 257,294 | 82,173 |
Sales and marketing {1} | ||||
Allocated Share-based Compensation Expense | 53,234 | 42,625 | 187,200 | 87,875 |
General and administrative expense | ||||
Allocated Share-based Compensation Expense | $ 231,377 | $ 97,492 | $ 568,960 | $ 293,350 |
13. NET INCOME (LOSS) PER SHA_3
13. NET INCOME (LOSS) PER SHARE (Details) - $ / shares | 3 Months Ended | 9 Months Ended | |||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | Dec. 31, 2018 | |
Options and warrants | 0 | 146,237 | 156,093 | 207,562 | |
Restricted stock units vested but not issued | 0 | 0 | 0 | 0 | |
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding, Number | 77,779 | 77,779 | 77,779 | ||
Options And Warrants | |||||
Potentially Dilutive Securities | 432,378 | 656,318 | 432,378 | 656,318 | |
Options And Warrants | Minimum | |||||
Potentially dilutive securities, exercise price | $ 2.28 | $ 0.90 | $ 2.28 | $ 0.90 | |
Options And Warrants | Maximum | |||||
Potentially dilutive securities, exercise price | $ 4.05 | $ 6.45 | $ 4.05 | $ 6.45 | |
Restricted Stock Units (RSUs) | |||||
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding, Number | 760,000 | 441,000 | 760,000 | 441,000 |
13. NET INCOME (LOSS) PER SHA_4
13. NET INCOME (LOSS) PER SHARE : Schedule of Earnings Per Share, Basic and Diluted (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||||||
Sep. 30, 2019 | Jun. 30, 2019 | Mar. 31, 2019 | Sep. 30, 2018 | Jun. 30, 2018 | Mar. 31, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | |
Numerator: | ||||||||
Net loss from continuing operations | $ (1,256,656) | $ (404,165) | $ (3,685,321) | $ (3,934,944) | ||||
Net income (loss) from discontinued operations, including gain on sale, net of tax | (6,500) | 1,558,291 | 18,878,149 | 4,502,860 | ||||
Net income (loss) | $ (1,263,156) | $ (1,091,448) | $ 17,547,431 | $ 1,154,126 | $ 121,133 | $ (707,343) | $ 15,192,828 | $ 567,916 |
Denominator for basic calculation weighted averages | 9,795,147 | 9,616,133 | 9,754,014 | 9,605,536 | ||||
Dilutive Common Stock equivalents: | ||||||||
Options and warrants | 0 | 146,237 | 156,093 | 207,562 | ||||
Denominator for diluted calculation weighted average | 9,795,147 | 9,762,370 | 9,910,107 | 9,813,098 | ||||
From continuing operations: | ||||||||
Basic | $ (0.13) | $ (0.04) | $ (0.38) | $ (0.41) | ||||
Diluted | (0.13) | (0.04) | (0.38) | (0.41) | ||||
From discontinued operations: | ||||||||
Basic | 0 | 0.16 | 1.94 | 0.47 | ||||
Diluted | 0 | 0.16 | 1.90 | 0.46 | ||||
Net income (loss) per share: | ||||||||
Basic | (0.13) | 0.12 | 1.56 | 0.06 | ||||
Diluted | $ (0.13) | $ 0.12 | $ 1.53 | $ 0.06 |
14. REMAINING PERFORMANCE OBL_2
14. REMAINING PERFORMANCE OBLIGATIONS (Details) | 9 Months Ended |
Sep. 30, 2019USD ($) | |
Disclosure Text Block [Abstract] | |
Deferred Revenue | $ 23,000,000 |
Revenue Recognition, Deferred Revenue description | We expect to recognize revenue on approximately 88% of these remaining performance obligations over the next 24 months |
15. EMPLOYMENT AGREEMENTS (Deta
15. EMPLOYMENT AGREEMENTS (Details) - USD ($) | Jan. 01, 2020 | Aug. 01, 2019 | Aug. 01, 2019 | Jan. 31, 2021 | Sep. 30, 2019 | Dec. 31, 2016 |
Base Salary, Annual Amount | $ 325,000 | |||||
Caleb Barlow | ||||||
Base Salary, Annual Amount | $ 350,000 | |||||
Bonus | $ 200,000 | $ 500,000 | ||||
Restricted stock units purchased | 50,000 | |||||
Caleb Barlow | Maximum | ||||||
Bonus | $ 85,000 | |||||
Chief Financial Officer | ||||||
Base Salary, Annual Amount | $ 245,000 | |||||
Bonus | $ 132,000 | |||||
Chief Financial Officer | Year 2018 | ||||||
Base Salary, Annual Amount | 284,700 | |||||
Chief Financial Officer | Year 2019 | ||||||
Base Salary, Annual Amount | 309,700 | |||||
Bonus | $ 209,047 | |||||
Chief Financial Officer | Year 2020 | ||||||
Bonus rate | 67.50% | |||||
Chief Executive Officer | Year 2018 | ||||||
Base Salary, Annual Amount | $ 334,700 | |||||
Bonus | 219,375 | |||||
Chief Executive Officer | Year 2019 | ||||||
Base Salary, Annual Amount | 359,700 | |||||
Bonus | $ 242,798 | |||||
Chief Executive Officer | Year 2020 | ||||||
Bonus rate | 67.50% | |||||
Subsequent Event [Member] | Caleb Barlow | ||||||
Bonus | $ 150,000 | $ 150,000 |
16. CONCENTRATIONS (Details)
16. CONCENTRATIONS (Details) - USD ($) | 9 Months Ended | ||
Sep. 30, 2019 | Sep. 30, 2018 | Dec. 31, 2018 | |
Concentration Risk, Percentage | 17.00% | 20.00% | |
Accounts receivable, net | $ 3,485,943 | $ 5,572,467 | |
Customer Concentration Risk | |||
Accounts receivable, net | $ 700,000 | $ 400,000 |
17. DISCONTINUED OPERATIONS (De
17. DISCONTINUED OPERATIONS (Details) - Asset Purchase Agreement - CTEK Solutions, Inc - USD ($) | 1 Months Ended | |
Jun. 20, 2019 | Mar. 20, 2019 | |
Purchase price | $ 30,000,000 | |
Amount escrow by Buyer | 5,000,000 | |
Reduction in cash | $ 629,746 | |
Escrow removed | $ 1,500,000 |
17. DISCONTINUED OPERATIONS_ Su
17. DISCONTINUED OPERATIONS: Summary of transaction selling MPS Business (Details) - USD ($) | 1 Months Ended | 3 Months Ended | 9 Months Ended | ||
Mar. 20, 2019 | Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | |
Income tax expense | $ (236,040) | $ (225,426) | $ (746,778) | $ (844,430) | |
Net gain from sale of discontinued operations | 23,689,269 | 0 | |||
Discontinued Operations [Member] | |||||
Initial cash received | $ 24,370,254 | ||||
Escrow balance receivable | 3,500,000 | ||||
Working capital adjustment | (1,566,753) | ||||
Book value of net assets disposed | (2,614,232) | ||||
Gain before provision for income taxes | 23,689,269 | (4,981) | 2,427,443 | 1,119,956 | 5,762,653 |
Income tax expense | (5,622,617) | $ (1,519) | $ (869,152) | $ (308,459) | $ (1,259,793) |
Net gain from sale of discontinued operations | $ 18,066,652 |
17. DISCONTINUED OPERATIONS_ Ba
17. DISCONTINUED OPERATIONS: Balance Sheet (Details) - USD ($) | Sep. 30, 2019 | Jan. 02, 2019 | Dec. 31, 2018 |
Currents assets held for sale | $ 201,965 | $ 8,427,408 | |
Property and equipment, net | 757,066 | 887,874 | |
Noncurrent assets held for sale | 0 | 1,844,349 | |
Accounts payable and accrued expenses | 215,631 | 1,370,336 | |
Accrued compensation and benefits | 920,014 | 1,592,765 | |
Current portion of long-term liabilities | 1,043,099 | 18,364,584 | |
Current liabilities held for sale | 0 | 7,299,561 | |
Operating lease liability | 503,449 | $ 808,841 | |
Noncurrent liabilities held for sale | 0 | 58,967 | |
Discontinued Operations [Member] | |||
Accounts receivable, net | 201,965 | 5,124,270 | |
Prepaid and other current assets | 0 | 2,118,664 | |
Supplies | 0 | 1,184,474 | |
Currents assets held for sale | 201,965 | 8,427,408 | |
Property and equipment, net | 0 | 327,332 | |
Goodwill | 0 | 1,517,017 | |
Noncurrent assets held for sale | 0 | 1,844,349 | |
Accounts payable and accrued expenses | 0 | 5,098,179 | |
Accrued compensation and benefits | 0 | 1,225,057 | |
Deferred revenue | 0 | 888,467 | |
Current portion of long-term liabilities | 0 | 87,857 | |
Current liabilities held for sale | 0 | 7,299,561 | |
Operating lease liability | 0 | 58,567 | |
Noncurrent liabilities held for sale | $ 0 | $ 58,967 |
17. DISCONTINUED OPERATIONS_ Op
17. DISCONTINUED OPERATIONS: Operation (Details) - USD ($) | 1 Months Ended | 3 Months Ended | 9 Months Ended | ||
Mar. 20, 2019 | Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | |
Net revenues | $ 4,766,000 | $ 5,655,738 | $ 15,597,117 | $ 14,338,322 | |
Cost of revenues | (3,165,502) | (2,898,273) | (9,613,777) | (7,783,317) | |
Sales and marketing | (1,090,733) | (1,193,878) | (3,907,847) | (3,885,948) | |
Depreciation | (47,775) | (36,853) | (135,875) | (107,833) | |
Income tax expense | (236,040) | (225,426) | (746,778) | (844,430) | |
Net (loss) income from discontinued operations | (6,500) | 1,558,291 | 18,878,149 | 4,502,860 | |
Discontinued Operations [Member] | |||||
Net revenues | 0 | 13,560,328 | 12,096,885 | 38,197,995 | |
Cost of revenues | 0 | (10,530,558) | (10,060,414) | (30,348,300) | |
Sales and marketing | (4,981) | (119,510) | (201,295) | (402,945) | |
General and administrative expenses | 0 | (439,104) | (676,630) | (1,516,977) | |
Depreciation | 0 | (47,987) | (36,635) | (157,592) | |
Interest (income) expense | 0 | 4,273 | (1,956) | (9,527) | |
Income before provision for income taxes | $ 23,689,269 | (4,981) | 2,427,443 | 1,119,956 | 5,762,653 |
Income tax expense | $ (5,622,617) | (1,519) | (869,152) | (308,459) | (1,259,793) |
Net (loss) income from discontinued operations | $ (6,500) | $ 1,558,291 | $ 811,497 | $ 4,502,860 |
17. DISCONTINUED OPERATIONS_ Ca
17. DISCONTINUED OPERATIONS: Cash Flow (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2019 | Sep. 30, 2018 | Sep. 30, 2019 | Sep. 30, 2018 | |
Depreciation | $ 47,775 | $ 36,853 | $ 135,875 | $ 107,833 |
Discontinued Operations [Member] | ||||
Depreciation | $ 0 | $ 47,987 | 36,635 | 157,592 |
Stock compensation | 124,348 | 40,443 | ||
Capital expenditures | $ 0 | $ 12,163 |
18. SUBSEQUENT EVENT (Details)
18. SUBSEQUENT EVENT (Details) - Subsequent Event [Member] - Stock Purchase Agreement - Backbone Enterprises | 1 Months Ended |
Oct. 31, 2019USD ($)shares | |
Acquisition of of common stock | 100.00% |
Payment of cash | $ 5,500,000 |
Issuance of common stock | shares | 491,804 |
Post-closing financial performance | $ 4,000,000 |
Cash Consideration | $ 1,500,000 |