Attached files
| file | filename |
|---|---|
| EX-99.4 - EXHIBIT 99.4 - CYNERGISTEK, INC | ctek_ex99z4.htm |
| EX-99.2 - EXHIBIT 99.2 - CYNERGISTEK, INC | ctek_ex99z2.htm |
| EX-23.1 - EXHIBIT 23.1 - CYNERGISTEK, INC | ctek_ex23z1.htm |
| 8-K/A - 8-K/A - CYNERGISTEK, INC | ctek_8ka.htm |
Exhibit 99.3
CYNERGISTEK, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements give the effect to the acquisition by CynergisTek, Inc. (“CynergisTek”), of Backbone Enterprises, Inc., (“Backbone”) following the execution on October 31, 2019, of a Stock Purchase Agreement (the “Agreement”) with Backbone and Walter Zuniga, Jacob Carroll, Nikhil D’Souza and Timothy Homstad (the “Stockholders”) pursuant to which Backbone’s outstanding shares were acquired by CynergisTek and Backbone became our wholly-owned subsidiary (the “Acquisition”). As consideration for the Acquisition, CynergisTek, Inc. paid upfront consideration of $5,500,000 in cash, 491,804 shares of CynergisTek common stock, $0.001 par value, 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 CynergisTek, against a portion of which CynergisTek may make claims for indemnification.
The unaudited pro forma condensed consolidated financial statements are based upon the estimates and assumptions set forth herein. The unaudited pro forma information has been prepared utilizing the historical financial statements and notes thereto, for which CynergisTek and Backbone are included herein. The unaudited pro forma financial data does not purport to be indicative of the results which actually would have been obtained had the purchase been affected on the dates indicated or of the results which may be obtained in the future. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements of CynergisTek, Inc. and the historical financial statements of Backbone Enterprises, Inc. included herein. The pro forma adjustments are based on estimates, available information and certain assumptions and may be revised as additional information becomes available. The unaudited pro forma condensed consolidated balance sheet gives effect to the Acquisition, which is accounted for as an acquisition of Backbone by CynergisTek, as if it had occurred on September 30, 2019. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2018, and for the nine months ended September 30, 2019, give effect to the Acquisition as if it had occurred on January 1, 2018.
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CYNERGISTEK, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 2019
(in thousands)
| CynergisTek, Inc. |
| Backbone Enterprises, Inc. |
| Pro Forma Adjustments |
| Combined Pro Forma |
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents | $10,183 |
| $1,092 |
| $(6,700) | (a) | $4,575 |
Accounts receivable, net | 3,486 |
| 654 |
| 177 | (b) | 4,317 |
Prepaid and other current assets | 4,058 |
| 2 |
| (140) | (b) | 3,920 |
Current assets held for sale | 202 |
| - |
| - |
| 202 |
Total current assets | 17,929 |
| 1,748 |
| (6,663) |
| 13,014 |
|
|
|
|
|
|
|
|
Property and equipment, net | 757 |
| 27 |
| (27) | (b) | 757 |
Deposits | 80 |
| - |
| - |
| 80 |
Deferred income taxes | 1,615 |
| - |
| - |
| 1,615 |
Intangible assets, net | 7,732 |
| - |
| 2,000 | (b) | 9,732 |
Goodwill | 17,008 |
| - |
| 7,073 | (b) | 24,081 |
|
|
|
|
|
|
|
|
Total assets | $45,121 |
| $1,775 |
| $2,383 |
| $49,279 |
|
|
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|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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|
|
Current liabilities: |
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|
|
|
|
|
Accounts payable and accrued expenses | $216 |
| $26 |
| $2,355 | (b) | $2,597 |
Accrued compensation and benefits | 920 |
| 577 |
| (482) | (b) | 1,015 |
Deferred revenue | 1,468 |
| - |
| - |
| 1,468 |
Income taxes payable | 4,016 |
| - |
| - |
| 4,016 |
Notes payable | - |
| 34 |
| (34) | (b) | - |
Current portion of long-term liabilities | 867 |
| - |
| - |
| 867 |
Total current liabilities | 7,487 |
| 637 |
| 1,839 |
| 9,963 |
|
|
|
|
|
|
|
|
Promissory note payable to related party, less current portion | 844 |
| - |
| - |
| 844 |
Operating lease liability, less current portion | 199 |
| - |
| - |
| 199 |
|
|
|
|
|
|
|
|
Total liabilities | 8,530 |
| 637 |
| 1,839 |
| 11,006 |
|
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|
Commitments and contingencies |
|
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|
Stockholders’ equity: |
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|
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|
Common stock | 10 |
| - |
| - | (c) | 10 |
Additional paid-in capital | 32,936 |
| - |
| 1,500 | (c) | 34,436 |
Accumulated earnings | 3,645 |
| 1,138 |
| (956) | (c) | 3,827 |
|
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|
|
|
|
|
|
Total stockholders’ equity | 36,591 |
| 1,138 |
| 544 |
| 38,273 |
|
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|
|
|
|
|
|
Total liabilities and stockholders’ equity | $45,121 |
| $1,775 |
| $2,383 |
| $49,279 |
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
2
CYNERGISTEK, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Nine Months Ended September 30, 2019 | |||||||
| CynergisTek, Inc. |
| Backbone Enterprises, Inc. |
| Pro Forma Adjustments |
| Combined Pro Forma |
Revenue | $15,597 |
| $2,670 |
| $- |
| $18,267 |
Cost of revenues | 9,614 |
| 1,707 |
| - |
| 11,321 |
|
|
|
|
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|
|
|
Gross profit | 5,983 |
| 963 |
| - |
| 6,946 |
|
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|
|
Operating expenses | 10,031 |
| 592 |
| 233 | (d)(e) | 10,856 |
|
|
|
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|
|
Operating income (loss) | (4,048) |
| 371 |
| (233) |
| (3,910) |
|
|
|
|
|
|
|
|
Interest and other income (expense), net | (384) |
| (1) |
| - |
| (385) |
|
|
|
|
|
|
|
|
Income (loss) before income taxes | (4,432) |
| 370 |
| (233) |
| (4,295) |
Benefit (provision) for income taxes | 747 |
| - |
| (80) | (f) | 667 |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations | (3,685) |
| 370 |
| (313) |
| (3,628) |
|
|
|
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|
|
|
Income from discontinued operations | 18,878 |
| - |
| - |
| 18,878 |
|
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|
Net income | $15,193 |
| $370 |
| $(313) |
| $15,250 |
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Net income (loss) per share: |
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|
From continuing operations: |
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Basic | $(0.38) |
|
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|
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| $(0.35) |
Diluted | $(0.38) |
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| $(0.35) |
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From discontinued operations |
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Basic | 1.94 |
|
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| 1.84 |
Diluted | 1.90 |
|
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| 1.81 |
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Net income (loss) |
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Basic | 1.56 |
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| 1.49 |
Diluted | 1.53 |
|
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| 1.47 |
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|
Basic weighted average shares outstanding | 9,754 |
|
|
| 492 |
| 10,246 |
Diluted weighted average shares outstanding | 9,910 |
|
|
| 492 |
| 10,402 |
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
3
CYNERGISTEK, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
| Year Ended December 31, 2018 | ||||||
| CynergisTek, Inc. |
| Backbone Enterprises, Inc. |
| Pro Forma Adjustments |
| Combined Pro Forma |
Revenue | $71,106 |
| $2,876 |
| $- |
| $73,982 |
Cost of revenues | 50,234 |
| 2,100 |
| - |
| 52,334 |
|
|
|
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|
Gross profit | 20,872 |
| 776 |
| - |
| 21,648 |
|
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Operating expenses | 16,393 |
| 558 |
| 475 | (d) | 17,426 |
|
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|
Operating income | 4,479 |
| 218 |
| (475) |
| 4,222 |
|
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|
Interest and other income (expense), net | (1,454) |
| (1) |
| - |
| (1,455) |
|
|
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|
|
Income before income taxes | 3,025 |
| 217 |
| (475) |
| 2,767 |
Provision for income taxes | (1,132) |
| - |
| (50) | (f) | (1,182) |
|
|
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|
Net income | $1,893 |
| $217 |
| $(525) |
| $1,585 |
|
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Net income per share: |
|
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|
Basic | $0.19 |
|
|
|
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| $0.15 |
Diluted | $0.19 |
|
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| $0.15 |
|
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|
Basic weighted average shares outstanding | 9,754 |
|
|
| 492 |
| 10,246 |
Diluted weighted average shares outstanding | 9,910 |
|
|
| 492 |
| 10,402 |
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
4
CYNERGISTEK, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 1 — Basis of presentation
The historical consolidated financial statements have been adjusted in the pro forma condensed consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the pro forma condensed consolidated statements of operations, expected to have a continuing impact on the combined results following the business combination.
The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of Backbone Enterprises, Inc.’s assets acquired and liabilities assumed and conformed the accounting policies of Backbone Enterprises, Inc. to its own accounting policies.
The pro forma consolidated financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The consolidated pro forma financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of Backbone Enterprises, Inc. as a result of restructuring activities and other planned cost savings initiatives following the completion of the business combination.
Note 2 — Financing transactions
The Company acquired Backbone Enterprises, Inc. for approximately $5.5 million in cash, 491,804 shares of CynergisTek, Inc. common stock, and contingent earn-out fees payable to the sellers up to $4.0 million (estimated fair value of the contingent earnout is $2.4 million).
Note 3 — Preliminary purchase price allocation
The Company has performed a preliminary valuation analysis of the fair value of Backbone Enterprises, Inc.’s assets and liabilities. The following table summarizes the preliminary allocation of the preliminary purchase price as of the acquisition date (in thousands):
Cash |
| $61 |
Accounts receivable |
| 831 |
Prepaid expenses |
| 55 |
Identified intangible assets |
| 2,000 |
Goodwill |
| 7,072 |
Accrued compensation and benefits |
| (94) |
Total allocated purchase price |
| $9,925 |
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and income statement. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in allocations to intangible assets such as trademarks, and customer relationships as well as goodwill and (2) other changes to assets and liabilities.
Note 4 — Pro forma adjustments
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The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed consolidated financial information:
(a) Reflects the $5.8 million net cash paid to the Stockholders, the $1.0 million net payout of Backbone Enterprises, Inc.’s existing cash to the Stockholders based on the stock purchase agreement and the add back of approximately $123,000 in legal fees paid by Backbone Enterprises, Inc. in 2019 that were directly related to the Acquisition.
(b) Reflects the working capital adjustments based on the purchase price allocation as of the acquisition date as shown in Note 3. The preliminary determination of the purchase price includes $2.4 million for the fair value of the earnout.
(c) Represents the elimination of the historical equity of Backbone Enterprises, Inc. and the issuance of common shares in connection with the Acquisition, as follows (in thousands):
Issuance of 491,804 shares of Company common stock | $ | 1,500 |
Elimination of historical stockholders’ equity and working capital adjustments |
| (1,079) |
Acquisition related legal fees paid by Backbone Enterprises in 2019 |
| 123 |
| $ | (956) |
(d) Reflects the addition of intangible assets acquired by the Company at their estimated fair values. As part of the preliminary valuation analysis, the Company identified intangible assets. The fair value of identifiable intangible assets is determined primarily using the “income approach,” which requires a forecast of the expected future cash flows. Since all information required to perform a detailed valuation analysis of Backbone Enterprises, Inc.’s intangible assets could not be obtained as of the date of this filing, for purposes of these unaudited pro forma condensed consolidated financial statements, the Company used certain assumptions based on publicly available transaction data for the industry. The following table summarizes the estimated fair values of Backbone Enterprises, Inc.’s identifiable intangible assets and their estimated useful lives (in thousands):
| Estimated Fair Value | Estimated Useful Life in Years | Year ended December 31, 2018 Amortization Expense | Nine months ended September 30, 2019 Amortization Expense | |||
Trademarks | $ | 500 | 5 | $ | 100 | $ | 75 |
Customer relationships |
| 1,500 | 4 |
| 375 |
| 281 |
Total | $ | 2,000 |
| $ | 475 | $ | 356 |
(e) As discussed in (a) above, Backbone Enterprises, Inc. incurred approximately $123,000 in acquisition related legal fees during the nine months ended September 30, 2019. This is added back to the pro forma income statement as a nonrecurring item.
(f) Represents the increase in income taxes expected to be incurred as a C Corporation
6