UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

Of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): March 20, 2019

CYNERGISTEK, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

000-27507

37-1867101

(State or other jurisdiction of

(Commission File Number)

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

 

11940 Jollyville Rd., Suite 300N

 

 

Austin, TX 78759

 

 

(512) 402-8550

 

 

 

 

 

(Address, including zip code, and telephone number,

 

 

including area code, of registrant’s principal executive offices)

 

 

 

 

 

27271 Las Ramblas, Suite 200

Mission Viejo, CA 92691

(949) 614-0700

 

 

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

  Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company    o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o

 

1.01 Entry into a Material Definitive Agreement  

 

1.02 Termination of a Material Definitive Agreement  

 

2.01 Completion of Acquisition or Disposition of Assets  

 

Sale of Certain Assets related to the Managed Print Services Business Division.

 

On March 20, 2019, CynergisTek, Inc., a Delaware corporation (the “ Company ”), and its wholly-owned subsidiary, CTEK Solutions, Inc., a California corporation (“ CTEK Solutions ,” and together with the Company, “ CynergisTek ”) 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, CynergisTek sold its assets used in the provision of its managed print services business division (the “ MPS Business ”), which had been primarily conducted by CTEK Solutions. The Buyer also assumed certain liabilities relating to the MPS Business. The purchase price paid to CynergisTek by Buyer pursuant to the Purchase Agreement was thirty million dollars ($30,000,000.00), $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. The purchase price is also subject to adjustment based on closing working capital of the MPS Business.  The Company will continue to operate, through its subsidiary CTEK Security, Inc., a Texas corporation (“ CTEK Security ”), its business of cybersecurity, privacy and compliance management consulting.   

 

Termination of BMO Harris Bank N.A. Credit Agreement and Related Agreements .

 

Also on March 20, 2019 the Company terminated the Revolving Credit Facility and Term Loan made by BMO Harris Bank N.A. (the “ Bank ”), under the Credit Agreement dated as of March 12, 2018 (together with the other related documents defined therein, the “ Credit Agreement ”), by and among the Company, CTEK Security, CTEK Solutions and Delphiis, Inc., a California corporation (“ Delphiis ”, and together with CTEK Security and CTEK Solutions, the “ Guarantors ”). In conjunction with such termination, the Company repaid its outstanding debt to the Bank of $15,509,744.03 with proceeds of the sale of the MPS Business.  The terms of the Credit Agreement previously were disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2018. There were no material early termination penalties incurred as a result of the termination of the Credit Agreement. 

 

In consideration of the payment in full of the amounts owed to the Bank under the Credit Agreement, the Bank agreed that (a) all liabilities, obligations, and indebtedness owing to the to the Bank pursuant to the Credit Agreement, and any other instrument, document, certificate or agreement entered into connection therewith were immediately and automatically deemed repaid in full, satisfied and discharged, other than (i) obligations consisting of funds transfer and deposit account liability of the Company and CTEK Security and (ii) obligations under the Credit Agreement which by their terms survive termination of the Credit Agreement (e.g., the Company’s obligation to repay all indebtedness under the Credit Agreement and to indemnify and hold the Bank harmless) (clauses (i) and (ii) are collectedly referred to herein as the “ Continuing Obligations ”); (b) the Credit Agreement and any other instrument, certificate, document or agreement entered into by the Company and the Guarantors in connection with the Credit Agreement, were each immediately and automatically terminated, other than any provision of any such agreement in respect of or securing the Continuing Obligations, and (c) all security interests and liens which the Bank may have on any assets of CTEK Solutions, Delphiis and the Company related to the MPS Business were automatically and fully terminated and released.

 

Payoff of Promissory Notes

 

With the proceeds from the sale of the MPS Business assets, the Company plans to repay the $5,437,500 principal balances, as well as accrued but unpaid interest, owed under its promissory notes with Michael Hernandez and Michael McMillan.  The Company may choose to pay a portion of the promissory notes immediately and delay payback of a portion until amounts held in escrow are subsequently paid.  The proforma information below assumes a full payoff of the promissory notes. 

 

 

Sublease Agreement

 

Effective March 20, 2019, the Company subleased a portion of its office located at 27271 Las Ramblas, Mission Viejo, California 92691 (the “ Mission Viejo Premises ”) containing approximately 12,620 square feet of space, a portion of which is located on the 2 nd floor of the Mission Viejo Premises and the basement within the same, pursuant to a Sublease Agreement dated March 20, 2019 (the “ Vereco Sublease ”) with Buyer. The term of the Vereco Sublease commenced on March 20, 2019, and terminates on April 14, 2021. Monthly rent payments are as follows: (a) $29,447 per month for the period commencing on the commencement date and ending on December 31, 2019; (b) $30,330.41 per month commencing on January 1, 2020 and ending on December 31, 2020; (c) $31,240.32 per month commencing on January 1, 2021 and ending on March 31, 2021; and (d) a single installment of $15,620.16 for the period commencing on April 1, 2021 and ending on April 14, 2021.

 

The foregoing summaries of the terms and conditions of the Purchase Agreement and Vereco Sublease do not purport to be complete, and are qualified in their entirety by reference to the full text of the Purchase Agreement and the Vereco Sublease, which are included as Exhibits 10.1 and 10.2, respectively, hereto.

 

Item 7.01 Regulation FD Disclosure.  

 

On March 20, 2019, the Company issued a press release regarding the closing of the sale of the MPS Business, which is attached hereto as Exhibit 99.1.

 

The press release included as Exhibit 99.1 will be deemed to be “furnished” rather than “filed,” pursuant to the rules of the Securities and Exchange Commission.

 

  Item 9.01 Financial Statements and Exhibits  

 

(b) Pro forma financial information .

 

The following pro forma financial statements are filed with this Form 8-K:

 

Pro forma condensed consolidated balance sheet as of September 30, 2018

Pro forma condensed consolidated statement of operations for nine months ended September 30, 2018

Pro forma condensed consolidated statement of operations for year ended December 31, 2017

Notes to pro forma statements

 

(d) Exhibits.

 

Exhibit No.

Description

10.1

10.2

99.1

 

Asset Purchase Agreement*

Sublease Agreement

Press Release dated March 20, 2019

 

*The schedules and exhibits to the Purchase Agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K.  A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

CYNERGISTEK, INC.

 

 

 

Date:   

March 26, 2019

 

By:

/s/ Paul T. Anthony

 

Name:

Paul T. Anthony

 

Title:

Chief Financial Officer

 

 

CynergisTek, Inc. and Subsidiaries

Pro Forma Condensed Consolidated Balance Sheet

As of September 30, 2018

(Unaudited)

 

 

 

 

 

As reported

Pro forma Adjustments (1)

Pro forma

ASSETS

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$ 6,355,427   

$ 2,641,121   

$ 8,996,548   

Accounts receivable, net

9,389,407   

(7,239,855)  

2,149,552   

Prepaid and other current assets

1,583,463   

(456,295)  

1,127,168   

Supplies

1,043,964   

(1,043,964)  

-   

Amount receivable from asset sale of CTEK Solutions

-   

4,500,000   

4,500,000   

Total current assets

18,372,261   

(1,598,993)  

16,773,268   

 

 

 

 

Property and equipment, net

648,895   

(388,523)  

260,372   

Deposits

87,778   

-   

87,778   

Deferred income taxes

2,930,051   

-   

2,930,051   

Intangible assets, net

9,542,722   

-   

9,542,722   

Goodwill

18,525,206   

(1,517,017)  

17,008,189   

Total assets

$ 50,106,913   

$ (3,504,533)  

$ 46,602,380   

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued expenses

$ 3,639,637   

$ 2,706,995   

$ 6,346,632   

Accrued compensation and benefits

3,792,516   

(306,508)  

3,486,008   

Deferred revenue

1,144,555   

-   

1,144,555   

Note payable

343,750   

-   

343,750   

Current portion of long-term liabilities

3,120,504   

(3,120,504)  

-   

Total current liabilities

12,040,962   

(720,017)  

11,320,945   

 

 

 

 

Long-term liabilities:

 

 

 

Term loan, less current portion

14,075,843   

(14,075,843)  

-   

Promissory notes to related parties, less current portion

5,156,250   

(5,156,250)  

-   

Capital lease obligations, less current portion

77,500   

(75,367)  

2,133   

Total long-term liabilities

19,309,593   

(19,307,460)  

2,133   

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

Common stock, par value at $0.001, 33,333,333 shares authorized, 9,616,133 shares issued and outstanding at September 30, 2018

9,616   

-   

9,616   

Additional paid-in capital

31,619,720   

-   

31,619,720   

Accumulated deficit

(12,872,978)  

16,522,944   

3,649,966   

Total stockholders’ equity

18,756,358   

16,522,944   

35,279,302   

Total liabilities and stockholders’ equity

$ 50,106,913   

$ (3,504,533)  

$ 46,602,380   

 

CynergisTek, Inc. and Subsidiaries

Pro Forma Condensed Consolidated Statement of Operations

For the Nine Months Ended September 30, 2018

(Unaudited)

 

 

 

 

 

As reported

Pro forma adjustments (2)

Pro forma

Net revenues

$ 52,536,317   

$ (38,197,995)  

$ 14,338,322   

Cost of revenues

38,131,617   

(30,307,857)  

7,823,760   

Gross profit

14,404,700   

(7,890,138)  

6,514,562   

 

 

 

 

Operating expenses:

 

 

 

Sales and marketing

4,288,893   

(402,945)  

3,885,948   

General and administrative

6,405,355   

(3,491,594)  

2,913,761   

Depreciation

265,424   

(163,325)  

102,099   

Amortization of acquisition-related intangibles

1,358,201   

-   

1,358,201   

Total operating expenses

12,317,873   

(4,057,864)  

8,260,009   

Income (loss) from operations

2,086,827   

(3,832,274)  

(1,745,447)  

 

 

 

 

Other income (expense):

 

 

 

Other income

44   

-   

44   

Interest expense

(1,103,592)  

1,090,784   

(12,808)  

Total other income (expense)

(1,103,548)  

1,090,784   

(12,764)  

 

 

 

 

Income (loss) before provision for income taxes

983,279   

(2,741,490)  

(1,758,211)  

Income tax (expense) benefit

(415,363)  

749,586   

334,223   

Net income (loss)

$ 567,916   

$ (1,991,904)  

$ (1,423,988)  

 

 

 

 

Net income (loss) per share:

 

 

 

Basic

$ 0.06   

$ (0.21)  

$ (0.15)  

Diluted

$ 0.06   

$ (0.20)  

$ (0.14)  

 

 

 

 

Number of weighted average shares outstanding:

 

 

 

Basic

9,605,536   

9,605,536   

9,605,536   

Diluted

9,813,098   

9,605,536   

9,605,536   

 

CynergisTek, Inc.

Pro Forma Condensed Consolidated Statement of Operations

For the Year Ended December 31, 2017

(Unaudited)

 

 

 

 

 

As reported

Pro forma adjustments (2)

Pro forma

Net revenues

$ 71,638,947   

$ (54,113,056)  

$ 17,525,891   

Cost of revenues

50,739,359   

(41,826,729)  

8,912,630   

Gross profit

20,899,588   

(12,286,327)  

8,613,261   

 

 

 

 

Operating expenses:

 

 

 

Sales and marketing

5,747,758   

(1,397,000)  

4,350,758   

General and administrative expenses

7,662,486   

(4,870,234)  

2,792,252   

Depreciation

383,419   

(248,590)  

134,829   

Amortization of acquisition-related intangibles

2,080,746   

-   

2,080,746   

Impairment of goodwill and intangible assets

180,726   

-   

180,726   

Total operating expenses

16,055,135   

(6,515,824)  

9,539,311   

Income (loss) from operations

4,844,453   

(5,770,503)  

(926,050)  

 

 

 

 

Other income (expense):

 

 

 

Interest expense

(1,526,653)  

1,526,653   

-   

Change in valuation of contingent earn-out

(1,394,000)  

-   

(1,394,000)  

Other expense

(675)  

-   

(675)  

Total other income (expense)

(2,921,328)  

1,526,653   

(1,394,675)  

 

 

 

 

Income (loss) before provision for income taxes

1,923,125   

(4,243,850)  

(2,320,725)  

Income tax (expense) benefit

(2,365,476)  

1,503,117   

(862,359)  

Net loss

$ (442,351)  

$ (2,740,733)  

$ (3,183,084)  

 

 

 

 

Net loss per share:

 

 

 

Basic

$ (0.05)  

$ (0.29)  

$ (0.34)  

Diluted

$ (0.05)  

$ (0.29)  

$ (0.34)  

 

 

 

 

Number of weighted average shares outstanding:

 

 

 

Basic

9,425,281   

9,425,281   

9,425,281   

Diluted

9,425,281   

9,425,281   

9,425,281   

 

CynergisTek, Inc. and Subsidiaries

Notes to Pro Forma Condensed Consolidated Financial Statements

As of and For the Nine Months Ended September 30, 2018

For the Year Ended December 31, 2017

 

 

Note 1 – Pro Forma Condensed Consolidated Balance Sheet Adjustments

 

The following adjustments reflect the sale of certain assets of the CTEK Solutions business as if the sale occurred on September 30, 2018 pursuant to the Asset Purchase Agreement.

 

Account

Dr

Cr

Cash and cash equivalents

$ 2,641,121   

 

Accounts receivable, net

 

$ 7,239,855   

Prepaid and other current assets

 

456,295   

Supplies

 

1,043,964   

Amount receivable from asset sale of CTEK Solutions

4,500,000   

 

Property and equipment, net

 

388,523   

Goodwill

 

1,517,017   

 

 

 

Accounts payable and accrued expenses

2,993,005   

 

Accrued compensation and benefits

306,508   

 

Income taxes payable (included in Accounts Payable)

 

5,700,000   

Current portion of long-term liabilities

3,120,504   

 

Term loan, less current portion

14,075,843   

 

Promissory notes to related parties, less current portion

5,156,250   

 

Capital lease obligations, less current portion

75,367   

 

Accumulated deficit

 

16,522,944   

 

$ 32,868,598   

$ 32,868,598   

 

Note 2 – Pro Forma Condensed Consolidated Statement of Operations

 

Pro forma condensed consolidated statements of comprehensive loss for the nine months ended September 30, 2018 and the year ended December 31, 2017 assume that the sale of certain assets of the CTEK Solutions business occurred on January 1, 2017. The pro forma adjustments reflect the elimination of revenues and expenses directly associated with the CTEK Solutions business operations, as originally reported. Selling, general and administrative expenses were not allocated between the disposed division and the continuing operations.  The proforma adjustments also reflect an assumption that the proceeds from the sale of the business would also have resulted in the repayment of term loan and seller notes, and as such, interest expense would be eliminated. The proforma adjustments do not reflect the gain on the sale of the CTEK Solutions business, which management estimated to be approximately $16.8 million using the September 30, 2018 pro forma balance sheet. The pro forma adjustments are as follows:

 

 

Account

Nine Months Ended September 30, 2018

Year Ended December 31, 2017

Net revenues

$ (38,197,995)  

$ (54,113,056)  

Cost of revenues

(30,307,857)  

(41,826,729)  

Sales and marketing

(402,945)  

(1,397,000)  

General and administrative

(3,491,594)  

(4,870,234)  

Depreciation

(163,325)  

(248,590)  

Interest expense

(1,090,784)  

(1,526,653)  

Income tax expense

749,586   

1,503,117   

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