Item 3.02 Unregistered Sales of Equity Securities.
Acquisition of Backbone Enterprises Inc.
Stock Purchase Agreement – Backbone Enterprises Inc.
On October 31, 2019, CynergisTek, Inc. (“CynergisTek” or the “Company”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Backbone Enterprises Inc., a Minnesota corporation (“Backbone”), and the following stockholders of Backbone: Walter Zuniga (“Zuniga”), Jacob Carroll (“Carroll”), Nikhil D’Souza (“D’Souza”) Timothy Homstad (“Homstad”; and together with Zuniga, Carroll and D’Souza, the “Stockholders”), pursuant to which CynergisTek 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 by CynergisTek of 491,804 shares of CynergisTek common stock, par value $0.001 per share (the “CynergisTek Stock”) to the Stockholders, pro rata among the Stockholders in proportion to each Stockholder’s ownership of the Shares (the “Securities Consideration”), 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.
In the Purchase Agreement, CynergisTek, 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 CynergisTek certificates representing the Shares and the corporate record books of Backbone. CynergisTek 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 CynergisTek, pursuant to which each will serve as a vice president of CynergisTek, and will have the duties and responsibilities assigned to them by CynergisTek’s executive management team.
Backbone has progressively built its reputation on delivering premium quality Information Technology (IT) Risk Advisory Services while supplying best-in-class customer service to its business partners. Originally established by Walter Zuniga in 2008, Backbone has developed a strong expertise in the areas of cybersecurity, IT audit, and data privacy. Backbone has been successful in building a strong client base with multiple fortune 1,000 companies.
The foregoing summary of the terms and conditions of the Purchase Agreement do not purport to be complete, and are qualified in their entirety by reference to the full text of the Purchase Agreement, which is included as Exhibit 10.1 hereto.
Issuance of CynergisTek Common Stock as Securities Consideration
The CynergisTek Stock issued as the Securities Consideration in the Purchase Agreement was issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), together with regulations promulgated thereunder by the U.S. Securities and Exchange Commission, based upon the following: (a) there was no public offering or general solicitation with respect to the offering of such shares, (b) each Stockholder was provided with certain disclosure materials and all other information requested with respect to CynergisTek, (c) each Stockholder acknowledged that the CynergisTek Stock was being acquired for investment intent and constitutes “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act, (d) each Stockholder represented and warranted that he is an “accredited investor” as defined in Rule 501(a) under the Securities Act, and (e) a legend has been, or will be, placed
on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.