UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

(Amendment No. 1)

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported):  October 31, 2019

 

CYNERGISTEK, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

(State or other jurisdiction of incorporation)

 

000-27507

37-1867101

(Commission File Number)

(I.R.S. Employer Identification No.)

 

11940 Jollyville Road, Suite 300-N

Austin, Texas 78759

(Address of principal executive offices)

 

(512) 402-8550

(Registrant’s telephone number, including area code)

 

N/A

(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:

 

¨

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

 

¨

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

 

¨

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

 

¨

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

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

CTEK

NYSE American

 

 

 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   

 

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.  


 

 

Explanatory Note

 

On November 1, 2019, Cynergistek, Inc. (the “Company”) filed a Current Report on Form 8-K to report the Company’s acquisition of Backbone Enterprises, Inc., following the execution by the Registrant on October 31, 2019, of a Stock Purchase Agreement by and among the Company, Backbone Enterprises, Inc., a Minnesota corporation, and the following “Stockholders” of Backbone: Walter Zuniga, Jacob Carroll, Nikhil D’Souza, and Timothy Homstad, pursuant to which the Company acquired 100% of the issued and outstanding shares of common stock of Backbone from the Stockholders. In that previously filed Current Report on Form 8-K, the Registrant indicated that it would file an amendment to the Form 8-K no later than 71 days after the date which the Current Report on Form 8-K was required to be filed, to provide financial information to the extent required by Item 9.01 of Form 8-K. This Amendment No. 1 to the Current Report on Form 8-K for Cynergistek, Inc. is being filed to provide the financial statements and Pro Forma information required by Item 9.01.

 

Item 2.01. Acquisition or Disposition of Assets.

The information set forth in Item 2.01 of the Current Report on Form 8-K filed by the Registrant on November 1, 2019, is incorporated herein by reference.

 

Item 9.01. Financial Statements and Exhibits.

 

(a)

Exhibit 99.2: Financial Statements of Business Acquired. Backbone Enterprises, Inc.

 

 

 

 

  

Independent Auditors’ Report

3

  

Balance Sheet as of December 31, 2018

4

  

Statement of Income for the year ended December 31, 2018

5

  

Statement of Stockholders’ Equity for the year ended December 31, 2018

6

  

Statement of Cash Flows for the year ended December 31, 2018

7

  

Notes to Financial Statements

8

 

(b)

Exhibit 99.3: Unaudited Pro Forma Financial Information. CynergisTek, Inc and Backbone Enterprises, Inc.

 

 

 

 

  

Unaudited Pro Forma Condensed Consolidated Financial Statements

1

  

Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2019

2

  

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019

3

  

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2018

4

  

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

5

 

(c)

Exhibit 99.4: Unaudited Financial Statements of Business Acquired. Backbone Enterprises, Inc.

 

 

 

 

  

Balance Sheet as of September 30, 2019

3

  

Statements of Income for the nine months ended September 30, 2019 and 2018

4

  

Statement of Stockholders’ Equity for the nine months ended September 30, 2019 and 2018

5

  

Statement of Cash Flows for the nine months ended September 30, 2019 and 2018

6

  

Notes to Financial Statements

7


 

 

(d)

Exhibits

 

 

 

 

2.1**

Stock Purchase Agreement by and among Cynergistek, Inc., Backbone Enterprises, Inc., and stockholders Walter Zuniga, Jacob Carroll, Nikhil D’Souza and Timothy Homstad dated October  

 

 

 

 

23.1*

Consent of Haskell & White LLP

 

 

 

 

99.1**

Press Release of Cynergistek, Inc. dated November 1, 2019

 

 

 

 

99.2*

Financial Statements of Business Acquired, Backbone Enterprises, Inc.

 

 

 

 

99.3*

Unaudited Pro Forma Financial Information

 

 

 

 

99.4*

Unaudited Financial Statements of Business Acquired, Backbone Enterprises, Inc.

 

 

*

Filed herewith.

**

Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 1, 2019.

 

 

 

SIGNATURES

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

 

 

 

 

 

 

 

 

Date: January 14, 2020

 

 

 

By:

 

/s/ Paul T. Anthony

 

 

 

 

 

 

Paul T. Anthony

 

 

 

 

 

 

Chief Financial Officer and Secretary

 

 

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

CynergisTek, Inc.

We consent to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-220888) and the Registration Statements on Form S-8 (Files No. 333-176462 and 333-220911) of CynergisTek, Inc. (the “Company”) of our report dated January 14, 2020, with respect to the balance sheet of Backbone Enterprises, Inc. as of December 31, 2018 and the related statements of income, stockholders’ equity, and cash flows for the year then ended, which report appears in the Form 8-K/A of CynergisTek, Inc. dated January 14, 2020.

 

 

 

/s/ HASKELL & WHITE LLP

Irvine, California

January 14, 2020

Exhibit 99.2

Financial Statements with

Independent Auditors’ Report

BACKBONE ENTERPRISES, INC.

As of December 31, 2018 and for the Year Then Ended



 

BACKBONE ENTERPRISES, INC.

Table of Contents

 

 

Independent Auditors’ Report

 

Financial Statements:

 

Balance Sheet – December 31, 2018                                                            4 

 

Statement of Income – Year Ended December 31, 2018                                             5 

 

Statement of Stockholders’ Equity – Year Ended December 31, 2018                                  6 

 

Statement of Cash Flows – Year Ended December 31, 2018                                          7 

 

Notes to Financial Statements – December 31, 2018                                                8 




Independent Auditors’ Report

 

To the Stockholders

Backbone Enterprises, Inc.

 

We have audited the accompanying balance sheet of Backbone Enterprises, Inc. (the “Company”) as of December 31, 2018, and the related statements of income, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Backbone Enterprises, Inc. as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Emphasis of Matters

 

As described in Note 7 to the financial statements, the Company’s outstanding stock was acquired by CynergisTek, Inc., a publicly-traded company.  Our opinion is not modified with respect to this matter.

 

 

 

 HASKELL & WHITE LLP

 

Irvine, California

January 14, 2020



BACKBONE ENTERPRISES, INC.


BALANCE SHEET

DECEMBER 31, 2018

 

ASSETS

Current assets:

 

 

Cash and cash equivalents

$235,927 

 

Accounts receivable

876,134 

 

 

Total current assets

1,112,061 

 

 

 

 

Property and equipment, net

41,487 

 

 

 

 

 

 

Total assets

$1,153,548 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

Current liabilities:

 

Accounts payable and accrued expenses

$19,223 

Accrued compensation and benefits

292,985 

Line of credit

23,708 

Notes payable

48,468 

 

 

Total current liabilities

384,384 

 

 

 

 

Commitments and contingencies (Notes 5 & 6)

 

 

 

 

 

Stockholders’ equity:

 

Common stock, par value at $0.01, 10,000 shares authorized,

32 

 

3,191 shares issued and outstanding

 

Accumulated earnings

769,132 

 

 

Total stockholders’ equity

769,164 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

$1,153,548 

 

 

 

 


4


BACKBONE ENTERPRISES, INC.


STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2018

 

Net revenues

$2,875,831  

Cost of revenues

2,099,522  

 

 

Gross profit

776,309  

 

 

 

 

Selling, general, and administrative expenses

558,463  

 

 

Income from operations

217,846  

 

 

 

 

Other income (expense):

 

 

Interest expense

(1,266) 

 

 

Total other income (expense)

(1,266) 

 

 

 

 

Income before provision for income taxes

216,580  

 

 

 

 

Income and franchise tax expense

 

 

 

 

 

Net income

$216,580  


5


BACKBONE ENTERPRISES, INC.


 

STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2018

 

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Accumulated

 

Stockholders’

 

 

Shares

 

Amount

 

Earnings

 

Equity

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

3,191 

 

$32 

 

$552,551 

 

$552,583 

Net income

 

- 

 

- 

 

216,580 

 

216,580 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

3,191 

 

$32 

 

$769,132 

 

$769,164 

 

 

 

 

 

 

 

 

 


6


BACKBONE ENTERPRISES, INC.


STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2018

 

Cash flows from operating activities:

 

 

Net income

$216,580  

 

Adjustments to reconcile net income to net

 

 

 

cash used in operating activities:

 

 

Depreciation expense

24,577  

 

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

(494,313) 

 

 

Prepaid and other current assets

191  

 

 

Accounts payable and accrued expenses

(18,541) 

 

 

Accrued compensation and benefits

130,741  

 

 

 

 

 

 

 

 

Net cash used in operating activities

(140,765) 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Cash flows from financing activities:

 

 

Repayments on line of credit

(1,250) 

 

Repayments on notes payable

(49,164) 

 

 

 

 

 

 

 

 

Net cash used in financing activities

(50,414) 

 

 

 

 

 

Net decrease in cash and cash equivalents

(191,179) 

 

 

 

 

 

Cash and cash equivalents, beginning of year

427,106  

 

 

 

 

 

Cash and cash equivalents, end of year

$235,927  

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

Interest paid

$1,266  

 

 

 

 

 


7


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements

December 31, 2018


1. Basis of Presentation and Significant Accounting Policies 

 

Description of Business

 

Backbone Enterprises, Inc. (the “Company” or “Backbone”), a subchapter S corporation, is engaged in the business of information security, risk management and compliance. Backbone helps organizations manage their information security through professional services and consulting engagements.

 

Presentation of Financial Statements

 

The accompanying audited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results. Significant items subject to such estimates and assumptions include the amount and period of revenue recognition; the useful lives of long-lived assets; allowances for doubtful accounts; income taxes and other contingencies.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents (Note 6).

 

Accounts Receivable

 

The Company reports accounts receivable at net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from amounts that will not be collected. The Company calculates the allowance based on a specific analysis of past due balances and historical collections. Accounts receivable are charged off against the allowance for doubtful accounts when it is determined that the receivable is uncollectible. Management believes that no accounts receivable are uncollectible at December 31, 2018.

 

Property and Equipment

 

Property and equipment are carried at cost less accumulated depreciation. Depreciation of the property and equipment is provided using the straight-line method over the assets’ estimated economic lives, which range from three to five years. Expenditures for maintenance and repairs are charged to expense as incurred.

 

Fair Value of Financial Instruments

 

Financial instruments consist principally of cash equivalents, accounts receivable, and accounts payable. The Company believes that the recorded values of all financial instruments approximate their current fair values because of their nature and relatively short maturity dates or durations.

 

Revenue Recognition

 

The Company derives its revenue from cyber security professional consulting services. The Company commences revenue recognition when all of the following conditions are satisfied:


8


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements

December 31, 2018


·there is persuasive evidence of an arrangement;  

·the service has been or is being provided to the customer;  

·the collection of the fees is reasonably assured; and  

·the amount to be paid by the customer is fixed or determinable.  

 

For arrangements with multiple elements, management allocates total consideration to the deliverables that qualify as accounting units based on an estimated selling price.

 

Consulting services contracts are on either a fixed fee or a time and materials basis. For fixed fee arrangements, revenue is recognized using the proportional performance method. For time and materials arrangements, revenues are recognized as the services are rendered.

 

Income and Franchise Taxes

 

The Company is a subchapter S corporation and is not subject to federal income taxes. The taxable income of the Company is included in the individual income tax returns of its stockholders. However, the Company may be required to pay state income taxes based on its apportioned net income or pay state franchise fees based on its apportioned gross receipts. Based on its evaluation of uncertain tax positions, management has concluded that there are no significant uncertain tax positions requiring recognition in the accompanying financial statements, nor have the stockholders been assessed interest or penalties by any major tax jurisdictions. Income tax returns for 2016-2018 are subject to examination by federal tax authorities.

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting requirements and those imposed under federal and state tax laws. Deferred taxes are provided for timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

2. Recent Accounting Pronouncements 

 

In May 2014, the FASB issued guidance which provides a single, comprehensive accounting model for revenue arising from contracts with customers. This guidance supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that a company expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer. The new guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flow arising from customer contracts, including significant judgments and changes in judgments. Considering the one-year delay in the required adoption date for the guidance as issued in July 2015, the new guidance is effective for the Company beginning in 2019 and may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. Management has evaluated its existing revenue recognition policies and determined there will be no material impact to the financial statements upon the adoption of this standard.

 

In February 2016, the 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 proposes a dual model for recognizing expense. This guidance is effective in the first quarter of 2021 with early adoption permitted. Management has evaluated the impact of adopting this guidance and is preparing for the changes


9


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements

December 31, 2018


to be made to the financial statements. Management expects the adoption of these accounting changes will materially increase assets and liabilities but will not have a material impact on net income or equity.

 

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 is 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. Management expects the adoption of these accounting changes will not have a material impact on the 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 will be effective for the Company for the year ending December 31, 2019 and interim reporting periods within that year. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or made available for issuance. Management expects the adoption of these accounting changes will not have a material impact on the financial statements.

 

3. Property and Equipment 

 

A summary of property and equipment follows:

 

Autos

$150,105  

Less accumulated depreciation

(108,618) 

 

 

 

$41,487  

 

 

 

Depreciation expense for property and equipment amounted to $24,577 for the year ended December 31, 2018.

 

The Company has two notes payables that are collateralized by autos.  Related notes bear interest at rates ranging between 3.75% and 3.875% and monthly payments aggregate $1,742.  As of December 31, 2018, outstanding balances totaled $48,468.

 

4. Line of Credit 

 

On December 29, 2017, the Company entered into a one-year line of credit agreement with North Star Bank. Under this agreement, the Company could borrow up to $300,000 at an interest rate of the bank’s prime plus 0.75% (6.25% as of December 31, 2018). Interest is paid monthly. The line of credit is collateralized by the Company’s accounts receivable, inventory, property and equipment, and is guaranteed by the stockholders of the Company.

 

Interest charges associated with the line of credit totaled $1,266 for the year ended December 31, 2018.

 

On December 29, 2018, the line of credit was renewed under substantially the same terms through December 2019 and expired.

 

5. Commitments and Contingencies 

 

Operating Leases


10


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements

December 31, 2018


The Company leases its corporate offices under an operating lease. The original term was 25 months from a commencement date of March 2016. In 2018, a new lease agreement was entered into with a term of 38 months. Rent expense for the year ended December 31, 2018 was $87,335.

 

Future, non-cancellable operating lease commitments under these lease agreements are as follows for the year ended December 31, 2018:

 

2019

$44,988 

2020

46,830 

2021

27,944 

 

 

 

$119,762 

 

Legal Contingencies

 

From time-to-time, the Company may be involved in certain legal proceedings. The Company accrues a liability for the estimated loss when a loss is considered probable and the amount of loss can be reasonably estimated. As of December 31, 2018, the Company has no accrued liabilities for such matters.

 

6.Concentrations 

 

Major Customer

 

For the year ended December 31, 2018, there was one customer that generated at least 10% of the Company’s revenues. This customer represented approximately 37% of revenues. As of December 31, 2018, net accounts receivable due from this customer totaled approximately $250,000.

 

Financial Institutions

 

The Company maintains its cash balances at a single financial institution. Balances held by this institution are insured by the Federal Deposit Insurance Corporation for up to $250,000. The Company’s cash balances may exceed such insured limits. The Company reduces its exposure to credit risk by monitoring the financial stability of the institution.

 

7. Subsequent Events 

 

Management has evaluated subsequent events through January 14, 2020, the date the financial statements were available to be issued.

 

On October 31, 2019, CynergisTek, Inc. acquired all the outstanding stock of the Company 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.


11

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.


1


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 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

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 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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 

 

 

 

 

 

 

 

 

Total stockholders’ equity

36,591 

 

1,138 

 

544  

 

38,273 

 

 

 

 

 

 

 

 

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  

 

 

 

 

 

 

 

 

Gross profit

5,983  

 

963  

 

 

 

6,946  

 

 

 

 

 

 

 

 

Operating expenses

10,031  

 

592  

 

233  

(d)(e)  

10,856  

 

 

 

 

 

 

 

 

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) 

 

 

 

 

 

 

 

 

Income from discontinued operations

18,878  

 

 

 

 

 

18,878  

 

 

 

 

 

 

 

 

Net income

$15,193  

 

$370  

 

$(313) 

 

$15,250  

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

From continuing operations:

 

 

 

 

 

 

 

Basic

$(0.38) 

 

 

 

 

 

$(0.35) 

Diluted

$(0.38) 

 

 

 

 

 

$(0.35) 

 

 

 

 

 

 

 

 

From discontinued operations

 

 

 

 

 

 

 

Basic

1.94  

 

 

 

 

 

1.84  

Diluted

1.90  

 

 

 

 

 

1.81  

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

Basic

1.56  

 

 

 

 

 

1.49  

Diluted

1.53  

 

 

 

 

 

1.47  

 

 

 

 

 

 

 

 

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  

 

 

 

 

 

 

 

 

Gross profit

20,872  

 

776  

 

 

 

21,648  

 

 

 

 

 

 

 

 

Operating expenses

16,393  

 

558  

 

475  

(d)  

17,426  

 

 

 

 

 

 

 

 

Operating income

4,479  

 

218  

 

(475) 

 

4,222  

 

 

 

 

 

 

 

 

Interest and other income (expense), net

(1,454) 

 

(1) 

 

 

 

(1,455) 

 

 

 

 

 

 

 

 

Income before income taxes

3,025  

 

217  

 

(475) 

 

2,767  

Provision for income taxes

(1,132) 

 

 

 

(50) 

(f)  

(1,182) 

 

 

 

 

 

 

 

 

Net income

$1,893  

 

$217  

 

$(525) 

 

$1,585  

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

Basic

$0.19  

 

 

 

 

 

$0.15  

Diluted

$0.19  

 

 

 

 

 

$0.15  

 

 

 

 

 

 

 

 

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


5


 

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

 

EXHIBIT 99.4

BACKBONE ENTERPRISES, INC.

Unaudited Condensed Financial Statements

As of September 30, 2019, and for the Nine Months Ended September 30, 2019 and 2018


1


 

 

 

BACKBONE ENTERPRISES, INC.

Table of Contents

 

Financial Statements (unaudited):

 

Balance Sheet – September 30, 2019                                            3 

 

Statements of Income – Nine Months Ended September 30, 2019 and 2018              4 

 

Statements of Stockholders’ Equity – Nine Months Ended September 30, 2019 and 2018   5 

 

Statements of Cash Flows – Nine Months Ended September 30, 2019 and 2018           6 

 

Notes to Financial Statements – September 30, 2019                                7 


2


BALANCE SHEET

September 30, 2019

 

 

ASSETS

Current assets:

 

 

Cash and cash equivalents

$1,092,447 

 

Accounts receivable

654,061 

 

Prepaid and other current assets

1,653 

 

 

Total current assets

1,748,161 

 

 

 

 

Property and equipment, net

27,138 

 

 

 

 

 

 

Total assets

$1,775,299 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

Current liabilities:

 

Accounts payable and accrued expenses

$25,636 

Accrued compensation and benefits

576,988 

Notes payable

34,019 

 

 

Total current liabilities

646,643 

 

 

 

 

Commitments and contingencies (Notes 5 & 6)

 

 

 

 

 

Stockholders’ equity:

 

Common stock, par value at $0.01, 10,000 shares authorized,

32 

 

3,191 shares issued and outstanding

 

Additional paid-in capital

- 

Accumulated earnings

1,138,624 

 

 

Total stockholders’ equity

1,138,656 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

$1,775,299 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.


3


 

STATEMENTS OF OPERATIONS

 

Nine Months Ended September 30, 2019 and 2018

 

 

 

 

 

September 30, 2019

 

September 30, 2018

 

 

 

 

 

 

Net revenues

$2,669,793  

 

$1,816,409  

Cost of revenues

1,707,162  

 

1,500,135  

 

 

Gross profit

962,631  

 

316,274  

 

 

 

 

 

 

Selling, general, and administrative expenses

592,285  

 

423,386  

 

 

Income (loss) from operations

370,346  

 

(107,112) 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

Interest expense

(854) 

 

(2,617) 

 

 

Total other income (expense)

(854) 

 

(2,617) 

 

 

 

 

 

 

Income (loss) before income taxes

369,492  

 

(109,729) 

 

 

 

 

 

 

Income and franchise tax expense

 

 

 

 

 

 

 

 

 

Net income (loss)

$369,492  

 

$(109,729) 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.


4


 

STATEMENTS OF STOCKHOLDERS EQUITY

Nine Months Ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Accumulated

 

Stockholders’

 

 

Shares

 

Amount

 

Earnings

 

Equity

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

3,191 

 

$32 

 

$552,551  

 

$552,583  

Net loss

 

- 

 

- 

 

(109,729) 

 

(109,729) 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

3,191 

 

$32 

 

$442,822  

 

$442,854  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Accumulated

 

Stockholders’

 

 

Shares

 

Amount

 

Earnings

 

Equity

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

3,191 

 

$32 

 

$769,132 

 

$769,164 

Net income

 

- 

 

- 

 

369,492 

 

369,492 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2019

 

3,191 

 

$32 

 

$1,138,624 

 

$1,138,656 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.


5


 

STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2019 and 2018

 

 

 

 

 

 

Nine Months Ended

Nine Months Ended

 

 

 

 

 

September 30, 2019

 

September 30, 2018

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$369,492 

 

$(109,729) 

 

Adjustments to reconcile net income to net

 

 

 

 

 

 

cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation expense

 

14,349  

 

19,793  

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

222,073  

 

(225,401) 

 

 

Prepaid and other current assets

 

(1,653) 

 

5,913  

 

 

Accounts payable and accrued expenses

 

6,413  

 

(23,069) 

 

 

Accrued compensation and benefits

 

284,003  

 

149,483  

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by (used in) operating activities

 

894,677  

 

(183,010) 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net repayments on line of credit

 

(23,708) 

 

(1,250) 

 

Repayments on notes payable

 

(14,449) 

 

(13,907) 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(38,157) 

 

(15,157) 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

856,820  

 

(198,167) 

 

 

 

 

 

 

 

 

Cash and cash equivalents beginning

 

235,927  

 

427,106  

 

 

 

 

 

 

 

 

Cash and cash equivalents ending

 

$1,092,447  

 

$228,939  

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

Interest paid

 

$854  

 

$2,317  

The accompanying notes are an integral part of these financial statements.


6


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements


1.Basis of Presentation and Significant Accounting Policies 

 

Description of Business

 

Backbone Enterprises, Inc. (the “Company” or “Backbone”), a subchapter S corporation, is engaged in the business of information security, risk management and compliance. Backbone helps organizations manage their information security through professional services engagements.

 

Presentation of Financial Statements

 

The accompanying financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results. Significant items subject to such estimates and assumptions include the amount and period of revenue recognition; the useful lives of long-lived assets; allowances for doubtful accounts; income taxes and other contingencies.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents (Note 6).

 

Accounts Receivable

 

The Company reports accounts receivable at net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from amounts that will not be collected. The Company calculates the allowance based on a specific analysis of past due balances and historical collections. Accounts receivable are charged off against the allowance for doubtful accounts when it is determined that the receivable is uncollectible. Management believes that no accounts receivables are uncollectible at September 30, 2019.

 

Property and Equipment

 

Property and equipment are carried at cost less accumulated depreciation. Depreciation of the property and equipment is provided using the straight-line method over the assets' estimated economic lives, which range from three to five years. Expenditures for maintenance and repairs are charged to expense as incurred.


7


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements


Fair Value of Financial Instruments

 

Financial instruments consist principally of cash equivalents, accounts receivable, and accounts payable. The Company believes that the recorded values of all financial instruments approximate their current fair values because of their nature and relatively short maturity dates or durations.

 

Revenue Recognition

 

The Company derives its revenue from cyber security professional consulting services.

 

Effective January 1, 2019, revenue is recognized pursuant to ASC Topic 606, “Revenue from Contracts with Customers” (ASC 606).  Accordingly, revenue is recognized at an amount that reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer.  This principle is applied using the following 5-step process:

 

1.Identify the contract with the customer 

2.Identify the performance obligations in the contract 

3.Determine the transaction price 

4.Allocate the transaction price to the performance obligations in the contract 

5.Recognize revenue when (or as) each performance obligation is satisfied 

 

Consulting Service Revenues

 

Consulting services contracts are on either a fixed fee or a time and materials basis. For fixed fee arrangements, revenue is recognized using the proportional performance method. For time and materials arrangements, revenues are recognized as the services are rendered.

 

Deferred and Unbilled Revenue

 

We receive payments from customers based on billing schedules established in our contracts.  Deferred revenue primarily consists of billings or payments received in advance of the amount of revenue recognized and such amounts are recognized as the revenue recognition criteria are met.  Unbilled revenue reflects our conditional right to receive payment from customers for our completed performance under contracts.

 

Income and Franchise Taxes

 

The Company is a subchapter S corporation and is not subject to federal income taxes. The taxable income of the Company is included in the individual income tax returns of its


8


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements


stockholders. However, the Company may be required to pay state income taxes based on its apportioned net income or pay state franchise fees based on its apportioned gross receipts. Based on its evaluation of uncertain tax positions, management has concluded that there are no significant uncertain tax positions requiring recognition in the accompanying financial statements, nor have the stockholders been assessed interest or penalties by any major tax jurisdictions. Income tax returns for 2016-2018 are subject to examination by federal tax authorities.

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting requirements and those imposed under federal and state tax laws. Deferred taxes are provided for timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

2.Recent Accounting Pronouncements 

 

In February 2016, the FASB issued a new accounting standard on leasing. The new standard will require companies to record most leased assets and liabilities on the balance sheet, and also proposes a dual model for recognizing expense. This guidance is effective in the first quarter of 2021 with early adoption permitted. Management has evaluated the impact of adopting this guidance and preparing for the changes to be made to the financial statements. The adoption of these accounting changes will materially increase our assets and liabilities but did not have a material impact on our net income or equity.

 

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 is 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. Management expects the adoption of these accounting changes will not have a material impact on the 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 will be effective for the Company for the year ending


9


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements


December 31, 2019 and interim reporting periods within that year. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or made available for issuance. Management expects the adoption of these accounting changes will not have a material impact on the financial statements.

 

3.Property and Equipment 

A summary of property and equipment as of September 30, 2019 is as follows:

 

Autos

$150,105  

Less accumulated depreciation

(122,967) 

 

 

 

$27,138  

 

Depreciation expense for property and equipment amounted to $14,349 and $19,793 for the nine months ended September 30, 2019 and 2018, respectively.

 

The Company has two notes payables that are collateralized by autos.  Related notes bear interest at rates ranging between 3.75% and 3.875% and monthly payments aggregate $1,742.  As of September 30, 2019, outstanding balances totaled $34,019.

 

4.Line of Credit 

 

On December 29, 2017, the Company entered into a one-year line of credit agreement with North Star Bank. Under this agreement, the Company could borrow up to $300,000 at an interest rate of the bank’s prime plus 0.75% (5.75% as of September 30, 2019). Interest was paid monthly. The line of credit is collateralized by the Company’s accounts receivable, inventory, property and equipment, and guaranteed by the stockholders of the Company. On December 29, 2018, the Company renewed the line of credit agreement for one year and expired. The line of credit was repaid in May 2019 with no subsequent borrowings.

 

Interest charges associated with the line of credit totaled $854 and $2,617 for the nine months ended September 30, 2019 and 2018, respectively

 

 

5.Commitments and Contingencies 

 

Operating Leases

 

The Company leases its corporate offices under an operating lease. The term of the lease is 38 months with a commencement date of June 2018. Rent expense for the nine months


10


BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements


ended September 30, 2019 and 2018 were $73,930 and $63,831, respectively.

 

Future, non-cancellable operating lease commitments under these lease agreements are as follows for each of the years ending December 31:

 

2019

$11,516 

2020

46,830 

2021

27,944 

 

 

 

$86,290 

 

Legal Contingencies

 

From time-to-time, the Company may be involved in certain legal proceedings. The Company accrues a liability for the estimated loss when a loss is considered probable and the amount of loss can be reasonably estimated. As of September 30, 2019, the Company has no accrued liabilities for such matters.


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BACKBONE ENTERPRISES, INC.

 

Notes to Financial Statements


6.Concentrations 

 

Major Customers

 

For the nine months ended September 30, 2019, there were two customers that generated at least 10% of revenues. These customers represented a total of approximately 68% of revenues. As of September 30, 2019, net accounts receivable due from these customers totaled approximately $390,000.

 

Financial Institutions

 

The Company maintains its cash balance at a single financial institution. Balances held by this institution are insured by the Federal Deposit Insurance Corporation for up to $250,000. The Company’s cash balances may exceed such insured limits. The Company reduces its exposure to credit risk by monitoring the financial stability of the institution.

 

7.Subsequent Events 

 

Management has evaluated subsequent events through January 14, 2020 the date the financial statements were available to be issued.

 

On October 31, 2019, CynergisTek, Inc. acquired all of the outstanding stock of the Company 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.


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