| (14) Asset Purchase Agreement - Redspin | (14)
Stock Purchase Agreement – CTEK Security, Inc. As previously disclosed in our Current Report on Form
8-K, filed with the SEC on January 17, 2017, on January 13, 2017, the Company (known at that time as Auxilio, Inc., a Nevada corporation,
and subsequently renamed Cynergistek, Inc., a Delaware corporation, as part of the Reincorporation (the “Company”))
entered into a Stock Purchase Agreement (the “SPA”) with CTEK Security, Inc., a Texas corporation (formerly CynergisTek,
Inc.) (“CTEK Security”), Dr. Michael G. Mathews (“Mathews”) and Michael H. McMillan (“McMillan,”
and together with Mathews, the “Stockholders”), pursuant to which we acquired 100% of the issued and outstanding shares
of Common Stock (the “Shares”) of CTEK Security from the Stockholders (the “CTEK Security Transaction”). Pursuant to the SPA, the purchase price paid for the
Shares consisted of four components: the Cash Consideration, the Securities Consideration, the Debt Consideration, and the Earn-out
Consideration. The total purchase price was approximately $28.3 million. · · · · Pursuant to the SPA, CTEK Security and the Stockholders
agreed to deliver to us stock certificates representing the Shares; the corporate record books of CTEK Security; and the employment
agreements (described below). We agreed to deliver the Cash Consideration, the Securities Consideration, the Debt Consideration
and the signed employment agreements. By agreement of the parties, the effective date of the CTEK Security Transaction for accounting
purposes was January 1, 2017. In connection with the SPA, the Company and the Stockholders
also entered into a registration rights agreement (the “Registration Rights Agreement”) and employment agreements,
each of which is discussed below. Registration Rights Agreement Pursuant to the Registration Rights Agreement between
the Company and the Stockholders, we agreed to grant piggy-back registration rights under certain circumstances, and demand registration
rights under other circumstances. Briefly, for the piggy-back rights, if we propose to register the sale of any of our stock
or other securities under the Securities Act of 1933, as amended (the “Securities Act”) in connection with the public
offering of such securities solely for cash, or the resale of shares of our Common Stock by other selling stockholders, we agreed
that prior to such filing, we would give written notice to the Stockholders of our intention to do so. Upon the written request
of a Stockholder given within twenty (20) days after we provide such notice, we agreed to file a registration statement to register
the resale of all such registrable securities which we have been requested by such Stockholder to register. With respect to the
demand registration rights, we agreed that in the event that we fail to file timely public reports with the U.S. Securities and
Exchange Commission if and as required by the Securities Exchange Act of 1934, as amended, then the Stockholders shall have the
right, by delivering written notice to us (a “Demand Notice”), to require us to register the number of registrable
securities requested to be so registered pursuant to the terms of the Registration Rights Agreement (a “Demand Registration”).
Following the receipt of a Demand Notice for a Demand Registration, we agreed to file a registration statement not later than sixty
(60) days after such Demand Notice, and we agreed to use our commercially reasonable efforts to cause such registration statement
to be declared effective under the Securities Act as promptly as practicable after the filing thereof. Additionally, pursuant to
the Registration Rights Agreement, the rights of the Stockholders to deliver a Demand Notice for a Demand Registration are not
effective at any time when the registrable securities held by such Stockholder may be resold under Rule 144 of the Securities Act
without regard to any volume limitation requirements under Rule 144 of the Securities Act. Employment Agreements In connection with the SPA, the Company and each of
the Stockholders entered into an employment agreement, pursuant to which McMillan was appointed President and Chief Strategy Officer
of the Company, and Mathews was appointed Executive Vice President of the Company. McMillan Employment Agreement. The Company and McMillan entered into an employment
agreement (the “McMillan Employment Agreement”), pursuant to which we employ McMillan as President and Chief Strategy
Officer of the Company. McMillan agreed that his duties for the Company and its subsidiaries would be substantially similar to
those duties that McMillan had performed on behalf of CTEK Security, and would include, without limitation, responsibility for
executive leadership and business development strategy. McMillan also agreed to perform additional duties as reasonably assigned
by our Chief Executive Officer, and/or Board of Directors in order to advance the interests of the Company and its subsidiaries.
The initial term of the McMillan Employment Agreement is 36 months from January 13, 2017, and will automatically renew for subsequent
12-month terms unless either party provides written notice to the other party of a desire to not renew the agreement. Pursuant to the McMillan Employment Agreement, McMillan’s
base salary is $250,000, and he is entitled to incentive bonus compensation and equity compensation (consisting of stock options),
as set forth in the McMillan Employment Agreement. The Company has the right to terminate McMillan’s employment without
cause at any time on thirty (30) days’ advance written notice to McMillan. Additionally, McMillan has the right to resign
for “Good Reason” (as defined in the McMillan Employment Agreement) on thirty (30) days’ written notice. In
the event of (i) such termination without cause, or (ii) McMillan’s inability to perform the essential functions of his position
due to a mental or physical disability or his death, or (iii) McMillan’s resignation for Good Reason, McMillan is entitled
to receive the base salary then in effect and full target annual bonus, prorated to the date of termination, and a “Severance
Payment” equivalent to (a) payment of compensation for an additional twelve months, payable as a lump sum, and (b) the acceleration
of all unvested stock options and warrants then held by McMillan, subject to certain conditions set forth in the McMillan Employment
Agreement. In addition, if McMillan is terminated by the Company without cause (as defined in the McMillan Employment Agreement),
certain of the Earn-out Payments will accelerate and become immediately due and payable, as set forth in the SPA. If McMillan
resigns for other than Good Reason, he will be entitled to receive the base salary for the thirty (30) day written notice period,
but no other amounts. On October 2, 2017, the Board also appointed McMillan as Chief Executive Officer and his base salary
was increased to $325,000. In February 2018, we extended the term of the McMillan
Employment agreement through December 31, 2020 and increased his base salary to $334,700 for 2018, and $359,700 for 2019, with
the 2020 base salary to be determined by the Board of Directors at the end of the 2019 calendar year. He will also be eligible
for a bonus of up to $219,375 and $242,798 in 2018 and 2019, respectively, and his 2020 bonus will be up to 67.5% of his base salary. Mathews Employment Agreement. The Company entered into an employment agreement with
Mathews (the “Mathews Employment Agreement”), pursuant to which we employ Mathews as Executive Vice President (Mathews
was also appointed Chief Operation Officer on April 27, 2017). Mathews agreed that his duties for the Company and its subsidiaries
would be substantially similar to those duties that Mathews had performed on behalf of CTEK Security, and would include, without
limitation, day-to-day P&L responsibility for the cybersecurity service business line. Mathews also agreed to perform
additional duties as reasonably assigned by our President, Chief Executive Officer, and/or Board of Directors in order to advance
the interests of the Company and its subsidiaries. The initial term of the Mathews Employment Agreement is 36 months from January
13, 2017, and will automatically renew for subsequent 12-month terms unless either party provides written notice to the other
party of a desire to not renew the agreement. Pursuant to the Mathews Employment Agreement, Mathews’ base salary is $250,000,
and he is entitled to incentive bonus compensation and equity compensation (consisting of stock options), as set forth in the
Mathews Employment Agreement. We have the right to terminate Mathews’ employment without cause at any time on thirty
(30) days’ advance written notice to Mathews. Additionally, Mathews has the right to resign for “Good Reason”
(as defined in the Mathews Employment Agreement) on thirty (30) days’ written notice. In the event of (i) such termination
without cause, or (ii) Mathews’ inability to perform the essential functions of his position due to a mental or physical
disability or his death, or (iii) Mathews’ resignation for Good Reason, Mathews is entitled to receive the base salary
then in effect and full target annual bonus, prorated to the date of termination, and a “Severance Payment” equivalent
to (a) payment of compensation for an additional twelve months, payable as a lump sum, and (b) the acceleration of all unvested
stock options and warrants then held by Mathews, subject to certain conditions set forth in the Mathews Employment Agreement.
In addition, if Mathews is terminated by the Company without cause (as defined in the Mathews Employment Agreement), certain
of the Earn-out Payments will accelerate and become immediately due and payable, as set forth in the SPA. If Mathews resigns
for other than Good Reason, he will be entitled to receive the base salary for the thirty (30) day written notice period, but
no other amounts. See also Note 15 describing that effective March 12,
2018, Michael Hernandez (f/k/a Michael G. Mathews) resigned as a Director of the Company and as the Company’s Chief Operating
Officer. In addition, the Company and Michael Hernandez entered into a Separation Agreement and Mutual Release. Amended and Restated Credit Agreement and Related Agreements Also on January 13, 2017, the Company and its
subsidiaries (the “Borrowers”) entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”)
with ZB, N.A., dba California Bank and Trust (“CBT”), and Avidbank, a California banking corporation (“Avidbank,”
and together with CBT, the “Lenders”), as well as Avidbank in its capacity as contractual representative for itself
and the other lender (“Agent”). By way of background, the Company on the one hand and
Avidbank on the other hand previously entered into a Loan and Security Agreement, dated as of April 19, 2012 (as amended to date,
the “Original Credit Agreement”), pursuant to which Avidbank extended to the Company a term loan and a revolving line
of credit. Subsequently, the Company advised Agent that the Company desired to acquire 100% of the ownership interests of
CTEK Security pursuant to the SPA. The CTEK Security Transaction is prohibited by Section 7.3 of the Original Credit Agreement.
Borrowers requested that Lenders (1) consent to the
CTEK Security Transaction, and (2) provide additional financing in order to finance, in part, the Company’s obligations under
the SPA. Agent and Lenders agreed with such request in accordance with and subject to the terms and conditions of the A&R
Credit Agreement and other related documents defined in the A&R Credit Agreement (the “Loan Documents”). In
connection with the entry into the A&R Credit Agreement, the parties to the A&R Credit Agreement agreed that CTEK Security
would automatically become a Borrower under the A&R Credit Agreement and under the Loan Documents on the closing date immediately
upon consummation of the CTEK Security Transaction (and not prior thereto), without further action required by any party. Accordingly, the parties to the A&R Credit Agreement
agreed that the A&R Credit Agreement and the Loan Documents would amend and restate the Original Credit Agreement in its entirety,
and continue the obligations incurred thereunder and evidenced thereby. Additionally, any amounts outstanding under the
Original Credit Agreement were repaid in full immediately prior to the execution of the A&R Credit Agreement. Loan Facilities Term Loans: Pursuant to the A&R Credit Agreement,
the Lenders agreed to provide term loans in the aggregate amount of $14,000,000 to the Company, which was paid to the Stockholders
as part of the Cash Consideration in the CTEK Security Transaction (described above). The term loans bear interest at a rate
of Prime plus 1.5%, and the loans mature on January 12, 2022. Revolving Line of Credit: Additionally, pursuant to
the A&R Credit Agreement, the Lenders agreed to provide revolving loans to the Borrowers in an aggregate amount of up to $5,000,000.
At the closing of the CTEK Security Transaction, no draws were made on the revolving loans. Security Agreement In connection with the A&R Credit Agreement, the
Borrowers and the Agent entered into a security agreement (the “Security Agreement”), pursuant to which each of the
Borrowers agreed to grant to Agent, for the ratable benefit of itself, the Lenders and the other secured parties, a first priority
security interest in certain collateral to secure prompt payment and performance of the secured obligations under the A&R Credit
Agreement. Pursuant to the Security Agreement, the “Collateral” was defined as including any and all (all such
terms as defined in the Security Agreement) of the Accounts, Chattel Paper, Commercial Tort Claims, Deposit Accounts, Documents,
Equipment, Instruments, Inventory, Investment Property, General Intangibles, Letter of Credit Rights, Negotiable Collateral, Supporting
Obligations, Vehicles, Grantors’ Books, in each case whether now existing or hereafter acquired or created, any money or
other assets of any Grantor that now or hereafter come into the possession, custody, or control of Agent and any Proceeds or products
of any of the foregoing, or any portion thereof. In connection with the grant of the security interest in the Collateral,
each of the Borrowers made standard representations and warranties relating to ownership of the collateral, location and control
of the collateral, and certain rights to payment. Seller Subordination Agreement Additionally, in connection with the A&R Credit
Agreement and the CTEK Security Transaction, Mathews, McMillan, the Company, and Avidbank entered into a subordination agreement
(the “Subordination Agreement”), pursuant to which Mathews and McMillan agreed that unless and until all of the Company’s
obligations under the A&R Credit Agreement have been repaid in full, Mathews and McMillan would not, except as provided in
the Subordination Agreement, ask, demand, sue for, take or receive, or retain, from the Company or any other person or entity,
by setoff or in any other manner, payment of all or any part of the Subordinate Debt (as defined below), or take any other action
with respect to the Subordinate Debt; forgive, cancel or discharge any of the Subordinate Debt; ask, demand or receive any security
for the Subordinate Debt; amend any documents relating to the Subordinate Debt or any other agreement, instrument or document
evidencing or executed in connection with the Subordinate Debt in a manner that could reasonably be expected to be adverse to
Lenders or Agent (or any other holders of the obligations arising under the A&R Credit Agreement); or bring or join with any
creditor in bringing any insolvency proceeding against the Company. Additionally, Mathews and McMillan each directed the Company
to make, and the Company agreed to make, such prior payment of the Company’s obligations under the A&R Credit Agreement
to Agent and the Lenders. The Subordination Agreement defines “Subordinate Debt” to include all debt of the
Company owing to Mathews and McMillan (or either of them) (a) under the Seller Notes or (b) in respect of the Earn Out Payments
(described above), in either case whether now existing or hereafter arising and including all principal, premium, interest, fees,
attorneys’ fees, costs, charges, expenses, reimbursement obligations, any other indemnities or guarantees in each case with
respect thereto, in each case whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured. So long as the Borrowers are not in default under the terms
of the A&R Credit Agreement, the Company may make regular payments to the Stockholders under the Seller Notes. See also Note
15 regarding the March 2018 restructuring of the term loan, line of credit, and Sellers Notes. The allocation of the purchase price of the assets
acquired and liabilities assumed in the CTEK Security Transaction based on their fair values was as follows:
Acquired technology $ 8,150,000
Customer relationships 2,150,000
Trademarks 1,550,000
Non-compete agreements 200,000
Goodwill 16,416,063
Cash 754,125
Accounts receivable 1,726,398
Other assets 346,439
Fixed assets, net 110,657
Accounts payable and accrued expenses (659,203)
Accrued compensation (1,035,522)
Deferred revenue (1,378,312)
Total $ 28,330,645 Purchased identifiable intangible assets are amortized
on a straight-line basis over the respective useful lives. Estimated useful lives of the identifiable intangible assets acquired
ranges from three to ten years. We also recognized goodwill of $16,416,063. Goodwill is recognized as we expect to be able to realize
synergies between the two companies, primarily our ability to provide market and reach for the Redspin products and services to
our managed print services customers. The Company incurred approximately $330,000 in legal,
accounting and other professional fees related to this acquisition, of which approximately $174,000 were expensed during the year
ended December 31, 2017. Pro Forma Information (Unaudited) The following supplemental unaudited pro forma information
presents the combined operating results of the Company and the acquired business during the years ended December 31, 2017 and 2016,
as if the acquisition had occurred at the beginning of each of the periods presented. The pro forma information is based on the
historical financial statements of the Company and that of the acquired business. Amounts are not necessarily indicative of the
results that may have been attained had the combinations been in effect at the beginning of the periods presented or that may be
achieved in the future.
Year Ended December 31,
2017 2016
Pro forma revenue $ 71,638,947 $ 75,710,140
Pro forma net (loss) income $ (442,351) $ 4,238,104
Pro forma basic net (loss) income per share $ (0.05) $ 0.45
Pro forma diluted net (loss) income per share $ (0.05) $ 0.45 |
