Item 8.01 Other Events.
Demand Letters Related to the Merger
On July 25, 2022, CynergisTek, Inc. ("CynergisTek" or the "Company") filed a
Definitive Proxy Statement on Schedule 14A (the "Proxy Statement") with the
Securities and Exchange Commission ("SEC") in connection with the Agreement and
Plan of Merger dated May 23, 2022 (as it may be amended from time to time, the
"Merger Agreement") by and among CynergisTek, Clearwater Compliance LLC, a
Tennessee limited liability company ("Parent"), and Clearwater Compliance
Acquisition Company I, a Delaware corporation and a wholly owned subsidiary of
Parent ("Merger Sub"). Subject to the terms and conditions of the Merger
Agreement, Merger Sub will merge with and into CynergisTek, as a result of which
the separate corporate existence of Merger Sub will cease, with CynergisTek
continuing as the surviving corporation (the "Merger") and a wholly owned
subsidiary of Parent. The special meeting of CynergisTek stockholders will be
held on August 31, 2022, at 3:00 p.m. Central Daylight Time, to, among other
things, act on the proposal to approve and adopt the Merger Agreement and
approve the Merger, as disclosed in the Proxy Statement.
Between July 26, 2022 and August 10, 2022, the Company received six demand
letters from putative stockholders alleging that there were material disclosure
deficiencies in the Proxy Statement and demanding that certain corrective
disclosures be made by amendment or supplement to the Proxy Statement.
CynergisTek believes that the allegations made in the demand letters are without
merit and that no supplemental disclosures are required under applicable law.
However, to avoid nuisance, potential expense and delay from potential lawsuits
and to provide additional information to CynergisTek's stockholders and without
admitting any liability or wrongdoing, CynergisTek has determined to voluntarily
supplement the Proxy Statement with the disclosures set forth herein. Nothing in
this supplement shall be deemed an admission of the legal necessity or
materiality under applicable law of any of the disclosures set forth herein.
CynergisTek specifically takes the position that no disclosure demanded in the
demand letters is required to supplement the Proxy Statement under applicable
law.
Supplement to Proxy Statement
The following supplemental disclosures should be reviewed in conjunction with
the disclosures in the Proxy Statement, which should be carefully read in its
entirety. To the extent information set forth herein differs from or updates
information contained in the Proxy Statement, the information contained herein
supersedes the information contained in the Proxy Statement. Any defined terms
used but not defined herein have the meanings set forth in the Proxy Statement.
The below supplemental disclosure replaces the first full paragraph on page 33
of the Proxy Statement under the heading "The Merger-Background of the Merger"
During the period between May 20, 2022 and May 23, 2022, representatives of AGC,
CynergisTek and Kirton McConkie negotiated the terms of a proposed amended and
restated engagement letter with AGC. AGC had previously been engaged by
CynergisTek in December 2019 to provide financial advisory services in analyzing
and evaluating the business, operations and financial position of CynergisTek
and its strategic alternatives. CynergisTek paid AGC a total of $126,644 for the
services provided under that initial engagement (inclusive of reimbursed
expenses), and the tail provisions of the previous engagement letter entitled
AGC to receive a fee in connection with the proposed Merger. Under the terms of
the amended and restated engagement letter, AGC has been engaged to assist
CynergisTek in soliciting and evaluating bids from third parties during the
"go-shop" period, and the term of AGC's engagement has been extended, but AGC
will be entitled only to one transaction fee, whether in connection with the
proposed Merger or an alternative transaction, as a result of its efforts during
the "go-shop" period. The transaction fee to be paid under the amended and
restated engagement letter would be $1,000,000.
In addition, under the terms of the amended and restated engagement letter,
CynergisTek agreed to reimburse AGC for certain of its expenses and to indemnify
AGC and related persons against various potential liabilities, including certain
liabilities that may arise in connection with AGC's engagement. CynergisTek
selected AGC to be its financial advisor during the go-shop period on the basis
of AGC's experience, familiarity with CynergisTek and the existing fee
arrangement discussed above in this paragraph that would entitle AGC to a
transaction fee in connection with the proposed Merger. AGC has not previously
provided financial or other services to Parent, Altaris or their respective
affiliates. The amended and restated engagement letter with AGC was signed by
the parties on May 23, 2022.
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The below supplemental disclosure follows the second full paragraph on page 47
of the Proxy Statement under the heading "The Merger-Opinion of Craig Hallum
Capital Group LLC-Analysis of Comparable Publicly Traded Companies"
EV / Revenue
LTM 2022 2023
Cross Country Healthcare, Inc. (CCRN) 0.4x 0.3x 0.4x
The Hackett Group, Inc. (HCKT)
2.1x 2.0x 1.8x
Resources Connection, Inc. (RGP) 0.7x 0.6x NA
NNIT A/S (CPSE: NNIT)
0.7x 0.7x 0.7x
Computer Task Group, Incorporated (CTG) 0.3x 0.3x 0.2x
Smart Employee Benefits Inc. (TSXV:SEB) 0.9x NA NA
GSE Systems, Inc. (GVP)
0.5x NA NA
The below supplemental disclosure follows the first full paragraph on page 50 of
the Proxy Statement under the heading "The Merger-Opinion of Craig Hallum
Capital Group LLC -Discounted Cash Flow Analysis"
Terminal value assumptions are calculated by taking the range of LTM Revenue and
LTM EBITDA multiples, as referenced in this Discounted Cash Flow Analysis
section, and multiplying those ranges with estimated 2026 Revenue and 2026
Adjusted EBITDA as estimated by management.
($ in millions)
Assumption
CTEK Net Debt1 $(0.8)
Share Count 13.9
(1)CTEK Net Debt includes an earnout liability which is not a traditional debt
instrument.
The below supplemental disclosure replaces the fifth full paragraph on page 50
of the Proxy Statement under the heading "The Merger-Opinion of Craig Hallum
Capital Group LLC-Miscellaneous"
Under the terms of an amended engagement letter dated May 10, 2022, CynergisTek
has agreed to pay Craig-Hallum a fee of $250,000 for rendering its opinion,
which was payable upon the delivery of Craig-Hallum's opinion. No part of
Craig-Hallum's fee for such opinion is conditioned upon the conclusion expressed
in its opinion, and no part of Craig-Hallum's fee for such opinion is
conditioned upon the successful closing of the Merger. In addition, CynergisTek
agreed to reimburse Craig-Hallum for certain of its expenses and to indemnify
Craig-Hallum and related persons against various potential liabilities,
including certain liabilities that may arise in connection with Craig-Hallum's
engagement.
The below supplemental disclosure follows the sixth full paragraph on page 50 of
the Proxy Statement under the heading "The Merger-Opinion of Craig Hallum
Capital Group LLC-Miscellaneous"
The following table sets forth the total amount of fees paid by CynergisTek to
Craig-Hallum for the aforementioned investment banking and financial advisory
services prior to rendering its opinion.
Compensation
2019 Fairness Opinion $165,000.00
October 2020 ATM Offering $60,821.37
September 2021 ATM Offering $43,011.75
Total Compensation $269,833.12
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Additional Information and Where to Find It
In connection with the proposed Merger, the Company has filed with the SEC the
Proxy Statement for the special meeting of its stockholders and may file other
relevant documents with the SEC regarding the proposed Merger. This
communication is not a substitute for the Proxy Statement or any other document
that the Company may file with the SEC. The Proxy Statement was mailed to the
Company's stockholders commencing on or about July 25, 2022. STOCKHOLDERS ARE
ADVISED TO READ THE PROXY STATEMENT AND ANY OTHER DOCUMENTS FILED OR TO BE FILED
WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE, AS WELL
AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION ABOUT THE PROPOSED MERGER.
Stockholders may obtain a free copy of the Proxy Statement and any amendments or
supplements thereto and other documents filed by the Company (when they become
available) at the SEC's web site at http://www.sec.gov. In addition, the Proxy
Statement and such other documents may also be obtained for free from the
Company on its website at www.cynergistek.com/investor-relations/, or by
directing such request to InvestorRelations@cynergistek.com.
Participants in the Solicitation
The Company and its directors, executive officers and other members of its
management and employees may be deemed to be participants in the solicitation of
proxies from its stockholders in connection with the proposed Merger. A list of
the names of such directors and executive officers, information concerning such
participants' ownership of the Company's common stock, and any direct or
indirect interest they have in the proposed Merger (by security holdings or
otherwise) is set forth in the Proxy Statement. Additional information about
the direct or indirect interests of those participants may be included in other
documents filed with the SEC regarding the proposed Merger, if and when they
become available. Free copies of these materials may be obtained as described
in the preceding paragraph.
Cautionary Note Regarding Forward Looking Statements
Statements made in this supplement that are not historical facts and any
statements about future expectations, plans, and prospects for the Company,
including statements containing the words "believes," "will," "anticipates,"
"plans," "expects," and similar expressions, constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Actual results may differ materially from those indicated by such
forward-looking statements as a result of various important factors, including
the risk that the proposed Merger may not be completed in a timely manner, or at
all, which may adversely affect the Company's business and the price of its
common stock; the failure to satisfy all of the closing conditions of the
proposed Merger, including the approval of the Merger Agreement by the Company's
stockholders; the occurrence of any event, change or other circumstance that
could give rise to the termination of the Merger Agreement; the effect of the
announcement or pendency of the proposed Merger on the Company's business,
operating results, and relationships with customers, suppliers, competitors and
others; risks that the proposed Merger may disrupt the Company's current plans
and business operations; potential difficulties retaining employees as a result
of the proposed Merger; risks related to the diverting of management's attention
from the Company's ongoing business operations; the outcome of any legal
proceedings that may be instituted against the Company related to the Merger
Agreement or the proposed Merger; risks relating to product development and
commercialization, limited demand for the Company's products and services,
limited number of customers, risks associated with competition, uncertainties
associated with regulatory agency approvals, competitive pricing pressures,
downturns in the economy, acquisition-related risks; and other factors discussed
in the Company's most recent quarterly and annual reports filed with the SEC. In
addition, the forward-looking statements included in this filing represent the
Company's views as of the date of this document. While the Company anticipates
that subsequent events and developments will cause the Company's views to
change, the Company specifically disclaims any obligation to update these
forward-looking statements. These forward-looking statements should not be
relied upon as representing the Company's views as of any later date.
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