CynergisTek, Inc. (NYSE American: CTEK) is a cybersecurity and privacy consulting firm that serves clients primarily in the healthcare industry. The company has faced significant challenges in recent years, including the lingering impact of the COVID-19 pandemic and broader economic uncertainty. However, a potential merger with Clearwater Compliance LLC offers a potential path forward for the company.

Business Overview

CynergisTek was founded in 2004 and is headquartered in Austin, Texas. The company provides a range of cybersecurity, privacy, and compliance services to its clients, with a focus on the healthcare industry. CynergisTek's services are organized into four main categories: Assess, Build, Manage, and Validate.

The Assess services include IT audits, technical testing, and risk and program assessments to help clients identify and measure their security and privacy risks. The Build services involve developing policies, procedures, and playbooks to help clients strengthen their security and privacy programs. The Manage services provide ongoing oversight and management of specific components of a client's security and privacy programs. Finally, the Validate services use advanced services and technology to verify the effectiveness of a client's security and privacy controls.

CynergisTek's client base is heavily concentrated in the healthcare industry, which has faced significant disruption and financial pressures due to the COVID-19 pandemic. This has led to extended sales cycles, delayed cybersecurity projects, and constrained budgets as healthcare providers have focused on patient care and navigating the pandemic.

Financials

CynergisTek's financial performance has been challenging in recent years. For the full year 2021, the company reported annual revenue of $16.3 million, down from $18.1 million in 2020. Net income for 2021 was a loss of $2.2 million, compared to a loss of $1.2 million in 2020. Operating cash flow was negative $2.7 million, and free cash flow was negative $2.8 million.

In the first half of 2022, CynergisTek's revenue was $8.6 million, up from $8.0 million in the first half of 2021. However, the company reported a net loss of $9.1 million in the first six months of 2022, compared to a net loss of $961,000 in the same period of 2021. Operating cash flow was negative $1.9 million, and free cash flow was negative $2.0 million.

The company's financial performance has been impacted by a number of factors, including the lingering effects of the COVID-19 pandemic on its healthcare clients, extended sales cycles, and delays in project work. CynergisTek has also faced increased costs, including higher human capital expenses, which have put pressure on its margins.

Potential Merger with Clearwater Compliance

On May 23, 2022, CynergisTek announced that it had entered into a merger agreement with Clearwater Compliance LLC, a portfolio company of Altaris Capital Partners. Under the terms of the agreement, Clearwater will acquire CynergisTek for $1.25 per share in cash, valuing the company at approximately $16.6 million.

The merger is subject to approval by CynergisTek's shareholders and other customary closing conditions. If approved, the transaction is expected to close in the third quarter of 2022. CynergisTek has incurred approximately $406,000 in legal, consulting, and accounting fees related to the merger negotiations and agreement as of June 30, 2022.

The proposed merger with Clearwater represents a potential opportunity for CynergisTek to address its financial and operational challenges. Clearwater is a leading provider of healthcare cybersecurity and compliance solutions, and the combination of the two companies could create synergies and scale that could benefit CynergisTek's customers and shareholders.

However, there are also risks associated with the merger, including the possibility that it may not be approved by CynergisTek's shareholders or that it may be terminated under certain circumstances, which could require CynergisTek to pay a $710,000 termination fee to Clearwater. Additionally, the merger could disrupt CynergisTek's current operations or affect its ability to retain or recruit key employees.

Liquidity

As of June 30, 2022, CynergisTek had $1.4 million in cash and cash equivalents, and its current assets minus current liabilities were $2.4 million. The company has no long-term debt.

In April 2022, CynergisTek received a $1.4 million tax refund, which helped to bolster its liquidity. Additionally, in August 2022, the company entered into a $750,000 revolving loan agreement with Clearwater, which it can use to finance ongoing operations and costs related to the proposed merger.

However, CynergisTek's ability to fund its operations and execute its business plan over the next twelve months will be influenced by a number of factors, including the pace of its investment in growth initiatives, its ability to manage operating expenses and maintain gross margins, the ongoing impact of the COVID-19 pandemic and broader economic uncertainty on its customers, and the success or failure of the proposed merger with Clearwater.

Risks and Challenges

CynergisTek faces a number of risks and challenges that could impact its future performance, including:

1. Concentration in the healthcare industry: CynergisTek's client base is heavily concentrated in the healthcare industry, which has faced significant disruption and financial pressures due to the COVID-19 pandemic. This has led to extended sales cycles, delayed cybersecurity projects, and constrained budgets, which have negatively impacted the company's revenue and profitability.

2. Competitive landscape: CynergisTek operates in a highly competitive market, with a number of larger, well-established players as well as smaller, specialized firms. The company's ability to differentiate its services and maintain its competitive position will be critical to its long-term success.

3. Reliance on key personnel: CynergisTek's success is heavily dependent on its ability to attract and retain highly skilled cybersecurity and privacy professionals. The loss of key personnel could have a significant impact on the company's operations and performance.

4. Regulatory and compliance risks: As a provider of cybersecurity and privacy services, CynergisTek is subject to a complex regulatory environment, including the Health Insurance Portability and Accountability Act (HIPAA) and other industry-specific regulations. Failure to comply with these regulations could result in significant fines and penalties.

5. Integration and execution risks related to the proposed merger: If the merger with Clearwater is approved, CynergisTek will face risks related to the integration of the two companies, including the potential for disruptions to its operations, the loss of key personnel, and the ability to realize the expected synergies and benefits of the transaction.

Outlook

CynergisTek's financial performance has been challenging in recent years, with declining revenue, net losses, and negative cash flow. The company's concentration in the healthcare industry, which has faced significant disruption due to the COVID-19 pandemic, has been a significant headwind.

However, the proposed merger with Clearwater Compliance represents a potential opportunity for CynergisTek to address its financial and operational challenges. The combination of the two companies could create synergies and scale that could benefit CynergisTek's customers and shareholders.

At the same time, the merger is subject to a number of risks and uncertainties, including the possibility that it may not be approved by CynergisTek's shareholders or that it may be terminated under certain circumstances. Additionally, CynergisTek faces ongoing risks related to its competitive landscape, reliance on key personnel, and regulatory and compliance requirements.

Conclusion

Overall, CynergisTek's future remains uncertain, but the proposed merger with Clearwater offers a potential path forward for the company. Investors should carefully consider the risks and potential rewards associated with an investment in CynergisTek, and monitor the progress of the proposed merger as it moves towards a shareholder vote and potential completion.