CTEK CynergisTek Inc

Item 1.01Entry into a Material Definitive Agreement. 

Agreement and Plan of Merger

On May 23, 2022, CynergisTek, Inc., a Delaware corporation (the “Company”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clearwater Compliance LLC, a Tennessee limited liability company (the “Parent”), and Clearwater Compliance Acquisition Company I, a Delaware corporation and a wholly owned subsidiary of the Parent (the “Merger Sub”). The Merger Agreement provides, subject to its terms and conditions, for the acquisition of the Company by the Parent at a price of $1.25 per share of the Company’s common stock, par value $0.001 (each, a “Share”), in cash, without interest and subject to deduction for any required withholding tax (the “Merger Consideration”), through the merger of the Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of the Parent. The Parent is a portfolio company of funds affiliated with Altaris Capital Partners, LLC (“Altaris”). The Company’s Board of Directors (the “Board”) has unanimously approved the Merger and the Merger Agreement and recommended that stockholders approve and adopt the Merger Agreement and approve the Merger, and the Company has agreed to hold a meeting of its stockholders to submit the Merger Agreement and the Merger to its stockholders for their consideration.  

Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”):

·each Share that is issued and outstanding immediately prior to the Effective Time (other than Shares owned by any subsidiary of the Company, the Merger Sub, the Parent or any other subsidiary of the Parent immediately prior to the Effective Time (all of which will be canceled) and Shares held by any holder who is entitled to, and who has perfected, appraisal rights under Delaware law) will be automatically converted into the right to receive the Merger Consideration; 

·each then-outstanding and unexercised Company stock option shall vest in full and automatically be canceled and converted into the right to receive the excess, if any, of the Merger Consideration over the exercise price per share of such stock option; provided that, in the event that the exercise price of any such stock option is equal to or greater than the Merger Consideration, such stock option will be canceled, without any consideration being payable in respect thereof and have no further force or effect; and 

·each Company restricted stock unit that is then outstanding and unvested shall vest in full and automatically be canceled and converted into the right to receive the Merger Consideration. 

Also, at or prior to the Effective Time, any outstanding but unexercised warrants to purchase Shares shall be cancelled and, in certain circumstances, payment therefor will be paid to such warrant holders in accordance with the terms of their respective warrants.

Completion of the Merger is subject to customary closing conditions, including (i) approval of the Merger Agreement by the Company’s stockholders, and (ii) the absence of governmental injunctions or other legal restraints prohibiting the Merger. In addition, the obligation of each party to consummate the Merger is conditioned upon, among other things, the accuracy of the representations and warranties of the other party (subject to certain materiality exceptions), and material compliance by the other party with its covenants under the Merger Agreement. The Parent’s obligations under the Merger Agreement are not subject to any financing condition.

Concurrently with the execution of the Merger Agreement, an affiliate of Altaris entered into an equity commitment letter, pursuant to which, upon the terms and subject to the conditions set forth therein, such affiliate committed to invest in the Parent, directly or indirectly, the cash amount set forth therein for the purpose of funding the aggregate purchase price due at the Effective Time. The Company is a third-party beneficiary with respect to certain enforcement rights under the equity commitment letter.

Mac McMillan, Chief Executive Officer of the Company, and Paul Anthony, Chief Financial Officer of the Company, have entered into a voting agreement (the “Voting Agreement”) pursuant to which they have agreed, among other things, to vote their Shares in favor of the Merger Agreement and the Merger.

The Merger Agreement contains customary representations and warranties from both the Company, on the one hand, and the Parent and the Merger Sub, on the other hand. It also contains customary covenants, including covenants providing for each of the Company and the Parent to use its reasonable best efforts to cause the Merger to be consummated, and covenants requiring the Company, among other things, (i) to use commercially reasonable efforts to conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and the Effective Time, and (ii) not to engage in specified types of transactions during such period.

During the period (the “Go-Shop Period”) beginning on May 23, 2022 and continuing until 11:59 p.m., Eastern time on (a) June 21, 2022 (30 days) (the “No-Shop Period Start Date”) or (b) June 26, 2022 (35 days) (the “Excluded Party No-Shop Period Start Date”) with respect to an Excluded Party (as defined below), the Company and its affiliates and their respective representatives have the right to: (i) solicit any proposal or inquiry that constitutes, could constitute or could reasonably be expected to lead to, an Acquisition Proposal (as defined in the Merger Agreement); (ii) subject to the entry into an Acceptable Confidentiality Agreement (as defined in the Merger Agreement), furnish to any third person and its representatives any information (including non-public information) relating to the Company, its subsidiaries or any of its affiliates or afford to any such third person (and such representatives) access to the business, properties, assets, books, records or to any personnel of the Company and its subsidiaries; and (iii) continue, enter into, maintain, participate or engage in discussions or negotiations with any third person (and its representatives) with respect to any proposal or inquiry that constitutes, could constitute or could reasonably be expected to lead to, an Acquisition Proposal. 

“Excluded Party” means a third party from whom the Company received an Acquisition Proposal prior to the No-Shop Period Start Date and which Acquisition Proposal the Board determines (prior to the No-Shop Period Start Date) in good faith, after consultation with its outside legal counsel and its financial advisors, constitutes or is reasonably likely to result in a Superior Proposal (as defined in the Merger Agreement). 

Beginning on the No-Shop Period Start Date (or with respect to an Excluded Party, the Excluded Party No-Shop Period Start Date) until the earlier of the Effective Time of the Merger or termination of the Merger Agreement in accordance with its terms, the Company will be subject to customary “no-shop” restrictions on its ability to solicit, initiate, encourage and facilitate any Acquisition Proposal, participate in discussions and negotiations with third parties regarding any Acquisition Proposal and provide nonpublic information to such third parties, provided that if the Company receives an unsolicited Acquisition Proposal that did not result from a material breach of the no-shop restrictions, the Company may furnish information and provide access to such third party and participate in discussions or negotiations with such third party, subject to certain restrictions set forth in the Merger Agreement.

The Merger Agreement provides for certain termination rights for both the Company and Parent, as well as the payment of termination fees in certain cases. The Merger Agreement provides that Parent will be required to pay the Company a termination fee of $710,000 upon termination of the Merger Agreement under certain circumstances. The Company will be required to pay Parent a fee of $470,000 upon termination of the Merger Agreement under certain circumstances, including the termination by the Company to accept a Superior Proposal. However, the Company’s termination fee in such instance would be $710,000 if the Superior Proposal was with respect to the entry into a definitive acquisition agreement with (i) a third party prior to the No-Shop Period Start Date, or (ii) an Excluded Party prior to the Excluded Party No-Shop Period Start Date. 

If the Merger is consummated, the Shares will be delisted from the NYSE American and deregistered under the Securities Exchange Act of 1934.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit 2.1 hereto and is incorporated herein by reference. The foregoing description of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the Voting Agreement, a copy of which is filed as Exhibit 9.1 hereto and is incorporated herein by reference.

The Merger Agreement has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about the Company, the Parent, the Merger Sub or their respective subsidiaries and affiliates. The Merger Agreement contains representations and warranties by the Company, on the one hand, and the Parent and the Merger Sub, on the other hand, made solely for the benefit of the other. The assertions embodied in those representations and warranties are subject to qualifications and limitations agreed to by the respective parties in negotiating the terms of the Merger Agreement, including information in confidential disclosure schedules delivered in connection with the signing of the Merger Agreement. Moreover, certain representations and warranties in the Merger Agreement were made as of a specified date, may be subject to a contractual standard of materiality different from what might be viewed as material to investors, or may have been used for the purpose of allocating risk between the Company, on the one hand, and the Parent and the Merger Sub, on the other hand, rather than establishing matters as facts. Accordingly, the representations and warranties in the Merger Agreement should not be relied on by any persons as characterizations of the actual state of facts about the Company, the Parent, the Merger Sub or their respective subsidiaries or affiliates at the time they were made or otherwise. In addition, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures.