Shearwater Regulatory News (SWG)

9 April 2019

SHEARWATER GROUP PLC

Acquisition of cyber security testing business

Shearwater Group plc ("Shearwater", the "Company" or the "Group", AIM: SWG), the digital resilience group, has entered into a share purchase agreement to acquire certain business and assets of Secarma Limited ("Secarma" or the "Business"), a leading provider of cyber security testing services and solutions (the "Acquisition").

Highlights:

§ Significantly strengthens the Group's existing cyber security testing services with world-leading "red teaming" capability

§ Provides for multiple cross selling opportunities across Group companies

§ In line with stated strategy of building a leading UK-based digital resilience group

§ Consideration of £7.4 million, payable £6.7 million in new ordinary shares and £0.7 million in unsecured loan notes

§ Business to be rebranded Pentest

The Business' first-generation cyber security testing services assess how attackers can exploit and penetrate weaknesses in operating systems, applications or services. In addition, the Business provides advance threat analytics and monitoring, and tailored "red teaming" operations through its highly experienced cyber security and ethical hacking specialists, which can simulate an attack on a customers' network environment to test its ability to withstand an attack.

Alongside this, the Business also offers customers cyber security consultancy solutions and training, and has its own proprietary cloud-based Platform-as-a-Service software, which is licenced to customers on a subscription basis to help integrate disparate IT Service Management platforms and ticketing systems.

David Williams, Chairman of Shearwater, said:

"Over the past year we have witnessed a substantial and growing demand for cyber security testing services and red teaming in particular. We've looked at a number of opportunities in this sector and we're delighted to have secured a deal to purchase this business.

"The incoming team's industry expertise and considerable experience as well as market position will be very complementary to our services businesses and provides another key capability for the Group as a whole."

Background

Established in 2001, the original Pentest business was acquired by Secarma in 2016. Since this time, it has gone on to build a substantial customer base of over 250 clients, including a number of long standing relationships with major multinational companies in the UK, US and Europe.

The Business' brand will return to Pentest on acquisition and will form a separate subsidiary company within Shearwater benefiting from cross selling opportunities across the Group and access to its established infrastructure.

For the 12 months ended 31 May 2018, the Business generated unaudited revenue of £3.7 million, an unaudited profit before tax of £0.12 million and had gross tangible assets of £2.8 million. The assets subject to the Acquisition include customer contracts, own proprietary software, certain employees of the Business and other tangible assets. Stripping out certain costs not being acquired would have resulted in an unaudited adjusted earnings before interest, tax, depreciation and amortisation of £0.5 million for the Business for the same historic period.

Details of the Acquisition

Under the terms of the Acquisition, the Company will acquire the shares of a recently incorporated subsidiary of Secarma Limited, Pentest Newco Limited, which contains the Business.

The total consideration for the Acquisition is £7.4 million, which will be settled through the issuance of 292,292,565 ordinary shares of the Company at an issue price of 2.3 pence per ordinary share ("Consideration Shares") to Secarma Limited (the "Seller"), and an unsecured loan note of £0.7 million to be repaid to the Seller in tranches on the first and third anniversary of completion of the Acquisition. The unsecured loan note will attract interest of 6 per cent. per annum. The issue price of the Consideration Shares represents a premium of 67.3 per cent. to the closing price of 1.375 pence per ordinary share as at 8 April 2019, being the last practicable date. The Consideration Shares will represent approximately 13.3% of the enlarged issued share capital of the Company.

In addition, the Company has agreed to issue up to a maximum of 196,633,180 additional ordinary shares of the Company on the first anniversary of completion of the Acquisition subject to the share price performance of the Company.

Under the terms of the Acquisition, it has been agreed with the Seller that they will not dispose of the Consideration Shares for a period of 12 months from issue, with a further 12 month orderly sale period. Accordingly, application has been made for 292,292,565 Consideration Shares in the Company to be admitted to trading on AIM ("Admission") and Admission is expected to take place on 15 April 2019. The Consideration Shares will rank pari passu with the existing ordinary shares in the Company.

Completion of the Acquisition also enables the Company's existing cyber security testing team to earn revenues for the Company following a period of inactivity whilst negotiations regarding, inter alia, the Acquisition were taking place.

Total Voting Rights

In accordance with the provisions of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, the Company confirms that, following Admission, its issued share capital will comprise 2,196,257,417 ordinary shares of 1p each, none of which are held in treasury. Accordingly, the total number of voting rights in the Company will therefore be 2,196,257,417 on Admission.

Certain information contained in this announcement would have constituted inside information (as defined by Article 7 of Regulation (EU) No 596/2014) ("MAR") prior to its release as part of this announcement and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations.

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