Company Announcements

31 January 2020

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.

GRC International Group plc

("GRC International", the "Company" or the "Group")

Deed of Variation and DQM Deferred Consideration update

Placing to raise £3.75 million

Notice of General Meeting

GRC International Group plc, a supplier of IT governance, risk management and compliance products and services, is pleased to announce that the Company has entered into a deed of variation to the sale and purchase agreement dated 11 February 2019 relating to its acquisition of DQM Group Holdings Limited ("DQM") (the "Acquisition") amending the terms on which deferred consideration in respect of the Acquisition is payable to the DQM Shareholders ("Deferred Consideration") (the "Deed of Variation").

Additionally the Company proposes to raise £3.75 million by way of a conditional placing of 28,846,154 new Ordinary Shares at 13 pence per Ordinary Share (the "Placing"). The proceeds of the Placing will be used to (i) satisfy the proposed revised cash portion of the Deferred Consideration; and (ii) provide additional working capital for the Group.

Conditional on completion of the Placing and passing of the Resolutions to be proposed at the General Meeting, notice of which is included in the Circular (defined below), the Deferred Consideration is agreed to have an aggregate value of £3,553,953 and under the terms of the Deed of Variation the cash component of the Deferred Consideration shall be satisfied by the payment of £1,626,186.85 in cash and the issue of Ordinary Shares with an aggregate value of £426,186 calculated on the basis of the Placing Price, (together the "Transaction").

The Company has today published a circular convening a general meeting to be held at the offices of Grant Thornton UK LLP, 30 Finsbury Square, London EC2A 1AG at 11.00 a.m. on 18 February 2020 (the "Circular") at which resolutions will be put to shareholders to provide the directors with the appropriate authorities, respectively, to issue shares and disapply pre-emption rights for existing shareholders, pursuant to the Transaction and the Placing.

Following the Acquisition, two of the three DQM Shareholders remained directors of DQM, a subsidiary of GRC and therefore, entering into the Transaction constitutes a related party transaction under Rule 13 of the AIM Rules. The Directors consider, having consulted with the Company's Nominated Adviser, that the terms of the Transaction are fair and reasonable insofar as the Company's shareholders are concerned.

Certain of the Directors, being Mr Andrew Brode, Mr Alan Calder, Mr Ric Piper, Mr Steve Watkins and Mr Neil Acworth have subscribed for shares pursuant to the Placing, for an amount of £350,000, £78,441.09, £35,000, £15,000 and £15,000, respectively (the "Directors' Participation"). The Directors' Participation constitutes a related party transaction under Rule 13 of the AIM Rules for Companies.  Christopher Hartshorne, the Director independent of the Directors' Participation considers, having consulted with the Company's Nominated Adviser, that the terms of the Directors' Participation are fair and reasonable insofar as the Company's shareholders are concerned.

An extract from the Circular is set out below. Definitions throughout this announcement have the same meaning as the definitions set out in the Circular, unless where otherwise stated.

Enquiries:

1. Introduction

The Company announced today that it has entered into a deed of variation to the Sale and Purchase Agreement amending the terms on which deferred consideration in respect of the Acquisition is payable to the DQM Shareholders ("Deferred Consideration") (the "Deed of Variation"), and has conditionally placed 28,846,154 Placing Shares at 13 pence per share (raising gross proceeds of £3.75 million) to (i) satisfy the proposed revised cash portion of the Deferred Consideration; and (ii) provide additional working capital for the Group.

2.     Background to and rationale for the Placing

On 11 February 2019, the Company entered into the Sale and Purchase Agreement to purchase the entire issued share capital of DQM from the DQM Shareholders. The initial consideration for the Acquisition was £5,886,839 (the "Initial Consideration"), comprising a cash payment of £3,532,104 and the issue of 2,021,232 Ordinary Shares worth £2,354,736 calculated on the basis of an issue price per share of 116.5 pence, equal to the average of the middle market quotations for the Ordinary Shares as shown by the AIM Appendix of the Daily Official List of the London Stock Exchange for the 10 business days prior to and including 7 February 2019. The Initial Consideration was satisfied on completion of the Acquisition.

Deferred Consideration was also payable under the Sale and Purchase Agreement to the DQM Shareholders, pursuant to the terms of an earn-out calculated by reference to eight times DQM's adjusted EBITDA for the financial year ended 28 February 2019, less the amount of the Initial Consideration and certain other adjustments. The Sale and Purchase Agreement required that the Deferred Consideration be satisfied through cash (as to 60 per cent. of the Deferred Consideration) and the issue of Ordinary Shares (as to 40 per cent. of the Deferred Consideration and based on an issue price per Ordinary Share of 116.5 pence) within five business days of the date on which the parties agree the EBITDA in respect of DQM's earn-out accounts for the financial year ending 28 February 2019 (the "DQM Audit").

In advance of completion of the DQM Audit, the Group explored with the DQM Shareholders whether the payment of the cash component of the Deferred Consideration could be settled in other ways. As announced today, the Company and the DQM Shareholders have entered into the Deed of Variation to confirm, subject to completion of the Placing and the passing of the resolutions, that the Deferred Consideration to be paid has an aggregate value of £3,553,953 and that the cash component of the Deferred Consideration shall be satisfied by the payment of £1,626,186.85 in cash and the issue of the Additional Consideration Shares (the "Transaction").

Accordingly, and in satisfaction of the Group's obligation to pay the Deferred Consideration, the DQM Shareholders shall subject to completion of the Placing and the passing of the resolutions:

(a)    be issued 1,288,910 Ordinary Shares at a price of 116.5 pence per share, having an aggregate price of £1,501,580.15 (such shares being the "Deferred Consideration Shares");

(b)    be issued an additional 3,278,353 Ordinary Shares at the Placing Price, having an aggregate price of £426,186 (such shares being the "Additional Consideration Shares"); and

(c)    be paid £1,626,186.85 in cash (the "Deferred Cash Payment").

The Directors believe that this arrangement is favourable to the Company's cash management and further aligns the DQM Shareholders to the Group's financial performance.

Should the Resolutions not be passed and/or the Placing not complete prior to 1 March 2020 the terms of the SPA will not be amended by the Deed of Variation.

Lock-in Agreements

The DQM Shareholders have entered into 12 month lock-in agreements which, inter alia, places certain restrictions on the sale of their Ordinary Shares with effect from Admission. This agreement will cease to be effective if the Placing does not complete before 5 March 2020.

Pursuant to the agreement, each DQM Shareholder undertakes to the Company and Dowgate Capital (a) for six months following Admission not to dispose of or agree to dispose of any interest in the Additional Consideration Shares or the Deferred Consideration Shares or other Ordinary Shares acquired during that period; and (b) not to dispose of or agree to dispose of any interest in such shares during the period from the six month anniversary of Admission to the twelve month anniversary of Admission without first consulting with Dowgate Capital.

Future intentions for DQM

As announced in the Company's interim financial results on 18 December 2019, DQM has traded profitably since the Acquisition and its financial performance for the year ended 28 February 2019 was better than the Directors had expected.

Should the Resolutions be passed at the General Meeting, the Group will no longer actively pursue a possible sale of DQM and will continue to work towards fully integrating DQM's business into the Group to maximise the opportunities available for all businesses within the Group. The Directors will continue to review the performance of DQM in the context of the Group's ambitions and future plans.

3.     The Placing

The Company proposes to raise approximately £3.5 million (net of expenses) through the issue of the Placing Shares at the Placing Price to fund the payment of the cash component of the Deferred Consideration and to provide additional working capital for the Group. The Placing Price represents a discount of 7.1 per cent. to the closing middle market price of 14 pence per Existing Ordinary Share on 29 January 2020, being the latest practicable date prior to the announcement of the Placing. The Placing Shares will represent 29.5 per cent. of the Company's Enlarged Share Capital immediately following Admission.

The terms of the Placing

Dowgate Capital, as agent for the Company, has agreed to use its reasonable endeavours to procure subscribers for the Placing Shares. Dowgate Capital has conditionally placed the Placing Shares with certain existing and new institutional and other investors at the Placing Price. The Placing has not been underwritten by Dowgate Capital. Completion of the Placing is conditional upon, inter alia, the Resolutions being duly passed at the General Meeting and Admission becoming effective on or before 8.00 a.m. on 20 February 2020 (or such later time and/or date as the Company and Dowgate Capital may agree, but in any event by no later than 8.00 a.m. on 29 February 2020.

The Company has given customary warranties to Dowgate Capital in the Placing Agreement. In addition, the Company has agreed to indemnify Dowgate Capital in relation to certain liabilities it may incur in respect of the Placing. Dowgate Capital has the right to terminate the Placing Agreement in certain circumstances prior to Admission, in particular, in the event of a material breach of the warranties given to Dowgate Capital, the failure of the Company to comply in any material respect with any of its obligations under the Placing Agreement or the occurrence of a force majeure event in respect of the Company.

The Directors believe that raising new funds by way of the Placing is the most appropriate method of funding the Deferred Consideration and providing the Company with ongoing working capital at the present time. The Board considers that a general offer to existing Shareholders by way of rights or other pre-emptive issue is not appropriate at this stage of the Company's development due to the significant additional costs that would be incurred and the delay that would be caused by the production and approval of a prospectus if required.

Settlement and dealings

Application will be made to the London Stock Exchange for the New Ordinary Shares to be admitted to trading on AIM. It is expected that Admission of the New Ordinary Shares will become effective at 8.00 a.m. on 20 February 2020.

The New Ordinary Shares will, when issued, rank pari passu in all respects with the Existing Ordinary Shares including the right to receive dividends and other distributions declared following Admission.

4.    Current trading

The Company continues to trade in line with market expectations. The Directors expect, with Brexit clarity and the improving macro-economic outlook, to continue building on the positive steps taken in H1, and that new client wins and continued cost control will underpin continued progress in profitability.

The Directors are pleased with the growth from cyber security products and services. Investments made since the Company's IPO in new business areas and geographies have started to show increased revenue and, the directors believe, will help GRC deliver long-term growth into FY20.

5.    Related Party Transactions
Deed of Variation

Following the Acquisition, two of the three DQM Shareholders remained directors of DQM, a subsidiary of GRC and therefore, entering into the Transacation constitutes a related party transaction under Rule 13 of the AIM Rules. The Directors consider, having consulted with the Company's Nominated Adviser, that the terms of the Transaction are fair and reasonable insofar as the Company's shareholders are concerned.

Director Subscription

Certain of the Directors, being Mr Andrew Brode, Mr Alan Calder*, Mr Ric Piper, Mr Steve Watkins and Mr Neil Acworth have subscribed for shares pursuant to the Placing, for an amount of £350,000, £78,441.09, £35,000, £15,000 and £15,000, respectively (the "Directors' Participation"). The Directors' Participation constitutes a related party transaction under Rule 13 of the AIM Rules for Companies. Christopher Hartshorne, the director independent of the Directors' Participation considers, having consulted with the Company's Nominated Adviser, that the terms of the Directors' Participation are fair and reasonable insofar as the Company's shareholders are concerned.

*The 603,393 Ordinary Shares represented by this £78,441.09 participation will be subscribed for by ITG Pension Fund, of which Alan Calder and his wife are sole beneficiaries and are also Trustees.

6.    Share Option Exercise by a Director

Mr Steve Watkins, a Director, has confirmed his intention to exercise vested options he holds over 1,680,000 Ordinary Shares at an exercise price of 0.31429 pence per Ordinary Share. Assuming such options are validly exercised, Mr Watkins will be issued with up to an additional 1,680,000 Ordinary Shares and which would raise up to an additional £5,280 payable to the Company. Shareholders should note that the Enlarged Share Capital does not include these shares but that such shares may, depending on the relevant exercise date, be issued and notified, should such options be validly exercised, prior to completion of the Placing and Admission.

7.    Share Option Exercise by a Director

A circular seeking the approval of Shareholders to issue and allot the New Ordinary Shares will today be sent to shareholders convening a General Meeting of the Company to be held on 18 February 2020 at the offices of Grant Thornton UK LLP at 30 Finsbury Square, London, EC2A 1AG, at 11.00 a.m. 

Publication of this document                                                                                               31 January

Latest time and date for receipt of Forms of Proxy                                         11.00 a.m. on 14 February

and CREST voting instructions

General Meeting                                                                                               11.00 a.m. on 18 February

Admission and dealings in the New Ordinary Shares                                        8.00 a.m. on 20 February

expected to commence on AIM

Expected date for CREST accounts to be credited in respect                                               20 February

of the New Ordinary Shares in uncertificated form

Where applicable, expected date for despatch of definitive share certificates                          By 2 March

for New Ordinary Shares in certificated form

Notes:

1.       Each of the above times and/or dates is subject to change at the absolute discretion of the Company, Grant Thornton and Dowgate Capital. If any of the above times and/or dates should change, the revised times and/or dates will be announced through a Regulatory Information Service.

2.       All of the above times refer to London time unless otherwise stated.

3.       All events listed in the above timetable following the General Meeting are conditional on the passing of the Resolutions at the General Meeting.

This Announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014 ("MAR"). In addition, market soundings (as defined in MAR) were taken in respect of the Placing with the result that certain persons became aware of inside information (as defined in MAR), as permitted by MAR. This inside information is set out in this Announcement. Therefore, those persons that received inside information in a market sounding are no longer in possession of such inside information relating to the Company and its securities.

Information to Distributors

Solely for the purposes of the product governance requirements contained within: (a) EU Directive 2014/65/EU on markets in financial instruments, as amended ("MiFID II"); (b) Articles 9 and 10 of Commission Delegated Directive (EU) 2017/593 supplementing MiFID II; and (c) local implementing measures (together, the "MiFID II Product Governance Requirements"), and disclaiming all and any liability, whether arising in tort, contract or otherwise, which any "manufacturer" (for the purposes of the MiFID II Product Governance Requirements) may otherwise have with respect thereto, the Placing Shares have been subject to a product approval process, which has determined that the Placing Shares are: (i) compatible with an end target market of retail investors and investors who meet the criteria of professional clients and eligible counterparties, each as defined in MiFID II; and (ii) eligible for distribution through all distribution channels as are permitted by MiFID II (the "Target Market Assessment"). Notwithstanding the Target Market Assessment, distributors should note that: the price of the Placing Shares may decline and investors could lose all or part of their investment; the Placing Shares offer no guaranteed income and no capital protection; and an investment in the Placing Shares is compatible only with investors who do not need a guaranteed income or capital protection, who (either alone or in conjunction with an appropriate financial or other adviser) are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear any losses that may result therefrom. The Target Market Assessment is without prejudice to the requirements of any contractual, legal or regulatory selling restrictions in relation to the Placing.

For the avoidance of doubt, the Target Market Assessment does not constitute: (a) an assessment of suitability or appropriateness for the purposes of MiFID II; or (b) a recommendation to any investor or group of investors to invest in, or purchase, or take any other action whatsoever with respect to the Placing Shares.

Each distributor is responsible for undertaking its own target market assessment in respect of the Placing Shares and determining appropriate distribution channels.

End.