Magnet Forensics Files and Commences Mailing of Management Information Circular for Special Meeting of Shareholders

Shareholders encouraged to vote FOR the Arrangement with Thoma Bravo and crystalize attractive value

All-Cash Consideration of $44.25 for public SV Shareholders delivers significant, immediate, and certain value

Magnet Forensics Inc. (the “Company” or “Magnet”) (TSX: MAGT), developer of digital investigation solutions for enterprises and public safety organizations, is pleased to announce that it has filed and commenced mailing its management information circular (the “Circular”), in connection with the Company's special meeting (the “Meeting”) of the holders (the “Shareholders”) of subordinate voting shares (“SV Shares”) and multiple voting shares (“MV Shares”, and together with the SV Shares, the “Shares”) of Magnet to be held on March 23, 2023 at 2:00 p.m. (Toronto time), virtually via live audio webcast, at https://meetnow.global/MZ6YJTX.

The Company also announced today that on February 15, 2023, it was granted a favorable interim order from the Ontario Superior Court of Justice (Commercial List) authorizing various matters, including the holding of the Meeting and the mailing of the Circular.

Magnet further announced that it will release its 2022 fourth quarter financial results by press release on Thursday, March 9, 2023, prior to market open.

The Circular provides important information on the plan of arrangement pursuant to which a corporation controlled by Thoma Bravo would acquire all of the outstanding Shares (the “Arrangement”) as well as related matters, including voting procedures, how to attend the virtual Meeting and instructions for Shareholders unable to attend the Meeting. Shareholders are urged to read the Circular and its appendices carefully and in their entirety. The Circular is available on the Company’s website at www.magnetforensics.com and under the Company’s profile on SEDAR at www.sedar.com.

The Arrangement has been unanimously approved by the board of directors (the “Board”), with conflicted directors abstaining, following the unanimous recommendation to the Board by a special committee (the “Special Committee”) of independent directors of the Company. Shareholders are encouraged to vote FOR the Arrangement.

Key Highlights of the Arrangement Include:

• Public SV shareholders, being all shareholders other than the Rolling Shareholders1, receive all-cash consideration of $44.25 per share (the “Purchase Price”), delivering significant, certain value and immediate liquidity.
• The Purchase Price represents highly favourable multiples2 for public SV shareholders of:
  • ~10x Aggregate Value3 / estimated 2023 Revenue;
  • ~51x Aggregate Value3 / estimated 2023 Adjusted EBITDA;
  • ~56x Aggregate Value3 / estimated 2023 Free Cash Flow.
• Public SV shareholders will be able to crystalize attractive valuation multiples while achieving certainty of value and liquidity without exposure to either the risks the Company faces on a standalone basis—including risks related to competition, industry consolidation, market conditions and the Company’s access to growth capital—or the risks associated with the combination of Magnet and Grayshift, LLC and subsequent integration.
• The Special Committee’s financial advisor Morgan Stanley ran a comprehensive process that was designed to create competitive tension and identified eight additional strategic and financial buyers representing the most synergistic, highest ability to pay counterparties. Three of these parties entered into Non-Disclosure Agreements and participated in a presentation with Company management.
• The Purchase Price was arrived at after a robust negotiation between Thoma Bravo and the Special Committee, with two price increases negotiated for public SV shareholders, yielding a 30% increase over the initial proposal of $34.00 per share. Magnet extracted significant additional value from both Thoma Bravo and the Rolling Shareholders for the benefit of public SV shareholders. Public SV shareholders will receive $44.25 per share, representing a ~13.5% premium to the value Rolling Shareholders will receive ($39.00 per share).
• Thoma Bravo’s offer is not subject to financing or due diligence conditions, and Thoma Bravo has demonstrated a proven ability to close transactions. If the requisite approvals are received, the Arrangement (as defined in the Circular) is expected to close by the second quarter of 2023.
• The terms and conditions of the Arrangement Agreement do not prevent a third party from making an unsolicited Acquisition Proposal (as defined in the Circular).

We are confident this transaction represents the most compelling value creation opportunity for all our stakeholders!

Vote FOR the Arrangement Today!

Please refer to the Management Information Circular dated February 16, 2023 filed on SEDAR at www.sedar.com. All information contained herein is qualified by reference thereto.

Shareholders who have questions or need assistance voting their Shares should contact Magnet’s strategic shareholder advisor and proxy solicitation agent, Laurel Hill Advisory Group, at 1-877-452-7184 (toll-free within North America) or at 1-416-304-0211 (outside of North America) or by email at assistance@laurelhill.com.

All dollar amounts set forth in this press release are in Canadian dollars unless stated otherwise.

About Magnet Forensics

Founded in 2010, Magnet Forensics is a developer of digital investigation software that acquires, analyzes, reports on, and manages evidence from digital sources, including computers, mobile devices, IoT devices and cloud services. Magnet Forensics’ software is used by more than 4,000 public and private sector customers in over 100 countries and helps investigators fight crime, protect assets and guard national security.

Non-IFRS Measures

The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

This press release makes reference to certain non-IFRS financial measures and non-IFRS ratios relating to Magnet. These measures and ratios are not recognized under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures and ratios presented by other issuers. Rather, these measures and ratios are provided as additional information to complement IFRS measures. Accordingly, these measures and ratios should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under IFRS. These non-IFRS financial measures and non-IFRS ratios include “Adjusted EBITDA”, “Free Cash Flow”, “Aggregate Value / Adjusted EBITDA” and “Aggregate Value / Free Cash Flow”. These non-IFRS financial measures and non-IFRS ratios are used to provide further understanding of the value implied by the Purchase Price to be received by holders of SV Shares (other than the Rolling Shareholders) by calculating non-IFRS ratios, or multiples, for Magnet, and comparing those multiples to both (i) the multiples implied by Magnet’s trading price, and (ii) multiples implied by precedent transactions comparable to the Arrangement as well as multiples implied by the trading price of industry peers. These multiples for Magnet, and such comparisons, were considered by the Special Committee in its assessment of the Arrangement, and in particular, its assessment of the value implied by the Purchase Price to be received by holders of SV Shares (other than the Rolling Shareholders). The Company also believes that securities analysts, investors, and other interested parties frequently use non-IFRS financial measures and non-IFRS ratios such as those considered by the Special Committee in their assessment of transactions such as the Arrangement and, in particular, their assessment of the value implied for shareholders by the transaction consideration payable to shareholders.

The non-IFRS financial measures, non-IFRS ratios and other financial ratio set forth in this press release use mean street consensus estimates for Magnet from Thomson Reuters Estimates as of the applicable dates for Adjusted EBITDA, Free Cash Flow and Revenue. The methodologies applied by analysts in preparing the estimates reflected in the Thomson Reuters Estimates may not be consistent with the Company’s methodology, and the Company’s actual results may differ materially (see “Market and Industry Data” in the Circular and “Cautionary Note Regarding Forward-Looking Information” in this press release).

For the purpose of the calculation of certain of the non-IFRS financial measures, non-IFRS ratios and other ratios set forth in this press release, an exchange rate of 0.7413 per Canadian dollar for one U.S. dollar, being the exchange rate published by Capital IQon January 19, 2023, the day prior to the announcement of the Arrangement, has been used to convert the Purchase Price and the consideration to be received by Rolling Shareholders pursuant to the Arrangement denominated in Canadian dollars into U.S. dollars.

Aggregate Value / Adjusted EBITDA and Aggregate Value / Free Cash Flow

This press release contains the non-IFRS ratios “Aggregate Value / Adjusted EBITDA” and “Aggregate Value / Free Cash Flow” that represent Aggregate Value divided by (i) Adjusted for the specified period and (ii) Free Cash Flow for the specified period, respectively. These metrics were utilized for purposes of calculating the multiples of the Company implied by the Purchase Price of $44.25 per Share.

For purposes of calculating such non-IFRS ratios for Magnet, the following defined terms have been used:

“Adjusted EBITDA” and “Free Cash Flow” for the applicable specified period are calculated using the mean street consensus estimates for Adjusted EBITDA and Free Cash Flow for Magnet from Thomson Reuters Estimates as of the date specified, respectively, which is then multiplied by the Implied Ownership of Holders of SV Shares. As of January 19, 2023, the day prior to the announcement of the Arrangement (i) Adjusted EBITDA was US$8 million for the financial year ending December 31, 2023 and US$11 million for the financial year ending December 31, 2024, and (ii) Free Cash Flow was US$7 million for the financial year ending December 31, 2023 and US$10 million for the financial year ending December 31, 2024. As of October 5, 2022, the day prior to Thoma Bravo’s submission of its initial non-binding proposal to acquire the Company (i) Adjusted EBITDA was US$7 million for the financial year ending December 31, 2023 and US$10 million for the financial year ending December 31, 2024, and (ii) Free Cash Flow was US$6 million for the financial year ending December 31, 2023 and US$9 million for the financial year ending December 31, 2024.

“Aggregate Value” is a measure of an issuer’s aggregate value and is calculated as (i) the relevant reference price per SV Share multiplied by the fully diluted shares outstanding at such price per share, with the resulting fully diluted shares outstanding amount accounting for outstanding dilutive equity awards and other securities via the treasury stock method, less (ii) cash and cash equivalents, plus (iii) outstanding debt, including short and long-term government loan payables. In this press release, “Aggregate Value” means the Aggregate Value of Magnet to holders of SV Shares (other than the Rolling Shareholders) implied by the Purchase Price of $44.25 per Share. For purposes of calculating the fully diluted equity value, only the basic Shares outstanding and outstanding dilutive equity awards or other securities held by holders of SV Shares (other than Rolling Shareholders) are used, and none of the Shares or outstanding dilutive equity awards or other securities held by the Rolling Shareholders are used. Furthermore, for purposes of calculating the Aggregate Value, both (i) cash and cash equivalents and (ii) outstanding debt were multiplied by the Implied Ownership of Holders of SV Shares. The resulting Aggregate Value reflects the proportional value to be received by holders of SV Shares (other than the Rolling Shareholders) under the Arrangement.

“Implied Ownership of Holders of SV Shares” means the implied ownership of holders of SV Shares (other than the Rolling Shareholders) based on the number of fully diluted Shares outstanding, using the consideration of $39.00 per Share to be received by the Rolling Shareholders pursuant to the Arrangement for purposes of estimating the dilution associated with dilutive equity awards and other securities held by the Rolling Shareholders, and the Purchase Price of $44.25 per Share for purposes of estimating the dilution associated with dilutive equity awards and other securities held by the holders of SV Shares (other than the Rolling Shareholders), in each case under the treasury stock method.

Aggregate Value / Revenue

This press release also contains the financial ratio “Aggregate Value / Revenue”, which ratio is neither an IFRS financial measure nor a non-IFRS financial measure under applicable securities laws.

“Aggregate Value / Revenue” represents Aggregate Value (as defined above) divided by Revenue (as defined below).

For purposes of calculating such ratio for Magnet, “Revenue” means the product of (i) revenue for the applicable specified period using the mean street consensus estimates from Thomson Reuters Estimates as of the date specified, and (ii) the Implied Ownership of Holders of SV Shares (as defined above). Revenue as of January 19, 2023, the day prior to the announcement of the Arrangement, was US$41 million for the financial year ending December 31, 2023 and US$51 million for the financial year ending December 31, 2024. Revenue as of October 5, 2022, the last day prior to Thoma Bravo’s submission of its initial non-binding proposal to acquire the Company, was US$39 million for the financial year ending December 31, 2023 and US$48 million for the financial year ending December 31, 2024.

Adjusted EBITDA, Free Cash Flow and Revenue

As indicated above, the non-IFRS financial measures and non-IFRS ratios set forth in this press release use mean street consensus estimates for Magnet from Thomson Reuters Estimates as of the applicable dates for Adjusted EBITDA, Free Cash Flow and Revenue.

Adjusted EBITDA and Free Cash Flow

To provide a reconciliation of historic Adjusted EBITDA and Free Cash Flow, as calculated by the Company, to net income (loss) of the Company for the periods indicated, the Company calculates these terms in accordance with the following definitions:

“Adjusted EBITDA” of the Company represents net income (loss) and net income (loss) as a percentage of total revenue, respectively, adjusted to exclude depreciation and amortization, income tax expense (recovery), share-based compensation expense, foreign exchange loss (gain), interest expense, certain financing-related expenses that are non-recurring in nature, and certain acquisition-related expenses that are non-recurring in nature and not indicative of continuing operations.

“Free Cash Flow” of the Company represents Adjusted EBITDA, less the purchase of property and equipment.

The following table reconciles Adjusted EBITDA and Free Cash Flow, as calculated by the Company, to net income (loss) of the Company for the periods indicated below:

Notes:

1. Depreciation and amortization expenses are primarily related to right-of-use assets and property and equipment. Depreciation and amortization expense for the three and nine months ended September 30, 2022 includes recognized depreciation expense on right-of-use assets of $213 and $630 (September 30, 2021 - $197 and $612). For the three and nine months ended September 30, 2022 interest expense related to lease liabilities was $77 and $246 (September 30, 2021- $92 and $280).
2. These expenses represent non-cash expenses recognized in connection with the issuance of share-based compensation to our employees and directors, excluding share-based compensation related to acquired businesses of $321 and $687, for the three and nine months ended September 30, 2022.
3. These losses (gains) relate to the impact of foreign exchange translation on financial assets and liabilities.
4. These expenses include certain professional, legal, consulting and accounting fees, certain employee compensation, and listing fees that are specific to financing activities, including the Company’s initial public offering completed on May 3, 2021, the base shelf prospectus filed on October 29, 2021, the secondary offering of shares of the Company completed on December 14, 2021, and public filings, and credit facility agreements, and are considered non-recurring and not indicative of continuing operations.
5. These expenses include post-combination compensation of acquired businesses, which represent a portion of the consideration paid that is contingent upon ongoing employment and performance criteria being achieved, including share-based compensation. Additionally, these expenses include certain professional, legal, consulting, accounting, advisory, and other fees incurred in connection with acquisitions and other strategic opportunities pursued as part of the Company’s growth strategy. These expenses are considered non-recurring and not indicative of continuing operations.

Revenue

To provide a reconciliation of historic Revenue, as defined in this press release and as calculated by the Company, to revenue of the Company for the periods indicated, the Company calculates this term as the product of revenue of the Company for the period multiplied by Implied Ownership of Holders of SV Shares.

The following table reconciles Revenue, as defined in this press release and calculated by the Company, to revenue of the Company for the periods indicated below:

Note:

“Implied Ownership of Holders of SV Shares” is calculated in accordance with the definition in this press release and is based on the number of shares of Magnet outstanding as of January 19, 2023 on a fully-diluted basis for all periods shown to reflect the ownership attributable to Holders of SV Shares (other than the Rolling Shareholders) under the contemplated Arrangement.

Cautionary Note Regarding Forward-Looking Information

This press release contains “forward-looking information” and “forward-looking statements” (collectively, “forward-looking information”) within the meaning of applicable securities laws. Such forward-looking information or statements (“FLS”) are provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes. Any such FLS may be identified by words such as “proposed”, “expects”, “intends”, “may”, “will”, and similar expressions. FLS contained or referred to in this press release includes, but is not limited to, statements regarding the proposed timing and various steps contemplated in respect of the Arrangement, the holding of the Meeting and capturing growth opportunities.

FLS is based on a number of factors and assumptions which have been used to develop such statements and information, but which may prove to be incorrect. Although the Company believes that the expectations reflected in such FLS are reasonable, undue reliance should not be placed on FLS because the Company can give no assurance that such expectations will prove to be correct. Factors that could cause actual results to differ materially from those described in such FLS include, without limitation, the following factors, many of which are beyond the Company’s control and the effects of which can be difficult to predict: (a) the possibility that the Arrangement will not be completed on the terms and conditions, or on the timing, currently contemplated, and that it may not be completed at all, due to a failure to obtain or satisfy, in a timely manner or otherwise, required shareholder, Court and regulatory approvals and other conditions of closing necessary to complete the Arrangement or for other reasons; (b) risks related to tax matters; (c) the possibility of adverse reactions or changes in business relationships resulting from the announcement or completion of the Arrangement; (d) risks relating to the Company’s ability to retain and attract key personnel during and following the period ending with the consummation of the Arrangement; (e) the possibility of litigation relating to the Arrangement; (f) credit, market, currency, operational, liquidity and funding risks generally and relating specifically to the Arrangement, including changes in economic conditions, interest rates or tax rates; (g) business, operational and financial risks and uncertainties relating to the COVID-19 pandemic; (h) risks related to the Company resulting from the combination of the Company and Grayshift in retaining existing customers and attracting new customers, retaining key personnel, executing on growth strategies, advancing its product line and protecting its intellectual property rights and proprietary information; (i) risks related to the Company’s ability to prevent unauthorized access to or disclosure, loss, destruction or modification of data, through cybersecurity breaches or computer viruses disrupting the functionality of the Company’s products; (j) the impact of competition; (k) changes and trends in the Company’s industry and the global economy; and (l) the identified risk factors included in the Company’s public disclosure, including the annual information form dated March 9, 2022, which is available on SEDAR at www.sedar.com and on the Company’s website at www.magnetforensics.com. If any of these risks or uncertainties materialize, or if the assumptions underlying the FLS prove incorrect, actual results or future events might vary materially from those anticipated in the FLS. Although the Company has attempted to identify important risk factors that could cause actual results to differ materially from those contained in FLS, there may be other risk factors not presently known to the Company or that the Company presently believe are not material that could also cause actual results or future events to differ materially from those expressed in such FLS. The FLS in this press release reflect the current expectations, assumptions, judgements and/or beliefs of the Company based on information currently available to the Company, and are subject to change without notice.

Any FLS speaks only as of the date on which it is made and, except as may be required by applicable securities laws, the Company disclaims any intent or obligation to update any FLS, whether as a result of new information, future events or results or otherwise, except as required under applicable securities laws. The FLS contained in this press release are expressly qualified by this cautionary statement. For more information on the Company, please review the Company's continuous disclosure filings that are available at www.sedar.com.

No securities regulatory authority has either approved or disapproved of the contents of this news release. The TSX accepts no responsibility for the adequacy or accuracy of this release.

1 “Rolling Shareholders” means Jad Saliba, Director, President and Chief Technology Officer of the Company, Adam Belsher, Director and Chief Executive Officer of the Company, and Jim Balsillie, Chair of the Board, and their respective associates and affiliates.

2 Based on mean street consensus estimates for 2023 from Thomson Reuters Estimates, as of January 19, 2023, the day prior to announcement. All metrics in the numerators and denominators are for public SV shareholders. These multiples constitute and/or are based on Non-IFRS measures. See "Non-IFRS Measures" and the reconciliation to the most directly comparable IFRS measure included in this press release.

3 “Aggregate Value” is calculated using the $44.25 per SV Share purchase price payable to public SV Shareholders pursuant to the Arrangement.

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