Thursday 22 July 2021

Kraken Robotics Inc. (“Kraken” or the “Company”) (TSX-V: PNG, OTCQB: KRKNF), Canada’s Ocean Company, is pleased to announce that it has signed a definitive share purchase agreement (the “PanGeo Agreement”) whereby Kraken Robotics Systems Inc., a wholly-owned subsidiary of Kraken, will acquire all of the issued share capital of PGH Capital Inc. (“PGH Capital”) on substantially similar terms to those set out in the non-binding letter of intent dated April 8, 2021, and disclosed in the Company’s press release dated April 9, 2021 (the “PanGeo Transaction”). PGH Capital operates its business through its subsidiaries, PanGeo Subsea Inc. and PanGeo Subsea Scotland Limited (collectively with PGH Capital, “PanGeo”). PanGeo is a private Canadian services company specializing in high-resolution 3D acoustic imaging solutions for the sub-seabed with offices in St. John’s, Newfoundland and Aberdeen, United Kingdom. PanGeo’s assets consist primarily of human capital, know-how and equipment comprised mostly of sub bottom imaging units and acoustic imaging units that are used to provide sub-seabed survey services.

The Company is also pleased to announce that it has entered into an agreement with a syndicate of underwriters led by Canaccord Genuity Corp. (the “Underwriters”), under which the Underwriters have agreed to buy on a bought deal basis 20,000,000 units (the “Units”) at a price of $0.50 per Unit for gross proceeds of approximately $10 million (the “Offering”). Each Unit will consist of one common share of the Company (a “Common Share”) and one-half of one Common Share purchase warrant (each whole purchase warrant, a “Warrant”). Each Warrant entitles the holder to acquire one Common Share (a “Warrant Share”) at a price of $0.60 per Warrant Share for a period of two years following the closing of the Offering, subject to acceleration in certain circumstances.

Strategic Benefits of the PanGeo Transaction

Completion of the PanGeo Transaction will significantly accelerate the Company’s vertical move into the provision of offshore survey and inspection services using Kraken technology as part of a robotics/data as a service business model. The PanGeo Transaction will also increase Kraken’s exposure to the non-defense market, including the offshore renewable energy market (PanGeo’s largest market) which will help to diversify its client base. Following closing of the PanGeo Transaction, Kraken will be able to offer a holistic solution of world-leading technologies and services in subsea acoustic and optical imaging using Kraken’s suite of ultra-high resolution seabed 3D acoustic imaging sensors, autonomous robotics, and optical laser scanning paired with PanGeo’s suite of leading-edge sub-seabed high-resolution 3D acoustic imaging capabilities.

Transaction Details

The aggregate purchase price for PanGeo is up to $23 million comprised of the following:

$3 million payable in immediately available funds (the “Cash Consideration”) on the closing date of the PanGeo Transaction (the “Closing Date”);

12,068,965 Common Shares having a deemed value of $0.58 each and $7 million in the aggregate to be issued on the Closing Date;

$4 million to be paid in cash, plus interest at a rate of 6% per annum, on the second anniversary of the Closing Date, to be evidenced by non-transferable promissory notes (the “Promissory Notes”); and

Up to an aggregate of $9 million to be paid pursuant to an earn-out on the following terms:

an amount equal to 300% of the amount by which certain qualifying revenue in the one-year period immediately following the Closing Date exceeds $9,500,000, up to a maximum payment of $4,500,000 (the “First Earn-Out Amount”); and

the amount equal to 300% of the amount by which certain qualifying revenue in the two-year period immediately following the Closing Date exceeds $21,500,000, up to a maximum payment of $4,500,000 less any amount paid pursuant to the First Earn-Out Amount (the “Second Earn-Out Amount”, and together with the First Earn-Out Amount, the “Earn-Out Amounts”).

The Earn-Out Amounts will be paid within thirty (30) business days following the filing deadline date or the actual filling date on SEDAR, whichever is the earliest, of Kraken’s quarterly financial statements for the quarter that includes first or second year anniversary of the Closing Date, as the case may be. At Kraken’s option and, subject always to the approval of the TSX Venture Exchange (the “TSXV”) at the time, payments required to be made in respect of the Earn-Out Amounts may be satisfied by way of a cash payment equal to 50% of the Earn-Out Amount and the issuance of Common Shares having an aggregate value equal to the remaining 50% of the Earn-Out Amount then due and payable.

The Promissory Notes also provide Kraken with the option, subject to TSXV approval at the time, to satisfy up to 40% of any principal amount owing under the Promissory Notes by issuing Common Shares in accordance with the terms of the PanGeo Agreement.

Based on the unaudited consolidated financial statements prepared on a review engagement basis using Canadian accounting standards for private enterprises for the operating entities, being PanGeo Subsea Inc. and PanGeo Subsea Scotland Limited, the consolidated assets at December 31, 2020 were $11.51 million and revenues for the same period were $10.55 million with a corresponding net loss of $1.84 million (which included, among others, a non-cash amortization expense of approximately $1.42 million). These results for the operating entities were down from comparable information (also based on unaudited financial statements) for the year ended December 31, 2019 where the consolidated revenues were $10.93 million with a corresponding net income of $1.26 million. The year-over-year decline was largely due to the impact of COVID on customer activity.

Kraken will also assume ordinary course debt owing to a Canadian chartered bank in the amount of approximately $1.5 million and to the Atlantic Canada Opportunities Agency in the amount of approximately $0.688 million on closing of the PanGeo Transaction (collectively, the “PanGeo Indebtedness”). The Company anticipates that it will also assume approximately $1.1 million in cash at closing of the PanGeo Transaction.

Completion of the PanGeo Transaction is subject to certain closing conditions including all required regulatory and stock exchange approvals and the completion of a financing for gross proceeds of not less than $10 million within 30 days of execution of the PanGeo Agreement. The PanGeo Transaction is expected to occur within 30 days of execution of the PanGeo Agreement.