A crack in the SPAC? Hub Security's SPAC merger in danger of falling through

The Israeli cybersecurity company Hub Security is dreaming of completing a huge IPO in the U.S., but in the meantime its coffers are emptying and the difficulties ahead of its merger with a SPAC company are piling up. These include the exit of one of the investors, the difficulty of diversifying the investor profile and changes at the top of the company. Will the merger be completed and the company, which has already announced that it will be delisted from trading on the Tel Aviv Stock Exchange, begin trading on Nasdaq?

Hub Security was supposed to complete the merger at a value of $1.28 billion at the beginning of this month. It is currently traded on the Tel Aviv Stock Exchange with a market cap of approximately NIS 670 million ($196 million). However, two weeks ago the company announced that it was postponing the completion date of the merger to the end of this month. Last Thursday, two weeks after the announcement of the postponement of the completion date of the merger, Hub Security revealed the reason for the postponement: one of the investors in the company, the Clover Wolf hedge fund, withdrew and decided not to invest in the company as part of the merger. This $10 million investment was part of the PIPE fundraising (private investment in public equity).

SPACs (Special Purpose Acquisition Company) are companies that are issued and raise money from the public with the aim of merging into private companies. They undertake to do this within a specified period of time, usually two years, and if they fail to do so, they return the money to the investors plus interest. This is not a new investment tool, but it gained momentum in 2020-2021, and through it many companies, including various Israeli companies, reached the U.S. stock exchanges.

While the SPAC is raising the money from the investors, it does not know which company it will merge with, and that is why it is possibile to withdraw the money after a merger deal has been concluded. After signing such a deal, the company embarks on another fundraiser known as a PIPE - which is done when the investors know what they are choosing to invest in. This investment round usually includes "stronger hands" such as institutional bodies and hedge funds, and these investors do not get the option to redeem the investment. Clover Wolf invested at this stage, so its withdrawal is a real drama.

In the first announcement by Hub Security regarding Clover Wolf’s withdrawal, the company said that the fund was disbanding and therefore the investment was canceled, but two and a half hours later the company corrected the report and said that Clover Wolf was not disbanding, but "decided to stop this type of investment". Hub Security said that it has instead received an irrevocable commitment by A-Labs Advisory & Finance Ltd. to invest another $10 million on the same terms as Clover Wolf. A-Labs is a consulting and investment body that also provides underwriting services, in exchange for commissions and options. This is the body that led Hub Security's $50 million PIPE investment, and now it is also the most significant investor in Hub Security, since the SPAC investors withdrew almost all the money they invested. In other words, the PIPE funds are almost the only funds that will flow into the company's coffers, while Hub Security reported that the merger should results in $50-$225 million of new funding (taking into account the SPAC fundraising funds and the PIPE funds).

In addition, Hub Security was not able to attract significant Israeli or international institutional bodies to its PIPE round. As mentioned, A-Labs will be responsible for the bulk of the amount, and will also receive $2.5 million in commissions upon completion of the transaction. Other investors include a family office named Mofo headed by Moshe Schlisser and hedge fund manager Guy Ben-Artzi.

The difficulties do not end there. Calcalist has learned that Hub Security is currently trying to raise about NIS 10 million in debt from Israeli investors in order to improve the company's finances. Hub Security approached Israeli institutions and private investors in the capital market, offered an interest rate of almost 10%, along with options in the company, but in the meantime has failed to raise the requested amount. In relation to this move, Hub Security told Calcalist that "the company strives to increase its funding resources, partly as a bridge to a delayed but certain drawdown based on existing contracts."

Hub Security, which became a public company on the TASE in June 2021 after merging with the skeleton ALD, reports in the format of a small corporation. That is, it publishes its financial reports twice a year, in the middle of the year, and not every quarter. According to the most recent information, as of the end of June 2022, the company's coffers have cash and cash equivalents amounting to only NIS 38 million ($11.1 million). The expenses for the merger have so far reached NIS 15 million ($4.4 million), and they are set to soar. Based on its results in the first half of 2022, its annual loss rate stands at NIS 140 million ($41 milllion), which puts its cash fund in danger, and clarifies its need to raise expensive debt as long as the completion of the merger is postponed and the company has difficulty collecting funds from customers.

In the meantime, Hub Security reported at the end of the week that in preparation for the merger it is making personnel changes in the company's management. The company's CEO Eyal Moshe will become the company's President of U.S. Operations, and his place will be taken by Uzi Moskovitz, a director of the company who previously also served as a director of the Migdal insurance group. According to the company, the purpose of the change is "to better focus resources and attention on the North American strategic business development." Also Moshe's partner, Ayelet Bitan, who serves as the VP of Human Resources, resigned. However, this change also brings with it a financial change that affects Moshe personally, which may indicate that his position in the company has weakened.

Last November, Hub Security convened a shareholders' meeting with an agenda to change the compensation policy and amend the options in a way that would have led to a 5-fold jump in the aggregate salary of Moshe and Bitan, from a salary costing NIS 6.8 million a year to a salary costing NIS 34.9 million a year. Due to opposition from the minority shareholders, the company decided to withdraw from the move, but announced that it would be on the agenda after the completion of the merger with the SPAC and the deletion of the company from the Tel Aviv Stock Exchange. Now, amid the personnel changes in management, Hub Security is canceling its plan to change compensation in the future. However, Moshe and Bitan are still the controlling owners of the company by virtue of their holdings (5.7%) and the agreements they have with other shareholders in the company.

Also, last week, Yafit Bouchris, a former director of ALD, filed a lawsuit due to a labor dispute with the company. Buchris is demanding NIS 1.23 million from the company. The hearing of the claim will be held at the Labor Court in Tel Aviv. Bouchris served as vice president and director of the skeleton that merged with Hub Security and turned it into a public company in Tel Aviv, and ended her position in June 2021, upon completion of the merger.

Hub Security first signed the merger deal with the American SPAC Mount Rainier Acquisition last March, and last December received the final approval for the move from the U.S. Securities and Exchange Commission (SEC). The company, which plans to be delisted in Tel Aviv and has already received the necessary approvals, aims to become a company that trades only on the Nasdaq stock exchange, because in its estimation in the U.S. investors will be able to better evaluate the company and its performance. According to its latest reports, in the first half of 2022 its revenues increased by 20% and amounted to NIS 122 million ($36 million). According to the company's forecasts, it should end 2022 with revenues of $38 million from the sale of cyber products and next year these revenues will amount to $92 million.

Hub Security operates in two areas: developing hardware and software to protect the organization's data stored on short-term memory (RAM); and providing regular services in the field of cyber to businesses. In 2022, the company's stock jumped by 84%, but even after the impressive surge, the company's value today stands at NIS 670 million and is very far from the value according to which it is expected to complete the merger with the SPAC, assuming it is eventually completed.