Nightmare on Wall Street: Hub Security’s value plummets after SPAC merger

Hub Security's promises to go public via a SPAC merger according to a valuation of $1.3 billion were shattered last week by the
harsh reality. Against the background of the investors' refusal to participate in the company's IPO on Nasdaq, the price of the cyber company's share today stands at just under $1.7, 84% lower than the price that Hub promised its investors in Israel. The company's market cap was estimated at just $157 million as of Friday.

Hub Security stopped trading in Tel Aviv two weeks ago at a value of NIS 740 million (approximately $205 million). The company's management and its controlling owners promised investors until the very last minute that the moment is coming when the company will reach Nasdaq and trade at a value of $1.28 billion (NIS 4.6 billion). In other words, the company's management's promise to investors was that the value of their holding would be multiplied 3.6 times within a day. As part of the merger with the Mount Rainier SPAC, the Israeli investors were supposed to receive 0.7 shares of Hub in Nasdaq for each share they held in Tel Aviv, but even after the dilution, the offer seemed promising since it was supposed to provide the investors in Tel Aviv with a 2.5-times profit.

The last day of trading in Hub stock in Tel Aviv was Thursday, February 23, and one of the reasons for the suspension of trading on the TASE was the desire to prevent the price from being fixed and the creation of arbitrage between the shares. The theoretical share price for the start of trading on Nasdaq, due to the conversion ratio, was $2.29 per share, and an investor who managed to sell their shares at this price exited the investment in a balanced position. In practice, the share began trading on March 1st on Nasdaq at a higher price, of $2.69 per share, but two days later it had already dropped by 37.7%, to the price of $1.67 as mentioned.

As is often the case in the capital market, promises and reality are two separate things, although at Hub Security they took this expression to the extreme. The promise of a PIPE offering in which "large institutions" would purchase shares amounting to $50 million did not happen, and the company is now forced to rely on $11 million borrowed at a high interest rate to complete the offering. The founder no longer takes an active part in the company, the management has been replaced, the external directors resigned, and the stock collapsed.

Due to a lack of funding from PIPE investors, which was a precondition for the merger to take place, and in order to complete the move to the U.S. anyway, the company entered into an "Equity Line" agreement. This agreement characterizes companies in problematic situations and results in a deal with underwriters to provide a line of credit in exchange for shares and options.

Hub received the $100 million credit line of the SPAC into which it was merged after the owner of the SPAC closed a line of credit for the company in preparation for its registration in New York. The terms of the credit placement specifically for Hub are not known and it is not clear according to what value the framework was established, but these are expected to weigh on Hub's balance sheet and further dilute Hub's existing and established investors from Israel. In fact, considering that the infusion of funds and the raising of the money according to a high value was not ultimately carried out, Hub's move to Nasdaq cannot be considered an IPO but only a re-registration of the public company in the U.S.

Under these conditions, it is not surprising that within two trading days the company is trading at a value that is even lower than the value at which it was traded in Tel Aviv.

In March 2022, Hub reported the signing of a merger agreement with the SPAC Mount Rainier, which raised $173 million as of that date. In addition, Hub received a commitment from four institutional bodies to invest $50 million in the company. SPAC companies are issued and raise money from the public with the aim of merging with private companies within a specified period of time, usually two years. If they are not successful in this, they return the money to the investors plus interest.

When the SPAC raises the money from the investors, they do not know which company they will merge with, and because of that they get the option to withdraw the money after the merger deal is signed. After signing such a deal, the company embarks on another fundraising, which is done when the investors, mostly institutional, know what they are choosing to invest in.

The large institutions that were promised by Hub Security as PIPE investors in the first half of 2022 never arrived, but amounted to two small investment companies, A-Labs and Mofo alongside two small hedge funds, one of which was Clover Wolf, investing amounts ranging from $5-10 million. However, even these companies did not transfer the money as promised.

Less than a month ago, the Hub board ousted its founder, CEO Eyal Moshe, and his place was taken by Uzi Moskowitz. Moshe's partner, Ayelet Bitan, who served as VP of Human Resources, also resigned. In order not to rock the ship, the company announced that Moshe would become the president of the company and concentrate on its activities in the U.S., however Moshe’s name disappeared from the company's website and he was not present at the traditional bell ringing ceremony at Nasdaq, even though executives who are located in Israel traveled to the U.S. for the event on a special flight. Attempts to contact the company and Moshe and receive comments on this issue were declined.

The new chairman of the company is Kasbian Nuriel Chirich, the former Israeli consul in Tanzania and an associate of Eli Reifman - who was sentenced in 2011 to four years in prison for financial fraud in the Emblaze case - and is a figure who works behind the scenes at A-Labs.