Cipherpoint to buy cyber-security services platform Brace168

Cipherpoint Ltd (ASX:CPT) has entered into a binding term sheet to acquire 100% of the issued capital in cybersecurity services platform Brace168 Pty Ltd for cash and shares in the company.  It is anticipated the transaction will complete by early March 2021 or shortly thereafter.  CPT plans to raise further capital of not less than $2 million under a placement and rights issue to fund the acquisition and expand its existing business, among others.  More attractive investment option CPT chairman Ted Pretty said “The Cipherpoint team is excited that the founders of Brace168 will be joining us on the journey to offer best of breed solutions to the business and enterprise market both locally and internationally. “Our focus has been to acquire a business with a strong and complementary platform, and which has an attractive organic growth trajectory. “Acquiring Brace168 gives CPT the ability to compete aggressively in the market. “In my opinion, it enables CPT to scale with an integrated offering and will be a more attractive investment option than other cyber consulting rollups underway in the market.” New standards in cybersecurity Brace168 spokesperson Bunt said: “We are excited about the prospect of joining Cipherpoint and its team at this critical stage of our growth journey. “In our opinion, Brace168 has the potential to set new standards in cybersecurity including providing managed detection and response services, security analytics and data protection. “We remain committed to ensuring our customers are provided best in class service and support and to be the clear choice of supplier, partner and employer.” Acquisition terms Consideration for the acquisition is a mix of cash and CPT securities - $3 million cash, 21.75 million shares and 5.4375 million options, subject to any necessary shareholder or other regulatory approvals. The cash payment will be split over two payments, with $2 million payable on completion and $1 million 12 months post-completion. Performance-based consideration An additional 14.2 million shares are to be issued on achieving 2021 and 2022 financial years financial milestones. They include: 2021 earn-out: If at the conclusion of Brace168’s 2021 financial year, the revenue for Brace168 is greater than $3.0 million, then CPT shall allot a further 7.1 million shares to the vendors; and 2022 earn-out: If at the conclusion of CPT’s 2022 financial year, the revenue is greater than $5.0 million, then CPT shall allot a further 7.1 million shares. CPT will also execute executive agreements with Brace168’s Greg Bunt and Matt Miller comprising: market-based salaries and short-term incentives; the issue to each an initial 2,500,000 performance rights with vesting when CPT trades above 10 cents per share for five consecutive trading days; and a further 2,500,00 performance rights, subject to Brace168 achieving the 2021 earn-out target. CPT also intends to issue Brace168 employees share-based incentives under its existing employee security ownership plans. Three key areas of focus Following completion of the Brace 168 transaction, CPT will focus on three key areas. They are: Security Solutions – the Brace168 business; Data Protection – CPT’s core business; and Data Discovery – a further growth opportunity. Brace168 will be managed as a separate business during the performance period. Fundraising CPT has received binding commitments to a placement of ordinary shares of $1 million at an issue price of 4.7 cents per ordinary share (21,276,596 shares), together with one free-attaching option for every four shares under the placement, with each option having an exercise price of 8 cents with an expiry of 12 months from issue. The placement shares are being issued at an 8% discount to the 15-day VWAP of CPT’s ordinary shares. CPT will pay a fee of 6% of funds raised from the placement and issue an aggregate of 4 million options (with the same terms as options under the placement) to brokers, who assisted with the placement. Rights issue In addition, CPT is planning a rights issue to raise not less than the balance of the capital required as a condition to the completion of the Brace168 acquisition (being $1 million). The rights issue will offer eligible shareholders, including placement participants, the opportunity to subscribe for one share for every two shares held at the record date at an issue price of 4.7 cents per share to raise up to around $4 million before costs. Subscribers in the rights issue will be issued with one free-attaching option for every four shares subscribed under the rights issue, with each option having an exercise price of 8 cents, with the same expiry date as the placement options. Use of funds The net capital raised will be used as follows: meet costs of the Brace168 transaction; meet costs of integration of the Brace 168 and CPT businesses; fund the expansion of the existing CPT business following the integration above; fund the anticipated growth of the Brace168 business; establish a second point of presence for Security Solutions in Europe co-located with CPT’s existing business in Heilbronn, Germany; and group working capital. Brace168 A unique feature of Brace168’s offering is its ability to manage multi-vendor customer environments within and across national boundaries supported by data and security analytics, which is highly complementary to the data-centric approach of CPT. Brace168 was set up in 2017 by founder Bunt, with Matt Miller as a senior executive, to provide managed detection and response services to medium and large-scale businesses and enterprises, based in North Sydney. The foundation of the business is its scalable next-generation Security Operations Centre (SOC) platform aligned with ISO27001 and Crest accreditations and is NSW Government panel-approved. Brace168 has a high percentage of annuity revenue. In the financial year 2020, its revenues were $1.2 million and in the first half of the financial year 2021, the figure stood at $1.3 million. Its customers come from the financial property, manufacturing, technology and health sectors,  including both ASX50 and ASX200 companies. CPT’s existing products will be offered to these customers.