Defenx Plc (LON:DFX) CFO Philipp Prince and UK Bond Network CEO Christopher Maule talk to DirectorsTalk about seeking up to £2m via UK Bond Network alongside a separate equity placing. Philipp explains why they chose the network over a more traditional route to raise equity, why this point in time and what the proceeds will be used for, while Chris tells us what attracted the UK Bond Network to working with Defenx and why this type of funding can better support a growing business.
Placing, Subscription and issue of Secured Convertible Bonds to raise up to approximately £3.37 million
Additional Information
1. Introduction
Defenx plc (LON:DFX), the cyber-security software group, is pleased to announce its intention to conduct a placing of approximately 700,000 new ordinary shares of £0.018 each in the Company (the “Placing Shares”), at a price of 160 pence per Placing Share (“Placing Price”), to raise approximately £1.12 million (before expenses) (the “Placing”) and the intention of an existing shareholder of the Company, BV Tech (“BV Tech”) to subscribe for up to an additional 156,250 new ordinary shares of £0.018 each at the Placing Price to raise up to an additional £250,000.
The Company is also proposing to issue secured convertible bonds (“Secured Convertible Bond”) to raise up to £2 million (“Convertible Bond Issue”). The Convertible Bond Issue is subject to, inter alia, the receipt of shareholder approval of the necessary resolutions at a general meeting of the Company, notice of which is to be dispatched on or about the date of this Announcement. If the requisite resolutions are not passed, the Convertible Bond Issue will not proceed.
The Placing Shares are being offered by way of an accelerated bookbuilding process (the “Bookbuild”), which will be launched immediately following this Announcement in accordance with the terms and conditions set out in the Appendix to this Announcement. WH Ireland Limited (“WH Ireland”) will be acting as sole bookrunner in connection with the Bookbuild. A further announcement will be made to confirm the completion of the Bookbuild in due course.
2. Background to and reasons for the Fundraising and use of net proceeds
The Company intends to use the net proceeds from the Fundraising to invest in its product portfolio, and its delivery and sales capability over the next 12 months to accelerate growth in existing and corporate markets.
The Directors believe that with recent high-profile cyber attacks, such as the WannaCry ransomware attack, cyber security is becoming a higher-priority board level issue for companies to address and as such the corporate market is a significant opportunity for the Company. The impact of ransomware on business and the challenges of protecting mobile devices in the workplace, together with the implementation of the EU General Data Protection Regulation (“GDPR”) in May 2018, are set to drive corporate investment in cyber security. The Company is keen to capitalise on this current positive market sentiment in order to raise additional funds to build on its existing IP base, to better leverage its value, and to accelerate growth into corporate and non-Italian markets which is expected to de-risk future revenues.
The funds raised from the Fundraising will be used to invest in the Company’s product portfolio, broaden the development and operations teams to support the Group’s products, and enhance the Group’s sales capacity, focusing particularly on the corporate sector. The Company’s strategic partnership with BV Tech is expected to provide access to corporate customers to whom the expanded product portfolio can be sold.
The Company intends to use the proceeds from the Fundraising to accelerate software development spend, including:
· the development of corporate versions of its consumer products e.g. enterprise security suite and mobile device management;
· building on Memopal Srl’s ‘MGFS’ technology e.g. end-2-end encrypted cloud backup;
· building privacy protection into its products e.g. addressing GDPR requirements;
· adding features and integrating products to provide 360° protection;
· accelerating the update cycle of its most popular mobile products; and
· building/acquiring complementary new functionality.
3. Details of the Placing
The Placing Shares will be offered by way of an accelerated bookbuilding process which will launch immediately following this Announcement. The Placing Price represents a discount of approximately 13.75 per cent. to the closing middle market price of 185.5 pence per Ordinary Share on 4 August 2017, being the Latest Practicable Date.
The New Ordinary Shares to be issued pursuant to the Placing will be conditionally placed by WH Ireland, as agent of the Company, with certain existing Shareholders and new institutional and other investors pursuant to the Placing Agreement. The Placing is not conditional on the passing of any of the Resolutions, although it is conditional, inter alia, on Admission and the Subscription Agreement being entered into.
In addition, the Company has also granted the Broker Option to WH Ireland order to enable WH Ireland to deal with additional demand under the Placing, following the closing of the Bookbuild where requests to participate in the Placing from institutional investors and certain other investors are received during the period from such closing to 4.30 p.m. on the date of this Announcement. The Broker Option is exercisable on more than one occasion at any time prior to 4.30 p.m. on the date of this Announcement. Any Ordinary Shares issued pursuant to the exercise of the Broker Option will be issued on the same terms and conditions as the Placing Shares placed under the Bookbuild. The Broker Option may be exercised by WH Ireland, following consultation with the Company, but there is no obligation on WH Ireland to exercise the Broker Option or to seek to procure subscribers for Ordinary Shares pursuant to the Broker Option. The maximum number of new Ordinary Shares that may be issued under the Placing, including pursuant to the exercise of the Broker Option, is 981,250. Accordingly, the maximum number of Ordinary Shares that may be issued under the Broker Option (assuming 700,000 Ordinary Shares are subscribed under the Bookbuild) is 281,250.
Under the terms of the Placing Agreement, WH Ireland will receive commission from the Company conditional on Admission and the Company will give customary warranties and undertakings to WH Ireland in relation, inter alia, to its business and the performance of its duties.
In addition, the Company has agreed to indemnify WH Ireland in relation to certain liabilities that they may incur in undertaking the Placing. WH Ireland has the right to terminate the Placing Agreement in certain circumstances prior to Admission, in particular, in the event that there has been, inter alia, a material breach of any of the warranties. The Placing is not being underwritten.
Following the issue of the New Ordinary Shares, the Company is expected to have approximately 12,719,042 Ordinary Shares in issue (assuming no exercise of the Broker Option) and there are no shares held in treasury.
The New Ordinary Shares will, when issued, be credited as fully paid and will rank pari passu in all respects with the existing Ordinary Shares of the Company, including the right to receive all dividends or other distributions made, paid or declared in respect of such shares after the date of issue of the New Ordinary Shares.
4. Details of the Subscription
BV Tech has indicated that it intends to subscribe for up to 156,250 New Ordinary Shares at the Placing Price pursuant to the Subscription, assuming the full funds are raised under the Placing. The Subscription is taking place on the same terms and conditions as the Placing, other than in respect of settlement. BV Tech currently holds 3,480,388 Ordinary Shares representing 29.34 per cent. of the Existing Ordinary Shares. Following admission of the Subscription Shares, BV Tech will hold up to 3,636,638 Ordinary Shares representing 28.59 per cent. of the Enlarged Share Capital, assuming the full funds are raised under the Placing and Subscription. In the event that the full funds are not raised under the Placing, the Subscription may be reduced to ensure that BV Tech’s resultant shareholding in the Company is less than than 30 per cent.. The Subscription is conditional upon the completion of the Placing and if the Placing does not proceed for whatever reason, then the Subscription will also not proceed.
BV Tech is a related party of the Company for the purposes of the AIM Rules by virtue of its status as a substantial shareholder of the Company, therefore the participation by BV Tech in the Subscription is a related party transaction under the AIM Rules. The independent Directors, being the Directors other than Raffaele Boccardo and Franco Francione, consider, having consulted with the Company’s nominated adviser, Strand Hanson Limited, that the terms of the Subscription by BV Tech, reflecting those of the Placing, are fair and reasonable insofar as the Company’s shareholders are concerned.
5. Details of the Secured Convertible Bonds
(a) Summary
The Company is proposing to raise up to £2 million pursuant to the Convertible Bond Issue, with the final amount to be determined by the auction process. Of this amount, UK Bond Network has procured that £1.25 million of the Convertible Bond Issue has been underwritten pursuant to the Bond Underwriting Commitment.
The Bonds will pay a coupon of between 8 per cent. and 10 per cent., with the exact rate being determined by participating bond investors through UK Bond Network’s auction process. Interest under the Secured Convertible Bonds will be payable quarterly.
The Secured Convertible Bonds will be convertible into Ordinary Shares at the Conversion Price of 200 pence per Ordinary Share, being a 25 per cent. premium to the Placing Price.
The auction process to be carried out in connection with the Convertible Bond Issue will be carried out by UK Bond Network, as agent of the Company, using its designated website auction platform. There will be a pre-auction period commencing on or around the date of this Announcement for Eligible Investors to review the Secured Convertible Bonds offering, followed by a live auction period commencing at 9.00 a.m. on 14 August 2017 and finishing at 4.30 p.m. on 30 August 2017.
Eligible Investors will be the only investors eligible to participate in the Convertible Bond Issue. Eligible Investors will be required to self-certify themselves, in accordance with the procedure required under FSMA, as being an investor falling into one of these categories before participating. Eligible Investors who wish to participate will need to register as a member of UK Bond network’s platform (www.ukbondnetwork.com).
(b) Terms of the Secured Convertible Bonds
The Company will create and authorise the issue of up to £2 million unlisted Secured Convertible Bonds (in multiples of £1 each) by entering into the Convertible Bond Instrument upon completion of the auction. The Secured Convertible Bonds will mature and be due for repayment in full on 31 August 2020. At the option of the Company, the Secured Convertible Bonds may be repaid fully or partially at any time on or after 31 August 2019 (being the second anniversary of the date of the Convertible Bond Instrument), subject to the share price being at least 130 per cent. of the Conversion Price for 20 consecutive Dealing Days.
The Company, Defenx SA, Memopal Srl and the Security Trustee will enter into an all assets debenture and guarantee and a security trust deed (each in customary form) to provide security in respect of the Secured Convertible Bonds.
The full amount of principal under the Secured Convertible Bonds, together with any interest accrued on them, may, at the option of the Security Trustee (acting in its capacity as the Bondholders’ trustee), become immediately due and repayable if an “Event of Default” occurs and is continuing. The Events of Default set out in the conditions to the Convertible Bond Instrument include, inter alia, late payment of any sum due under the Secured Convertible Bonds, or the insolvent liquidation of the Company.
The Secured Convertible Bonds accrue interest daily, payable in quarterly instalments by the Company. The rate at which interest will accrue will be between 8 per cent. and 10 per cent. per annum with the exact interest rate payable to be determined through the auction process conducted by UK Bond Network.
Each Bondholder will receive a certificate recording the details of their Secured Convertible Bonds and, at any time before the Secured Convertible Bonds mature, Bondholders will have the right to convert the principal amounts of their Secured Convertible Bonds then outstanding into Ordinary Shares.
The Conversion Price represents a 25 per cent. premium to the Placing Price. However, the conditions attached to the Convertible Bond Instrument set out a number of different circumstances in which this Conversion Price may be adjusted, including in the event of any share capital reorganisation affecting the Ordinary Shares, or if an Event of Default or a Takeover Offer occurs. Accordingly, as at the date of this Announcement, it is not possible to ascertain exactly what effect any conversion of the Secured Convertible Bonds may have on the interests of Shareholders, because the Conversion Price (and therefore the number of Ordinary Shares into which the Secured Convertible Bonds convert) may be subject to change. However, for illustrative purposes only, if the maximum amount of £2 million is raised by the Convertible Bond Issue, and each Bondholder were to convert their entire holding of Secured Convertible Bonds into Ordinary Shares, then based upon the current Conversion Price the Company would need to allot and issue 1,000,000 Ordinary Shares in satisfaction of such a conversion.
The Company gives certain customary representations, warranties, covenants and undertakings to the Bondholders under the terms of the Convertible Bond Instrument and the associated security documents, including as to matters relating to the Group and its business.
(c) Terms of the Bond Placing Agreement
Under the terms of the Bond Placing Agreement, for the purpose of procuring Eligible Investors who will subscribe for the Secured Convertible Bonds, UK Bond Network has agreed to make available to the Company its website platform, upon which the auction of the Secured Convertible Bonds to Eligible Investors is to be conducted.
Under the terms of the Bond Placing Agreement, completion of the Convertible Bond Issue is conditional, inter alia, upon the requisite resolutions being passed at the General Meeting referred to below under the heading “Notice of General Meeting”.
This means that unless such conditions are satisfied, the Convertible Bond Issue will not complete.
The Bond Placing Agreement incorporates the customary representations and warranties given by the Company under the Convertible Bond Instrument, including as to matters relating to the Group and its business. The Bond Placing Agreement also contains customary rights of termination which could enable UK Bond Network to terminate the Bond Placing Agreement in certain circumstances.
The Secured Convertible Bonds have not been made available to the public and have not been offered or sold in any jurisdiction where it would be unlawful to do so.
(d) Terms of the Bond Underwriting Commitment
Pursuant to the terms of the Bond Underwriting Commitment, UK Bond Network has procured that £1.25 million of the Convertible Bond Issue has been underwritten, subject to certain conditions.
The Directors consider the terms of the Convertible Bond Issue to be appropriate in view of the reasons for the Fundraising and use of net proceeds as described above.
6. Current trading and outlook
As announced on 22 June 2017, year-to-date trading remains in line with management expectations.
As seen in previous years, the Group’s business is heavily seasonal with the majority of billings falling towards the end of the year, whereas certain costs, notably marketing contributions, are higher in the first half of the year. Whilst the Directors believe that the strategic partnership with BV Tech will, in time, reduce this seasonality, the Company’s results for 2017 are inevitably dependent on billings in the second half of 2017 and driven predominately by the existing core business.
The Company and BV Tech are at an advanced stage of negotiations on a master services agreement (“MSA”) pursuant to which BV Tech will (once entered into) develop software for Defenx, which alongside the software distribution contract announced on 22 June 2017, forms part of the strategic partnership between both parties as envisaged at the time of BV Tech’s initial investment. The MSA will constitute a related party transaction under the AIM Rules once entered into and further announcements will be made in this regard as appropriate.
The core business, which is focused on the distribution of mobile and PC security software to the Group’s channel partners, is maturing and new channel partners – including Multi Time Srl and Arnavalle Telecommunications SL announced on 3 July 2017 – and products are now starting to support future growth. Meanwhile, the sales and technical teams are making good progress with BV Tech, with whom a promising pipeline of opportunities is developing.
Accordingly, the Directors remain confident that Defenx’s diversification into the corporate market, supported by BV Tech, will yield significant profitable growth over the medium term and that the results for 2017 will remain in line with expectations.
7. Notice of General Meeting
A notice convening a general meeting of the Company “General Meeting” to be held at the offices of Taylor Vinters LLP, Tower 42, 33rd Floor, 25 Old Broad Street, London EC2N 1HQ on 23 August 2017 at 12.00 p.m., at which resolutions authorising the Convertible Bond Issue and giving the Directors general authorities to allot shares will be proposed, will be dispatched shortly.
8. Irrevocable undertakings
BV Tech, Andrea Stecconi, Philipp Prince, Anthony Reeves and Leonard Seelig are expected to provide irrevocable undertakings to vote in favour of the resolutions to be proposed at the General Meeting (“Resolutions”) in respect of their own beneficial holdings of, in aggregate, 5,434,729 Existing Ordinary Shares, in aggregate representing approximately 45.81 per cent. of the Existing Ordinary Shares.
9. Admission, Settlement and CREST
Application will be made to the London Stock Exchange for the admission of the New Ordinary Shares to trading on AIM. It is expected that Admission of the Placing Shares will become effective at 8.00 a.m. on 11 August 2017 and that dealings in the Placing Shares will commence at that time. It is expected that admission of the Subscription Shares will become effective by 8.00 a.m. on 1 September 2017 and that dealings in the Subscription Shares will commence at that time.
The Articles permit the Company to issue shares in uncertificated form. CREST is a computerised paperless share transfer and settlement system which allows shares and other securities to be held in electronic rather than paper form. The Ordinary Shares are already admitted to CREST and therefore the New Ordinary Shares will also be eligible for settlement in CREST.
10. Directors’ recommendation
The Directors consider the passing of the Resolutions and the completion of the Proposals to be in the best interests of the Company and its Shareholders as a whole. Accordingly, the Directors recommend that all Shareholders vote in favour of the Resolutions.