NSO’s Cash Dilemma: Missing Debt Repayment or Selling to Risky Customers

Faced with a looming cash crunch so severe that Israel’s NSO Group, maker of the Pegasus cyberweapon, could miss its November 2021 payroll, Shalev Hulio made a startling suggestion.

The rude CEO told a team representing the company’s majority owners in New York that month: why not start selling to risky customers again?

NSO is the maker of military-grade spyware that thwarts encryption on phones and turns them – surreptitiously – into listening devices, while mirroring their contents on terminals thousands of miles away.

The sale of the coveted technology has led to annual sales exceeding $250 million. But after human rights groups documented the abuse of Pegasus by Saudi Arabia, the United Arab Emirates, Mexico and more than a dozen other countries against journalists, dissidents and academics, NSO had gone months without a new sale.

Hulio said there was an option to bring in cash quickly enough to pay salaries and debt service: reassemble a defunct internal committee and approve sales to customers flagged as “high risk” during the due diligence.

To his audience, the suggestion was alarming. They were managers of Berkeley Research Group, which had recently been brought in by investors in a billion-euro private equity fund run by London-based Novalpina Capital, which had a majority stake in NSO but had then gone collapsed in a quarrel of partners.

BRG’s task was to close the Novalpina fund. Now they were being asked to get involved in decisions about whether or not to sell Pegasus to countries that even ONS staff might have flagged.

BRG refused, telling Hulio that the plan was fraught with risk. He joked that it was also risky to miss a debt payment.

This account of the NSO Group’s struggles is based on interviews with nearly a dozen people from New York to Tel Aviv, including company insiders, investors, creditors, government officials and a review of court documents and correspondence.

They reveal a company in crisis, its owners pitted against each other in legal battles and its future requiring delicate diplomacy between the United States and Israel, which has used the lure of NSO technology to open relationships with customers, especially Gulf countries and Arab countries. , whose misuse of the weapon now eclipses NSO’s reputation.

At the heart of the dispute is BRG’s decision last October to refuse to convene NSO’s governance, risk and compliance committee, which had been set up by Novalpina Capital a few months after it bought a majority stake in NSO. in 2019 at a price of $1. valuation in billions.

Hulio told creditors that BRG’s decision only made the company’s cash flow problems worse. BRG’s response to creditors, in correspondence seen by the FT, was that given the publicity around former NSO clients, Hulio’s sales team had only been able to suggest potential sales from difficult clients, including one who, according to BRG, had already abused the weapon.

“You demand that (BRG) blindly sanction the sale of . . . Pegasus. . . to high-risk customers without a thorough governance review,” BRG lawyers wrote to a consortium of creditors on December 13. “Please note that under no circumstances (BRG) is prepared to do this.

Hulio did not leave empty-handed after last October’s crucial meeting. BRG provided an immediate $10 million loan to a subsidiary of NSO, a fledgling unit that makes a drone defense system that Hulio touted as the company’s future, so NSO can do the payroll of this month.

Shortly after those paychecks were disbursed, the U.S. Department of Commerce blacklisted NSO for selling Pegasus to countries that used it for “transnational repression,” taking both the company and Israel off guard.

Since then, any American company has had to obtain a hard-to-obtain waiver before it can sell any technology to NSO, a crippling blow for a company whose terminals ran on servers from Dell and Intel, routers from Cisco and whose desktop computers were running on Windows operating systems.

NSO has repeatedly tried unsuccessfully to meet with the Department of Commerce’s Bureau of Industry and Security, which oversees export control restrictions, according to a person with knowledge of the situation.

As a result, NSO has been unable to make its case for temporary waivers, such as those received by suppliers to Huawei, the Chinese telecommunications company, which was blacklisted for fear of facilitating Chinese espionage. BRI declined to comment.

NSO said: “It is critical that direct engagement with policy makers provides a better understanding of how our technologies work, the countless lives they have saved, and the specific steps the company is taking to prevent abuse and terminate breaches. contracts when it is determined that an abuse has occurred.

The company also said its products remain in “high demand”, and that it “has a rigorous due diligence process”, and that a “small group of detractors. . . continue to circulate recycled and inaccurate rumours.

The US blacklist ended the original plan Hulio had discussed with BRG: a pivot to sell to Israel’s Western allies. The company had been cut off from US law enforcement, the world’s most lucrative surveillance market, which Hulio has told investors, clients and friends could help propel NSO to a public listing to compete with Palantir. Technologies or Verint Systems.

Once a darling of Israel’s security establishment, NSO appears to have been abandoned by the Israeli government, which may instead champion nearly a dozen local companies providing the same technology, including some founded by former NSO engineers.

“Hulio keeps telling everyone that the company is on the verge of recovery,” said an Israeli official, who declined to lobby the United States on behalf of NSO. “It’s not. Whether he survives or not depends on the decisions of Washington, not Herzliya [the Tel Aviv suburb where NSO is headquartered].”

In recent months, Hulio has come up with a new plan dubbed the “phoenix plan” by company insiders. The idea is to separate NSO’s greatest assets from its greatest liabilities – it meant separating the code behind Pegasus and the company’s engineers who are highly paid graduates of Israel’s elite military intelligence units , clients who have drawn the ire of the United States and human rights groups. .

Hulio and a group of creditors hope that by creating a new entity that houses the code and engineers, he can circumvent the Commerce Department’s blacklist, especially if a new owner was a major US defense contractor.

By the end of November, the company’s finances appear to have recovered enough to hold a big party on Israel’s Red Sea coast. Hulio briefly served as the DJ. The company posted photos on LinkedIn, along with the caption. “ONS Group. Peer. United. Winner.”

Meanwhile, BRG’s $10 million loan to drone subsidiary NSO remains unpaid.

Tana T. Thorsen