Paterson's updated note - spec buy - price target 30c

Nearing the Inflection Point
Investment Highlights

• Covata Limited (CVT) seems to be approaching an inflection point in its business model. Having previously built its technology suite and laid the groundwork with partners, it expects first major revenues in FY17 from the UK Government channel and the Cisco partnership.
• The $13.2m capital raising in the June Quarter has shored up the Balance Sheet and should provide the liquidity buffer needed to see the Company through to cash flow break even, forecast for FY18.
• This inflection point should thus herald a turnaround; however risk still remains if the Company does not monetise at the rate budgeted for, due to its high operating cost base of $3.5m a quarter.
• We have reduced our target price to $0.30/sh (from $0.41/sh) but have upgraded our recommendation to Spec Buy (from Hold), due to the recent share price decline (down 40.5% over the past 3 months).

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COMPANY OVERVIEW

Covata Limited (CVT) is a cyber-security company, which enables true ownership and control over enterprise
data in the cloud and over mobile services. The Company delivers data-centric security solutions providing a
true end-to-end security platform for enterprises of various sizes to access, store, share, and manage their
content/information.

The technology protects the individual data and files by using an approach with three core attributes: strong
encryption, identity (who can access the information), and policy (who can do what plus an audit trail). The
platform is designed such that cryptographic keys, which are used to encrypt and decrypt data files, are stored
separately from the data and managed centrally. This provides users with the flexibility to choose to maintain
control of their encryption keys on-premises, while using another location such as cloud storage for the
protected data. It can also be integrated into existing systems which enables organisations to leverage the
security functions of the platform while using its existing applications.

CVT’s business model going forward is focussed on commercialising its software security platform through
three channels: 1) entering into global distribution agreements with Telcos and Managed Service Providers
(MSPs); 2) entering into agreements with Original Equipment Manufacturers (OEMs) and; 3) providing
services to Government organisations (Govt). This is illustrated in Figure 1. Given its global focus, the reseller
strategy is particularly effective for its software solutions as the reseller can provide training, implementation
and necessary integration services when required; all at a reduced cost to CVT.

The Company has leveraged its platform to create Safe Share, an enterprise-focused secure file share and
synchronisation solution that allows secure sharing of data over public and private networks and on any
device; and its OEM Key-as-a-Service (KaaS) solution, an Internet of Things (IOT) data-centric encryption and​

security service which is currently licenced to global hardware manufacturer, Cisco, on a 10-year agreement.