FINSIGHT Group Inc (“FINSIGHT”), a New York City based financial technology provider that is believed to be Q4 Inc’s (“Q4” or the “Company”) third largest shareholder and who beneficially owns over 2 million or approximately 5.6% of Q4’s outstanding shares, today issued a letter to the board of directors of Q4 (the “Board”) announcing that it intends to vote AGAINST the Company’s proposed plan of arrangement to be acquired by Sumeru Equity Partners (“Sumeru”) (the “Arrangement”) at a special meeting of Q4 shareholders (“Special Meeting”) currently scheduled for January 24, 2024.
The full text of the letter is below:
December 28, 2023
Dear Directors,
FINSIGHT has been a long-term shareholder for the majority of Q4’s existence as a public company. We own over 2.2 million or approximately 5.6% of Q4’s outstanding shares, which we believe represent approximately 8.5% of the minority (non-rolling) shareholders eligible to vote at the upcoming Special Meeting.
As a seasoned provider of capital markets financial technology, serving potentially hundreds of the same corporate issuers, broker dealers and institutional investors as Q4, FINSIGHT believes it has a credible understanding of the financial services industry and sees tremendous intrinsic value within Q4. FINSIGHT’s perspective is that of a committed, long-term believer in and investor of Q4.
FINSIGHT believes that the acquisition of Q4, at an almost 50% discount to its 2021 IPO price, is a premature and opportunistic transfer of value from the minority (non-rolling) shareholders to insiders of Q4, which include Ten Coves Capital, Q4 CEO Darryl Heaps, director Neil Murdoch, and an undisclosed shareholder (the “Rolling Shareholders”); and to the purchaser, Sumeru Equity Partners.
We are deeply concerned about the genesis, timing, and scope of the sale process, the level of involvement of conflicted members of the Board and management in the sale process, and the potential for change in control payments to be paid to members of management as a result of the sale. We believe that Q4’s business and future prospects are strong, and that the proposed Arrangement significantly undervalues the current and future potential of the business.
To be clear, we are not advocating for an incremental increase in the purchase price. We believe the proposed Arrangement is significantly off-market and are concerned that the process undertaken resulting in this proposed Arrangement was potentially fraught with irreconcilable conflicts that Q4 has failed to address to date. More importantly, FINSIGHT believes Q4 is at an inflection point following a successful restructuring process and is thus well positioned to thrive as a standalone public company.
For these reasons, and as we explain further below, subject to more substantive disclosure, FINSIGHT intends to vote AGAINST the Arrangement.
FINSIGHT acquired its ownership in Q4 because we believe in its long-term growth potential and the strength of its core business.
Within the US investor relations space, Q4 is virtually unrivaled. The Company has over $56 million in annual recurring revenue with 92.8% controllable net retention. Its revenue sources are diversified, with over 2,500 customers from over 120 countries, including 58% of the S&P 100, 63% of the DOW 30. Q4 has deep moats and generates troves of proprietary capital markets data, which will be increasingly valuable in an AI-enabled world. It generates this data by hosting thousands of virtual events and conference calls, accessed by over 380k investors per quarter, and hosting portals visited by over 18 million monthly active users1.
Q4’s operating profile today is significantly better than at the time of its October 2021 IPO. Its gross margins have improved almost 1000 basis points. The Company went from burning approximately $30 million in 2022 to almost break-even by the third quarter of 2023 and is projected to be break-even in the fourth quarter on a run-rate basis. The Company and its shareholders have successfully weathered challenging capital markets conditions, including a cyclical decline in IPO issuance (that troughed in 2022). Despite the macro environment, Q4 has consistently demonstrated its ability to achieve double digit organic growth through cross selling and upselling, driven by the quality and stickiness of their solutions.
The reported acquisition multiple is approximately 2.8x annual recurring revenue (“ARR”), a demonstrably low multiple when compared with Q4’s public comparables on a standalone basis, and even worse when considering we estimate Q4 has over $100 million of net operating losses, which we believe it can carry forward for 20 years, to offset future taxes. FINSIGHT believes that a company with Q4’s customer base, technology, margin potential and growth prospects, in a normalized market, would warrant a significantly higher multiple of ARR should it realize a valuation multiple comparable to its Canadian or US SaaS peers (where it derives the majority of its revenue) and realize greater liquidity via a dual-listing.
FINSIGHT, along with thousands of minority (non-rolling) investors who collectively own approximately 60% of outstanding shares, patiently supported the Company and its management team as it invested in innovation and growth while optimizing its expense profile. This support is evidenced by the prolonged periods of low average daily trading volume for Q4 stock in 2022 and 2023. The minority (non-rolling) shareholders are due the opportunity to participate in its future upside potential of the Company. Instead, the proposed Arrangement threatens to prematurely siphon the Company’s future potential into the pockets of conflicted insiders, the Rolling Shareholders, and Sumeru Equity Partners.
Who spoke for minority shareholders in the boardroom?
As Q4 revealed, the most significant, longest tenured, and most knowledgeable insiders, specifically Darrell Heaps the CEO, director Neil Murdoch, and directors Ned May and Daniel Kittredge representing the Ten Coves entities, are rolling their equity positions instead of being forced to accept the cash consideration offered to non-rolling shareholders.
We are concerned that the participation of a majority of the Board and the CEO as Rolling Shareholders presents an irreconcilable conflict for the Board, and notwithstanding the formation of the Special Committee, may have strongly influenced the outcome of this process.
Absent evidence to the contrary, we also believe that the commitment of the Company’s CEO and shareholder Ten Coves Capital to the Sumeru Equity Partners transaction, could have presented a deterrent to other potential acquirors, who may not have known the Company was actionable or did not offer the insiders an opportunity to roll – even if they offered all shareholders greater overall financial terms.
We suspect the Company will maintain that following the announcement, it commenced a “Go-Shop Period” which would provide a market check on the transaction. As a significant shareholder, we would like to understand the extent of the Company’s outreach to potential strategic and financial acquirers during the process that led to the Sumeru transaction, and during the Go-Shop period. In Q4’s November 13 press release announcing the proposed transaction, it stated “the Arrangement resulted from a review process undertaken by the Company following inbound interest from Sumeru and several others…” This raises questions: was a formal sale process explored and were a broad universe of relevant strategic and financial investors approached? Moreover:
- Is any portion of Q4 management’s future compensation tied to the returns to be realized by Sumeru Equity Partner’s investment in Q4?
- How many initial inbound inquiries did management, or the Board, receive?
- How many parties were contacted before and after the go-shop period and how many were strategic or financial acquirers?
- How many entered into NDAs with the Company?
- How many conducted due diligence?
- Who, if any, submitted a proposal to Q4?
- Who was involved in the discussions and negotiations with these entities?
- Will members of management of Q4 receive change in control payments, accelerated equity compensation vesting, or other similar benefits as a result of the Arrangement?
Unless the Company can demonstrate to shareholders otherwise, we remain steadfast in our belief that the Special Committee process did not serve the interests of the minority (non-rolling) shareholders, who collectively own a majority of the Company.
A standalone Q4 is the best alternative for ALL Shareholders
FINSIGHT believes that Q4 has a bright future and should remain a public standalone company and allow its patient, loyal and long term shareholders, an opportunity to benefit from improving market conditions and the 18-month restructuring process that has been so successful. We believe that Q4’s operating profile and long-term prospects are as strong as ever. We are not alone in our view. In fact, both CEO Darryl Heaps and Sumeru offered buoyant and optimistic praise for Q4’s business and future prospects in the Company’s announcement of the proposed Arrangement. Per Sumeru’s Mark Haller, Managing Director, and Jack McCabe, Principal: “Q4 is well-positioned for growth given its single, integrated platform across IR websites, virtual events, investor targeting and real-time analytics.”
Given the Company’s short history since its IPO, we believe that the Arrangement is a premature and opportunistic effort by insiders of the Company to preserve their positions and capture future upside equity value of the Company for their own benefit (rolling shareholders) and Sumeru at the expense of minority (non-rolling) shareholders. In fact, CEO Darryl Heaps told The Globe and Mail in an interview that Q4 could go public again “down the road.2”
Absent more fulsome disclosure evidencing the scope and objectivity of the sale process, FINSIGHT intends to vote AGAINST the proposed Arrangement and reserves all options available to it as a shareholder of Q4.
Sincerely,
Leo Efstathiou
CEO, FINSIGHT Group Inc
About FINSIGHT Group Inc.
FINSIGHT Group Inc is a privately held software service provider that serves thousands of the world’s leading institutional investors, investment banks and corporations. Its applications streamline workflows that facilitate hundreds of billions of dollars worth of capital markets activity annually to provide unparalleled visibility and actionable insights into fixed income and equity capital markets.
Advisors
Goodmans LLP is serving as legal counsel, and Gagnier Communications and Carson Proxy Advisors are serving as strategic advisors to FINSIGHT Group Inc.
No Solicitation
This press release is for informational purposes only and is not a solicitation of proxies. If FINSIGHT determines to solicit proxies in respect of any meeting of shareholders of the Company any such solicitation will be undertaken by way of an information circular or as otherwise permitted by applicable Canadian corporate and securities laws
Disclaimer for Forward-Looking Information
Certain information in this news release may constitute “forward-looking information” within the meaning of applicable securities legislation. Forward-looking statements and information generally can be identified by the use of forward-looking terminology such as “outlook,” “objective,” “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “plans,” “continue,” or similar expressions suggesting future outcomes or events. Forward-looking information in this news release may include, but is not limited to, statements of FINSIGHT regarding how FINSIGHT intends to exercise its legal rights as a shareholder of the Company.
Although FINSIGHT believes that the expectations reflected in any such forward-looking information are reasonable, there can be no assurance that such expectations will prove to be correct. Such forward-looking statements are subject to risks and uncertainties that may cause actual results, performance or developments to differ materially from those contained in the statements. Except as required by law, FINSIGHT does not intend to update these forward-looking statements.
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1 Company disclosures to shareholders and securities filings.
2https://www.theglobeandmail.com/business/technology/article-more-tech-companies-disappearing-from-tsx-as-q4-agrees-to-257-million/
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