an (azure) blue sky opportunity in cloud services and fintech · 5/14/2020 · an (azure) blue sky...

Noel Atkinson, CFA 416-343-3352 | [email protected]

George Ulybyshev, CFA, Associate | 416-343-4203

An (Azure) Blue Sky Opportunity in

Cloud Services and Fintech

May 14, 2020

Quisitive is one of the fastest-growing cloud IT solutions providers

that focuses primarily on the Microsoft Cloud technology platform.

The Company also spent over two years developing a proprietary

Microsoft Azure-based retail payment processing and data insights

product platform called LedgerPay. We believe LedgerPay –

announced in March 2020 – could be a transformational revenue

stream for Quisitive. When combined with expected strong organic

growth for its IT solutions unit due to companies increasingly

embracing cloud technology, we expect Quisitive to more than double

its revenues between 2020 and 2022 to over US$100 million. We are

initiating coverage of Quisitive with a Speculative Buy rating and

a 12-month target price of C$1.25 per share.

• LedgerPay solves a significant gap in customer data insight for

brick-and-mortar retailers: LedgerPay captures detailed customer

credit/debit card transactions for merchants in an anonymized

manner at physical stores and provides consumer insight for physical

store visits at depths usually only available to online retailers. Global

retail data analytics provider dunnhumby is the most prominent

analytics and marketing partner and adds serious credibility to the

platform. Quisitive estimates that a single mid-sized grocer could

drive as much as US$30MM/year of revenue for LedgerPay. We see

potential for US$100MM/year of LedgerPay revenues within the

next few years, which at current peer group valuations could result

in a 5x increase in market cap.

• 2019 Microsoft U.S. Partner of the Year for IT Solutions: Quisitive

helps companies migrate their computing, storage and business

software requirements to the Microsoft Cloud. Enterprise cloud

adoption continues to grow rapidly, and we expect companies to

further embrace remote-access, lower-capex operation models

post-COVID – which should boost Quisitive’s revenue growth.

• LedgerPay Should Boost Already-Solid Profit Margins: Quisitive

has pre-announced record quarterly revenues for Q1/20 of

~US$11MM and Adj. EBITDA of US$1MM. The IT solutions unit

generates gross margin of about 40%. We expect LedgerPay to

generate at least US$3.5MM of revenues in 2020 and scale rapidly in

2021+ with blended gross margin over 60%.

• Target Price of $1.25, Speculative Buy Rating: Our 12-month target

price equates to 12.5x 2022e EV/Adj. EBITDA discounted 1 year at

15%.

Quisitive Technology

Solutions, Inc. QUIS-TSXV: $0.68

Rating: Speculative Buy

Target: $1.25

Valuation

Calendar Year 2019 2020e 2021e 2022e

Revenue (US$MM) $18.5 $49.1 $66.5 $104.7

Adj. EBITDA (US$MM) $1.3 $6.3 $8.8 $17.1

Adj. EBITDA Margin 7% 13% 13% 16%

Diluted EPS (US$) ($0.08) ($0.02) ($0.00) $0.04

Price/Sales (CY) 2.9x 1.1x 0.8x 0.5x

EV/Adj. EBITDA (CY) 86.1x 17.4x 12.4x 6.4x

P/E (CY) NEG NEG NEG 11.1x

2020e Q1e Q2e Q3e Q4e

Revenue (US$MM) $11.0 $11.4 $12.9 $13.8

Adj. EBITDA (US$MM) $1.0 $1.2 $1.9 $2.2

Stock Data

Price C$0.68

52-Week Range C$0.07 - C$0.85

Avg Daily Vol (3-Mo) 85,319

Shares Basic / Diluted (pro forma, MM) 111.8 / 177.0

Basic/Dil. Market Cap (pro forma, C$MM) $76 / $120

Cash (pro forma, C$MM) $6

Debt (pro forma, C$MM) $39

Enterprise Value (pro forma, C$MM) $154

Mgmt & Dir. Ownership (pro forma) 20%

Fiscal Year End Dec 31

Company Profile

Quisitive is a premier partner and National Solution Provider for

Microsoft to migrate, optimize and maintain enterprise business

solutions using the Microsoft Cloud. Quisitive has also launched

LedgerPay, its cloud-based payment processing and data insights

platform that is offered in partnership with global retail analytics

firm dunnhumby.

mailto:[email protected]

Quisitive Technology Solutions, Inc.

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Investment Thesis

Two of the leading topics in business today are the rise of cloud computing solutions and how brick-and-

mortar store chains need to evolve in order to compete more effectively against online retailers. We

believe Quisitive Technology Solutions (“Quisitive” or “the Company”) is one of the best-positioned

service providers to assist companies with both business issues.

Quisitive assists companies to migrate their computing and data storage/analytics solutions onto the

Microsoft Cloud (NASDAQ: MSFT, NR) technology platform. Microsoft is the world’s largest provider of

enterprise cloud services by revenue, and it relies almost entirely on accredited IT solutions partners for

implementation and custom development. Quisitive is one of ~10 top-tier IT solutions partners for

Microsoft in North America, and we believe it is the largest such partner that exclusively focuses on the

Microsoft Cloud. As a result, Quisitive provides investors with a unique exposure to Microsoft’s massive

and fast-growing cloud platform. Recent acquisitions have scaled up revenues (preannounced Q1/20

revenues of ~US$11 million or US$44 million/year) and Adj. EBITDA, and we expect solid organic growth

through our forecast period due to the various macro tailwinds driving enterprise cloud services adoption.

Quisitive also develops its own cloud software that generates recurring revenue. In March 2020, Quisitive

launched LedgerPay – a proprietary payment processing and consumer insights data platform on

Microsoft Azure. LedgerPay could be truly transformative for Quisitive, as it could generate millions of

dollars in annual high-margin revenues with adoption by even one mid-sized retail chain. LedgerPay

has been given serious credibility through its analytics and marketing partnership with leading global

retail analytics firm dunnhumby, which serves some of the world’s largest retailers and consumer

packaged goods (CPG) companies. We see potential for US$100MM/year of LedgerPay revenues

within the next few years, which at current peer group valuations could drive a 5x increase in market

cap.

We believe Quisitive can scale revenues to over US$100 million by 2022, which would be more than

double our 2020 forecast, and grow Adj. EBITDA multi-fold over the same period. If Quisitive can execute

to our forecast, we expect investors to be well-rewarded.

Figure 1: Key Business Segments and Market Drivers for Quisitive

Source: Clarus Securities Inc.


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We Expect Revenues to More than Double between 2020 and 2022 to Over

US$100 Million

Our base case assumes the LedgerPay payment processing platform begins to generate revenue in Q2/20

via the white-label license agreement with Rev19, followed by first point-of-sale (POS) data product sales

revenue and first LedgerPay direct processing service revenue in Q1/21. We also assume no further

acquisitions by the IT Solutions group. All future accretive acquisitions would provide upside to our

current forecast.

• 2020e: We expect the COVID-19 outbreak to cause only a modest drag on IT Solutions

revenues in Q2/20 and then likely be a macro growth driver for cloud services thereafter.

Revenue growth Y/o/Y will be supported by the recent acquisitions of CRS and Menlo. We

forecast LedgerPay to contribute US$3.5 million of revenues in 2020, starting in Q2 and mainly

in the form of high-margin license fees from the Rev19 agreement.

• 2021e: LedgerPay revenues expected to grow nearly 3x Y/o/Y to US$9.9 million due to

increased data revenues and the launch of full-service payment processing (expected in Q1/21

after securing a U.S. bank sponsor in late 2020e). IT Solutions revenue growth is expected to

be +24% Y/o/Y to US$56.6 million.

• 2022e: We expect LedgerPay to drive 289% Y/o/Y revenue growth to US$38.5 million, and for

the IT Solutions unit to grow revenues +17% Y/o/Y to US$66.2 million.

Figure 2: Revenue Split by Business Units, 2019 to 2022e (in US$ Millions)

Source: Corporate reports and Clarus Securities Inc. estimates.


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Figure 3: Annual Revenue and Adj. EBITDA, 2019 to 2022e (in US$ Millions)


Initiating with Speculative Buy Rating and 12-Month Target Price of $1.25 per Share

Quisitive should have material contribution to its revenues and earnings from both LedgerPay and IT

Solutions in 2021. Consequently, we have constructed two peer groups – IT solutions providers and

payment processing providers – for valuation analysis purposes.

Using FactSet consensus estimates for companies not covered by Clarus, the IT solutions provider peer

group currently trades at an average of:

• Price/sales: 1.3x 2020e and 1.2x 2021e;

• EV/Adj. EBITDA: 10.5x 2020e and 9.3x 2021e.

Meanwhile, payment processing companies typically enjoy higher Adj. EBITDA margins than IT solutions

companies and offer significant (i.e. global) expansion potential with significant economies of scale.

Consequently, the payment processing peer group currently trades at a very significant valuation

premium:

• Price/sales: 8.4x 2020e and 6.9x 2021e;

• EV/Adj. EBITDA: 51.0x 2020e and 26.5x 2021e.

Using Clarus estimates on a fully-diluted basis, Quisitive currently trades at 1.7x 2020e price/sales and

1.3x 2021e price/sales, as well as 17.4x 2020e EV/Adj. EBITDA and 12.4x 2021e EV/Adj. EBITDA.

The IT Solutions peer group is expected to grow Adj. EBITDA +4% Y/o/Y in 2020 on 0% average revenue

growth, along with +3% revenue growth and +12% Adj. EBITDA growth in 2021. The Payment Processing

peer group is expected to grow much more rapidly, with consensus average Y/o/Y revenue growth of

+19% and Adj. EBITDA +24% Y/o/Y in 2020, followed by +20% revenue growth and +35% Adj. EBITDA

growth in 2021. In comparison, we expect Quisitive to grow even more quickly, with Y/o/Y revenue

growth of +165% and Adj. EBITDA +396% Y/o/Y in 2020, and +35% revenue growth and +40% Adj. EBITDA

growth in 2021. Our forecast for Quisitive does not assume any further acquisitions.

Our 12-month price target for Quisitive is $1.25 per share, which is equal to 12.5x 2022e EV/Adj. EBITDA

discounted one year at 15%. We believe 2022 is a reasonable target year as by then we expect LedgerPay

to be a large component of Quisitive’s total revenue and profitability. Our target multiple is in between


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the consensus average 2021e EV/Adj. EBITDA multiples of the two peer groups. We would revisit our

target multiple if LedgerPay can scale revenues and profitability above our forecast.

We are applying an initial rating of Speculative Buy, which primarily reflects that the LedgerPay business

unit recently had its commercial launch and does not yet have a track record of performance.

Figure 4: Table of Comparables (in $Millions except as noted)

Source: Clarus Securities Inc. estimates for Quisitive Technology Solutions, Inc., FactSet.

We estimate that, as of the end of March 2020, Quisitive had about US$4.1 million in cash on hand along

with US$23.7 million of non-convertible debt. Of that debt, US$17.4 million is scheduled to mature by June

2021:

• US$5.2 million note is scheduled to mature in September 2020;

• US$7.2 million note primarily used to fund the Menlo acquisition in January matures in December

2020; and

• US$5.0 million sellers’ note for the CRG acquisition matures in June 2021.

There are 22.0 million warrants outstanding (expiring in 2022) that are currently well in the money and

could generate up to US$7.6 million in cash inflows for Quisitive. Of these warrants, 19.5 million (at C$0.35

strike for nearly US$5MM of proceeds to the Company) are held by the CRG sellers, and it is possible they

exercise the warrants when the sellers’ note matures to minimize Quisitive’s out-of-pocket cost to repay

that sellers’ note. Our model, however, conservatively assumes that Quisitive sources a US$20 million

corporate credit facility in Q3/20 that is used in part to fund the repayment of the CRG sellers’ note, and

that the warrants held by the CRG sellers are exercised at maturity in 2022.

There were US$4.9 million of convertible sellers’ notes issued for the Menlo acquisition in January 2020

that are in the money (convert at C$0.20/share). We assume these convertible notes convert at maturity

but it could happen sooner.


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Quisitive also has a series of expected earnout payments. The first is an estimated US$1.6 million cash

earnout for the CRG acquisition, which is likely to occur in Q2/20, with similar payouts likely in Q2/21 and

Q2/22. A payment of 10.2 million shares related to Quisitive’s performance after the reverse take-over is

expected in Q3/20. Finally, the Menlo acquisition includes earnouts over a 3-year period for a “base

maximum” of C$6.5 million (US$4.6 million) with potential upside, which could be payable in cash and/or

Quisitive shares.

Quisitive achieved positive free cash flow in Q4/19 and we expect the Company’s free cash flow growth

to continue during our forecast period. Our model conservatively assumes no further acquisitions by the

IT Solutions unit. We believe, subject to sourcing the assumed US$20 million corporate credit facility or

other financing, Quisitive should have sufficient funding to pay for the pending earnouts and debt

maturities through our forecast period.

Quisitive has provided equity ownership in LedgerPay to key members of the team including CEO Mike

Reinhart and Senior Vice President (and head of LedgerPay business unit) Scotty Perkins. Currently

Quisitive owns about 89.5% of LedgerPay, but that will decline over time to 80% as the LedgerPay equity

rights vest for additional staff. There are 4.2 million LedgerPay shares held by the team members that can

be exchanged 1:1 into Quisitive shares once fully vested.

We estimate that as of March 31, 2020, Quisitive had about 111.8 million shares outstanding. Including all

options, warrants, RSUs, LedgerPay exchangeable shares, and convertible debt, we estimate the fully-

diluted count is about 177.0 million shares (rising to 187.2 million in Q3 with the Quisitive LLC earnout).

Figure 5: Estimated Pro Forma Capitalization Table as of March 31, 2020 (in Millions except as noted)


Helping Companies Migrate to and Operate on Microsoft Cloud-Based Technology

Platforms

Quisitive, based in Irving, TX and with offices across the U.S., Canada and India, is one of the largest IT

solutions providers in North America fully focused on solutions utilizing the Microsoft technology cloud.

The Company was the 2019 Microsoft U.S. Country Partner of the Year and, according to a Microsoft

executive’s comments during a recent investor day, Quisitive is one of approximately 10 key IT solutions

providers that have a full range of capabilities to serve basically any large or small corporate customer.

The main Microsoft cloud platforms are:

• Microsoft Azure “Platform as a Service” (PaaS): Microsoft provides corporations access to its

hosted computing and storage systems on which the corporations can develop, manage and

store software programs and data. Microsoft provides the hosted network infrastructure,

security, operating systems and data backup capabilities.


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• Microsoft Dynamics 365 ERP/CRM Software as a Service (SaaS): Microsoft’s Dynamics software

provides a suite of cloud-based modules to help companies manage their sales initiatives,

supply chain, manufacturing, and finance activities. The data generated from these activities

can be analyzed through Dynamics business intelligence software modules to improve

performance.

• Microsoft 365 Business Productivity SaaS: The world’s leading business productivity tools

including Word, Excel, and Outlook. Customers receive automatic software updates and can

have their data stored in the cloud.

Azure provides a suite of software tools that are used to build, implement and manage applications on a

global network of Microsoft datacenters. The types of Azure use cases can range from cloud-based

backup storage of data that reside within a company’s on-premise servers (Azure Backup) or

administrative tools to oversee and optimize on-premise server loads, to taking existing software and

data used on-premise and hosting it on Azure (“rehosting” or “lift and shift”) to rearchitecting or rebuilding

existing on-premise software apps to be able to fully utilize the functionality of Azure.

Quisitive often starts with audits and assessments of a company’s plans to move functionality to the

Microsoft Cloud, and then assists (consulting, custom software optimization or rearchitecting, etc.) to

help that migration to occur. Thereafter, Quisitive seeks to provide managed services (system

administration) and increasingly acts as a reseller of Microsoft cloud software subscriptions to its clients.

Finally, Quisitive can help design and manage business analytics solutions or build custom apps as needed.

We understand that more than half of Quisitive’s IT Solutions revenues are generated from repeat

customers looking to expand their utilization of Microsoft Cloud technologies.

Figure 6: Quisitive IT Services for Current and Potential Microsoft Cloud Customers

Source: Company website.


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Figure 7: Typical Quisitive On-Ramp to Azure Data Migration Timeline


Quisitive also develops its own proprietary cloud software that utilize the Microsoft Azure platform and

sold directly to corporations. These products offer recurring revenue and, particularly in the case of

LedgerPay, could be truly transformative for revenues and profitability within the next few years:

• CRG emPerform: cloud-based business productivity software focused on human resources and

staff performance management. The software was acquired as part of the 2019 acquisition of

Ottawa-based CRG and has thousands of paying users in North America and the U.K. The

emPerform software integrates with ERP and payroll platforms including PeopleSoft, SAP, and

ADP. EmPerform generates about US$2 million (C$2.8 million) in annual recurring revenue from

over 170 corporate clients (more than 100,000 active user licenses).

• LedgerPay: a complete direct payment processing platform, providing unique payment

tokenization capabilities that enable brick-and-mortar merchants the ability to securely and

instantly learn specific, definable information about their customers they can leverage for

marketing, promotions and supply chain management purposes. In partnership with leading

retail business analytics company dunnhumby, Quisitive’s LedgerPay can provide customer

insights and targeted marketed opportunities that historically have only been available in

online retail environments. We explore LedgerPay in detail later in this report.

Recent Acquisitions Filled Out Service Capabilities and Geographic Reach Across

U.S. and Canada, and We Expect More Tuck-In Acquisitions in the Future

The Company’s revenue growth has been driven by a mix of organic growth and acquisitions. Microsoft

is a significant partner for organic growth as it does its own marketing of its cloud solutions but then

directs the customers to partners such as Quisitive for assessment and implementation. We understand

Microsoft provided more than 100 qualified customer leads to Quisitive in 2019, and Quisitive

complemented that with customers from its own marketing activities.

Quisitive has completed two significant acquisitions in the past two years. These deals rounded out the

Company’s capabilities across the full Microsoft cloud platform, and significantly increased its geographic


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reach by adding offices in key markets including Silicon Valley, Canada and India. Quisitive now has

service offices across the U.S., plus one in Ottawa and one in Hyderabad, India.

Figure 8: Quisitive Locations


CRG. In June 2019 Quisitive acquired Ottawa-based Corporate Renaissance Group (CRG) for

consideration of C$19.5 million at closing plus up to C$4.8 million in potential earn-outs. The upfront

consideration included C$5.7 million of cash, ~4.5 million QUIS shares worth about ~C$850,000, warrants

to purchase 19.5 million QUIS shares at C$0.35/share, and C$6.5 million of sellers’ notes with 10% interest

and 2-year term (with option to extend for one additional year). CRG’s founder and President, Dr. Vijay

Jog, was appointed to Quisitive’s board.

CRG serves more than 4,500 corporate clients worldwide with strength in Canada, the U.S. and the

Caribbean. It had C$7.8 million of revenue in 2018 and Adj. EBITDA of C$3 million. Its strength is in

Microsoft Dynamics solutions, along with its proprietary CRG emPerform cloud solution for employee

reviews and staff performance management.

Menlo Technologies Inc. In January 2020 Quisitive acquired Menlo Technologies, which is based in Los

Altos, CA. The transaction included upfront consideration of US$3.7 million, 19.1 million common shares,

a 3-year convertible sellers’ note for US$5 million that converts at C$0.20/share, and an earn-out of up to

US$4.5 million. Menlo generated about US$17.5 million in revenues and US$2.4 million of Adj. EBITDA in

the 12 months ended September 2019, and the deal was priced at about 6.2x TTM Adj. EBITDA. The two

main Menlo shareholders also became some of the largest shareholders of Quisitive as a result of the

acquisition.

Menlo specializes in development of applications on Microsoft Azure, cloud migrations to Microsoft Azure,

and Microsoft Dynamics software implementations. Their key verticals include technology, hospitality and

government. The acquisition provided Quisitive with a strong Silicon Valley presence and a foothold into

U.S. government work. Menlo also has an offshore development team in Hyderabad, India. It has nearly

200 employees.

The CRG and Menlo acquisitions allowed Quisitive to expand to more than US$40 million in annualized

revenue (over 20% recurring) as of Q1/20. We expect Quisitive to opportunistically pursue tuck-in

acquisitions (US$10+MM in revenues) of complementary Microsoft IT solutions partners that bring

additional competencies, new customer verticals, or additional U.S. or Canadian market presence.

Quisitive does not yet have offices in the Pacific Northwest, the U.S. Southeast, the Boston-Philadelphia


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corridor or in the Rust Belt region (Chicago/Detroit/Ohio/Pittsburgh). Quisitive’s preferred deal structure

is 1/3 cash, 1/3 equity and 1/3 in a 2-3 year earnout. The Company notes that typical deal pricing has

been in the 6-9x TTM EBITDA range. However, our model conservatively assumes no additional

acquisitions.

Global Cloud Services Sector Continues to Grow Rapidly, and Microsoft is the Leader

According to industry research firm Synergy Research Group, global cloud infrastructure service (PaaS,

Infrastructure as a Service (IaaS) or hosted private cloud services) was over US$96 billion in 2019. Most of

this revenue is for public cloud services and the top five providers control over 75% of the global market.

Amazon (NASDAQ: AMZN, NR) is the largest provider with an estimated 33% of global cloud infrastructure

revenues in Q4/19. Microsoft is the second largest at about 18% market share and has been growing much

faster than the rest of the top-5 providers. Synergy estimated that Microsoft added almost 3 percentage

points of global market share during 2019. In comparison, Amazon grew at about the same rate as the

overall market.

However, when we add in its cloud software offerings (Dynamics, Microsoft 365), Microsoft is the world’s

largest provider of commercial cloud services by revenue. The company reported US$12.5 billion in

commercial cloud revenue in the quarter ended December 2019, up +39% Y/o/Y, suggesting a US$50

billion annualized run-rate. Microsoft does not specifically break out Azure revenue, but the company

reported that Azure revenue rose 62% Y/o/Y in the December 2019 quarter and Microsoft Dynamics 365

revenue rose 42% Y/o/Y.

Figure 9: Synergy Research Group Competitive Matrix for Large Cloud Providers – Q4/19

Source: Synergy Research Group (February 2020).

Industry research firm Gartner estimated that worldwide public cloud service revenues reached almost

US$228 billion in 2019, up +16% Y/o/Y. It also projected sector revenues to expand to US$266 billion in

2020 (+17% Y/o/Y) and to US$355 billion by 2022. We anticipate that the COVID-19 outbreak will slow

some of this activity in H1/2020, and then rebound very aggressively in H2/2020 and 2021 as delayed

projects are implemented.


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Why are Cloud Services growing so quickly? There are several reasons why companies continue to shift

their on-premise computing, storage and software licenses to cloud-based versions:

• Lower systems capex with access to cutting-edge technology. Companies often evaluate a

shift to the cloud when their internal (“on-premise” or “private”) hardware and software

systems are approaching an upgrade cycle, or when M&A events bring together companies

operating on different in-house systems. Replacing some on-premise systems with cloud

computing or storage services eliminates the upfront hardware capex in return for a monthly

service fee. Cloud service providers invest heavily in upgrading and optimizing the systems

available to the cloud customers, so even small businesses can access cutting-edge

technology.

• Offload maintenance, security and basic development costs. Cloud service providers handle

the maintenance, security and even basic application development platforms. Customers can

reduce their administrative costs and focus resources on developing tools and applications to

improve their business.

• Flexibility. Customers purchase as much or as little storage, computing and software capacity

as they need. Large development projects can be accelerated with immediate access to more

computing power. There may be a substantial opportunity over time to work with existing

cloud customers to minimize wastage.

• Tools and computing power for data analytics. Companies are increasingly focused on

analyzing data generated throughout their operations, including manufacturing and supply

chain, sales and marketing, customer service, finance, and human resources, in order to

streamline costs, develop better products and services, and increase competitive advantages.

Cloud services provide access to massive amounts of storage and computing power to collect

data, as well as advanced data analytics software (i.e. Microsoft Dynamics) to be able to identify

problems and opportunities.

The Blue Sky Call Option: LedgerPay Could Be Truly Transformational

We believe Quisitive’s most exciting opportunity is its LedgerPay payment processing and data insights

platform. Developed in partnership with Microsoft on the Azure cloud platform, LedgerPay provides full

end-to-end debit and credit payment processing for brick-and-mortar retailers. The differentiator is that

LedgerPay can offer conventional brick-and-mortar retailers – and the consumer package goods (CPG)

companies wholesaling their products to those retailers – the immediacy and depth of insight into

customer activity typically only available for online transactions.

LedgerPay creates a unique and secure identifier (or “tokenizes”) each credit and debit card used in its

payment processing network, and then uses that unique identifier rather than the actual card number for

transactions, reporting and data collection going forward. Tokenization has been typically used to protect

consumer data in online transactions because hackers are not able to do anything with the tokenized card

numbers. The actual card numbers are stored in the processor’s data vaults, and the merchants do not

actually take possession of cardholder data.

Quisitive seems to be taking a bold step forward by using the tokenized data for transactional data

analysis. A Payments Journal article from July 2018 noted that data analytics firms could not do anything

useful with tokenized data because each operator and their banking relationships use different

tokenization rules that generate different tokens for the same underlying card.


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Instead, LedgerPay is intended to layer onto a merchant’s transaction platform for all of its stores and

capture all card transaction data. LedgerPay then aggregates this data across all of its merchants to be

able to see a fulsome view of customer activity. The more stores that add LedgerPay, the more powerful

the data can be. We understand Quisitive will allow merchants to use LedgerPay’s tokenization module

right away and then transition the merchant processing function from the legacy provider to Quisitive

when the legacy provider’s contract expires. This should allow Quisitive to achieve scale much more

quickly and provide tangible returns to the merchant before pursuing the mission-critical merchant

processing component as well.

Figure 10: Simplified LedgerPay Revenue Model

Source: Clarus Securities Inc. using data from Quisitive Technology Solutions, Inc.

The initial target markets for LedgerPay are grocery chains, quick service and fast casual restaurant chains,

dollar stores and convenience stores. LedgerPay is partnering with UK-based dunnhumby, one of the

world’s largest retail data analytics companies (typically using loyalty card data) that counts Tesco,

McDonald’s, Unilever, Nestle, P&G, Whole Foods, Metro (Canada), and Coca-Cola as customers. We

understand that dunnhumby will promote LedgerPay to merchants and be the platform for data analytics.

Microsoft and dunnhumby recently signed a global agreement on transition dunnhumby’s data platforms

to the Microsoft Azure platform, so LedgerPay appears to be a natural fit.

We understand that there are several revenue streams that would be (eventually) generated by

LedgerPay:

• Share of data analytics fees, split between dunnhumby, LedgerPay and retailers participating

in the program. The analytics data could be sold to the merchants in the LedgerPay program

as well as to CPG companies that sell their products through those brick-and-mortar

merchants. Quisitive estimates that one mid-sized U.S. grocer generating 1.6 billion

debit/credit point-of-sale transactions annually could drive US$6 million/year of high-margin

data analytics fees for Quisitive.


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• Licensing of the payment processing platform to select payment processing Independent Sales

Organizations for a license fee plus a small share of transaction fees; and

• once a bank sponsor is achieved – LedgerPay launches its own point-of-sale payment

processing for customers, which would generate processor and gateway fees of 1-2% of retail

transaction volume. Quisitive estimates that the mid-sized grocer example noted above (1.6

billion annual debit/credit transactions) could generate up to US$24 million/year of processing

revenue for LedgerPay.

Quisitive announced in March 2020 that it had signed its first payment processing platform license

agreement with a Texas-based ISO called Rev19. We expect revenues from this deal to be at least US$4

million – most of which would be license fees captured mainly in H2/20 – as we understand that the deal

size could be sufficient to cover more than the entire cost of the platform development to date. There

may be one or more “white-label” licensing agreements with other ISOs to drive near-term revenues and

work out any kinks in the platform before LedgerPay begins to offer payment processing under its own

banner.

For Quisitive to launch its own direct payment processing activities, it will have to secure a bank sponsor

in each country where it operates (initially the U.S. and Canada). Quisitive hopes to secure its U.S. bank

sponsor by the end of 2020 and launch direct payment processing in early 2021.

We are particularly interested in the payment tokenization and data analytics solution within the platform

and believe it has the potential to globally scale given its partnership with dunnhumby out of the gate.

Even if LedgerPay’s direct payment processing never really achieves critical mass, the payment

tokenization software layer can still reside within the point-of-sale network and capture and resell

customer insight data that appears to be in demand for both the retailer and the companies wholesaling

products to those retailers. Importantly, retailers that sign up to provide point-of-sale data to LedgerPay

would receive a split of the data services revenues generated by LedgerPay and dunnhumby.

While we expect LedgerPay to eventually roll out worldwide since dunnhumby has a global footprint, the

U.S. market alone represents a massive opportunity for LedgerPay. According to industry research firm

IBIS, the U.S. grocery and supermarket sector is expected to generate US$678 billion in retail sales in 2020

– of which almost all will occur at a physical store. The U.S. quick service restaurant sector, meanwhile,

generated US$273 billion in sales in 2019. Not to be outdone, U.S. convenience stores sold US$432 billion

in motor fuel and US$242 billion of in-store products in 2018.

We see potential for LedgerPay to reach US$100 million of annual revenues within the next few years. At

current peer group valuations, that could result in a 5x increase in Quisitive’s market cap.

Competition in the payment processing sector is fierce, with substantial consolidation having occurred

in recent years. We see online processors such as PayPal (NASDAQ: PYPL, NR) now pursuing physical

point-of-sale customers, as well as newer operators such as Stripe and Square (NASDAQ: SQ, NR) that

have been successful in capturing smaller businesses’ card processing. We have yet to find a direct

competitor to LedgerPay that is also using token-based card data for consumer insights and marketing.

The more generic competition to LedgerPay would be from loyalty card programs, but those are typically

restricted to large retail/restaurant businesses. The largest operators of retail loyalty card programs

include Fiserv’s (NASDAQ: FISV, NR) First Data unit and Global Payments’ (NYSE: GPN, NR) TSYS unit.


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Figure 11: The 50 Largest Grocery Product Retailers in U.S and Canada (by 2019-20 Revenues), in US$ Billions

Note: *Sales reflect in-store grocery consumable product sales only.

Source: Clarus Securities Inc. using data from Supermarket News.


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Selected Investment Risks

Competition: Many of Quisitive’s competitors compete principally based on price and may have lower

costs or accept lower selling prices to win the business. Quisitive could therefore face significant price

competition from its competitors and may be forced to reduce the prices of the products and services it

sells in response to offerings made by its competitors. There is no assurance that the Company will be

able to respond effectively or in a timely manner to the various competitive factors affecting the industries

in which it operates. In addition, Quisitive may not be able to maintain the level of bargaining power that

it has enjoyed in the past when negotiating the prices of its services. If Quisitive is not able to maintain

favorable pricing for its products and services, its profit margin and profitability may be materially

affected.

Changes in the IT Industry: The introduction of new products, product enhancements and distribution

methods in the industry could have an adverse impact on demand for current products and services or

render them obsolete, which could, in turn, have a material adverse effect on Quisitive’s performance, if

the Company fails to adapt to such changes in a timely manner.

Attracting and Retaining Clients: Quisitive’s ability to attract new clients, as well as increase revenues

from existing clients, is dependent on several factors including, but not limited to, offering high quality

products and services to its clients at competitive prices. A high level of client support and service is also

required for the successful marketing and sale of Quisitive’s services and solutions. Failure to provide

effective support and to quickly resolve any post deployment issues that may arise could have a negative

impact on Quisitive’s reputation and its ability to sell its IT solutions to clients.

Protection of Intellectual Property Rights and Potential Litigation Costs: The future success of

Quisitive’s consolidated business is dependent upon the intellectual property rights surrounding certain

technology held by LedgerPay and the other Quisitive subsidiaries. Failure to protect any proprietary

rights or to prevent others from claiming violations of their proprietary rights, could have a negative

impact on the business and subject Quisitive or its subsidiaries to costly litigation. If the protection of

proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value

of LedgerPay, other Quisitive subsidiaries and other intangible assets may also be diminished. Any of these

events could have an adverse effect on Quisitive’s consolidated business and financial results.

Impact of COVID-19: The effects of COVID-19 or other global pandemic outbreaks across the global

economy could impact Quisitive’s ability to, among other things, generate new client leads and procure

and deliver on new client contracts and engagements. In addition, liquidity and capital resources could

potentially be impacted by increased counterparty credit risk, liquidity, and financing pressures arising

from such outbreaks. Even though the impact of COVID-19 is expected to be temporary, its duration and

impact on the Corporation’s business operations and financial position cannot be reasonably estimated

at this time.

Economic Conditions: Spending patterns of its clients, which are subject to economic and business

conditions can have a negative impact on the Company’s business. Downturns in the economy or

geopolitical uncertainties may result in capital investment in IT and related service declining and causing

clients to reduce or cancel orders.

Additional risk factors are noted in the Company’s MD&A filed on SEDAR on April 29, 2020.


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Directors and Executives

Mike Reinhart – Director and CEO. Mr. Reinhart founded Quisitive in 2016 and serves as its CEO and a

Director. He has over 20 years of experience leading national Microsoft IT services firms. Prior to founding

Quisitive, Mr. Reinhart was the co-founder and President of RBA Consulting. Mr. Reinhart’s previous

experience also includes serving as Vice President of the Microsoft National Practice for Born Information

Services and working at Medtronic, where he was responsible for IT strategy and technology

implementation for corporate shared services and international systems. Mr. Reinhart holds a Bachelor of

Science degree in Computer Science from the University of Wisconsin – La Crosse and an MBA from the

University of St. Thomas in Minnesota.

Michael Murphy – CFO and Director. Mr. Murphy have over 20 years of financial management experience.

He previously served as CFO of Acasta Enterprises Inc. where he successfully took on a lead role on the

sell side due diligence team responsible for all aspects of the marketing, pricing and sale of the issuer’s

remaining consumer products business. Prior to that Mr. Murphy served as CFO of Transeastern Power

Trust, a TSXV-listed renewable energy trust with hydro, solar and wind assets located in Romania, and VP

and Controller of Allied Nevada Gold Corp. He also served as a Senior Manager with

PricewaterhouseCoopers from September 1998 to December 2012. Mr. Murphy is a Chartered Professional

Accountant. He holds a B.A. in Economics from the University of Western Ontario and a diploma in

accounting from Wilfred Laurier University.

Dave Guebert – Director. Mr. Guebert has been a Director since August 2018 and serves as the Audit

Committee Chair. He is an experienced financial professional and business manager with more than 35

years of experience in finance and accounting. Mr. Guebert has spent more than two decades as the CFO

of public and private companies in the resource, finance and technology sectors. He also serves as a

member of the Board of Directors (and chairman of the audit committee) for Legend Power Systems

(TSXV: LPS, NR) and on the audit and finance committees for both the Calgary Stampede and Winsport.

Mr. Guebert has a B.Comm. degree from the University of Saskatchewan and has both CPA-CA (Alberta)

and CPA (Pennsylvania) designations.

Gord McMillan – Director. Mr. McMillan has been a Director since August 2018. Since 1994, Mr. McMillan

has been an entrepreneur in the Canadian financial services industry, co-founding and serving as Chief

Executive Officer of multiple firms including Triax Capital Corporation and Skylon Capital Corporation,

both of which were sold to large industry consolidators. He is currently a principal of FS Group Holdings

Ltd and serves on the board of Flow Capital Corporation and LOGiQ Asset Management. Mr. McMillan

holds a LL.B. degree from Queen’s University.

Phil Sorgen – Director. Mr. Sorgen has been a Director since April 2018. Mr. Sorgen served as an executive

at Microsoft from 1996 to 2020. While at Microsoft, Mr. Sorgen’s organization served the largest

commercial customers in the U.S. by helping them to deliver their digital transformation using Microsoft’s

full suite of enterprise cloud offerings. In this role, Mr. Sorgen was responsible for leading U.S. enterprise

sales and customer success teams including national, industry and technical teams. Mr. Sorgen also served

as Corporate VP of Worldwide Partner Group and Corporate VP of U.S. Small and Mid-Market Solutions &

Partners at Microsoft, as well as President of Microsoft Canada. He currently is the Chief Revenue Officer

at RingCentral, where he is responsible for global sales including all direct, service providers, channel,

and strategic partners. Mr. Sorgen holds a B.A. degree and an MBA degree from the University of North

Texas.


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Dr. Vijay Jog – Director and CRG President. Dr. Jog joined Quisitive’s Board in June 2019 upon the

acquisition of CRG by the Company. As the Founder and President of CRG, Dr. Jog is a leading authority

in corporate value creation and performance improvement. He also is a Professor of Finance at Carleton

University’s Sprott School of Business. Dr. Jog earned a master’s degree in Engineering, an MBA and a

Ph.D. in Finance from McGill University.


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Appendix A: Financial Statements (in US$000’s except per-share items)

INCOME STATEMENT

Source: Company reports and Clarus Securities Inc. estimates.


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BALANCE SHEET



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CASH FLOW STATEMENT



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Clarus Securities Equity Research Disclosures

Within the last 24 months, Clarus Securities Inc. has managed or co-managed a public offering of securities of the Company.

Within the last 24 months, Clarus Securities Inc. has received compensation for investment banking services with respect to the securities

of the Company.

General Disclosure

The information and opinions in this report were prepared by Clarus Securities Inc. (“Clarus Securities”). Clarus Securities is a wholly-owned

subsidiary of Clarus Securities Holdings Ltd. and is an affiliate of such. The reader should assume that Clarus Securities or its affiliate may

have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed

herein.

The opinions, estimates and projections contained in this report are those of Clarus Securities as of the date of this report and are subject to

change without notice. Clarus Securities endeavours to ensure that the contents have been compiled or derived from sources that we

believe are reliable and contain information and opinions that are accurate and complete. However, Clarus Securities makes no

representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and

accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available

to Clarus Securities or its affiliate that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or

sell any security. No part of this report may be reproduced or re-distributed without the written consent of Clarus Securities.

Conflicts of Interest

The research analyst and/or associates who prepared this report are compensated based upon (among other factors) the overall profitability

of Clarus Securities and its affiliate, which includes the overall profitability of investment banking and related services. In the normal course

of its business, Clarus Securities or its affiliate may provide financial advisory and/or investment banking services for the issuers mentioned

in this report in return for remuneration and might seek to become engaged for such services from any of such issuers in this report within

the next three months. Clarus Securities or its affiliate may buy from or sell to customers the securities of issuers mentioned in this report

on a principal basis. Clarus Securities, its affiliate, and/or their respective officers, directors or employees may from time to time acquire,

hold or sell securities discussed herein, or in related securities or in options, futures or other derivative instruments based thereon.

Analyst’s Certification

Each Clarus Securities research analyst whose name appears on the front page of this research report hereby certifies that (i) the

recommendations and opinions expressed in the research report accurately reflect the research analyst’s personal views about the Company

and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such

research analyst and (ii) no part of the research analyst’s compensation was, is, or will be directly or indirectly, related to the specific

recommendations or views expressed by such research analyst in this report.

Equity Research Ratings

Buy: Attractively valued and expected to appreciate significantly from the current price over the next 12-18 months.

Speculative Buy: Expected to appreciate significantly from the current price over the next 12-18 months. Financial and/or operational risk

is high in the analyst’s view.

Accumulate: Attractively valued, but given the current market price, is expected to appreciate moderately over the next 12 -18 months.

Hold: Fairly valued and expected to trade in line with the current price over the next 12-18 months.

Sell: Overvalued and expected to decline from the current price over the next 12-18 months.

Under review: Pending additional review and/or information. No rating presently assigned.

Tender: Company subject to an acquisition bid: accept offer.

A summary of our research ratings distribution can be found on our website.

Dissemination of Research

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at the same time. Please contact your Clarus institutional sales or trading representative or investment advisor for more information.

Institutional clients may also receive our research via THOMSON and REUTERS.

For additional disclosures, please visit our website http://www.clarussecurities.com.

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