Nellore Capital Responds to Magnet Forensics' Presentation and Continues to Raise Concerns about Unfairness to Subordinate Voting Shareholders

Sends Letter to Special Committee

Proposes Publication of Management Forecast and Changing Record Date to March 10, 2023 so that All Shareholders Can Make an Informed Decision Before Voting

Reiterates its Intention to vote AGAINST the Proposed Transaction with Thoma Bravo

PALO ALTO, Calif., Feb. 13, 2023 /PRNewswire/ - Nellore Capital Management LLC ("Nellore"), the largest holder of subordinate voting shares ("SV Shares") of Magnet Forensics Inc. (TSX: MAGT) ("Magnet") holding over 10% of the issued and outstanding SV Shares, today wrote a public letter to the Special Committee of Magnet (the "Special Committee") in response to the Special Committee's presentation from February 10, 2023, reiterating its concerns and its intention to vote AGAINST the proposed transaction with Thoma Bravo.  The text of the letter is as follows: 

Dear Special Committee,

Thank you for your response. I will respond to your technical arguments with my own technical arguments. But before doing that, I will get to the punchline.

Firstly and most obviously, if CAD $44.25 being offered to SV Shareholders is so attractive, why then are the rolling shareholders opting to roll 55% of their stake? If a non-executive inside investor (from whom a roll would not normally be required) and two executives who have the most experience and knowledge about their business and industry are saying CAD $44.25 is not the value maximizing price for them is telling and is more relevant than the fact that an independent advisor concluded that it is "fair". There is SOME price at which these insiders would take the all-cash option or at least a much greater proportion of cash so that all shareholders could have an equal opportunity to roll their shares? If you are forcing us to sell all of our shares for cash at a price that is unattractive to these insiders, price discovery is paramount.

Secondly, and more actionably, you are claiming that the cash consideration is a fair price based on consensus estimates. In the absence of Q4 results or management forecast, what we see are consensus estimates that are far too conservative and the Special Committee and its advisors justifying a transaction on those overly conservative and stale forecasts. My 2023 EBITDA estimate of $37.5mm is 46% (!) higher than the consensus estimate of $25.6mm and my 2024 EBITDA estimate 71% higher. I agree with you that 51x 2023 EBITDA is fair value for the business but based on which EBITDA number?  We are currently being asked to make a decision without material information. The Rolling Shareholders, Thoma Bravo, CIBC and Morgan Stanley all have the management forecast. The SV shareholders do not.

So here is my proposal: either publish the management forecast today (so that shareholders can review and have time to make investment or divestment decisions ahead of the company's accelerated meeting record date), or move the record date to after March 10^th when Q4 results come out. If you do neither, well, then we know that you are trying to get a structurally unfair, undervalued and opportunistic transaction to the finish line as soon as possible.

Further, in light of the new disclosure that Thoma Bravo is comfortable with buying 25% of the MV shares instead of the 45% currently proposed, we continue to welcome them to turn this transaction into a PIPE and contribute Grayshift at currently negotiated prices (with public shareholders buying the remaining 20% from the company's founders). We believe this is a win / win / win situation with all parties achieving their goals and keeping this great company in the public markets. We have the utmost respect for Thoma Bravo and it is clear they are capable of adding value to public-scale companies with Dynatrace, Meridian Link, Instructure and Ellie Mae as shining examples.

The rest of my technical arguments hinge on a simple fact: Magnet doesn't need to be valued based on revenues, it generates strong cash flow that is growing at a rapid clip. Investors don't go around quoting Microsoft is valued at 10x revenues, they quote it valued at 25x FCF. Investors don't go around quoting Visa valued at 15x revenues, they quote it valued at 27x FCF. Investors don't go around quoting Adobe trading at 9x revenues, they quote it valued at 23x FCF. But these three companies are growing at <10%, Magnet is growing at 35%!

For the reasons outlined above and previously, I intend to vote AGAINST the proposed transaction with Thoma Bravo.

My full technical argument and our long form analysis, including regarding the standalone execution and strategic risks, will be both available on SEDAR and at www.secureMAGT.com

Sincerely,

Sakya Duvvuru

This press release is for informational purposes only and is not a solicitation of proxies. Any proxies solicited will be solicited by Nellore as permitted by Canadian corporate and securities laws.

Goodmans LLP is serving as legal advisor to Nellore.  Carson Proxy Advisors is acting as strategic shareholder and communications advisor to Nellore.

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 Nellore regarding the meeting and how Nellore intends to vote on the resolutions proposed by Magnet.

Although Nellore 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, Nellore does not intend to update these forward-looking statements.

A copy of this news release may be obtained on Magnet's SEDAR profile at www.sedar.com. The head office of Magnet is 2220 University Avenue East, Suite 300, Waterloo, Ontario, N2K 0A8. The address of Nellore is PO Box 1237, 855 Jefferson Avenue Redwood City, CA 94063-9992.

Nellore Capital Management invests in entrepreneurially managed, competitively advantaged technology businesses globally for the long term.

SOURCE Nellore Capital Management LLC

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