$1 Club, page-26883

I've been looking over the details for the IDSB acquisition and discovered a few interesting pieces of information that I thought I'd share in case others had missed them.

To clarify the final payment can be made in June at the latest:
The Second Tranche payment for the balance of the investment is due on the later of completion of the audit of IDSB’s FY2021 statutory accounts orsix (6) months after Settlement (with the Company having the right to bring forward that tranche if it wishes).

IDSB financial year ends in December.

According to my calculations remaining cash that IOU currently has after paying the first 50% of the acquisition is $23,006,000 I got this number by deducting the refundable deposit amount paid which by IOU which was $4,191,000 (Shown in September 4C) from the 50% amount of the acquisition which was $20,700,000 that means $16,509,000 was paid. I deducted this amount from the reported Cash amount from the September 4C giving the figure as stated at the beginning of the paragraph.

Deducting the remaining 50% figure of $20,700,000 from the remaining cash ($23,006,000) leaves only $2,306,000. These calculations do not take into account the costs associated with BNPL activities. While there is likely to be a few million dollars coming in through the current quarter relating to repayments from the previous quarter, this money will be like a revolving door and go straight back out to fund further BNPL activities.

The company has stated quite clearly that all or part of the payment will come from a capital raise. The figures above indicate quite clearly that fact as well. We've also been told in the mid December update that merchant growth has accelerated in Regional Malaysia. With the BNPL business growing so rapidly and the current cash position, it is my personal belief that the company will announce a funding facility in the next few weeks as well as raising capital to support business operations. The requirement for more capital would be a very good sign of how fast the business is growing.

The final note of interest and something that I overlooked originally is the actual return that IDSB is expected to return for IOU. Below is an excerpt from the September Activities Report.

This effectively provided only three months of normal operating conditions for 2020, in which time IDSB secured a second bank loan processing collaboration agreement withAffin Islamic Bank Berhad (“Affin Bank”) adding to its existing agreement with RHB Bank Islamic Berhad signed in 2010.

In line with IDSB’s expectation for the Affin Bank business to reach the size of its RHB business within three years, IDSB’s business volumes for the first six months of 2021 consistently performed on track to reach its $10m Profit Before Tax target benchmark under the Share Purchase Agreement signed with the Company despite the COVID-19 MCO level 4 lockdown restrictions. However, a second six-month loan moratorium
was subsequently imposed from 7th July 2021

Here are the IDSB figures for FY2020 when it entered into the agreement with Affin Bank:
Total Revenue: A $6,851,977
Profit Before Tax: A $3,705,041

These figures represent only an effective 3 month trading period for IDSB before disruptions occurred.

Here are the IDSB figures for FY2021 to September 30, remembering that the second loan moratorium was announced on the 7th of July 2021.
Total Revenue: A $7,864,066
Profit Before Tax: A $5,274,682

In 2019, Prior to Covid-19 and any business disruptions occurred, Profit Before Tax was reported as A $6,256,716. Remember this was before IDSB entered into the second agreement with Affin Bank. As per the statement above, IDSB expects the agreement with Affin Bank to reach the same value to that of the agreement with RHB Bank. Doubling the 2019 PBT equals A $12,513,432. This is the expectation for IDSB under their financial modelling. As per the share purchase agreement with IOU of 42% of the IDSB business, this results in A $5,255,641. This is the figure that is likely to appear on the IOU financial statement for FY2022 rather than the $4m that has been discussed. As IOU has invested A $41,300,000 to acquire 42% of IDSB that means the return on investment for IOU is actually 12.65%

Reviewing the interest received figure from the September 4C, IOU had A $51,405,000 and only received a return of $475,000. That means they were only receiving a rate of .00925%, that's right, not even 1%. We already know the margin for BNPL is only 9.6% as per the most recent figures report.

A scenario I suggested a few weeks ago regarding expansion into region T1 (Malaysia), T2 and T3. If all regions were returning similar figures for BNPL as per the September Quarter which was A $6,571,327 multiplied by 3 would be A $19, 713,981 for just one quarter. Factor in growth and the A $50,000,000 from the previous capital raise would be exhausted over two quarters and only returning 9.6% and that is if there are no bad debts.

Getting back to the discussion of raising capital. If the company decides to raise A $10,000,000 at 15c it would add a further 66,000,000 shares to the registry. Taking outstanding shares to a total of 618,000,000 approximately. At a share price of $1 that would make the market cap $618,000,000. Reaching a valuation like that in the current market would be quite difficult. As investors pull away from growth stocks and return to value stocks due to the risks around interest rate increases, it's going to be more difficult for IOU to achieve higher multiples. I believe interest rates may rise in 2022 but I don't see it going back over 1% for quite some time due to the increase in borrowing that has occurred during the pandemic. This would likely cause another debt crisis. I believe once supply constraints subside inflation will begin to dissipate and the need for further interest rate increases will go along with it. The inflation that we're seeing has been caused by mass amounts of liquidity being pumped into the market and "free" money given to consumers. As consumers spent the money supply chains were unable to keep up due to shipping slow downs cause by the pandemic and the blockage of the Suez Canal that latest about one week. The figures that the Fed and the RBA are looking at to judge the economy are skewed by those factors. When the figures catch up to what is actually happening in the economy it will paint a much more gruesome picture and raising interest rates further won't make sense.

In summary, it is my opinion that the diversified income stream provided by the IDSB investment is the smartest use of the capital as it will provide an ongoing return at a much higher rate afforded by any other income stream available to IOU. The current market conditions are creating a buyers opportunity for growth stocks in general including IOU. This is all in my own opinion.