IOUpay : December 2021 Quarterly Report and Business Update

IOUPAY LIMITED (ASX: IOU)

(ACN 091 192 871)

Suite 305, Level 3, 35 Lime Street,

Sydney NSW 2000

Tel: [phone]

Website: www.iou-pay.com

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31 January 2022

ASX Announcement

December 2021 Quarterly Report

& Business Activity Update

Highlights

• Uptake of BNPL service offering continues with increased margins on myIOU BNPL transactions completed in the December Quarter (1 Oct to 31 Dec):

1. $6,082,024 in Total Transaction Value has been transacted; delivering,

• 1. $611,048 in Net Transaction Revenues;
• Positive adjusted Net Operating Cashflow - for the first time since product launch - positive $1.20m after adding back $5.26m payments to BNPL merchants that form part of BNPL receivables;
• Continued growth in Consumer and Merchant sign ups (since mid-June launch), approval and onboarding:
• 1. 2,987 merchant outlets now onboarded (up 29% since 30 Sep)

1. 1,536 merchant outlets activated and listed on myIOU (up 62% since 30 Sep)

1. 39,422 consumer downloads of myIOU (up 132% since 30 Sep)

• 1. 10,989 consumer activated accounts (up 129% since 30 Sep)
• Merchant acquisition across industry verticals and into regional Malaysia is driving significant growth trend in consumer onboarding and activation;
• Razer Merchant Services ("RMS") now into full implementation phase following successful completion of integration testing, sales training and pilot;
• Update on IDSB completion and settlement process of acquisition;
• COVID-19Environment Update - restrictions easing and economy reopening.

IOUpay Limited (ASX:IOU) ('IOUpay' or the Company) has released its Appendix 4C today and the Board of Directors are pleased to provide this Quarterly Report & Business Activity Update for the period ended 31st December 2021.

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BNPL Business Update

TTV¹ and NTR² Performance Metrics

Values for Period	1 October - 31 December 2021
Total Transaction Value 1,3	$6,082,024
Net Transaction Revenue 2,3	$611,048
myIOU Income Margin 4	10.0%

Cumulative Totals as at	31 December 2021
Merchant Outlets Signed	3,400
Merchant Outlets Onboarded	2,987
Merchant Outlets System Active	1,536
Merchant Relationships System Active	704
Consumer Downloads	39,422
Consumers Onboarded	27,986
Consumer Account Activations	10,989
Note: 1.	Total Transaction Value (TTV) means total value of purchases made by myIOU customers

1. Net Transaction Revenue (NTR) means TTV less the amounts paid to merchants
2. All amounts in AUD, assumed MYR/AUD exchange rate 2.99 using an RBA sourced reference
3. myIOU Income Margin means NTR as a percentage of TTV
4. Merchant Outlets means discrete shopfronts, whether physical or online
5. Merchant Relationships means business entities that may have multiple outlets

Net Transaction Revenue ("NTR") of $611,048 on Total Transaction Value ("TTV") of $6,082,024 for the quarter reflects stronger than anticipated margins across a range of industry sectors with a myIOU Income Margin for the quarter of 10.0%.

The Company continues its focus on building a community of quality merchants and consumers as part of its 'best-in-class' brand positioning in South East Asia. The rigorous assessment of quality and value is yielding results with NTR up 23% on the previous quarter despite a minor reduction in TTV.

There are now in excess of 1,500 merchant outlets that are system active on the myIOU platform across twenty industry verticals with more than 1,800 signed as at 31st December still to be assessed for activation. These active outlets represent the physical and online shopfronts of more than 700 merchant relationships from around Malaysia.

Merchant & Consumer Activation

As the local Malaysian economy opens up, merchant acquisition is increasing with business development personnel able to be more active in the field and engage with prospective merchants through in-person marketing and account management calls. This includes dedicated sales staff operating in regional Malaysia under the Company's regional commercial development plan.

During the December quarter, more than 200 merchant relationships operating over 500 outlets around Malaysia have been added to the myIOU platform. New merchants have been added to almost every industry vertical category. Key industry verticals with numerous merchants added since 30th September include: Electronics & Gadgets (93 merchants with 282 outlets); Automotive (43/102); Beauty & Wellness (29/100); and, Home Living (42/141).

Note that the 'Electronics & Gadgets' vertical includes electrical goods, electronics, information technology and electrical gadgets. These had previously been allocated between two separate categories.

Notable businesses amongst these new merchant relationships include the following electrical stores from regional Malaysia (outside Kuala Lumpur & Selangor): Wah Lee Chain Store Sdn Bhd, Darson Electronics Sdn Bhd, Star Electronics Sales and Services Sdn Bhd, and Surai Jerai Electrical Sdn Bhd.

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Other notable businesses and brands welcomed to the myIOU ecosystem during the period include Advanced Apotheke Sdn Bhd (Jurlique), Brightstar Computer Sdn Bhd (including Dell & Lenovo), Box of Bricks Sdn Bhd (Lego), Five Star Fitness Sdn Bhd (trading as Star Fitness) and Petsmore Sdn Bhd (specialising in pet products).

As shopping choice expands with many new merchants added across industry verticals and physical store locations throughout the country, consumer engagement with myIOU has continued a significant growth trend reported in November. Consumer app downloads, onboarding and account activation metrics are all up by circa 130% since Q1 FY22. This growth also correlates with the Government's easing of COVID-19 restrictions, the Company's ongoing Digital Marketing Strategy and various promotional campaigns.

Razer Merchant Services ("RMS") Update

Following successful completion of systems integration testing by the RMS Quality Control & Implementation team, training of RMS internal and sales staff on the myIOU platform was conducted by the IOUpay Merchant Services team and completed at the end of October. During November, a pilot was selected to "go live" with the myIOU BNPL offering.

The Company has now moved to full implementation with RMS to send batches of merchants for review and acceptance by IOUpay. As at the date of this report, the Company had completed its review of the initial batch and approved more than 140 merchants for onboarding by RMS so that those approved merchants will offer their customers the option of funding purchases using myIOU when they go to the 'checkout'. Onboarding of approved merchants from the initial batch is expected early February.

iPay88 Update

The Company's September Quarterly Report and Business Activity Update announced 29th October 2021 advised that commercial activities with iPay88 (M) Sdn Bhd were expected to be finalised in the December quarter. Due to ongoing negotiation of commercial terms and operational details, this has been delayed. The Company now expects resolution of terms by end of the current March quarter.

Once commercial terms and operational details are finalised, then systems integration and testing will be performed with expected completion during Q4 FY22.

4C Cashflow Analysis

Receipts from customers increased to $6,087,000 reflecting growing instalment receipts from BNPL transactions. The net operating cash outflow of $4,061,000 is derived after paying out $5,262,000 to merchants for BNPL purchases during the period.

This net cash outflow figure includes product and manufacturing costs of $1,627,000 (up from $1,501,000 last quarter); these being the core telco costs of the Mobile Banking business division. Staff costs of $890,000 rose by 30% from $687,000 with the Company boosting staff levels across the group by 60% from 83 as at 30th September to 133 as at 31st December with the largest additional resourcing being in the business development, account management, merchant services, operations and credit teams to accommodate the increase in BNPL business volumes and operational support required.

Advertising and Marketing costs of $523,000 notionally decreased by 14% from $608,000, however the previous quarter included pre-payment of advertising and influencer costs for six months in exchange for heavily discounted pricing. After adjusting the September quarter for the pre-payments, the December quarter shows an increase of approximately 16% reflecting the growth of the Company's BNPL activities.

Administration and corporate costs of $2,000,000 rose by 22% from $1,635,000 reflecting overall growth of the Company plus costs associated with the IDSB investment.

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Factoring the BNPL merchant payouts into net operating cashflow produces a positive net inflow of $1,201,000 for the quarter compared to an effective net outflow of $2,193,000 reported last quarter. This is the first time since product launch that the Company has produced a positive quarterly effective operating cashflow.

The Company's Net Transaction Revenues are spread over the term of each BNPL transaction and are added to the merchant payout figure plus upfront BNPL deposits to calculate Total Transaction Revenue which is not provided in the 4C Cashflow and therefore reported separately in the BNPL Business Update.

The Company had $15,384,000 in cash and call deposits as at the end of the Quarter, however this amount is after deducting the $5,262,000 paid out to merchants to come back as part of customer BNPL instalments and does not include a holding deposit of approximately $3,177,000 (being RM9,500,000) for the IDSB transaction. The $5,262,000 merchant payment figure combined with the Company's Net Transaction Revenues is effectively now BNPL receivables to be reflected as cash receipts in future months excluding any non-performing loans (NPL's). To date the Company has no non-performing loans.

The Company's Mobile Banking division produced 77,593,345 transaction events, down from 85,385,966 in the previous quarter. This reflects temporary system down time during upgrade and transition to a new data centre with larger capacity infrastructure capabilities to accommodate expected future growth in transaction volumes. Consistent with the September Quarterly Report, the Company's Mobile Banking revenues are not completely reflected in Receipts from Customers due to the payment terms with the banks and other mobile banking customers extending from 30 days to 90 days during the extended MCO period and yet to return to pre-COVID norms.

Total payments to Directors and their nominated entities for the quarter was $163,000 as set out in item 6.1 of the Appendix.

The Company received interest income of $208,000 from its call and interest-bearing deposit accounts.

IDSB Investment

The Company announced on 9th September 2021 that it was acquiring 42% of the total issued share capital of I.Destinasi Sdn Bhd ("IDSB") for a purchase price of RM126 million (~A$42.1 million 9) ("Purchase Price").

On the 1st December 2021 the Company announced confirmation that all conditions precedent to completion of the first tranche of the investment in IDSB had been satisfied facilitating settlement of the first tranche payment for 50% of the Purchase Price ("Settlement"). The first tranche payment of RM63 million (~A$21.1 million 9) was funded from existing cash holdings.

The second tranche of the investment for the remaining 50% of the Purchase Price is payable by the later of completion of the audit of IDSB's FY21 statutory accounts or six (6) months after Settlement (with the Company having the right to bring forward the second tranche if it wishes).

Pricing adjustments to the investment due to any variations to the profit target benchmark are accommodated for under the Share Purchase Agreement.

In the meantime, the Company has been working closely with IDSB management to establish reporting protocols, build operational interaction and develop inter-company staff working relationships. Planning is well underway for a pilot programme marketing myIOU BNPL services into IDSB's high credit quality, civil servant customer base.

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IDSB Business Model and Key Metrics

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IDSB generates revenue through upfront transaction fees and ongoing account management fees which are calculated based on the number and value of loans originated and serviced by IDSB.

Business Activity	31 December 2019	31 December 2020	31 December 2021
Active Loan Accounts 7		27,136	36,323
Loan Balances Outstanding 8,9		A $627,987,000	A $774,247,000
Financial Performance 9,10	FY19	FY20	FY21 11
Total Revenue		A $8,744,452	A $6,989,475	A $10,357,380
Profit Before Tax	A $6,382,269	A $3,779,390	A $6,747,021
Note: 7.	Loan Accounts are originated and managed by IDSB for its partner bank lenders

1. Loans are funded by partner bank lenders who take consumer counterparty credit risk
2. The dollar values in the table above are shown in AUD, having been converted from MYR assuming an MYR/AUD exchange rate of 2.99, using an RBA sourced reference
3. IDSB uses a financial year ending 31 December
4. Revenue and profit figures for FY21 are based on un-audited management accounts

As the Company reported in its September 2021 Quarterly Report announced 29th October 2021, the business volumes of IDSB during 2020 and 2021 have been variously impacted by the COVID-19 health emergency (including loan moratoriums imposed by the Malaysia Government in each year) and the temporary national suspension imposed by Bank Negara Malaysia of access to credit reference information during October and November due to potential cyber threats and data leaks.

These operating conditions during the first half of the December quarter saw a temporary slowdown in processing capabilities with credit checks having to be manually processed instead of online. The temporary suspension was lifted and access to the Central Credit Reference Information System resumed during November.

Purchase Price Adjustment

As part of the negotiations, the Company was able to negotiate a purchase price adjustment in the event that there was more than a 10% variance to the RM30 million Profit Before Tax ("PBT") threshold for the FYE 31st December 2021 (FY21).

In the situation where there is more than a 10% variance then the Adjusted Purchase Price will be calculated as 10 x PBT for FY21, with the total variance to the Purchase Price adjusted against the second tranche payment as a net reduction.

Based upon the unaudited management accounts for FY21, the Company expects there to be an adjustment to the Purchase Price and a reduction in the amount of the second tranche payment. The actual amount of the variance in PBT and hence the corresponding reduction in the value of the second tranche payment will be determined once IDSB's audited statutory accounts are available.

Formula for Calculation of Purchase Price Adjustment:

• Adjusted Purchase Price ("APP") = 10 x PBT (for FY21 based on audited accounts)

➢	Total amount payable	= 42% x APP
➢	Second tranche payment	= Total amount payable less first tranche payment
		= 0.42 x 10 x PBT minus RM63m

The Company will assess its cash position and the market closer to the due date for the second tranche payment and make a decision on how to fund that payment at that time.

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