IOU Financial Inc. Corporate Presentation June 2018 Forward - - PowerPoint PPT Presentation

IOU Financial Inc.

Corporate Presentation June 2018

Certain information set forth in this presentation may contain forward-looking statements. Forward-looking statements are statements, other than statements of historical fact, that address or discuss activities, events or developments that IOU Financial expects or anticipates may occur in the future. These forward-looking statements can be identified by the use of words such as "anticipates", "believes", "estimates", "expects", "may", "plans", "projects", "should", "will", or the negative thereof or other variations thereon. These forward-looking statements reflect management's current views and are based on certain assumptions including assumptions as to future economic conditions and courses of action, as well as other factors management believes are appropriate in the circumstances. Such forward-looking statements are subject to risks and uncertainties and no assurance can be given that any of the events anticipated by such statements will occur or, if they do occur, what benefit IOU Financial will derive from them. A number of factors could cause actual results, performance or developments to differ materially from those expressed

• r implied by such forward looking statements, including, but not limited to risks inherent in growing a new business,

dependence on third-party service providers, competition, regulatory risk, dependence on key personnel, risks related to rapid growth of IOU Financial, security and confidentiality risk, risk related to inability to attract borrowers and lenders, technological development risk, IT disruptions, maintenance of client relationships, litigation risk, volatility of stock price, and other factors that are beyond its control. Additional information concerning these and other factors can be found beginning on page 17 under the heading "Risks and Uncertainties" in IOU Financial's Q1 2018 MD&A dated May 24, 2018, which is available under IOU Financial's profile

• n SEDAR at www.sedar.com. IOU Financial does not undertake any obligation to update publicly or to revise any such

forward-looking statements, unless required by applicable legislation or regulation.

Forward looking statements

2

Shareholder summary

• US$530+ million – over half a billion of total loans originated since inception.
• 8,000+ loans made to merchants and small businesses across the US and Canada.
• 4th on the 2016 PROFIT 500 List of Canada’s fastest growing companies.
• Proprietary, fully integrated technology platform.
• 3-5 minute application process with approved loans funded in as little as 24 hours.
• Scalable operating and financial model.

A leading online lender to small businesses

in millions (US$)

87.8M total shares outstanding ~25% insider ownership

3

$533 (Q1 18) $- $100 $200 $300 $400 $500 $600 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cumulative loans originated

• Significant inflection point – IOU profitable for two consecutive quarters

– Achieved profitability in Q4 17 with $0.1 million in adjusted earnings, followed by $0.8 million of adjusted earnings in Q1 2018.

• Alignment of interests

– Directors and insiders own approximately 25% of Company’s stock.

• Large market with growing demand

– Online lenders expect to originate US$47 billion in 2020 from just US$4.6 billion in 2014 – a 47% CAGR.*

• Significant growth potential in loan originations

– IOU expects to ramp up its growth rate to 25%-30% per annum, over the long-term.

• Demonstrated improvements in operating leverage over past two years

– Increasing portfolio yield. – Decreasing cost of debt capital over time. – Implemented credit improvement strategies. – Decreasing operating expenses as a percentage of revenues.

• Unique, proprietary technology platform

– Allows for industry-leading operating efficiency.

Investment highlights

4 Source: * Morgan Stanley Research, “Global Marketplace Lending: Disruptive Innovation in Financials,” Blue Paper, May 19, 2015. Market size figures in USD.

The online lending industry

Online lenders will continue to increase their share of the small business lending market.

Larry Summers, former U.S. Treasury Secretary, sees online lenders capturing a 70% market share in small business lending.

Source: Morgan Stanley Research, “Global Marketplace Lending: Disruptive Innovation in Financials,” Blue Paper, May 19, 2015. Market size figures in USD.

$4.6 billion $47.0 billion

Size of SMB online lending industry 2% of the total market 16% of the total market

2014 2020

5

$0 $300 $600 $900 $1,200 $1,500 $1,800

SMB lending in the USA since 2000

Small Business Loans (<$250K) All Business Loans

Several key factors are driving the growth in online lending to SMBs.

• Banks have largely exited the small business loan market

– With a focus on larger loans, banks’ presence in the SMB loan market has been in decline for over a decade.

• Readily available institutional debt capital

– Institutional capital has been attracted by relatively high rate of returns available by lending in this market.

• Tremendous innovation and use of technology

– Ease and simplicity of the application process and the speed at which capital is delivered to merchants.

Industry growth drivers

Source: FDIC, Q3 2016 - Commercial and Industrial Loan Balances at FDIC – Insured Institutions under $250,000. All figures in USD.

Unmet demand

in billions (US$) 6

Business model

IOU’s business model is simple, scalable and has significant embedded operating leverage.

IOU generates interest income from originated loans held

• n its own balance sheet and servicing income from
• riginated loans sold to institutional investors.

The Company’s profitability is dependent on its cost of capital, the credit performance of its loan portfolio, and its

• perating efficiency.

Interest & servicing revenues Credit losses Interest expense Opex Operating income

IOU’s business model

7

$1.9 $5.6 $11.8 $14.3 $27.5 $42.1 $33.0 $32.2 $14.7 $42.7 $65.2 $28.2 $28.6 $32.0

$0 $20 $40 $60 $80 $100 2011 2012 2013 2014 2015 2016 2017 Q1 18

Total loans under management

Servicing portfolio Principal portfolio

Loan originations & Loans under management

2017 was a transitional year for IOU. By improving loan pricing and servicing, tightening credit, and cutting costs, IOU has emerged stronger and better positioned to profitability grow into 2018 and beyond.

in millions (US$) 8 in millions (C$)

IOU will grow loan originations by:

• Increasing the number of quality loan brokers and

capital markets participants working with IOU.

• Continuing to add new strategic partners such as

banks and payment processors.

• Adding new products to complement IOU’s short-

term working capital loan product.

• Further geographic expansion into Canada.

$26.5 $56.9 $92.7 $70.3 $61.7 $5.6

$0.4 $2.4 $11.5 $49.5 $99.5 $146.4 $107.8 $91.3 $93.8 $- $25 $50 $75 $100 $125 $150 2010 2011 2012 2013 2014 2015 2016 2017 TTM

Loans originated

Note: TTM refers to “Trailing Twelve Months” as of Q1 18. $64.2

Revenues

IOU utilizes a hybrid revenue strategy to fully optimize it’s

• rigination platform.

The revenue on IOU’s principal portfolio has increased as IOU improved pricing. Servicing revenues declined as the Company shifted to more of a balance sheet model in 2016.

in millions (C$) 9 Note: “Servicing & other” revenues represent actual cash revenues and exclude certain non-cash items such as gains on servicing asset and amortization of servicing asset. “Portfolio yield” is calculated by dividing TTM interest revenues earned over the period by the average of the beginning, quarterly, and end of period commercial loans receivable balance outstanding over such period.

$2.9 $6.8 $13.3 $14.4 $14.0 $2.5 $5.6 $4.7 $2.8 $3.1 $0 $3 $6 $9 $12 $15 $18 2014 2015 2016 2017 TTM

Revenue breakdown

Servicing & other Interest

Note: TTM refers to “Trailing Twelve Months” as of Q1 18.

23.2% 32.6% 38.1% 35.8% 36.8% 15% 20% 25% 30% 35% 40% 2014 2015 2016 2017 TTM

Increasing portfolio yield over time

IOU’s cost of debt capital has decreased over time.

Interest expenses

In Q1 18, IOU successfully modified and extended its facility with MidCap Financial, a company owned and managed by Apollo Global Management. This further improved:

• Financial flexibility via an available $5M revolving

portion on the facility.

• Control over growth with improved ability to fund

mid-market-sized loans.

Size of facility (US$) Cost of debt Note: TTM refers to “Trailing Twelve Months” as of Q1 18. As of May 14, 2018, the US Base rate and LIBOR 1-month rate were 5.25% and 1.93%, respectively. 10 Note: “Average net interest margin” is calculated as the average of four quarterly data points in a TTM period, with each data point calculated by subtracting interest expenses over the period from the portfolio yield (as defined on the Revenues slide) of such period. Note: “Average cost of borrowing” is calculated as interest expenses divided by the average balance of debt outstanding over such period. The average balance of debt outstanding considers the average of five quarterly points-in-time, including the beginning and end of such period. Interest expenses and the average balance of debt outstanding includes both conv. debenture and credit facility interest expenses and balances.

$3.0 $15.0 $20.0

US base rate + 14% US base rate + 12% LIBOR + 8.5%

0% 5% 10% 15% 20% 25% $0 $5 $10 $15 $20 $25 Q2 12 Q1 13 Q1 18

IOU borrowing evolution

16.1% 14.0% 10.8% 13.5% 11.4% 10.4% 10.5% 6% 9% 12% 15% 18% 2012 2013 2014 2015 2016 2017 TTM

Decreasing average cost of borrowing

0% 5% 10% 15% 20% 25% 30% 35%

Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18

Quarterly annualized provisional loss rates

Credit performance

Compared to prior years, and particularly in 2015 and 2016, loss rates in the online lending industry to small businesses increased over historical norms.* In response to this, IOU pro-actively implemented the following strategies to improve its portfolio’s credit performance:

• A tightening of credit oversight.
• An aggressive litigation strategy to pursue

intentional defaults by borrowers.

• Improved servicing and collections processes.

Loss provisions have improved for two consecutive quarters starting in Q4 17.

11 Note: Quarterly annualized provisional loss rates calculated by multiplying the quarterly provisional loss as defined in IOU’s financial statements by four, divided by the average commercial loans receivable balance over the quarter. * As per public disclosure from comparable companies operating in the online lending space listed on page 15 of this presentation.

IOU has improved the credit quality of its loan book over the past eighteen months, as demonstrated by declining provisional loss rates.

Average 15.1%

IOU’s scalable business model provides great operating leverage.

Operating expenses

In Q3 16, IOU publicly announced a significant cost reduction effort to set the table for sustainable growth.

• Opex has declined on a quarterly basis since

public announcement.

• IOU will carefully manage opex into the future,

balancing profitability with growth opportunities.

in millions (C$) Note: Adjusted opex as defined in IOU’s financial disclosure. Adjusted revenues calculated as interest revenue plus “servicing & other” revenues as defined on Revenues slide 9. 12

204% 77% 106% 79% 59% 49% 40% 0% 75% 150% 225%

2012 2013 2014 2015 2016 2017 Q1 18

Adjusted opex as a percentage

• f adjusted revenues

$2.7 $2.1 $1.7 $0.7 $1.4 $2.1 $2.8 2016 2017 Q1 18

Average quarterly adjusted opex

Inflection point: profitability achieved

IOU has recorded two consecutive quarters of profitability

• n both an accounting (IFRS) and adjusted earnings (cash) basis.

13

($473) ($1,136) ($131) ($1,431) ($690) ($1,301) ($1,202) $95 $804

• $1,600
• $1,200
• $800
• $400

$0 $400 $800 $1,200 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

in thousands (C$)

Quarterly adjusted losses and earnings since 2016

Proven & experienced team

Phil Marleau, CFA CEO

Formerly equity research at Merrill Lynch, CSFB, Scotia Capital

Robert Gloer President & COO

Formerly SVP East Region at First Franklin Financial

David Kennedy, CPA, CA CFO

Formerly CFO at Dale Parizeau Morris Mackenzie & CFO at Mirabaud Canada

Madeline Wade VP, Operations

Formerly underwriting at First Franklin Financial

Jeff Turner VP, Credit & Compliance

Formerly VP & Branch Manager at First Franklin Financial

Mark Schrews VP, Wholesale

Former nuclear weapons technician at US Navy & broker at Metro Brokers

Christophe Choquart, MBA VP, BD & Strategic Partnerships

Formerly institutional equity sales at Bear Stearns & Lehman Bros

Benjamin Yi, CFA Capital Markets & Corp Dev.

Formerly Investor at Dundee Corp & 1832 Asset Management L.P.

14

IOU represents a very compelling investment opportunity.

• IOU is profitable and at a key inflection point

– IOU reached profitability in Q4 17, continuing the trend with another strong showing in Q1 18.

• Very few publicly-traded competitors

– IOU is a good choice for investors seeking exposure to the rapidly growing SMB lending industry.

• Highly-aligned management team & insiders

– Insiders and directors own approximately 25% of the Company.

Comparables

Source: Company reports, Yahoo! Finance Note: TTM refers to “Trailing Twelve Months” as of Q1 18 for all companies. Share prices displayed reflect closing prices as of June 12, 2018. 15

Online lenders Valuation Price-to-sales ratio Price-to-earnings ratio Company Ticker Share price Shares

• utstanding

Market cap TTM Revenues TTM RevPS Trailing P/S TTM Earnings TTM EPS Trailing P/E Mogo Finance Tech (C$) TSXV:MOGO $4.01 22.7 $90.9 $51.7 $2.28 1.8x

• $19.1
• $0.84
• LendingClub (US$)

NYSE:LC $3.74 418.3 $1,564.4 $600.3 $1.44 2.6x

• $155.2
• $0.37
• On Deck Capital (US$)

NYSE:ONDK $7.26 74.3 $539.2 $204.8 $2.76 2.6x

• $2.4
• $0.03
• Peer group average
• $731.5
• $2.16

2.3x

• IOU Financial Inc. (C$)

TSXV:IOU $0.16 87.8 $14.1 $17.6 $0.20 0.8x

• $1.6
• $0.02

IOU Financial Inc.

Corporate Presentation June 2018

For more information, please contact:

Benjamin Yi, MFin, CFA Capital Markets & Corporate Development Email: byi@ioufinancial.com www.ioufinancial.com