Business Plan

This document provides a detailed business plan for the proposed HTS Customer Finance Program.

HTS Opco is the operating company HTS Engineering Ltd. engaged in the business of selling HVAC equipment and services in the province of Ontario.

HTS Fico is a start-up finance company that provides financing for HTS Opco customers.

It contemplates:

• creation of a standalone finance company, wholly-owned by HTS, to provide equipment financing to HTS customers

• credit risk model to support risk-based pricing of loans and ongoing monitoring of portfolio risk

• implementation plan, including partnership with 3rd party lenders. This allows initiation without requiring investment or new corporate structure

• once confidence is established, investment structured as mix of shareholder debt and equity to support 99.95% Value at Risk (VaR)

As part of the plan, we propose:

• year 1: engagement with 3rd party lendering partners

• year 2: investment of ~$1M in HTS Fico

• year 5: investment peaks at ~$10M

• year 6+: engage 3rd party funding for debt to support future growth and repay shareholder debt

Detailed projections are provided (see Financial Model section) with following highlights:

• by year 5, HTS FICO annual originations, sales, and net income reach $15M, $1.5M, and $1.1M respectively

• by year 15, HTS FICO annual originations, sales, and net income reach $31M, $2.8M, and $2.5M respectively

• investment generates 5-year IRR of 29.2%

Strategic Objectives

1. A customer finance program should increase sales for HTS Opco

   • via new customers and new markets

   • broader service offering for existing customers

2. an HTS Fico can be a profitable venture in its own right

   • HTS Opco has several advantages (vs true FIs) that should enhance profitability

   • HTS Fico can leverage existing HTS Opco capabilities of equipment expertise, customer relationships, and service network (including for repossession and remarketing)

HTS Opco Advantages

HTS Opco has several advantages in financing versus standalone finance companies.

Existing Customer Relationships

• financing product for long-term existing customers should decrease risk

• knowledge and comfort with customer’s business practices

• reputational incentive of customer to make loan payments

• reputational considerations work both ways, however. Fico must be very careful to treat good customers appropriately.

Understanding Asset Value

• market experts have better visibility to ongoing asset values

• know what products are / are not susceptible to obsolescence

• better risk profile of loans

• better market pricing

Profit from Resale

• if HTS Opco products can be resold, potential to profit again from a repossessed piece of equipment

• additional considerations:

  • inventory management (handling, storage, impact on working capital)

  • product obsolescence

Loan Types

Fico will engage in a handful of loan types, distinguished by their structure and risk profile.

Core

• bread and butter equipment finance

• serial numbered goods that are common and readily tradeable (where possible)

• sales for existing buildings, for parts and maintenance

• good portfolio diversification

• good asset value visibility

Environmental / Incentive-Induced

• equipment purchases incentivized by government programs

• incentive typically involves a tax credit

• similar to core, with opportunity to transfer tax credit etc

• adds a wrinkle to the profit assessment (potentially much higher) and risk assessment (also potentially higher, as there is likely some uncertainty around whether customer will actually receive the incentive)

Off-Site Builds

• larger, more complex products

• several additional complications offset by potential for greater profit

• what is the prevailing resale market?

• How unique is any one modular build? Impacts how closely the ongoing value of any one build must be monitored.

• Consideration around security: is the modular build distinct from the building, legally speaking. Rights to building fixtures at times can be disputed. May need to confirm or get acknowledgements from first morgtagers

Evaluating Investment in HTS Fico

There are three main considerations that will be explored in greater detail below.

1. How much capital should HTS Opco invest in HTS Fico, both initially and ongoing?

   • requires risk modeling, growth plan

2. What is return on invested capital in HTS Fico?

   • requires risk modeling, growth plan

   • what is loan hurdle rate?

3. What is impact on HTS Opco Working Capital and liquidity for other needs?

   • must be incorporate in HTS Opco projections

   • investing any amount of capital will, at the time of investment, reduce working capital

   • over time, HTS Fico can accumulate its own equity to fund growth

   • over time, HTS Fico can obtain 3rd party funding

Other Considerations / Needs

• HTS must develop a robust Loss Model, as outlined in this document.

• Competitive Environment

  • many of HTS Opco’s competitors or businesses in related industry have finance divisions.

    • Enercare Commercial Loan Contract

    • Johnson Controls focused on energy retrofits

    • Johnson Controls financing brochure

  • what kind of credit facilities are available for these types of assets?

    • not much in Canada but BDCs, private lenders, even Banks in the US

• Capital / Corporate Structure

  • HTS Opco should provide seed capital

  • HTS Fico should be a separate legal entity

    • more clearly see HTS Opco and HTS Fico liquidity positions

    • more clearly see return on HTS Fico investments

    • brown dollar HTS Fico-supported sales

    • liability benefits

    • advantages in acquiring standalone 3rd party funding

  • Capital Mix

    • ficos generally support high leverage (relative to opcos) with debt funding provided by depositors (banks) or other FIs (large equipment finance companies use securitization etc.).

    • at startup, HTS Fico is funded entirely with Equity, its return hurdles will be too high to be competitive in the market.

    • Solution: HTS Opco could fund HTS Fico with both Debt and Equity

    • HTS Opco debt would charge prevailing market interest rate

    • this mix can be explicitly achieved with separate companies, or achieved through brown dollars

• Implementation

  • initiate with 3rd party lending partners (banks, BDCs, etc.)

    • build process comfort internally

    • evaluate credit risk profile of opportunities to taylor risk model and pricing

    • allow for handful of “quick wins” before committing capital

  • start with existing customers

    • strong, broader relationship should improved credit performance

  • start with smaller loans in core segments; increases likelihood of success in short term

  • start in only one or two main jurisdictions

  • start with very narrow sales team (maybe just one person)

• Administration

  • Documentation

    • loan / lease agreement drafted by lawyer

    • registration of financing statements (PPSA / UCC)

    • PAD document

  • Collection

    • could piggyback on current process for ARs

    • may need to add bulk, periodic EFT pulls (via bank/Ceridian)

  • Realization

    • should partner with 3rd party provider(s) to handle pickup, transportation, etc. as required

    • protect should be truly recoverable