VendTek provides a software-based transaction processing platform that enables the distribution and sale

of prepaid goods and services (so far, primarily gift cards and prepaid wireless time) at retail points of

sale (POS). VendTek operates Canada’s largest prepaid distribution network, with almost 15,000

POS. VendTek has also licensed its platform in 7 “emerging markets” where prepaid is the primary way

that wireless minutes are purchased, and has just launched its own network (similar to the way it does

business in Canada) in Brazil.

The $100-$120million/year in revenue that VendTek generates in Canada is generated approximately as

follows:

It should be noted that VendTek’s revenue in Canada is recognized similarly to how Pharmacy Benefit

Management (PBM) companies in the US recognize revenue: PBMs recognize the entire cost of a

prescription as revenue; in Canada, VendTek recognizes the entire face value of a pre-paid wireless card or

gift card as revenue. This means (for both PBMs, and VendTek in Canada) skinny net margins on a

percentage basis, but big bottom-line numbers as the number of transactions ramps up.

It is outside of Canada where Vendtek’s significant cash flow growth opportunities lie. This is because

Canada’s market is so limited—our population is small to begin with, and only 10%-20% of the wireless

market in Canada is prepaid, versus 80%-90% in Brazil and most of the rest of the world.

An example of a license agreement outside of North America is as follows: Vendtek’s transaction

processing platform underlies a prepaid network in the UAE that generates $500-$700million/year in

revenue to the operator of the network, and a per-transaction fee to Vendtek which totals about

$1million/year (100% margin). A similar agreement in a country like Saudi Arabia would likely generate

$4million/year, straight to the bottom line.

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Most importantly, VendTek has now launched its own network in Brazil, similar to what they have done in

Canada, except that in Brazil, there are over 170 million prepaid wireless users, versus less than 5 million

in Canada, and the transaction velocity (transactions/day/terminal) in Brazil is 3-10 times greater than in

Canada (i.e., Canada averages 2.5 transactions/day/terminal, whereas in Brazil, velocity ranges from 7

transactions/day/terminal to up to 30 transactions/day/terminal.).

Of all the companies in the portfolio, VendTek is the one that has seen the most significant and

transforming developments since the beginning of the year: there have been 6 press releases since January

17 regarding the establishment and expansion of their business in Brazil.

January 17, 2011 www.vendteksys.com/Investors/news_2011_0117.htm Vivo: national distribution

January 31, 2011 www.vendteksys.com/Investors/news_2011_0131.htm Embratel: national distribution

February 7, 2011 www.vendteksys.com/Investors/news_2011_0207.htm Telefonica: national distribution

February23, 2011 www.vendteksys.com/Investors/news_2011_0223.htm TIM: national distribution

March 23, 2011 www.vendteksys.com/Investors/news_2011_0323.htm Claro: national distribution

April 5, 2011 www.vendteksys.com/Investors/news_2011_0406.htm 3,000 POS contract

What does landing national distribution agreements with 5 of the top 6 telcos (including the top 3) in

Brazil mean for VendTek? It means VendTek has expanded its network sandbox from the rather small

prepaid market of 5 million users in Canada to over 130 million high velocity users in Brazil alone (and to

a total of about 170million Brazilian prepaid users once they land the 4th largest carrier).

How difficult is to get national distributor status with the telcos in Brazil? Extremely difficult. It is a

grueling process involving significant testing and integration with the carriers—a process which is already

complete for VendTek. The difficulty of becoming a national distributor is also hinted at by the fact there

are only 3 national prepaid distributors in Brazil:

1) Cielo, with 600,000 POS

2) Redecard, with 600,000+ POS

3) GetNet, with 700,000 POS

And now VendTek has become the fourth.

Two startlingly positive facts: 1) the 3 incumbents took 5-10 years to get to their existing 600,000+ POS

footprints, and 2) the Brazilian carriers have told VendTek that they expect VendTek to have hundreds of

thousands of POS within 5-6 years.

So...the precedents are there: it IS possible to get to several hundred thousand POS for VendTek within 5-6

years. Indeed, with the carriers pushing to have VSI's footprint expanded rapidly (because the carriers

make more money when VendTek is the distributor), big numbers seem to be increasingly plausible.

What kind of numbers? Well, if you use the low-end of Brazilian velocity numbers and Canadian margins

on 45,000 VendTek POS, it means VendTek would generate $30-$40million in cash flow from Brazil

every year. (45,000 POS would be assuming that VendTek only achieves 7.5% of the penetration that the

other 3 national distributors have achieved.)

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If one wants to get a sense of the blue-sky now possible with VendTek in Brazil: use low-end Brazilian

velocity numbers and Canadian margins on 200,000 Brazilian POS, and it means VendTek would be

generating over $130million in cash flow from Brazil alone. The math on 600,000 gets silly (which is why

I won’t do it.) For the purposes of our benchmarking exercise, let’s use 45,000 in 5 years.

The fact that VendTek is one of only four companies to have landed a coveted spot as a national prepaid

distributor in Brazil suggests that VendTek must be doing something right—must be offering something

that the competitors don’t.

Here is the biggest competitive differentiator that I am aware of:

VendTek offers the only transaction processing platform that is simultaneously both: a) device agnostic

(i.e., VendTek's software can operate in any POS device), AND b) agnostic to the mode of delivery of the

prepaid goods and services. (i.e., VendTek's transaction processing platform supports hard card, PINbased,

and 'real-time-refresh' delivery.)

This device- and delivery-mode-agnosticism is the holy grail from a telco (or, for that matter, financial

institution) perspective, because it allows the telco or financial institution to sell their products/services

"anywhere, any time, any mode" while interfacing with only ONE processor. The bottom-line is that

VendTek allows the carriers (or financial institutions) to sell more product, through more POS, with lower

distribution costs. i.e., the telco or bank can sell their products/services at ANY store or Point of Sale,

regardless of the POS device installed at the POS (rather than having to have different processors for

different POS devices), and through ANY mode of delivery (rather than having to have different

processors for different modes). This also explains why the carriers would be pushing to have VendTek’s

footprint expanded rapidly, and why the carriers would have told VendTek that they expect VendTek to

have hundreds of thousands of POS within 5-6 years.

This differentiator also answers two of the questions that I often get: why would the carriers/telcos and big

banks choose to work with VendTek in the first place, and why won't VendTek get squeezed out of the

value chain at some point? The answers are obvious given the preceding information.

So where is VendTek in their roll-out process in Brazil? The roll-out is off to a very good start, with the

announcement on April 6 that they signed 3,000 POS in Brazil—the largest single contract in the

company’s history. To put this in perspective: it took VendTek 7 years to get 15,000 POS established in

Canada (currently generating over $100mm in revenue). This contract is for 3,000 POS in a part of Brazil

where POS generate 3x the number of transactions per day than they do in Canada. i.e., in one contract,

less than 2 months after signing their first carrier, VendTek established the equivalent of 60% of their

Canadian operations. (NB: it should take them until October 31 of this year before these 3,000 POS are

rolled out and transacting.).

This 3,000 POS deal points to the lumpy way in which their Brazilian network expansion will primarily

occur. Yes, VendTek will grind it out, expanding on an organic, location-by-location basis as well, but

that portion of their efforts probably gets them to 15,000 locations within 5 years. To get VendTek to my

expectation of 45,000 POS in Brazil within 5 years, the company will be looking to sign more “chunky”

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deals like this 3,000 POS deal. To get to 45,000 in 5 years, they need two 3,000 POS deals per year, on

top of the organic growth achieving 15,000 POS in 5 years. Is that doable? Looking at the precedents, it

certainly looks that way. At the very least, it is a good benchmark by which to measure their progress