EMAIL DETAILS

Per our call today, here’s the info.

Below is the explanation we got on AirFastTickets - the person writing the email seems to be the guy shopping the deal. He’s not the one who passed it on to us so I can’t vouch for this narrative. I am also attaching the S-1. Let me know the initial thoughts - if it isn’t something we think we’d be interested I’d like to let them know sooner rather than later.
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Alison introduced AirFastTickets to us in late August asking us if we may be interested in investing in the company. Very quickly, we realized that this is indeed a special company that deserves our attention. It's an online travel agency (OTA, similar to Expedia and Priceliine) with very unique and innovative strategy and technology. As you will notice in the introductory presentation that they sent me (attached), they had a total of $15M million gross booking in 2013 and they were projecting to reach $1.2 billion this year. Based on IATA (the regulatory body of the ticketing industry), they have never seen a company with such rapid growth within the travel industry.

Our group, including the Investment Director of Baidu (the Google of China), just spent the past one and half week in New York doing due diligence on the company. To speed up the discussion with you, here is a brief summary of our findings:

1) We found that the business model and the technology behind AFT to be very sound. Based on the Baidu gentleman's assessment, they should have at least 1 1/2 to 2 1/2 years of lead in the industry.

2) We confirmed that because of their unique business model and technology, they have much higher margin than anyone else in the industry. They have found a way to create 9% to 14% of margin in an industry where the products have become a commodity with 1% to 3% of margin in general.

3) On the financial side, we don't have all the most recent financials yet (September 2014) as the company is still working on it. But because they were on the way to an IPO in July, the statements up to June were audited. Please see attached.

4) Problem with IATA: We confirmed their story about the difficulty they ran into with IATA (the regulatory body that also serves as the clearing house for the airline tickets purchases). Following advise from their investment banker, AFT pushed hard for growth by spending $65M on marketing during the first half of the year. As a result, with only $8M of gross booking in January, their gross booking roughly doubled every month since January till May, reaching $134M or so. Because of the rapid growth, IATA asked them for additional bank guarantee to support the 45 days credit. To make the situation worse, a new regulation kicked in I believe in June, that requires company to have higher level of bank guarantee. They were not able to come up with it so their license and credit terms were revoked... Because they have over spent on marketing (using cash flow from airline tickets and profits) and without the credit line (all the A/P became due instantly), they were all of a sudden deeply in debt. They are still in negotiation with IATA and they have draft settlement agreement in place with almost all the airlines to resolve this issue.

5) Current Situation: Since July, without license to issue tickets, they now need to route the purchase through local consolidators (larger travel agencies that have license from IATA to do so). So, while they are still making $6M to $10M of profit on a monthly basis, they no longer have any cash flow and need to wait till the beginning of next year to receive their profit because airlines only settle their volume discount and commissions on an annual basis.

6) Plan:
1. Strategic Partner: AFT's executive team will come to China next week to meet with the Qunar (the 2nd largest OTA in China with $3.6B of market cap on NASDAQ and roughly 60% owned by Baidu) and Tuniu (the 1st or 2nd largest online tour package company in China with close to $1B of market cap on NASDAQ). We are also introducing them to Alibaba and Tengshen (the second largest internet giant in China after Alibaba). Initial round of discussions have gone very well so we decided to make a trip here.

2. Funding Partner: While the strategic partner may decide to invest, we are also looking for funding partner that is interested in growing with the company.


6) Funding needs:
1. Initial Fund: This will be in the form of a convertible bridge loan, backed by their large account receivables. We plan to raise up to $6M based on $18M of A/R generated in July and August. Because they are still profitable with roughly $85M to $100M of gross booking per month since July, the AR is still growing.

2. Initial round: $35 M in equity (or combined with some debt financing). This amount will put AFT back on its feet and cash flow will be stable again.

3. Second round: $35M to $50M in equity (or combined with some debt financing). After the company is stable, we believe the company will need some additional funding to create the impressive growth for IPO.

Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
eschwerin@rosemontseneca.com
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