IOU Financial Inc.
Annual Report
2020
IOU FINANCIAL INC.
Contents
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Corporate Information
Management’s Report
Consolidated Financial Statements
3
28
29
30
Management’s Discussion and Analysis of Financial Condition and Results of Operations
IOU FINANCIAL INC.
INTRODUCTION
The following management’s discussion and analysis (“MD&A”) of IOU Financial Inc. (“IOU Financial” or the
“Company”), prepared as of April 28, 2021, should be read in conjunction with, and is qualified in its entirety by reference
to the condensed consolidated financial statements as at and for the years ended December 31, 2020 and 2019 and
related notes which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”).
All amounts are expressed in Canadian dollars unless otherwise indicated.
OVERVIEW
IOU Financial Inc. is a wholesale lender that provides quick and easy access to growth capital to small businesses
through a network of preferred brokers across the US and Canada. Built on a proprietary technology platform that
connects underwriters, merchants and brokers in real time, IOU Financial has become a trusted alternative to banks
by underwriting US$873 million in loans to fund small business growth since 2009. To learn more about IOU Financial’s
corporate history, financial products, or to join our broker network please visit: IOUFinancial.com.
As at December 31, 2020, IOU Financial’s customers had been in business an average 11.6 years (based on their
incorporation date) at the time of application. These businesses borrowed on average US$78,019 for a weighted
average term of 11.9 months and generally used the funds for working capital purposes, to purchase new equipment,
invest in an increased workforce, attend to repairs, expand their business, purchase more inventory or increase
marketing efforts.
IOU Financial finances its lending activities in part by selling some of its commercial loans receivable to institutional
purchasers on a non-recourse basis and retaining the servicing rights for these loans in exchange for a service fee.
As a lender, IOU Financial earns revenue from fees it charges to its borrowers, interest payments it receives on loans
it has funded, gains on the sale of loans it has sold as well as servicing fees it charges institutional purchasers for
servicing the loans. A referral fee is earned on loans that are referred to and funded by other third-party lenders.
IOU Financial’s common shares trade on the TSX Venture Exchange (“TSX-V”) under the symbol “IOU”. IOU Financial
had 45 full-time employees as at December 31, 2020.
Page | 1
CORPORATE HISTORY
IOU Financial is the continuation of Matco Ravary Inc. (“Matco Ravary”), a Company founded in 1977, which specialized
for over 40 years in the retailing of home improvement and building materials. On November 1, 2002, Matco Ravary
sold its operating assets to a company involved in the same sector, thereby ceasing all operations in the home
improvement and building materials retailing sector. On May 14, 2004, substantially all of its issued and paid-up capital
was distributed to its shareholders.
On April 29, 2005, Matco Ravary changed its corporate name to MCO Capital Inc. (“MCO”). During the following fiscal
years, the main business and objective of MCO was to identify and evaluate businesses and assets with a view to a
potential acquisition.
On February 28, 2011, MCO completed a reverse acquisition and acquired all of the issued and outstanding shares of
IOU Central Inc. (“IOU Central”), a Canadian corporation incorporated in August 2006. On the same day, MCO also
acquired all of the issued and outstanding shares of IOU USA, other than the shares of IOU USA already held by IOU
Central. IOU USA was incorporated in Delaware in August 2006. In connection with the completion of the reverse
acquisition, MCO effected a share consolidation and changed its name from “MCO Capital Inc.” to “IOU Financial Inc.”
FORWARD-LOOKING STATEMENTS
Statements made in this MD&A that describe IOU Financial’s or management’s budgets, estimates, expectations,
forecasts, objectives, predictions or projections of the future may be “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. The forward-looking statements can
be identified by the use of the conditional or forward-looking terminology such as “anticipates”, “believes”, “estimates”,
“expects”, “may”, “plans”, “projects”, “should”, “will”, or the negative thereof or other variations thereon.
IOU Financial cautions that, by their nature, forward-looking statements involve risks and uncertainties. A number of
factors could cause actual results, performance or developments to differ materially from those expressed or 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 the Company, 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. IOU Financial cautions that the foregoing list of factors is not exhaustive. For more
information on risks and uncertainties and assumptions that would cause the company’s actual results to differ from
current expectations, please refer to the section “Risks and Uncertainties” of this MD&A.
The forward-looking statements in this MD&A reflect IOU Financial’s views as at the date of this MD&A 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. 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.
Page | 2
OVERALL PERFORMANCE AND SELECTED FINANCIAL INFORMATION
The following table summarizes key financial data for each of the respective periods. The financial information
presented below has been presented in Canadian dollars (except where otherwise noted) and has been prepared in
accordance with International Financial Reporting Standards (IFRS).
Summarized Financial Data
For the year ended December 31
Loan originations ($US)
Principal balance of loan portfolio
Principal balance of servicing portfolio
Total loans under management
Adjusted gross revenue (1)
Interest expense
Provision for loan losses
Adjusted operating expenses (2)
Adjusted net (loss) earnings(3)
Adjusted net (loss) earnings per share(4)
Net (loss) earnings
Net (loss) earnings per share(4)
Total assets
Total liabilities
2020
$
84,867,150
13,466,093
55,796,788
69,262,881
17,132,332
2,800,963
8,689,540
9,523,257
(3,175,061)
(0.03)
(2,819,475)
(0.03)
25,171,893
13,153,234
2019
$
154,221,080
56,871,350
53,900,047
110,771,397
23,699,254
3,998,673
7,951,635
10,117,365
1,758,254
0.02
1,523,309
0.02
64,814,946
51,664,568
(1)
(2)
(3)
IOU Financial’s adjusted gross revenue is defined as gross revenue prepared in accordance with IFRS for the period, plus amortization of servicing
assets less gain on sale of loans. The Company uses adjusted gross revenue as it eliminates items that do not necessarily reflect how the Company
is performing. Specifically, it eliminates the non-cash gain on sale of loans and the non-cash amortization of servicing assets which influence
operating results depending on the timing and amount of the loan sales.
IOU Financial’s adjusted operating expenses is defined as total operating expenses prepared in accordance with IFRS for the period less: non-cash
stock-based compensation which is given at different times and prices, and non-recurring costs, plus non-recurring gains which affects operating
results only periodically. The Company uses adjusted operating expenses as it eliminates items that do not necessarily reflect how the Company is
performing.
IOU Financial’s adjusted net (loss) earnings is defined as net (loss) earnings for the period prepared in accordance with IFRS less: gain on sale of
loans and non-recurring gains, plus: amortization of servicing assets, stock-based compensation and non-recurring costs.
(4) Basic and diluted. The adjusted net earnings and net earnings per share has been calculated using the weighted average number of shares
outstanding during each period.
The onset of the COVID-19 pandemic in March 2020 effected significant changes to the operational and financial
performance of the Company, leading to a series of strategic initiatives pursuant to IOU’s Pandemic Resilience Plan.
On March 13, 2020, two days after the World Health Organization (WHO) declared the corona virus a pandemic,
management transitioned all of IOU’s employees to a work from home status. The transition was seamless and service
levels remained uninterrupted largely due to IOU’s 360 proprietary platform, keeping employees, brokers and
merchants connected in real time. Furthermore, the Company moved certain employees from loan originations to
service and collection efforts related to its loan and servicing portfolios. This evolved into the creation of a full-time loss-
avoidance team dedicated to limiting write-offs.
Despite the disruption, slowdown and temporary closures of many of the Company’s borrowers as a result of the
pandemic, IOU was able to continue to originate loans, albeit at reduced levels, as the Company modified its
underwriting standards to cease lending to industries and geographical areas which were strongly impacted by COVID-
19. For example, IOU ceased lending to highly impacted industries such as restaurants, hotels, travel and certain retail
sectors.
Page | 3
In addition, the continuation of loan originations was possible due to the Company’s diversified sources of capital. For
example, the Company was able to seamlessly shift to selling all of its loan originations to institutional buyers, while
simultaneously moving away from originating loans to its balance sheet following the onset of the COVID-19 pandemic.
Due to the uncertainty facing the North American economy at the introduction of the COVID-19 pandemic, management
focused on preserving the Company’s capital by way of a series of cost cutting and other measures as follows:
1. On April 1, 2020, the Company immediately implemented a hiring freeze and furloughed approximately
40% of its full-time employees and implemented a temporary 20% reduction in salary for all remaining
employees and directors.
2. On April 3, 2020, IOU announced that more than two-thirds of the value of the Company's convertible
debenture holders agreed to defer the payment of interest from the April 30, 2020 payment period to the June
30, 2020 payment period ("reprieve period") and capitalizing the accrued interest over the reprieve period to
the principal amount of the debentures at the end of the reprieve period. In addition, on August 4, 2020, more
than two-thirds of the value of the Company's convertible debenture holders agreed to receive 75% of the
interest owed for the months of July, August and September 2020 in cash, and capitalize the remaining 25%
of the monthly interest payments to the principal amount of the debenture at the end of each monthly payment
period.
3. Other measures implemented by management included the reduction or delayed payment of certain vendor
expenses resulting in decreased data services and IT costs as well as travel and entertainment expenses.
In an effort to help its clients navigate the pandemic, IOU created a website (www.iouinsights.com) to identify available
government assistance programs and other small business resources. Furthermore, in late March 2020, management
began the process of effecting modified payment plans for clients manifesting bona fide hardships directly attributable
to the impacts of the COVID-19 pandemic. In part as a result of entering these modified plans, IOU exceeded the
concentration limits in its financing credit facilities which created over advances and, ultimately, led to the Company
receiving notices of default in April 2020 from these financing credit facilities. Nevertheless, the Company articulated a
clear plan to its financing credit facilities and repaid the remaining loan amounts in Q4 2020. This led to the following
series of events:
1. On October 22, 2020, the Company obtained a waiver from its 2019 Credit Facility for not having cured the
over advance position initially created in March 2020. In addition, the Company obtained a waiver in relation
to the defaults arising from its failure to meet certain covenants for the April to September 2020 period. At the
same time, the Company entered into an amended agreement allowing for certain flexibility for certain financial
covenants in future as well as to maintain the current interest rate at 90-day LIBOR, subject to a minimum
LIBOR of 1.5%, plus 4.50% which represents 6.00% as at December 31, 2020.
2. On December 2, 2020, the 2016 financing credit facility was fully re-paid and was subsequently terminated.
All costs associated with the termination have been accounted for in the net loss for the year ended December
31, 2020 which amounted to $342,032.
Despite the setback caused by the COVID-19 pandemic, the Company worked throughout 2020 to bring its loan
origination volumes back to pre-pandemic levels. In Q1 2020, the Company originated US$38.1 million in loans and
then hit low of US$9.2 million in Q2 2020. However, in Q3 2020 and Q4 2020, loan originations increased to US$18.4
million and US$19.1 million, respectively as IOU gradually resumed lending to more businesses and geographical
areas in the US.
In the second half of 2020, IOU continued its capital market program in the search for new sources of capital and
announced, on November 4, 2020, that it closed a loan purchase agreement (the "Loan Purchase Agreement") with a
fund managed by Neuberger Berman for up to US$150 million per year over the next two years. In addition, IOU
completed a non-brokered private placement of 18,009,806 common shares of the Company at a price of $0.1157 per
common share for gross proceeds of approximately $2.1 million. The announcement of the Loan Purchase Agreement
in Q4 2020 in conjunction with other sources of funding will support IOU’s plan to bring back its loan origination volumes
to pre-pandemic levels. The Loan Purchase Agreement significantly bolsters IOU's funding capabilities and puts the
Company in an excellent position to capitalize on the eventual economic recovery.
Page | 4
.
In the first quarter ended March 31, 2021, the Company’s loan originations exceeded US$ 25 million and in the month
of March 2021, IOU originated in excess of US$12.1 million of loans, representing the highest monthly loan origination
volume since the beginning of the COVID-19 pandemic.
Despite the adjusted net loss for the year ended December 31, 2020 of $3.2 million, IOU's corporate cash position
increased from $5.3 million at December 31, 2019 to $9.9 million at December 31, 2020 and increased again to
approximately $11.5 million at March 31, 2021.This was primarily due to a shift in the Company's funding strategy to
reduce the loan portfolio in favour of the servicing portfolio. Specifically, once the financing credit facilities were repaid,
cash collected from the loan portfolio was not used to pay down debt nor to reinvest in loans as loans were originated
and sold to institutional buyers.
Financial Highlights
For the year ended December 31, 2020, the Company funded US$84.9 million in loans (2019: US $154.2 million),
representing a decrease of 45.0% over the same period last year. The decrease in loan originations was a result of the
COVID-19 pandemic whereby IOU modified its underwriting standards to cease lending to industries and geographical
areas which were strongly impacted by COVID-19.
In Q2 2020, the Company separated what was previously referred to as its wholesale and retail channels. IOU Central
Inc. (USA) (“IOU USA”), a wholly owned subsidiary of IOU Financial, will maintain its wholesale channel where its
borrowers are sourced through the servicing of existing broker relationships as well as the development of new broker
relationships. IOU USA intends to grow by providing brokers with a best-in class user experience.
Commencing Q2 2020, IOU USA spun out its former retail channel into a wholly owned subsidiary, Zing Funding I, LLC
(“Zing Funding”). Zing Funding is engaged in the commercial lending brokerage business where borrowers are sourced
directly and referred either to a third-party lending platform or to its parent, IOU USA. A commission is earned on loans
that are referred to and funded by IOU USA or third-party lenders. Zing Funding intends to grow through investments
in direct marketing and sales.
In Q4 2020, Zing Funding facilitated loan originations of approximately US$3.9 million (of which approximately US$3.6
million was originated by its parent, IOU USA). On a pro-forma basis, this compares to approximately US$4.4 million
in Q4 2019 (of which approximately US$3.5 million was originated by IOU USA). For the twelve-month period ended
December 31, 2020, Zing Funding facilitated loan originations of approximately US$11.4 million (of which approximately
US$9.3 million was originated by its parent, IOU USA). On a pro-forma basis, this compares to approximately US$16.4
million in the twelve-month period ended December 31, 2019 (of which approximately US$13.1 million was originated
by IOU USA).
As at December 31, 2020, total loans under management amounted to $69.3 million (2019: $110.8 million),
representing a decrease of 37.5% year over year and is attributable to the decrease in loan originations of 45.0% in
the year 2020 compared to the same period in 2019. The principal balance of the loan portfolio amounted to $13.5
million (2019: $56.9 million), representing a decrease of 76.3%. The principal balance of IOU Financial’s servicing
portfolio (loans being serviced on behalf of institutional purchasers) amounted to $55.8 million (2019: $53.9 million),
representing an increase of 3.5%.
Adjusted gross revenue decreased to $17.1 million (2019: $23.7 million), representing a decrease of 27.7% for the year
ended December 31, 2020 compared to the same period in 2019.
Interest revenue decreased 33.8% to $11.8 million in 2020 compared to the same period in 2019 as a result of a
decrease in the average commercial loan receivable balance of 15.5% in 2020 as compared to 2019. The commercial
loan receivable balance decreased from $59.0 million at December 31, 2019 to $14.0 million at December 31, 2020 as
a result of the Company's funding strategy to reduce the loan portfolio in favor of the servicing portfolio following the
onset of the COVID-19 pandemic.
Servicing income decreased 17.1% to $3.7 million in the year ended December 31, 2020 compared to the same period
in 2019 as a result of the decrease in the servicing portfolio yield from 8.0% in 2019 to 6.7% in 2020. The decrease in
servicing yield is due largely to the impacts stemming from the COVID-19 pandemic. Consistent with the improvement
Page | 5
in loan quality, the servicing portfolio yield increased from a low of 5.2% in Q2 2020 to 6.8% in Q3 2020 and increased
again to 7.0% in Q4 2020.
Interest expense during the year ended December 31, 2020 decreased 30.0% to $2.8 million (2019: $4.0 million). The
decrease is attributable to a decrease in average borrowings of 19.3% in 2020 compared to 2019 due to the fact the
Company repaid all its outstanding debt to its financing credit facilities.
The provision for loan losses during the year ended December 31, 2020 increased to $8.7 million (2019: $8.0 million)
due to a deterioration in the credit quality of the commercial loan receivable balance caused mainly by the COVID-19
pandemic. More specifically, the increase in the provision for loan losses is due mainly to a $4.1 million increase of
loans written off in 2020 compared to 2019, as well as an upward revision to the Company’s estimated loss rates to
incorporate forward looking information. This was offset by a $3.5 million decrease in the provision for loan losses
relating to impacts of originations as the Company shifted from originating loans to its balance sheet in favor of its
servicing portfolio. The provisional credit loss rate increased from 16.7% in 2019 to 21.6% in 2020 due in part to the
deterioration in the credit quality of the commercial loan receivable balance and due in part to a diminishing commercial
loan receivable balance. The provisional credit loss rate is expected to be volatile as the commercial loan receivable
balance continues to diminish.
The Net Credit Loss Rate increased from 12.5% for the year ended 2019 to 23.8% for the year ended 2020 due to an
increase in net charge offs of 60.9% in 2020 to $9.6 million as compared to 2019 caused mainly by the COVID-19
pandemic. As a result of the company’s collection efforts, recoveries increased from $0.2 million in 2019 to $0.7 million
in 2020. The Company also uses the Net Credit Loss Rate as another measure for loan losses as it excludes the effect
of provisions (reductions) in the allowance for expected credit losses during the period which may not coincide with the
actual timing of charge offs and recoveries.
Adjusted operating expenses decreased 5.9% to $9.5 million for the year ended 2020 compared to $10.1 million for
the year ended 2019 primarily due to the implementation of IOU’s Pandemic Resilience Plan. On April 1, 2020, the
Company furloughed approximately 40% of its full-time employees and implemented a temporary 20% reduction in
salaries for all remaining employees and directors as well as having managed certain vendors and discretionary costs
resulting in decreased data services and IT costs as well as travel and entertainment expenses. The Adjusted Operating
Expense Ratio, which is a measure of the Company’s operating efficiency, increased slightly from 9.9% in 2019 to
10.2% in 2020. Operating expenses decreased by $0.9 million to $9.0 million in 2020 compared to $9.9 million in 2019.
IOU closed on its year ended December 31, 2020 with an adjusted net loss of $3.2 million compared to adjusted net
earnings of $1.8 million for the year ended December 31, 2019.
IOU closed on its year ended December 31, 2020 with IFRS net loss of $2.8 million, or $(0.03) per share, compared to
IFRS net earnings of $1.5 million or $0.02 per share for the same period in 2019.
Page | 6
ADJUSTED AND IFRS NET (LOSS) EARNINGS FOR THE PERIOD ENDED DECEMBER 31, 2020
The following table presents IOU Financial’s adjusted and IFRS net (loss) earnings for the years ended December 31,
2020 and 2019. The financial information is presented in Canadian dollars (except where otherwise noted) and was
prepared in accordance with IFRS.
Adjusted and IFRS net (loss) earnings
2020
$
11,815,590
5,316,742
17,132,332
2,800,963
8,689,540
(706,367)
10,784,136
6,348,196
9,523,257
-
(3,175,061)
(0.03)
(3,175,061)
2,857,268
(3,004,811)
(137,345)
640,474
(2,819,475)
(0.03)
2019
$
17,861,394
5,837,860
23,699,254
3,998,673
7,951,635
(248,043)
11,702,265
11,996,989
10,117,365
121,370
1,758,254
0.02
1,758,254
3,273,642
(3,706,180)
(287,986)
485,579
1,523,309
0.02
For the year ended December 31
Interest revenue
Servicing & other income
Adjusted Gross Revenue
Interest expense
Provision for loan losses
Recoveries
Cost of Revenue
Adjusted Net Revenue
Adjusted operating expense
Income tax expense
Adjusted Net (Loss) Earnings
Adjusted Net (Loss) Earnings per Share
Adjusted Net (Loss) Earnings
Non-cash gain on sales of loans
Non-cash amortization of servicing asset
Non-cash stock-based compensation
Non-recurring gain -net
Net (Loss) Earnings per IFRS
Net (Loss) Earnings per Share
Page | 7
Adjusted Gross Revenue
IOU Financial’s adjusted gross revenue is defined as gross revenue prepared in accordance with IFRS, plus
amortization of servicing assets less gain on sale of loans. The Company uses adjusted gross revenue as it eliminates
items that do not necessarily reflect how the Company is performing. Specifically, it eliminates the non-cash gain on
sale of loans and the non-cash amortization of servicing assets which influence operating results depending on the
timing and amount of the loan sales.
The following table summarizes revenues by category.
Adjusted Gross Revenue
For the year ended December 31
Gross Revenue
Interest revenue
Servicing & other income
Non-cash amortization of servicing assets
Non-cash gain on sale of loans
Gross Revenue
Non-cash amortization of servicing assets
Non-cash gain on sale of loans
Adjusted Gross Revenue
Ratios
Portfolio Yield (1)
Servicing Portfolio Yield (2)
2020
$
11,815,590
5,316,742
(3,004,811)
2,857,268
16,984,789
3,004,811
(2,857,268)
17,132,332
2019
$
17,861,394
5,837,860
(3,706,180)
3,273,642
23,266,716
3,706,180
(3,273,642)
23,699,254
29.3%
6.7%
37.5%
8.0%
(1) Portfolio Yield is calculated as follows: interest revenue divided by the average commercial loans receivable for the period presented on an annualized
basis. The ratios are calculated on a five-point basis, using December, March, June, September, and period end balances, presented on an annualized
basis.
(2) Servicing Portfolio Yield is calculated as follows: servicing income divided by the average servicing portfolio for the period presented on an annualized
basis. The ratios are calculated on a five-point basis, using December, March, June, September, and period end balances, presented on an annualized
basis.
Adjusted gross revenue decreased to $17.1 million (2019: $23.7 million), representing a decrease of 27.7% for the year
ended December 31, 2020 compared to the same period in 2019.
Interest revenue decreased 33.8% to $11.8 million in 2020 compared to the same period in 2019 as a result of a
decrease in the average commercial loan receivable balance of 15.5% in 2020 as compared to 2019. The commercial
loan receivable balance decreased from $59.0 million at December 31, 2019 to $14.0 million at December 31, 2020 as
a result of the Company's funding strategy to reduce the loan portfolio in favor of the servicing portfolio following the
onset of the COVID-19 pandemic.
Servicing income decreased 17.1% to $3.7 million in the year ended December 31, 2020 compared to the same period
in 2019 as a result of the decrease in the servicing portfolio yield from 8.0% in 2019 to 6.7% in 2020. The decrease in
servicing yield is due largely to the impacts stemming from the COVID-19 pandemic. Consistent with the improvement
in loan quality, the servicing portfolio yield increased from a low of 5.2% in Q2 2020 to 6.8% in Q3 2020 and increased
again to 7.0% in Q4 2020.
Gross revenue decreased to $17.0 million for the year ended December 31, 2020 (2019: $23.3 million), representing a
decrease of 27.0% over 2019. The decrease is primarily due to a decrease in interest revenue and servicing income
due largely to the COVID-19 pandemic.
Page | 8
As per the debt assignment agreements, the Company retains the servicing rights (payment collections) to the loans it
has sold, and the institutional purchasers agree to be charged a servicing fee over the term of the loans. Under IFRS,
the Company recognizes a non-cash gain on sale along with servicing assets that are amortized to the consolidated
statements of comprehensive income over the term of the assignment agreements. The Company recognizes a non-
cash gain on sale of loans and related servicing asset since the actual expected cash flows to be received are higher
than the fair value of providing such services.
Cost of revenue
IOU Financial’s cost of revenue consists primarily of interest costs incurred in connection with the financing of its lending
activities and provisions for loan losses (net of recoveries). The following table summarizes cost of revenue by category.
Cost of Revenue
For the year ended December 31
Cost of revenue
Interest expense
Provision for loan losses
Recoveries
Cost of Revenue
Ratios
Cost of Borrowing Rate (1)
Provisional Credit Loss (PCL) Rate (2)
Net Credit Loss (NCL) Rate (3)
2020
$
2,800,963
8,689,540
(706,367)
10,784,136
9.0%
21.6%
23.8%
2019
$
3,998,673
7,951,635
(248,043)
11,702,265
10.4%
16.7%
12.5%
(1) The Cost of Borrowing Rate is calculated as follows: interest expense divided by the average borrowings for the year, presented on an annualized
basis. The ratios are calculated on a five-point basis, using December, March, June, September, and period end balances, presented on an annualized
basis.
(2) The Provisional Credit Loss rate is calculated as follows: provision for loan losses divided by the average commercial loans receivable for the year,
presented on an annualized basis. The ratios are calculated on a five-point basis, using December, March, June, September, and period end balances,
presented on an annualized basis.
(3) The Net Credit Loss rate is calculated as follows: charge offs net of recoveries divided by the average commercial loans receivable for the year,
presented on an annualized basis. The ratios are calculated on a five-point basis, using December, March, June, September, and period end balances,
presented on an annualized basis.
The cost of revenue for the year ended December 31, 2020 decreased from $11.7 million in 2019 to $10.8 million in
2020. The decrease is primarily a result of a decrease in interest expense due to the decrease of average borrowings
in 2020. At the end of 2020, the Company has no outstanding debt to its financing credit facilities.
Interest expense during the year ended December 31, 2020 decreased 30.0% to $2.8 million (2019: $4.0 million). The
decrease is attributable to a decrease in average borrowings of 19.3% in 2020 compared to 2019 due to the fact the
Company repaid all its outstanding debt to its financing credit facilities.
The provision for loan losses during the year ended December 31, 2020 increased to $8.7 million (2019: $8.0 million)
due to a deterioration in the credit quality of the commercial loan receivable balance caused mainly by the COVID-19
pandemic. More specifically, the increase in the provision for loan losses is due mainly to a $4.1 million increase of
loans written off in 2020 compared to 2019, as well as an upward revision to the Company’s estimated loss rates to
incorporate forward looking information. This was offset by a $3.5 million decrease in the provision for loan losses
relating to impacts of originations as the Company shifted from originating loans to its balance sheet in favor of its
servicing portfolio. The provisional credit loss rate increased from 16.7% in 2019 to 21.6% in 2020 due in part to the
deterioration in the credit quality of the commercial loan receivable balance and due in part to a diminishing commercial
loan receivable balance. The provisional credit loss rate is expected to be volatile as the commercial loan receivable
balance continues to diminish.
The Net Credit Loss Rate increased from 12.5% for the year ended 2019 to 23.8% for the year ended 2020 due to an
increase in net charge offs of 60.9% in 2020 to $9.6 million as compared to 2019 caused mainly by the COVID-19
Page | 9
pandemic. As a result of the company’s collection efforts, recoveries increased from $0.2 million in 2019 to $0.7 million
in 2020. The Company also uses the Net Credit Loss Rate as another measure for loan losses as it excludes the effect
of provisions (reductions) in the allowance for expected credit losses during the period which may not coincide with the
actual timing of charge offs and recoveries.
.
Adjusted Operating Expenses
IOU Financial’s adjusted operating expenses is defined as total operating expenses prepared in accordance with IFRS
for the period, less: non-cash stock-based compensation, which is given at different times and prices, non-recurring
costs, plus non-recurring gains which affects operating results only periodically. The Company uses adjusted operating
expenses as it eliminates items that do not necessarily reflect how the Company is performing. Operating expenses
consist of day to day operating expenses such as wages and salaries, professional fees, including consulting services,
legal, audit and accounting fees, data services and IT costs.
Adjusted Operating Expenses
For the year ended December 31
Operating Expenses
Stock Based Compensation
Non-Recurring Gain-net (2)
Adjusted Operating Expenses
Ratio
2020
$
9,020,128
(137,345)
640,474
9,523,257
2019
$
9,919,772
(287,986)
485,579
10,117,365
Adjusted Operating Expense Ratio (1)
10.2%
9.9%
(1) The Adjusted Operating Expense Ratio is calculated as follows: adjusted operating expenses divided by the average loans under management for the
year, presented on an annualized basis. The ratios are calculated on a five-point basis, using December, March, June, September, and period end
balances, presented on an annualized basis.
(2) Refer to Note 17 of the Financial Statement relating to the breakdown of non-recurring gains and loss.
Adjusted operating expenses decreased 5.9% to $9.5 million for the year ended 2020 compared to $10.1 million for
the year ended 2019 primarily due to the implementation of IOU’s Pandemic Resilience Plan. On April 1, 2020, the
Company furloughed approximately 40% of its full-time employees and implemented a temporary 20% reduction in
salaries for all remaining employees and directors as well as having managed certain vendors and discretionary costs
resulting in decreased data services and IT costs as well as travel and entertainment expenses.
Adjusted operating expenses decreased by $0.6 million to $9.5 million in 2020 compared to $10.1 million in 2019. This
decrease can be primarily attributed to the following:
-
-
-
-
-
a decrease of $0.6 million in wages and salaries as a result of a decrease in the number of full-time employees
and a temporary reduction in salaries for all remaining employees and directors.
a decrease of $0.2 million in data services and IT costs.
a decrease of $0.1 million in travel and entertainment expenses.
an increase of $0.2 million in amortization of transaction costs on financing credit facilities.
an increase of $0.1 million in insurance costs.
The Adjusted Operating Expense Ratio, which is a measure of the Company’s operating efficiency, increased slightly
from 9.9% in 2019 to 10.2% in 2020.
Operating expenses decreased by $0.9 million to $9.0 million in 2020 compared to $9.9 million in 2019. This decrease
in the following can be primarily attributed to measures taken by the Company as part of its Pandemic Resilience Plan:
-
a decrease of $0.6 million in wages and salaries as a result of a decrease in the number of full-time employees
and a temporary reduction in salaries for all remaining employees and directors.
Page | 10
-
-
-
-
-
-
a decrease of $0.2 million in stock-based compensation.
a decrease of $0.2 million in data services and IT costs.
a decrease of $0.1 in travel and entertainment expenses.
an increase of $0.2 million in amortization of transaction costs on financing credit facilities.
an increase of $0.1 million in insurance costs
an increase of $0.1 million in non-recurring gain-net.
Adjusted Net (loss) Earnings
IOU Financial’s adjusted (loss) earnings is defined as net (loss) earnings for the period prepared in accordance with
IFRS less: gain on sale of loans and non-recurring gains, plus: amortization of servicing assets, stock-based
compensation and non-recurring costs. The Company uses adjusted net (loss) earnings as a measure of financial
performance.
Adjusted Net (loss) Earnings
For the period ended December 31
Net (Loss) Earnings
Gain on Sale of Loans
Amortization of Servicing Assets
Stock-Based Compensation
Non-Recurring Gain-net
Adjusted Net (Loss) Earnings (1)
2020
$
(2,819,475)
(2,857,268)
3,004,811
137,345
(640,474)
(3,175,061)
2019
$
1,523,309
(3,273,642)
3,706,180
287,986
(485,579)
1,758,254
(1) IOU Financial’s adjusted net (loss) earnings is defined as net (loss) earnings for the period prepared in accordance with IFRS less: gain on sale of
loans and non-recurring gains, plus: amortization of servicing assets, stock-based compensation and non-recurring costs.
IOU closed on its year ended December 31, 2020 with an adjusted net loss of $3.2 million compared to adjusted net
earnings of $1.8 million for the year ended December 31, 2019.
IOU closed on its year ended December 31, 2020 with IFRS net loss of $2.8 million, or $(0.03) per share, compared to
IFRS net earnings of $1.5 million or $0.02 per share for the same period in 2019.
Page | 11
CONSOLIDATED FINANCIAL POSITION
The following table presents IOU Financial’s consolidated statement of financial position as at December 31, 2020 and
December 31, 2019. The financial information is presented in Canadian dollars (except where noted) and was prepared
in accordance with IFRS.
Condensed Consolidated Statement of Financial Position
As at December 31, 2020
As at December 31, 2019
Assets
Commercial loans receivable
Allowance for expected credit losses
Commercial loans receivable – net
Non-portfolio assets
Total assets
Liabilities
Financing credit facilities
Convertible debentures – liability component
Other liabilities
Total liabilities
Shareholders’ equity
Ratios
Allowance for Expected Credit Losses (ACL)
Ratio (1)
Stage 3 Delinquency Ratio (2)
$
13,987,002
(2,927,407)
11,059,595
14,112,298
25,171,893
-
10,404,569
2,748,665
13,153,234
12,018,659
20.9%
53.1%
$
58,964,204
(4,515,175)
54,449,029
10,365,917
64,814,946
38,936,865
9,931,181
2,796,522
51,664,568
13,150,378
7.7%
10.2%
(1) The Allowance for Expected Credit Losses Ratio is calculated as follows: allowance for expected credit losses divided by the commercial loans
receivable at year end.
(2) The Stage 3 Delinquency Ratio is calculated as follows: amount of commercial loans receivable included in stage 3 divided by the commercial loans
receivable at year end.
Total Assets
Total assets decreased by $39.6 million (61.2%) from $64.8 million at December 31, 2019 to $25.2 million at December
31, 2020. This decrease is mainly attributable to a decrease of $43.4 million in commercial loans receivable-net.
As at December 31, 2020, the allowance for Expected Credit Losses Ratio increased from 7.7% to 20.9% compared
to December 31, 2019. The Stage 3 Delinquency Ratio increased from 10.2% to 53.1% compared to December 31,
2019. The increase in the ACL and Stage 3 Delinquency Ratios are primarily attributable to the impact related to the
COVID-19 pandemic. The ACL and Stage 3 Delinquency Ratios are expected to be volatile as the commercial loan
receivable balance continues to diminish.
Total Liabilities
IOU Financial’s total liabilities decreased by $38.5 million (74.5%) from $51.7 million at December 31, 2019 to $13.2
million at December 31, 2020. The decrease is mainly due to the decrease in financing credit facilities of $ 38.9 million.
Shareholders’ Equity
Shareholders’ Equity decreased by $ 1.1 million (8.6%) from $ 13.1 million at December 31, 2019 to $12.0 million at
December 31, 2020. This decrease is mainly attributable to current period comprehensive loss ($3.2 million) and offset
by the private placement of approximately $2.1 million.
Page | 12
LIQUIDITY AND CAPITAL RESOURCES
IOU Financial’s primary sources of liquidity and capital resources are cash-on-hand, cash provided by operations and
cash provided by financing through the issuance of equity and/or debt securities as well as the sale of loans.
IOU's corporate cash position increased from $5.3 million at December 31, 2019 to $9.9 million at December 31, 2020
and increased again to approximately $11.5 million at March 31, 2021 as a result of the Pandemic Resilience Plan
implemented by management in 2020.
Due to the COVID-19 pandemic, the Company went into an over-advance position with its financing credit facilities. At
the end of Q4 2020, the Company paid off all outstanding debt to its financing credit facilities. Having cured the over
advanced position with its financing credit facilities, the Company entered into an amended agreement with the 2019
Credit Facility and the 2016 Credit Facility terminated its agreement with the Company.
In the second half of 2020, IOU continued its capital market program in the search for new sources of capital and
announced, on November 4, 2020, that it closed a loan purchase agreement (the "Loan Purchase Agreement") with a
fund managed by Neuberger Berman for up to US$150 million per year over the next two years. In addition, IOU
completed a non-brokered private placement of 18,009,806 common shares of the Company at a price of $0.1157 per
common share for gross proceeds of approximately $2.1 million.
On April 8, 2021, the Company announced today that it intends to repurchase up to $2,000,000 of its convertible
debentures in the capital of the Company (the “Debentures”) at a discount per $1,000 of aggregate principal amount
per Debenture (the “Repurchases”). IOU will seek to repurchase such Debentures pursuant to repurchase agreements
to be entered into with individual holders of Debentures and to close the Repurchases by no later than June 30, 2021.
There can be no assurances that any Debentures will be so repurchased, that all Debentures that an individual holder
wishes to be repurchased will so be, or that the Repurchases will be completed by such date. The total reduction in
interest expenses to IOU, should the Repurchases be completed, will amount to approximately $500,000, representing
the interest savings for the period July 1, 2021 to the maturity date of December 31, 2023.
Flow of funds
The following table presents a summary of cash flows for the years ended December 31, 2020 and 2019.
Consolidated Statement of Cash Flows
For the year ended December 31
Cash generated (used) in operating activities
Cash generated in investing activities
Cash (used) generated in financing activities
(Decrease) increase in cash
Exchange rate (loss) on cash
Net increase (decrease) in cash
Cash used in operating activities
2020
$
41,898,271
66,505
(37,153,841)
4,810,935
(184,490)
4,626,445
2019
$
(21,222,645)
548,757
19,487,561
(1,186,327)
(242,311)
(1,428,638)
The $63.1 million increase in cash generated in operating activities for the year ended December 31, 2020, compared
to the same period in 2019, was primarily related to a decrease of $75.6 million in the cash outflow from the net change
in non-cash working capital items (2020: $39.3 million compared to 2019: $114.9 million) and a decrease of $8.7 million
in the cash inflow from the sale of commercial loans (2020: $84.6 million compared to 2019: $93.3 million).
Cash used in investing activities
The $0.5 million decrease in cash generated by investing activities for the year ended December 31, 2020, compared
to the same period in 2019, is primarily due to a decrease of cash inflow of $0.5 million in restricted cash.
Page | 13
Cash generated from financing activities
The $56.6 million increase in cash used in financing activities for year ended December 31, 2020, compared to the
same period in 2019, is primarily due to the repayment of $38.9 million to the financing credit facilities in 2020 and
proceeds of $19.9 million from the financing credit facilities in 2019 and offset by the issuance of equity of $1.9 million.
SUMMARY OF QUARTERLY RESULTS
Quarterly Results
For the quarters ended
Gross revenue
Net (loss) revenue
Net (loss) earnings
Net (loss) earnings per share(1)
For the quarters ended
Gross revenue
Net revenue
Net earnings
Net earnings per share(1)
Dec 31/20
$
2,427,139
2,925,855
703,292
0.01
Dec 31/19
$
6,339,300
3,079,405
217,569
0.00
Sept 30/20
$
3,821,597
4,069,970
1,698,588
0.02
Sept 30/19
$
6,595,598
3,208,098
1,000,614
0.01
Jun 30/20
$
4,392,762
(1,222,449)
(3,079,747)
(0.04)
Jun 30/19
$
5,486,327
2,737,863
219,256
0.00
Mar 31/20
$
6,343,291
427,277
(2,141,608)
(0.02)
Mar 31/19
$
4,845,491
2,539,085
85,870
0.00
(1) Basic and diluted. Net earnings (loss) per share has been calculated using the weighted average number of shares outstanding during each
period. Rounded to the nearest cent.
OFF-BALANCE SHEET ARRANGEMENTS
IOU Financial does not engage in any off-balance sheet financing activities. IOU Financial does not have any interest
in non-consolidated entities referred to as variable interest entities, which include special purpose entities and other
structured finance entities.
PROPOSED TRANSACTIONS
There were no proposed transactions as at the date of the Company’s financial statements.
Page | 14
TRANSACTIONS BETWEEN RELATED PARTIES
i)
ii)
The Company rents its Canadian office space from Palos. The lease may be cancelled after October 2021 upon
the payment of a termination fee. The terms of this operating lease are similar to those that would have been
present for an arm’s-length transaction. The amount of $122,874 is expensed as rental expense for the period
(2019: rent expense of $122,018). That amount does not include the amortization of right-of-use assets and the
interest on the lease liabilities. Future non-cancellable lease liabilities under this agreement amount to $628,789.
The Company sells loans to a fund managed by Neuberger Berman. In 2020, the Company sold loans in the
amount of US$4,093,785 (2019: US$0) and earned service fees of $23,815 (2019: $0) and recorded deferred
service fees receivable in the amount of $283,216 as at December 31, 2020 (2019: $0).
iii) Key Management Compensation
Key management includes directors (executive and non-executive), the Chief Operating Officer and the Chief
Financial Officer who is also the Company Secretary. The compensation paid or payable to key management for
employee services for years ended December 31, 2020 and 2019 is shown below:
Key Management Compensation
For the year ended December 31
Salaries and other short-term employee benefits
Share-based payments
2020
749,925
92,483
842,408
2019
885,529
169,496
1,055,025
Page | 15
COMMERCIAL LOANS RECEIVABLE
IOU Financial’s commercial loan receivable portfolio is composed of a large number of loans, and as such, no individual
loan comprises a significant portion of the portfolio. As at December 31, 2020, the average loan balance in the portfolio
was approximately US$36,315 (2018: US$91,223). In addition to limiting its exposure to any single loan, IOU Financial
maintains a geographically and industry diversified loan portfolio which reduces the risk of loss arising from adverse
regional or industrial economic conditions.
The following tables present the portfolio by geography and industry as at December 31, 2020.
Portfolio %
19%
13%
9%
6%
5%
5%
5%
38%
100%
Portfolio %
17%
10%
8%
7%
6%
5%
4%
3%
3%
3%
34%
100%
Industry Category
Specialty trade contractors and home building renovation
Casual, fine dining and full- service restaurants
Manufacturing
Medical services
Other store or online retailers and wholesalers
Other professional services
Automotive garage
Other
Total
State
Texas
Florida
New York
California
Georgia
Illinois
Tennessee
New Jersey
North Carolina
Michigan
Other
Total
Page | 16
OUTSTANDING SHARE DATA
The following table presents IOU Financial’s outstanding share data as at April 28, 2021
Outstanding Share data
Ordinary shares issued and outstanding:
December 31, 2019
Shares issued between January 1, 2020 and December 31, 2020
Shares cancelled between January 1, 2020 and December 31,2020
Shares outstanding on April 28, 2021
Options issued and outstanding:
December 31, 2019
Options granted between January 1, 2020 and December 31, 2020
Options forfeited between January 1, 2020 and December 31, 2020
Options exercised between January 1, 2020 and December 31, 2020
Options granted after December 31, 2020
Options forfeited after December 31, 2020
Options outstanding on April 28, 2021
Number of shares issued
86,708,122
18,214,806
(279,000)
104,643,928
Number of Options issued
6,861,500
2,000,000
(1,090,000)
(205,000)
-
-
7,566,500
The Company granted, on January 15, 2020, options to a consultant to acquire up to 200,000 Common Shares at an
exercise price of $0.25 per share. These options have a term of three years and vest as follows: 50,000 options shall
vest on March 15, 2020, 50,000 options shall vest on June 15, 2020, 50,000 options shall vest on September 15,
2020, and 50,000 options shall vest on December 15, 2020.
On July 28, 2020, the Company granted options entitling its senior officers, its directors, and certain employees and
consultants to acquire up to an aggregate of 1,745,000 common shares of the Company ("Shares") at an exercise
price of $0.08. These options have a term of five years from the date of grant with one-third (1/3) vesting immediately
and one-third (1/3) vesting on each of the first and second anniversaries of the date of grant, and if exercised, their
underlying shares would be subject to a four-month hold period from the date of issuance of the options. The grant-
date fair value has been established at $0.10 per option using the following assumptions: expected volatility of 84%,
risk-free interest rate of 0.23% and an expected life to maturity that equals the term.
In addition, the exercise price of 2,403,167 stock options, granted prior to July 28, 2020, to purchase common shares
of the Company and which are currently outstanding, were repriced to $0.08 per share. If exercised, their underlying
shares would be subject to a four-month hold period from July 28, 2020. None of these restrictions will apply as of
November 29, 2020.
On September 11, 2020, the Company amended the exercise price of the 200,000 options granted on January 15,
2020 to a consultant from $0.25 to $0.08. If exercised, the shares underlying these options would be subject to a four-
month hold period from the date of the amendment.
On December 3,2020, the Company granted options entitling one director to acquire up to 55,000 common shares at
an exercise price of $0.11 per share. Those options are vested over a two-year period, with one-third vesting
immediately and one-third vesting on each of the first and second anniversaries of the date of the grant and
exercisable for a period of five years from the date of grant, provided that it has vested.
In 2020, 205,000 options were exercised at an average exercise price of $0.08.
Due to the repricing of options, the weighted average exercise price was reduced to $0.13.
Page | 17
NORMAL COURSE ISSUER BID
IOU Financial commenced on May 1st, 2019, a Normal Course Issuer Bid (“NCIB”) pursuant to which IOU Financial
may purchase for cancellation, from time to time, as it considers advisable, up to 2,000,000 of its common shares
(“Shares”) over a 12-month period. The NCIB terminated on April 30, 2020. Purchases of Shares under the NCIB were
made through the facilities of the TSX Venture Exchange at the market price of the Shares at the time of acquisition.
Leede Jones Gable Inc. conducted the NCIB on behalf of IOU and Shares were re-purchased at the discretion of senior
management of IOU. For the period commencing May 1st, 2019 and ending April 30, 2020, 1,944,500 Shares were
repurchased and cancelled.
BUSINESS OUTLOOK
Despite the setback caused by the COVID-19 pandemic, the Company continues to work on bringing its loan origination
volumes back to pre-pandemic levels and a return to profitability on an annual basis. For all of 2021, the company is
targeting loan originations in the range of US$165M to US$200M as compared to US$84.9M in 2020 and US$154.2M
in 2019.
EVENTS AFTER THE REPORTING DATE
On April 20,2021, the Company’s wholly owned subsidiary, IOU Central Inc., received loan proceeds of US$699,800
pursuant to the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). IOU Central Inc. can apply
for an amount of loan forgiveness which would equal, in large part, to expenses incurred for payroll, rent and utilities
commencing from the date of first disbursement and ending no later than twenty-four (24) weeks after the date of
disbursement. The loan carries a fixed interest rate of 1% and matures five (5) years from the date IOU Central Inc.
applies for forgiveness. No payment of principal and interest are due on this loan beginning on the date of disbursement
and ending on the date on which the amount of forgiveness is determined under the PPP program.
Page | 18
CRITICAL ACCOUNTING ESTIMATES
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by
definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing
a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed
below.
1.
2.
3.
Valuation of commercial loans
Management exercises judgment to determine the expected credit losses (ECL) based on all available
reasonable and supportable information about past events, current conditions and forecasts of future events
and economic conditions. At the end of each reporting period, the Company applies a three-stage forward
looking impairment approach to measure the expected credit losses (ECL) on its Originated to hold (OTH)
loans. The stages are based on the change in the credit quality of the OTH loan since initial recognition.
Measurement of ECLs at each reporting period reflects reasonable and supportable information about past
events, current conditions, and forecasts of future events and economic conditions. Further details on the
estimates used to determine any allowance for impaired commercial loans are provided in the accounting
policy of the consolidated Financial Statement “Impairment of OTH loans”.
Servicing assets
The initial recognition of servicing assets requires the Company to make estimates of the fair value of the
service to be provided which is based on market expectations at the time of the loan sale and may vary
from the actual cash flows serviced.
Deferred Tax Estimation
Deferred tax assets and liabilities recognition involves making a series of assumptions. For instance, the
Company must estimate the timing of the reversal of temporary differences or if it is probable that temporary
differences will not reverse in the foreseeable future or the tax rates expected to apply to the period when
the asset is realized or the liability is settled.
With respect to deferred tax assets, their realization ultimately depends on taxable profits being available
in the future. Deferred tax assets should be recognized when it is probable that taxable profits will be
available against which the deferred tax asset can be utilized, and it is probable that the entity will earn
sufficient taxable profit in future periods to benefit from a reduction in tax payments. This involves the
Company making assumptions within its overall tax-planning activities and periodically reassessing them in
order to reflect changed circumstances as well as tax regulations. Moreover, the measurement of a deferred
tax asset or liability reflects the manner in which the entity expects to recover the asset’s carrying value or
settle the liability.
Page | 19
CURRENT CHANGES IN ACCOUNTING POLICIES
The Company has not adopted any new or revised standards, along with any consequential amendments, effective
January 1, 2020.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
The carrying values of cash, commercial loans receivable, other receivables, financing credit facilities and accounts
payable and accrued liabilities approximate their fair values due to the relatively short period to maturity of these items.
The majority of commercial loan receivables are due from customers in the United States. The maximum credit risk
associated with the company’s financial assets is the carrying value of those assets.
Foreign exchange risk
The Company operates internationally and is exposed to foreign exchange risk arising from currency exposure with
respect to the US dollar. Foreign exchange risk arises from future commercial transactions, recognized assets and
liabilities.
The Company does not use derivative financial instruments to reduce its foreign exchange exposure. Fluctuations in
foreign exchange rates could cause unanticipated fluctuations in the Company’s operating results.
Listed below are the relevant instruments and the amount of foreign currencies included in their balances (in US dollars)
As at December 31, 2020:
Cash
Restricted cash
Certain other assets
Net commercial loan receivables
Accounts payable and accrued liabilities
Financing credit facilities
6,234,762
208,209
1,566,724
8,568,568
(1,022,440)
-
The exchange rate applied as at December 31, 2020 was 1.2732 (December 31, 2019: 1.2988).
Based on the Company’s foreign currency exposure noted above, varying the above foreign exchange rates to reflect
a 10% strengthening of the Canadian dollar would have increased the net loss by approximately $1,835,055 (2019:
reduced net earnings by $3,955,744), assuming that all other variables remained constant. An assumed 10%
weakening of the Canadian dollar would have had an equal but opposite effect on the above currencies to the amounts
shown above, on the basis that all other variables remain constant.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The
Company’s approach in managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking
damage to the Company’s reputation.
The Company manages liquidity risk through the management of its capital structure. The Company has been financed
mainly through equity and debt offerings, commercial loan sales and the use of its financing credit facilities.
With respect to commercial loan sales, the Company has an agreement with an investor to sell interests in certain of
its commercial loan receivable of up to US$150 million per year for the next two years (2019 - $0 million). As at
December 31, 2020, $4 million (2019- $0 million) of certain commercial loans receivable were sold to the investor
pursuant to the agreement.
Page | 20
With respect to the financing credit facilities, it is noted that save for the amortization period during the last year of the
committed term, they are in the form of revolving credit facilities for which the availability is determined by the
collateral value of the loans pledged thereunder. In order to meet its liabilities when they come due, the Company is
dependent on the continued availability of such financing activities.
Credit risk
Credit risk is managed on a Company basis and results from the possibility that a loss may occur from the failure of
another party to perform according to the terms of the contract. The Company regularly monitors the credit risk exposure
and takes steps to mitigate the likelihood of these exposures from resulting in actual loss.
The Company, in the normal course of business, monitors the financial condition of its customers and reviews the credit
risk history of each customer. These policies cover the approval of credit applications, attribution of risk ratings,
management of impaired loans, establishment of provisions and risk-based pricing. The Company’s maximum credit
risk is the carrying value of the cash, restricted cash and commercial loans receivable. The allowance for loan losses
is maintained at a level considered sufficient to cover all potential losses.
In addition, financial instruments that potentially subject the Company to significant concentrations of credit risk consist
of deposits in the form of cash and restricted cash. The Company invests with major North American financial
institutions. The Company has investment policies that are designed to provide for the safety and preservation of
principal, the Company's liquidity needs and appropriate yields. The Company has no exposure to any asset-backed
securities.
Interest rate risk
The Company is subject to interest rate risk on its cash, restricted cash and financing credit facilities. A 10% increase
in interest rates over a 12-month horizon based on the balances as at December 31, 2020 would not impact the net
loss as the financing credit facilities have been fully repaid as at December 31,2020. Interest rate impact (2020 - $0,
2019 - $285,601).
None of the Company’s current commercial lending is based on variable interest rates. The Company is also exposed
to changes in the value of a loan when that loan’s interest rate is at a rate other than current market rate. The Company
mitigates this risk by lending for short terms, with terms at the inception of the loan generally varying from six to eighteen
months.
The Company is exposed to cash flow interest rate risk on its financing credit facilities issued at a variable rate. During
2019 and 2020, the borrowings at a variable rate were denominated in USD. The Company mitigates this risk by
borrowing in the short term and therefore the Company does not believe that its exposure to interest rate risk is
significant.
Interest revenue presented in the consolidated statement of comprehensive loss represents interest revenue on
financial assets that are classified as loans and receivables.
Page | 21
RISKS AND UNCERTAINTIES
In addition to the risks mentioned above, IOU Financial is subject to a number of risks and uncertainties in carrying out
its activities.
COVID-19
The duration of the COVID-19 pandemic and full impact of the crisis are unknown. COVID-19 has resulted in a material
adverse effect on IOU Financial’s business, operating results, financial condition and liquidity. Governmental
requirements or recommendations for “non-essential” businesses to temporarily close or severely limit their operations
have impacted many small businesses that are or could have been IOU Financial’s clients. Reduced customer demand
has also hurt many of those small businesses. It is uncertain how long these conditions will continue and whether such
businesses will be able to continue to operate after an extended period. The ultimate depth, duration and impact of this
crisis are unknown, which creates material uncertainty for IOU Financial Inc.
IOU Financial is Subject to the Risks Inherent in Growing a Business.
IOU Financial’s operations are subject to the general risks inherent in growing a business, including, among others,
hiring and retaining experienced and qualified employees. If IOU Financial cannot hire or retain qualified employees,
or cannot effectively implement its business planned strategy, it will be hampered in its ability to grow its current market
and to develop new markets, which would in turn have an adverse effect on its financial performance. Even if IOU
Financial successfully implements its planned strategy, it may not achieve the favorable impact on its operations that it
anticipates.
Compliance with debt covenants
IOU Financial entered into loan agreements with lenders in 2016 and in 2019. The loan agreements impose covenants
and obligations on the part of the Company. In particular, the agreements contain certain covenants and
representations, the breach of which could result in a default and the acceleration of the maturity of the term of the
financing credit facilities. IOU Financial plans to address the risk of default by endeavoring to meet the financial
covenants and other obligations in the loan agreement. There is no assurance, however, that IOU Financial will be in
compliance with covenants in the future due to unforeseen events or circumstances and if IOU Financial was to default
there is no assurance that an amendment or waiver will be granted by the lender.
As part of the 2016 and the 2019 Credit Facilities, the Company must respect certain financial covenants. All financial
covenants were met as at December 31, 2019. Despite the fact that the 2016 Credit Facility was terminated effective
December 31, 2020, not all financial covenants were met at December 31, 2020. All financial covenants relating to the
2019 Credit Facilities were met as at December 31, 2020.
Dependence on Third Party Service Providers
IOU Financial’s service to its clients depends, in part, on its ability to attract and retain the services that are provided to
it, by third party service providers. If some or all of IOU Financial’s current third-party service providers were to interrupt
or cancel their current services to IOU Financial, the company might be forced to curtail or cease its operations.
Competition
IOU Financial operates in an increasingly competitive environment. Both large and small competitors compete with IOU
Financial. Some of these competitors may have longer operating histories, greater name recognition and greater
financial and marketing resources than IOU Financial. IOU Financial believes that its ability to compete effectively is
dependent upon the quality of its product and client service. There can be no assurance that IOU Financial will be able
to compete effectively and retain its existing clients or attract and retain new clients. IOU Financial’s current and
potential competitors may develop and market new products or services that render IOU Financial’s existing and future
products and services less marketable or competitive.
Regulatory Risk
IOU Financial is subject to strict regulatory and licensing compliance standards, non-conformity with which may expose
IOU Financial to adverse consequences. IOU Financial’s business is dependent to a large extent on its ability to remain
Page | 22
in good standing with all regulators. Some of these regulators impose minimum working capital or net equity
requirements, amongst other, which in certain cases and under certain circumstances, IOU Financial may not be able
to satisfy. Under such cases, the Company may not be able to operate its regular business until all such financial or
regulatory requirements have been satisfied.
Dependence on Key Personnel
IOU Financial’s future depends, in part, on its ability to attract and retain key personnel. IOU Financial’s future also
depends on the continued contributions of its executive officers and other key technical personnel, each of whom would
be difficult to replace. The loss of the services of executive officers or key personnel, and the process to replace any of
its key personnel could involve significant time and expense and may significantly delay or prevent the achievement of
its business objectives.
IOU Financial’s growth could strain its personnel, resources and infrastructure
IOU Financial’s growth in headcount and operations may place a significant strain on its management and its
administrative, operational and financial reporting infrastructure. Accordingly, IOU Financial’s success will depend, in
part, on the ability of its senior management to manage the growth it achieves effectively. To do so, it must continue to
hire, train and manage new employees as needed. The addition of new employees and the system development that
it anticipates will be necessary to manage its growth will increase its cost base, which will make it more difficult for it to
offset any future revenue shortfalls by reducing expenses in the short term. If IOU Financial fails to successfully manage
its growth, it will be unable to execute its business plan. If its new hires perform poorly, or if it is unsuccessful in hiring,
training, managing and integrating these new employees, or if it is not successful in retaining its existing employees,
IOU Financial’s business may be harmed. To manage the growth of IOU Financial’s operations and personnel, it will
need to continue to improve its operational and financial controls and update its reporting procedures and systems.
Given the complex nature of the accounting of the Company’s operations and the limited number of staff resources,
IOU Financial may not be able to address all accounting and reporting impacts of new transactions or agreements on
a timely basis.
Security and Confidentiality Risk
IOU Financial stores users’ bank information and other personally-identifiable sensitive data. Any accidental or willful
security breaches or other unauthorized access could cause users’ secure information to be stolen and used for criminal
purposes. Security breaches or unauthorized access to secure information could also expose IOU Financial to liability
related to the loss of the information, time-consuming and expensive litigation, and negative publicity. If security
measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in
its software is exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized
access to any of its users’ data, IOU Financial’s relationships with its users will be severely damaged and it could incur
significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently
and generally are not recognized until they are launched against a target, IOU Financial and its third-party hosting
facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition,
many states have enacted laws requiring companies to notify individuals of data security breaches involving their
personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to
widespread negative publicity, which may cause IOU Financial’s users to lose confidence in the effectiveness of its
data security measures. Any security breach, whether actual or perceived, could harm IOU Financial’s reputation and
could result in the loss of users and future business.
If IOU Financial is unable to increase transaction volumes, its business and results of operations will be
affected adversely.
To succeed, IOU Financial must increase transaction volumes on its lending platform by raising additional capital and
attracting a large number of qualified borrowers in a cost-effective manner. The general tightening and other
developments in the broader credit markets may impact IOU Financial’s ability to attract capital to lend which, in turn,
could limit its ability to increase transaction volumes. If IOU Financial is not able to attract qualified borrowers, IOU
Financial will not be able to increase its transaction volumes. In addition, IOU Financial will rely on a variety of methods
to drive traffic to its website and lending platform. If IOU Financial is unable to use any of its planned marketing initiatives
or the cost of these initiatives was to significantly increase, IOU Financial may not be able to attract new qualified
borrowers in a cost-effective manner. As a result, its revenue and results of operations could be affected adversely and
could impair its ability to maintain its lending platform.
Page | 23
As an online company constantly involved in the development of its online lending platform, IOU Financial
faces increased risks, uncertainties, expenses and difficulties.
If IOU Financial is successful, the volume of loans originated through its lending platform may increase beyond its
current capacity, which will require IOU Financial to increase its facilities, personnel and infrastructure in order to
accommodate the greater servicing requirements and demands of its lending platform. IOU Financial’s lending platform
is dependent upon its website.
IOU Financial will likely be required to constantly add new hardware and update its software and website, expand its
customer support services and add new employees to maintain the operation of its lending platform, as well as satisfy
its servicing requirements. If IOU Financial is unable to increase the capacity of its lending platform and maintain the
necessary infrastructure, it might then suffer from a negatively impact on its revenue stream.
Any significant disruption in service on IOU Financial’s website or in its computer systems could reduce the
attractiveness of its lending platform and result in a loss of users.
If a catastrophic event resulted in a lending platform outage and physical data loss, IOU Financial’s ability to service its
loans would be materially and adversely affected. The satisfactory performance, reliability and availability of its
technology and its underlying network infrastructure are critical to its operations, level of customer service, reputation
and ability to attract and retain users. IOU Financial’s system hardware is hosted in multiple hosting facilities. All of the
data is stored in multiple geographic locations to ensure data availability in the event a particular data center fails. IOU
Financial’s service provider does not guarantee that access to IOU Financial’s website will be uninterrupted, error-free
or secure. IOU Financial’s operations depend on its supplier’s ability to protect their and its systems in their facilities
against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature,
humidity and other environmental concerns, computer viruses or other attempts to harm its systems, criminal acts and
similar events. If its arrangement with this supplier is terminated, or there is a lapse of service or damage to the
supplier’s facilities, IOU Financial could experience interruptions in its service, as well as delays and additional expense
in arranging new facilities. Any interruptions or delays in its service, whether as a result of its supplier or other third-
party error, its own error, natural disasters or security breaches, whether accidental or willful, could harm its
relationships with its users and its reputation. In addition, in the event of damage or interruption, IOU Financial's
insurance policies may not adequately compensate it for any losses that it may incur. IOU Financial’s disaster recovery
plan has not been tested under actual disaster conditions, and it may not have sufficient capacity to recover all data
and services in the event of an outage at a supplier facility. These factors could prevent it from processing or posting
payments on the loans, damage its brand and reputation, divert its employees’ attention, reduce its revenue, subject it
to liability and cause users to abandon its lending platform, any of which could adversely affect its business, financial
condition and results of operations.
IOU Financial’s ability to service loans or maintain accurate accounts may be adversely affected by computer
viruses, physical or electronic break-ins and similar disruptions.
The highly-automated nature of IOU Financial’s lending platform may make it an attractive target and potentially
vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. If a computer “hacker” were
able to infiltrate IOU Financial’s lending platform, users would be subject to an increased risk of fraud or identity theft,
and IOU Financial may not receive the principal or interest payments that it expects to receive on any loans that it was
fraudulently induced to make. Hackers might also disrupt the accurate processing and posting of payments to IOU
Financial’s accounts on its lending platform, or cause the destruction of data and thereby undermine IOU Financial’s
rights to repayment of the loans it has made. While IOU Financial has taken steps to prevent hackers from accessing
its lending platform, if it is unable to prevent hacker access, its ability to receive the principal and interest payments that
it expects to receive on loans it made and its ability to service its loans and to maintain its lending platform could be
adversely affected.
Page | 24
Maintenance of Client Relationships
The ability of IOU Financial to attract and maintain clients requires that it provide a competitive offering of products and
services that meet the needs and expectations of its clients. IOU Financial’s ability to satisfy the needs or demands of
its clients may be adversely affected by factors such as the inability or failure to identify changing client needs or
expectations or the inability to adapt in a timely and cost-effective manner to innovative products and services offered
by competitors.
Litigation Risk
IOU Financial’s business may become susceptible from time to time to various legal claims, including class action
claims, in the course of its operations or with respect to the interpretation of existing agreements. Any future claims or
litigation could have a material adverse effect on IOU Financial’s business and its profitability.
Possible Volatility of Stock Price
The market price of the common Shares could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in IOU Financial’s results of operations, changes in financial estimates by securities analysts or
by management, general market conditions and other factors. Market fluctuations, as well as general economic, political
and market conditions such as recessions, interest rate changes or international currency fluctuations may adversely
affect the market price of the common shares.
GENERAL
The Company also discloses information related to its activities on SEDAR at www.sedar.com and on its website
www.ioufinancial.com
Page | 25
IOU FINANCIAL INC.
CORPORATE INFORMATION
DIRECTORS AND OFFICERS
Philippe Marleau, Director, President & CEO
David Kennedy, Chief Financial Officer and Secretary
Wayne Pommen – Director
Evan Price - Director
Yves Roy - Director
Lucas Timberlake - Director
Neil Wolfson - Director
AUDITORS
PricewaterhouseCoopers LLP
TRANSFER AGENT AND REGISTRAR
Computershare Investor Services Inc.
HEAD OFFICE
IOU Financial Inc.
1 Place Ville-Marie
Suite 1670
Montreal, Quebec
H3B 2B6
Telephone: (514) 789-0694
(514) 789-0542
Fax:
SUPPLEMENTARY INFORMATION
Supplementary documents regarding
(www.sedar.com) or upon written request to the Company’s principal business center:
1 Place Ville-Marie, Suite 1670, Montreal, Quebec, H3B 2B6.
the Company are available on SEDAR’s website
IOU FINANCIAL INC.
MANAGEMENT’S REPORT
Management is responsible for the integrity and fair representation of the financial statements and
other information in this annual report. The financial statements have been prepared in accordance
with International Financial Reporting Standards. Financial data and operating results elsewhere in
the annual report are consistent with those contained in the financial statements.
The Company's policy is to maintain high-quality internal accounting and administrative control
systems within the limits of reasonable cost. Such systems are designed to provide assurance that
the financial information is accurate and reliable and that assets are adequately accounted for and
safeguarded.
The financial statements have been reviewed by the Audit Committee and approved by the Board of
Directors, as has the other information in this annual report. In addition, the financial statements have
been audited by PricewaterhouseCoopers LLP.
In the opinion of management, these financial statements incorporate, within reasonable limits, all
important elements and data available as at April 28, 2021.
(s) David Kennedy
David Kennedy
Chief Financial Officer
Montreal, Canada
April 28, 2021
Independent auditor’s report
To the Shareholders of IOU Financial Inc.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of IOU Financial Inc. and its subsidiaries (together, the Company) as at
December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in
accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statements of financial position as at December 31, 2020 and 2019;
the consolidated statements of comprehensive (loss) income for the years then ended;
the consolidated statements of changes in shareholders’ equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to consolidated financial statements, which include significant accounting policies and other
explanatory information.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of
the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities
in accordance with these requirements.
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.
1250 René-Lévesque Boulevard West, Suite 2500, Montréal, Quebec, Canada H3B 4Y1
T: +1 514 205 5000, F: +1 514 876 1502
“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis.
Our opinion on the consolidated financial statements does not cover the other information, and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting
process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards
will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of
not detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report
to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit. We
remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Jean-Luc Tremblay.
Montréal, Quebec
April 28, 2021
1 CPA auditor, CA, public accountancy permit No. A125840
IOU FINANCIAL INC.
Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
PAGE
Consolidated Statements of Financial Position 3
Consolidated Statements of Comprehensive Income 4
Consolidated Statements of Changes in Shareholders’ Equity 5
Consolidated Statements of Cash Flows 6
Notes to the Consolidated Financial Statements 7
IOU FINANCIAL INC.
Consolidated Statements of Financial Position
As at December 31, 2020 and 2019
(in Canadian dollars)
Assets
Cash and cash equivalents
Restricted cash
Sales taxes receivable
Commercial loans receivable, net
Servicing assets
Other receivables
Prepaid expenses and deposits
Equipment and leasehold improvements
Intangible assets
Right-of-use assets
Unamortized financing transaction costs
Total Assets
Liabilities
Accounts payable and accrued liabilities
Financing credit facilities
Convertible debentures
Lease liabilities
Total Liabilities
Shareholders’ Equity
Share capital
Contributed surplus
Accumulated other comprehensive income
Deficit
Total Shareholders’ Equity
Note
2020
$
2019
$
4
4
5
6
7
8
10
9
10
11
8
13
9,958,977
1,291,646
49,161
11,059,595
1,237,550
605,930
92,886
103,721
-
672,456
99,971
25,171,893
2,017,542
-
10,404,569
731,123
13,153,234
5,332,532
1,378,989
23,286
54,449,029
1,405,302
211,940
114,772
145,233
54,940
716,787
982,136
64,814,946
2,042,877
38,936,865
9,931,181
753,645
51,664,568
28,887,186
4,614,728
1,728,918
(23,212,173)
12,018,659
26,988,530
4,477,383
2,077,163
(20,392,698)
13,150,378
Total Liabilities and Shareholders’ Equity
25,171,893
64,814,946
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board on April 28, 2021
Phil Marleau (signed), Director
Wayne Pommen (signed), Director
3
IOU FINANCIAL INC.
Consolidated Statements of Comprehensive (Loss) Income
For the Years Ended December 31, 2020 and 2019
(in Canadian dollars)
Note
2020
$
2019
$
Revenue
Interest revenue
Other fees and servicing income
Net gain recognized on sale of loans
Gross Revenue
Cost of Revenue
Interest expense
Provision for loan losses, net of recoveries
Total Cost of Revenue
Net Revenue
Operating expenses
(Loss) Earnings Before Income Taxes
Income tax expense
Net (Loss) Earnings for the Year
Currency translation differences
Income tax
Other comprehensive loss
Comprehensive (Loss) Income for the
Year
(Loss) Earnings per Share:
Basic
Diluted
15
15
4
4
17
16
16
12
12
11,815,590 17,861,394
1,754,589
3,650,733
16,984,789 23,266,716
1,624,994
3,544,205
2,800,963
7,983,173
3,998,673
7,703,592
10,784,136 11,702,265
6,200,653 11,564,451
9,020,128
(2,819,475)
9,919,772
1,644,679
-
121,370
(2,819,475)
1,523,309
(348,245)
(454,869)
-
(3,167,720)
121,370
(333,499)
(3,167,720)
1,189,810
(0.03)
(0.03)
0.02
0.02
Net (loss) earnings and comprehensive (loss) income are entirely attributable to the shareholders of the
Company. Other comprehensive (loss) income is entirely subject to be reclassified to net (loss) earnings.
The accompanying notes are an integral part of these consolidated financial statements.
4
IOU FINANCIAL INC.
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Note
Common
Shares
(#)
Share
Capital
($)
Contributed
Surplus
($)
Accumulated
OCI 1
($)
Deficit
($)
Shareholders’
Equity
($)
Balance as at
December 31, 2018
Comprehensive income
for the year
Warrants exercised
Debentures exercised
Shares repurchased
Stock-based
compensation
Balance as at
December 31, 2019
Comprehensive loss
for the year
Shares Issued
Shares repurchased
Stock options exercised
Stock-based
compensation
Balance as at
December 31, 2020
87,825,309
27,171,722
4,189,397
2,410,662
(21,916,007)
11,855,774
-
-
348,313
69,662
200,000
(1,665,500)
100,000
(352,854)
-
-
-
-
-
-
287,986
(333,499)
1,523,309
1,189,810
-
-
-
-
-
-
-
-
69,662
100,000
(352,854)
287,986
86,708,122
26,988,530
4,477,383
2,077,163
(20,392,698)
13,150,378
-
18,009,806
(279,000)
205,000
-
1,937,644
(55,388)
16,400
-
-
-
-
(348,245)
-
-
-
-
-
137,345
-
(2,819,475)
-
-
-
-
(3,167,720)
1,937,644
(55,388)
16,400
137,345
13
11
13
13
13
13
13
13
104,643,928
28,887,186
4,614,728
1,728,918
(23,212,173)
12,018,659
1 OCI: Other Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
5
IOU FINANCIAL INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020 and 2019
(in Canadian dollars)
Operating Activities
Net (loss) earnings for the year
Non-cash items included in net earnings
Change in non-cash working capital items
Sale of commercial loans
Interest received
Interest expense
Interest paid
Cash (used) generated in operating activities
Investing Activities
Additions to equipment and leasehold
improvements
Deductions to restricted cash
Cash generated in investing activities
Note
18
18
2020
$
2019
$
(2,819,475)
(11,299,387)
(39,279,996)
84,570,685
10,253,056
2,854,977
1,523,309
(17,181,434)
(114,955,469)
93,261,010
16,177,700
4,062,894
(2,381,589)
41,898,271
(4,110,655)
(21,222,645)
(20,838)
87,343
66,505
(42,334)
591,091
548,757
Financing Activities
Transaction costs paid
Issuance (repurchase) of equity, net of
transaction costs
Proceeds from financing credit facilities
Repayment of financing credit facilities
Decrease in lease liabilities
Cash generated (used) in financing activities
-
(81,546)
13
10
10
1,898,656
-
(38,936,865)
(115,632)
(37,153,841)
(183,192)
19,906,790
-
(154,491)
19,487,561
Increase (Decrease) in Cash
4,810,935
(1,186,327)
Exchange rate difference on cash
(184,490)
(242,311)
Cash
Beginning of period
End of period
5,332,532
9,958,977
6,761,170
5,332,532
The accompanying notes are an integral part of these consolidated financial statements.
6
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
1. General Information
IOU Financial Inc. (“IOU Financial”) was incorporated under Part IA of the Companies Act
(Quebec) and is governed by the Business Corporations Act (Quebec). The registered office
of IOU Financial is located at 1 Place Ville-Marie, Suite 1670, Montréal, Quebec, Canada.
IOU Financial is a public company listed on the TSX Venture Exchange (TSX-V).
IOU Financial’s wholly owned subsidiary IOU Central Inc. (“IOU Central”) was incorporated
under the Canada Business Corporations Act on August 10, 2006 and presently operates
an internet-based commercial lending business in the United States of America, through its
subsidiary, IOU Central Inc. (USA) (“IOU USA”), based in the state of Georgia (incorporated
in Delaware on August 16, 2006). On January 1, 2020, IOU Central was dissolved, leaving
IOU USA to be a subsidiary of IOU Financial.
IOU Financial’s wholly owned subsidiary IOU Financial Canada Inc. (“IOUF Canada”) was
incorporated on December 1, 2015 under the Business Corporations Act (Quebec). IOUF
Canada is engaged in the commercial lending business in Canada.
IOU USA’s wholly owned subsidiary IOU Small Business Asset Fund I, LLC (“IOU SBAF I”)
and IOU Small Business Asset Fund II, LLC (“IOU SBAF II”) were incorporated on
December 9, 2015 and January 2, 2019 respectively, as Delaware limited liability
companies and currently hold a portfolio of commercial loans receivable.
IOU USA’s new wholly owned subsidiary, Zing Funding I, LLC, (“Zing Funding”) was
incorporated on March 16, 2020 as a Delaware limited liability company and is engaged in
the commercial lending brokerage business.
The term “Company” in these consolidated financial statements refers collectively to IOU
Financial and its wholly owned subsidiaries: IOU Central, IOU USA, IOUF Canada, IOU
SBAF I, IOU SBAF II, and Zing Funding.
These consolidated financial statements were authorized for issuance by the Board of
Directors of the Company on April 28, 2021.
2. Basis of Preparation
The consolidated financial statements of the Company have been prepared in accordance
with International Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”). These consolidated financial statements have been
prepared under the historical cost convention. Other measurement bases used are
described in the applicable notes.
7
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
3. Significant Accounting Policies
The principal accounting policies applied in the preparation of these consolidated financial
statements are consistent with those applied in the previous financial year, except as
described below.
4.1 Current and Future Changes in Accounting Policies
a) New standards adopted during the year
The Company has not adopted any new standards that have had a significant effect on
the Company during the year.
b) New standards and interpretations not yet adopted that are relevant to the Company.
A number of new standards and amendments to standards and interpretations are effective
for annual periods beginning after January 1, 2021 and have not been applied in preparing
these consolidated financial statements. Interest Rate Benchmark Reform (Amendments to
IFRS 9, IAS 39 and IFRS 7), may be applicable but is not expected to have a significant
effect on the consolidated financial statements of the Company.
4.2 Use of Estimates and Judgments
The preparation of consolidated financial statements in conformity with IFRS requires the
use of certain critical accounting estimates. It also requires management to exercise its
judgment in the process of applying the Company’s accounting policies. Estimates and
judgments are continually evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be reasonable under the
circumstances. The areas involving a higher degree of judgment or complexity, or areas
where assumptions and estimates are significant to the consolidated financial statements
are described below:
1. Critical Accounting Estimates and Assumptions
The Company makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal the related actual results. The
estimates and assumptions that have a significant risk of causing a significant
adjustment to the carrying amounts of assets and liabilities within the next financial year
are addressed below.
1.1
Deferred Tax Estimation
The recognition of deferred tax assets and liabilities involves making
assumptions including estimating the timing of the reversal of temporary
8
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
differences or if it is probable that temporary differences will not reverse in the
foreseeable future.
The realization of deferred tax assets ultimately depends on taxable profits being
available in the future. Deferred tax assets should be recognized when it is
probable that taxable profits will be available against which the deferred tax
asset can be utilized and it is probable that the entity will earn sufficient taxable
profit in future periods to benefit from a reduction in tax payments. This involves
the Company making assumptions within its overall tax-planning activities and
periodically reassessing them in order to reflect changed circumstances as well
as tax regulations. Moreover, the measurement of a deferred tax asset or liability
reflects the manner in which the Company expects to recover the asset’s
carrying value or settle the liability.
1.2
Servicing Assets
The initial recognition of servicing assets requires the Company to make
estimates of the fair value of the service to be provided, which is based on
market expectations at the time of the sale of the loan and may vary from the
actual cash flows received. The Company also make estimates on the timing of
future cash flows from servicing fees to be received from institutional purchasers.
1.3 Valuation of Commercial Loans
Management exercises judgment to determine the expected credit losses
(“ECL”) based on all available reasonable and supportable information about
past events, current conditions and forecasts of future events and economic
conditions. Further details on the estimates used to determine any allowance for
impaired loans receivable are provided in the accounting policy “Impairment of
OTH Loans”.
Basis of Consolidation
The consolidated financial statements include the accounts of IOU Financial and its
subsidiaries, which are the entities over which IOU Financial has control. The Company
controls an entity when the Company is exposed to, or has the rights to, variable returns
from its involvement with the entity and has the ability to affect those returns through its
power over the entity. Subsidiaries are fully consolidated from the date on which control is
transferred to the Company. They are deconsolidated from the date that control ceases.
All intercompany transactions, balances, income and expenses are eliminated in full on
consolidation.
Segment Reporting
9
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Operating segments are reported in a manner consistent with the internal reporting provided
to the chief operating decision-maker. The chief operating decision-maker, who is
responsible for allocating resources and assessing performance of the operating segments,
has been identified as the Chief Executive Officer (“CEO”).
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at historical cost less residual value,
accumulated depreciation and impairment losses. Historical cost includes expenditures that
are directly attributable to the acquisition of the items. The depreciation rate, residual value
and useful life of equipment are reviewed annually and adjusted if appropriate. Depreciation
based on the estimated useful life of the assets is calculated as follows:
Office Equipment
Computer Equipment
Leasehold Improvements
20% straight-line method
30% straight-line method
Over remaining lease term
An asset’s carrying amount is written down immediately to its recoverable amount if the
asset’s carrying amount is greater than its estimated recoverable amount.
Intangible Assets
The costs to develop software for the Company’s website and online loan platform are
capitalized when management has authorized and committed project funding, preliminary
development efforts are successfully completed, and it is probable that the project will be
completed and the software will be used as intended. Capitalized software development
costs primarily include fees paid to outside consultants and salaries for employees directly
involved in the development efforts. Costs incurred prior to meeting these criteria, together
with costs incurred for training and maintenance, are expensed. Costs incurred for upgrades
and enhancements that are considered to be probable to result in additional functionality
are capitalized. The Company capitalizes expenditures for betterments and expenses
amounts for maintenance, repairs and renewals as they are incurred.
Internal use software is stated at cost less accumulated amortization. Amortization and
useful lives are reviewed annually. Capitalized costs are amortized using the straight-line
method over their expected lives, which presently approximate three years.
Leases
IFRS 16 specifies a single accounting model for the lessee under which a lease liability and
a right-of-use asset are recognized for all leases with a term of more than 12 months (except
if the value of the underlying asset is low).
10
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
The lease liabilities and right-of-use assets are initially measured at the present value of the
lease payments payable over the lease term, discounted at the Company’s incremental
borrowing rate.
Each month, the right-of-use assets are amortized on a linear basis until the end of the
lease. Lease payments are apportioned between the lease liabilities and interest expense.
Leases in which the Company is the lessor are generally sub-leases for premises. The
Company classifies the leases in which it is the lessor as either finance leases or operating
leases. A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incidental to ownership of an underlying asset and as an operating lease if it does
not. The Company mainly enters into operating leases. When the Company is the lessor,
lease income from operating leases is recognized on a straight-line basis over the lease
term to offset its rental expense. Initial direct costs incurred in negotiating and arranging an
operating lease are recognized as an expense.
Impairment of Tangible and Intangible Assets
At the end of each reporting period, the Company reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication of impairment.
If any such indication exists, the recoverable amount of the asset is estimated in order to
determine the extent of the impairment loss, if any. Where it is not possible to estimate the
recoverable amount of an individual asset, the Company estimates the recoverable amount
of the cash-generating unit (“CGU”) to which the asset belongs. Where a reasonable and
consistent basis of allocation can be identified, corporate assets are also allocated to
individual CGUs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In
assessing value in use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset for which the estimates of future cash flows have
not been adjusted.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the
carrying amount of the asset is reduced to its recoverable amount. An impairment loss is
recognized immediately in the consolidated statements of comprehensive income (loss).
Where an impairment loss subsequently reverses, the carrying amount of the asset is
increased to the revised estimate of its recoverable amount, but so that the increased
carrying amount does not exceed the carrying amount that would have been determined
had no impairment loss been recognized for the asset in prior years. A reversal of an
impairment
the consolidated statements of
loss
comprehensive income (loss).
immediately
recognized
in
is
11
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Government Grants
At the end of each reporting period, the Company reviews if the government grant may be
reported separately as “other income or non-recurring gain” or deducted from the related
expense.
If a grant becomes repayable, the Company will treat it as a change in estimate. Where the
original grant related to income or non-recurring gain, the repayment should be applied first
against any related unamortised deferred credit, and any excess should be dealt with as an
expense. Where the original grant related to an asset, the repayment should be treated as
increasing the carrying amount of the asset or reducing the deferred income balance. The
cumulative depreciation which would have been charged had the grant not been received
should be charged as an expense.
Financial Instruments
Classification and Measurement – Financial Assets
At initial recognition, all financial assets are recorded at fair value on the consolidated
statements of financial position. After initial recognition, financial assets are classified either
at (i) amortized cost; (ii) fair value through profit or loss (“FVTPL”); or (iii) fair value through
other comprehensive income (“FVOCI”).
Such classification is based on:
- the contractual cash flow characteristics of the financial assets; and
- the Company’s business model for managing these financial assets.
The contractual cash flows associated with the financial asset must be solely payments of
principal and interest on the outstanding principal amount for the asset to be classified at
amortized cost or for a debt instrument held to be classified as FVOCI; otherwise, it must
be classified and measured at FVTPL.
The table below presents the different classifications for each of the three possible business
models that can be used to manage, on a portfolio basis, a group of financial assets to
achieve their respective business objectives.
Business Model
Originated to hold (OTH)
Originated to sell (OTS)
Originated to hold and sell
Business Objective
Solely the collection of the
contractual cash flows of the
financial assets
Sale of the financial assets or
managed on a fair value basis
Both the collection of contractual
cash flows of the financial assets
and their sale
12
Classification
Amortized cost
FVTPL
FVOCI
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
In addition, debt instruments held that would otherwise be measured at amortized cost or
at FVOCI can be designated upon initial recognition using the fair value option if doing so
would reduce an accounting mismatch. Equity instruments held are always measured at
FVTPL unless they are designated upon initial recognition at FVOCI, whereby subsequent
changes in fair value would be recorded in OCI and would never be reclassified to net
income (loss).
The following table presents the Company’s classification of its financial assets. The
Company has no financial assets at FVOCI and has not used the fair value option.
Financial Assets
Cash
Restricted cash
OTH loans
OTS loans
Other receivables
Classification
Amortized cost
Amortized cost
Amortized cost
FVTPL
Amortized cost
Commercial Loans Receivable
The Company recognizes commercial loans receivable when cash is advanced to a
borrower. Commercial loans are initially recognized at fair value plus directly attributable
costs and are subsequently measured at amortized cost using the effective interest method
for OTH loans or at fair value for OTS loans.
Presentation
OTH loans are presented net of allowances for expected credit losses on the consolidated
statements of financial position.
The interest income on OTS loans is recorded in interest revenue in the consolidated
statements of comprehensive income (loss). Changes in the fair value of OTS loans are
recognized in net gain recognized on sale of loans in the consolidated statements of
comprehensive income (loss).
Reclassifications
The portfolio of commercial loans designated as OTS at initial recognition would be
reclassified as OTH only in rare situations when there is a change in the business model
used to manage the portfolio. Such a reclassification would be applied prospectively from
the reclassification date.
Impairment of OTH Loans
At the end of each reporting period, the Company applies a three-stage forward-looking
impairment approach to measure the ECLs on its OTH loans. The stages are based on the
change in the credit quality of the OTH loan since initial recognition. Measurement of ECLs
at each reporting period reflects reasonable and supportable information about past events,
13
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
current conditions, and forecasts of future events and economic conditions.
The following table presents the three stages of the Company’s impairment model.
Stage
Credit Quality – Reporting
Date vs. Initial Recognition
Impairment Amount
1
2
3
No significant increase
Equals to 12-month ECL
Significant increase
Equals to lifetime ECL
Credit-impaired
Equals to lifetime ECL until the
financial asset is written off
Interest Income
The interest income is calculated on the gross carrying amount of the OTH loans in stages
1 and 2 and on the net carrying amount of the OTH loans in stage 3.
Changes in Credit Risk
The Company considers that a significant increase in credit risk exists after a commercial
loan has one missed payment or earlier if other reasonable and supportable information
exists to support the estimated increase in probability of default of the OTH loan. The
assessment of a significant increase in credit risk requires significant judgment.
If the credit risk of an OTH loan improves such that there is no longer a significant increase
in credit risk since initial recognition, the OTH loan can revert from stage 2 to stage 1.
Credit-Impaired Loans
The definition of default used by the Company to identify its credit-impaired OTH loans is
consistent with the definition of default used for internal credit risk management purposes.
The Company considers that an event of default occurs when a payment is late by more
than 90 days or earlier when one or more events that have a detrimental impact on the
estimated future cash flows of the commercial loan have occurred.
If a credit impaired OTH loan improves such that there is no longer a significant increase in
credit risk since initial recognition, the credit impaired OTH loan can revert from stage 3 to
either stage 2 or stage 1.
Write offs
Commercial loans are written off when the Company considers the probability of recovery
to be non-existent due to:
(i)
(ii)
having exhausted reasonable recovery efforts; or
the borrower is bankrupt or winding up, and balances owing are not likely to be
recovered.
14
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
ECL Measurement
ECLs are measured as the probability-weighted present value of all expected cash shortfalls
over the remaining expected life of the financial instrument, and reasonable and supportable
information about past events, current conditions and forecasts of future events and
economic conditions is considered. The estimation and application of forward-looking
information requires significant judgment. The cash shortfall is the difference between all
contractual cash flows owed to the Company and all the cash flows that the Company
expects to receive.
The measurement of ECLs is primarily based on the product of the OTH loan’s:
- probability of default;
loss given default; and
-
- exposure at default.
The determination of ECL also requires the utilization of forward-looking macroeconomic
factors such as credit default indices, interest rates and gross domestic product that are
incorporated into the risk parameters. The estimate of ECL losses reflects an unbiased and
probability-weighted amount that is determined by evaluating a range of possible outcomes.
In order to implement these principles, the Company has developed loss-ratios by ECL
impairment stage. The forward-looking macroeconomic factors are integrated in the
aforementioned loss ratios to reflect the current economic conditions. Nevertheless, the
short-term nature of the Company’s commercial loans curtails the importance of these
forward-looking macroeconomic factors.
The Company applies experienced credit judgment to adjust the modelled ECL results when
it becomes evident that known or expected risk factors and information were not considered
in the initial credit risk rating and modelling process.
Classification and Measurement – Financial Liabilities
The following table presents the Company’s classification of its financial liabilities.
Financial Liabilities
Accounts payable and accrued liabilities
Financing credit facilities
Convertible debentures
Lease Liabilities
Classification
Amortized cost
Amortized cost
Amortized cost
Amortized cost
15
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Definitions – Financial Instruments
Term
Amortized cost
Exposure at
default
Fair value
Fair value option
(for a financial
asset)
FVOCI option
Modified loans
Loss given
default
Probability of
default
Meaning
The principal amount is generally the fair value of the financial
instrument at initial recognition. The interest consists of consideration
for the time value of money, the credit risk associated with the
principal amount outstanding during a particular period of time, and
other basic lending risks and costs as well as of a profit margin.
Outstanding balances anticipated at each point in time and assuming
previous payments were made. Expected exposure at default
decreases over time until it reaches zero upon loan maturity.
The fair value on initial recognition is the transaction price, which is
the fair value of the consideration given or received. Subsequent to
initial recognition, fair value is determined by management using
available market information or other valuation methodologies.
Irrevocable designation at FVTPL at initial recognition. Certain
conditions must be met:
- elimination or significant reduction in a measurement or
recognition inconsistency that would otherwise arise from
liabilities or
measuring
recognizing gains and losses on them on different bases; and
fair values are reliable.
financial assets or
financial
-
Irrevocable designation, at initial recognition, of an investment in an
equity instrument that is neither held for trading nor a contingent
consideration recognized in a business combination as being
measured at FVOCI.
OTH loans for which the contractual cash flows have been
renegotiated or otherwise modified.
Reflects the losses expected should a default occur and considers
such factors as repayments of principal and interest between the
consolidated statement of financial position date and the time of
default.
Probabilities of a default occurring over the determined period, based
on conditions existing at the consolidated statement of financial
position date and on future economic conditions that have, or will
have, an impact on credit risk.
16
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Calculation of Interest Income
Type of revenue Method of calculation
Interest – OTH
loans
Effective interest rate method on the gross carrying amount.
Interest –
credit-impaired
loans
Interest –
modified loans
Interest – OTS
loans
The effective interest rate method is applied to the amortized cost of
a credit-impaired loan (i.e., net of the stage 3 allowance for that loan)
in subsequent reporting periods, until the loan is fully impaired or
written off.
The gross carrying amount of a modified loan is recalculated as the
present value of the renegotiated or modified contractual cash flows
that are discounted at the loan’s original effective interest rate.
Effective interest rate method.
Definitions – Calculation of Interest Income
Term
Effective interest
rate
Expected life
Loan origination
fees
Loan Sales
Meaning
Rate that discounts estimated future cash flows through the expected
life of the financial instrument back to the net carrying amount
considering all contractual cash flows, including, for commercial
loans, loan origination fees, net of any transaction costs that are
directly attributable to the financial instrument but, for financial
assets, not future credit losses. Under the effective interest method,
the interest realized is not necessarily the same as the stated interest
rate on the agreement. The application of this method has the effect
of recognizing interest on the financial instrument evenly in
proportion to the amount outstanding over the period of repayment.
Represents the remaining contractual life of commercial loans
receivable.
Fee income charged to the borrower on the origination of the financial
asset.
In the normal course of business, the Company may sell its interests in commercial loans
receivable. The Company derecognizes loans receivable sold only when it has transferred
substantially all the risks and rewards of ownership of the assets, which occurs when the
Company no longer considers itself to have any significant exposure to the variability in the
present value of the future cash flows from the loans receivable. Outstanding proceeds of
sold or discharged loans receivable are reported separately from other loans receivable and
are measured at their realizable value, net of expected transaction costs.
17
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
When substantially all the risks and rewards related to a financial asset are neither
transferred nor retained, the Company derecognizes the financial asset over which it does
not retain control and recognizes an asset or a liability representing the rights and
obligations created or retained in the asset transfer. If control of the financial asset is
retained, the Company continues to recognize the asset in the Consolidated Statements of
Financial Position to the extent of its continuing involvement in that asset.
Where the Company retains the servicing rights of loans sold, the benefits of servicing are
assessed against market expectations. When the benefits of servicing are more than market
expectations, a servicing asset is recognized. Servicing assets are carried at amortized
cost. Amortization is calculated on a straight-line basis over the term of the servicing
agreement, which approximates one year. When the benefits of servicing are less than
market expectations, a servicing liability is recognized.
Transaction Costs
Transaction costs incurred as a necessary part of completing an equity transaction are
accounted for as part of that transaction and deducted from equity, net of any related income
tax benefit. Transaction costs that relate to the issue of a compound financial instrument
are allocated to the liability and equity components of the instrument in proportion to the
allocation of proceeds. Transaction costs for all financial instruments not at FVPTL are
added to the carrying amount of the instrument.
Interest Revenue
Interest revenue is recognized in the consolidated statements of comprehensive income
(loss) for all financial assets measured at amortized cost using the effective interest rate
method.
When a loan is classified as impaired, the original expected timing and amount of future
cash flows may be revised to reflect new loan circumstances. Interest revenue continues to
be recognized using the effective interest rate used to discount the future cash flows for the
purpose of measuring the impairment loss. This is offset by a corresponding adjustment to
the allowance for loan loss charge to reflect the fact that this additional revenue may not be
collectible.
Interest income and guarantee fee income is thereafter recognized on this impaired carrying
value using the effective interest rate. Additional changes to the amount or timing of future
cash flows could result in further loan losses, or the reversal of prior loan losses, which
would also impact the amount of subsequent income recognized.
18
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Interest Expense
Interest expense comprises interest expense on debt borrowings and is recognized in profit
or loss, in the period in which it is incurred, under the effective interest method.
Provisions
Provisions are recognized when the Company has a present legal or constructive obligation
as a result of a past event, it is probable that the Company will be required to settle the
obligation, and a reliable estimate can be made of the amount of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to
settle the present obligation at the end of the reporting period, taking into account the risks
and uncertainties surrounding the obligation. Where a provision is measured using the cash
flows estimated to settle the present obligation, its carrying amount is the present value of
those cash flows.
Revenue Recognition
Revenue is recognized when the Company has transferred control of goods or a service
(i.e., the performance obligation is satisfied). Management must use its judgment to
determine when performance obligations are satisfied and establish the transaction price
and the amounts allocated to such obligations.
Other Fees and Servicing Income
Fee income that is integral to the effective yield of a financial asset is recognized as an
adjustment to the effective interest rate calculation and is included in financing revenue as
previously described.
Fee and servicing revenue comprise service fees, insufficient funds and other administrative
fees, and referral fees.
Service fees are charged on loans sold to institutional purchasers where the Company
retains the servicing rights on the loans. In some instances, service fees are based on the
future cash flows of the loans sold to institutional purchasers, the amount recognized as a
service fee is based on the best estimate on the future cash flow taking into account the
risks and uncertainties surrounding the loans.
Insufficient funds and other administrative fee revenue are charged and collected on all
missed payments or for other administrative reasons and is recognized as it is earned.
Referral fee revenue is collected upon the successful referral and funding of unfunded loan
applications to third parties. This revenue is recognized when it is earned.
19
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Cash and Restricted Cash
Cash and restricted cash comprise cash in hand, deposits held at call with banks and
restricted cash. Restricted cash comprises bonding insurance collateral and cash held as
security for payment clearing activities.
Convertible Debentures
Convertible debentures are separated into their liability and equity components. The fair
value of the liability component at the time of issue is determined based on an estimated
interest rate of the debenture without the conversion feature. The amount attributed to the
equity component is determined as the difference between the fair value of the convertible
debenture as a whole and the fair value of the liability component.
Subsequent to initial recognition, the liability component is measured at amortized cost
using the effective interest method. The equity component is not remeasured subsequent
to initial recognition and is reclassified within equity on conversion or expiry.
requiring les sees to rec ognis e ass ets and liabilities for all l eas es unles s the leas e term is 12 months or l ess or the underlying asset has a low val ue. Les sors conti nue to clas sify l eases as operati ng or finance
Share Capital
Common shares are classified as equity. Incremental costs directly attributable to the issue
of new common shares are shown in equity as a deduction, net of tax, from the proceeds.
Contributed Surplus
Contributed surplus is used to record the accumulated fair value of stock options recognized
as stock-based payments and warrants issued. Contributed surplus is increased by the
compensation charge over the vesting period and is reduced by corresponding amounts
when the options and warrants are exercised, forfeited, or expire.
Foreign Exchange
a) Functional and Presentation Currency
Items included in the financial statements of each of the Company’s entities are
measured using the currency of the primary economic environment in which the entity
operates (the “functional currency”). The consolidated financial statements are
presented in Canadian dollars. The functional currency of IOU USA, IOU SBAF, IOU
SBAF II and Zing Funding is the US dollar, while the rest of the Company uses the
Canadian dollar as its functional currency.
20
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
b) Group Companies
The assets and liabilities of the subsidiaries with a US dollar functional currency are
translated at the exchange rate prevailing on the reporting date, and revenues and
expenses at the average rates during the reporting period. Foreign currency gains or
losses resulting from the translation of those subsidiaries are recorded in other
comprehensive income (loss) with a corresponding increase or decrease to the foreign
currency translation reserve component of accumulated other comprehensive income
(loss), which is a component of shareholders’ equity.
Stock-Based Compensation
The Company operates an equity-settled stock-based compensation plan, under which the
entity receives services from employees as consideration for equity instruments (options)
of the Company. The fair value of the employee and others providing similar services
received in exchange for the grant of options is recognized as an expense with a
corresponding increase to contributed surplus. The total amount to be expensed is
determined by reference to the fair value of the options granted at the grant date.
Each tranche of a stock-based compensation award with a different vesting date is
considered a separate grant for the calculation of fair value, and the resulting fair value is
amortized over the vesting period of the respective tranches, based on the Company’s
estimate of equity instruments that will eventually vest. At the end of each reporting period,
the Company revises its estimate of the number of equity instruments expected to vest. The
impact of the revision of the original estimates, if any, is recognized in the consolidated
statements of comprehensive income (loss), such that the cumulative expense reflects the
revised estimate with a corresponding adjustment to contributed surplus.
When the options are exercised, the Company issues new shares. The proceeds received
net of any directly attributable transaction costs are credited to share capital. Any amounts
previously credited to contributed surplus relating to the original stock-based compensation
is also allocated to share capital.
Taxation
Income tax expense or recovery represents the sum of the tax currently payable and
deferred tax.
21
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
a) Current Tax
The tax currently payable is based on taxable income for the year. Taxable income differs
from net earnings as reported in the consolidated statements of comprehensive income
(loss) because of items of income or expense that are taxable or deductible in other years
and items that are never taxable or deductible. The Company’s liability for current tax is
calculated using tax rates that have been enacted or substantively enacted by the end of
the reporting period.
b) Deferred Tax
Deferred tax is recognized, using the balance sheet method, on temporary differences
arising between the tax bases of assets and liabilities and their carrying amounts in the
consolidated statements of financial position. Deferred tax is calculated using tax rates and
laws that have been enacted or substantively enacted at the end of the reporting period,
and which apply when the related deferred income tax asset is expected to be realized or
the deferred income tax liability is expected to be settled.
i) Deferred Tax Liabilities:
● are generally recognized for all taxable temporary differences; and
● are not recognized on temporary differences that arise from goodwill
which is not deductible for tax purposes or the initial recognition of an
asset or liability in a transaction which is not a business combination and
at the time of the transaction, affects neither accounting nor taxable profit
(loss).
ii) Deferred Tax Assets:
● are recognized to the extent it is probable that taxable profits will be
available against which the deductible temporary differences can be
utilized; and
● are reviewed at the end of the reporting period and reduced to the extent
that it is no longer probable that sufficient taxable profits will be available
to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set
off current tax assets against current tax liabilities and when they relate to income taxes
levied by the same taxation authority and the Company intends to settle its current tax
assets and liabilities on a net basis.
22
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
c) Current and Deferred Tax for the year
Current and deferred tax are recognized as an expense or income in net earnings, except
when they relate to items that are recognized outside profit or loss (whether in other
comprehensive income (loss) or directly in equity), in which case the tax is also recognized
outside profit or loss, or where they arise from the initial accounting for a business
combination. In the case of a business combination, the tax effect is included in the
accounting for the business combination.
Basic and Diluted Earnings per Share
Earnings per share is calculated using the weighted average number of shares outstanding
during the year. Diluted earnings per share is computed using the treasury stock method,
giving effect to the exercise of all stock options, warrants and convertible debentures. The
diluted earnings per share is equal to the basic earnings per share due to the anti-dilutive
effect of these elements.
4. Commercial Loans Receivable
As at December 31, 2020 and 2019, the Company held commercial loans receivable as
part of its regular operations.
Principal balance of OTH loans
Unamortized fees and transaction costs
OTH loans
2020
$
2019
$
13,466,093
520,909
13,987,002
56,871,350
2,092,854
58,964,204
Allowance for expected credit losses
(2,927,407)
(4,515,175)
Commercial loans receivable, net
11,059,595
54,449,029
The loans bear fixed interest at a rate of 9.25% (2019: ranging between 9.25% and 15.99%)
and mature no later than 18 months (2019: 18). As at December 31, 2020, 0% (2019:
10.70%) of commercial loans receivable have a maturity date over 12 months. Guarantee
fees charged on each loan range between 7.00% and 30.00% (2019: 7.00% and 29.00%)
of the original loan amount. At inception, the loans had an average date to maturity of 12.9
months (2019: 12.0 months). The loans are being repaid daily or weekly over their terms.
Loans are not collateralized but are backed by a general security agreement against all of
the assets of the business and are personally guaranteed by the owner(s) of the business.
The commercial loans receivable are substantially all denominated in US dollars.
Transaction costs and unamortized fees comprise broker commissions and loan closing
fees and are recognized over the term of the loan through the effective rate mechanism.
23
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
The fair value of these loans is estimated to be equivalent to the carrying amount, due to
the residual short-term nature of these loans.
Credit Quality of OTH Loans
The commercial loan receivable balance consists of term loans and given their relatively
short-term nature; the Company assesses the credit quality of its loans solely at the time of
origination. Subsequent to origination, the credit quality of the loan portfolio is derived
principally through the monitoring of payment delinquencies and interactions with the
borrowers which then has a corresponding impact on the classification of the ECL
impairment stages.
The following table presents the gross carrying amount of commercial loans receivable as
at December 31, 2020, according to their ECL impairment stages.
As noted below, Stage 3 loans are subdivided into two subgroups described as Tier 1 and
Tier 2. Tier 1 includes credit-impaired loans that are still responsive and have made at least
one payment in the last 30 days. Tier 2 includes credit-impaired loans that are not
responsive and have not made a payment in the last 30 days. Inactive loans are estimated
ultimate recoverable amounts for delinquent loans that are in the last stages of the collection
process.
Stage 1
Stage 2
Stage 3 Tier 1
Stage 3 Tier 2
Inactive
Total
%
38.42
0.44
48.96
3.13
9.05
100.00
Gross Carrying
Amount
5,262,045
59,926
6,979,057
447,396
1,238,578
13,987,002
Allowance for
Expected Credit
Losses
(131,235)
(12,584)
(2,407,775)
(375,813)
Net Carrying
Amount
5,130,810
47,342
4,571,282
71,583
-
(2,927,407)
1,238,578
11,059,595
24
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
The following table presents the gross carrying amount of commercial loans receivable as
at December 31, 2019, according to credit quality and ECL impairment stages.
Stage 1
Stage 2
Stage 3 Tier 1
Stage 3 Tier 2
Inactive
Total
%
85.89
3.45
4.96
5.23
0.47
100.00
Gross Carrying
Amount
50,643,436
2,037,037
2,927,133
3,085,948
270,650
58,964,204
Allowance for
Expected Credit
Losses
(1,005,219)
(285,065)
(711,363)
(2,513,528)
-
(4,515,175)
Net Carrying
Amount
49,638,217
1,751,972
2,215,770
572,420
270,650
54,449,029
Movement in the Allowances for Losses on OTH Loans
The following table presents the movements of the allowance for expected credit losses as
at December 31, 2020.
Stage 1
Stage 2
Stage 3
Total
Balance, December
31, 2019
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Impact of
originations
Net remeasurement
Net variation of the
allowance
Loans written off
Recoveries of loans
previously
written off
Net write offs
Translation
differences
Balance,
December 31,
2020
1,005,219
2,063,864
(1,473,838)
(1,513,803)
541,268
(465,740)
(848,249)
-
285,065
(1,473,525)
1,473,838
(42,803)
3,224,891
(590,339)
-
1,556,606
4,515,175
-
-
-
-
(222,693)
-
8,248,767
541,268
7,560,334
(265,183)
-
9,215,034
8,101,602
(10,280,147) (10,280,147)
-
-
-
-
706,367
(9,573,780)
706,367
(9,573,780)
(25,735)
(7,298)
(82,557)
(115,590)
131,235
12,584
2,783,588
2,927,407
25
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
The following table presents the movements of the allowance for expected credit losses as
at December 31, 2019.
Stage 1
Stage 2
Stage 3
Total
Balance, December
31, 2018
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Impact of
originations
Net remeasurement
Net variation of the
allowance
Loans written off
Recoveries of loans
previously
written off
Net write offs
Translation
differences
Balance,
December 31,
2019
620,256
4,295,537
(3,263,488)
(3,052,229)
4,006,047
(1,560,339)
447,926
(4,295,537)
3,263,488
(76,904)
2,255,932
-
-
3,129,133
3,324,114
-
-
-
-
975,386
-
3,937,972
4,006,047
3,353,019
425,528
-
(133,567)
-
7,067,105
(6,198,651)
7,359,066
(6,198,651)
-
-
-
-
248,043
(5,950,608)
248,043
(5,950,608)
(40,565)
(29,294)
(147,538)
(217,397)
1,005,219
285,065
3,224,891
4,515,175
Amounts charged to the allowance are charged off when there is no expectation of
recovering additional cash.
Loans with a contractual amount of $10,280,147 written off during the period are still
subject to enforcement activity.
Loan modification
Commencing March 2020, the coronavirus pandemic (“COVID-19”) caused disruption,
slowdown and even temporary closures of several of the Company’s clients. In an effort to
help its clients, in late March 2020, management began the process of effecting modified
payment plans for clients manifesting bona fide hardships directly attributable to the impacts
of the COVID-19 pandemic. The nature and duration of the modified plans varied according
to the degree of hardship experienced by each client. These plans generally contemplated
temporary deferral of principal payments without reductions in the applicable interest rates
and for the most part not exceeding four months. As such, the effect on the amortized cost
of the modified loans were not significant and did not result in derecognitions of the loans
in question. These modifications were temporary in nature and by December 31, 2020 more
than two-thirds of all such loans have reverted to the initial payment schedule. All loans that
participated in the deferral program have been subject to the normal staging process for
26
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
ECL purposes, however given the extraordinary circumstance of COVID-19, as at
December 2020, if a credit-impaired OTH loan improves such that there is no longer a
significant increase in credit risk since initial recognition, the credit-impaired OTH loan
reverts from stage 3 to either stage 2 or stage 1.
Loan sales and servicing assets
During the year ended December 31, 2020, the Company sold some of its commercial loans
receivable, on a non-recourse basis, at face value, for total proceeds of $84.6 million (2019:
$93.3 million). At the time of sale, the Company transferred to the purchaser all rights and
risks associated with the loans sold, and the Company determined that the criteria for
derecognition had been met.
However, as per the debt assignment agreements, the Company retained the servicing
rights (payment collections) to the loans, and the purchaser agreed to be charged a
servicing fee over the term of the loans. The Company recognized a net gain on sale of the
commercial loans of $3.5 million for the year ended December 31, 2020 (2019: $3.7 million),
along with servicing assets that are amortized to the consolidated statements of
comprehensive income over the term of the assignment agreements. As at December 31,
2020, the carrying amount of these assets amounted to $1.2 million (2019: $1.4 million).
The servicing asset is determined by comparing the actual expected cash flows to be
received to the fair value of providing such services. The fair value of the servicing was
determined by using readily available third-party pricing for a similar type of service, which
is around 1% of the total principal and interest collected over the term of the servicing period.
27
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
5. Other receivables
Other receivable
Deferred Service Fees receivable
Total
2020
$
322,714
283,216
605,930
2019
$
211,940
-
211,940
Deferred service fees receivable relates to amounts to be collected with respect to the
sale proceeds and service fees on certain OTS loans.
6. Equipment and Leasehold Improvements
The following table presents the carrying amount of the equipment and leasehold
improvements as at December 31, 2020 and 2019.
Cost
Balance at December 31, 2018
Translation differences
Additions
Balance at December 31, 2019
Translation differences
Additions
Balance at December 31, 2020
Accumulated Depreciation
Balance at December 31, 2018
Translation differences
Depreciation expense
for the year
Balance at December 31, 2019
Translation differences
Depreciation expense
for the year
Balance at December 31, 2020
Carrying Amounts
At December 31, 2019
At December 31, 2020
Office
Equipment
$
Computer
Equipment
$
Leasehold
Improvements
$
Total
$
183,602
(4,672)
-
178,930
(1,828)
2,210
179,312
188,580
(6,400)
7,977
190,157
(3,510)
18,626
205,273
181,607 553,789
(12,799)
(1,727)
42,334
34,357
214,237 583,324
(6,041)
20,836
213,534 598,119
(703)
-
148,922
(4,287)
153,322
(5,667)
73,509 375,753
(11,105)
(1,151)
25,950
170,585
(1,862)
15,413
163,068
(2,912)
32,080
73,443
104,438 438,091
(5,358)
(584)
7,759
176,482
18,726
178,882
35,180
61,665
139,034 494,398
8,345
2,830
28
27,089
26,391
109,799 145,233
74,500 103,721
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
7.
Intangible Assets
The following table presents the carrying amount of the intangible assets as at
December 31, 2020 and 2019. Intangible assets comprise internal use software.
Cost
Balance at beginning of year
Translation differences
Additions
Balance at end of year
Accumulated Amortization
Balance at beginning of year
Translation differences
Amortization charge for the year
Balance at end of year
2020
$
2019
$
1,750,978
(40,500)
-
1,710,478
1,696,038
(42,297)
56,737
1,710,478
1,854,440
(103,462)
-
1,750,978
1,711,068
(98,629)
83,599
1,696,038
Carrying Amount
-
54,940
29
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
8. Right-of-use assets and lease liabilities
The following table presents the value of the right-of-use assets and lease liabilities as at
December 31, 2020 and 2019.
Right-of-use Assets
Balance at beginning of year
Depreciation of right-of-use assets
Translation differences
Balance at end of year
Lease Liabilities
Balance at beginning of year
Principal payments
Translation differences
Balance at end of year
9. Accounts Payable and Accrued Liabilities
Trade payables
Payable to loan purchasers
Other payables and accruals
Total
2020
$
2019
$
716,787
(137,441)
93,110
672,456
753,645
(115,632)
93,110
731,123
1,088,257
(191,349)
(180,121)
716,787
1,088,257
(154,491)
(180,121)
753,645
2020
$
252,097
814,339
951,106
2019
$
573,882
792,916
676,079
2,017,542
2,042,877
30
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
10. Financing Credit Facilities
Balance at beginning of year
Proceeds
Repayments
New transaction costs incurred
Exit fee
Amortization of transaction costs
Translation differences
Balance at end of year
2020
$
37,954,729
-
(38,936,865)
-
222,810
662,409
(3,054)
(99,971)
At year-end, the carrying value of the liability (asset) was composed of:
Financing credit facilities
Unamortized transaction costs
2020
$
-
(99,971)
(99,971)
2019
$
19,758,556
19,906,790
-
(375,083)
-
461,373
(1,796,907)
37,954,729
2019
$
38,936,865
(982,136)
37,954,729
The carrying amount of current borrowings was a reasonable approximation of the fair
value, as the facilities bear interest at a floating rate and the contractual spreads are
commensurate with the spreads the Company estimates it could currently obtain.
2016 Credit Facility
On April 22, 2016, the Company entered into a US$50.0 million credit facility with a third-
party lender (the “2016 Credit Facility”). The facility consisted of a US$25.0 million term
loan, expandable to US$50.0 million at the Company’s request and the lender’s
acceptance. The facility is denominated in US dollars and the interest rate is LIBOR plus
8.50%, which represented 10.19% as at December 31, 2019.
In February and July 2018, the 2016 Credit Facility was modified and extended until
December 31, 2020, the date on which the full amount will be due. The amount of the
modified facility is US$22.0 million, with a term portion equal to US$15.0 million and a
revolver amount of US$7.0 million.
In December 2019, the Company modified and extended its 2016 Credit Facility
until December 31, 2022. The modified interest rate of the 2016 Credit Facility is LIBOR
plus 5.50%, down from LIBOR plus 8.50%. The new rate came into effect in 2020.
In April 2020, the Company received default notices from the 2016 Credit Facility as a result
31
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
of an uncured over advance position and consequently it began charging additional default
interest of 3% for a total interest rate of LIBOR plus 8.5% and reduced the maximum facility
amount from US$22.0 million to US$15.0 million.
The amount outstanding as at December 31, 2020 is US$0 and the credit facility was
terminated effective December 31, 2020. Upon termination, the 2016 Credit Facility charged
an exit fee of US$175,000, a termination fee of US$75,000 and US$5,000 of legal costs
(Refer to Note 17).
2019 Credit Facility
On March 5, 2019, the Company entered into a new US$50.0 million credit facility (the
“2019 Credit Facility”). The facility has an initial commitment amount of US$50.0 million and
is expandable to US$100.0 million at the Company’s request and the lender’s acceptance.
The interest rate on the facility is 90-day LIBOR, subject to a minimum LIBOR of 1.5%, plus
4.50%, which represents 6.00% as at December 31, 2020. The term of the facility is three
years with a revolving period ending on March 5, 2021 and an amortization period
reflecting the availability of the credit facility.
On October 15, 2020, the Company repaid the remaining loan amount related to the 2019
Credit Facility and as a result, on October 22, 2020, the Company obtained a waiver for not
having cured the over advance position initially created in March 2020. In addition, the
Company obtained a waiver in relation to the defaults arising from its failure to meet certain
covenants for the April-September 2020 period. At the same time, the Company entered
into an amended agreement allowing for certain flexibility for certain financial covenants in
future.
The amount outstanding as at December 31, 2020 is US$0.
Transaction costs
Transaction costs directly attributable to the implementation and subsequent modification
of the financial liabilities described above have been included in the measurement of the
liabilities and are amortized over a period reflecting the availability of the credit facility. For
the year ended December 31, 2020, amortization of $662,409 (2019: $461,373) has been
included in operating expenses (Note 17).
Pledged assets
With respect to the 2016 Credit Facility, all assets held by the subsidiary IOUF SBAF are
pledged as collateral for the facility. The following table presents the carrying amounts of
assets pledged as collateral.
32
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Asset
Commercial loans receivable, net
Cash
2020
$
4,830,825
1,322,558
2019
$
28,547,715
2,356,398
With respect to the 2019 Credit Facility, all assets held by the subsidiary IOUF SBAF II are
pledged as collateral for the facility. The following table presents the carrying amounts of
assets pledged as collateral.
Asset
Commercial loans receivable, net
Cash
Financial covenants
2020
$
5,449,924
2,141,428
2019
$
25,901,314
1,303,424
As part of the 2016 and the 2019 Credit Facilities, the Company must respect certain
financial covenants. All financial covenants were met as at December 31, 2019.
Despite the fact that the 2016 Credit Facility was terminated effective December 31, 2020,
not all financial covenants were met at December 31, 2020.
All financial covenants relating to the 2019 Credit Facility were met as at December 31,
2020.
11. Convertible Debentures
On November 2, November 20 and December 17, 2015, the Company closed tranches of
an offering for convertible unsecured subordinated debentures (the “Debentures”) for
aggregate gross proceeds of $11,500,000. The Debentures mature on December 31, 2020
and bear interest at a rate of 10% per annum, payable monthly. The Debentures are
convertible at the holders’ option into common shares at a price of $0.75 per common share,
representing a conversion rate of 1,333.33 common shares for each $1,000 principal
amount of the Debentures. The Company has the right to force the conversion of the
Debentures into common shares at any time on or after December 31, 2018 should the
20-day volume weighted average price of the common shares on the TSX-V exceed 125%
of the conversion price. The issue costs were $621,159, resulting in net proceeds of
$10,878,841. The fair value of the liability component at the time of issuance was based on
an estimated interest rate of 11.90% for a debt without the conversion feature. The net
proceeds were attributed to the liability and equity components amounting to $10,092,467
(net of transaction costs of $576,268) and $786,374 (net of transaction costs of $44,891),
respectively. Considering the issuance costs, the effective interest rate on the liability
component of the Debentures is 12.14%.
33
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
On August 2, 2019, the Company amended the Debentures according to the terms below.
a) extended the maturity date of the Debentures from December 31, 2020 to
December 31, 2023;
b) eliminated the condition that the Debentures be redeemable by the Company only
when the current market price is 125% of the conversion price;
c) modified the conversion price of the Debentures from $0.75 to $0.50 per share;
d) eliminated the Company’s right to carry out a forced conversion of the Debentures;
and
e) eliminated the Company’s right to redeem or repay the principal amount of the
Debentures with freely tradeable shares.
The conversion period for the Debentures remains unchanged and is set to expire at
5:00 p.m. on the last business day prior to December 31, 2020.
The Company issued the Debentures by way of a private placement pursuant to a trust
indenture dated November 2, 2015 and entered into a supplemental trust indenture with
Computershare Trust Company of Canada, the debenture trustee.
Following the amendment, the liability component of the Debentures was determined to be
$10,012,175, resulting in a gain of $485,579 in 2019.
On October 21, 2019, an amount of $100,000 of the Debentures was converted to
200,000 common shares at $0.50 per share, bringing the par value of Debentures from
$11,500,000 to $11,400,000, and resulting in a gain of $9,028.
In April 2020, more than two-thirds of the value of the Company's convertible debenture
holders agreed to defer the payment of interest from the April 30, 2020 payment period to
the June 30, 2020 payment period ("reprieve period") and capitalize the accrued interest
over the reprieve period to the principal amount of the debentures at the end of the reprieve
period, in accordance to the terms of the trust indenture under which such debentures were
issued.
In August 2020, more than two-thirds of the value of the Company's convertible debenture
holders agreed to receive 75% of the interest owed for the months of July, August and
September 2020 in cash, and capitalize the remaining 25% of the monthly interest
payments to the principal amount of the debenture at the end of each monthly payment
period, in accordance to the terms of the trust indenture under which such debentures were
issued.
The Debentures recognized in the consolidated statements of financial position are
34
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
calculated as follows:
2020
$
2019
$
Par value of the Debentures
Unamortized discount and transaction costs
11,760,434
(1,355,865)
11,400,000
(1,468,819)
Liability component amount
10,404,569
9,931,181
12. Earnings per Share
Basic and Diluted Earnings per Share
2020
$
2019
$
Net (loss) earnings
Weighted average number of common shares
for the purposes of basic earnings per share
(2,819,475)
1,523,309
87,854,907
87,547,924
Basic (loss) earnings per share
Effect of dilutive securities: Options
Weighted average number of common shares
for the purposes of diluted earnings per share
(0.03)
-
0.02
-
87,854,907
87,547,924
Diluted earnings per share
(0.03)
0.02
The following potential common shares are anti-dilutive and are therefore excluded from
the weighted average number of common shares for the purposes of diluted earnings per
share.
Stock options
Debentures
Number of shares
2020
7,566,500
-
7,566,500
2019
6,861,500
22,800,000
29,661,500
35
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
13. Share Capital
Authorized
Unlimited number of common shares
Issued and Outstanding
104,643,928 Common shares
86,708,122 Common shares
2020
$
28,887,186
2019
$
26,988,530
On May 24, 2019, 348,313 warrants were exercised for total proceeds of $69,662.
As part of the Normal Course Issuer Bid (“NCIB”), in December 2019, the Company
repurchased and cancelled 1,665,500 common shares in the market for a total cost of
$352,854 including $4,087 of transaction costs.
On October 31, 2019, 100,000 Debentures were converted into 200,000 common shares.
In 2020, as part of the NCIB, the Company repurchased and cancelled 279,000 common
shares in the market for a total cost of $55,388 including $823 of transaction costs. The
NCIB terminated on April 30, 2020.
IOU completed a non-brokered private placement of 18,009,806 common shares of the
Company at a price of $0.1157 per common share for gross proceeds of $2,083,736,
excluding transactions cost of approximately $146,092.
In 2020, 205,000 options were exercised at an average exercise price of $0.08 for total
proceeds of $16,400.
36
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Warrants
A continuity schedule of outstanding common share purchase warrants for the years
presented is as follows:
Balance as at December 31, 2018
Exercised
Expired
Balance as at December 31, 2019
Exercised
Expired
Balance as at December 31, 2020
Stock-Based Compensation
Warrants
Outstanding
(#)
479,125
(348,313)
(130,812)
-
-
-
-
Average Exercise
Price per Warrant
($)
0.20
0.20
0.20
-
-
-
-
Movements in options for the years presented are as follows:
Balance as at December 31, 2018
Granted
Forfeited
Balance as at December 31, 2019
Granted
Exercised
Forfeited
Balance as at December 31, 2020
Options
Outstanding
(#)
6,201,000
2,385,000
(1,724,500)
6,861,500
2,000,000
(205,000)
(1,090,000)
7,566,500
Average
Exercise Price
($)
0.35
0.23
0.48
0.28
0.08
0.08
0.39
0.13
Stock options are granted to directors, officers, selected employees, and consultants. The
exercise price of the granted options is determined by the Board of Directors at a price
which shall not be lower than the greater of the closing market price of the shares on the
TSX-V on (a) the trading day prior to the grant of the options and (b) the date of the grant
of the options.
The employee options vest over a two-year period, with one-third vesting immediately and
one-third vesting on each of the first and second anniversaries of the date of the grant. Each
option is exercisable for a period of five years from the date of grant, provided that it has
vested.
37
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
The following summarizes information about stock options outstanding as at
December 31, 2020:
Exercise Price
($)
0.27
0.08
0.27
0.20
0.08
0.27
0.22
0.08
0.08
0.08
0.08
0.11
Total
Outstanding
Options
(#)
1,205,000
376,500
500,000
705,000
645,000
500,000
705,000
860,000
70,000
200,000
1,745,000
55,000
7,566,500
Exercisable
(#)
1,205,000
376,500
500,000
705,000
645,000
333,333
470,000
573,333
46,667
200,000
581,667
18,333
5,654,833
Expiry Date
June 2022
June 2022
July 2023
July 2023
July 2023
March 2024
March 2024
March 2024
August 2024
January 2023
July 2025
December 2025
The Company granted, on January 15, 2020, options to a consultant to acquire up to
200,000 Common Shares at an exercise price of $0.25 per share. These options have a
term of three years and vest as follows: 50,000 options shall vest on March 15, 2020,
50,000 options shall vest on June 15, 2020, 50,000 options shall vest on September 15,
2020, and 50,000 options shall vest on December 15, 2020.
On July 28, 2020, the Company granted options entitling its senior officers, its directors,
and certain employees and consultants to acquire up to an aggregate of 1,745,000
common shares of the Company ("Shares") at an exercise price of $0.08. These options
have a term of five years from the date of grant with one-third (1/3) vesting immediately
and one-third (1/3) vesting on each of the first and second anniversaries of the date of
grant, and if exercised, their underlying shares would be subject to a four-month hold
period from the date of issuance of the options. The grant-date fair value has been
established at $0.10 per option using the following assumptions: expected volatility of
84%, risk-free interest rate of 0.23% and an expected life to maturity that equals the term.
In addition, the exercise price of 2,403,167 stock options, granted prior to July 28, 2020, to
purchase common shares of the Company and which are currently outstanding, were
repriced to $0.08 per share. If exercised, their underlying shares would be subject to a
four-month hold period from July 28, 2020. None of these restrictions will apply as of
November 29, 2020.
38
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
On September 11, 2020, the Company amended the exercise price of the 200,000 options
granted on January 15, 2020 to a consultant from $0.25 to $0.08. If exercised, the shares
underlying these options would be subject to a four-month hold period from the date of the
amendment.
On December 3,2020, the Company granted options entitling one director to acquire up to
55,000 common shares at an exercise price of $0.11 per share. Those options are vested
over a two-year period, with one-third vesting immediately and one-third vesting on each
of the first and second anniversaries of the date of the grant and exercisable for a period
of five years from the date of grant, provided that it has vested.
In 2020, 205,000 options were exercised at an average exercise price of $0.08.
Due to the repricing of options, the weighted average exercise price was reduced to $0.13.
14. Financial Risk Management
The Company is exposed to a variety of financial risks including credit risk, liquidity risk and
market risk (including foreign exchange and interest rate risks). The Company’s overall risk
management program focuses on the unpredictability of financial markets and seeks to
minimize potential adverse effects on the Company’s financial performance.
14.1 Financial Risks
a) Credit risk
Credit risk is managed on a Company-wide basis and results from the possibility that a loss
may occur from the failure of another party to perform according to the terms of the contract.
The Company regularly monitors the credit risk exposure and takes steps to mitigate the
likelihood of those exposures resulting in actual loss.
The Company, in the normal course of business, monitors the financial condition of its
customers. These policies cover the approval of credit applications, attribution of risk
ratings, management of impaired loans, establishment of provisions and risk-based pricing.
The Company establishes an allowance for ECLs that corresponds to the credit risk of its
customers, historical trends and future economic circumstances. The Company’s maximum
credit risk is the carrying value of the cash, restricted cash, other receivables and
commercial loans receivable. Refer to Note 4 for information related to the commercial
loans receivable at year-end and the related allowance for ECLs.
In addition, financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of deposits in the form of cash and restricted cash. The
Company invests with major North American financial institutions with external credit ratings
varying from A- to A+. The Company has investment policies that are designed to provide
39
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
for the safety and preservation of principal, the Company’s liquidity needs and appropriate
yields.
b) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as
they become due. The Company’s approach in managing liquidity is to ensure, as far as
possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal
and stressed conditions, without incurring unacceptable losses or risking damage to the
Company’s reputation.
The Company manages liquidity risk through the management of its capital structure. The
Company has been financed mainly through equity and debt offerings, commercial loan
sales and the use of its financing credit facilities.
With respect to commercial loan sales, the Company has an agreement with an investor to
sell interests in certain of its commercial loan receivable of up to US$150 million per year
for the next two years (2019 - US$0 million). As at December 31, 2020, US$4.1 million
(2019- US$0 million) of certain commercial loans receivable were sold to the investor
pursuant to the agreement.
With respect to the financing credit facilities, it is noted that save for the amortization period
during the last year of the committed term, they are in the form of revolving credit facilities
for which the availability is determined by the collateral value of the loans pledged
thereunder. In order to meet its liabilities when they come due, the Company is dependent
on the continued availability of such financing activities.
The following table presents the contractual maturities of financial liabilities.
As at December 31, 2020
Carrying
Amount
$
0 to 1
Month
$
1 to 12
Months
$
12 to 36
Months
$
36
Months
and Over
$
2,017,542 575,678 1,144,864
-
-
-
10,404,569
731,123
-
-
97,964 1,077,604 14,111,580
439,826
205,276
18,371
-
-
-
182,626
Accounts payable and
accrued liabilities
Financing credit
facilities
Convertible debentures
Lease liabilities
40
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Amounts denominated in foreign currency or based on variable rates are determined based
on the spot rates as at December 31, 2020.
c) Foreign exchange risk
The Company, due to its operations being conducted primarily in the United States, is
exposed to foreign exchange risk arising from currency exposure with respect to the US
dollar. Foreign exchange risk arises from foreign denominated future commercial
transactions and recognized assets and liabilities.
The Company does not use derivative financial instruments to reduce its foreign exchange
exposure. Fluctuations in foreign exchange rates could cause unanticipated fluctuations in
the Company’s operating results.
The Company’s foreign exchange exposure arising from financial instruments that would
affect net earnings as at December 31, 2020 and 2019 relates to US dollar balances of the
Canadian dollar functional entities and Canadian dollar balances of US dollar functional
entities.
Based on the Company’s foreign currency exposure noted above, varying the above
foreign exchange rates to reflect a 10% strengthening of the Canadian dollar would have
increased the net loss by approximately $1,835,055 (2019: reduced net earnings by
$3,955,744), assuming that all other variables remained constant. An assumed 10%
weakening of the Canadian dollar would have had an equal but opposite effect on the
above currencies to the amounts shown above, on the basis that all other variables remain
constant.
d) Interest rate risk
The Company is subject to interest rate risk on its cash, restricted cash and financing credit
facilities. A 10% increase in interest rates over a 12-month horizon based on the balances
as at December 31, 2020 would not impact the net loss as the financing credit facilities have
been fully repaid as at December 31,2020. Interest rate impact (2020 - $0, 2019 - $285,601).
None of the Company’s current commercial lending is based on variable interest rates. The
Company is also exposed to changes in the value of a loan when that loan’s interest rate is
at a rate other than current market rate. The Company mitigates this risk by lending for short
terms, with terms at the inception of the loan generally varying from 6 to 18 months.
41
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
14.2 Management of Capital
The Company defines capital to be total shareholders’ equity, which includes share capital,
and certain debt, specifically the financing credit facilities and Debentures.
The Company’s objective in managing capital is to ensure a sufficient liquidity position to
market its loans, to finance its sales and marketing activities, research and development
activities, general and administrative expenses, working capital and overall capital
expenditures, including those associated with equipment and intangible assets. The ability
to fund these requirements in the future depends on the Company’s ability to access
additional capital and generate additional cash flow from its operations.
Since inception, the Company has financed its liquidity needs primarily through private
placements, the sale of loans and convertible debentures. When possible, the Company
tries to optimize its liquidity needs by non-dilutive sources. The capital management
objectives listed above have not changed since the previous fiscal year.
As part of the 2016 and the 2019 Credit Facilities, the Company must respect certain
financial covenants. All financial covenants were met as at December 31, 2019. Despite the
fact that the 2016 Credit Facility was terminated effective December 31, 2020, not all
financial covenants were met at December 31, 2020. All financial covenants relating to the
2019 Credit Facilities were met as at December 31, 2020.
15. Revenue by Category
The following table presents an analysis of revenue by category.
2020
$
2019
$
Interest Revenue
11,815,590
17,861,394
Other Fees and Servicing Income
Other fees
Servicing fees
Amortization of servicing assets
883,204
3,746,601
(3,004,811)
944,041
4,516,728
(3,706,180)
Total other fees and servicing income
1,624,994
1,754,589
42
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
16. Income Tax
Income tax expense (recovery) comprises:
Current tax expense
Deferred tax expense (recovery)
Total income tax (recovery) expense
2020
$
-
-
-
2019
$
5,694
115,676
121,370
The tax on the Company’s income before income tax differs from the theoretical amount
that would arise using the federal and provincial statutory tax rates applicable to income of
the consolidated entities. The statutory tax rates for 2020 decreased from 26.6% to 26.5%.
This decrease is in line with Quebec’s tax rate reduction from 11.6% to 11.5%. The
difference between the Company’s income tax and theoretical tax is as follows:
2020
2019
Canadian statutory tax rates
26.5%
26.6%
Statutory income taxes
Non-deductible expenses
Difference in foreign tax rates
Net change to unrecognized tax assets
Effective income tax (recovery) expense
$(747,161)
$86,614
$28,818
$631,729
-
$437,485
$52,892
$(29,254)
$(339,753)
$121,370
The adjustment in respect of differences in foreign tax rates includes amounts arising from
the differences in taxable income under US jurisdictions in which the Company operates.
43
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
Recognized Deferred Tax Assets and Liabilities
The following tables presents the composition of recognized deferred income tax assets
and liabilities.
Opening
balance
$
Recognized
in net earnings
$
For the Year Ended December 31, 2020
Recognized
Recognized
in OCI1
in equity
$
$
Closing
balance
$
Temporary Differences
Tax credit for salaries and
wages
Financing fees
Fixed assets / Intangibles /
ROU assets
Capital lease obligation
Unrealized foreign exchange
gain
Convertible debentures
Tax Losses and Credits
Tax losses
(25,475)
7,643
127,630
-
(358,531)
(248,733)
248,733
-
(757)
(7,643)
(166,820)
39,190
-
21,463
(114,567)
114,567
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(26,232)
-
(39,190)
39,190
-
(337,068)
(363,300)
363,300
-
Temporary Differences
Tax credit for salaries and
wages
Financing fees
Fixed assets
Unrealized foreign exchange
gain
Convertible debentures
Tax Losses and Credits
Tax losses
Opening
balance
$
Recognized
in net earnings
$
For the Year Ended December 31, 2019
Closing
Recognized
Recognize
d in OCI1
balance
in equity
$
$
$
(34,455)
11,466
(649)
(115,676)
8,980
(3,823)
-
-
128,279 -
115,676
-
(208,389)
(347,703)
(150,142)
-
(16,705) 115,676
347,703
(98,971)
-
-
(115,676)
115,676
-
-
-
-
-
-
-
(25,475)
7,643
127,630
-
(358,531)
(248,733)
248,733
-
44
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
As at December 31, 2020, no deferred income tax asset has been recognized on
approximately $8,885,000 and $9,083,000 of Federal and Provincial tax loss carryforwards,
respectively and on approximately $5,135,000 of tax loss carryforwards in the United States
(expressed in Canadian dollars). These tax loss carryforwards remain available for use in
the future to reduce taxable income, no later than as follows:
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
No expiry
Total
Federal
$
29,000
-
-
195,000
361,000
373,000
243,000
502,000
2,551,000
1,477,000
1,500,000
1,287,000
367,0002
1 -
$
Provincial United States
$
-
-
-
-
-
-
-
-
-
383,000
2,719,000
-
-
29,000
-
-
195,000
361,000
373,000
243,000
502,000
2,551,000
1,477,000
1,500,000
1,492,000
360,0003
1 -
8,885,000
9,083,000
5,135,000
2,033,000
1 Gross tax losses of $932,000 for Federal and Provincial less recognized amount of $932,000
against taxable temporary differences.
2 Gross tax losses of $804,000 for Federal less recognized amount of $437,000 against taxable
temporary differences.
3 Gross tax losses of $804,000 for Provincial less recognized amount of $444,000 against taxable
temporary differences.
As at December 31, 2020, the Company had approximately $98,000 of unused Federal tax
credits that are not recognized in the consolidated financial statements. Those unused tax
credits will expire between 2026 and 2033.
As at December 31, 2020, the Company had other deductible temporary differences of
approximately $1,031,000 for the Federal, $1,177,000 for the Provincial and $4,657,000 in
the United States (expressed in Canadian dollars) for which no deferred income tax asset
is recognized.
45
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
17. Operating Expenses
The following table presents the details of operating expenses for the years ended
December 31.
Wages and salaries
Credit on qualifying wages
Stock-based compensation
Depreciation of right-of-use assets
Rental liability interest expense
Rental expense
Insurance
Amortization of transaction costs – financing
credit facilities
Bank charges
Professional fees
Legal and accounting fees
Business fees and licences
Travel and entertainment
Telecommunications
Data services and IT costs
Advertising and promotion
Depreciation and amortization
Other
Non-recurring cost (gain) – revaluation of
convertible debenture
Non-recurring gain – PPP loan forgiveness and
wage subsidies (1)
Non-recurring cost – credit facility termination and
exit fees
Note
2020
$
2019
$
8
8
10
4,916,626
(128,987)
137,345
195,541
54,014
148,467
179,924
662,409
206,723
162,379
1,383,682
125,001
58,715
82,438
770,323
440,352
118,402
147,248
5,554,087
(96,132)
287,986
191,349
64,221
136,353
125,684
461,373
252,651
177,894
1,160,791
142,884
182,583
62,478
976,580
394,628
157,042
172,899
11
29,825
(485,579)
(1,012,331)
9
342,032
-
-
Total Operating Expenses
9,020,128
9,919,772
(1) On May 11th, 2020, the Company received funds from the US Small Business
Administration (SBA) through the Payroll Protection Program in the amount of
US$699,800. The Company also received $73,689 in wage subsidies through the
Canada Wage Subsidy program during 2020. All the forgiveness criteria for the loan
and subsidies were met in 2020 as such the Company recognized the PPP loan
forgiveness and wage subsidies as a non-recurring gain in 2020.
46
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
18. Supplemental Cash Flow Information
Non-cash items included in net earnings comprise the following:
Note
6
7
Depreciation of equipment and leasehold
improvements
Amortization of intangible assets
Amortization of servicing asset
Amortization of right-of-use asset
Stock-based compensation
Interest revenue
Net gain recognized on sale of loans
Income tax expense
Amortization of transaction costs –
financing credit facility
Revaluation of convertible debentures
2020
$
2019
$
61,665
56,737
3,004,811
137,441
137,345
(11,815,590)
(3,544,205)
-
73,443
83,599
3,706,180
191,349
287,986
(17,861,394)
(3,650,733)
121,370
662,409
-
(11,299,387)
461,373
(594,607)
(17,181,434)
Change in non-cash working capital items comprises the following:
Sales taxes receivable
Commercial loans receivable
Other receivables
Prepaid and deposits
Accounts payable and accrued liabilities
2020
$
(25,875)
(38,856,682)
(393,990)
21,886
(25,335)
(39,279,996)
2019
$
3,468
(115,237,057)
27,600
44,400
206,120
(114,955,469)
47
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
19. Related Party Transactions
Transactions in the Normal Course of Operations
The Company had the following transactions with related parties in the normal course of
its operations:
i) The Company rents its Canadian office space from Palos. The lease may be cancelled
after October 2021 upon the payment of a termination fee. The terms of this operating
lease are similar to those that would have been present for an arm’s-length transaction.
The amount of $122,874 is expensed as rental expense for the period (2019: rent
expense of $122,018). That amount does not include the amortization of right-of-use
assets and the interest on the lease liabilities. Future non-cancellable lease liabilities
under this agreement amount to $628,789.
ii) The Company sells loans to a fund managed by Neuberger Berman. In 2020, the
Company sold loans in the amount of US$4,093,785 (2019: US$0) and earned service
fees of $23,815 (2019: $0) and recorded deferred service fees receivable in the amount
of $283,216 as at December 31, 2020 (2019: $0).
Key Management Compensation
Key management includes directors (executive and non-executive), the Chief Operating
Officer and the Chief Financial Officer who is also the Company Secretary. The
compensation paid or payable to key management for employee services is shown below:
Salaries and other short-term employee benefits
Stock-based payments
2020
$
749,925
92,483
842,408
2019
$
885,529
169,496
1,055,025
48
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
20. Segment Information
The Company determines its reportable operating segments according to the manner in
which the information is used by the chief operating decision-maker and has determined
that the Company operates in one reportable operating segment with two main activities:
lending and servicing. Those activities have been identified on the basis of services
provided.
The Company’s lending activity originates and retains loans as part of its commercial loans
receivable portfolio. The Company’s servicing activity services commercial loans that have
been sold to institutional purchasers on a non-recourse basis in exchange for a servicing
fee.
Substantially all of the Company’s assets are located in the United States.
Revenues by activity are as follows:
2020
2019
Lending
$
Servicing
$
Total
$
Lending
$
Servicing
$
Total
$
Revenue
Interest revenue
11,815,590
- 11,815,590 17,861,394
- 17,861,394
Other fees
883,204
-
883,204
944,041
-
944,041
Servicing fees
-
3,746,601
3,746,601
-
4,516,728
4,516,728
Accelerated
recognition of
transaction costs
on loans sold
Amortization of
servicing asset
Gain on sale of
loans
-
686,937
686,937
-
377,091
377,091
- (3,004,811) (3,004,811)
-
(3,706,180)
(3,706,180)
-
2,857,268
2,857,268
-
3,273,642
3,273,642
Gross Revenue
12,698,794
4,285,995 16,984,789 18,805,435
4,461,281 23,266,716
49
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2020 and 2019
(in Canadian dollars, except as otherwise noted)
21. Event after the reporting date
On April 20,2021, the Company’s wholly owned subsidiary, IOU Central Inc., received loan
proceeds of US$699,800 pursuant to the Small Business Administration’s (SBA) Paycheck
Protection Program (PPP). IOU Central Inc. can apply for an amount of loan forgiveness
which would equal, in large part, to expenses incurred for payroll, rent and utilities
commencing from the date of first disbursement and ending no later than twenty-four (24)
weeks after the date of disbursement. The loan carries a fixed interest rate of 1% and
matures five (5) years from the date IOU Central Inc. applies for forgiveness. No payment
of principal and interest are due on this loan beginning on the date of disbursement and
ending on the date on which the amount of forgiveness is determined under the PPP
program.
50