IOU Financial Inc.
Annual Report
2021
Contents
PAGE
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
3
Corporate Information
25
Management’s Report
26
Consolidated Financial Statements
27
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IOU FINANCIAL INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following management’s discussion and analysis (“MD&A”) of IOU Financial Inc. (“IOU Financial” or the
“Company”), prepared as of April 27, 2022, should be read in conjunction with, and is qualified in its entirety by reference
to the consolidated financial statements as at and for the years ended December 31, 2021 and 2020 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 approximately US$1.03 billion 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, 2021, IOU Financial’s customers had been in business an average 11.5 years (based on their
incorporation date) at the time of application. These businesses borrowed on average US$84,578 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 primarily all 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 63 full-time employees as at December 31, 2021.
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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 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, cyber risk, maintenance of client relationships, litigation risk, volatility of stock price,
geopolitical risk 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.
NON-IFRS FINANCIAL MEASURES
The Company uses certain non-IFRS financial measures as an alternative method to evaluate performance. These
measures include adjusted gross revenue, adjusted net revenue, servicing portfolio yield, adjusted operating expenses,
adjusted operating expense ratio, non- recurring gains and losses, adjusted net earnings (loss), adjusted net earnings
(loss) per share. These financial measures may not be comparable to similar measures used by other issuers. The
definitions for each of the non-IFRS financial measures used as well as reconciliations to an IFRS basis, where
applicable, are provided below.
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OUTLOOK
2021 has been a pivotal year for IOU Financial, with the Company delivering on its 3 major strategic goals:
1.
Growing loan origination volumes back to pre-pandemic levels,
2.
Achieving a return to profitability on an annual basis, and
3.
Laying the groundwork for scalable growth in the coming years.
Success has been achieved on all fronts:
1.
IOU Financial has grown loan originations beyond pre-pandemic levels: Total loan originations reached
US$161.5 million in 2021, representing an increase of more than 90.3% over 2020 and surpassing all
previous annual loan origination figures in the history of the Company.
While the growth in loan origination volumes was driven by an increased market demand for funding, it should be
noted that a significant portion of loan originations was enabled by the Company’s successful transition from a
balance sheet strategy (under which the Company traditionally funded loans to its balance sheet) to a marketplace
strategy under which new loan originations are primarily being sold to institutional purchasers. Combined with an
increased emphasis on growing brand awareness in the industry, this has allowed the Company to maximize its
exposure to the economic recovery in 2021 untethered to the equity requirements that a balance sheet strategy
places on capacity to originate loans.
2.
IOU Financial achieved a return to profitability on an annual basis: The Company posted net earnings of
$3.7 million for 2021 on an IFRS basis, compared with a net loss of $2.8 million in 2020.
The success of the Company’s transition to a marketplace strategy is reflected in an 89.8% increase in servicing
and fee revenue ($10.1 million in 2021 vs. $5.3 million in 2020), driven by an unprecedented 72.5% year-over-year
growth in loans under management, which stood at $119.5 million as of December 31, 2021. These revenue
streams can be broken down as follows:
•
Servicing fees increased 61.4% to $6.0 million in 2021 vs. $3.8 million in 2020;
•
Gain on sale revenue increased 202.5% ($2.1 million in 2021 vs. $0.7 million in 2020. Gain on sale
revenue refers to the accelerated recognition of transaction costs on loans sold under IFRS, which
represents income earned on loans sold after taking into consideration loan origination sales costs);
•
Referral fee revenue earned by IOU’s retail distribution operation ZING Funding increased 105.4% ($1.1
million in 2021 vs. $0.5 million in 2020);
•
Administrative and other fees on the servicing portfolio increased 146.9% ($0.9 million in 2021 vs. $0.5
million in 2020).
Also playing a role in helping the Company achieve a return to profitability on an IFRS basis in 2021 is the $0.9
million in loan loss reversals and $2.4 million in reduced operating expenses as a result of loan forgiveness and
employee retention credits.
The Company expects servicing and fee revenue to continue to increase along with an increase in loans under
management as loan origination volumes grow. Interest revenue (which totaled $1 million in 2021 vs. $11.8 million
in 2020) will decline to negligible levels as the Company continues to wind down its balance sheet loan portfolio.
3.
Laying the groundwork for scalable growth:
The Company’s successful transition to a marketplace strategy has not only enabled the Company to capture more
growth opportunities in 2021 but has also liberated resources to invest in the further reduction of corporate debt
through the repurchase of approximately $3.7 million in convertible debentures in 2021 and an additional
repurchase of $1.2 million through to April 27, 2022 as well as to continue to invest in its Post-Pandemic Growth
Plan (PPGP) first announced as part of its Q1 2021 Financial Results. Under the PPGP, the Company continues
to advance 3 areas of strategic focus:
•
Technology innovation: Major projects are underway to support enhanced scalability by improving the
efficiency, flexibility and resiliency of the Company’s proprietary IOU360 technology platform. In 2021,
the Company introduced new service portals for internal reporting and legal services and is currently
preparing to launch new portals for brokers, merchants and investors in 2022 – all designed to support
greater efficiencies and the long-term scalability of loan applications, processing, underwriting and
originations.
•
Product expansion: The Company launched its first new lending product, the IOU Financial Cash-Back
Loan, in August 2021 – an industry first resulting in increased brand awareness and demand; the IOU
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Financial 24-Month Loan – launched in November 2021 – further supports these goals. Additional product
innovations are planned and will be enabled by further development of the IOU360 platform in 2022.
•
Product distribution: The Company continues to expand its wholesale (IOU Financial) and retail (ZING
Funding) distribution strategies to maximize its exposure to the economic recovery through both channels.
As noted above elsewhere in this document, ZING Funding was launched in June of 2020 and contributed
$1.1 million in Referral Fee revenues to IOU Financial in 2021.
IOU Financial’s strong 2021 loan originations and progress towards its strategic goals demonstrate the Company’s
ability to continue capitalizing on the economic recovery and create value for investors by capitalizing on its marketplace
strategy and investing in areas that support scalable growth.
In the first quarter ending March 31, 2022, IOU originated US$59.6 million in loans and set a new quarterly loan
origination record in its history. For all of 2022, the Company is targeting loan originations in the range of US$220M to
US$260M while continuing to invest in growth and scalability.
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
2021
$
2020
$
Loan originations ($US)
161,486,680
84,867,150
Principal balance of loan portfolio
2,647,198
13,466,093
Principal balance of servicing portfolio
116,826,337
55,796,788
Total loans under management
119,473,535
69,262,881
Adjusted gross revenue (1)
11,077,458
17,132,332
Interest expense
1,278,677
2,800,963
Net provision (Recovery) for loan losses
(925,548)
8,689,540
Adjusted operating expenses (2)
11,033,325
9,523,257
Adjusted net loss(3)
(326,908)
(3,175,061)
Adjusted net earnings (loss) per share(4)
(0.00)
(0.03)
Net earnings (loss)
3,722,068
(2,819,475)
Net earnings (loss) per share
0.04
(0.03)
Total assets
26,563,736
25,171,893
Total liabilities
11,058,178
13,153,234
(1) Adjusted gross revenue is a non-IFRS measure and 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 another measure of financial performance. 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.
(2) Adjusted operating expenses is a non-IFRS measure and 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 another measure of financial performance.
(3) Adjusted net (loss) earnings is a non-IFRS measure and 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.
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Financial Highlights
The Company continues to focus on its marketplace strategy allowing it to accelerate loan origination growth. This
strategy has the impact of placing more emphasis on servicing and fee revenue over interest revenue and cost of
revenue associated with holding loans as part of a loan portfolio. Interest revenue decreased as the principal loan
portfolio balance continues to wind down while servicing and fee revenue increased consistent with the increase in loan
origination volume as well as the increase in the servicing portfolio.
Due to the wind down of the loan portfolio, there is nominal interest expense associated with the financing credit facilities
in 2021 as IOU’s two financing credit facilities were terminated in December 2020 and October 2021, respectively.
Interest expense has decreased in 2021 as the Company was able to use its financial resources to repurchase
approximately $3.7 million its convertible debentures in 2021.
In addition, the marketplace strategy will render the net provision for loan losses irrelevant and IOU will continue to
focus on cash collections on the remaining portfolio which may give rise to reversals in the net provision for loan losses
and recoveries of loans previously written off.
For the year ended December 31, 2021, the Company funded US$161.5 million in loans (2020: US $84.9 million),
representing an increase of 90.3% over the same period last year. The increase in loan origination volumes in 2021
was driven by market demand for funding and was enabled by the Company’s successful transition from a loan portfolio
strategy to a marketplace strategy.
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 2021, ZING Funding facilitated loan originations of approximately US$15.3 million (of which approximately US$11.0
million was originated by its parent, IOU USA). This compares to approximately US$11.4 million in 2020 (of which
approximately US$9.3 million was originated by IOU USA).
Total loans under management increased 72.5% in 2021 ($119.5 million) over 2020 ($69.3 million) as the Company
experienced its highest loan origination volume in its history. The principal balance of the loan portfolio amounted to
$2.6 million at the end of 2021 (2020: $13.5 million), representing a decrease of 80.3% year over year. The principal
balance of IOU Financial’s servicing portfolio (loans being serviced on behalf of institutional purchasers) amounted to
$116.8 million at the end of the year 2021 (2020: $55.8 million), representing an increase of 109.4% year over year
due to the Company having sold the vast majority of its loan originations in 2021 to its base of institutional buyers.
Overall, the financial impacts of IOU’s transition to an originate to sell model in 2021 as compared to 2020 are as
follows:
•
Adjusted gross revenue decreased to $11.1 million (2020: $17.1 million), representing a decrease
of 35.3% for the year ended December 31, 2021 compared to the same period in 2020.
•
Interest revenue decreased 91.7% to $1.0 million in 2021 from $11.8 million in 2020. The principal
balance of the loan portfolio decreased 82.2% to $2.6 million in 2021 from $13.5 million in 2020
consistent with the transition to the marketplace strategy.
•
Servicing and fee revenue increased 89.8% to $10.1 million in 2021 from $5.3 million in 2020.
•
Interest expense decreased 54.3% to $1.3 million (2020: $2.8 million). The decrease is attributable
to nominal borrowings from its financing credit facilities in 2021 as well as the repurchase of $3.7
million of convertible debentures as at December 31, 2021.
•
The net recovery for loan losses in 2021 amounted to $(0.9) million (2020: net provision for loan
losses of $8.0 million). The Company recorded the vast majority of its net provision for loan losses
on its loan portfolio in 2020 following the onset of the COVID-19 pandemic. Due to better than
anticipated collection on loans for which IOU recorded a net provision for loan losses in prior periods,
the Company continues to benefit from reversals in the net provision for loan losses.
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Adjusted operating expenses increased 15.9% to $11.0 million in 2021 compared to $9.5 million in 2020 mainly due to
an increase in wages and salaries and data and IT costs as the Company continues to support the future growth in
loan originations by investing in innovation and resources as part of its 2021 Post-Pandemic Growth Plan (PPGP).
IOU closed on its year ended December 31, 2021 with an adjusted net loss of $0.3 million compared to adjusted net
loss of $3.2 million for the year ended December 31, 2020.
IOU closed on its year ended December 31, 2021 with IFRS net earnings of $3.7 million, or $0.04 per share, compared
to IFRS net loss of $(2.8) million or $(0.03) per share for the same period in 2020.
ADJUSTED AND IFRS NET EARNINGS (LOSS) FOR THE PERIOD ENDED DECEMBER 31, 2021
The following table presents IOU Financial’s adjusted and IFRS net earnings (loss) for the years ended December 31,
2021 and 2020. The financial information is presented in Canadian dollars (except where otherwise noted) and was
prepared in accordance with IFRS.
Adjusted and IFRS net earnings (loss)
For the year ended December 31
2021
$
2020
$
Interest revenue
986,092
11,815,590
Servicing & fee revenue
10,091,366
5,316,742
Adjusted Gross Revenue
11,077,458
17,132,332
Interest expense
1,278,677
2,800,963
Net provision (Recovery) for loan losses
(925,548)
7,983,173
Cost of Revenue
353,129
10,784,136
Adjusted Net Revenue
10,724,329
6,348,196
Adjusted operating expense
11,033,325
9,523,257
Income tax expense
17,912
-
Adjusted Net Loss
(326,908)
(3,175,061)
Adjusted Net Loss per Share
(0.00)
(0.03)
Adjusted Net (Loss)
(326,908)
(3,175,061)
Non-cash gain on sales of loans
7,018,006
2,857,268
Non-cash amortization of servicing asset
(5,177,397)
(3,004,811)
Non-cash stock-based compensation
(150,213)
(137,345)
Non-recurring gain -net
2,358,580
640,474
Net Earnings (Loss) per IFRS
3,722,068
(2,819,475)
Net Earnings (Loss) per Share
0.04
(0.03)
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Adjusted Gross Revenue
Adjusted gross revenue is a non-IFRS measure and 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 another
measure of financial performance. 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
2021
$
2020
$
Gross Revenue
Interest revenue
986,092
11,815,590
Servicing fees
6,048,422
3,746,601
Referral fee revenue
1,069,145
520,432
Administrative and other fees
895,769
362,772
Accelerated recognition of transaction costs on loans sold
2,078,030
686,937
Non-cash amortization of servicing assets
(5,177,397)
(3,004,811)
Non-cash gain on sale of loans
7,018,006
2,857,268
Gross Revenue
12,918,067
16,984,789
Non-cash amortization of servicing assets
5,177,397
3,004,811
Non-cash gain on sale of loans
(7,018,006)
(2,857,268)
Adjusted Gross Revenue
11,077,458
17,132,332
Ratios
Servicing Portfolio Yield (1)
7.4%
6.7%
(1) Servicing Portfolio Yield is a non-IFRS measure and is calculated as follows: servicing fees 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.
Overall, the impacts to revenue as a result of IOU’s transition to an originate to sell model are as follows:
Adjusted gross revenue decreased to $11.1 million (2020: $17.1 million), representing a decrease of 35.3%
for the year ended December 31, 2021 compared to the same period in 2020.
Interest revenue decreased 91.7% to $1.0 million in 2021 from $11.8 million in 2020. The principal balance of
the loan portfolio decreased 82.2% to $2.6 million in 2021 from $13.5 million in 2020 consistent with the
transition to the marketplace strategy.
Servicing and fee revenue increased 89.8% to $10.1 million in 2021 from $5.3 million in 2020. More
specifically, servicing and fee revenue growth in 2021 over 2020 is attributable to the following:
•
Servicing fees earned on the servicing portfolio increased $2.3 million or 61.4% over 2020
as the average servicing portfolio increased by 47.3% over 2020.
•
Referral fee revenue earned by IOU’s retail distribution operation (ZING Funding)
increased to $1.1 million in 2021 from $0.5 million in 2020 as it facilitated approximately
US$15.3 million in loan origination volume in 2021, representing an increase of 34.2%
over 2020 (US$11.4 million).
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•
Administrative and other fees earned on the servicing portfolio increased $0.5 million to
$0.9 million in 2021 over 2020.
•
Accelerated recognition of transaction costs on loans sold. This represents income earned
on loans after taking into consideration loan origination sales costs. This income category
increased by $1.4 million or 202.5% over 2020 as loan origination volume increased to
US$161.5 million in 2021 from US$84.9 million in 2020.
Gross revenue decreased to $12.9 million for the year ended December 31, 2021 (2020: $17.0 million), representing a
decrease of 23.9% over 2020.
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
Cost of revenue consists primarily of interest costs incurred in connection with the financing of its lending activities and
net provision (Recovery) for loan losses. The following table summarizes cost of revenue by category.
Cost of Revenue
For the year ended December 31
2021
$
2020
$
Cost of revenue
Interest expense
1,278,677
2,800,963
Net provision (Recovery) for loan losses
(925,548)
7,983,173
Cost of Revenue
353,129
10,784,136
The cost of revenue for the year ended December 31, 2021 decreased from $10.8 million in 2020 to $0.4 million in
2021. The decrease is primarily due a decrease in interest expense and net provision for loan losses highlighted below.
Interest expense during the year ended December 31, 2021 decreased 54.3% to $1.3 million (2020: $2.8 million). The
decrease is attributable to nominal borrowings from its financing credit facilities in 2021 as well as the repurchase of
$3.7 million of convertible debentures in 2021.
The net provision (recovery) for loan losses during the year ended December 31, 2021 amounted to $0.9 million (2020:
$8.0 million). The Company recorded the vast majority of its net provision (recovery) for loan losses on its loan portfolio
in 2020 following the onset of the COVID-19 pandemic. Due to better than anticipated collection on loans for which IOU
recorded a net provision (recovery) for loan losses in prior periods, the Company continues to benefit from reversals in
the net provision (recovery) for loan losses.
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Adjusted Operating Expenses
Adjusted operating expenses is a non-IFRS measure and is defined as total operating expenses prepared in
accordance with IFRS for the year, 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 another measure of financial performance as it eliminates items that do not occur
in the normal course of operations. 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
2021
$
2020
$
Operating Expenses
8,824,958
9,020,128
Stock Based Compensation
(150,213)
(137,345)
Non-Recurring Gain-net (2)
2,358,580
640,474
Adjusted Operating Expenses
11,033,325
9,523,257
Ratio
Adjusted Operating Expense Ratio (1)
12.4%
10.2%
(1) The Adjusted Operating Expense Ratio is a non-IFRS measure and 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) Non-Recurring Gain-net is a non-IFRS measure and refers to adjustments to remove the impacts on operating expenses which are not incurred in the
normal course of business and can fluctuate at different times and at various amounts. In 2021, the non-recurring gain-net is comprised of PPP loan
forgiveness, wage subsidies and employment retention credits of $2,381,078 less net loss on redemption of convertible debentures of $22,498. In 2020,
the non-recurring gain-net is comprised of PPP loan forgiveness, wage subsidies and employment retention credits of $1,012,331 less credit facility
termination and exit fees of $342,032 and less revaluation of convertible debenture of $29,825.
Adjusted operating expenses increased 15.9% to $11.0 million in 2021 compared to $9.5 million in 2020 mainly due to
an increase in wages and salaries and data and IT costs as the Company continues to support the future growth in
loan originations by investing in innovation and resources as part of its 2021 Post-Pandemic Growth Plan (PPGP).
The Adjusted Operating Expense Ratio, which is a measure of the Company’s operating efficiency, increased from
10.2% in 2020 to 12.4% in 2021. Since there will be a period of investment to support the future growth in loan
originations, the ratio will be higher at the beginning of this investment period as the Company continues to ramp up its
loan originations.
Adjusted operating expenses increased by $1.5 million to $11.0 million in 2021 compared to $9.5 million in 2020. This
increase can be primarily attributed to the following:
-
an increase of $1.9 million in wages and salaries as a result of an increase in the number of full-time employees
to support loan origination growth.
-
an increase of $0.5 million in data services and IT costs as a result of an increase in data costs due to an
increase in loan application volume compared to 2020 and costs incurred to support the IOU360 technology
platform.
-
a decrease of $0.7 million in legal and accounting as a result of increase in legal collection fees collected in
2021 compared to 2020.
-
a decrease of $0.5 million in amortization of transaction costs on financing credit facilities.
-
an increase of $0.2 million in advertising and promotion.
-
an increase of $0.1 million in professional fees.
Operating expenses decreased by $0.2 million to $8.8 million in 2021 compared to $9.0 million in 2020 mainly
attributable to a $1.7 million difference in non-recurring gain-net in 2021 compared to 2020 and a $1.5 million increase
in adjusted operating expenses noted above in 2021 compared to 2020.
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Adjusted Net Earnings (loss)
Adjusted earnings (loss) is a non-IFRS measure and is defined as net earnings for the period prepared in accordance
with IFRS less: non-cash gain on sale of loans and non-recurring gains, plus: non-cash amortization of servicing assets,
stock-based compensation and non-recurring costs. The Company uses adjusted net earnings (loss) as another
measure of financial performance.
Adjusted Net Earnings (loss)
For the period ended December 31
2021
$
2020
$
Net Earnings (Loss)
3,722,068
(2,819,475)
Non-Cash Gain on Sale of Loans
(7,018,006)
(2,857,268)
Non-Cash Amortization of Servicing Assets
5,177,397
3,004,811
Stock-Based Compensation
150,213
137,345
Non-Recurring Gain-net
(2,358,580)
(640,474)
Adjusted Net Loss (1)
(326,908)
(3,175,061)
(1) Adjusted net earnings (loss) is a non-IFRS measure and is defined as net earnings (loss) for the period prepared in accordance with IFRS less: non-
cash gain on sale of loans and non-recurring gains, plus: non-cash amortization of servicing assets, stock-based compensation and non-recurring costs.
IOU closed on its year ended December 31, 2021 with an adjusted net loss of $0.3 million compared to adjusted net
loss of $3.2 million for the year ended December 31, 2020.
IOU closed on its year ended December 31, 2021 with IFRS net earnings of $3.7 million, or $0.04 per share, compared
to IFRS net loss of $(2.8) million or $(0.03) per share for the same period in 2020.
Page | 11
CONSOLIDATED FINANCIAL POSITION
The following table presents IOU Financial’s consolidated statement of financial position as at December 31, 2021 and
December 31, 2020. The financial information is presented in Canadian dollars (except where noted) and was prepared
in accordance with IFRS.
Total Assets
Total assets increased by $1.4 million (5.5%) from $25.2 million at December 31, 2020 to $26.6 million at December
31, 2021. This increase is mainly attributable to a decrease of $4.3 million in commercial loans receivable-net, offset
by an increase of $5.7 million in non-portfolio assets due mainly to an increase in servicing assets of $1.9 million as
well as increases to servicing fees and purchase price receivables on loans sold of $3.7 million as the Company
transitioned to its marketplace strategy in 2021.
Total Liabilities
Total liabilities decreased by $2.5 million (18.6%) from $13.6 million at December 31, 2020 to $11.1 million at December
31, 2021. The decrease is mainly due to a decrease in convertible debentures of $3.2 million and offset by an increase
of $0.7 million in other liabilities.
Shareholders’ Equity
Shareholders’ Equity increased by $ 3.9 million (33.6%) from $11.6 million at December 31, 2020 to $15.5 million at
December 31, 2021. This increase is mainly attributable to the current period comprehensive earnings of $3.7 million.
Condensed Consolidated Statement of Financial Position
As at December 31, 2021
As at December 31, 2020
(Revised)
$
$
Assets
Commercial loans receivable
7,577,341
13,987,002
Allowance for expected credit losses
(788,060)
(2,927,407)
Commercial loans receivable – net
6,789,281
11,059,595
Non-portfolio assets
19,774,455
14,112,298
Total assets
26,563,736
25,171,893
Liabilities
Convertible debentures – liability component
7,619,634
10,815,242
Other liabilities
3,438,544
2,748,665
Total liabilities
11,058,178
13,563,907
Shareholders’ equity
15,505,558
11,607,986
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 decreased from $9.9 million at December 31, 2020 to $7.3 million at December 31, 2021.
The Company repurchased approximately $3.7 million of its convertible debentures in the capital of the Company (the
"Debentures"). Such transactions were carried out pursuant to repurchase agreements entered into with individual
holders of Debentures. Without the repurchase of Debentures, IOU’s corporate cash position would be approximately
$11.0 million at December 31, 2021.
Flow of funds
The following table presents a summary of cash flows for the years ended December 31, 2021 and 2020.
Consolidated Statement of Cash Flows
For the year ended December 31
2021
2020
$
$
Cash generated in operating activities
1,805,407
41,898,271
Cash (used) generated in investing activities
(775,289)
66,505
Cash used in financing activities
(3,607,491)
(37,153,841)
(Decrease) increase in cash
(2,577,373)
4,810,935
Exchange rate loss on cash
(22,852)
(184,490)
Net (decrease) increase in cash
(2,600,225)
4,626,445
Cash used in operating activities
The $40.1 million decrease in cash generated in operating activities for the year ended December 31, 2021, compared
to the same period in 2020, was primarily related to an increase of $162.0 million in the cash outflow from the net
change in non-cash working capital items (2021: $201.3 million compared to 2020: $39.3 million) and an increase of
$116.9 million in the cash inflow from the sale of commercial loans (2021: $201.5 million compared to 2020: $84.6
million).
Cash used in investing activities
The $0.8 million increase in cash used by investing activities for the year ended December 31, 2021, compared to the
same period in 2020, is primarily due to the additions of intangible assets of $0.8 million ($0.8 million in 2021 compared
to $0 in $2020).
Cash generated from financing activities
The $33.5 million decrease in cash used in financing activities for the year ended December 31, 2021, compared to
the same period in 2020, is primarily due to the repayment of $38.9 million to the financing credit facilities in 2020 ($0
in 2021) and offset by the redemption of convertible debentures of $3.5 million in 2021 ($0 in 2020).
Page | 13
SUMMARY OF QUARTERLY RESULTS
Quarterly Results
For the quarters ended
Dec 31/21
Sept 30/21
Jun 30/21
Mar 31/21
$
$
$
$
Gross revenue
3,098,178
4,421,079
2,754,135
2,644,675
Net loss revenue
2,826,606
4,586,301
2,789,588
2,362,443
Net earnings
690,507
3,100,271
10,754
(79,464)
Net earnings (loss) per share(1)
0.01
0.03
0.00
(0.00)
For the quarters ended
Dec 31/20
Sept 30/20
Jun 30/20
Mar 31/20
$
$
$
$
Gross revenue
2,427,139
3,821,597
4,392,762
6,343,291
Net revenue (loss)
2,925,855
4,069,970
(1,222,449)
427,277
Net earnings (loss)
703,292
1,698,588
(3,079,747)
(2,141,608)
Net earnings (loss) per share(1)
0.01
0.02
(0.04)
(0.02)
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.
TRANSACTIONS BETWEEN RELATED PARTIES
i)
The Company rents its Canadian office space from Palos Management Inc (“PMI”). PMI which is indirectly owned
by The Marleau Capital Corporation (“MCC”). Philippe Marleau, a director of the Company, holds a significant
number of shares of MCC which has significant influence over the Company. The terms of this lease are similar
to those that would have been present for an arm’s-length transaction. The amount of $114,406 is expensed as
rental expense for the period (2020: rent expense of $122,874). 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 $1,682,028.
ii)
The Company sells loans to funds managed by NB Specialty Finance Fund LP who has significant influence over
the Company. In 2021, the Company sold loans in the amount of US$41.8 million (2020: US$4.1 million) and
earned service fees of $2.0 million (2020: $23,815) and recorded service fees and purchase price receivables in
the amount of $4 million as at December 31, 2021 (2020: $283,216).
Page | 14
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, 2021 and 2020 is shown below:
Key Management Compensation
For the year ended December 31
2021
2020
Salaries and other short-term employee benefits
820,926
749,925
Share-based payments
97,076
92,483
918,002
842,408
LOANS UNDER MANAGEMENT
IOU Financial maintains a geographically and industry diversified loans under management which reduces the risk of
loss arising from adverse regional or industrial economic conditions to IOU Financial and its base of institutional loan
buyers.
The following tables present the portfolio by geography and industry as at December 31, 2021.
Industry Category
Portfolio %
Specialty trade contractors and home building renovation
18%
Other store or online retailers and wholesalers
8%
Medical services
6%
Other professional services
7%
Manufacturing
4%
Automotive garage
3%
Other
54%
Total
100%
State
Portfolio %
California
12%
Florida
12%
Texas
11%
Georgia
5%
New York
4%
Ohio
4%
North Carolina
4%
Arizona
4%
Pennsylvania
3%
New Jersey
3%
Other US states
38%
Total
100%
Page | 15
OUTSTANDING SHARE DATA
The following table presents IOU Financial’s outstanding share data as at April 27, 2022
Outstanding Share data
Ordinary shares issued and outstanding:
Number of shares issued
December 31, 2020
104,643,928
Shares issued between January 1, 2021 and December 31, 2021
346,668
Shares cancelled between January 1, 2021 and December 31,2021
-
Shares outstanding on April 27, 2022
104,990,596
Options issued and outstanding:
Number of Options issued
December 31, 2020
7,566,500
Options granted between January 1, 2021 and December 31, 2021
2,695,000
Options forfeited between January 1, 2021 and December 31, 2021
(539,832)
Options exercised between January 1, 2021 and December 31, 2021
(346,668)
Options granted after December 31, 2021
55,000
Options forfeited after December 31, 2021
(61,667)
Options outstanding on April 27, 2022
9,368,333
The Company granted, on May 3, 2021, options entitling its senior officers, directors, and certain employees and
consultants to acquire up to an aggregate of 2,625,000 Common Shares of the Corporation ("Shares") at an exercise
price of $0.12. 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) which will vest on each of the first and second anniversaries of the date of grant, except for the
following:
i)
200,000 of these options, granted to a company engaged by the Company to assist it with a variety of
capital markets and corporate development related projects, including the provision of certain investor
relation services, will vest as follows: one twelfth (1/12) of the options will vest at each three (3) month
period during the first 12 months of the date of grant, and one-third (1/3) vest on each of the first and
second anniversaries of the date of grant.
ii)
105,000 of these options granted to a consultant will vest on February 2, 2026.
The Company granted, on August 30, 2021, options entitling its employees to acquire up to an aggregate of 70,000
Common Shares of the Corporation ("Shares") at an exercise price of $0.18. 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) which will vest on each of the first
and second anniversaries of the date of grant.
In September 2021, the Company amended 105,000 options granted to a consultant on July 28, 2020 to vest on April
28, 2025.
The Company granted, on February 1, 2022, options entitling a director to acquire up to an aggregate of 55,000
Common Shares of the Corporation ("Shares") at an exercise price of $0.2005. 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) which will vest on each of the first
and second anniversaries of the date of grant.
Page | 16
EVENT AFTER THE REPORTING DATE
The Company repurchased approximately $1.2 million of its convertible debentures in the capital of the Company (the
"Debentures") at par. Such transactions were carried out pursuant to repurchase agreements entered into with
individual holders of Debentures and brings the total repurchases to $4.9 million as of April 27, 2022, leaving
approximately $6.8 million of outstanding principal value of Debentures which mature December 2023.
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.
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”.
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 loan sale and may vary
from the actual cash flows serviced.
3.
Deferred Tax
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.
CURRENT CHANGES IN ACCOUNTING POLICIES
The Company adopted on January 1, 2021 Interest Rate Benchmark Reform phase 2 (Amendments to IFRS 9, IAS 39
and IFRS 7). The amendment issued by IASB in August 2020 address issues that arise from the implementation of the
reforms including the replacement of one benchmark with an alternative one. The adoption of these amendments did
not have a significant effect on the consolidated financial statements of the Company.
Page | 17
The Company has not adopted any other new or amended standards and interpretations that became effective on
January 1, 2021.
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.
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 reduced the net earnings by approximately $1.5 million (2020:
increased the net loss by $1.8 million), 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, commencing October 2020, has an agreement with an investor
to sell interests in certain of its commercial loans receivable of up to US$150 million per year. For 2021, US$74.9 million
(2020- US$4.1 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 were in the form of revolving credit facilities for which the availability was determined by the
collateral value of the loans pledged thereunder.
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, commercial loans receivable and other receivables. 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
Page | 18
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. Since the financing
credit facilities were repaid in full in 2020 and in 2021, the Company is not significantly affected by interest rate risk.
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 for OTH loans.
Interest revenue presented in the consolidated statement of comprehensive income (loss) represents interest revenue
on financial assets that are classified as loans and receivables.
Page | 19
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
There continues to be general economic risk associated with COVID-19 since the onset of the pandemic in 2020 and
the full impact of the crisis remains unknown. COVID-19 has resulted in a material adverse effect on IOU Financial’s
business, operating results, financial condition and liquidity. In 2020, 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 possible that these conditions that had existed in 2020 and 2021 could return and may
adversely impact such businesses who may or may not 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
Since the 2016 and 2019 financing credit facilities have been terminated, no financial covenants are applicable at
December 31, 2021.
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
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
Page | 20
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.
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.
Page | 21
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.
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.
Page | 22
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
IOU FINANCIAL INC.
CORPORATE INFORMATION
DIRECTORS AND OFFICERS
Robert Gloer, Director, President & CEO
David Kennedy, Chief Financial Officer and Corporate Secretary
Philippe Marleau, Director
Kathleen Miller, 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
Fax: (514) 789-0542
Supplementary documents regarding the Company are available on SEDAR’s website (www.sedar.com)
or upon written request to the Company’s principal business center:
1 Place Ville-Marie, Suite 1670, Montreal, Quebec, H3B 2B6
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 27, 2022.
(s) David Kennedy
David Kennedy
Chief Financial Officer
Montreal, Canada
April 27, 2022
IOU FINANCIAL INC.
IOU Financial Inc.
Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
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.
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, 2021 and 2020, 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, 2021 and 2020;
the consolidated statements of comprehensive income (loss) 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 the 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.
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.
/s/PricewaterhouseCoopers LLP1
Montréal, Quebec
April 27, 2022
1 CPA auditor, CA, public accountancy permit No. A125840
IOU FINANCIAL INC.
Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
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.
3
Consolidated Statements of Financial Position
As at December 31, 2021 and 2020
(in Canadian dollars)
Note
2021
$
2020
(Revised - Note 22)
$
Assets
Cash and cash equivalents
7,358,752
9,958,977
Restricted cash
1,205,688
1,291,646
Sales taxes receivable
152,559
49,161
Commercial loans receivable, net
4
6,789,281
11,059,595
Servicing assets
4
3,092,164
1,237,550
Service fees receivable
5
1,368,210
283,216
Other receivables
6
4,553,282
322,714
Prepaid expenses and deposits
440,077
92,886
Equipment and leasehold improvements
7
118,416
103,721
Intangible assets
8
763,782
-
Right-of-use assets
9
213,955
672,456
Lease receivable
9
507,570
-
Unamortized financing transaction costs
11
-
99,971
Total Assets
26,563,736
25,171,893
Liabilities
Accounts payable and accrued liabilities
10
2,654,698
2,017,542
Convertible Debentures
12
7,619,634
10,815,242
Lease liabilities
9
783,846
731,123
Total Liabilities
11,058,178
13,563,907
Shareholders’ Equity
Share capital
14
28,929,953
28,887,186
Contributed surplus
4,764,941
4,614,728
Accumulated other comprehensive income
1,711,442
1,728,918
Deficit
(19,900,778)
(23,622,846)
Total Shareholders’ Equity
15,505,558
11,607,986
Total Liabilities and Shareholders’ Equity
26,563,736
25,171,893
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board on April 27, 2022
Robert Gloer (signed), Director
Neil Wolfson (signed), Director
IOU FINANCIAL INC.
4
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2021 and 2020
(in Canadian dollars)
Note
2021
$
2020
$
Revenue
Interest revenue
16
986,092
11,815,590
Servicing income and other fees
16
2,835,939
1,624,994
Net gain recognized on sale of loans
4
9,096,036
3,544,205
Gross Revenue
12,918,067
16,984,789
Cost of Revenue
Interest expense
1,278,677
2,800,963
Net provision (Recovery) for loan losses
(925,548)
7,983,173
Total Cost of Revenue
353,129
10,784,136
Net Revenue
12,564,938
6,200,653
Operating expenses
18
8,824,958
9,020,128
Earnings (Loss) Before Income Taxes
3,739,980
(2,819,475)
Income tax expense
17
17,912
-
Net Earnings (Loss) for the Year
3,722,068
(2,819,475)
Currency translation differences
(17,476)
(348,245)
Income tax
17
-
-
Other comprehensive Income (Loss)
3,704,592
(3,167,720)
Comprehensive Income (Loss) for the
Year
3,704,592
(3,167,720)
Earnings (Loss) per Share:
Basic
13
0.04
(0.03)
Diluted
13
0.03
(0.03)
Net Earnings (Loss) and Comprehensive Income (Loss) are entirely attributable to the shareholders of the
Company. Other Comprehensive Income (Loss) is entirely subject to be reclassified to Net Earnings (Loss).
The accompanying notes are an integral part of these consolidated financial statements.
IOU FINANCIAL INC.
5
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
Note
Common
Shares
(#)
Share
Capital
($)
Contributed
Surplus
($)
Accumulated
OCI 1
($)
Income/
(Deficit)
($)
Shareholders’
Equity
($)
Balance as at
December 31, 2019
86,708,122
26,988,530
4,477,383
2,077,163
(20,392,698)
13,150,378
Comprehensive loss
for the year
-
-
-
(348,245)
(2,819,475)
(3,167,720)
Shares Issued
14
18,009,806
1,937,644
-
-
-
1,937,644
Shares repurchased
14
(279,000)
(55,388)
-
-
-
(55,388)
Stock options exercised
14
205,000
16,400
-
-
-
16,400
Stock-based
compensation
14
-
-
137,345
-
-
137,345
Balance as at
December 31, 2020
104,643,928
28,887,186
4,614,728
1,728,918
(23,212,173)
12,018,659
Correction of convertible
debentures opening
balance
21
-
-
-
-
(410,673)
(410,673)
Revised Balance as at
December 31, 2020
104,643,928
28,887,186
4,614,728
1,728,918
(23,622,846)
11,607,986
Comprehensive income
for the year
-
-
-
(17,476)
3,722,068
3,704,592
Stock options exercised
14
346,668
42,767
-
-
42,767
Stock-based
compensation
14
-
-
150,213
-
-
150,213
Balance as at
December 31, 2021
104,990,596
28,929,953
4,764,941
1,711,442
(19,900,778)
15,505,558
1 OCI: Other Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
IOU FINANCIAL INC.
6
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2021 and 2020
(in Canadian dollars)
2021
2020
Note
$
$
Operating Activities
Net Earnings (Loss) for the year
3,722,068
(2,819,475)
Non-cash items included in net earnings
19
(3,826,757)
(11,299,387)
Change in non-cash working capital items
19
(201,302,709)
(39,279,996)
Sale of commercial loans
4
201,520,850
84,570,685
Interest received
1,453,129
10,253,056
Interest expense
1,278,677
2,854,977
Interest paid
(1,039,851)
(2,381,589)
Cash generated in operating activities
1,805,407
41,898,271
Investing Activities
Additions to equipment and leasehold
improvements
7
(79,305)
(20,838)
Additions to intangible assets
8
(781,942)
-
Deductions to restricted cash
85,958
87,343
Cash (used) generated in investing activities
(775,289)
66,505
Financing Activities
Redemption of convertible debentures
12
(3,456,931)
-
Issuance of equity, net of transaction costs
14
42,767
1,898,656
Repayment of financing credit facilities
11
-
(38,936,865)
Decrease in lease receivable
9
21,401
-
Payment of lease liabilities 9
(214,728)
(115,632)
Cash used in financing activities
(3,607,491)
(37,153,841)
(Decrease) Increase in Cash
(2,577,373)
4,810,935
Exchange rate difference on cash
(22,852)
(184,490)
Cash
Beginning of period
9,958,977
5,332,532
End of period
7,358,752
9,958,977
The accompanying notes are an integral part of these consolidated financial statements.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
7
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 subsidiaries 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 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 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 27, 2022.
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
8
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.
3.1 Current and Future Changes in Accounting Policies
a) New standards adopted during the year
The Company adopted on January 1, 2021 Interest Rate Benchmark Reform phase 2
(Amendments to IFRS 9, IAS 39 and IFRS 7). The amendment issued by IASB in August
2020 address issues that arise from the implementation of the reforms including the
replacement of one benchmark with an alternative one. The adoption of these amendments
did not have a significant effect on the consolidated financial statements of the Company.
The Company has not adopted any other new or amended standards and interpretations
that became effective on January 1, 2021.
b) New standards and interpretations not yet adopted that are relevant to the Company.
A number of new or amended standards and interpretations are expected to become
effective on January 1, 2022 and beyond. There are no new or amended standards and
interpretations that are expected to have a significant effect on the consolidated financial
statements of the Company. The Company has not early adopted any new or amended
standards and interpretations that has been issued but is not yet effective.
3.2 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
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
9
adjustment to the carrying amounts of assets and liabilities within the next financial year
are addressed below.
1.1
Deferred Tax
The recognition of deferred tax assets and liabilities involves making
assumptions including estimating the timing of the reversal of temporary
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”.
1.4
Service Fees Receivable
Management exercises judgment to determine the expected future cash flows
of certain OTS Loans based on all available, reasonable and supportable
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
10
information about past events, current conditions and forecasts of future events
and economic conditions.
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
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
20% straight-line method
Computer Equipment
30% straight-line method
Leasehold Improvements
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
11
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
A. Company as a Lessee
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).
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.
B. Company as a Lessor
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.
In a finance lease, the Company recognizes lease receivable measured at the present value
of lease payments receivable over the lease term, discounted at the Company’s incremental
borrowing rate. Each month, the lease payments for the period are apportioned between
the reduction in the lease receivable and interest income.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
12
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.
When the Company is an intermediate lessor, it accounts for the head lease and the sub-
lease as two separate contracts. The sub-lease is classified as a finance or operating lease
by reference to the right-of-use asset arising from the head lease.
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 loss is recognized immediately in the consolidated statements of
comprehensive income (loss).
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 or asset.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
13
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
Business Objective
Classification
Originated to hold (OTH)
Solely the collection of the
contractual cash flows of the
financial assets
Amortized cost
Originated to sell (OTS)
Sale of the financial assets or
managed on a fair value basis
FVTPL
Originated to hold and sell
Both the collection of contractual
cash flows of the financial assets
and their sale
FVOCI
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
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
14
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
Classification
Cash
Amortized cost
Restricted cash
Amortized cost
OTH loans
Amortized cost
OTS loans
FVTPL
Servicing fees receivable
Amortized cost
Other receivables
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. OTS loans are presented at fair value on the consolidated
statements of financial position.
The interest income on OTH and OTS loans are 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,
current conditions, and forecasts of future events and economic conditions.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
15
The following table presents the three stages of the Company’s impairment model.
Stage
Credit Quality – Reporting
Date vs. Initial Recognition
Impairment Amount
1
No significant increase
Equals to 12-month ECL
2
Significant increase
Equals to lifetime ECL
3
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)
having exhausted reasonable recovery efforts; or
(ii)
the borrower is bankrupt or winding up, and balances owing are not likely to be
recovered.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
16
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
Classification
Accounts payable and accrued liabilities
Amortized cost
Financing credit facilities
Amortized cost
Convertible debentures
Amortized cost
Lease Liabilities
Amortized cost
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
17
Definitions – Financial Instruments
Term
Meaning
Amortized cost
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.
Exposure at
default
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.
Fair value
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.
Fair value option
(for a financial
asset)
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
measuring financial assets or financial liabilities or
recognizing gains and losses on them on different bases; and
-
fair values are reliable.
Modified loans
OTH loans for which the contractual cash flows have been
renegotiated or otherwise modified.
Loss given
default
Reflects the losses expected should a default occur and considers
such factors as repayments of principal and interest between the
consolidated statements of financial position date and the time of
default.
Probability of
default
Probabilities of a default occurring over the determined period, based
on conditions existing at the consolidated statements of financial
position date and on future economic conditions that have, or will
have, an impact on credit risk.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
18
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
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.
Interest –
modified loans
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.
Interest – OTS
loans
Effective interest rate method.
Definitions – Calculation of Interest Income
Term
Meaning
Effective interest
rate
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.
Expected life
Represents the remaining contractual life of commercial loans
receivable.
Loan origination
fees
Fee income charged to the borrower on the origination of the financial
asset.
Loan Sales
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
19
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
20
Interest Expense
Interest expense comprises interest expense on debt borrowings and is recognized in the
statement of 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.
Servicing Income and Other Fees
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 accordance with the commercial terms of the
various arrangements. In some instances, the ultimate service fee revenue to be recognized
is based on the total future cash flows of the loans sold to institutional purchasers and the
amount recognized in the current year as a service fee revenue is based on the best
estimate on the future cash flows 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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
21
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.
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 lessees to recognise assets and liabilities for all l eases unless the lease term is 12 m onths or l ess or the underlying asset has a low val ue. Lessors conti nue to classify l eases as operating or fi nance
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. Contributed surplus is increased by the compensation charge
over the vesting period.
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
22
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,
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
23
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
24
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 (loss) 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 (loss) per share is equal to the basic earnings (loss) per
share due to the anti-dilutive effect of these elements.
4.
Commercial Loans Receivable
As at December 31, 2021 and 2020, the Company held commercial loans receivable as
part of its regular operations.
2021
2020
$
$
Principal balance of OTH loans
2,647,198
13,466,093
Unamortized fees and transaction costs
49,160
520,909
OTH loans
2,696,358
13,987,002
Allowance for expected credit losses
(788,060)
(2,927,407)
Net carrying amount of OTH loans
OTS loans
1,908,298
4,880,983
11,059,595
-
Commercial loans receivable, net
6,789,281
11,059,595
The OTH loans bear fixed interest at a rate of 9.25% (2020: 9.25%) and mature no later
than 18 months (2020:18). As at December 31, 2021 and 2020, no OTH loans have a
maturity date over 12 months. Guarantee fees charged on each loan range between 9.00%
and 29.00% (2020: 7.00% and 30.00%) of the original OTH loan amount. At inception, the
OTH loans had an average date to maturity of 12.9 months (2020: 12.9 months). The OTH
loans are being repaid daily or weekly over their terms. Transaction costs and unamortized
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
25
fees comprise broker commissions and loan closing fees and are recognized over the term
of the OTH loan through the effective rate mechanism. The fair value of the OTH loans is
estimated to be equivalent to the carrying amount, due to the residual short-term nature of
these loans.
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.
Credit Quality of OTH Loans
The commercial loans 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, 2021, 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.
%
Gross Carrying
Amount
Allowance for
Expected Credit
Losses
Net Carrying
Amount
Stage 1
6.29
169,587
(4,172)
165,415
Stage 2
0.00
-
-
-
Stage 3 Tier 1
66.82
1,801,822
(621,629)
1,180,193
Stage 3 Tier 2
7.16
193,166
(162,259)
30,907
Inactive
19.72
531,783
-
531,783
Total
100.00
2,696,358
(788,060)
1,908,298
The following table presents the gross carrying amount of commercial loans receivable as
at December 31, 2020, according to credit quality and ECL impairment stages.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
26
%
Gross Carrying
Amount
Allowance for
Expected Credit
Losses
Net Carrying
Amount
Stage 1
38.42
5,262,045
(131,235)
5,130,810
Stage 2
0.44
59,926
(12,584)
47,342
Stage 3 Tier 1
48.96
6,979,057
(2,407,775)
4,571,282
Stage 3 Tier 2
3.13
447,396
(375,813)
71,583
Inactive
9.05
1,238,578
-
1,238,578
Total
100.00
13,987,002
(2,927,407)
11,059,595
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, 2021.
Stage 1
Stage 2
Stage 3
Total
Balance, December 31,
2020
131,235
12,584
2,783,588
2,927,407
Transfers to stage 1
235,029
(21,791)
(213,238)
-
Transfers to stage 2
(20,063)
20,063
-
-
Transfers to stage 3
-
(20,063)
20,063
-
Impact of originations
18,100
-
-
18,100
Net remeasurement
(356,062)
9,597
(693,739)
(1,040,204)
Net variation of the
allowance
(122,996)
(12,194)
(886,914)
(1,022,104)
Loans written off
-
-
(1,354,104)
(1,354,104)
Recoveries of loans
previously
written off
-
-
327,609
327,609
Net write offs
-
-
(1,026,495)
(1,026,495)
Translation differences
(4,067)
(390)
(86,291)
(90,748)
Balance, December
31, 2021
4,172
-
783,888
788,060
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
27
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
1,005,219
285,065
3,224,891
4,515,175
Transfers to stage 1
2,063,864
(1,473,525)
(590,339)
-
Transfers to stage 2
(1,473,838)
1,473,838
-
-
Transfers to stage 3
(1,513,803)
(42,803)
1,556,606
-
Impact of originations
541,268
-
-
541,268
Net remeasurement
(465,740)
(222,693)
8,248,767
7,560,334
Net variation of the
allowance
(848,249)
(265,183)
9,215,034
8,101,602
Loans written off
-
-
(10,280,147) (10,280,147)
Recoveries of loans
previously written off
-
-
706,367
706,367
Net write offs
-
-
(9,573,780)
(9,573,780)
Translation differences
(25,735)
(7,298)
(82,557)
(115,590)
Balance, December 31,
2020
131,235
12,584
2,783,588
2,927,407
Amounts charged to the allowance are charged off when there is no expectation of
recovering additional cash.
Loans with a contractual amount of $1,354,104 (2020: $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. All loans that participated in the deferral program
had been subject to the normal staging process for ECL purposes, however given the
extraordinary circumstances of COVID-19, as at December 2021, if a credit-impaired OTH
loan improved such that there was no longer a significant increase in credit risk since
initial recognition, the credit-impaired OTH loan reverted from stage 3 to either stage 2 or
stage 1.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
28
Loan sales and servicing assets
During the year ended December 31, 2021, the Company sold some of its commercial loans
receivable, on a non-recourse basis, at face value, for total proceeds of $201.5 million
(2020: $84.6 million). At the time of sale of certain loans, the Company neither transfers nor
retains substantially all rights and risks associated with the loans sold to the purchaser, and
the Company determined that the criteria for derecognition had been met. For other loans,
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 $9.1 million for the year ended December 31, 2021 (2020: $3.5
million), along with servicing assets that are amortized to the consolidated statements of
comprehensive income (loss) over the term of the assignment agreements. As at
December 31, 2021, the carrying amount of these assets amounted to $3.1 million
(2020: $1.2 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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
29
Service fees receivable relates to service fees recognized as revenue based on the
expected future cash flows of loans sold but not yet collected. These service fees are
expected to be collected from the institutional purchaser over the next twelve months once
certain threshold levels of cash flows are received on the loans sold to the institutional
purchaser.
Purchase price receivable on loans sold relates to a portion of the sale proceeds to be
collected with respect to certain loan sales pursuant to the contractual terms with an
institutional loan purchaser once certain thresholds of expected cash flows are received by
the institutional purchaser.
During the period, the Company’s wholly owned subsidiary, IOU Central Inc. (USA), met
the eligibility criteria required to receive US$1,206,349 ($1.5 million) under the US
Employee Retention Credit (ERC) program for Q4 2020, Q1 2021, Q2 2021 and Q3 2021.
In September 2021, the Company received a credit of US$248,814 ($315,446) from its
payroll service provider which was applied against wages and salaries otherwise payable.
The Company is reasonably assured of receiving all the remaining credits as such the
Company recognized the balance of US$957,535 ($1.2 million) as a receivable. The total
amount of the ERC of US$1,206,349 ($1.5 million) was recorded as a reduction to operating
expenses (Note 18).
5.
Service fees receivable
2021
$
2020
$
Service fees receivable
1,368,210
283,216
6.
Other receivables
2021
$
2020
$
Purchase price receivable on loans sold
Employee retention and wage credits
2,604,411
1,567,962
-
-
Other
380,909
322,714
Total
4,553,282
322,714
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
30
7.
Equipment and Leasehold Improvements
The following table presents the carrying amount of the equipment and leasehold
improvements as at December 31, 2021 and 2020.
Office
Equipment
Computer
Equipment
Leasehold
Improvements
Total
$
$
$
$
Cost
Balance at December 31,
2019
178,930
190,157
214,237
583,324
Translation differences
(1,828)
(3,510)
(703)
(6,041)
Additions
2,210 18,626
-
20,836
Balance at December 31,
2020
179,312
205,273
213,534 598,119
Translation differences
(386)
(29)
(148)
(563)
Additions
-
79,305
-
79,305
Balance at December
31, 2021
178,926
284,549
213,386
676,861
Accumulated
Depreciation
Balance at December 31,
2019
170,585
163,068
104,438 438,091
Translation differences
(1,862)
(2,912)
(584)
(5,358)
Depreciation expense
for the year
7,759
18,726
35,180
61,665
Balance at December 31,
2020
176,482
178,882
139,034 494,398
Translation differences
(377)
(340)
(20)
(737)
Depreciation expense
for the year
1,594
28,473
34,717
64,784
Balance at December
31, 2021
177,699
207,015
173,731
558,445
Carrying Amounts
At December 31, 2020
2,830
26,391
74,500 103,721
At December 31, 2021
1,227
77,534
39,655
118,416
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
31
8.
Intangible Assets
The following table presents the carrying amount of the intangible assets as at
December 31, 2021 and 2020. Intangible assets comprise internal use software.
2021
$
2020
$
Cost
Balance at beginning of year
1,710,478
1,750,978
Translation differences
(1,074)
(40,500)
Additions
781,942
-
Balance at end of year
2,491,346
1,710,478
Accumulated Amortization
Balance at beginning of year
1,710,478
1,696,038
Translation differences
(7,130)
(42,297)
Amortization charge for the year
24,216
56,737
Balance at end of year
1,727,564
1,710,478
Carrying Amount
763,782
-
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
32
9.
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, 2021 and 2020.
2021
$
2020
$
Right-of-use Assets
Balance at beginning of year
672,456
716,787
Additions
270,223
-
Derecognition of right-of-use assets
(497,831)
-
Depreciation of right-of-use assets
(228,780)
(137,441)
Translation differences
(2,113)
93,110
Balance at end of year
213,955
672,456
Lease receivable
Balance at beginning of year
-
-
Additions
528,971
-
Depreciation of Net investment
(21,401)
-
Balance at end of year
507,570
-
Lease Liabilities
Balance at beginning of year
731,123
753,645
Additions
270,223
-
Principal payments
(214,728)
(115,632)
Translation differences
(2,772)
93,110
Balance at end of year
783,846
731,123
On October 1, 2021, the following events occurred:
1. The Company modified and revised the existing sub-lease for its office space
located in Canada resulting in a $209,907 increase in the right-of-use assets and
lease liability.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
33
2. The Company entered into a sub-sub lease with a third party for its entire office
space located in Canada, making the Company an intermediate lessor. The sub-
sub lease is classified as a finance lease and is accounted separately from the
Company’s contract with the sub- lessor. At the commencement of the sub-sub
lease, the Company derecognized the right-of-use assets and accumulated
depreciation of right-of-use assets relating to its sub-lease amounting to a
$497,831 decrease in right-of-use assets and recognized a lease receivable of
$528,971. The sub sub-lease contract will expire April 20, 2027 consistent with
the Company’s sub-lease.
3. The Company entered into a new separate sub- lease agreement and recognized
a right-of-use assets and lease liability of $60,316 at the commencement of the
sub lease. The sub-lease contract will expire April 20, 2027.
10. Accounts Payable and Accrued Liabilities
11. Financing Credit Facilities / Unamortized Financing Transaction Costs
2021
$
2020
$
Balance at beginning of year
(99,971)
37,954,729
Repayments
-
(38,936,865)
Exit fee
-
222,810
Amortization of transaction costs
99,569
662,409
Translation differences
402
(3,054)
Balance at end of year
-
(99,971)
2021
$
2020
$
Trade payables
567,502
252,097
Payable to loan purchasers
201,491
814,339
Commissions payable
619,961
45,836
Other payables and accruals
1,265,744
905,270
Total
2,654,698
2,017,542
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
34
At year-end, the carrying value of the liability (asset) was composed of:
2021
$
2020
$
Unamortized financing transaction costs
-
(99,971)
-
(99,971)
The financing credit facilities were comprised as follows:
1. 2016 Credit Facility
On April 22, 2016, the Company entered into a US$50 million credit facility with a third-party
lender (the “2016 Credit Facility”). The facility consisted of a US$25 million term loan,
expandable to US$50 million at the Company’s request and the lender’s acceptance.
In April 2020, the Company received default notices from the 2016 Credit Facility as a result
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 million to US$15 million.
The amount outstanding as at December 31, 2020 was 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 18).
2. 2019 Credit Facility
On March 5, 2019, the Company entered into a new US$50 million credit facility (the “2019
Credit Facility”). The facility had an initial commitment of US$50 million and was expandable
to US$100 million at the Company’s request and the lender’s acceptance. The interest rate
on the facility was 90-day LIBOR, subject to a minimum LIBOR of 1.5%, plus 4.50%, which
represented 6.00% as at December 31, 2020. The term of the facility was 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.
On October 29, 2021, 2019 Credit Facility was officially terminated.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
35
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, 2021, amortization of $99,569 (2020: $662,409) has been
included in operating expenses (Note 18).
Pledged assets
Since the financing credit facilities have been terminated, there are no pledged assets at
December 31, 2021 (2020-$13,744,735 comprised of commercial loans receivable, net of
$10,280,749 and cash of $3,463,986)
Since the credit facilities have been terminated, no financial covenants are applicable at
year end.
12. Convertible Debentures
The Convertible Debentures recognized in the consolidated statements of financial position
are calculated as follows:
Revised
2021
$
2020
$
Par value of the Convertible Debentures
8,075,368
11,760,434
Unamortized discount and transaction costs
(455,734)
(1,355,865)
Revision of financial information (Note 22)
-
410,673
Liability component amount
7,619,634
10,815,242
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 initially matured on December
31, 2020 and bear interest at a rate of 10% per annum, payable monthly. The Debentures
were initially 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 had the right to force the conversion of
the Debentures into common shares at any time on or after December 31, 2018 had the
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
36
20-day volume weighted average price of the common shares on the TSX-V exceeded
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%.
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.
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 expired at 5:00 p.m. on the last business day
prior to December 31, 2020.
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.
In 2021, the Company redeemed $3,685,066 of principal value of certain convertible
debentures for cash payments of $3,456,932. The company incurred a net loss of $22,498
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
37
on redemption of the convertible debentures due to the difference between $250,632
accounted for as accelerated amortization of transaction costs and a discount to the
principal amount of convertible debentures in the amount of $228,134 on redemption.
13. Earnings per Share
2021
$
2020
$
Basic and Diluted Earnings per Share
Net earnings (loss)
3,722,068
(2,819,475)
Weighted average number of common shares
for the purposes of basic earnings per share
104,747,738
87,854,907
Basic earnings (loss) per share
0.04
(0.03)
Effect of dilutive securities: Options
2,147,265
-
Weighted average number of common shares
for the purposes of diluted earnings per share
106,895,003
87,854,907
Diluted earnings (loss) per share
0.03
(0.03)
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 (loss)
per share.
2021
2020
Stock options
7,227,735
7,566,500
Number of shares
7,227,735
7,566,500
14. Share Capital
Authorized
Unlimited number of common shares
Issued and Outstanding
2021
$
2020
$
104,990,596 Common shares
104,643,928 Common shares
28,929,953
28,887,186
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
38
In 2021, 346,668 options were exercised at an average exercise price of approximately
$0.12 for total proceeds of $42,767.
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.
In 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 $16,400.
Stock-Based Compensation
Movements in options for the years presented are as follows:
Options
Outstanding
(#)
Average
Exercise Price
($)
Balance as at December 31, 2019
6,861,500
0.28
Granted
2,000,000
0.08
Exercised
(205,000)
0.08
Forfeited/Expired
(1,090,000)
0.39
Balance as at December 31, 2020
7,566,500
0.13
Granted
2,695,000
0.12
Exercised
(346,668)
0.12
Forfeited/Expired
(539,832)
0.13
Balance as at December 31, 2021
9,375,000
0.12
,
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
39
The following summarizes information about stock options outstanding as at
December 31, 2021:
Exercise Price
($)
Outstanding
Options
(#)
Exercisable
(#)
Expiry Date
0.27
1,150,000
1,150,000
June 2022
0.08
360,000
360,000
June 2022
0.08
200,000
200,000
January 2023
0.27
500,000
500,000
July 2023
0.20
650,000
650,000
July 2023
0.08
525,000
525,000
July 2023
0.27
500,000
500,000
March 2024
0.22
650,000
650,000
March 2024
0.08
725,000
725,000
March 2024
0.08
1,690,000
1,056,667
July 2025
0.11
55,000
36,667
December 2025
0.12
2,300,000
731,666
May 2026
0.18
70,000
23,333
August 2026
Total
9,375,000
7,108,333
The Company granted, on May 3, 2021, options entitling its senior officers, directors, and
certain employees and consultants to acquire up to an aggregate of 2,625,000 Common
Shares of the Corporation ("Shares") at an exercise price of $0.12. 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) which will vest on each of the first and second anniversaries of the date of
grant, except for the following:
i)
200,000 of these options, granted to a company engaged by the Company to
assist it with a variety of capital markets and corporate development related
projects, including the provision of certain investor relation services, will vest as
follows: one twelfth (1/12) of the options will vest at each three (3) month
period during the first 12 months of the date of grant, and one-third (1/3) vest
on each of the first and second anniversaries of the date of grant.
ii)
105,000 of these options granted to a consultant will vest on February 2, 2026.
The Company granted, on August 30, 2021, options entitling its employees to acquire up
to an aggregate of 70,000 Common Shares of the Corporation ("Shares") at an exercise
price of $0.18. 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) which will vest on each of the first and
second anniversaries of the date of grant.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
40
In September 2021, the Company amended 105,000 options granted to a consultant on
July 28, 2020 to vest on April 28, 2025.
15. 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.
15.1 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 for OTH loans 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
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.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
41
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, commencing October 2020, has an
agreement with an institutional loan buyer to sell interests in certain of its commercial loan
receivable of up to US$150 million per year for two years (2020 - US$150 million). As at
December 31, 2021, US$72.9 million (2020- US$4.1 million) of certain commercial loans
receivable were sold to this loan buyer pursuant to the contractual terms of the agreement.
The following table presents the contractual maturities of financial liabilities.
As at December 31, 2021
Carrying
Amount
0 to 1
Month 1 to 12 Months
12 to 36
Months
36
Months
and Over
$
$
$
$
$
Accounts
payable and
accrued
liabilities
2,654,698
1,893,970
760,728
-
-
Convertible
debentures
7,619,634
67,268
739,946
8,882,582
-
Lease liabilities
783,846
22,420
268,930
303,194
309,711
Amounts denominated in foreign currency or based on variable rates are determined based
on the spot rates as at December 31, 2021.
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, 2021 and 2020 relates to US dollar balances of the
Canadian dollar functional entities and Canadian dollar balances of US dollar functional
entities.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
42
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
reduced the net earnings gain by approximately $1.5 million (2020: increased the net loss
by $1.8 million), 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. Since the financing credit facilities were repaid in full in 2020 and in 2021, the
Company is not significantly affected by interest rate risk.
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.
15.2 Management of Capital
The Company defines capital to be total shareholders’ equity, which includes share capital,
and certain debt, specifically the financing credit facilities if any 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, financing credit facilities and 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 both 2016 Credit Facility and 2019 Credit Facility are terminated, there are no financial
covenants related to these facilities as at December 31, 2021.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
43
16. Revenue by Category
The following table presents an analysis of revenue by category.
2021
$
2020
$
Interest Revenue
986,092
11,815,590
Servicing Income and Other Fees
Servicing fees
6,048,422
3,746,601
Other fees
1,964,914
883,204
Amortization of servicing assets
(5,177,397)
(3,004,811)
Total servicing income and other fees
2,835,939
1,624,994
17. Income Tax
Income tax expense comprises:
2021
$
2020
$
Current tax expense
17,912
-
Deferred tax expense
-
-
Total income tax expense
17,912
-
The tax on the Company's income before income tax differs from the theoretical amount
that would rise using the federal and provincial statutory rates applicable to income of the
consolidated entities. The statutory tax rates remained unchanged in 2021 at 26.5%.
The difference between the Company's income tax and theoretical tax is as follows:
2021
2020
Canadian statutory tax rates
26.5%
26.5%
Statutory income taxes
991,095
(747,161)
Non-deductible expenses (non-taxable income)
(170,217)
86,614
Difference in foreign tax rates
(80,562)
28,818
Net change to unrecognized tax assets
(722,404)
631,729
Income tax expense
17,912
-
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
44
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.
Recognized Deferred Tax Assets and Liabilities
The following tables presents the composition of recognized deferred income tax assets
and liabilities.
For the Year Ended December 31, 2021
Opening
balance
(revised)
$
Recognized
in net earnings
$
Closing
balance
$
Temporary Differences
Tax credit for salaries and wages
(26,232)
(30,776)
(57,008)
Financing fees
-
-
-
Fixed assets / ROU assets
(39,190)
(16,099)
(55,289)
Intangibles
-
10,397
10,397
Capital lease obligation
39,190
5,702
44,892
Unrealized foreign exchange gain
-
-
-
Convertible debentures
(228,239)
107,470
(120,770)
(254,471) 76,693
(177,778)
Tax Losses and Credits
Tax losses
254,471
(76,693)
177,778
-
-
For the Year Ended December 31, 2020
Opening balance
$
Recognized
in net earnings
$
Closing
Balance
(revised)
$
Temporary Differences
Tax credit for salaries and wages
(25,475)
(757)
(26,232)
Financing fees
7,643
(7,643)
-
Fixed assets / Intangibles / ROU assets
127,630
(166,820)
(39,190)
Capital lease obligation
-
39,190
39,190
Unrealized foreign exchange gain
-
-
-
Convertible debentures
(358,531)
130,292
(228,239)
(248,733)
(5,738)
(254,471)
Tax Losses and Credits
Tax losses
248,733
5,738
254,471
-
-
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
45
As at December 31, 2021, no deferred income tax asset has been recognized on
approximately 10,596,000 and $10,794,000 of Federal and Provincial tax loss
carryforwards, respectively and on approximately $2,157,000 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:
As at December 31, 2021, the Company had approximately $98,000 of unused Federal tax
and $67,000 of unused United States tax credits that are not recognized in the
consolidated financial statements. Those unused Federal tax credits will expire between
2026 and 2033 and those unused United States tax credits will expire between 2038 and
2040.
As at December 31, 2021, the Company had other deductible temporary differences of
approximately $1,144,000 for the Federal, $1,147,000 for the Provincial and $3,093,000 in
the United States (expressed in Canadian dollars) for which no deferred income tax asset
is recognized.
Federal
Provincial
United States
$
$
$
2027
29,000
29,000
-
2028
-
-
-
2029
-
-
-
2030
136,000
136,000
-
2031
420,000
414,000
-
2032
373,000
373,000
-
2033
243,000
243,000
-
2034
502,000
502,000
-
2035
2,551,000
2,551,000
-
2036
1,465,000
1,465,000
-
2037
1,478,000
1,478,000
750,000
2038
1,288,000
1,492,000
-
2039
804,000
804,000
-
2040
945,000
945,000
-
2041
362,000
362,000
-
No expiry
1,407,000
Total
10,596,000
10,794,000
2,157,000
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
46
18. Operating Expenses
The following table presents the details of operating expenses for the years ended
December 31.
Note
2021
2020
$
$
Wages and salaries
6,853,415
4,916,626
Credit on qualifying wages
(100,320)
(128,987)
Stock-based compensation
150,213
137,345
Depreciation of right-of-use assets
9
228,780
195,541
Rental liability interest expense
9
68,225
54,014
Rental expense
138,152
148,467
Insurance
173,757
179,924
Amortization of transaction costs –
financing credit facilities
11
99,569
662,409
Bank charges
132,301
206,723
Professional fees
308,071
162,379
Legal and accounting fees
694,179
1,383,682
Business fees and licences
28,414
125,001
Travel and entertainment
79,818
58,715
Telecommunications
88,808
82,438
Data services and IT costs
1,234,103
770,323
Advertising and promotion
686,398
440,352
Depreciation and amortization
89,000
118,402
Other
230,655
147,248
Revaluation of convertible debenture
-
29,825
Net loss on redemption of convertible
debentures
12
22,498
-
PPP loan forgiveness, wage subsidies
and employment retention credits (1) (2) (3)
(2,381,078)
(1,012,331)
Credit facility termination and exit fees
11
-
342,032
Total Operating Expenses
8,824,958
9,020,128
(1) On May 11th, 2020, the Company received funds from the US Small Business
Administration (SBA) through the Payroll Protection Program (“PPP”) 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 and, as such, the Company recognized the PPP
loan forgiveness and wage subsidies as a reduction to operating expenses in 2020.
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
47
(2) On April 16th, 2021, the Company received additional funds from the US Small
Business Administration (SBA) through the PPP in the amount of US$699,800. All
the forgiveness criteria for the loan was met in 2021 and, as such, the Company
recognized the PPP loan forgiveness as a reduction to operating expenses in 2021.
(3) Additional non-recurring gain in 2021 relates to the recognition of the US
Employee Retention Credit of US$1.2 million (refer to note 6).
19. Supplemental Cash Flow Information
Non-cash items included in net earnings (loss) comprise the following:
Note
2021
$
2020
$
Depreciation of equipment and
leasehold improvements
7
64,784
61,665
Amortization of intangible assets
8
24,216
56,737
Amortization of servicing assets
20
5,177,397
3,004,811
Amortization of right-of-use asset
9
228,780
137,441
Additions to right-of-use asset
9
(270,223)
-
Derecognition of right-of-use asset
9
497,831
-
Additions to lease liability
9
270,223
-
Additions to lease receivable
9
(528,971)
-
Stock-based compensation
18
150,213
137,345
Interest revenue
(467,037)
(11,815,590)
Net gain recognized on sale of loans
(9,096,036)
(3,544,205)
Amortization of transaction costs –
financing credit facility
11
99,569
662,409
Accumulated accreted interest on
redeemed convertible debentures
(228,135)
-
Accelerated amortization of
unamortized transaction cost due to
redemption of convertible debentures
250,632
-
(3,826,757)
(11,299,387)
Change in non-cash working capital items comprises the following:
2021
$
2020
$
Sales taxes receivable
(103,398)
(25,875)
Commercial loans receivable
(196,173,714)
(38,856,682)
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
48
Service fees receivable
(1,084,994) (283,216)
Other receivables
(4,230,568)
(110,774)
Prepaid and deposits
(347,191)
21,886
Accounts payable and accrued liabilities
637,156
(25,335)
(201,302,709)
(39,279,996)
20. 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 Management Inc (“PMI”).
PMI which is indirectly owned by The Marleau Capital Corporation (“MCC”). Philippe
Marleau, a director of the Company, holds a significant number of shares of MCC which
has significant influence over the Company. The terms of this lease are similar to those
that would have been present for an arm’s-length transaction. The amount of $114,406
is expensed as rental expense for the period (2020: rent expense of $122,874). 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
$1,682,028.
ii)
The Company sells loans to funds managed by NB Specialty Finance Fund LP who
has significant influence over the Company. In 2021, the Company sold loans in the
amount of US$41.8 million (2020: US$4.1 million) and earned service fees of $2.0
million (2020: $23,815) and recorded service fees and purchase price receivables in
the amount of $4 million as at December 31, 2021 (2020: $283,216).
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:
2021
$
2020
$
Salaries and other short-term employee benefits
820,926
749,925
Stock-based payments
97,076
92,483
918,002
842,408
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
49
21. 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:
2021
2020
Lending
$
Servicing
$
Total
$
Lending
$
Servicing
$
Total
$
Revenue
Interest revenue
986,092
-
986,092
11,815,590
-
11,815,590
Other fees
1,964,914
-
1,964,914
883,204
-
883,204
Servicing fees
-
6,048,422
6,048,422
-
3,746,601
3,746,601
Accelerated
recognition of
transaction
costs on loans
sold
-
2,078,030
2,078,030
-
686,937
686,937
Amortization of
servicing
assets
-
(5,177,397)
(5,177,397)
-
(3,004,811)
(3,004,811)
Gain on sale of
loans
-
7,018,006
7,018,006
-
2,857,268
2,857,268
Gross Revenue
2,951,006
9,967,061
12,918,067
12,698,794
4,285,995
16,984,789
IOU FINANCIAL INC.
Notes to the Consolidated Financial Statements
For the Years Ended
December 31, 2021 and 2020
(in Canadian dollars, except as otherwise noted)
50
22. Revision of Financial Information
The Company has revised certain financial information related to convertible debentures,
that was previously included in the financial statements for the year ended December 31,
2020. At December 31, 2020, convertible debentures were understated by $410,673 due to
an error in the carrying amount at amortised cost calculated using the effective interest
method.
The related corrections as at December 31, 2020 are noted in the ‘Revision’ column in the
following table:
December 31, 2020
as previously
reported
Revision
due to error
Revised
December 31,
2020
$
$
$
Liabilities
Convertible
debentures
10,404,569
410,673
10,815,242
Total Liabilities
13,153,234
410,673
13,563,907
Shareholders’ Equity
Deficit
(23,212,173) (410,673)
(23,622,846)
Total Shareholders’
Equity
12,018,659 (410,673)
11,607,986
The impact of the error on the consolidated statements of comprehensive income (loss)
and consolidated statements of cash flows was negligible for the year ended December
31, 2020.
23. Event after the reporting date
The Company repurchased approximately $1.2 million of its convertible debentures in the
capital of the Company (the "Debentures") at par. Such transactions were carried out
pursuant to repurchase agreements entered into with individual holders of Debentures
and brings the total repurchases to $4.9 million as of April 27, 2022, leaving approximately
$6.8 million of outstanding principal value of Debentures which mature December 2023.