IOU Financial Inc. Releases Financial Results for the Three-Month Period Ended March 31, 2020 and Provides Corporate Update

• Loan originations increased 16.0% to US$38.1 million in Q1 2020 compared to the same period in 2019.
• Total loans under management increased 24.3% to $119.9 million in Q1 2020 compared to Q1 2019.
• Adjusted gross revenue increased 25.4% to $6.4 million in Q1 2020 compared to Q1 2019.
• Adjusted operating expense ratio decreased to 9.0% in Q1 2020 compared to 9.7% in Q1 2019.
• Adjusted net loss amounted to $2.1 million in Q1 2020 compared to adjusted net earnings of $0.5 million in Q1 2019 primarily due to COVID-19 related events.

MONTRÉAL, May 28, 2020 /PRNewswire/ - IOU FINANCIAL INC. ("IOU" or "the Company") (TSXV: IOU), a leading online lender to small businesses (IOUFinancial.com), announced today its results for the three-month period ended March 31, 2020.

"IOU delivered strong loan origination and revenue growth despite closing with a net loss which was primarily related to COVID-19 events occurring in the first quarter of 2020. Given the COVID-19 pandemic and its impact on the economy, IOU continues to focus on pro-actively managing its business through this time of crisis," said Phil Marleau, CEO.

FINANCIAL HIGHLIGHTS

• Please refer to the table below for adjustments made to IFRS gross revenue and operating expenses in order to better reflect the actual operating performance of the business. During the three-month period ended March 31, 2020, the Company funded approximately US$38.1 million in loans (2019: US$32.8 million), representing an increase of 16.0% over the same period last year. This was driven by identifying, recruiting, partnering and promoting existing relationships with business loan brokers, continued geographic expansion into Canada and investing in direct marketing and sales. It should be noted the Company retracted in March 2020 its previously disclosed long-term outlook for loan origination growth of 25% to 30% due to the COVID-19 pandemic and its unknown consequences on the economy.
• As at March 31, 2020, total loans under management amounted to $119.9 million (2019: $96.5 million), representing an increase of 24.3% year over year and is attributable to the growth in loan originations of 16.0% compared to the same period in 2019. The principal balance of the loan portfolio amounted to $61.6 million (2019: $38.1 million), representing an increase of 61.8% and consistent with the Company's strategy to retain more loans on its balance sheet. The principal balance of IOU Financial's servicing portfolio (loans being serviced on behalf of third parties) amounted to $58.3 million (2019: $58.4 million), representing a decrease of 0.2%.
• Adjusted gross revenue increased 25.4% to $6.4 million for the three-month period ended March 31, 2020 compared to Q1 2019 ($5.1 million) primarily due to an increase in interest revenue.
• Interest revenue increased 38.8% to $5.0 million in Q1 2020 compared to the same period in 2019 as a result of the increase in the average commercial loans receivable balance of 63.5% in Q1 2020 compared to Q1 2019, offset by a decrease in portfolio yield from 38.1% in Q1 2019 to 32.4% in Q1 2020. The decrease in portfolio yield is due in part to the Company effecting modified payments plans with clients due to the COVID-19 pandemic in March 2020 resulting in a decrease in portfolio yield of approximately two (2) percentage points in Q1 2020 compared to Q1 2019. In addition, commencing late 2019, the Company applies the entire amount of proceeds received on loans previously written off against the principal balance of the loan compared to Q1 2019 where the proceeds received on loans previously written off were first applied to interest and the remainder applied to principal. This change in methodology resulted in a decrease of approximately two (2) percentage points in portfolio yield in Q1 2020 compared to Q1 2019.
• Servicing income decreased 13.7% to $1.1 million in Q1 2020 compared to Q1 2019 as a result of the decrease in the average servicing portfolio of 6.4% in Q1 2020 compared to Q1 2019 as well as a decrease in the servicing portfolio yield from 8.4% in Q1 2019 to 7.7% in Q1 2020.
• Interest expense during the three-month period ended March 31, 2020 increased 13.1% to $1.0 million (2019: $0.9 million). The increase is attributable to an increase in average borrowings of 59.1% in Q1 2020 compared to Q1 2019 and offset by a three (3) percentage point decrease in the Cost of Borrowing Rate to 8.0%. This is due to the closing of a new credit facility in the first quarter of 2019 at 90-day LIBOR, subject to a minimum LIBOR of 1.5%, plus 4.50% which represents 6.0% as at March 31, 2020. Also, in December 2019, the Company modified and extended its 2016 Credit Facility until December 31, 2022. The modified interest rate of the Credit Facility is LIBOR plus 5.5%, down from LIBOR plus 8.5%. The new rate came into effect in January 2020. However, due to the COVID-19 pandemic, the Company effected modification agreements in March and April 2020 with certain borrowers in excess of allowable limits and as a result, the Company went into an over-advance position with its financing credit facilities. Due to the fact that the over- advance positions remained uncured, the Company received default notices subsequent to quarter end and the 2016 Credit Facility began charging additional default interest of 3% for a total interest rate of LIBOR plus 8.5% effective April 1, 2020.
• Provision for loan losses during the three-month period year ended March 31, 2020 increased to $5.2 million (2019: $1.5 million).The increase is attributable to an increase in the average commercial loans receivable balance in first quarter of 2020 of 63.5% compared to the same period last year and an increase in the Provisional Credit Loss Rate to 34.1% in Q1 2020 compared to 16.1% in Q1 2019. In an effort to help the Company's 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. Pursuant to the Company's standard provision methodology and as a result of effecting modified payment plans as a result of COVID-19, approximately $18.2 million of commercial loans receivable balances entered the Stage 2 provision category thereby increasing the Provisional Credit Loss Rate by approximately fifteen (15) percentage points. In addition, increased delinquencies stemming from the Q3 2019 vintage contributed an additional three (3) percentage points to the Provisional Credit Loss.
• The Net Credit Loss Rate increased from 12.1% in the first quarter of 2019 to 15.2% in the first quarter of 2020. The Company also uses the Net Credit Loss Rate as an another measure for loan losses as it excludes the effect of provisions (reductions) in the allowance for expected credit losses during the period which may not coincide with the actual timing of charge-offs and recoveries.
• Adjusted operating expenses increased 12.1% to $2.6 million in Q1 2020 compared to $2.3 million in Q1 2019 primarily due to reinvestments in staff, increase in data services and IT costs and higher legal and accounting fees. However, the Adjusted Operating Expense Ratio, which is a measure of the Company's operating efficiency, decreased to 9.0% in the first quarter of 2020 (2019: 9.7%) as the Company increased its loans under management at a greater rate than operating expenses. Operating expenses increased to $2.6 million in Q1 2020 compared to $2.5 million in the same period in 2019. The reinvestments in staff and an increase in legal and accounting fees contributed to the increase in operating expenses, offset by a decrease in stock- based compensation.
• IOU closed on its first quarter ended March 31, 2020 with an adjusted net loss of $2.1 million, or ($0.02) per share compared to adjusted net earnings of $0.5 million or $0.01 per share for the same period last year.
• IOU closed on its first quarter ended March 31, 2020 with an IFRS net loss of $2.1 million, or ($0.02) per share, compared to IFRS net earnings of $0.1 million or $0.00 per share for the same period last year.

OUTLOOK

The Company's principal balance of its loan and servicing portfolios is diversified both across industry type and location within North America, mostly in the United States. Due to the COVID-19 pandemic, IOU has modified its underwriting standards to cease lending to industries and geographical areas which are strongly impacted by COVID-19. The company continues to originate loans and support businesses deemed essential by various governments.

The duration of the current situation with the pandemic is unknown and considering the uncertainty faced by the North American economy over the coming months, the Company retracted in March 2020 its previously disclosed long-term outlook for loan origination growth of 25% to 30%. However, the Company also sees potential for a greater than expected need for small business loans as significant working capital will be required once the situation normalizes. Furthermore, the Company is working closely with various government agencies to assist some of its merchants who may encounter hardships as a result of the COVID-19 pandemic.

Due to the uncertainty surrounding the current situation, the Company furloughed approximately 40% of its full-time employees and implemented a temporary 20% reduction in salary for all remaining employees commencing on April 1, 2020. IOU also announced, in April 2020, that more than two-thirds of the value of the Company's convertible debenture holders have agreed to defer the payment of interest from the April 30, 2020 payment period to the June 30, 2020 payment period ("reprieve period") and capitalizing the accrued interest over the reprieve period to the principal amount of the debentures at the end of the reprieve period, in accordance to the terms of the trust indenture under which such debentures were issued.

While the current unprecedented economic situation due to the pandemic remains uncertain, the Company is prepared to react quickly as the situation may require and looks forward to emerging as a stronger business coming out of this downturn.

IOU's financial statements and management discussion & analysis for the quarter ended March 31, 2020 have been filed on SEDAR and are available at www.sedar.com.

CORPORATE UPDATE

On May 10^th, 2020, Company's wholly owned subsidiary, IOU Central Inc., was approved by the U.S. Department of the Treasury and the Small Business Administration (SBA) to provide Paycheck Protection Program (PPP) loans.

On May 11^th, 2020, the Company's wholly owned subsidiary, IOU Central Inc., received loan proceeds of US$699,800 from the Small Business Administration (SBA) under the Paycheck Protection Program (PPP) program. The loan carries a fixed interest rate of 1% and matures two (2) years from the date of first disbursement. No payments are due for six (6) months from the date of first disbursement, although interest will accrue during the deferment period. IOU Central Inc. can apply for an amount of loan forgiveness which would equal, in large part, to expenses incurred for payroll, rent and utilities during and an eight (8) week period commencing from the date of first disbursement, subject to the loan forgiveness provisions in the PPP program.

CONFERENCE CALL

The Company will hold a conference call at 4:30 (EDT) on June 1, 2020, to discuss its financial results. The dial-in number to access the conference call from Canada and the United States is 1 (888) 231-8191 (toll-free), conference ID: 3736188

About IOU Financial Inc.

IOU Financial Inc. provides small businesses throughout the U.S. and Canada access to the capital they need to seize growth opportunities quickly. In a unique approach to lending, IOU Financial's advanced, automated application and approval system accurately assesses applicants' financial realities, with an emphasis on day-to-day cash flow trends. IOU Financial allows these businesses to apply for six, nine, twelve, fifteen and eighteen-month term loans of up to US$500,000 to qualified U.S. applicants ($100,000 in Canada) within a few business days, with affordable charges favorable to cash-flow management. Its speed and transparency make IOU Financial a trusted alternative to banks. To learn more visit: IOUFinancial.com.

Forward Looking Statements

Certain information set forth in this news release may contain forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond the control of IOU including, but not limited to, the impact of general economic conditions, industry conditions, dependence upon regulatory and shareholder approvals, the execution of definitive documentation and the uncertainty of obtaining additional financing. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. IOU does not assume any obligation to update or revise its forward-looking statements, whether as a result of new information, future events, or otherwise.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Definitions

• Adjusted gross revenue is defined as gross revenue prepared in accordance with IFRS for the period, plus amortization of servicing assets less gain on sale of loans. The Company uses adjusted gross revenue as it eliminates items that do not necessarily reflect how the Company is performing. Specifically, it eliminates the non-cash gain on sale of loans and the non-cash amortization of servicing assets which influence operating results depending on the timing and amount of the loan sales.
• Portfolio Yield is calculated as follows: interest revenue divided by the average commercial loans receivable for the period presented on an annualized basis. The ratios are calculated on a two-point basis, using December and year-end period end balances, presented on an annualized basis.
• Servicing Portfolio Yield is calculated as follows: servicing income divided by the average servicing portfolio for the period presented on an annualized basis. The ratios are calculated on a two-point basis, using December and period end balances, presented on an annualized basis.
• The Cost of Borrowing Rate is calculated as follows: interest expense divided by the average borrowings for the period, presented on an annualized basis. The ratios are calculated on a two-point basis, using December and period end balances, presented on an annualized basis.
• The Provisional Credit Loss rate is calculated as follows: provision for loan losses divided by the average commercial loans receivable for the period, presented on an annualized basis. The ratios are calculated on a two-point basis, using December and period end balances, presented on an annualized basis.
• The Net Credit Loss rate is calculated as follows: charge offs net of recoveries divided by the average commercial loans receivable for the period, presented on an annualized basis. The ratios are calculated on a two-point basis, using December and period end balances, presented on an annualized basis. The Company uses the Net Credit Loss Rate as an alternative measure to the Provisional Credit Loss Rate as it excludes the effect of provisions (reductions) in the allowance for expected credit losses during the period which may not coincide with the actual timing of charge-offs and recoveries.
• Adjusted operating expenses is calculated as follows: total operating expenses prepared in accordance with IFRS for the period less: stock-based compensation and non-recurring costs, plus non-recurring gains. The Company uses adjusted operating expenses as it eliminates items that do not necessarily reflect how the Company is performing. Specifically, it eliminates non-cash stock-based compensation which is given at different times and prices and non-recurring costs and gains which affects operating results only periodically.
• The Adjusted Operating Expense Ratio is calculated as follows: adjusted operating expenses divided by the average loans under management for the period, presented on an annualized basis. The ratios are calculated on a two-point basis, using December and period end balances, presented on an annualized basis.
• The calculation of adjusted net (loss) earnings is defined as net (loss) earnings for the period prepared in accordance with IFRS less: gain on sale of loans and non-recurring gains, plus: amortization of servicing assets, stock-based compensation and non-recurring costs.

SOURCE IOU Financial Inc.

Related Links

https://ioufinancial.com/en-ca/

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