IOU Financial Inc. Reports Second Quarter 2020 Financial Results

Rhea-AI Summary

IOU Financial reported a significant impact from the COVID-19 pandemic on its Q2 2020 results, with loan originations dropping to US$2.2 million in April, before recovering to US$6.8 million by July. Overall, 76% year-over-year decrease in loan funding was noted with US$9.2 million in Q2. Adjusted operating expenses decreased 30% to $1.8 million. The company faced a net loss of $3.1 million, or $0.04 per share for Q2 2020. Provisions for loan losses rose sharply to $4.8 million from $1.8 million a year earlier. Despite challenges, IOU is positioned to capitalize on post-pandemic recovery.

Positive

• Strong recovery in loan originations from US$2.2 million in April to US$6.8 million in July 2020.
• Adjusted operating expenses decreased by 30% to $1.8 million, improving operational efficiency.

Negative

• Total loans under management decreased by 9.3% year-over-year.
• Provision for loan losses surged to $4.8 million in Q2 2020 from $1.8 million in Q2 2019.
• Adjusted net loss increased to $2.7 million for Q2 2020 compared to an adjusted net earnings of $0.3 million in Q2 2019.

• IOU's Q2 2020 results were significantly impacted by the economic disruption of the COVID-19 pandemic, including reduced loan originations and increased provision for loan losses.
• However, IOU recovered strongly month-over-month during the course of Q2, and this has continued into Q3.
• Loan originations hit a low of US$2.2 million in April 2020. Loan originations have since grown in subsequent months, reaching US$2.7million in May 2020 and US$4.4 million in June 2020 as IOU gradually resumed lending to more businesses and geographical areas in the US. Loan origination growth has continued in Q3, reaching US$6.8 million in July 2020.
• IOU entered the COVID-19 pandemic in a strong financial position with diversified sources of capital; this has enabled the Company to continue loan originations, in contrast to several of IOU's competitors.
• The Company substantially reduced operating expenses in response to the pandemic. In Q2 2020, adjusted operating expenses decreased 30% to $1.8 million as compared to Q1 2020 ($2.6 million).
• IOU's corporate cash position has remained stable at $5.4 million since the onset of the pandemic due to cost reductions, government payroll assistance, recoveries of previously charged off loans, and an increase in loan originations.

MONTRÉAL, Aug. 27, 2020 /PRNewswire/ - IOU FINANCIAL INC. ("IOU" or "the Company") (TSX-V: IOU), a leading online lender to small businesses (IOUFinancial.com), announced today its results for the three and six-month period ended June 30, 2020.

"While the initial challenges of COVID-19 are reflected in our Q2 results, we are very encouraged by our progress over the past several months. IOU was proactive in its response to the COVID-19 pandemic, with tightened lending standards and the implementation of cost cutting measures. We are now seeing renewed loan origination growth in an improved competitive environment, and we are benefiting from our sound liquidity position and our diversified and supportive sources of capital. Looking forward, IOU is well positioned to capitalize on the economic recovery and to generate growing volumes of higher-quality loans," 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.
  
  
• In the second quarter of 2020, the Company funded approximately US$9.2 million in loans (2019: US$38.5 million), representing a decrease of 76.0% over the same period last year. For the first half of 2020, the Company funded US$47.3 million in loans (2019: US $71.1 million), representing a decrease of 33.7% over the same period last year. The decrease in loan originations was a result of the COVID-19 pandemic whereby IOU modified its underwriting standards to cease lending to industries and geographical areas which were strongly impacted by COVID-19. The Company continued to originate loans and support businesses deemed essential by various governments. 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 June 30, 2020, total loans under management amounted to $91.6 million (2019: $101.0 million), representing a decrease of 9.3% year over year and is attributable to the decrease in loan originations in the first half of 2020 of 33.7% compared to the same period in 2019. The principal balance of the loan portfolio amounted to $37.6 million (2019: $46.5 million), representing a decrease of 19.2% The principal balance of IOU Financial's servicing portfolio (loans being serviced on behalf of third parties) amounted to $54.1 million (2019: $54.5 million), representing a decrease of 0.9%.
  
  
• Adjusted gross revenue decreased 14.3% to $4.7 million for the three-month period ended June 30, 2020 compared to Q2 2020 ($5.5 million) primarily due to a decrease in interest and servicing revenue. Adjusted gross revenue increased to $11.1 million (2019: $10.6 million), representing an increase of 4.8% for the six-month period ended June 30, 2020 compared to the same period in 2019.
  
  
• Interest revenue decreased 2.6% to $3.8 million in Q2 2020 compared to the same period in 2019 as a result of the decrease in portfolio yield from 35.9% in Q2 2019 to 29.1% in Q2 2020. The decrease in portfolio yield is due in part to the Company effecting modified payment plans with clients due to the COVID-19 pandemic commencing in March 2020.
  
  
• Servicing income decreased 41.5% to $0.7 million in Q2 2020 compared to Q2 2019 as a result of a decrease in the servicing portfolio yield from 8.9% in Q2 2019 to 5.2% in Q2 2020. The decrease in servicing yield is due in largely to the Company effecting modified payment plans with merchants due to the COVID-19 pandemic commencing in March 2020.
  
  
• Interest expense during the three-month period ended June 30, 2020 decreased 3.4% to $0.9 million (2019: $1.0 million). The decrease is attributable to a decrease in the Cost of Borrowing Rate to 9.1% in Q2 2020 from 11.2% in Q2019 offset by an increase in average borrowings of 18.1% in Q2 2020 compared to Q2 2019. This is due, in part, 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 June 30, 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 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. Interest expense during the six-month period ended June 30, 2020 increased to $1.9 million (2019: $1.8 million), an increase of 4.4% compared to the same period last year.
  
  
• Provision for loan losses during the three-month period ended June 30, 2020 increased to $4.8 million (2019: $1.8 million). The increase is attributable to an increase in the average commercial loans receivable balance in second quarter of 2020 of 20.4% compared to the same period last year and an increase in the Provisional Credit Loss Rate to 36.7% in Q2 2020 compared to 16.8% in Q2 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. The entering into these modified plans and the application of the Company's standard provision methodology resulted in an increase of approximately $18.3 million to $21.2 million of commercial loans receivable balances entering the Stage 3 provision category as at June 30, 2020, thereby increasing the Provisional Credit Loss by approximately $4.1 million for the six-month period ended June 30, 2020. Nevertheless, the clients representing the $21.2 million of commercial loans receivable balances in the Stage 3 provision category are considered responsive as they have maintained a paying relationship with IOU in the month of June 2020 and serves to mitigate the impacts to the Provisional Credit Loss. Provision for loan losses increased to $10.1 million for the six-month period ended June 30, 2020 (2019: $3.3 million).
  
  
• The Net Credit Loss Rate increased from 15.1% in the second quarter of 2019 to 37.6% in the second quarter of 2020. The Company also uses the Net Credit Loss Rate as another measure for loan losses as it excludes the effect of provisions (reductions) in the allowance for expected credit losses during the period which may not coincide with the actual timing of charge-offs and recoveries.
  
  
• Adjusted operating expenses decreased 25.3% to $1.8 million in Q2 2020 compared to $2.4 million in Q2 2019 primarily due to measures taken at the beginning of Q2 2020 in response to the COVID-19 pandemic. On a sequential basis, adjusted operating expenses decreased 30% to $1.8 million from Q1 2020 ($2.6 million). On April 1, 2020, the Company furloughed approximately 40% of its full-time employees and implemented a temporary 20% reduction in salaries for all remaining employees as well as having managed certain vendors resulting in decreased data services and IT costs. The Adjusted Operating Expense Ratio, which is a measure of the Company's operating efficiency, decreased to 6.9% in the second quarter of 2020 (2019: 10.0%) as the decrease in operating expenses was at a greater rate than the decrease in the Company's loans under management following the COVID-19 pandemic. Operating expenses decreased to $1.9 million in Q2 2020 compared to $2.5 million in the same period in 2019. For the six-month period ended June 30, 2020, adjusted operating expenses decreased 7.1% to $4.4 million (2019: $4.8 million) and the Adjusted Operating Expense Ratio decreased to 8.3% in the first half of 2020 from 9.8% in the first half of 2019.
  
  
• IOU closed on its second quarter ended June 30, 2020 with adjusted net loss of $2.7 million compared to adjusted net earnings of $0.3 million for the second quarter ended June 30, 2019. IOU closed on the six-month period ended June 30, 2020 with adjusted net loss of $4.9 million, compared to adjusted net earnings of $0.8 million for the same period last year.
  
  
• IOU closed on its second quarter ended June 30, 2020 with IFRS net loss of $3.1 million, or ($0.04) per share, compared to IFRS net earnings of $0.2 million or $0.00 per share for the same period in 2019. IOU closed on the six-month period ended June 30, 2020 with IFRS net loss of $5.2 million, or ($0.06) per share, compared to IFRS net earnings of $0.3 million or $0.00 per share for the same period last year.

Adjusted and IFRS net (loss) earnings
For the period ended June 30	Three-Month		Six-Month
	2020 $	2019 $	2020 $	2019 $
Interest revenue	3,815,288	3,918,840	8,784,674	7,497,809
Servicing & other income	903,282	1,589,627	2,337,675	3,118,002
Adjusted Gross Revenue	4,718,570	5,508,467	11,122,349	10,615,811
Interest expense	933,936	966,932	1,918,415	1,837,760
Provision for loan losses	4,813,545	1,836,573	10,055,554	3,345,383
Recoveries	(132,270)	(55,041)	(442,744)	(128,273)
Cost of Revenue	5,615,211	2,748,464	11,531,225	5,054,870
Adjusted Net (Loss) Revenue	(896,641)	2,760,003	(408,876)	5,560,941
Adjusted operating expense	1,837,597	2,460,758	4,444,677	4,786,004
Income tax expense/(recovery)	-	-	-	-
Adjusted Net (Loss) Earnings	(2,734,238)	299,245	(4,853,553)	774,937
Adjusted Net (Loss) Earnings per Share	(0.03)	0.00	(0.06)	0.01
Adjusted Net (Loss) Earnings	(2,734,238)	299,245	(4,853,553)	774,937
Non-cash gain on sales of loans	420,977	812,073	1,207,554	1,622,133
Non-cash amortization of servicing asset	(746,785)	(834,213)	(1,593,850)	(1,906,126)
Non-cash stock-based compensation	(19,701)	(57,849)	(54,984)	(185,818)
Non-recurring gain	-	-	73,478	-
Net (Loss) Earnings per IFRS	(3,079,747)	219,256	(5,221,355)	305,126
Net (Loss) Earnings per Share	(0.04)	0.00	(0.06)	0.00

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 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.

While the current unprecedented economic situation due to the pandemic remains uncertain, the Company continues to maintain diversified sources of capital as well as to manage its liquidity position with a view to emerging as a stronger business coming out of this downturn.

IOU's financial statements and management discussion & analysis for the quarter ended June 30, 2020 have been filed on SEDAR and are available at www.sedar.com.

CONFERENCE CALL

The Company will hold a conference call at 4:30 (EDT) on September 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: 9867597

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 ($150,000 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 six-month ratios are calculated on a three-point basis, using December, March and June 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 six-month ratios are calculated on a three-point basis, using December, March and June 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 six-month ratios are calculated on a three-point basis, using December, March and June 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 six-month ratios are calculated on a three-point basis, using December, March and June 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 six-month ratios are calculated on a three-point basis, using December, March and June 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 six-month ratios are calculated on a three-point basis, using December, March and June period end balances, presented on an annualized basis. 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 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 six-month ratios are calculated on a three-point basis, using December, March and June 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.

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SOURCE IOU Financial Inc.

FAQ

What were IOU Financial's loan origination figures for Q2 2020?

IOU Financial's loan originations hit a low of US$2.2 million in April 2020, gradually increasing to US$6.8 million by July.

How did COVID-19 impact IOU Financial's financial results?

The pandemic led to a 76% year-over-year decrease in loan funding to approximately US$9.2 million in Q2 2020.

What was IOU Financial's adjusted net loss for Q2 2020?

IOU Financial reported an adjusted net loss of $2.7 million for Q2 2020.

What measures did IOU Financial take in response to COVID-19?

The company implemented cost-cutting measures and tightened lending standards to mitigate risks during the pandemic.

What is the outlook for IOU Financial post-COVID-19?

IOU Financial anticipates a significant need for small business loans as the economy normalizes.