Business context and reporting period
The supplied filing is Mogo Finance Technology Inc.’s audited annual report on Form 20-F for the fiscal year ended December 31, 2018, filed April 29, 2019—not a quarterly filing. The request metadata names Orion Digital Corp.; that company name does not appear in the filing, so the identity should be verified. Financial figures are in Canadian dollars (CAD), generally in thousands unless stated otherwise. Statements follow IFRS as issued by the IASB.
Mogo operates a Canadian digital financial-services platform, combining consumer lending with subscriptions and services such as credit monitoring, identity protection, prepaid cards, mortgage brokerage and bitcoin trading. It reported more than 800,000 members in its business overview; membership was 756,000 at year-end 2018 versus 544,000 a year earlier.
Financial performance and position
| Metric (CAD millions, except per-share data) | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | 61.3 | 48.7 | +26% |
| Gross profit | 38.9 | 32.8 | +18% |
| Gross margin | 63.4% | 67.4% | -4.0 percentage points |
| Operating loss | (4.2) | (2.9) | Loss widened |
| Net loss | (22.0) | (19.7) | Loss widened |
| Adjusted EBITDA | 4.2 | 2.5 | Improved |
| Basic and diluted loss per share | (C$0.97) | (C$1.07) | Loss per share narrowed |
Subscription and services revenue rose to C$26.7 million from C$13.0 million, while interest revenue increased to C$26.4 million from C$18.2 million. Loan fees fell to C$8.1 million from C$17.5 million as Mogo phased out legacy short-term loans; those fees were nil in Q4 2018. Core revenue, defined by the company as revenue excluding loan fees, was C$53 million, up 68% year over year. Subscription and services represented 44% of annual revenue.
Cash was C$20.4 million at year-end, down from C$40.6 million. Net loans receivable were C$86.3 million, against gross loans of C$101.8 million and an allowance for loan losses of C$15.4 million. Total assets were C$132.2 million; total liabilities were C$140.9 million, leaving a C$8.7 million shareholders’ deficit. Credit facilities were C$75.9 million, debentures C$41.6 million and convertible debentures C$11.8 million—about C$129.3 million of these reported borrowings in total.
Operating cash outflow was C$29.2 million, versus C$21.4 million in 2017; investing cash outflow was C$11.1 million, and financing inflow was C$20.1 million. Management also presented C$7.2 million of operating cash inflow before investment in loans receivable, a company-defined view that excludes net loan issuance from operating activities. Capitalized software development additions were C$7.7 million. No dividends have been declared.
Material changes versus the prior comparable period
- Revenue shifted toward subscriptions, services and long-term loan interest as legacy short-term loan products were phased out. Total revenue in 2017 had been slightly below 2016; 2018 rebounded.
- Gross profit dollars grew, but gross margin declined. The company attributed much of the comparison to IFRS 9 adoption, which increased upfront expected-credit-loss provisioning; opening loans receivable fell by C$5.1 million and opening deficit increased by the same amount on January 1, 2018. Prior periods were not restated.
- Provision for loan losses, net of recoveries, rose to C$16.4 million from C$11.4 million in 2017; the filing says IFRS 9 and loan-book growth contributed. The year-end allowance increased to C$15.4 million from C$7.4 million, including the transition adjustment.
- Credit facilities increased from C$57.1 million to C$75.9 million, while cash declined. The company increased the Credit Facility–Other limit from C$40 million to C$50 million in December 2018.
- 2018 brought the launch of MogoCrypto, expansion of MogoMortgage and MogoAccount into additional provinces, and NASDAQ trading under MOGO. The Postmedia marketing agreement was extended through 2020.
Outlook, commentary, risks and unusual items
No quantified earnings or revenue guidance is provided. Management expects continued investment in technology, products and growth, and says it intends to refinance credit facilities and debentures as they come due. Management judged the company had resources to continue as a going concern for at least 12 months from the financial-statement approval date, based in part on forecast cash flows and assumed access to debt and equity funding. The filing separately identifies a history of losses, negative operating cash flow and potential need for additional financing.
- Funding and liquidity: Debt funding is concentrated, facilities mature in 2020, and restrictive financial and portfolio covenants apply. Management reported covenant compliance at December 31, 2018. Debenture principal of C$28.0 million was scheduled for 2020, and convertible debentures mature in June 2020; refinancing is not assured.
- Credit and rates: Higher borrower defaults or weaker credit performance could increase losses or trigger facility provisions. Credit facilities bear floating LIBOR-based rates; the filing estimates a C$428,000 annual expense increase for a 0.50 percentage-point LIBOR increase.
- Regulation and operations: Lending and cryptocurrency rules are evolving. The filing notes possible registration requirements for MogoCrypto and MogoCard, uncertainty over high-cost credit regulation, and cybersecurity, privacy, third-party service and fraud risks.
- Cryptocurrency: Bitcoin-market volatility, changing regulation, custody or security incidents, and limited access to banking or insurance services could impair MogoCrypto operations and results.
- Unusual items and accounting: The company recorded a C$1.1 million non-cash impairment of bitcoin-mining equipment in 2018. A C$1.7 million non-cash gain from remeasuring a derivative liability partly offset other expenses. IFRS 16 adoption was expected to recognize a lease liability and right-of-use asset of approximately C$6.0–7.5 million from January 1, 2019; this was a preliminary estimate.
- Subsequent transaction: A proposed combination with Difference Capital Financial Inc., announced in April 2019, was subject to shareholder, regulatory and other approvals and was expected to close in Q2 2019. Former Mogo shareholders were expected to own approximately 80% of the combined entity. This was not a completed transaction as of the filing.
The audited financial statements received an unqualified audit opinion. Management reported effective disclosure controls; the report did not include management’s assessment or auditor attestation on internal control over financial reporting, citing the SEC transition period for newly public companies. The filing identifies Mogo as likely a PFIC for U.S. tax purposes for 2018, subject to annual determination.
Most important facts for investors to verify
- Confirm the issuer: the supplied metadata says Orion Digital Corp., but the filing is for Mogo Finance Technology Inc.; also confirm that an FY2018 annual report, rather than Q4-only results, is intended.
- Review loan delinquency, charge-off and recovery trends, the C$15.4 million allowance, and the impact of IFRS 9 on comparability and future margins.
- Assess cash runway and refinancing capacity against the 2020 facility maturities, contractual obligations and continuing negative operating cash flow.
- Verify facility covenant headroom, lender concentration, variable-rate exposure and the terms and dilution implications of convertible debentures and equity issuances.
- Check the status and final terms of the proposed Difference Capital transaction and the company’s PFIC status for the relevant tax year.