Orion Digital Corp. annual report, Q4 FY2019

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Business context and reporting period

The supplied filing is Mogo Inc.’s annual report on Form 20-F for the fiscal year ended December 31, 2019, dated May 28, 2020. It is not a quarterly report, and the filing identifies Mogo Inc.—not Orion Digital Corp.—as the issuer. Financial statements are audited and prepared under IFRS, with amounts in Canadian dollars unless stated otherwise. In June 2019, Mogo Finance combined with Difference Capital Financial Inc. in a reverse acquisition; the statements reflect Mogo Finance’s continuing operations.

Key financial metrics

Amounts below are Canadian dollars; figures are rounded to millions unless otherwise noted.

  • Revenue: $59.8 million in 2019, up 5.8% from $56.6 million in 2018. Subscription and services revenue rose to $25.3 million from $21.6 million; interest revenue increased to $34.5 million from $26.9 million. Loan-fee revenue was nil, following the phaseout of legacy short-term loans in 2018.
  • Profitability: Gross profit was $41.0 million versus $39.6 million; gross margin was approximately 68.6% versus 70.1%. Operating loss narrowed to $3.7 million from $4.2 million. Net loss was $10.8 million versus $22.0 million, or $0.42 loss per share versus $0.97. The 2019 result included a $13.1 million net gain on acquisition. Adjusted EBITDA, a non-IFRS measure, was $7.2 million versus $4.2 million; adjusted net loss was $20.9 million versus $20.3 million.
  • Credit costs: Provision for loan losses, net of recoveries, rose 11% to $18.2 million. Gross loans were $104.7 million and the allowance for loan losses was $16.0 million at year-end; net loans receivable were $88.7 million. Stage 3 gross loans were $10.6 million, compared with $7.5 million in 2018.
  • Cash flow: Operating cash use was $15.2 million, improved from $29.2 million in 2018, mainly because net loan issuance used less cash. Before investment in loans receivable, operating cash flow was positive at $7.0 million, compared with $7.2 million. Investing cash use was $9.1 million; financing cash provided was $14.3 million. Cash fell to $10.4 million from $20.4 million.
  • Balance sheet and debt: Total assets were $151.1 million, liabilities $149.3 million, and equity $1.8 million, versus an $8.7 million equity deficit in 2018. Credit facilities totaled $76.5 million, debentures $44.0 million, and convertible debentures $12.4 million. Cash was substantially below total debt.
  • Other metrics: Membership increased from 756,000 to 976,000. The company reported no declared regular dividend and said it did not expect to pay dividends in the foreseeable future.

Material changes versus 2018

  • Revenue growth was led by interest revenue and subscription and services, offset by the disappearance of legacy loan fees and the exit from bitcoin mining in 2019.
  • Operating loss improved modestly, but net loss improvement was substantially affected by the acquisition gain. Adjusted net loss increased slightly.
  • Provision for loan losses and credit-facility interest expense increased; credit-facility interest expense rose to $11.3 million from $9.4 million.
  • Cash declined by $10.0 million. The June 2019 combination added $10.2 million cash and an investment portfolio; year-end portfolio fair value was $20.8 million.
  • IFRS 16 was adopted in 2019, adding lease assets and liabilities; comparative figures were not restated. Revenue and cost presentation was also recast, with no effect on net loss or balance sheet.

Outlook, risks and unusual items

  • Funding and liquidity: Management stated that it expected adequate resources to continue as a going concern for at least 12 months, based on forecasts and expected access to investors and lenders. The company had negative operating cash flow and said additional financing might be required. Credit facilities and debentures require refinancing; lender covenants and early repayment triggers could constrain lending and liquidity. The company reported compliance with facility covenants at December 31, 2019.
  • Subsequent financing and portfolio actions: In February 2020, Mogo sold most of its MogoLiquid loan portfolio to goeasy and extinguished the related facility, which had approximately $28.7 million outstanding. The filing gives gross sale consideration as $31.6 million in one section and $31.9 million in the financial-statement note; verify the final amount. The company also incurred a $2.5 million prepayment penalty, partly settled in shares. A three-year lending partnership with goeasy was intended to shift toward partner-originated lending and fee revenue.
  • COVID-19: Management reported no material business interruption to date because operations were digital, but said effects could include higher loan-loss provisions, weaker revenue or profitability, investment or asset impairments, and reduced access to financing. It offered payment flexibility to members, moved employees to remote work, and planned significant expense reductions effective Q2 2020. The ultimate economic and company impact was unknown.
  • Principal risks: Consumer defaults and adequacy of loan-loss allowances; reliance on a concentrated set of lenders and variable-rate facilities; ability to refinance debt and sustain liquidity; COVID-19 and economic deterioration; evolving lending, privacy and cryptocurrency regulation; cybersecurity and sensitive-data exposure; competition and member acquisition costs; and execution, acceptance and impairment risks for products and technology. The investment portfolio included private and potentially illiquid holdings valued using estimates.
  • Unusual accounting and reporting items: The acquisition generated a $13.1 million net gain after transaction costs. The company ceased bitcoin mining in 2019. The auditor issued an unqualified opinion on the 2019 financial statements; management did not provide an internal-control-over-financial-reporting assessment or auditor attestation under the stated transition-period exemption.

Most important facts for investors to verify

  • Confirm issuer and period: this is Mogo Inc.’s 2019 annual Form 20-F, not an Orion Digital Corp. filing or a standalone Q4 report.
  • Reconcile the reported $31.6 million versus $31.9 million gross consideration for the MogoLiquid portfolio sale and assess the net cash and debt impact after the penalty.
  • Review loan performance, delinquency trends, charge-offs and allowance assumptions, particularly the increase in Stage 3 balances and loan-loss provision.
  • Assess refinancing and covenant exposure, facility maturity in 2022, interest costs, available cash, and the company’s dependence on lender and capital-market access.
  • Separate recurring operating performance from the acquisition gain and compare IFRS results with the company’s non-IFRS adjusted EBITDA and adjusted net loss reconciliations.
  • Track COVID-related expense reductions, member payment accommodations, credit losses, asset valuations, and subsequent revenue and liquidity developments.