Mogo is not a regulated bank, and it feels no compunction to present its numbers as if it were.Kerry K. Taylor
Mogo Finance Technology Inc. oozes cool. It targets millennials with its mobile-phone-based financial products, from credit-score checks to mortgages. It counts the open-shirted rock-star Dragon’s Den investor Michael Wekerle as one of its backers. If you are inclined to seek a loan from the Royal Bank of Canada, you may not be the customer it’s looking for.
That entrepreneurial approach to breaking norms also seems to apply to the way it presents its financials. Despite taking in the majority of its money from lending and its associated fees, Vancouver-based Mogo is not a regulated bank, and it feels no compunction to present its numbers as if it were.
That helps Mogo, which just obtained a listing on the Nasdaq to pull in U.S. investors, to perpetuate a buzzy growth story – even though its revenues are actually falling, at an even greater rate than is obvious.
The Mogo platform, it says “empowers” Canadians to “manage their financial health,” with mortgages, a prepaid Visa card, a credit-monitoring and ID protection system. The company signs up users for a MogoAccount, typically via mobile phone, then introduces them to the products. It says it had 544,000 members in 2017’s fourth quarter. It likes to talk about its business opportunity by comparing its member numbers with those of Canada’s credit unions.
Sounds a lot like a bank. Until you get to the top of the company’s income statement, where revenue is to be found. Mogo reports “loan fees,” “loan interest” and “subscription and fee-based revenue.” This is all well and good, except if you’re expecting to examine the numbers of a lender. Bank investors know that lending revenue isn’t truly revenue until you net out the interest costs of your lending. It’s called “net interest income,” and it’s part of the top line of a bank’s income statement.
Mogo, however, does not place any of its cost of funds in its revenue line. By publishing an income statement more appropriate to a tech company than a financial company, it is able to claim that its financing costs aren’t even operating expenses, and places them below the operating-income line.
This choice also allows the company to report both “gross profit” on its income statement and EBITDA, or earnings before interest, taxes, depreciation and amortization, in its press releases to investors. Neither of these is a typical metric for a bank or traditional lender, and neither of these Mogo profit measures include the cost of money that the company is lending out to generate a significant amount of its revenue. (Mogo got 38 per cent of its revenue from gross loan interest in 2017, and another 36 per cent from loan fees.)
The company has an explanation, provided to me in writing. Greg Feller, the company’s president and chief financial officer, says the company has studied International Financial Reporting Standards and has concluded that “it would be inappropriate under IFRS for Mogo to use a ‘net interest revenue’ presentation.”
Mogo, he says, has looked to a section of IFRS that deals with presentation of the operating segments of a business. It’s found specific guidance on net interest revenue that says it’s only to be presented when a majority of revenues are from interest and when the chief operating decision maker of the segment relies primarily on net interest revenue as a performance indicator. Since neither of these things is true of Mogo, he says, the company shouldn’t use net interest income in its financial statements.
Why, though, is Mogo citing language on operating segments when the issue is the income statement for the entire company? Mr. Feller says “detailed guidance in one section should be used to interpret general guidance in another section. … It does not make sense nor would it be consistent to have one set of presentation principles in the income statement, and a separate set of presentation principles in an operating segment disclosure.”
Among the company’s outside auditors who assist Mogo with its financial statements, and the securities regulators in British Columbia who monitor them, no one seems to have objected enough to this interpretation to make the company change. However, if I were to look to that general guidance in IFRS that Mr. Feller refers to, International Accounting Standard 1 says an entity shall present additional line items “when such presentation is relevant to an understanding of the entity’s financial performance.” With two-thirds of revenue from the gross proceeds of lending, I’m willing to say yes, net interest income is relevant to understanding the company and should be found at the top of the income statement. Mogo, which says it highlights cost of funding in a section of key performance indicators in its disclosures, clearly disagrees with my interpretation.
Since the company is primarily focused on growing its subscription and fee-based revenue, such as sales of its identity-protection service, its press releases highlight top-line growth only in that segment: a 96 per cent year-over-year increase in the fourth quarter.
Let’s look at the whole picture, including lending. In Mogo’s formulation of revenue, its top line shrank by roughly double digits in 2017’s first two quarters, posted a small decline in the third, then gained 12.7 per cent in the fourth. The full-year number: a 2.4 per cent drop. That’s unimpressive enough.
But if one uses just its “funding interest expense” to calculate net interest income, 2017’s revenue fell by 5.1 per cent compared with the prior year. If one includes “corporate interest expense,” which Mogo says is devoted in part to new-product development and is not related in any way to its loans, the year-over-year decline is 9.3 per cent. (This is the construct S&P Global Market Intelligence uses for Mogo’s net interest income in its database, as it classifies Mogo as a consumer-finance company.)
In its announcement of its April 18 Nasdaq listing, it describes itself as “building Canada’s leading digital banking experience.” Mogo presents itself as a bank when it is advantageous and says it is not when regulation or conventional accounting standards are at play. Grasp this, and you may not be the investor it’s looking for.
David Milstead