0001420811-20-000104.txt : 20200511 0001420811-20-000104.hdr.sgml : 20200511 20200511082700 ACCESSION NUMBER: 0001420811-20-000104 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 84 CONFORMED PERIOD OF REPORT: 20200331 FILED AS OF DATE: 20200511 DATE AS OF CHANGE: 20200511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: On Deck Capital, Inc. CENTRAL INDEX KEY: 0001420811 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 421709682 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36779 FILM NUMBER: 20862737 BUSINESS ADDRESS: STREET 1: 1400 BROADWAY STREET 2: 25TH FLOOR CITY: New York STATE: ny ZIP: 10018 BUSINESS PHONE: 888-269-4246 MAIL ADDRESS: STREET 1: 1400 BROADWAY STREET 2: 25TH FLOOR CITY: New York STATE: ny ZIP: 10018 FORMER COMPANY: FORMER CONFORMED NAME: On Deck Capital Inc DATE OF NAME CHANGE: 20071210 10-Q 1 ondk-2020033110qfinal.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
 
(MARK ONE)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                 TO
Commission File Number 001-36779
 
 
 
 
On Deck Capital, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
42-1709682
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1400 Broadway, 25th Floor
New York, New York 10018
(Address of principal executive offices)
(888) 269-4246
(Registrant’s telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.005 per share
ONDK
New York Stock Exchange
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ý    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
 
¨
 
Accelerated filer
 
x
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨

 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
The number of shares of the registrant’s common stock outstanding as of April 30, 2020 was 58,423,600.


 



On Deck Capital, Inc.
Table of Contents
 
 
 
Page
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
March 31,
 
December 31,
 
2020
 
2019
Assets
 
 
 
Cash and cash equivalents
$
121,148

 
$
56,344

Restricted cash
29,094

 
40,524

Loans and finance receivables
1,291,586

 
1,265,312

Less: Allowance for credit losses
(205,703
)
 
(151,133
)
Loans and finance receivables, net
1,085,883

 
1,114,179

Property, equipment and software, net
23,714

 
20,332

Other assets
77,339

 
73,204

Total assets
$
1,337,178

 
$
1,304,583

Liabilities, mezzanine equity and stockholders' equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
6,804

 
$
6,470

Interest payable
3,100

 
2,334

Debt
1,043,924

 
914,995

Accrued expenses and other liabilities
56,834

 
70,110

Total liabilities
1,110,662

 
993,909

Commitments and contingencies (Note 13)

 

Mezzanine equity:
 
 
 
Redeemable noncontrolling interest
13,112

 
14,428

Stockholders’ equity:
 
 
 
Common stock—$0.005 par value, 1,000,000,000 shares authorized and 80,247,423 and 80,095,061 shares issued and 58,419,304 and 66,363,555 outstanding at March 31, 2020 and December 31, 2019, respectively.
406

 
405

Treasury stock—at cost
(82,503
)
 
(49,641
)
Additional paid-in capital
514,785

 
513,571

Accumulated deficit
(217,509
)
 
(169,002
)
Accumulated other comprehensive loss
(2,923
)
 
(1,333
)
Total On Deck Capital, Inc. stockholders' equity
212,256

 
294,000

Noncontrolling interest
1,148

 
2,246

Total stockholders' equity
213,404

 
296,246

Total liabilities, mezzanine equity and stockholders' equity
$
1,337,178

 
$
1,304,583

 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3


ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share data)
 
Three Months Ended March 31,
 
2020
 
2019
Interest and finance income
$
106,935

 
$
105,799

Interest expense
11,569

 
11,332

Net interest income
95,366

 
94,467

Provision for credit losses
107,907

 
43,291

Net interest income (loss), after credit provision
(12,541
)
 
51,176

Other revenue
3,620

 
4,176

Operating expense:
 
 
 
Sales and marketing
11,664

 
11,960

Technology and analytics
16,484

 
16,806

Processing and servicing
6,689

 
5,489

General and administrative
16,280

 
14,029

Total operating expense
51,117

 
48,284

Income (loss) from operations, before provision for income taxes
(60,038
)
 
7,068

Provision for (Benefit from) income taxes

 
1,740

Net income (loss)
(60,038
)
 
5,328

Less: Net income (loss) attributable to noncontrolling interest
(1,063
)
 
(338
)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
(58,975
)

$
5,666

Net income (loss) per share attributable to On Deck Capital, Inc. common stockholders:
 
 
 
Basic
$
(0.94
)
 
$
0.08

Diluted
$
(0.94
)
 
$
0.07

Weighted-average common shares outstanding:
 
 
 
Basic
62,534,517

 
75,539,535

Diluted
62,534,517

 
79,115,037

Comprehensive income (loss):
 
 
 
Net income (loss)
$
(60,038
)
 
$
5,328

Other comprehensive income (loss):


 


Foreign currency translation adjustment
(3,213
)
 
366

Unrealized gain (loss) on derivative instrument
270

 
(742
)
Comprehensive income (loss)
(62,981
)
 
4,952

Less: Comprehensive income (loss) attributable to noncontrolling interests
(1,353
)
 
26

Less: Net income (loss) attributable to noncontrolling interest
(1,063
)
 
(338
)
Comprehensive income (loss) attributable to On Deck Capital, Inc. common stockholders
$
(60,565
)
 
$
5,264

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Changes in Equity and Redeemable Noncontrolling Interest(in thousands, except share data)
 
On Deck Capital, Inc.'s stockholders' equity
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Noncontrolling interest
 
Total
Equity
 
 
Redeemable Noncontrolling Interest
 
Shares
 
Amount
 
 
 
Balance—December 31, 2018
75,375,341

 
$
396

 
$
502,003

 
$
(196,959
)
 
$
(5,656
)
 
$
(1,832
)
 
$
297,952

 
$
4,533

 
$
302,485

 
 
$

Stock-based compensation

 

 
2,743

 

 

 

 
2,743

 

 
2,743

 
 

Issuance of common stock through vesting of restricted stock units and option exercises
264,364

 
2

 
45

 

 

 

 
47

 

 
47

 
 

Employee stock purchase plan
267,688

 
1

 
1,659

 

 

 

 
1,660

 

 
1,660

 
 

Tax withholding related to vesting of restricted stock units

 

 
(291
)
 

 

 

 
(291
)
 

 
(291
)
 
 

Currency translation adjustment

 

 

 

 

 
340

 
340

 
26

 
366

 
 

Cash flow hedge and other

 

 

 

 

 
(742
)
 
(742
)
 

 
(742
)
 
 

Net Income (loss)

 

 

 
5,666

 

 

 
5,666

 
(338
)
 
5,328

 
 

Balance—March 31, 2019
75,907,393


$
399


$
506,159


$
(191,293
)

$
(5,656
)

$
(2,234
)

$
307,375


$
4,221


$
311,596



$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—December 31, 2019
66,363,555

 
$
405

 
$
513,571

 
$
(169,002
)
 
$
(49,641
)
 
$
(1,333
)
 
$
294,000

 
$
2,246

 
$
296,246

 
 
$
14,428

Transition to ASU 2016-13 Adjustment

 

 

 
10,468

 

 

 
10,468

 

 
10,468

 
 

Stock-based compensation

 

 
1,738

 

 

 

 
1,738

 

 
1,738

 
 

Issuance of common stock through vesting of restricted stock units and option exercises
152,362

 
1

 
15

 

 

 

 
16

 

 
16

 
 

Employee stock purchase plan

 

 
(310
)
 

 

 

 
(310
)
 

 
(310
)
 
 

Repurchases of Common Stock
(8,096,613
)
 

 

 

 
(32,862
)
 

 
(32,862
)
 

 
(32,862
)
 
 

Tax withholding related to vesting of restricted stock units

 

 
(229
)
 

 

 

 
(229
)
 

 
(229
)
 
 

Currency translation adjustment

 

 

 

 

 
(1,860
)
 
(1,860
)
 
(253
)
 
(2,113
)
 
 
(1,100
)
Cash flow hedge and other

 

 

 

 

 
270

 
270

 
2

 
272

 
 

Net Income (loss)

 

 

 
(58,975
)
 

 

 
(58,975
)
 
(847
)
 
(59,822
)
 
 
(216
)
Balance—March 31, 2020
58,419,304


$
406


$
514,785


$
(217,509
)

$
(82,503
)

$
(2,923
)

$
212,256


$
1,148


$
213,404



$
13,112

                    
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities
 
 
 
Net income (loss)
$
(60,038
)
 
$
5,328

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Provision for credit losses
107,907

 
43,291

Depreciation and amortization
1,630

 
1,748

Amortization of debt issuance costs
955

 
802

Stock-based compensation
1,416

 
2,743

Amortization of net deferred origination costs
15,544

 
17,832

Changes in servicing rights, at fair value

 
69

Unfunded loan commitment reserve

 
48

Loss on disposal of fixed assets

 
674

Amortization of intangibles
122

 

Changes in operating assets and liabilities:
 
 
 
Other assets
(5,177
)
 
(3,781
)
Accounts payable
518

 
859

Interest payable
781

 
369

Accrued expenses and other liabilities
(6,249
)
 
(1,007
)
Net cash provided by operating activities
57,409


68,975

Cash flows from investing activities
 
 
 
Purchases of property, equipment and software
(2,370
)
 
(536
)
Capitalized internal-use software
(2,766
)
 
(1,379
)
Originations of loans and finance receivables, excluding rollovers into new originations
(510,613
)
 
(537,147
)
Payments of net deferred origination costs
(17,030
)
 
(18,529
)
Principal repayments of loans and finance receivables
426,014

 
469,894

Net cash used in investing activities
(106,765
)

(87,697
)
Cash flows from financing activities
 
 
 
Tax withholding related to vesting of restricted stock units
(229
)
 
(291
)
Repurchases of common stock
(32,862
)
 

Proceeds from exercise of stock options
15

 
45

Issuance of common stock under employee stock purchase plan

 
1,281

Proceeds from the issuance of debt
261,743

 
210,789

Payments of debt issuance costs
(155
)
 
(3,097
)
Repayments of debt principal
(126,323
)
 
(182,849
)
Net cash (used in) provided by financing activities
102,189


25,878

Effect of exchange rate changes on cash and cash equivalents
541

 
(77
)
Net increase (decrease) in cash, cash equivalents and restricted cash
53,374

 
7,079

Cash and cash equivalents at beginning of period
96,868

 
97,638

Cash and cash equivalents at end of period
$
150,242


$
104,717

 
 
 
 
Reconciliation to amounts on consolidated balance sheets
 
 
 
Cash and cash equivalents
$
121,148

 
$
60,085

Restricted cash
29,094

 
44,632


6


 
Three Months Ended March 31,
 
2020
 
2019
Total cash, cash equivalents and restricted cash
$
150,242

 
$
104,717

 
 
 
 
Supplemental disclosure of other cash flow information
 
 
 
Cash paid for interest
$
9,582

 
$
9,887

Cash paid for income taxes
$
30

 
$

Supplemental disclosures of non-cash investing and financing activities
 
 
 
Stock-based compensation included in capitalized internal-use software
$
14

 
$
57

Unpaid principal balance of term loans rolled into new originations
$
79,740

 
$
98,481


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


ON DECK CAPITAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
On Deck Capital, Inc.’s principal activity is providing financing to small businesses located throughout the United States as well as Canada and Australia, through term loans, lines of credit, equipment finance loans and additionally in Canada through a variable pay product. We use technology and analytics to aggregate data about a business and then quickly and efficiently analyze the creditworthiness of the business using our proprietary credit-scoring model. We originate most of the loans in our portfolio and also purchase loans from an issuing bank partner. We subsequently transfer most of our loan volume into one of our wholly-owned subsidiaries for financing purposes.
In October 2018, we announced the launch of ODX, a wholly-owned subsidiary that helps banks digitize their small business lending process. ODX offers a combination of software, analytic insights, and professional services that allow banks to bring their small business lending process online.
In April 2019, we combined our Canadian operations with Evolocity Financial Group, or Evolocity, to create a new holding company in which we own a 58.5% majority interest. We have accounted for this transaction as a business combination and have consolidated the financial position and results of operations of the holding company. The noncontrolling interest has been classified as mezzanine equity because it was deemed to be a redeemable noncontrolling interest. See Note 9 for further discussion.
Basis of Presentation and Principles of Consolidation
We prepare our consolidated financial statements and footnotes in accordance with accounting principles generally accepted in the United States of America, or GAAP, as contained in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. All intercompany transactions and accounts have been eliminated in consolidation. When used in these notes to consolidated financial statements, the terms "we," "us," "our" or similar terms refer to On Deck Capital, Inc. and its consolidated subsidiaries.
At December 31, 2019, we changed the presentation of the revenue portion of our Consolidated Statements of Operations and Comprehensive Income to present new line items for "Net interest income" and "Net interest revenue, after credit provision" and "Total non-interest income." We no longer present the line items, "Gross revenue," "Total cost of revenue" and "Net revenue." "Gains on sales of loans" and "Other revenue" for the quarter ended March 31, 2019, which were previously reported as components of "Gross revenue", have been recast to be presented as components of "Total non-interest income". "Interest expense" and "Provision for credit losses" for the quarter ended March 31,2019, which were previously reported as components of "Total cost of revenue", have been recast to be presented as components of "Net interest income" and "Net interest revenue, after credit provision", respectively. The change in presentation had no effect on our "Income (loss) from operations, before provision for income taxes" or "Net income (loss)". The new presentation solely repositions our existing financial statement line items and does not create any new financial statement line items except for new subtotals. The change was made to better align with industry standards and to reflect key metrics which we use to measure our business.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Significant estimates include allowance for credit losses, stock-based compensation expense, capitalized software development costs, the useful lives of long-lived assets, goodwill, our effective income tax rate and valuation allowance for deferred tax assets. We base our estimates on historical experience, current events and other factors we believe to be reasonable under the circumstances. These estimates and assumptions are inherently subjective in nature; actual results may differ from these estimates and assumptions.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 which changed the impairment model and how entities measure credit losses for most financial assets. The standard requires entities to use the new expected credit loss impairment model which replaced the incurred loss model used previously. We adopted the new standard effective January 1, 2020. Upon adoption, the $7 million liability for unfunded line of credit commitments previously included in Other liabilities was released and other transition related adjustments to the allowance for credit losses were $3 million. On January 1, 2020, the transition adjustments of a total of $10 million were recorded against retained earnings.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminated the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by

8


which the carrying amount exceeds the reporting unit’s fair value. We adopted the new standard prospectively on January 1, 2020 and it did not have a material impact on our unaudited consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements for fair value measurements under ASC 820, Fair Value Measurement. We adopted the new standard effective January 1, 2020 and the adoption did not have a material impact on our unaudited consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. We adopted the new standard effective January 1, 2020 utilizing the prospective transition approach with no material impact on our unaudited consolidated financial statements as of March 31, 2020.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic, which led to governmental requirements or recommendations for “non-essential” businesses to temporarily close or severely limit their operations. Our small business customers have been directly or indirectly affected by the COVID-19 pandemic due to the closures and reduced customer demand. We have included the COVID-19 impacts as part of our calculation of the allowance for credit losses for the quarter ended March 31, 2020. See Note 4.
The pandemic is having unprecedented negative economic consequences. We have changed our near-term priorities to actively monitor and respond to the impacts that COVID-19 is having on our business and customers. See Part I, Item 2- "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more detail. It is currently unclear what the full impact of COVID-19, will be on our business, cash flows, available liquidity, financial condition, and results of operations, due to the many material uncertainties that exist. 
Revision of Prior Period Financial Statements
During the second quarter of 2019, we identified an immaterial error in our historical financial statements relating to the accrual of commissions on a portion of our renewal loans. The aggregate amount of the under-accrual was $2.4 million, approximately 90% of which relates to 2015 and subsequent periods, and represents less than 1%, of our total stockholders’ equity at March 31, 2019. The amount of the error in each of the impacted annual and interim periods was less than 1% of total commissions paid for such period.
In accordance with the SEC’s SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” we evaluated the error and concluded that the impact was not material to our financial statements for any prior annual or interim period. Accordingly, we have revised our previously reported financial information to correct the immaterial error contained in our Quarterly Report on Form 10-Q for the three-months ended March 31, 2019.
A summary of revisions to certain previously reported financial information is presented in Note 11.


9


2. Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share is calculated as follows (in thousands, except share and per share data):
 
Three Months Ended March 31,
 
2020
 
2019
Numerator:
 
 
 
Net Income (loss)
$
(60,038
)
 
$
5,328

Less: Net income (loss) attributable to noncontrolling interest
(1,063
)
 
(338
)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
(58,975
)
 
$
5,666

Denominator:
 
 
 
Weighted-average common shares outstanding, basic
62,534,517

 
75,539,535

Net income (loss) per common share, basic
$
(0.94
)
 
$
0.08

Effect of dilutive securities

 
3,575,502

Weighted-average common shares outstanding, diluted
62,534,517

 
79,115,037

Net income (loss) per common share, diluted
$
(0.94
)
 
$
0.07

Anti-dilutive securities excluded
12,410,306

 
4,863,474

The difference between basic and diluted net income per common share has been calculated using the Treasury Stock Method based on the assumed exercise of outstanding stock options, the vesting of restricted stock units, or RSUs, performance restricted stock units, or PRSUs, and the issuance of stock under our employee stock purchase plan. Changes in the average market price of our stock can impact when stock equivalents are considered dilutive or anti-dilutive. For example, in periods of a declining stock price, stock equivalents have a greater likelihood of being recharacterized from dilutive to anti-dilutive. The following common share equivalent securities have been included in the calculation of dilutive weighted-average common shares outstanding:
 
Three Months Ended March 31,
Dilutive Common Share Equivalents
2020
 
2019
Weighted-average common shares outstanding
62,534,517

 
75,539,535

RSUs and PRSUs

 
1,024,301

Stock options

 
2,549,887

Employee stock purchase plan

 
1,314

Total dilutive common share equivalents
62,534,517

 
79,115,037

The following common share equivalent securities were excluded from the calculation of diluted net income per share attributable to common stockholders. Their effect would have been antidilutive for the three months ended March 31, 2020 and 2019.
 
Three Months Ended March 31,
 
2020
 
2019
Anti-Dilutive Common Share Equivalents
 
 
 
Warrants to purchase common stock

 
22,000

RSUs and PRSUs
5,716,536

 
669,075

Stock options
6,693,770

 
4,172,399

Total anti-dilutive common share equivalents
12,410,306

 
4,863,474

On July 29, 2019 we announced that our Board of Directors authorized the repurchase of up to $50 million of common stock with the repurchased shares to be retained as treasury stock and available for possible reissuance. Any share repurchases under the program will be made from time to time in the open market, in privately negotiated transactions or otherwise. The timing and amount of any share repurchases will be subject to market conditions and other factors as we may determine. The repurchase authorization expires August 31, 2020, however, we may suspend, modify or discontinue the program at any time in our discretion without prior notice. On February 11, 2020 we announced that our Board of Directors authorized the repurchase of up to an additional $50 million of common stock under the repurchase program described above, with no expiration on the additional

10


authorization. During the three months ended March 31, 2020 we repurchased 8,096,613 shares of common stock for $32.9 million, compared to the previous quarter where we repurchased 7,490,094 shares of common stock for $33.0 million. In late February 2020, we suspended repurchase activity under our program as part of our focus on liquidity and capital preservation, but maintain authorization to resume purchases at our sole discretion.
3. Interest Income
Interest income was comprised of the following components for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Interest and finance income
$
122,283

 
$
123,434

Amortization of net deferred origination costs
(15,583
)
 
(17,892
)
Interest and finance income, net
106,700

 
105,542

Interest on deposits and investments
235

 
257

Total interest and finance income
$
106,935

 
$
105,799

4. Loans and Finance Receivables Held for Investment and Allowance for Credit Losses
Loans and finance receivables consisted of the following as of March 31, 2020 and December 31, 2019 (in thousands):
 
March 31, 2020
 
December 31, 2019
Term loans
$
945,570

 
$
946,322

Lines of credit
300,353

 
277,843

Other loans and finance receivables (1)
17,441

 
14,244

Total Unpaid Principal Balance
1,263,364

 
1,238,409

Net deferred origination costs
28,222

 
26,903

Total loans and finance receivables
$
1,291,586

 
$
1,265,312

(1) 
Includes loans secured by equipment and our variable pay product in Canada.
We include both loans we originate and loans originated by our issuing bank partner and later purchased by us as part of our originations. During the three months ended March 31, 2020 and 2019 we purchased loans from our issuing bank partner in the amount of $109.7 million and $111.5 million, respectively.
As of January 1, 2020, we began to utilize a model that is compliant with the Current Expected Credit Loss, or CECL, standard. The credit losses on our portfolio are estimated and recognized upon origination, based on expected credit losses for the life of the balance as of the period end date. We evaluate the creditworthiness of our portfolio on a pooled basis based on the product type. We use a proprietary model to project contractual lifetime losses at origination based on our historical lifetime losses of our actual loan performance. Future economic conditions include multiple macroeconomic scenarios provided to us by an independent third party and reviewed by management. These macroeconomic scenarios contain certain variables that are influential to our modelling process, including real gross domestic product and economic indicators such as small business and consumer sentiment and small business demand and performance metrics. We perform a Qualitative Assessment to address possible limitations within the model, and at times when deemed necessary include the Qualitative Assessment to our calculation.
Upon adoption, the net change in the required Allowance for credit losses was minimal with a $3 million decrease driven by lower required reserves for lines of credit. Additionally, the $7 million reserve for unfunded line of credit commitments previously included in Other liabilities was released as part of the adoption. Under the new model, we reserve for the committed debt balance on our outstanding line of credit balances. These changes resulted in a net increase of approximately $10 million in Stockholder's equity on January 1, 2020.
We increased our allowance for credit losses at March 31, 2020 due to higher expected losses related to the COVID-19 pandemic. Management's consideration at March 31, 2020 included the potential macro-economic impact of continued

11


government-mandated lockdowns for small businesses, expected timing for the reopening of the economy, as well as the effectiveness of the government stimulus programs.
The change in the allowance for credit losses for the three months ended March 31, 2020 and 2019 consisted of the following (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
 
Term Loans and Finance Receivables
 
Lines of Credit
 
Total
 
Total
Balance at beginning of period
$
116,752

 
$
34,381

 
$
151,133

 
$
140,040

Recoveries of previously charged off amounts
5,042

 
555

 
5,597

 
3,914

Loans and finance receivables charged off
(45,667
)
 
(9,561
)
 
(55,228
)
 
(39,839
)
Provision for credit losses
78,278

 
29,629

 
107,907

 
43,291

Transition to ASU 2016-13 Adjustment
2,800

 
(6,104
)
 
(3,304
)
 

Foreign Currency Translation Adjustment
(402
)
 

 
(402
)
 

Allowance for credit losses at end of period
$
156,803

 
$
48,900

 
$
205,703

 
$
147,406

When loans and finance receivables are charged off, we typically continue to attempt to recover amounts from the respective borrowers and guarantors, including, when we deem it appropriate, through formal legal action. Alternatively, we may sell previously charged-off loans to third-party debt buyers.  The proceeds from these sales are recorded as a component of the recoveries of loans previously charged off. For the three months ended March 31, 2020 loans sold accounted for $1.2 million of recoveries previously charged off. We did not sell any previously charged-off loans for the three months ended March 31, 2019.
The following table contains information regarding the unpaid principal balance we originated related to non-delinquent, paying and non-paying delinquent loans and finance receivables as of March 31, 2020 and December 31, 2019 (in thousands). At March 31, 2020, approximately 30% of our delinquent loans and finance receivables were making payments.
 
March 31, 2020
 
Term Loans and Finance Receivables
 
Lines of Credit
 
Total
Current loans and finance receivables
$
673,274

 
$
249,301

 
$
922,575

Delinquent: paying (accrual status)
86,396

 
13,885

 
100,281

Delinquent: non-paying (non-accrual status)
203,341

 
37,167

 
240,508

Total
963,011

 
300,353

 
1,263,364

 
December 31, 2019
 
Term Loans and Finance Receivables
 
Lines of Credit
 
Total
Current loans and finance receivables
$
842,083

 
$
255,981

 
$
1,098,064

Delinquent: paying (accrual status)
33,512

 
5,002

 
38,514

Delinquent: non-paying (non-accrual status)
84,971

 
16,860

 
101,831

Total
$
960,566

 
$
277,843

 
$
1,238,409


12


We consider the delinquency status of our loans and finance receivables as one of our primary credit quality indicators once loans advance beyond the origination underwriting stage. We monitor delinquency trends to manage our exposure to credit risk. The following tables show an aging analysis of the unpaid principal balance related to loans and finance receivables and lines of credit, by delinquency status and origination year as of March 31, 2020 (in thousands):
 
March 31, 2020
 
Term Loans and Finance Receivables
 
Lines of Credit
 
Total
 
Origination Year
 
 
By delinquency status:
2017 and prior
 
2018
 
2019
 
2020
 
2020
 
 
Current loans and finance receivables
$
5

 
$
2,900

 
$
347,911

 
$
322,458

 
$
249,301

 
$
922,575

1-14 calendar days past due

 
727

 
117,694

 
61,578

 
31,055

 
211,054

15-29 calendar days past due

 
153

 
16,763

 
4,745

 
3,800

 
25,461

30-59 calendar days past due

 
114

 
23,380

 
1,852

 
4,032

 
29,377

60-89 calendar days past due

 
323

 
19,844

 
313

 
4,256

 
24,737

90 + calendar days past due
944

 
7,592

 
33,715

 

 
7,909

 
50,160

Total unpaid principal balance
$
949

 
$
11,809

 
$
559,307

 
$
390,946

 
$
300,353

 
$
1,263,364

At March 31, 2020 the amount of loans that were in the delinquent, especially in the 1 to 14 days past due bucket were at a historical high, due to the broad-based pressures from COVID-19 that our customers experienced late in quarter.
The following tables show an aging analysis of the unpaid principal balance related to loans and finance receivables and lines of credit, by delinquency status as of December 31, 2019 (in thousands):
 
December 31, 2019
By delinquency status:
Term Loans and Finance Receivables
 
Lines of Credit
 
Total
Current loans and finance receivables
$
842,083

 
$
255,981

 
$
1,098,064

1-14 calendar days past due
$
23,426

 
$
4,949

 
28,375

15-29 calendar days past due
$
15,153

 
$
2,230

 
17,383

30-59 calendar days past due
$
20,647

 
$
4,419

 
25,067

60-89 calendar days past due
$
18,527

 
$
3,477

 
22,004

90 + calendar days past due
$
40,730

 
$
6,787

 
47,516

Total unpaid principal balance
$
960,566

 
$
277,843

 
$
1,238,409

We utilize OnDeck Score, industry data and term length to monitor the credit quality and pricing decisions of our portfolio. For our lines of credit, one of our primary credit quality indicators is delinquency, particularly whether they are in a paying or non-paying status. In addition to delinquency, the credit quality of US term loan portfolio is evaluated based on an internally developed credit risk model that assigns a risk grade based on credit bureau data, the OnDeck Score, business specific information and loan details. The risk grade is used in our model to calculate our allowance for credit losses. One of our credit quality indicators is the risk grade that we assign to our US term loan. Additionally, we utilize historical performance on the previous loan for our renewal customers. After grouping the loans according to their term length, they are further divided into the following risk grades based on probability of default.
W - lowest risk
X - low risk
Y - medium risk
Z - high risk

13


The following table contains the breakdown of our US Term Loans by the year of origination and our risk grades, at March 31, 2020:
 
March 31, 2020
 
Origination Year
Risk Grade
2020
 
2019
 
2018
 
2017 and prior
 
Total
W
$
124,634

 
$
169,776

 
$
3,094

 
$
317

 
$
297,821

X
73,033

 
99,501

 
2,626

 
35

 
175,195

Y
52,964

 
83,449

 
2,317

 
164

 
138,894

Z
56,372

 
78,831

 
1,306

 
290

 
136,799

 
$
307,003

 
$
431,557

 
$
9,343

 
$
806

 
$
748,709

The COVID-19 pandemic created and will continue to create unprecedented economic impacts that our current model may not accurately predict, since such an event has not happened in the past. For our calculation of the allowance for credit losses at March 31, 2020 we bifurcated the delinquent receivable pool into two groups: delinquencies that existed prior to March 11th which we define as “normal” delinquencies, and delinquencies that occurred on or after March 11th, which we define as post- pandemic delinquencies. We further stratified the post-pandemic delinquencies into sub-groups based on payment performance. We then set reserve levels based on expected lifetime loss for each of the groups. Reserve levels were based on collection status and product type.
5. Debt
The following table summarizes our outstanding debt as of March 31, 2020 and December 31, 2019 (in thousands):
 
 
 
 
 
Outstanding
 
Type
 
Maturity Date
 
Weighted Average Interest
Rate at March 31, 2020
 
March 31, 2020
 
December 31, 2019
Debt:
 
 
 
 
 
 
 
OnDeck Asset Securitization Trust II - Series 2018-1
Securitization
 
April 2022
(1) 
3.8%
 
$
225,000

 
$
225,000

OnDeck Asset Securitization Trust II - Series 2019-1
Securitization
 
November 2024
(2) 
3.0%
 
125,000

 
125,000

OnDeck Account Receivables Trust 2013-1
Revolving
 
March 2022
(3) 
2.7%
 
143,241

 
129,512

Receivable Assets of OnDeck, LLC
Revolving
 
September 2021
(4) 
2.6%
 
99,631

 
94,099

OnDeck Asset Funding II LLC
Revolving
 
August 2022
(5) 
4.0%
 
166,913

 
123,840

Prime OnDeck Receivable Trust II
Revolving
 
March 2022
(6) 
3.3%
 

 

Loan Assets of OnDeck, LLC
Revolving
 
October 2022
(7) 
2.7%
 
122,403

 
120,665

Corporate line of credit
Revolving
 
January 2021
 
4.0%
 
105,000

 
40,000

International and other agreements
Various
 
Various
(8) 
4.0%
 
63,546

 
64,585

 
 
 
 
 
3.4%
 
1,050,734

 
922,701

Deferred debt issuance cost
 
 
 
 
 
 
(6,810
)
 
(7,706
)
Total Debt
 
 
 
 
 
 
$
1,043,924

 
$
914,995


(1) 
The period during which new loans may be purchased under this securitization transaction expired in March 2020.
(2) 
The period during which new loans may be purchased under this securitization transaction expires in October 2021. An early amortization event has occurred under this transaction, please refer to Note 14 for details.
(3) 
The period during which new borrowings may be made under this facility expires in March 2021.
(4) 
The period during which new borrowings of Class A revolving loans may be made under this debt facility expires in December 2020.
(5) 
The period during which new borrowings may be made under this facility expires in August 2021.
(6) 
The period during which new borrowings may be made under this facility expires in March 2021.

14


(7) 
The period during which new borrowings may be made under this debt facility expires in April 2022. An amendment was made to the facility on April 27, 2020, please refer to Note 13 for details.
(8) 
Other Agreements include, among others, our local currency debt facilities in Australia and Canada. The periods during which new borrowings may be made under the various agreements expire between June 2020 and March 2023. Maturity dates range from June 2021 through March 2023.

Certain of our loans are transferred to our special purpose vehicle subsidiaries and are pledged as collateral for borrowings in our funding debt facilities and for the issuance in our securitization. These loans totaled $1.2 billion and $1.0 billion as of March 31, 2020 and December 31, 2019, respectively. Our corporate debt facility includes a blanket lien on substantially all of our assets.
Recent Amendments to Debt Facilities
On March 23, 2020, our Canadian entities entered into a CAD 40 million revolving credit facility that amended and extended the terms of their prior facility with the Bank of Montreal. The revolving credit facility matures in March 2023. The facility is secured by substantially all the assets of our Canadian entities, including Canadian small business loans.
6. Fair Value of Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs
We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. Our interest rate cap is reported at fair value utilizing Level 2 inputs. The fair value is determined using third party valuations that are based on discounted cash flow analysis using observed market inputs.
The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (in thousands):
 
March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Interest rate cap

 
3

 

 
3

Total assets
$

 
$
3

 
$

 
$
3

 
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Interest rate cap
$

 
$

 
$

 
$

Total assets
$

 
$

 
$

 
$

There were no transfers between levels for the three months ended March 31, 2020 and December 31, 2019.

Assets and Liabilities Disclosed at Fair Value
Because our loans and finance receivables and fixed-rate debt are not measured at fair value, we are required to disclose their fair value in accordance with ASC 825. Due to the lack of transparency and comparable loans and finance receivables, we utilize an income valuation technique to estimate fair value. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize third-party service providers to assist in the valuation process. This determination requires significant judgments to be made. The following tables summarize the carrying value and fair value of our loans held for investment and fixed-rate debt (in thousands):

15


 
March 31, 2020
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans and finance receivables, net
$
1,085,883

 
$
1,197,481

 
$

 
$

 
$
1,197,481

Total assets
$
1,085,883

 
$
1,197,481

 
$

 
$

 
$
1,197,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
350,000

 
$
302,779

 
$

 
$

 
$
302,779

Total fixed-rate debt
$
350,000

 
$
302,779

 
$

 
$

 
$
302,779

 
December 31, 2019
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans and finance receivables, net
$
1,114,179

 
$
1,241,893

 
$

 
$

 
$
1,241,893

Total assets
$
1,114,179

 
$
1,241,893

 
$

 
$

 
$
1,241,893

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
350,000

 
$
337,510

 
$

 
$

 
$
337,510

Total fixed-rate debt
$
350,000

 
$
337,510

 
$

 
$

 
$
337,510

7. Income Taxes
For interim periods, the income tax provision is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items. We use an estimated annual effective tax rate which is based on expected annual income and statutory tax rates to determine our quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
We did not book a provision for income taxes for the three months ended March 31, 2020 and our provision for income taxes for the three months ended March 31, 2019 was $1.7 million representing a quarterly effective income tax rate of 24% for the three months ended March 31, 2019.
8. Stock-Based Compensation and Employee Benefit Plans
Equity incentives are currently issued to employees and directors in the form of stock options and RSUs under our 2014 Equity Incentive Plan. Our 2007 Stock Option Plan was terminated in connection with our Initial Public Offering (IPO). Accordingly, no additional equity incentives are issuable under this plan although it continues to govern outstanding awards granted thereunder. Additionally, we offer an Employee Stock Purchase Plan through the 2014 Employee Stock Purchase Plan and a 401(k) plan to employees.

16


Options
The following is a summary of option activity for the three months ended March 31, 2020:
 
Number of
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at January 1, 2020
6,822,219

 
$
5.68

 

 

Exercised
(43,771
)
 
$
0.40

 

 

Forfeited
(73,678
)
 
$
6.55

 

 

Expired
(11,000
)
 
$
5.52

 

 

Outstanding at March 31, 2020
6,693,770

 
$
5.71

 
4.5

 
$
2,621

Exercisable at March 31, 2020
6,182,891

 
$
5.72

 
4.2

 
$
2,621

Vested or expected to vest as of March 31, 2020
6,678,295

 
$
5.71

 
4.5

 
$
2,621

Total compensation cost related to nonvested option awards not yet recognized as of March 31, 2020 was $0.9 million and will be recognized over a weighted-average period of 1.7 years. The aggregate intrinsic value of employee options exercised during the periods ended March 31, 2020, and 2019 was $0.2 million, and $1.1 million, respectively.

Restricted Stock Units
The following table is a summary of activity in RSUs and PRSUs for the three months ended March 31, 2020:
 
Number of RSUs and PRSUs
 
Weighted-Average Grant Date Fair Value Per Share
Unvested at January 1, 2020
4,185,560

 
$
5.32

RSUs and PRSUs Granted
1,961,929

 
$
3.61

RSUs and PRSUs Vested
(156,320
)
 
$
6.47

RSUs and PRSUs Forfeited/Expired
(274,633
)
 
$
5.71

Unvested at March 31, 2020
5,716,536

 
$
4.69

Expected to vest after March 31, 2020
4,525,071

 
$
4.69

As of March 31, 2020, there was $16.1 million of unrecognized compensation cost related to unvested RSUs and PRSUs, which is expected to be recognized over a weighted-average period of 2.9 years.
Stock-based compensation expense related to stock options, RSUs, PRSUs and the employee stock purchase plan are included in the following line items in our accompanying consolidated statements of operations for the three months ended March 31, 2020 and 2019 (in thousands). We had a number of forfeitures in our Sales and Marketing personnel which resulted in a reversal of expenses for the three months ending March 31, 2020.
 
For the three months ending March 31,
 
2020
 
2019
Sales and marketing
$
(23
)
 
$
559

Technology and analytics
460

 
828

Processing and servicing
99

 
90

General and administrative
880

 
1,606

Total
$
1,416

 
$
3,083





17


9. Business Combination
On April 1, 2019, we combined our Canadian operations with Evolocity Financial Group, or Evolocity, a Montreal-based online small business lender. The purpose of the transaction was to accelerate the growth of our Canadian operations and to enable us to provide a broader range of financing options to Canadian small businesses nationwide. In the transaction, Evolocity contributed its business to a holding company, and we contributed our Canadian business plus cash to that holding company such that we own a 58.5% majority interest in the holding company. The remainder is owned by former Evolocity stockholders. We have accounted for this transaction as a business combination.
The transaction has a purchase price for accounting purposes of approximately $16.7 million. Goodwill arising from the business combination is not amortized, but is subject to impairment testing at least annually or more frequently if there is an indicator of impairment. A quarterly impairment test was performed at March 31, 2020 that determined no impairment was needed. There have been no changes to goodwill since December 31, 2019.
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the business combination (in thousands):
 
Fair Value at Combination
Loans and finance receivables
$
36,763

Intangibles and other assets (1)
2,810

Debt and other liabilities
(34,437
)
Goodwill (1)
11,585

Net assets acquired
$
16,721

(1) Goodwill, and Intangibles and other assets were included in Other Assets on the Consolidated Balance Sheet as of March 31, 2020 and December 31, 2019.
We consolidate the financial position and results of operations of the holding company.
Our business combination with Evolocity resulted in a redeemable noncontrolling interest, which has been classified as mezzanine equity due to the option of the noncontrolling shareholders to require us to purchase their interest. The redeemable noncontrolling interest was recorded at fair value of $16.1 million as a result of the business combination. The fair value was measured using a mix of a discounted cash flow and cost approach. These interests are classified as mezzanine equity and measured at the greater of fair value at the end of each reporting period or the historical cost basis of the noncontrolling interest adjusted for cumulative earnings allocations. The mezzanine equity balance at March 31, 2020 was $13.1 million and at December 31, 2019 was $14.4 million.
10. Derivatives and Hedging
We are subject to interest rate risk in connection with borrowings under our debt agreements which are subject to variable interest rates. In December 2018 we entered into an interest rate cap, which is a derivative instrument, to manage our interest rate risk on a portion of our variable-rate debt. We do not use derivatives for speculative purposes. The interest rate cap is designated as a cash flow hedge. In exchange for our up-front premium, we would receive variable amounts from a counterparty if interest rates rise above the strike rate on the contract. The interest rate cap agreement is for a notional amount of $300 million and has a maturity date of January 2021.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the changes in the fair value of the derivative are recorded in Accumulated Other Comprehensive Income, or AOCI, and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. We estimate that $0.6 million will be reclassified as an increase to interest expense over the next 12 months.
The table below presents the fair value of our derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2020 and December 31, 2019 (in thousands):

18


Derivative Type
 
Classification
 
March 31, 2020
 
December 31, 2019
Assets:
 
 
 
 
 
 
Interest rate cap agreement
 
Other Assets
 
$
3

 
$

The table below presents the effect of cash flow hedge accounting on AOCI for the three months ended March 31, 2020 and 2019 (in thousands):
 
March 31, 2020
 
March 31, 2019
Amount Recognized in OCI on Derivative:
 
 
 
Interest rate cap agreement
$
270

 
$
742

The table below presents the effect of our derivative financial instruments on the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2020 and 2019 (in thousands):
 
 
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Interest expense
 
(267
)
 
(135
)

11. Revision of Prior Period Financial Statements
During the second quarter of 2019, we revised prior period financial statements to correct an immaterial error related to the channel attribution of certain loans and the commissions associated with those loans. Commissions become due upon the closing of a loan. Those commissions are capitalized as a component of the loan balance and are amortized as an adjustment to interest income over the life of the loan. A summary of those revisions is as follows:
Revised Consolidated Balance Sheet as of March 31, 2019 (in thousands):
 
As Reported
 
Adjustment
 
As Revised
Loans and finance receivables
1,202,531

 
240

 
1,202,771

Total assets
1,224,658

 
240

 
1,224,898

Accrued expenses and other liabilities
61,097

 
2,236

 
63,333

Total liabilities
911,066

 
2,236

 
913,302

Accumulated deficit
(189,297
)
 
(1,996
)
 
(191,293
)
Total On Deck Capital, Inc. stockholders' equity
309,371

 
(1,996
)
 
307,375

Total stockholders' equity
313,592

 
(1,996
)
 
311,596

Revised Consolidated Statements of Operations and Comprehensive Income (in thousands):    
 
Three Months Ended March 31, 2019
 
As Reported
 
Adjustment
 
As Revised
Interest and finance income
$105,991
 
$(192)
 
$105,799
Gross Revenue
$110,167
 
$(192)
 
$109,975
Net Revenue
$55,544
 
$(192)
 
$55,352
Income (loss) from operations, before provision for income taxes
$7,260
 
$(192)
 
$7,068
Net income (loss)
$5,520
 
$(192)
 
$5,328
There was no impact to earnings per share for any period presented.


19


Revised Consolidated Statements of Cash Flows
We revised our condensed consolidated statement of cash flows for the three months ended March 31, 2019 to reflect the correction of the error, which had no impact to net cash provided by operating activities, net cash used in investing activities and net cash provided by financing activities in the period.

12. Commitments and Contingencies
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and loans. We hold cash, cash equivalents and restricted cash in accounts at regulated domestic financial institutions in amounts that exceed or may exceed FDIC insured amounts and at non-U.S. financial institutions where deposited amounts may be uninsured. We believe these institutions to be of acceptable credit quality and we have not experienced any related losses to date.
We are exposed to default risk on loans we originate and hold and that we purchase from our issuing bank partner. We perform an evaluation of each customer's financial condition and during the term of the customer's loan(s), we have the contractual right to limit a customer's ability to take working capital loans or other financing from other lenders that may cause a material adverse change in the financial condition of the customer.
Contingencies
We are involved in lawsuits, claims and proceedings incidental to the ordinary course of our business.  We review the need for any loss contingency accruals and establishes an accrual when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated.  When and to the extent that we do establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time. We believe that the ultimate resolution of its current matters will not have a material adverse effect on our condensed consolidated financial statements.

13. Going Concern
At each reporting period, we assess our ability to continue as a going concern for one year after the date the financial statements are issued. We evaluate whether relevant conditions and events, considered in the aggregate, raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. As required under ASC Topic 205-40, Presentation of Financial Statements - Going Concern, our initial evaluation does not initially take into consideration the potential mitigating effects of management’s plans if they have not been fully implemented as of the date the financial statements are issued.
As a result of the COVID-19 pandemic and its economic impacts, we are experiencing higher delinquencies in our portfolio and, in turn, lower cash collections. While we were in compliance with the terms of our debt agreements as of March 31, 2020, the reduced collections and higher COVID-19 related delinquencies have resulted in non-compliance with certain debt agreements and are expected to result in, additional non-compliance with debt agreements in future periods. If such non-compliance is not waived by our lenders, we are not able to obtain amendments or other relief, or are otherwise unable to obtain new or alternate methods of financing on acceptable terms, such non-compliance can result in loss of ability to borrow under the facilities, early amortization events and/or events of default. Absent the mitigating actions below that management is in the midst of executing, or has already executed, management concluded that the uncertainty surrounding our future non-compliance in our debt facilities, ability to negotiate some of our existing facilities or repay outstanding indebtedness, and maintain sufficient liquidity raises substantial doubt about our ability to continue as a going concern within one year of issuance date.
We have implemented the following plans to mitigate those doubts. In April 2020, we amended one of our debt facilities to obtain temporary relief from, among other things, borrowing base requirements and portfolio performance tests and in May 2020, lenders in another debt facility agreed to temporarily waive non-compliance with borrowing base requirements. Please see Note 14 for details. We are actively engaging with all of our lenders to amend our debt agreements or otherwise obtain relief, and in parallel we are exploring other financing options, including new or alternative methods of financing. We are also taking aggressive measures to reduce costs for the foreseeable future by reducing our operating expenses in the second quarter of 2020. If needed, we can choose to extend the decreases past the initial 90 day period or make them larger and/or more permanent. We have also suspended nearly all new term loan and line of credit originations, and ceased all equipment finance lending. These steps have been taken, and others are under consideration, to help manage our liquidity and preserve capital for at l

20


east the next 12 months, and we believe that such actions will alleviate the substantial doubt on our ability to continue as a going concern.
14. Subsequent Events
In late April 2020, we suspended nearly all new term loan and line of credit originations and having previously ceased all equipment finance lending. We are focused on liquidity and capital preservation and we expect there will be a significant portfolio contraction, reflecting an 80% or more reduction in the second quarter origination volume.
On April 27, 2020 we amended our Loan Assets of OnDeck, LLC, or LAOD debt facility so that no borrowing base deficiency shall occur during the period from April 27, 2020 to July 16,2020, the amended period. Additionally, no portfolio performance test will be performed on the facility until the first interest payment date following the amended period. No additional loans will be sold into the facility nor will we draw additional funds on the facility during the amended period.
On May 7, 2020, we obtained a temporary waiver for the OnDeck Asset Funding II, LLC, or ODAF II debt facility. Under the waiver, the lenders temporarily waived the occurrence and existence of a borrowing base deficiency reported by ODAF II on May 1, 2020 and any failure to cure such deficiency amount, in each case, until the close of business on May 14, 2020.  ODAF II entered into the waiver in contemplation of obtaining a broader amendment to the ODAF II facility to enable ODAF II to remain in compliance with performance and other criteria in light of increased delinquency and other portfolio dynamics that result from COVID-impacted loans.  If such an amendment is not entered into or if the borrowing base deficiency is not otherwise cured, the borrowing base deficiency would constitute an event of default under the ODAF II facility at close of business on May 14, 2020.
The foregoing descriptions of the amendment of the LAOD debt facility and the temporary waiver for the ODAF II debt facility do not purport to be complete and are qualified in their entirety by reference to the amendment of the LAOD debt facility and the temporary waiver for the ODAF II debt facility, filed as exhibits 10.1 and 10.2, respectively, to this report.
As of May 7, 2020, an early amortization event occurred with respect to the Series 2019-1 notes issued by OnDeck Asset Securitization Trust II LLC, or ODAST II as a result of an asset amount deficiency in that Series. Beginning on the next payment date under the ODAST II Agreement, all remaining collections held by ODAST II, after payment of accrued interest and certain expenses, will be applied to repay the principal balance of the Series 2018-1 notes and the Series 2019-1 notes on a pro rata basis.



21


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes, and other financial information included elsewhere in this report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” below for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.


22


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, objectives, plans and current expectations.
Forward-looking statements appear throughout this report including in Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to statements under the subheading ["2020 Outlook"] and Part II - Item 1A. Risk Factors. Forward-looking statements can generally be identified by words such as “will,” “enables,” “expects,” "intends," "may," “allows,” "plan," “continues,” “believes,” “anticipates,” “estimates” or similar expressions.
Forward-looking statements are neither historical facts nor assurances of future performance. They are based only on our current beliefs, expectations and assumptions regarding the future of our business, anticipated events and trends, the economy and other future conditions. As such, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and in many cases outside our control. Therefore, you should not rely on any of these forward-looking statements. Our expected results may not be achieved, and actual results may differ materially from our expectations.
The impact of the novel strain of coronavirus SARS-CoV-2, causing the Coronavirus Disease 2019, also known as COVID-19 could cause or contribute to such differences. The COVID-19 health crisis is fast moving and complex, creating material risks and uncertainties that cannot be predicted with accuracy. Other important factors that could cause or contribute to such differences, include the following, many of which may be exacerbated due to the impact of COVID-19: (1) our ability to achieve consistent profitability in the future in light of our prior loss history and competition; (2) our growth strategies, including the introduction of new products or features, expanding our platform to other lenders through ODX, maintaining ODX’s current clients or losing a significant ODX client, expansion into international markets, offering equipment financing and our ability to effectively manage and fund our growth; (3) possible future acquisitions of complementary assets, businesses, technologies or products with the goal of growing our business, and the integration of any such acquisitions; (4) any material reduction in our interest rate spread and our ability to successfully mitigate this risk through interest rate hedging or raising interest rates or other means; (5) worsening economic conditions that may result in decreased demand for our loans or services and increase our customers’ delinquency and default rates; (6) supply and demand driven changes in credit and increases in the availability of capital for our competitors that negatively impacts our loan pricing; (7) our ability to accurately assess creditworthiness and forecast and provision for credit losses; (8) our ability to prevent or discover security breaches, disruptions in service and comparable events that could compromise confidential information held in our data systems or adversely impact our ability to service our loans; (9) incorrect or fraudulent information provided to us by customers causing us to misjudge their qualifications to receive a loan or other financing; (10) the effectiveness of our efforts to identify, manage and mitigate our credit, market, liquidity, operational and other risks associated with our business and strategic objectives; (11) our ability to continue to innovate or respond to evolving technological changes and protect our intellectual property; (12) our reputation and possible adverse publicity about us or our industry; (13) failure of operating controls, including customer or partner experience degradation, and related legal expenses, increased regulatory cost, significant fraud losses and vendor risk; (14) changes in federal or state laws or regulations, or judicial decisions involving licensing or supervision of commercial lenders, interest rate limitations, the enforceability of choice of law provisions in loan agreements, the validity of bank sponsor partnerships, the use of brokers or other significant changes; (15) risks associated with pursuing a bank charter, either de novo or in a transaction, and risks associated with either failing to obtain or obtaining a bank charter; and other risks, including those described in Part I - Item IA. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, Part II - Item 1A. Risk Factors in this report, and other documents that we file with the Securities and Exchange Commission, or SEC, from time to time which are or will be available on the SEC website at www.sec.gov.Except as required by law, we undertake no duty to update any forward-looking statements. Readers are also urged to carefully review and consider all of the information in this report, as well as the other documents we make available through the SEC’s website.
  ;
 
 
 
In this report, when we use the terms “OnDeck,” the “Company,” “we,” “us” or “our,” we are referring to On Deck Capital, Inc. and its consolidated subsidiaries, and when we use the term "ODX" we are referring to our wholly-owned subsidiary ODX, LLC, in each case unless the context requires otherwise.




Overview
We are a leading online small business lender. We make it efficient and convenient for small businesses to access financing. Enabled by our proprietary technology and analytics, we aggregate and analyze thousands of data points from dynamic, disparate data sources to assess the creditworthiness of small businesses rapidly and accurately. Small businesses can apply for financing on our website in minutes and, using our loan decision process, including our proprietary OnDeck Score®, we can make a funding decision immediately and, if approved, fund as fast as 24 hours. We have originated more than $13 billion of loans since we made our first loan in 2007.
We have offered term loans since we made our first loan in 2007 and lines of credit since 2013. In 2019 we began offering equipment finance loans and, in Canada, merchant cash advances through Evolocity Financial Group with whom we combined operations on April 1, 2019. Our term loans range from $5,000 to $500,000, have maturities of 3 to 36 months and feature fixed dollar repayments. Our lines of credit range from $6,000 to $100,000, and are generally repayable within 6 or 12 months of the date of the most recent draw. As of April 2020, we decided to pause origination of equipment finance loans as part of our focus on preserving liquidity and capital resources. Qualified customers may have multiple financings with us concurrently, which we believe provides opportunities for repeat business, as well as increased value to our customers.
We originate loans throughout the United States, Canada and Australia, although, to date, the majority of our revenue has been generated in the United States. These loans are originated through our direct marketing channel, including direct mail, our outbound sales team, our social media and other online marketing channels; referrals from our strategic partner channel, including small business-focused service providers, payment processors, and other financial institutions; and through independent funding advisor program partners, or FAPs, who advise small businesses on available funding options.
We generate the majority of our revenue through interest income and fees earned on the loans we make to our customers. We earn interest on the balance outstanding and lines of credit are subject to a monthly fee unless the customer makes a qualifying minimum draw, in which case the fee is waived for the first six months. The balance of our other revenue primarily comes from our servicing and other fee income, most of which consists of fees generated by ODX, monthly fees earned from lines of credit, and marketing fees from our issuing bank partner.
We rely on a diversified set of funding sources for the loans we make to our customers. Our primary source of this financing has historically been debt facilities with various financial institutions and securitizations. We have also used proceeds from operating cash flow to fund loans in the past and continue to finance a portion of our outstanding loans with these funds. As of March 31, 2020, we had $1.1 billion of debt principal outstanding.
Recent Developments
In early to mid-April 2020, we saw continued declines in cash collections from borrowers and unprecedented increases in delinquency. We further tightened our underwriting standards, put draw limits on certain customer lines of credit and offered greater flexibility in customer loan repayment plans where circumstances warranted.
In the second half of April 2020, the rate of new customers entering delinquency slowed but remained well above pre-COVID-19 levels. At the end of April 2020, approximately 45% of our portfolio was one day or more delinquent, which was up from approximately 28% at March 31, 2020, and nearly 80% of our overall U.S. portfolio had made some amount of payment within the prior week, compared to approximately 82% at March 31, 2020.
We have changed our near-term priorities due to the COVID-19 crisis. We effectively paused all new term loan and line of credit originations by the end of April 2020, other than funding certain line of credit draws, and ceased all equipment finance lending as we focused our resources on supporting government stimulus programs including the Small Business Administration’s Paycheck Protection Program, or PPP. As a result, we expect second quarter originations to decline 80% or more from our first quarter originations.
We have taken measures to reduce operating costs by approximately $13 million, or 25%, for the second quarter compared to the first quarter. Actions taken include an almost complete elimination of marketing spend; a significant reduction in other discretionary costs; and broad-based employee actions including a temporary hiring freeze, the placement of approximately 30% of our employees on part-time or furlough status, and a 15% salary reduction for those remaining full-time. Our Chief Executive Officer took a 30% salary reduction and our Board of Directors reduced its compensation by 30%. The operating cost reductions were implemented for an initial 90-day period, after which we can make changes as appropriate based on then prevailing circumstances. Changes could include extending the current actions, making them larger and/or more permanent, or relaxing the cuts to gradually resume more normal operations. Our international operations are taking similar actions in curtailing originations and cutting expenses in response to the COVID-19 crisis and its economic consequences.
We are focusing on maintaining ample liquidity and protecting our financial resources. We have a strong and diverse group of lenders and are proactively working with them to modify our debt facilities. Our requested modifications are intended to enable us to remain in compliance with borrowing base, portfolio performance and other criteria for at least some period

24


despite increased delinquency and other adverse dynamics resulting from COVID-impacted loans. We amended the Loan Assets of OnDeck, LLC debt facility on April 27, 2020. On May 7, 2020 we obtained a temporary waiver for the OnDeck Asset Funding II, LLC debt facility, which we entered into in contemplation of obtaining a broader amendment. Discussions with our other warehouse and corporate facility lenders are progressing. As of May 7, 2020, an early amortization event occurred with respect to the Series 2019-1 notes issued by OnDeck Asset Securitization Trust II LLC, or ODAST II, as a result of an asset amount deficiency in the Series 2019-1 transaction. While these events reduce our immediate borrowing capacity, we do not envision requiring incremental immediate liquidity given the significant reductions in our near-term originations. Our unrestricted cash balance as of April 30, 2020 was largely unchanged from March 31, 2020.
This dynamic operating environment is having a very direct negative impact on the small business lending landscape in which we operate. While it presents many immediate challenges, we believe it also provides long-term opportunities. We continue to explore all options to maximize shareholder value.
Key Financial and Operating Metrics
We regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
 
As of or for the Three Months Ended March 31,
 
2020
 
2019
 
(dollars in thousands)
Gross Revenue
$
110,555

 
$
109,975

Originations
591,863

 
635,506

Portfolio Yield (a)
33.3
 %
 
35.6
%
Cost of Funds Rate
4.8
 %
 
5.4
%
Net Interest Margin (a)
27.6
 %
 
29.5
%
Reserve Ratio
16.3
 %
 
12.5
%
15+ Day Delinquency Ratio
10.3
 %
 
8.7
%
Net Charge-off Rate
15.8
 %
 
12.2
%
Efficiency Ratio (a)
46.2
 %
 
43.9
%
Adjusted Efficiency Ratio* (a)
45.0
 %
 
41.1
%
Return on Assets (a)
(17.9
)%
 
1.9
%
Adjusted Return On Assets* (a)
(17.5
)%
 
2.7
%
Return on Equity (a)
(88.1
)%
 
7.5
%
Adjusted Return On Equity* (a)
(86.0
)%
 
10.8
%
(a) The prior period metrics have been updated to reflect the impact of the revision. We believe the impact of the revision to each affected KPI is not meaningful. See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements.
*Non-GAAP measure. Refer to "Non-GAAP Financial Measures" below for an explanation and reconciliation to GAAP.
Gross Revenue
Gross Revenue represents the sum of interest and finance income, gain on sales of loans and other revenue.
Originations
Originations represent the total principal amount of Loans made during the period plus the total amount advanced on other finance receivables. Many of our repeat term loan customers renew their term loans before their existing term loan is fully repaid. In accordance with industry practice, originations of such repeat term loans are presented as the full renewal loan principal, rather than the net funded amount, which would be the renewal term loan’s principal net of the Unpaid Principal Balance on the existing term loan. Loans referred to, and funded by, our issuing bank partner and later purchased by us are included as part of our originations.
Unpaid Principal Balance
Unpaid Principal Balance represents the total amount of principal outstanding on Loans, plus outstanding advances relating to other finance receivables and the amortized cost of loans purchased from other than our issuing bank partner at the end of the

25


period. It excludes net deferred origination costs, allowance for credit losses and any loans sold or held for sale at the end of the period.
Portfolio Yield
Portfolio Yield is the rate of return we achieve on Loans and finance receivables outstanding during a period. It is calculated as annualized Interest and finance income on Loans and finance receivables including amortization of net deferred origination costs divided by average loans and finance receivables. Annualization is based on 365 days per year and is calendar day-adjusted. Loans and finance receivables represents the sum of term loans, lines of credit, equipment finance loans and finance receivables.
Net deferred origination costs in Loans and finance receivables held for investment and loans held for sale consist of deferred origination fees and costs. Deferred origination fees include fees paid up front to us by customers when Loans and finance receivables are originated and decrease the carrying value of Loans and finance receivables, thereby increasing Portfolio Yield. Deferred origination costs are limited to costs directly attributable to originating loans and finance receivables such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to originations and increase the carrying value of loans and finance receivables, thereby decreasing Portfolio Yield.
Recent pricing trends are discussed under the subheading “Key Factors Affecting Our Performance - Pricing.”
Cost of Funds Rate
Cost of Funds Rate is calculated as interest expense divided by average debt outstanding for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.
Net Interest Margin
Net Interest Margin is calculated as annualized net interest and finance income divided by average Interest Earning Assets. Net interest and finance income represents Interest and finance receivable income less Interest expense during the period. Annualization is based on 365 days per year and is calendar day-adjusted. Interest and finance receivable income is net of fees on loans held for investment and loans held for sale. Interest expense is the interest expense, fees, and amortization of deferred debt issuance costs we incur in connection with our debt facilities. Interest Earning Assets represents the sum of Loans and finance receivables plus Cash and cash equivalents plus Restricted cash.
Reserve Ratio
Reserve Ratio is our allowance for credit losses at the end of the period divided by the Unpaid Principal Balance at the end of the period.
15+ Day Delinquency Ratio
15+ Day Delinquency Ratio equals the aggregate Unpaid Principal Balance for our Loans that are 15 or more calendar days contractually past due and for our finance receivables that are 15 or more payments behind schedule, as a percentage of the Unpaid Principal Balance at the end of the period. The Unpaid Principal Balance for our loans and finance receivables that are 15 or more calendar days or payments past due includes Loans and finance receivables that are paying and non-paying. Because term and line of credit loans require daily and weekly repayments, excluding weekends and holidays, they may be deemed delinquent more quickly than loans from traditional lenders that require only monthly payments. 15+ Day Delinquency Ratio is not annualized, but reflects balances at the end of the period.
Net Charge-off Rate
Net Charge-off Rate is calculated as our annualized net charge-offs for the period divided by the average Unpaid Principal Balance outstanding during the period. Net charge-offs are charged-off loans and finance receivables in the period, net of recoveries of prior charged-off loans and finance receivables in the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.
Efficiency Ratio
Efficiency Ratio is a measure of operating efficiency and is calculated as Total operating expense for the period divided by Gross Revenue for the period.
Adjusted Efficiency Ratio
Adjusted Efficiency Ratio is non-GAAP measure calculated as total operating expense divided by Gross Revenue for the period, adjusted to exclude (a) stock-based compensation expense and (b) items management deems to be non-representative of operating results or trends, all as shown in the non-GAAP reconciliation presentation of this metric. We believe Adjusted Efficiency Ratio is useful because it provides investors and others with a supplemental operating efficiency metric to present our operating efficiency across multiple periods without the effects of stock-based compensation, which is a non-cash expense based on equity

26


grants made to participants in our equity plans at specified prices and times but which does not necessarily reflect how our business is performing, and items which may only affect our operating results periodically. Our use of Adjusted Efficiency Ratio has limitations as an analytical tool and you should not consider it in isolation, as a substitute for or superior to our Efficiency Ratio, which is the most comparable GAAP metric. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures for a discussion and reconciliation.
Return on Assets
Return on Assets is calculated as annualized net income (loss) attributable to On Deck Capital, Inc. common stockholders for the period divided by average total assets for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.
Adjusted Return on Assets
Adjusted Return on Assets is a non-GAAP measure calculated as Adjusted Net Income (Loss) for the period divided by average total assets for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted. We believe Adjusted Return on Assets is useful because it provides investors and others with a supplemental metric to assess our performance across multiple periods without the effects of stock-based compensation, which is a non-cash expense based on equity grants made to participants in our equity plans at specified prices and times but which does not necessarily reflect how our business is performing, and items which may only affect our operating results periodically, all as shown in the non-GAAP reconciliation presentation of this metric. Our use of Adjusted Return on Assets has limitations as an analytical tool and you should not consider it in isolation, as a substitute for or superior to Return on Assets, which is the most comparable GAAP metric. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures for a discussion and reconciliation.
Return on Equity
Return on Equity is calculated as annualized net income (loss) attributable to On Deck Capital, Inc. common stockholders for the period divided by average total On Deck Capital, Inc. stockholders’ equity for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.
Adjusted Return on Equity
Adjusted Return on Equity is a non-GAAP measure calculated as Adjusted Net Income (Loss) attributable to On Deck Capital, Inc. common stockholders for the period divided by average total On Deck Capital, Inc. stockholders’ equity for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted. We believe Adjusted Return on Equity is useful because it provides investors with a supplemental metric to assess our performance across multiple periods without the effects of stock-based compensation, which is a non-cash expense based on equity grants made to participants in our equity plans at specified prices and times but which does not necessarily reflect how our business is performing, and items which may only affect our operating results periodically, all as shown in the non-GAAP reconciliation presentation of this metric. Our use of Adjusted Return on Equity has limitations as an analytical tool and you should not consider it in isolation, as a substitute or superior to Return on Equity, which is the most comparable GAAP metric. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures for a discussion and reconciliation of Adjusted Net Income (Loss) to net income (loss).



27


On Deck Capital, Inc. and Subsidiaries
Consolidated Average Balance Sheets
(in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Assets
 
 
 
Cash and cash equivalents
$
64,245

 
$
48,115

Restricted cash
38,206

 
48,182

Loans and finance receivables
1,284,050

 
1,203,378

Less: Allowance for credit losses
(164,840
)
 
(145,742
)
Loans and finance receivables, net
1,119,210

 
1,057,636

Property, equipment and software, net
22,159

 
16,494

Other assets
73,614

 
38,843

Total assets
$
1,317,434

 
$
1,209,270

Liabilities, mezzanine equity and stockholders' equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
6,965

 
$
5,053

Interest payable
2,621

 
2,646

Debt
961,977

 
838,867

Accrued expenses and other liabilities
62,287

 
56,780

Total liabilities
1,033,850

 
903,346

Mezzanine equity:
 
 
 
Redeemable noncontrolling interest
13,958

 

Stockholders’ equity:
 
 
 
Total On Deck Capital, Inc. stockholders' equity
267,800

 
301,469

Noncontrolling interest
1,826

 
4,455

Total stockholders' equity
269,626

 
305,924

Total liabilities, mezzanine equity and stockholders' equity
$
1,317,434

 
$
1,209,270

 
 
 
 
Memo:
 
 
 
Unpaid Principal Balance
$
1,256,429

 
$
1,177,801

Interest Earning Assets
$
1,386,501

 
$
1,299,675

Loans and Finance Receivables
$
1,284,050

 
$
1,203,378


Average Balance Sheet line items for the period represent the average of the balance at the beginning of the first month of the period and the end of each month in the period.

Non-GAAP Financial Measures
We believe that the non-GAAP metrics can provide useful supplemental measures for period-to-period comparisons of our core business and useful supplemental information to investors and others in understanding and evaluating our operating results. However, non-GAAP metrics are not calculated in accordance with GAAP, and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with GAAP. Other companies may calculate these non-GAAP metrics differently than we do. The reconciliations below reconcile each of our non-GAAP metrics to their most comparable respective GAAP metric.

28


Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share
Adjusted Net Income (Loss) represents net income (loss) attributable to OnDeck adjusted to exclude the items shown in the table below. Stock-based compensation includes employee compensation as well as compensation to third-party service providers. Adjusted Net Income (Loss) per Share is calculated by dividing Adjusted Net Income (Loss) by the weighted average common shares outstanding during the period.
Our use of Adjusted Net Income (Loss) has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Adjusted Net Income (Loss) does not reflect the potentially dilutive impact of stock-based compensation; and
Adjusted Net Income (Loss) excludes charges we are required to incur in connection with real estate dispositions, severance obligations, debt extinguishment costs and sales tax refunds.
The following tables present reconciliations of net income (loss) to Adjusted Net Income (Loss) and net income (loss) per share to Adjusted Net Income (Loss) per Share for each of the periods indicated:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands, except shares and per share data)
Reconciliation of Net Income (Loss) Attributable to OnDeck to Adjusted Net Income (Loss)
 
 
 
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
(58,975
)
 
$
5,666

Adjustments (after tax):
 
 
 
Stock-based compensation expense
1,416

 
2,436

Adjusted Net Income (Loss)
$
(57,559
)
 
$
8,102

 
 
 
 
Adjusted Net Income (Loss) per share:
 
 
 
Basic
$
(0.92
)
 
$
0.11

Diluted
$
(0.92
)
 
$
0.10

Weighted-average common shares outstanding:
 
 
 
Basic
62,534,517

 
75,539,535

Diluted
62,534,517

 
79,115,037

Below are reconciliations of the Adjusted Net Income (Loss) per Basic and Diluted Share to the most directly comparable measures calculated in accordance with GAAP.
 
Three Months Ended March 31,
 
2020
 
2019
 
(per share)
Reconciliation of Net Income (Loss) per Basic Share to Adjusted Net Income (Loss) per Basic Share
 
 
 
Net income (loss) per basic share attributable to On Deck Capital, Inc. common stockholders
$
(0.94
)
 
$
0.08

Add / (Subtract):
 
 
 
  Stock-based compensation expense
0.02

 
0.03

Adjusted Net Income (Loss) per Basic Share
$
(0.92
)
 
$
0.11



29


 
Three Months Ended March 31,
 
2020
 
2019
 
(per share)
Reconciliation of Net Income (Loss) per Diluted Share to Adjusted Net Income (Loss) per Diluted Share
 
 
 
Net income (loss) per diluted share attributable to On Deck Capital, Inc. common stockholders
$
(0.94
)
 
$
0.07

Add / (Subtract):
 
 
 
  Stock-based compensation expense
0.02

 
0.03

  Adjusted Net Income (Loss) per Diluted Share
$
(0.92
)
 
$
0.10


Adjusted Efficiency Ratio
Adjusted Efficiency Ratio is non-GAAP measure calculated as total operating expense divided by gross revenue for the period, adjusted to exclude (a) stock-based compensation expense and (b) items management deems to be non-representative of operating results or trends.