|02/23/2021||OnDeck partners with HomeAdvisor|
|01/04/2021||Addtl OnDeck employees spread wings|
|10/13/2020||Enova completes acquisition of OnDeck|
|10/08/2020||OnDeck / Enova merger approved|
|09/23/2020||OnDeck surpasses $1B funded in NY|
Episode 32 - OnDeck, Bitcoin, Super Bowl
ODX, OnDeck Canada & Australia
“We’re very pleased so far with the OnDeck acquisition and as we view the economic landscape, we continue to believe that it’s an excellent time to be increasing our focus on SMB lending,” Enova CEO David Fisher said on the company’s Q4 earnings call. Enova originated $120 million in small business loans in December and $95 million in November. The October figure wasn’t specified, but back-of-the-napkin math based on other provided statistics suggests it was about $54 million.
Growing those originations will continue to be their primary agenda as the economy improves, the company said, while the ODX side of the business may be shown the door.
“While ODX has been able to sign some high-profile bank clients, divesting ODX will allow for more efficient use of capital as the business has over 70 employees but less than $10 million in revenue,” Fisher said.
OnDeck Canada and OnDeck Australia may also be on the chopping block.
“The Australian and Canadian businesses are viable businesses in their respective market,” Fisher said, “but are small compared to OnDeck US operations and are unlikely to have a significant impact on Enova’s overall growth. In addition, OnDeck only has partial ownership of those two businesses.”
Meanwile, OnDeck’s portfolio outlook is improving.
“The percentage of OnDeck receivables past due 30 days and more declined during the quarter from 23.2% in closing to 15.6% at December 31,” said Enova CFO Steve Cunningham.
On the call, JMP analyst David Scharf asked when OnDeck would return to quarterly origination levels of $550M to $650M as it had been enjoying prior to the pandemic.
“I mean I think there’s just way too much uncertainty to be able to answer that,” Fisher replied. “I mean, does the vaccine work great and the economy opens up soon or is there a new strain of the COVID virus that requires lockdowns during the summer? I mean, there’s no way to know. But I think there’s a couple trends that are super encouraging for us and we saw great sequential growth as we talked about throughout the call.”
Fisher also added that they’ve seen a bunch of competitors go out of business. “We think we have a lot of share in the market that we don’t think has shrunk and so we think we’re really well positioned as this pandemic winds down,” he said.
On New Year’s Day, OnDeck Head of Business Development Kevin Chin announced he was parting ways with the company and joining Avant. “As we wrap up 2020,” Chin posted on LinkedIn, “I wanted to take a moment to thank all of my colleague at OnDeck as well as Noah Breslow and Cory Campfer for building such an outstanding company with great people and culture.”
Similarly, Matt Cluney, who was VP of Brand and Product Marketing at OnDeck, announced that he was leaving to become Chief Marketing Officer for Yardline Capital. On LinkedIn, he wrote: “New year, new adventures… excited to join Ari Horowitz, Tomo Matsuo, Seth Broman and the rest of the team at Yardline Capital at a time when ecommerce is booming and the opportunity to provide a differentiated growth capital solution for ecommerce sellers is big!” Cluney will be in good company at Yardline with another OnDeck veteran Dennis Chin.
“2019 was an important year for OnDeck and we finished strong,” said OnDeck CEO Noah Breslow in the year-end earnings call that took place on February 11, 2020. “Financially, we had our second full year of profitability. And strategically, we are making significant progress positioning the company for improved performance and even greater long-term success.”
OnDeck reported net income of $28 million for 2019 and its share price closed at $4.07 the day earnings were announced, giving it a market cap of roughly $240 million. This was down significantly from its IPO value of $1.3 billion, but up from the lows it had hit in 2017 and 2019.
Over the next 30 days, however, the price fell by 50% on fears that the looming novel coronavirus could cause catastrophic disruption. The company also announced the departure of its Chief Accounting Officer.
As the industry looked on with wonder, news coming out of the company seemed strangely at odds with reality. For example, OnDeck announced a “first-ever” NASCAR sponsorship on March 10th.
“OnDeck is proud to sponsor the JR Motorsports team and driver Daniel Hemric for races during the 2020 NASCAR Xfinity Series season,” said a senior vice president of marketing at OnDeck. “So many of our small business customers are avid motorsports fans and we look forward to joining them to cheer on Daniel and the No. 8 car decked out in OnDeck colors at the Atlanta 250 and the Chicago 300.”
On March 23, OnDeck closed at 70 cents. The market, it seemed, valued OnDeck at a paltry $41 million.
Publicly, OnDeck kept up the optimism. The company applied to be a PPP lender as the program was just beginning to roll out. “We are excited to be one of the fintechs delivering PPP loans as a direct lender,” Breslow said. “Our team has been working around the clock getting us ready and now we wait and hope we are approved soon!”
Simultaneously, the company suspended the funding of its “Core” loans and lines of credit to new and existing customers. The company then went on to report a Q1 net loss of $59M due to covid-related damage, wiping out all of its 2019 profits and more. It also furloughed many employees while reducing the pay for those that stayed on.
That same month, OnDeck’s management “commenced a review of potential financing options to secure additional liquidity and potentially replace [its] corporate line facility and began contacting potential sources of alternative financing, including mezzanine debt.”
The response it got was grim.
“The interest rates offered by those alternative financing sources ranged from 1-month LIBOR plus 900 basis points to 1,700 basis points (in addition to an upfront fee) and all but one required a significantly dilutive equity component,” the company later disclosed. “The one proposal that did not include an equity component was at an interest rate of 1-month LIBOR plus 1,400 basis points to 1,700 basis points.”
OnDeck engaged in negotiations with four potential sources of alternative financing, but two dropped out as the economic effects of the pandemic worsened. At the same time, it was speaking with Enova about something else entirely, a potential merger.
On the frontend, OnDeck was keeping the public abreast of its negotiations with creditors. The pandemic had put them in a technical breach of its terms with several of them but the company was experiencing some success with securing workouts and reprieves.
Regardless, the stock continued to trade below $1 as the world looked on to see what would become of their Q2.
On July 28th, bombshell news broke. Enova, an international lending conglomerate, announced it was acquiring OnDeck for the price of approximately $90 million.
“Following an extensive review of our strategic options, we believe this is the right path forward for our customers, employees, and shareholders,” Noah Breslow said on a call with Enova executives the following day.
Some shareholders had a different opinion and thought that the deal and the terms looked a little fishy, all considered. Nine different shareholder lawsuits were filed over the next two months with the intent to delay or block the acquisition.
How could this possibly be the best deal or the right path?!
That was the underlying question being posed between the lines of the various claims asserted. OnDeck ultimately settled with all the parties by releasing supplemental information to the public about its financial situation and thought process that led up to the Enova merger. All the objections appeared to fade as shareholders approved the deal by an overwhelming majority.
On October 13th, Enova announced that it had completed the acquisition of OnDeck.
But by that time, was OnDeck merely a hollowed out shell of its former self? Not quite, according to disclosures made two weeks later. Enova announced that OnDeck’s portfolio performance was already exceeding their expectations.
“On the small business side, the makeup of the demand is surprisingly similar to a year ago,” said David Fisher, CEO of Enova. “You would expect so many differences given what the economy has been through but there’s actually very very few. It’s pretty broad based. Credit quality look really really strong. If anything it’s stronger- I think it’s the stronger businesses that are trying to borrow at this point that are trying to lean into covid, not the ones that are just trying to survive so if anything on the demand there is a slight improvement on credit quality in small business.”
Fisher was also bullish going forward. “We believe now is a great time to be increasing our presence in
small business lending. The pandemic has devastated many small businesses across the country. Their
revenues are down and small business owners are digging into their savings to survive until the pandemic subsides and the economy reopens.”
Enova reported monster quarterly earnings of $94 million, a company record.
“Together Enova and OnDeck will be well positioned to further support small businesses and consumers in the wake of the pandemic,” Fisher said.
OnDeck more than doubled its Q2 loan volume, according to statements made on Enova’s latest quarterly earnings call. OnDeck originated $148M in Q3 versus the $66M in originated in Q2.
For frame of reference, this is still down significantly from the $618M that the company originated in Q4 2019, well before covid became a factor.
But expect the numbers to ramp up.
“We have basically all of our marketing channels turned on across consumer and small business [lending],” said David Fisher, Enova’s CEO.
“OnDeck is probably a little bit ahead of where we are on the Enova side. We were a little bit more cautious in our re-acceleration of our lending kind of going into the 3rd quarter but we are totally comfortable with that decision. If the biggest mistake we make during all of covid is waiting an extra 60 days to re-accelerate lending, we think that’s a great position to be in. We think that extra conservatism makes sense and with the rate that we’re re-accelerating lending, it won’t hurt that much in the long run.”
And apparently demand and credit quality are looking quite normal, despite covid, according to Fisher.
“On the small business side, the makeup of the demand is surprisingly similar to a year ago. You would expect so many differences given what the economy has been through but there’s actually very very few. It’s pretty broad based. Credit quality look really really strong. If anything it’s stronger- I think it’s the stronger businesses that are trying to borrow at this point that are trying to lean into covid, not the ones that are just trying to survive so if anything on the demand there is a slight improvement on credit quality in small business.”
OnDeck’s annualized quarterly net charge-off rate for the third quarter was 23% and its 15 day+ delinquency rate decreased from 40% at June 30th to 27% at September 30th.
Enova reported monster quarterly earnings of $94M. CEO David Fisher and CFO Steve Cunningham said it was a record-breaking quarter for profitability.
The drama surrounding what OnDeck allegedly did or did not disclose to shareholders about the Enova merger presumably came to an end on Wednesday. 38 million voting shares approved the deal while less than half a million voted against it.
However, shareholders sent a message by voting against “the compensation that may be paid or become payable to the Company’s named executive officers that is based on or otherwise relates to the merger.”
OnDeck has said that the merger is expected to be completed in the fourth quarter of 2020.
After OnDeck announced its planned merger with Enova, it was sued nine different times (See here and here) by shareholders that accused the company’s Board of Directors that they had failed to disclose material information about the deal.
OnDeck formally responded on Monday, September 28th, wherein they disclosed that plaintiffs in all of those actions had agreed to dismiss their claims in light of the release of this supplemental information:
The Company and Enova believe that the claims asserted in the Actions are without merit and that no supplemental disclosures are required under applicable law. However, in an effort to put the claims that were or could have been asserted to rest, to avoid nuisance, minimize costs and avoid potential transaction delays, and without admitting any liability or wrongdoing, the Company has determined to voluntarily supplement the Proxy Statement/Prospectus as described in this Current Report on Form 8-K to address claims asserted in the Actions, and the plaintiffs in the Actions have agreed to voluntarily dismiss the Actions in light of, among other things, this supplemental disclosure. Nothing in this Current Report on Form 8-K shall be deemed an admission of the legal necessity or materiality of any of the disclosures set forth herein. To the contrary, the Company and the other defendants specifically deny all allegations in the Actions that any additional disclosure was or is required and expressly maintain that, to the extent applicable, they have complied with their respective legal obligations.
OnDeck first re-explained its background situation leading up to the Enova deal:
Starting in April 2020, OnDeck management commenced a review of potential financing options to secure additional liquidity and potentially replace the Corporate Line Facility and began contacting potential sources of alternative financing, including mezzanine debt. OnDeck contacted, or was contacted by, more than ten potential sources of mezzanine or alternative financing, and received pricing indications from four sources. The interest rates offered by those alternative financing sources ranged from 1-month LIBOR plus 900 basis points to 1,700 basis points (in addition to an upfront fee) and all but one required a significantly dilutive equity component. The one proposal that did not include an equity component was at an interest rate of 1-month LIBOR plus 1,400 basis points to 1,700 basis points. Based on the initial term sheets proposed, OnDeck engaged in negotiations with each of the four potential sources of alternative financing. As these negotiations progressed and COVID-19’s impact on the macro economy and OnDeck’s loan portfolio intensified, two of the four potential sources of alternative financing ceased to actively participate in negotiations. Discussions with the final two potential sources of alternative financing remained ongoing through the time that OnDeck and Enova entered into the merger agreement. Throughout the Process, OnDeck management reported the status of such negotiations on a frequent and ongoing basis to the OnDeck Board for its deliberation in the context of OnDeck’s standalone plan, and the OnDeck Board considered the significant uncertainty of being able to reach agreement on alternative financing in its decision to enter into the merger agreement.
Of particular contention in the deal were OnDeck’s financial projections, prepared to estimate OnDeck’s trajectory as an independent entity. Shareholders complained that there were two sets of books and that they only got to see one. The other set, dubbed Scenario 1, had been used to shop OnDeck around to other suitors. OnDeck published both sets in their supplemental materials on Monday.
The difference is stark. Originally disclosed to shareholders was a projected cumulative net loss of $20.4 million through the end of 2024. The other set of projections, Scenario 1, state a cumulative net income of $33.5 million over the same time period, a difference of over $50 million.
The original predicted a 2021 net loss of $19.4 million while Scenario 1 predicted a net income of $14.3 million.
One reason offered for selecting the less optimistic of the two is that OnDeck’s management determined that loan originations were trending below both sets of projections as of July 12th. OnDeck announced the Enova deal about two weeks later.
Shareholders will cast their votes on the merger on October 7th. OnDeck’s Board “unanimously recommends” that they vote in favor of the proposed merger with Enova.
At least three federal lawsuits have been filed against the directors of OnDeck relating to the announcement that the company is being acquired by Enova. These suits allege securities act violations with regards to how the technical aspects of the deal were disclosed while the initially reported action in the Delaware Court of Chancery alleged a breach of fiduciary duty.
The federal securities lawsuits are:
Daniel Senteno v. On Deck Capital, Inc. et al – Case 1:20-cv-01179-MN
Eric Sabatini (on behalf of a class) v On Deck Capital, Inc et al – Case 1:20-cv-01166-MN
Mohamed Aboubih v On Deck Capital, Inc. et al – Case 1:20-cv-07319-Vm
OnDeck Directors Sued in Class Action For Allegedly Withholding “Material Information” From Shareholders To Make Enova Deal HappenSeptember 8, 2020
An OnDeck shareholder is asking the Delaware Court of Chancery to halt the sale of the company to Enova until OnDeck discloses allegedly material information that would appear to put the landmark deal in an entirely new light.
On September 4, Conrad Doaty filed a class action lawsuit against Noah Breslow, Daniel S. Henson, Chandra Dhandapani, Bruce P. Nolop, Manolo Sánchez, Jane J. Thompson, Ronald F. Verni, and Neil E. Wolfson for breaching their fiduciary duties owed to the public shareholders of OnDeck.
According to Doaty, the Enova offer of $90 million ($82 million stock, $8 million in cash) was not even the best bid that OnDeck received but he alleges that OnDeck’s directors and executives took it because they were individually offered “exorbitant personal compensation” including “millions of dollars in severance packages, accelerated stock options, performance awards, golden parachutes and other deal devices to sweeten the offer.”
Doaty makes reference to other bids for OnDeck with specifics including two all-cash offers, one that valued OnDeck at between $100 million and $125 million and one that valued it at between $80 million and $110 million. He says that no explanation for their rejection was disclosed.
Doaty also alleges that OnDeck relied on two sets of financial projections to evaluate a sale of the company, one for all prospective bidders (that projected a quick economic recovery) and another set that was used only for Enova (that projected a slow economic recovery). Doaty’s point is that Enova’s valuation was based on less optimistic data and that OnDeck did not publicly disclose to shareholders the more optimistic version that all the other prospective buyers of the company got to see.
“Most significantly, is that it is not pressing time to sell,” Doaty says. “The company was not facing imminent financial collapse or financial ruin.” He continues by pointing out that the company had $150 million of cash on hand and that it had successfully navigated workouts with its creditors over issues caused by the pandemic.
“Yet as a result of the frantic and unreasonable timing of the sale, the consideration offered for OnDeck is woefully inadequate.”
In addition to “exorbitant personal compensation” promised to the Board members, Doaty argues that a cheap price benefits parties who sat on both sides of the transaction, namely Dimensional Fund Advisors LP, BlackRock, Inc., and Renaissance Technologies, LLC, all of whom are said to hold greater than 5% beneficial ownership interest in both OnDeck and Enova. None of them are named as defendants.
“…even if the exchange ratio is unfair,” Doaty argues, “those institutional investors will still benefit from seeing their positions in Enova benefitted. Non-insider stockholders, on the other hand, will not be parties to the benefit.”
The law firm representing the plaintiff in Delaware is Cooch and Taylor, P.A.
Case ID #: 2020-0763 in the Delaware Court of Chancery.
As an aside, deBanked mused two days prior to the filing of this lawsuit that the sales price of OnDeck was so low that early OnDeck shareholders stand to recover less of their investment as a result of this deal than investors in a rival company that was placed in a court-ordered receivership by the SEC.
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