Required North Carolina Disclosures
DISCLOSURES REQUIRED BY NORTH CAROLINA LAW
The State of North Carolina has not reviewed and does not approve, recommend, endorse or sponsor any loan brokerage contract. The information contained in this disclosure has not been verified by the State. If you have any questions, see an attorney before you sign a contract or agreement.
(1) LendingClub Corporation, a Delaware corporation
a. Renaud Laplanche, CEO, Director
b. Carrie Dolan, CFO
c. John Donovan, COO
d. Rebecca Lynn, Director
e. Jeff Crowe, Director
f. Dan Ciporian, Director
g. Simon Williams, Director
The address for each of the above is:
c/o LendingClub Corporation
71 Stevenson St. Suite 300
San Francisco, CA 94105
There are no employees or brokers in North Carolina
(3) The length of time the broker has conducted business as a loan broker: 3 years
(4) The total number of loan brokerage contracts the broker has entered in North Carolina within the past 12 months: 0
(5) The number of loan brokerage contracts in North Carolina in which the broker has successfully obtained a loan for the prospective borrower within the past 12 months: 0
(6) Financial Statements – see attached
(7) Lending Club is an on-line financial platform that has
entered into agreements with WebBank, a Utah chartered industrial bank, to
provide peer-to-peer lending services. Interested borrowers come to the Lending Club site (www.lendingclub.com) and complete an on-line loan
application where they may request loans for no less $1,000 and no more than
$25,000 (or $35,000 after February 3, 2011), for terms of either 36- or 60-months. If the borrower satisfies WebBank's credit policy and other
verification procedures undertaken by the company, the loan request and certain
information (financial and otherwise) about the borrower (whose identity is
anonymous) are listed on the Company's website and filed with the Securities
and Exchange Commission, in either case for review by potential investors. Through the LendingClub site, investors
(whose identity is also anonymous) from approved states may elect to indirectly
fund these listed loan requests in increments as low as $25. A borrower's loan issues upon the
earlier of (i) the request being 100% funded and (ii) a loan being funded at
least 60%, at which point the loan will issue for the 60% amount at the end of
the listing period. If the loan
request is not funded to at least 60% by the 14th day of listing, it
is removed from the site and the borrower may elect to reapply. Borrowers may cancel loans prior to
issuance without penalty and loans may be pre-paid without penalty at any time. Borrower origination fees are paid at
the time the loan is issued and are netted out of the proceeds delivered to the
borrower. The issuer of the loan
is WebBank. WebBank subsequently
sells the note to LendingClub, which acts as the servicer of the loan.
Neither LendingClub nor WebBank guarantees that a borrower will receive a loan.
(8) Borrowers are only required to pay an origination fee to the company in the event that the requested loan is actually issued to borrower.
(9) As required by North Carolina law, this loan broker has secured a bond by International Fidelity Insurance Company, One Newark Center, 20th Floor, Newark, NJ 07102, a surety authorized to do business in this State. Before signing a contract with this loan broker, you should check with the surety company to determine the bond's current status.
Condensed Balance Sheets
|June 30, 2010||March 31, 2010|
|Cash and cash equivalents||$ 23,837,256||$ 2,572,174|
|Member loans held for investment, net of allowance for loan losses||6,931,527||7,545,186|
|CM Loans held for investment, at fair value||76,422,175||56,056,228|
|Loan servicing rights, at fair value||15,023||22,141|
|Prepaid expenses and other assets||112,245||242,380|
|Property and equipment, net||126,582||130,827|
|Total assets||$ 108,930,926||$ 68,024,026|
|Accounts payable||$ 634,075||$ 422,690|
|Notes, at fair value||76,392,955||56,042,064|
|Loans payable, net of debt discount||7,063,228||8,507,107|
|Commitments and contingencies (see Note 14)|
|Total preferred stock||52,850,391||28,462,446|
|Additional paid-in capital||3,877,227||3,805,485|
|Total stockholders' deficit||(28,716,867)||(26,263,666)|
|Total liabilities, preferred stock and stockholders' deficit||$ 108,930,926||$ 68,024,026|
Condensed Statements of Operations
|Three Months Ended June 30,|
|Member loans held for investment|
|Interest income, net||$ 233,145||$ 332,709|
|Net interest loss, member loans held for investment||(62,371)||(4,077)|
|Provision for loan losses||(182,014)||(463,675)|
|Net interest loss after provision for loan losses||(244,385)||(467,752)|
|CM Loans and Notes held for investment at fair value|
|Interest income, CM Loans, net||1,365,237||160,988|
|Interest income, Notes, net||(116,623)||(5,826)|
|Net interest income, CM Loans and Notes, held for investment at fair value||1,248,614||155,162|
|Amortization of loan servicing rights||5,841||7,888|
|Sales, marketing and customer service||2,298,366||1,196,139|
|General and administrative||833,727||941,885|
|Total operating expenses||3,630,463||2,564,095|
|Loss before provision for income taxes||(2,525,235)||(2,860,947)|
|Provision for income taxes||-||-|
|Net loss attributable to common stockholders||$ (2,525,235)||$ (2,860,947)|
|Basic and diluted net loss per share||$ (0.30)||$ (0.35)|
|Weighted-average shares of common stock used in computing basic and diluted net loss per share||8,558,261||8,223,810|
Condensed Statements of Cash Flows
|For the Three months Ended June 30,|
|Cash flows from operating activities|
|Net loss||$ (2,525,235)||$ (2,860,947)|
|Adjustments to reconcile net loss to net cash used in operating activities|
|Amortization of debt issuance costs||-||1,760|
|Non-cash interest expense||1,739,927||324,967|
|Non-cash interest income||(1,662,808)||(255,191)|
|Stock based compensation expense||63,348||29,969|
|Change in fair value of loan servicing rights||7,118||10,184|
|Interest capitalized on loans||36,273||23,910|
|Provision for loan losses||182,014||463,675|
|Changes in operating assets and liabilities|
|Prepaid expenses and other assets||130,135||(261,476)|
|Net cash used in operating activities||(2,476,212)||(2,225,148)|
|Cash flows from investing activities|
|Member loans originated||(974,325)||(3,897,175)|
|Origination of CM Loans held at fair value||(28,619,475)||(6,119,201)|
|Repayment of member loans originated||1,369,697||1,257,177|
|Repayment of CM Loans held at fair value||6,589,223||904,606|
|Change in restricted cash||500,000||(800,000)|
|Purchase of property and equipment||(14,655)||(5,054)|
|Net cash used in investing activities||(21,149,535)||(8,659,647)|
|Cash flows from financing activities:|
|Proceeds from issuance of notes payable||-||3,068,328|
|Proceeds from issuance of Notes held at fair value||28,619,475||6,119,200|
|Payments on notes payable||(1,518,713)||(1,132,653)|
|Payments on Notes held at fair value||(6,605,776)||(906,116)|
|Proceeds from issuance of Series A convertible preferred stock, net of issuance costs||24,387,945||-|
|Proceeds from issuance of common stock||7,898||3,071|
|Net cash provided by financing activities||44,890,829||7,151,830|
|Net increase (decrease) in cash and cash equivalents||21,265,082||(3,732,965)|
|Cash and cash equivalents -- beginning of period||2,572,174||11,998,541|
|Cash and cash equivalents -- end of period||$ 23,837,256||$ 8,265,576|
|Supplemental disclosure of cash flow information:|
|Cash paid for interest||$ 2,000,113||$ 528,103|
|Supplemental disclosure of non-cash investing|
|and financing activities:|
|Issuance of Series B convertible preferred stock warrants in exchange for term loan agreement||$ -||$ 184,860|
Notes to Condensed Financial Statements
1. Basis of Presentation
The condensed balance sheet as of June 30, 2010, the condensed statements of operations for the three months ended June 30, 2010 and 2009, respectively, and the condensed statements of cash flows for the three months ended June 30, 2010 and 2009, respectively, have been prepared by LendingClub Corporation, or Lending Club, and are unaudited. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made for a fair presentation of interim results. Interim results are not necessarily indicative of the results for a full fiscal year. The condensed balance sheet as of March 31, 2010 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed financial statements should be read in conjunction with the audited financial statements and notes included in our Annual Report on Form 10-K for the year ended March 31, 2010.
2. Summary of Significant Accounting Policies
We have incurred operating losses since our inception. For the three months ended June 30, 2010 and 2009, we incurred net losses of $2,525,235 and $2,860,947, respectively. For the three months ended June 30, 2010 and 2009, we had negative cash flows from operations of $2,476,212 and $2,225,148, respectively. Additionally, we have an accumulated deficit of $32,679,744 and a stockholders' deficit of $28,716,867 as of June 30, 2010.
Since our inception, we have financed our operations through debt and equity financing from various sources. We are dependent upon raising additional capital or seeking additional debt financing to fund our current operating plans. Failure to obtain sufficient debt and equity financing and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve our business objectives and continue as a going concern. Further, there can be no assurance as to the availability or terms upon which any required financing and capital might be available, if at all.
During the three months ended June 30, 2010, we issued 15,621,609 shares of Series C convertible preferred stock for aggregate cash consideration of $24,489,996. In connection with our private placement of Series C convertible preferred stock, we incurred transaction expenses, recorded as an offset to gross proceeds, of $102,051.
Use of estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make judgments and estimates that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.
Cash and cash equivalents
Cash and cash equivalents include various deposits with financial institutions in checking and short-term money market accounts. We consider all highly liquid investments with original maturity dates of three months or less to be cash equivalents. Such deposits periodically exceed amounts insured by the FDIC.
At June 30, 2010, and March 31, 2010, restricted cash consisted primarily of funds held in escrow in certificates of deposit or money market accounts at the banks associated with the loan facilities described in Note 6 — Loans Payable, and by our operating banks as security for transactions on our platform.
Member loans held for investment
We fund member loans ourselves from time to time to ensure a sufficient level of funding for borrower members. The majority of funds for such loans were obtained through our borrowings under loan facilities with various entities (see Note 6 — Loans Payable). As of June 30, 2010 and March 31, 2010, we had funded and retained an aggregate total of $20,663,900 and $19,689,575, respectively, of member loans to borrower members. These member loans are classified as held for investment based on management's intent and ability to hold such member loans for the foreseeable future or to maturity. Member loans held for investment are carried at amortized cost reduced by a valuation allowance for estimated credit losses incurred as of the balance sheet date. A member loan's cost includes its unpaid principal balance along with unearned income, comprised of fees charged to borrower members offset by incremental direct costs for loans originated by us. Unearned income is amortized ratably over the member loan's contractual life using the effective interest method.
Allowance for loan losses
We may incur losses in connection with member loans we hold for investment if the borrower members fail to pay their monthly scheduled loan payments. We provide for incurred losses on these loans with an allowance for loan losses in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") 310-10-35 guidance on the subsequent measurement of receivables and FASB ASC 450 guidance on accounting for contingencies. The allowance for loan losses is a valuation allowance established to provide for estimated incurred credit losses in the portfolio of member loans held for investment at the balance sheet date.
The allowance for loan losses is evaluated on a periodic basis by management, and represents an estimate of potential credit losses based on a variety of factors, including the composition and quality of the loan portfolio, loan specific information gathered through our collection efforts, delinquency levels, probable expected losses, current and historical charge-off and loss experience, current industry charge-off and loss experience, and general economic conditions. Determining the adequacy of the allowance for loan losses is subjective, complex and requires judgment by management about the effect of matters that are inherently uncertain, and actual losses may differ from our estimates.
A member loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Our member loan portfolio is comprised primarily of small groups of homogeneous, unsecured loans made to borrower members, which loans are evaluated for impairment at least every 120 days based on their payment status and information gathered through our collection efforts. Our estimate of the required allowance for loan losses is developed by estimating both the rate of default of the loans within each FICO band, a loan's collection status, the borrower's FICO score at or near the evaluation date, and the amount of probable loss in the event of a borrower member default. Loan losses are charged against the allowance when management believes the loss is confirmed. We make an initial assessment of whether a specific reserve is required on each delinquent loan no later than the 150th day of delinquency of that loan.
CM Loans and Notes held for investment at fair value
Starting October 13, 2008, our investors have had the opportunity to buy Notes issued by us. These Notes are special limited recourse obligations of Lending Club. Each series of Notes corresponds to a single corresponding member loan, or CM Loan originated through our platform. In conjunction with this new operating structure effective as of October 13, 2008, for CM Loans and Notes, we adopted the provisions of FASB ASC 825-10 guidance on the fair value option for financial assets, which permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that estimated unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We applied the provisions of FASB ASC 825-10 to the Notes and CM Loans.
In accordance with the provisions of FASB ASC 825-10, we report the aggregate fair value of the CM Loans and Notes as separate line items in the assets and liabilities sections of our balance sheet using the methods and disclosures related to fair value accounting that are described in FASB ASC 820.
FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Changes in fair value of the CM Loans and Notes, subject to the provisions of FASB ASC 825-10, are recognized in earnings, and fees and costs associated with the origination or acquisition of CM Loans are recognized as incurred rather than deferred.
We determined the fair value of the CM Loans and Notes in accordance with the fair value hierarchy established in FASB ASC 820 which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs, which generally requires significant management judgment, when measuring fair value. FASB ASC 820 establishes the following hierarchy for categorizing these inputs:
Level 1 – Quoted market prices in active markets for identical assets or liabilities
Level 2 – Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs) ; and
Level 3 – Significant unobservable inputs.
As observable market prices are not available for similar assets and liabilities, we believe the CM Loans and Notes should be considered Level 3 financial instruments under FASB ASC 820. For CM Loans and Notes, the fair value is estimated using discounted cash flow methodologies adjusted for our expectation of both the rate of default of the CM Loans and Notes and the amount of loss in the event of default under those CM Loans and Notes. These estimates of default are recorded as interest expense related to our CM Loan originations and a corresponding interest income against the Notes in the period of loan origination.
Our obligation to pay principal and interest on any Note is equal to the pro-rata portion of the CM Loan payments, if any, we receive on the related CM Loan, net of our 1.00% service charge. As such, the fair value of the Notes is approximately equal to the fair value of the CM Loans, adjusted for the 1.00% service charge. Any unrealized gains or losses on the CM Loans and Notes for which the fair value option has been elected are reported separately in earnings. The effective interest rate associated with a Note will be less than the interest rate earned on the related CM Loan due to the 1.00% service charge. Accordingly, as market interest rates fluctuate, the resulting change in fair value of the fixed rate CM Loans and fixed rate Notes will not be the same. For additional discussion on this topic, see Note 5 — CM Loans and Notes Held for Investment at Fair Value.
Revenues primarily result from interest income and transaction fees earned on member loans originated through our online platform. Transaction fees include origination fees (borrower member paid) and servicing fees (investor member paid). Together we classify interest and fees earned on member loans as interest income (See Note 13 — Net Interest Income).
Revenues related to member loan origination fees are recognized in accordance with FASB ASC 310-20 guidance on nonrefundable fees and other costs. The loan origination fee charged to each borrower member is determined by the credit grade of that borrower member's loan and as of June 30, 2010, ranged from 2.25% to 4.50% of the aggregate member loan amount. If the loan is for a small business or for a self-employed borrower, we charge an additional 1.5% loan origination fee. The member loan origination fees are included in the annual percentage rate ("APR") calculation provided to the borrower member and are subtracted from the gross loan proceeds prior to disbursement of the loan funds to the borrower member. A member loan is considered issued when we move funds on our platform from the investor members' accounts to the borrower member's account, following which we initiate an Automated Clearing House ("ACH") transaction to transfer funds from our platform accounts to the borrower member's bank account.
Lender servicing fee revenue is recognized in accordance with FASB ASC 860 guidance on transfers and servicing of financial assets. Currently, a 1.00% service charge, based on any payments received, is charged to the investor at the time that we receive any payments from the borrower member. The service charge is deducted from any payments received on a member loan before the net amounts of those payments are allocated to the investors' accounts.
Our treatment of interest and fee income is determined by the category that each member loan origination falls into, which are:
- Third Party Purchased Member Loans — Member loans originated through our platform and sold to third party investor members through April 7, 2008.
- Member Loans Originated as CM Loans — CM Loans originated on or after October 13, 2008.
- Lending Club Funded Member Loans — Member loans we funded ourselves, irrespective of when originated.
Third Party Purchased Member Loans
These member loans are considered to have been sold to the investor members. As such, we recognize only origination fee and servicing fee revenue on these member loans and do not provide an allowance for loan losses. We recognize a servicing asset and corresponding servicing liability as a result of this sale in accordance with FASB ASC 860, and amortize the asset into income as payments are received on the member loans.
At June 30, 2010 and March 31, 2010, gross future expected servicing fees related to these member loans was estimated to be $15,024 and $22,141, respectively, net of estimated future loan losses that would impair the value of this asset, which losses were estimated using those methods described in Allowance for loan losses in this footnote above. We have insufficient history to predict prepayments. However we believe that, based on our competitive interest rates, borrower members are unlikely to prepay their member loans in any great volume. For many borrower members, the main reason for securing a member loan with us is to provide needed cash flow at more attractive interest rates than could be obtained from other sources.
Further, because the earnings process is deemed to be complete at the time these member loans were transferred to the investors, and because there is no recourse to us in the event of default by the borrower member, we recognized 100% of the origination fee as revenue at the time the member loan was transferred to the purchaser and included the fee in interest income.
Member Loans Originated as CM Loans
Investor members are no longer able to purchase member loans. Rather, as described above, each member loan, or CM Loan, is recorded as a note receivable funded by us, while Notes, which are special limited recourse obligations of Lending Club corresponding to those CM Loans, are recorded as notes payable issued by us to investors. After we receive payments of principal and interest on the CM Loans, we in turn make principal and interest payments on the Notes. These principal payments reduce the carrying value of both the CM Loans and Notes. If we do not receive a payment on the CM Loan, we are not obligated to and will not make any payments on the corresponding Notes. In light of this new structure, we adopted and account for the CM Loans and Notes under the provisions of FASB ASC 825 as described above.
We do not directly record servicing fee revenue from these CM Loans, but rather recognize interest income on our CM Loans related to these member loans based on the full amount of the loan payment at the stated interest rate to the borrower member without regard to the servicing fee. We correspondingly record interest expense on the corresponding Note based on the post-service fee payment we make to our investor members, which results in an interest rate and an interest expense on these Notes which is lower than that for the CM Loans. Origination fees on these CM Loans are recognized upon origination and included in interest income.
In accordance with FASB ASC 825, we include the estimated amount of unrealized gains or losses included in earnings during the period attributable to changes in instrument-specific credit risk and how the estimated unrealized gains or losses attributed to changes in instrument-specific credit risk were determined. As such, we do not record a specific loan loss allowance related to CM Loans and Notes in which we have elected the fair value option. Rather, we estimate the fair value of CM Loans and Notes using discounted cash flow methodologies adjusted for our expectation of both the rate of default of the CM Loans and Notes and the amount of loss in the event of default using methodologies similar to those used for member loans we have funded ourselves. At origination and at each reporting period, we recognize as interest expense an amount equal to our estimated loan losses for the CM Loans, and interest income in an amount equal to our estimated loan losses on these Notes. As the CM Loans are amortizing at slightly higher interest rates than the Notes, the amount of interest expense related to estimated loan losses on the CM Loans will always be slightly higher than the estimated interest income from loan losses on the Notes. Our net interest income related to these CM Loans and Notes is further described in Note 13— Net Interest Income.
Lending Club Funded Member Loans
We have ourselves funded approximately $20.7 million of member loans originated through the platform. When a member loan has been funded in whole, or in part, by us, we retain the portion of the borrower member's monthly loan payment that corresponds to the percentage of the member loan that we have funded. In these cases, we record interest income on these notes receivable.
Origination fees from member loans funded by us are offset by our direct loan origination costs. The net amount is initially deferred and subsequently amortized ratably over the term of the member loan as an adjustment to yield, and is reported in the accompanying statements of operations as interest income. As of June 30, 2010 and March 31, 2010, we had net unamortized deferred loan origination costs of $15,110 and $51,383, respectively (see Note 4 — Member Loans Held for Investment). These deferred loan origination costs will be amortized monthly as interest expense/(income) through the remaining life of the related, member loans.
Concentrations of credit risk
Financial instruments that potentially subject us to significant concentrations of credit risk, consist principally of cash, cash equivalents, restricted cash, member loans held for investment, and CM Loans held at fair value. We hold our cash, cash equivalents and restricted cash in accounts at high-credit quality financial institutions. We are exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet periodically exceeds the FDIC insured amounts. We perform credit evaluations of our borrower members' financial condition and do not allow borrower members to have more than two member loans outstanding at any one time. We do not require collateral for member loans, but we maintain allowances for potential credit losses, as described above.
We apply FASB ASC 718 guidance regarding the stock based compensation to account for equity awards made to employees. FASB ASC 718 requires all share-based payments made to employees, including grants of employee stock options, restricted stock and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values, and does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement recognition. FASB ASC 718 also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under previous literature.
FASB ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of each award as of the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model considers, among other factors, the expected life of the award and the expected volatility of our stock price.
FASB ASC 718 also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of estimated forfeitures, such that expense is recorded only for those stock-based awards that are expected to vest. Share-based awards issued to non-employees are accounted for in accordance with provisions of FASB ASC 718 and FASB ASC 505-50 guidance on equity based payment to non-employees.
New accounting pronouncements
In January 2010, FASB issued ASU No. 2010-06, "Fair Value Measurements and Disclosures," that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. The new and revised disclosures are required to be implemented in fiscal years beginning after December 15, 2009. We adopted this standard during the quarter ending June 30, 2010. The adoption did not have a material impact on our consolidated financial statements.
3. Net Loss Attributable to Common Stockholders
We compute net loss per share in accordance with FASB ASC 260 guidance on this subject. Under FASB ASC 260, basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the "treasury stock" and/or "if converted" methods as applicable.
The following table details the computation of the net loss per share (unaudited):
|Three Months Ended June 30,|
|Weighted-average common shares outstanding, basic and diluted||8,558,261||8,223,810|
|Net loss per common share:|
|Basic and diluted||$(0.30)||$(0.35)|
Due to the losses for each of the periods presented in the table below, the following potentially dilutive shares are excluded from the basic and diluted net loss per share calculation as including such shares in the calculation would be anti-dilutive.
|(Unaudited)||Three Months Ended June 30,|
|Weighted-average Series A convertible preferred stock||15,740,285||15,740,285|
|Weighted-average Series B convertible preferred stock||16,036,346||16,036,346|
|Weighted-average Series C convertible preferred stock||13,389,951||-|
|Weighted-average restricted stock options issued to employees||3,863,143||2,317,135|
|Weighted-average warrants and contingent shares outstanding||1,744,383||1,771,912|
|Total common stock equivalents excluded from diluted net loss per share||50,774,108||35,865,678|
4.Member Loans Held for Investment
Member loans funded by us and held for investment are as follows:
|As of June 30, 2010(unaudited)||As of March 31, 2010|
|Unsecured member loans, net of chargeoffs||$7,669,476||$8,275,561|
|Deferred origination costs, net||15,111||51,383|
|Allowance for loan losses||(753,060)||(781,758)|
|Member loans held for investment, net||$6,931,527||$7,545,186|
As of June 30, 2010, we had identified and fully reserved $203,893 on 54 loans, and our aggregate allowance for loan losses was $753,060. As of March 31, 2010, we had identified and fully reserved $144,312 on 29 loans. For the three months ended June 30, 2010, we charged off a total of 48 loans with an aggregate principal balance of $210,712, while during the three months ended June 30, 2009, we charged off a total of 33 loans with an aggregate principal balance of $228,875.
Changes in the allowance for loan losses, the composition of the allowance for loan losses and the allowance for loan losses were as follows (unaudited except balance at March 31, 2010):
|Balance at March 31, 2010||$ 781,758|
|Provision for loan losses||182,014|
|Balance at June 30, 2010||$ 753,060|
We believe that the credit and interest rate risks of our member loans held for investment are substantially similar to those of our CM Loans, which we measure at fair value (see Note 5 – CM Loans and Notes Held for Investment at Fair Value). In fact, both of these instruments are originated through our lending platform, and in many instances a portion of a member loan may be carried as a member loan held for investment, while another portion of that same member loan will become a CM Loan against which related Notes will be issued. Further, because of the similarity of these two instruments, our methodology for recording realized and unrealized gains on our CM Loans is substantially similar to the methodologies we use to measure our provision for loan loss allowances and chargeoffs on our member loans held for investment (see Note 2 – Summary of Significant Accounting Policies, Revenue Recognition, Member Loans Originated as CM Loans). Based on these similarities, we therefore believe that the fair value of our member loans held for investment is equivalent to their carrying value.
5. CM Loans and Notes Held for Investment at Fair Value
At June 30, 2010, we had the following assets and liabilities measured at fair value on a recurring basis (unaudited):
|Level 1 Inputs||Level 2 Inputs||Level 3 Inputs||Fair Value|
Both observable and unobservable inputs may be used to determine the fair value of positions that we have classified within the Level 3 category. As a result, the realized and unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs. The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2010 (unaudited except balances at March 31, 2010):
|Fair value at March 31, 2010||$ 56,056,228||$ 56,042,064|
|Realized and unrealized gains/(losses) included in earnings||(1,664,305)||(1,662,808)|
|Fair value at June 30, 2010||$ 76,422,175||$ 76,392,955|
The majority of realized and unrealized gains/(losses) included in earnings are attributable to changes in instrument-specific credit risk and are reported on the "Interest income, CM Loans, net" and "Interest income, Notes, net" line items. The majority of total realized and unrealized gains/(losses) were related to Level 3 instruments held at June 30, 2010.
At June 30, 2010, we had thirty CM Loans representing $243,232 of outstanding CM Loan principal, $79,617 of CM Loan fair value, and $79,563 of Notes principal fair value which were 90 days or more delinquent. At June 30, 2010, we had fifty seven CM Loans representing $394,611 of outstanding CM Loan principal, $8,960 of CM Loan fair value and $8,948 of Notes principal fair value which were on non-accrual status.
6. Loans Payable
Loans payable consists of the following:
|As of June 30, 2010
|As of March 31, 2010|
|Growth capital term loan||$2,407,018||$2,912,421|
|Unamortized discount on growth capital term loan||(73,731)||(90,260)|
|Financing term loan||3,011,140||3,600,082|
|Unamortized discount on financing term loan||(119,729)||(150,595)|
|Private placement notes||1,941,462||2,365,830|
|Unamortized discount on private placement notes||(102,932)||(130,371)|
|Total loans payable||$7,063,228||$8,507,107|
At June 30, 2010, future maturities due on all loans payable were as follows (unaudited):
Year ending March 31,
|Less amount representing debt discount||(296,392)|
|Total loans payable||$ 7,063,228|
Growth capital term loan
In October 2007, we entered into a loan and security agreement with a bank that allowed for borrowings of up to $3,000,000 for working capital needs. In October 2008, we amended the agreement to increase available borrowing to $4,000,000. The loan is secured by substantially all of our assets except our intellectual property rights, payments received on our CM Loans, and certain deposit accounts. Borrowings bear interest at a fixed rate of 8.5% per annum. Each advance is repayable in 36 equal monthly installments of principal and interest commencing the first day of the month following the advance. The growth capital term loan also requires us to maintain a certificate of deposit with the bank of $150,000 until repayment. This amount is included in restricted cash in the accompanying balance sheets. In December 2008, we drew down the remaining $1,000,000 of availability under this line. At June 30, 2010, no amounts were available for future financing under this agreement.
In connection with this loan agreement and its subsequent amendments, we issued fully exercisable warrants to purchase 164,320 shares of Series A convertible preferred stock at an exercise price of $1.065 per share, for which we recorded debt discounts of $135,696. Amortization of the debt discounts recorded for this loan, as amended, were $16,529 and $13,961 in the three months ended June 30, 2010 and 2009, respectively, and were recorded as interest expense.
Financing term loan
In February 2008, we entered into a loan and security agreement with a lender that provided for financing of up to $5,000,000 to be lent out to borrower members funded by us. The financing term loan was available for advances through June 30, 2008, but was subsequently amended in October 2008 to allow availability through December 31, 2008. The interest rate is fixed at 10.0% per annum. The agreement requires that proceeds received from borrower member payments on member loans funded by us be used to pay down the financing term loan. The financing term loan is secured by substantially all of our assets except our intellectual property rights, payments received on the CM Loans, and certain deposit accounts. The financing term loan requires us to maintain a certificate of deposit with a bank of $250,000 until repayment. This amount is included in restricted cash in the accompanying balance sheets. At June 30, 2010, no amounts were available for future financing under this agreement.
In connection with this loan agreement, we issued fully exercisable warrants to purchase an aggregate of 328,637 shares of Series A convertible preferred stock at a price of $1.065 per share and recorded total debt discounts of $277,962. Amortization of the debt discounts recorded for this loan were $30,866 and $28,299 in the three months ended June 30, 2010 and 2009, respectively, and were recorded as interest expense.
May 2009 term loan
In May 2009, we entered into another secured loan facility, the May 2009 term loan, with our growth capital term loan and financing term loan lenders, and amended our prior growth capital term loan and financing term loan to accommodate the new borrowing. The May 2009 term loan allows us to borrow up to $4,000,000 at an interest rate of 10.0% per annum. We also paid a commitment fee of $20,000 and $9,850 of the lenders' expenses in connection with the facility. The borrowings were used to fund member loans. The borrowings are secured by a blanket lien on substantially all of our assets, except our intellectual property rights, certain deposit accounts and payments received on CM Loans. Additionally, the May 2009 term loan was secured with a certificate of deposit in the amount of $300,000 until repayment. This amount is included in restricted cash in the accompanying balance sheets. The lenders also received the right to invest up to $500,000 each in our next round of equity financing on the same terms offered to other investors. On a monthly basis, we also agreed to maintain a minimum collateral ratio calculated as (i) the sum of the certificate of deposit collateral and the outstanding balance of member loans funded with the borrowing which are current in their payment status to (ii) the outstanding balance under the loan facility. In the event that the minimum collateral ratio is less than the minimum allowed under the agreement, we must increase the certificate of deposit to meet the minimum collateral ratio.
Effective August 3, 2009, we consolidated the growth capital term loan, the financing term loan and the May 2009 term loan into two loan agreements by executing an amended and restated growth capital term loan and an amended and restated financing term loan, together the "Newly Restated Agreements." The terms of the Newly Restated Agreements are substantially the same as those of the three prior agreements, including that the borrowings continue to be secured by a blanket lien on substantially all of our assets, except for our intellectual property rights, certain deposit accounts, and payments we receive on the CM Loans. Additionally, the Newly Restated Agreement continues to require that Lending Club maintain combined certificates of deposit in the amount of $700,000 as collateral until repayment. Further, we agreed in the Newly Restated Agreements to maintain the same minimum collateral ratio as established in the May 2009 term loan. As of June 30, 2010, we had fully drawn down the entire $13,000,000 of combined availability under the Newly Restated Agreements.
In connection with this loan facility, we issued fully exercisable warrants to purchase an aggregate of 187,090 shares of Series B convertible preferred stock at a price of $0.7483 per share and recorded total debt discounts of $277,962. Amortizations of those debt discounts are included in the amortizations of debt discounts presented above for the growth capital term loan and the financing term loan.
Private placement notes
During the year ended March 31, 2009, we entered into a series of loan and security agreements with accredited investors providing for loans evidenced by notes payable totaling $4,707,964. Each note is repayable over three years and bears interest at the rate of 12% per annum. In June and July 2009, we issued an additional $200,000 of notes which bear interest at the rate of 8% per annum. We are using the proceeds of these notes to fund member loans. In connection with origination of these notes payable, we issued fully exercisable warrants to purchase an aggregate of 514,817 shares of Series A convertible preferred stock (see Note 9 — Preferred Stock). We recorded a debt discount of $329,271, and amortization of the debt discount was recorded as interest expense of $27,439 and $27,439 for the three months ended June 30, 2010 and 2009, respectively.
8. Related Party Transactions
Of the private placement notes described in Note 6 – Loans Payable, $450,000 of original principal was invested by related parties on terms identical to those of given to the other private placement note investors. At June 30, 2010 and 2009, the outstanding principal balance of these notes was $174,762 and $323,315, respectively.
9. Preferred Stock
Convertible preferred stock
In March 2009, we filed an Amended and Restated Certificate of Incorporation with the State of Delaware, which increased the total number of shares which we are authorized to issue from 49,500,000 shares to 83,200,000 shares, 50,000,000 of which are designated as common stock, and 33,200,000 of which are designated as preferred stock.
In July 2009, we filed an Amended and Restated Certificate of Incorporation with the State of Delaware, which increased the total number of shares which we are authorized to issue from 83,200,000 shares to 83,600,000 shares, 50,000,000 of which are designated as common stock, and 33,600,000 of which are designated as preferred stock.
In April 2010, we filed an Amended and Restated Certificate of Incorporation with the State of Delaware, which increased the total number of shares which we are authorized to issue from 83,600,000 shares to 117,116,801 shares, 68,000,000 of which are designated as common stock, 17,006,275 of which are designated as Series A Preferred Stock, 16,410,526 of which are designated as Series B Preferred Stock, and 15,700,000 of which are designated as Series C Preferred Stock.
A complete description of the rights, preferences, privileges and restrictions of our common stock and the Series A, Series B, and Series C convertible preferred stock is included in the Amended and Restated Certificate of Incorporation, as amended. The outstanding shares of convertible preferred stock are not redeemable. None of our convertible preferred stock is considered permanent equity based on the guidance of SEC Accounting Series Release No. 268, "Presentation in Financial Statements of Redeemable Preferred Stocks." The significant terms of outstanding Series A, Series B, and Series C convertible preferred stock are as follows:
Conversion — Each share of convertible preferred stock is convertible, at the option of the holder, initially, into one share of common stock (subject to adjustments for events of dilution). Each share of convertible preferred stock will each automatically be converted upon the earlier of (i) the closing of an underwritten public offering of our common stock with aggregate gross proceeds that are at least $30,000,000 or (ii) the consent of the holders of a 65% majority of outstanding shares of convertible preferred stock, voting together as a single class, on an as-converted to common stock basis. The Company's preferred stock agreements contain certain anti-dilution provisions, whereby if the Company issues additional shares of capital stock for an effective price lower than the conversion price for a series of preferred stock immediately prior to such issue, then the existing conversion price of such series of preferred stock will be reduced. The Company determined that while its convertible preferred stock contains certain anti-dilution features, the conversion feature embedded within its convertible preferred stock does not require bifurcation under the guidance of FASB ASC 815, Derivatives and Hedging Activities.
Liquidation preference —Upon any liquidation, winding up or dissolution of us, whether voluntary or involuntary (a "Liquidation Event"), before any distribution or payment shall be made to the holders of any common stock, the holders of convertible preferred stock shall, on a pari passu basis, be entitled to receive by reason of their ownership of such stock, an amount per share of Series A convertible preferred stock equal to $1.065 (as adjusted for stock splits recapitalizations and the like) plus all declared and unpaid dividends (the "Series A Preferred Liquidation Preference"), an amount per share of Series B convertible preferred stock equal to $0.7483 (as adjusted for stock splits recapitalizations and the like) plus all declared and unpaid dividends (the "Series B Preferred Liquidation Preference") and an amount per share of Series C convertible preferred stock equal to $1.5677 (as adjusted for stock splits recapitalizations and the like). However, if upon any such Liquidation Event, the assets of ours shall be insufficient to make payment in full to all holders of convertible preferred stock of their respective liquidation preferences, then the entire assets of ours legally available for distribution shall be distributed with equal priority between the holders of based upon the amounts such series was to receive. Any excess assets, after payment in full of the liquidation preferences to the convertible preferred stockholders, are then allocated to the holders of common and preferred stockholders, pro-rata, on an as-if-converted to common stock basis.
Dividends — If and when declared by the Board of Directors, the holders of Series A, Series B, and Series C convertible preferred stock, on a pari passu basis, will be entitled to receive non-cumulative dividends at a rate of 6% per annum in preference to any dividends on common stock (subject to adjustment for certain events). The holders of Series A, Series B, and Series C convertible preferred stock are also entitled to receive with common stockholders, on an as-if-converted basis, any additional dividends issued by us.
Voting rights — Generally, preferred stockholders have one vote for each share of common stock that would be issuable upon conversion of preferred stock. Voting as a separate class, and on an as-if-converted to common stock basis, the Series A convertible preferred stockholders are entitled to elect two members of the Board of Directors and the holders of Series B convertible preferred stockholders are entitled to elect one member of the Board of Directors. The Series C convertible preferred stockholders are not entitled to elect a member of the Board of Directors. The holders of common stock, voting as a separate class, are entitled to elect one member of the Board of Directors. The remaining directors are elected by the preferred stockholders and common stockholders voting together as a single class on an as-if-converted to common stock basis.
10. Stockholders' Deficit
As of June 30, 2010, we have reserved shares of common stock for future issuance as follows (unaudited):
|Convertible preferred stock, Series A||15,740,285|
|Convertible preferred stock, Series B||16,036,346|
|Convertible preferred stock, Series C||15,621,609|
|Options to purchase common stock||5,444,250|
|Options available for future issuance||3,498,517|
|Convertible preferred Series A stock warrants||1,265,990|
|Convertible preferred Series B stock warrants||374,180|
|Common stock warrants||110,463|
|Total common stock reserved for future issuance||58,091,640|
During the three months ended June 30, 2010 we issued 29,250 shares of common stock in exchange for proceeds of $7,898 upon the exercise of employee stock options.
In June 2010, in connection with the issuance of Notes, we issued fully exercisable warrants to purchase 6,463 shares of common stock at $1.5677 per share. The warrants may be exercised at any time on or before June 2020. The fair value of these warrants was estimated to be $788 using the Black-Scholes option pricing model with the following assumptions: a volatility of 46.31%, a contractual life of 10 years, no dividend yield and a risk-free interest rate of 3.05%. The entire warrant value of $788 was expensed as interest expense in the three months ended June 30, 2010.
11. Stock-Based Compensation
Under our 2007 Stock Incentive Plan, or the Option Plan, we may grant options to purchase shares of common stock to employees, executives, directors and consultants at exercise prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory options. An aggregate of 9,096,778 shares have been authorized for issuance under the Option Plan. These options generally expire ten years from the date of grant and generally vest 25% twelve months from the date of grant, and ratably over the next 12 quarters thereafter.
The Option Plan allows for employees to early exercise options. If an employee's employment is terminated prior to fully vesting in options that have been early exercised, we may repurchase the common stock associated with unvested options at the original exercise price. As of June 30, 2010, none of the option holders have chosen to early exercise.
We used the Black-Scholes option pricing model for estimating the fair value of stock options granted with the following assumptions for the three months ended June 30, 2010 and 2009 (unaudited):
|Three Months Ended June 30,|
|Expected dividend yield||0%||0%|
|Risk-free interest rates||2.45%||2.81%|
|Expected life||6.08 years||6.05 years|
We have elected to use the calculated-value method under FASB ASC 718 to calculate the volatility assumption for three months ended June 30, 2010 and 2009. The expected life assumption was determined based upon historical data gathered from public peer companies. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. We have paid no cash dividends and do not anticipate paying any cash dividends in the foreseeable future and therefore used an expected dividend yield of zero in our option-pricing models.
Options activity under the Option Plan is summarized as follows (unaudited except balances at March 31, 2010):
|Options Outstanding||Vested and Expected to Vest|
|Shares Available for Grant||Number of Shares||Number of Shares||Weighted Average Exercise Price per Share|
|Balances at March 31, 2010||3,484,739||2,938,500||1,041,062||$ 0.25|
|Additional Shares Authorized||2,548,778|
|Balances at June 30, 2010||3,498,517||5,444,250||4,922,217||$ 0.32|
A summary by exercise price of outstanding options, vested options, and options vested and expected to vest at June 30, 2010, is as follows (unaudited):
|Exercise Price and Weighted Average Exercise Price||Number of Options Outstanding||Weighted Average Remaining Contractual Life of Outstanding Options (Years)||Number of Options Vested||Number of Options Vested and Expected to Vest|
A summary by outstanding options, vested options and options vested and expected to vest at June 30, 2010, is as follows (unaudited):
|Number of Options||Weighted Average Remaining Contractual Life (Years)||Weighted Average Exercise Price|
|Options Outstanding||5,444,250||8.27||$ 0.32|
|Vested Options||1,267,984||7.81||$ 0.26|
|Options Vested and Expected to Vest||4,922,217||8.25||$ 0.32|
The following table presents details of stock-based compensation expenses by functional line item for the periods indicated (unaudited):
|Three Months Ended June 30,|
|Sales, marketing and customer service||$ 20,054||$ 7,464|
|General and administrative||28,140||11,158|
|Less stock-based compensation expense for non-employees||(1,441)||(1,416)|
|Total employee stock-based compensation expense||$61,907||$28,553|
No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.
During the three months ended June 30, 2010 and 2009, we granted stock options to purchase 2,535,000 and 1,624,478 shares, respectively, of common stock with a weighted average grant date fair value of $0.20 and $0.12, respectively, per share. As of June 30, 2010, total unrecognized compensation cost was $631,818. These costs are expected to be recognized through October 2014.
12. Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves determining our income tax expense or benefit together with calculating the deferred income tax expense or benefit related to temporary differences resulting from differing treatment of items, such as deferred revenue or deductibility of certain intangible assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the accompanying balance sheet. We must then assess the likelihood that the deferred tax assets will be recovered through the generation of future taxable income.
As of June 30, 2010, we continued to have a full valuation allowance against our net deferred tax assets. We believe that our deferred tax assets will more likely than not be realized. For the three months ended June 30, 2010, we were in a loss position. We did not have any foreign operations and therefore did not record any tax provisions during the period.
We adopted the provisions of FASB ASC 740 on April 1, 2007. FASB ASC 740 clarifies the accounting for uncertainty in tax positions and requires that companies recognize in their financial statements the largest amount of a tax position that is more-likely-than-not to be sustained upon audit, based on the technical merits of the position. The adoption of FASB ASC 740 did not affect our financial condition, results of operations or cash flows for the fiscal year ended March 31, 2010.
We file income tax returns in the U.S. federal jurisdiction and California jurisdictions. Our tax years for 2006 and forward are subject to examination by the U.S. and California tax authorities as the statutes of limitation remain open.
Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FASB ASC 740, we did not have any unrecognized tax benefits and associated accrued interest or penalties nor was any interest expense or penalties recognized during the fiscal year ended March 31, 2010.
13. Net Interest Income
Revenues primarily result from interest income and transaction fees. Transaction fees include origination fees (borrower member paid) and investor service charges (investor paid). Interest income is accrued and recorded in the accompanying statements of operations as collected. We classify interest and fees earned on our member loans together as interest income in these financial statements.