Attached files
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EX-32.1 - EXHIBIT 32.1 - LendingClub Corp | c95739exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - LendingClub Corp | c95739exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - LendingClub Corp | c95739exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
or
o | 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: 333-151827
LendingClub Corporation
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
51-0605731 (I.R.S. Employer Identification No.) |
|
370 Convention Way | ||
Redwood City, California (Address of principal executive offices) |
94063 (Zip Code) |
800-964-7937
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of January 31, 2010, there were 8,504,261 shares of the registrants common stock
outstanding.
TABLE OF CONTENTS
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Item 4. Submission of Matters to a Vote of Security Holders |
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than statements of historical facts,
included in this Quarterly Report on Form 10-Q regarding our borrower members, credit scoring, FICO
scores, our strategy, future operations, future financial position, future revenue, projected
costs, prospects, plans, objectives of management and expected market growth are forward-looking
statements. The words anticipate, believe, estimate, expect, intend, may, plan,
predict, project, will, would and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain these identifying
words. These forward-looking statements include, among other things, statements about:
| the status of borrower members, the ability of borrower members to repay member
loans and the plans of borrower members; |
| our ability to attract additional investor members; |
| expected rates of return and interest rates; |
| the attractiveness of our lending platform; |
| our financial performance; |
| the availability and functionality of the trading platform; |
| our ability to retain and hire competent employees and appropriately staff our
operations; |
| regulatory developments; |
| our intellectual property; and |
| our estimates regarding expenses, future revenue, capital requirements and needs
for additional financing. |
We may not actually achieve the plans, intentions or expectations disclosed in forward-looking
statements, and you should not place undue reliance on forward-looking statements. Actual results
or events could differ materially from the plans, intentions and expectations disclosed in
forward-looking statements. We have included important factors in the Risk Factors section that
could cause actual results or events to differ materially from these forward-looking statements.
You should carefully review those factors and also the risks outlined in other documents we have
filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the
fiscal year ended March 31, 2009, and the Prospectus for the Member Payment Dependent Notes dated
January 20, 2010. In this Quarterly Report on Form 10-Q, we refer to the Member Payment Dependent
Notes that we issue to investors as the Notes, and we refer to the corresponding loans made to
borrower members as CM Loans. Forward-looking statements do not reflect the potential impact of
any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this Quarterly Report on Form 10-Q completely and with the understanding that
actual future results may be materially different from what we expect. We do not assume any
obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.
3
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
LendingClub Corporation
Condensed Balance Sheets
December 31, | March 31, | |||||||
2009 | 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 4,730,406 | $ | 11,998,541 | ||||
Restricted cash |
1,252,000 | 452,000 | ||||||
Member loans held for investment, net of allowance for loan losses |
9,067,857 | 9,918,479 | ||||||
CM Loans held for investment, at fair value |
39,729,200 | 8,239,909 | ||||||
Other receivables |
49,138 | 71,594 | ||||||
Loan servicing rights, at fair value |
29,133 | 56,116 | ||||||
Prepaid expenses and other assets |
260,642 | 63,620 | ||||||
Property and equipment, net |
132,451 | 139,993 | ||||||
Deposits |
53,350 | 146,548 | ||||||
Total assets |
$ | 55,304,177 | $ | 31,086,800 | ||||
LIABILITIES |
||||||||
Accounts payable |
$ | 377,519 | $ | 630,452 | ||||
Accrued expenses |
657,092 | 424,249 | ||||||
Notes, at fair value |
39,718,345 | 8,238,597 | ||||||
Deferred revenue |
29,133 | 56,117 | ||||||
Loans payable, net of debt discount |
9,915,886 | 9,647,804 | ||||||
Total liabilities |
50,697,975 | 18,997,219 | ||||||
Commitments and contingencies (see Note 14) |
||||||||
PREFERRED STOCK |
||||||||
Preferred Stock |
28,462,446 | 28,462,446 | ||||||
Total preferred stock |
28,462,446 | 28,462,446 | ||||||
STOCKHOLDERS DEFICIT |
||||||||
Common stock |
85,043 | 82,207 | ||||||
Additional paid-in capital |
3,756,880 | 3,444,301 | ||||||
Accumulated deficit |
(27,698,167 | ) | (19,899,373 | ) | ||||
Total stockholders deficit |
(23,856,244 | ) | (16,372,865 | ) | ||||
Total liabilities, preferred stock and stockholders deficit |
$ | 55,304,177 | $ | 31,086,800 | ||||
The accompanying notes are an integral part of these condensed financial statements.
4
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LendingClub Corporation
Condensed Statements of Operations
(Unaudited)
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
||||||||||||||||
Member loans held for investment |
||||||||||||||||
Interest income, net |
$ | 332,305 | $ | 339,233 | $ | 1,040,760 | $ | 804,466 | ||||||||
Interest expense |
(369,158 | ) | (289,410 | ) | (1,094,602 | ) | (1,168,978 | ) | ||||||||
Net interest loss, member loans held for investment |
(36,853 | ) | 49,823 | (53,842 | ) | (364,512 | ) | |||||||||
Provision for loan losses |
(176,376 | ) | (245,428 | ) | (1,170,880 | ) | (530,359 | ) | ||||||||
Net interest loss after provision for loan losses |
(213,229 | ) | (195,605 | ) | (1,224,722 | ) | (894,871 | ) | ||||||||
CM Loans and Notes held for investment at fair value |
||||||||||||||||
Interest income, CM Loans, net |
469,532 | (57,476 | ) | 684,110 | (57,476 | ) | ||||||||||
Interest income, Notes, net |
273,778 | 114,121 | 587,858 | 114,121 | ||||||||||||
Net interest income, CM Loans and Notes, held for investment at fair value |
743,310 | 56,645 | 1,271,968 | 56,645 | ||||||||||||
Amortization of loan servicing rights |
7,003 | 9,260 | 21,973 | 38,221 | ||||||||||||
Other Revenue |
13,675 | 2,514 | 30,346 | 3,480 | ||||||||||||
Total income/(losses) |
550,759 | (127,186 | ) | 99,565 | (796,525 | ) | ||||||||||
Operating expenses |
||||||||||||||||
Sales, marketing and customer service |
1,586,098 | 600,953 | 4,030,724 | 1,502,372 | ||||||||||||
Engineering |
442,433 | 443,054 | 1,310,687 | 1,427,196 | ||||||||||||
General and administrative |
646,940 | 1,381,372 | 2,556,948 | 5,886,815 | ||||||||||||
Total operating expenses |
2,675,471 | 2,425,379 | 7,898,359 | 8,816,383 | ||||||||||||
Loss before provision for income taxes |
(2,124,712 | ) | (2,552,565 | ) | (7,798,794 | ) | (9,612,908 | ) | ||||||||
Provision for income taxes |
| | | | ||||||||||||
Net loss |
(2,124,712 | ) | (2,552,565 | ) | (7,798,794 | ) | (9,612,908 | ) | ||||||||
Amortization of beneficial conversion feature on convertible preferred stock |
| | | 156,410 | ||||||||||||
Net loss attributable to common stockholders |
$ | (2,124,712 | ) | $ | (2,552,565 | ) | $ | (7,798,794 | ) | $ | (9,456,498 | ) | ||||
Basic and diluted net loss per share |
$ | (0.25 | ) | $ | (0.31 | ) | $ | (0.94 | ) | $ | (1.15 | ) | ||||
Weighted-average shares of common stock used in
computing basic and diluted net loss per share |
8,419,466 | 8,190,000 | 8,297,515 | 8,190,000 |
The accompanying notes are an integral part of these condensed financial statements.
5
Table of Contents
LendingClub Corporation
Condensed Statements of Cash Flows
(Unaudited)
For the Nine months Ended December 31, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (7,798,794 | ) | $ | (9,612,908 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Depreciation |
51,646 | 44,606 | ||||||
Non-cash interest expense |
2,343,149 | 672,910 | ||||||
Non-cash interest income |
(2,123,281 | ) | (129,260 | ) | ||||
Stock based compensation expense |
113,660 | 53,354 | ||||||
Change in fair value of loan servicing rights |
26,983 | 22,722 | ||||||
Interest capitalized on loans |
38,043 | (126,791 | ) | |||||
Provision for loan losses |
1,170,880 | 530,359 | ||||||
Changes in operating assets and liabilities |
||||||||
Other receivables |
22,456 | (9,124 | ) | |||||
Deposits |
93,198 | (185,200 | ) | |||||
Prepaid expenses and other assets |
(197,022 | ) | (25,594 | ) | ||||
Accounts payable |
(252,934 | ) | 333,204 | |||||
Accrued expenses |
232,843 | 60,698 | ||||||
Deferred revenue |
(26,983 | ) | (22,722 | ) | ||||
Net cash used in operating activities |
(6,306,156 | ) | (8,393,746 | ) | ||||
Cash flows from investing activities |
||||||||
Member loans originated |
(5,116,625 | ) | (6,155,225 | ) | ||||
Origination of CM Loans held at fair value |
(38,460,025 | ) | (2,803,550 | ) | ||||
Repayment of member loans originated |
4,194,244 | 2,425,051 | ||||||
Repayment of CM Loans held at fair value |
5,411,031 | 67,657 | ||||||
Increase in restricted cash |
(800,000 | ) | (42,000 | ) | ||||
Purchase of property and equipment |
(44,104 | ) | (21,944 | ) | ||||
Net cash used in investing activities |
(34,815,479 | ) | (6,530,011 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of notes payable |
4,200,000 | 6,807,966 | ||||||
Proceeds from issuance of Notes held at fair value |
39,024,105 | 2,803,550 | ||||||
Payments on notes payable |
(3,966,424 | ) | (2,443,322 | ) | ||||
Payments on Notes held at fair value |
(5,421,076 | ) | (67,730 | ) | ||||
Proceeds from issuance of Series A convertible preferred
stock, net of issuance costs |
| 5,405,455 | ||||||
Proceeds from issuance of common stock |
16,895 | | ||||||
Net cash provided by financing activities |
33,853,500 | 12,505,919 | ||||||
Net increase (decrease) in cash and cash equivalents |
(7,268,135 | ) | (2,417,838 | ) | ||||
Cash and cash equivalents beginning of period |
11,998,541 | 5,605,179 | ||||||
Cash and cash equivalents end of period |
4,730,406 | 3,187,341 | ||||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 2,410,657 | $ | 528,550 | ||||
Supplemental disclosure of non-cash investing
and financing activities: |
||||||||
Convertible preferred debt converted to Series A preferred stock |
$ | | $ | 1,504,575 | ||||
Reclassification of member loans held for investment to CM Loans held at fair value |
$ | 564,080 | $ | | ||||
Issuance of Series B convertible preferred stock warrants in exchange for term loan
agreement |
$ | 184,860 | $ | |
The accompanying notes are an integral part of these condensed financial statements.
6
Table of Contents
LENDINGCLUB CORPORATION
Notes to Condensed Financial Statements
(Unaudited)
1. Basis of Presentation
The condensed balance sheet as of December 31, 2009, the condensed statements of operations for the
three months and nine months ended December 31, 2009 and 2008, respectively, and the condensed
statements of cash flows for the nine months ended December 31, 2009 and 2008, respectively, have
been prepared by LendingClub Corporation, or LendingClub, 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, 2009 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, 2009.
2. Summary of Significant Accounting Policies
Other than the changes described under Revenue Recognition in this footnote below and
Note 5 CM Loans and Notes Held for Investment at Fair Value, which we implemented
beginning on October 13, 2008, there have been no material changes to any of our significant
accounting policies and estimates.
Liquidity
We have incurred operating losses since our inception. For the three and nine months ended
December 31, 2009, we incurred net losses of $2,124,712 and $7,798,794, respectively. For the nine
months ended December 31, 2009 and 2008, we had negative cash flows from operations of $6,306,156
and $8,393,746, respectively. Additionally, we have an accumulated deficit of $27,698,167 since
inception and a stockholders deficit of $23,856,244 as of December 31, 2009.
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 nine months ended December 31, 2009, we raised $4,200,000 through the issuance of
notes payable in connection with our May 2009 term loan and our private placement notes, see
Note 6 Loans Payable.
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.
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Restricted cash
At December 31, 2009 and March 31, 2009, 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 December 31, 2009
and March 31, 2009, we had funded and retained an aggregate total of $19,542,675 and $13,109,700,
respectively, of member loans to borrower members. These member loans are classified as held for
investment based on managements 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
loans 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 loans 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 loans collection status, the borrowers 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. As of December 31, 2009, we had identified and fully reserved $70,718 on
18 loans. Our aggregate allowance for loan losses was $881,607 at December 31, 2009, while as of
March 31, 2009, we had identified and fully reserved $221,801 on 34 loans, and our aggregate
allowance for loan losses was $1,110,726. For the three months ended December 31, 2009, we charged
off a total of 179 loans with an aggregate principal balance of $890,558. There were no loans
charged off in the three months ended December 31, 2008.
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 LendingClub. Each series of Notes
corresponds to a single 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.
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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) |
||
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.
Revenue recognition
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 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 members loan and as of December
31, 2009, ranged from 1.25% 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% origination fee. The
member loan origination fees are included in the annual percentage rate (APR) calculation provided
to the borrower member and is 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 members account, following which we
initiate an Automated Clearing House (ACH) transaction to transfer funds from our platform
accounts to the borrower members bank account.
Lender servicing fee revenue is recognized in accordance with Statement 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.
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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. |
||
| LendingClub 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 December 31, 2009, gross future expected servicing fees related to these member loans was
estimated to be $29,133 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. Indeed 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 LendingClub 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.
LendingClub Funded Member Loans
We have ourselves funded approximately $19.5 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 members 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.
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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 December 31, 2009 and 2008, we had net unamortized deferred loan
origination costs of $63,421 and $71,546, 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.
Stock-based compensation
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 June 2008, the FASB revised the definition of indexed to a companys own stock under FASB
ASC 815, Derivatives and Hedging Activities, in response to practice questions about whether an
instrument or embedded feature is indexed to the reporting companys own stock by establishing a
framework for the determinations and by nullifying some previous requirements. The revision will
affect issuers accounting for warrants and many convertible instruments with provisions that
protect holders from declines in the stock price (down-round provisions). Warrants with such
provisions will no longer be recorded in equity, and many of the convertible instruments with such
provisions will have to be bifurcated, with the conversion option separately accounted for as a
derivative under FASB ASC 815. The revision is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. It
will initially be applied by recording a cumulative-effect adjustment to opening retained earnings
at the date of adoption for the effect on outstanding instruments. We are still evaluating whether
the adoption of the revision will have a material impact on the Companys consolidated financial
position, results of operations or cash flows.
In June 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162. FASB
ASC 105 establishes a single source of authoritative, nongovernmental U.S. GAAP, except for rules
and interpretive releases of the SEC. The effective date of FASB ASC 105 is for interim and annual
reporting periods ending after September 15, 2009. FASB ASC 105 does not have an impact on our
financial position or results of operations as it does not change authoritative guidance.
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In May 2009, the FASB issued ASC 855, Subsequent Events. FASB ASC 855 provides guidance on the
disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The date through which any subsequent events have been
evaluated and the basis for that date must be disclosed. FASB ASC 855 requires that we disclose the
analysis of subsequent events through the date that our Financial Statements are issued. FASB ASC
855 also defines the circumstances under which an entity should recognize such events or
transactions and the related disclosures of such events or transactions that occur after the
balance sheet date. FASB ASC 855 is effective for our interim or annual financial periods ending
after June 15, 2009.
In April 2009, the FASB issued ASC 825-10-65, Interim Disclosures about Fair Value of
Financial Instruments, which expands the fair value disclosures for all financial instruments
within the scope of FASB ASC 825-10-50 to interim reporting periods. We have adopted FASB ASC
825-10-65, and it is effective for interim reporting periods ending after June 15, 2009. ASC
825-10-65 does not have an impact on our financial position or results of operations as it focuses
on additional disclosures. This disclosure is presented in Note 4 Member Loans Held for
Investment.
In April 2009, the FASB issued ASC 820-10-65-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly. FASB ASC 820-10-65-4 is an amendment of FASB ASC 820-10, Fair
Value Measurements. FASB ASC 820-10-65-4 applies to all assets and liabilities and provides
guidance on measuring fair value when the volume and level of activity has significantly decreased
and guidance on identifying transactions that are not orderly. FASB ASC 820-10-65-4 requires
interim and annual disclosures of the inputs and valuation techniques used to measure fair value
and a discussion of changes in valuation techniques and related inputs, if any, which occurred
during the period. We have adopted FASB ASC 820-10-65-4, which is effective for interim and annual
reporting periods ending after June 15, 2009. ASC 820-10-65-4 does not have a material impact on
our financial position or results of operations.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Fair Value
Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value, which updates FASB
ASC 820-10. The update provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following techniques:
| A valuation technique that uses a) the quoted price of an identical liability when traded
as an asset, or b) quoted prices for similar liabilities or similar liabilities when traded as
assets. |
| Another valuation technique that is consistent with the principles of FASB ASC 820,
examples include an income approach, such as a present value technique, or a market approach,
such as a technique that is based on the amount at measurement date that the reporting entity
would pay to transfer the identical liability or would receive to enter into the identical
liability. |
This standard is effective for financial statements issued for interim and annual periods beginning
after August 2009. We adopted ASU 2009-05 during the quarter ending December 31, 2009. The
adoption did not have a material impact on our consolidated financial statements.
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. The Company is currently evaluating the
impact of adopting this standard on its financial position and results of operations.
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.
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In January 2008, as detailed in Note 7 Convertible Notes Payable, we issued two
subordinated convertible promissory notes totaling $1,000,000. Additionally, in connection with the
issuance of these subordinated convertible promissory notes, we issued
warrants to purchase 234,742 shares of Series A convertible preferred stock, and we recorded a
beneficial conversion feature of $178,755 of which a total of $0 and $156,410 was amortized to
interest expense during the three and nine months ended December 31, 2008, respectively. In
September 2008, these notes were converted into 990,212 shares of our Series A preferred stock.
Because our convertible preferred stock and the subordinated convertible promissory notes on
an as-converted basis are deemed to be anti-dilutive, and were therefore excluded from the
computation of basic earnings per share, we have also decreased the net loss attributable to common
stockholders by the value of our amortized beneficial conversion feature.
The following table details the computation of the net loss per share (unaudited):
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net loss |
$ | (2,124,712 | ) | $ | (2,552,565 | ) | $ | (7,798,794 | ) | $ | (9,612,908 | ) | ||||
Add: amortization of
beneficial conversion
feature on convertible
preferred stock |
| | | 156,410 | ||||||||||||
Net loss attributable to
common stockholders |
$ | (2,124,712 | ) | $ | (2,552,565 | ) | $ | (7,798,794 | ) | $ | (9,456,498 | ) | ||||
Weighted-average common
shares outstanding, basic
and diluted |
8,419,446 | 8,190,000 | 8,297,515 | 8,190,000 | ||||||||||||
Net loss per common share: |
||||||||||||||||
Basic and diluted |
$ | (0.25 | ) | $ | (0.31 | ) | $ | (0.94 | ) | $ | (1.15 | ) |
Due to the losses attributable to common stockholders 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.
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
(Unaudited) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Excluded Securities: |
||||||||||||||||
Weighted-average Series A convertible
preferred stock |
15,740,285 | 14,779,988 | 15,740,285 | 12,010,700 | ||||||||||||
Weighted-average Series B convertible
preferred stock |
16,036,346 | | 16,036,346 | | ||||||||||||
Weighted-average restricted stock
options
issued to employees |
2,626,118 | 2,042,175 | 2,687,619 | 1,715,068 | ||||||||||||
Weighted-average warrants and
contingent shares outstanding |
1,818,637 | 1,502,484 | 1,852,197 | 1,356,158 | ||||||||||||
Total common stock equivalents excluded
from diluted net loss per share |
36,221,386 | 18,324,647 | 36,316,447 | 15,081,926 | ||||||||||||
4. Member Loans Held for Investment
Member loans funded by us and held for investment are as follows:
As of December 31, | As of March 31, | |||||||
2009 | 2009 | |||||||
(unaudited) | ||||||||
Unsecured member loans, net of chargeoffs |
$ | 9,886,044 | $ | 10,927,941 | ||||
Deferred origination costs/(revenue), net |
63,421 | 101,464 | ||||||
9,949,464 | 11,029,205 | |||||||
Allowance for loan losses |
(881,607 | ) | (1,110,726 | ) | ||||
Member loans held for investment, net |
$ | 9,067,857 | $ | 9,918,749 | ||||
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We provide an allowance for loan losses for member loans funded by us in accordance with FASB
ASC 310-10-35 and FASB ASC 450. The allowance for loan losses is a valuation allowance established
to provide for estimated credit losses in the portfolio of member loans held for investment at the
balance sheet date. As of December 31, 2009, we had fully reserved for our portion of 18 member
loans with an aggregate principal balance of $70,718.
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):
Balance at March 31, 2009 |
$ | 1,110,726 | ||
Chargeoffs |
(228,876 | ) | ||
Provision for loan losses |
463,676 | |||
Balance at June 30, 2009 |
1,345,526 | |||
Chargeoffs |
(280,566 | ) | ||
Provision for loan losses |
530,828 | |||
Balance at Sept 30, 2009 |
1,595,789 | |||
Chargeoffs |
(890,558 | ) | ||
Provision for loan losses |
176,376 | |||
Balance at Dec 31, 2009 |
$ | 881,607 | ||
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.
Of the $5,116,625 of member loans held for investment that we originated during the nine
months ended December 31, 2009, we reclassified $564,080 to CM Loans held at fair value upon the
sale to investor members of a like amount of Notes to which those member loans corresponded. The
Notes were sold for an amount equal to the par value of the corresponding member loans, and
therefore no gain or loss was recorded on the sale of the Notes or transfer of the member loans
held for investment to CM Loans held at fair value.
5. CM Loans and Notes Held for Investment at Fair Value
At December 31, 2009, 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 | |||||||||||||
Assets |
||||||||||||||||
CM Loans |
| | $ | 39,729,200 | $ | 39,729,200 | ||||||||||
Liabilities |
||||||||||||||||
Notes |
| | $ | 39,718,345 | $ | 39,718,345 |
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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 December 31, 2009 (unaudited):
CM Loans | Notes | |||||||
Fair value at March 31, 2009 |
$ | 8,239,909 | $ | 8,238,597 | ||||
Originations |
6,119,200 | 6,119,200 | ||||||
Principal repayments |
(904,606 | ) | (906,116 | ) | ||||
Outstanding principal |
13,454,503 | 13,451,681 | ||||||
Realized and unrealized gains/(losses) included in earnings |
(255,268 | ) | (255,191 | ) | ||||
Fair value at June 30, 2009 |
13,199,235 | 13,196,490 | ||||||
Originations |
12,088,125 | 12,652,205 | ||||||
Reclassification from member loans held for investment |
564,080 | | ||||||
Principal repayments |
(1,536,522 | ) | (1,538,503 | ) | ||||
Outstanding principal |
24,314,918 | 24,310,192 | ||||||
Realized and unrealized gains/(losses) included in earnings |
(755,384 | ) | (755,222 | ) | ||||
Fair value at September 30, 2009 |
23,559,534 | 23,554,970 | ||||||
Originations |
20,252,700 | 20,252,700 | ||||||
Principal repayments |
(2,969,618 | ) | (2,979,129 | ) | ||||
Outstanding principal |
40,842,616 | 40,828,541 | ||||||
Realized and unrealized gains/(losses) included in earnings |
(1,113,416 | ) | (1,110,196 | ) | ||||
Fair value at December 30, 2009 |
$ | 39,729,200 | $ | 39,718,345 | ||||
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 December 31, 2009.
At December 31, 2009, we had twelve CM Loans representing $82,210 of outstanding CM Loan
principal and $48,180 of CM Loan fair value which were 90 days or more delinquent, and $48,166 of
Notes principal fair value which had not been paid for 90 days or more. At December 31, 2009, we
had thirty-five CM Loans representing $192,026 of outstanding CM Loan principal and $73,481 of CM
Loan fair value which were on non-accrual status, and $73,445 of Notes principal fair value which
were on non-accrual status.
6. Loans Payable
Loans payable consists of the following:
As of December 31, | As of March 31, | |||||||
2009 | 2009 | |||||||
(unaudited) | ||||||||
Growth capital term loan |
$ | 3,407,676 | $ | 2,704,571 | ||||
Unamortized discount on growth capital term loan |
(106,788 | ) | (61,376 | ) | ||||
Financing term loan |
4,176,220 | 3,697,067 | ||||||
Unamortized discount on financing term loan |
(181,461 | ) | (179,061 | ) | ||||
Notes payable to private placement investors |
2,778,050 | 3,726,731 | ||||||
Unamortized discount on notes payable |
(157,811 | ) | (240,128 | ) | ||||
Total loans payable |
$ | 9,915,886 | $ | 9,647,804 | ||||
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At December 31, 2009, future maturities due on all loans payable were as follows (unaudited):
Year ending March 31, |
||||
2010 |
$ | 1,483,613 | ||
2011 |
5,907,151 | |||
2012 |
2,601,694 | |||
2013 |
369,488 | |||
10,361,946 | ||||
Less amount representing debt discount |
(446,060 | ) | ||
Total loans payable |
$ | 9,915,886 | ||
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.
In connection with this loan agreement, we issued a fully exercisable warrant to purchase
98,592 shares of Series A convertible preferred stock at an exercise price of $1.065 per share, for
which we recorded a debt discount of $84,263. 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. At December 31, 2009, no amounts
were available for future financing under this agreement.
On October 7, 2008, we entered into amendments to our growth capital term loan and financing
term loan. These amendments became effective as of October 10, 2008, whereby the lenders waived
certain or our past covenant violations and consented to our new operating structure. In connection
with the amendments to one of these facilities, we issued the growth capital term loan lender a
fully exercisable warrant to purchase 37,558 shares of Series A convertible preferred stock at an
exercise price of $1.065 per share and recorded an debt discount of $29,782.
In December 2008, we drew down the remaining $1,000,000 of availability under this line and
issued a fully exercisable warrant to purchase 28,170 shares of Series A convertible preferred
stock at an exercise price of $1.065 per share, and recorded a debt discount of $21,651.
Amortization of the debt discounts recorded for this loan, as amended, were $16,529 and $7,623
in the three months ended December 31, 2009 and 2008, respectively, and $47,018 and $21,667,
respectively, for the nine months ended December 31, 2009 and 2008, and were recorded as interest
expense.
Financing term loan
In February 2008, we entered into a loan and security agreement with a lender that provides
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.
In February and March 2008, we received advances totaling $3,600,000. During the year ended
March 31, 2009, we drew down the remaining $1,400,000 available under the financing term loan. In
connection with this loan agreement, from inception through December 31, 2009, 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. At December
31, 2009, the financing term loan was fully drawn.
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Amortization of the debt discounts recorded for this loan were $30,866 and $21,881 in the
three months ended December 31, 2009 and 2008, respectively, and $90,031 and $63,076, respectively,
for the nine months ended December 31, 2009 and 2008, and were recorded as interest expense.
May 2009 term loan
On May 18, 2009, we entered into another secured loan facility, or 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. In connection with this loan facility, we issued each lender a fully exercisable
warrant to purchase 187,090 shares of Series B convertible preferred stock with an exercise price
of $0.7483 per share, (see Note 9 Preferred Stock). We recorded a debt discount related
to the issuance of these warrants of $184,860. Amortization of the debt discount related to this
warrant is included in interest expense for the growth capital term loan and financing term loan,
as further explained immediately below.
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 December 31, 2009, we had fully drawn down the entire $13,000,000 of combined availability
under the Newly Restated Agreements.
Notes payable to private placement investors
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 $24,390 for the three months ended December 31, 2009 and 2008,
respectively. During the nine months ended December 31, 2009 and 2008, we recorded interest
expense of $82,318 and $61,703, respectively, related to amortization of debt discounts.
7. Convertible Notes Payable
In January 2008, we issued subordinated convertible promissory notes, or the convertible notes, to
two venture capital stockholders with principal amounts of $500,000 each, under the terms of a note
and warrant purchase agreement. The convertible notes bore interest at the rate of 8% per annum,
and principal and interest are due in full on January 24, 2010. In connection with the issuance of
the convertible notes, we issued warrants to purchase an aggregate of 234,742 shares of Series A
convertible preferred stock to the convertible notes holders and recorded a debt discount of
$178,755. This debt discount was amortized into interest expense over the life of the convertible
notes. At December 31, 2009, the unamortized balance of the debt discount was $0, and both the
related interest expense recognized during the three months ended December 31, 2009 and 2008 was
$0. During the nine months ended December 31, 2009 and 2008, the related interest expense was $0
and $156,410, respectively.
On September 29, 2008, the lenders converted the convertible notes, which had an outstanding
principal balance of $1,000,000 and accrued interest of $54,575 into shares of Series A convertible
preferred stock at a purchase price of $1.065 per share. We issued
495,106 shares of Series A convertible preferred stock for principal and interest to each
venture capital stockholder for an aggregate total of 990,212 shares.
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In accordance with FASB ASC 470-20 guidance on accounting for debt with conversion features
and other options, the intrinsic value of the beneficial conversion feature (BCF) was determined
to be equal to the fair value of the warrants as estimated above. Accordingly, we recorded a
beneficial conversion feature of $178,755. This amount was amortized into interest expense over
the life of the convertible notes. At December 31, 2009, the unamortized balance of the BCF was
$0, and both the related interest expense recognized during the three months ended December 31,
2009 and 2008 was $0. During the nine months ended December 31, 2009 and 2008, the related
interest expense was $0 and $156,410, respectively.
8. Related Party Transactions
Of the notes payable to private placement investors described in Note 6 Loans
Payable, $625,000 of original principal was invested by related parties on terms identical to
those of given to the other private placement note investors.
9. Preferred Stock
Convertible preferred stock
In March 2009, we filed a Certificate of Amendment to our 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 a Certificate of Amendment to our 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.
A complete description of the rights, preferences, privileges and restrictions of our common
stock and the Series A and Series B convertible preferred stock is included in the Amended and
Restated Certificate of Incorporation, as amended, which was attached as an exhibit to our Annual
Report on Form 10-K for the fiscal year ended March 31, 2009. There are significant restrictions on
the obligation or right to redeem the outstanding convertible preferred stock. 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 and Series B convertible preferred stock are as follows:
Conversion Each share of Series A and Series B 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). The Series A and Series B 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 $20,000,000 or (ii) the consent of the
holders of a 55% majority of outstanding shares of Series A and Series B convertible preferred
stock, voting together as a single class, on an as-converted to common stock basis.
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 Series A and Series B 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 the original issue
price of $1.065 for the Series A convertible preferred stock plus all declared and unpaid dividends
(the Series A Preferred Liquidation Preference) and an amount per share of Series B convertible
preferred stock equal to the original issue price of $0.7483 for the Series B convertible preferred
stock plus all declared and unpaid dividends (the Series B Preferred Liquidation Preference).
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 Series A convertible preferred stock and Series B
convertible preferred stock such that an equal amount of such assets shall be distributed to the
holders of Series A convertible preferred stock, in the aggregate, and the holders of Series B
convertible preferred stock, in the aggregate (such assets being distributed ratably among the
holders of each respective series of convertible preferred stock). Furthermore, if the holders of
Series B convertible preferred stock have received their full Series B Preferred Liquidation
Preference but the holders of Series A convertible preferred stock have not received their full
Series A Preferred Liquidation Preference, any remaining assets of ours legally available for
distribution shall be distributed ratably to the holders of Series A convertible preferred stock,
prior to any further payment to the holders of shares of Series B convertible preferred stock or
payment to
the holders of common stock, until such holders have received their full Series A Preferred
Liquidation Preference. Any excess distributions, after payment in full of the liquidation
preferences to the convertible preferred stockholders, are then allocated to the holders of common
and convertible preferred stockholders, on an as-if-converted to common stock basis.
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Dividends If and when declared by the Board of Directors, the holders of Series A and Series
B 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 and Series B 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 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.
Preferred stock warrants
In May 2009, in connection with the May 2009 term loan (See Note 6 Loans Payable, May 2009
term loan), we issued fully exercisable warrants to purchase 374,180 shares of Series B convertible
preferred stock at $0.7483 per share. The warrants may be exercised at any time on or before May
2019. The fair value of these warrants was estimated to be $184,860 using the Black-Scholes option
pricing model with the following assumptions: a volatility of 57.4%, a contractual life of
10 years, no dividend yield and a risk-free interest rate of 3.22%. These values were capitalized
as debt discounts and are being amortized to interest expense over the life of the term loans.
10. Stockholders Deficit
Common stock
As of December 31, 2009, 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 | |||
Options to purchase common stock |
2,979,750 | |||
Options available for future issuance |
3,474,989 | |||
Convertible preferred Series A stock warrants |
1,265,990 | |||
Convertible preferred Series B stock warrants |
374,180 | |||
Common stock warrants |
104,000 | |||
Total common stock reserved for future issuance |
39,975,540 | |||
During the three months ended December 31, 2009, we issued 16,263 shares of common stock in
exchange for proceeds of $4,391 upon the exercise of employee stock options and 221,000 shares upon
the exercise of warrants for $0.
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 6,548,000
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 on the first anniversary date
of employment, regardless of the vested status of granted options. If an employees 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 December 31,
2009, none of the option holders have chosen to early exercise.
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We used the Black-Scholes option pricing model for estimating the fair value of stock options
granted with the following assumptions for the three and nine months ended December 31, 2009 and
2008 (unaudited):
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Expected dividend yield |
0 | % | | 0 | % | 0 | % | |||||||||
Expected volatility |
59.4% 61.5 | % | | 53.8% 61.5 | % | 63.6 | % | |||||||||
Risk-free interest rates |
2.72% 3.60 | % | | 2.72% 3.60 | % | 3.38 | % | |||||||||
Expected life |
6.00 10.00 years | | 5.92 10.00 years | 6.11 years |
We have elected to use the calculated-value method under FASB ASC 718 to calculate the
volatility assumption for fiscal 2009 and 2008. 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 for balances
at March 31, 2009):
Options Exercisable and Not Subject to | ||||||||||||||||
Options Outstanding | Repurchase | |||||||||||||||
Weighted Average | ||||||||||||||||
Shares Available | Exercise Price per | |||||||||||||||
for Grant | Number of Shares | Number of Shares | Share | |||||||||||||
Balances at March 31, 2009 |
4,638,765 | 1,878,550 | 756,312 | $ | 0.27 | |||||||||||
Options Granted |
(2,195,978 | ) | 2,195,978 | | 0.23 | |||||||||||
Options Exercised |
| (62,576 | ) | | 0.27 | |||||||||||
Options Cancelled |
1,032,202 | (1,032,202 | ) | | 0.24 | |||||||||||
Balances at December 31,
2009 |
3,474,989 | 2,979,750 | 947,830 | $ | 0.25 | |||||||||||
A summary by exercise price of outstanding options and options exercisable and not subject to
repurchase at December 31, 2009, is as follows (unaudited):
Options Exercisable and | ||||||||||||||||||||
Options Outstanding | Not Subject to Repurchase | |||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||
Average | Average | Average | ||||||||||||||||||
Exercise | Remaining | Exercise | ||||||||||||||||||
Number of | Price per | Contractual | Number of | Price per | ||||||||||||||||
Shares | Share | Life (Years) | Shares | Share | ||||||||||||||||
Exercise price $0.23 |
1,464,500 | $ | 0.23 | 9.43 | 105,250 | $ | 0.23 | |||||||||||||
Exercise price $0.27 |
1,515,250 | $ | 0.27 | 7.89 | 842,580 | $ | 0.27 |
The following table presents details of stock-based compensation expenses by functional line item
for the periods indicated (unaudited):
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Sales, marketing and customer service |
$ | 9,536 | $ | 2,710 | $ | 29,896 | $ | 7,383 | ||||||||
Engineering |
15,173 | 8,686 | 43,093 | 24,042 | ||||||||||||
General and administrative |
13,715 | 8,926 | 40,671 | 21,929 | ||||||||||||
38,424 | 20,322 | 113,660 | 53,354 | |||||||||||||
Less stock-based compensation expense for non-employees |
(1,416 | ) | (1,416 | ) | (4,247 | ) | (3,163 | ) | ||||||||
Total employee stock-based compensation expense |
$ | 37,008 | $ | 18,906 | $ | 109,413 | $ | 50,191 | ||||||||
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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 nine months ended December 31, 2009 and 2008, we granted stock options to purchase
2,195,978 and 964,800 shares, respectively, of common stock with a weighted average grant date fair
value of $0.13 and $0.17, respectively, per share. We granted stock options to purchase 571,500
shares of common stock in the three months ended December 31, 2009 with a weighted average grant
date fair value of $0.14 per share. As of December 31, 2009, total unrecognized compensation cost
was $241,417. These costs are expected to be recognized through October 2013.
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 December 31, 2009, 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 December 31, 2009, 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, 2009.
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 are still 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, 2009.
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.
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The following table summarizes net interest income (expense) as follows (unaudited):
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest income: |
||||||||||||||||
Member loans held for investment |
$ | 329,423 | $ | 325,787 | $ | 1,016,809 | $ | 763,107 | ||||||||
CM Loans held for investment at fair value |
||||||||||||||||
Interest and fees earned on CM Loans |
1,582,662 | 71,809 | 2,807,892 | 71,809 | ||||||||||||
Credit risk related adjustment (interest expense) |
(1,113,130 | ) | (129,285 | ) | (2,123,782 | ) | (129,285 | ) | ||||||||
Cash and cash equivalents |
2,882 | 13,446 | 23,951 | 13,446 | ||||||||||||
Total interest income |
$ | 801,837 | $ | 281,757 | $ | 1,724,870 | $ | 719,077 | ||||||||
Interest expense: |
||||||||||||||||
Notes held for investment at fair value |
||||||||||||||||
Interest and fees expensed on Notes |
$ | 839,090 | $ | 15,139 | $ | 1,535,422 | $ | 15,139 | ||||||||
Credit risk related adjustment (interest income) |
(1,112,868 | ) | (129,260 | ) | (2,123,280 | ) | (129,260 | ) | ||||||||
Loans payable |
294,324 | 235,515 | 875,236 | 513,411 | ||||||||||||
Convertible notes payable |
| | | 39,890 | ||||||||||||
Amortization of debt discount |
74,834 | 53,895 | 219,366 | 459,267 | ||||||||||||
Amortization of BCF |
| | | 156,410 | ||||||||||||
Total interest expense |
$ | 95,380 | $ | 175,289 | $ | 506,744 | $ | 1,054,857 | ||||||||
A reconciliation of the table above to our Condensed Statements of Operations is as follows
(unaudited):
Per table above: |
||||||||||||||||
Total interest income |
$ | 801,837 | $ | 281,757 | $ | 1,724,870 | $ | 719,077 | ||||||||
Total interest expense |
(95,380 | ) | (175,289 | ) | (506,744 | ) | (1,054,857 | ) | ||||||||
$ | 706,457 | $ | 106,468 | $ | 1,218,126 | $ | (335,780 | ) | ||||||||
Per Condensed Statements of Operations: |
||||||||||||||||
Net interest income (loss), loans held for investment |
$ | (36,853 | ) | $ | 49,823 | $ | (53,842 | ) | $ | (364,512 | ) | |||||
Net interest income (loss), CM Loans and Notes held
for investment at fair value |
743,310 | 56,645 | 1,271,968 | 56,645 | ||||||||||||
$ | 706,457 | $ | 106,468 | $ | 1,218,126 | $ | (307,867 | ) | ||||||||
14. Commitments and Contingencies
Operating leases
We lease our principal administrative and service facilities, as well as office equipment,
under a two year operating lease. Rent expense was $36,275 and $36,500 for the three months ended
December 31, 2009 and 2008, respectively, and $109,977 and $110,900 for the nine months ended
December 31, 2009 and 2008, respectively.
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Securities law compliance
From May 2007 through April 2008, we sold approximately $7.4 million of member loans to
investor members who were unaffiliated with us through our platform whereby we assigned promissory
notes directly to investor members. We did not register the
offer and sale of the promissory notes offered and sold through our platform under the
Securities Act of 1933 or under the registration or qualification provisions of the state
securities laws. Our management believes that the question of whether or not the operation of our
platform involved an offer or sale of a security involved a complicated factual and legal
analysis that was uncertain. If the sales of promissory notes offered through our platform were
viewed as a securities offering, we would have failed to comply with the registration and
qualification requirements of federal and state law, and investor members who hold these promissory
notes may be entitled to rescission of unpaid principal, plus statutory interest. Generally, the
federal statute of limitations for noncompliance with the requirement to register securities under
the Securities Act of 1933 is one year from the violation. The statute of limitations periods under
state securities laws for sales of unregistered securities may extend for a longer period of time,
and certain state securities laws empower state officials to seek restitution or rescission
remedies for purchasers of unregistered securities. We have received inquiries from a number of
states in respect of these prior sales of loans; neither the SEC nor any state, however, has taken
or threatened administrative action or litigation over such loan sales.
Our decision to restructure our operations and cease sales of promissory notes offered through
the platform effective April 7, 2008 limited this contingent liability so that it only relates to
the period from the launch of our platform in May 2007 until April 7, 2008, the termination of
sales under our prior operating structure.
We have not recorded an accrued loss contingency under FASB ASC 450 in connection with this
contingent liability. Accounting for loss contingencies pursuant to FASB ASC 450 involves the
existence of a condition, situation or set of circumstances involving uncertainty as to possible
loss that will ultimately be resolved when one or more future event(s) occur or fail to occur.
Additionally, accounting for a loss contingency requires management to assess each event as
probable, reasonably possible or remote. Probable is defined as the future event or events are
likely to occur. Reasonably possible is defined as the chance of the future event or events
occurring is more than remote but less than probable, while remote is defined as the chance of the
future event or events occurring is slight. An estimated loss in connection with a loss contingency
shall be recorded by a charge to current operations if both of the following conditions are met:
first, the amount can be reasonably estimated; and second, the information available prior to
issuance of the financial statements indicates that it is probable that a liability has been
incurred at the date of the financial statements. We have assessed the contingent liability related
to prior sales of member loans on the platform in accordance with FASB ASC 450 and have determined
that the occurrence of the contingency is reasonably possible. In accordance with FASB ASC 450, we
have estimated the range of loss as of December 31, 2009 as between $0 and $2.54 million, which is,
as of December 31, 2009, the aggregate outstanding principal balance of member loans sold to
persons unaffiliated with us from inception through April 7, 2008. In making this assessment, we
considered our view, described above, that analyzing whether or not the operation of our platform
involved an offer or sale of a security involved a complicated factual and legal analysis that
was uncertain. In addition, we considered our belief that investor members have received what they
expected to receive in the transactions under our prior operating structure. Generally, the
performance of the outstanding member loans had, in our view, delivered to investor members the
benefits they expected to receive in using our platform.
Due to the legal uncertainty regarding the sales of promissory notes offered through our
platform under our prior operating structure as described above, we decided to restructure our
operations to resolve such uncertainty. We began our implementation of this decision on April 7,
2008, when we ceased offering investor members the opportunity to make purchases on our platform,
ceased accepting new investor member registrations and ceased allowing new funding commitments from
existing investor members. We then filed the registration statement (the Registration Statement)
with the SEC to register the issuance and sale of Notes under our new operating structure. We
resumed accepting new investor members and allowing transactions with investor members starting
October 13, 2008, after the date the Registration Statement became effective.
The change in the operation of our platform, as well as our adoption of new accounting
pronouncements, had a significant impact on our financial statements and results of operations for
periods following the effective date of the Registration Statement. Because the Notes are a novel
financing structure, we will continue to evaluate the impact the changes this shift in our
operations will have on our financial condition, results of operations and cash flows.
We adopted the provisions of FASB ASC 820 and FASB ASC 825. FASB ASC 825 permits companies to
choose to measure certain financial instruments and certain other items at fair value. FASB ASC 825
requires that 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 to the CM Loans and Notes issued
under our prospectus, but did not apply the provisions of FASB ASC 825 to prior member loans which
were sold to our investor members.
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15. Subsequent Events
Subsequent to December 31, 2009 and through the date immediately prior to the release of these
financial statement, we increased by $100,000 the amount of restricted cash that supports certain
state surety bonds required to allow us to offer loans in certain states.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, this quarterly report contains forward-looking statements
that involve risks and uncertainties that could cause actual results to differ materially from
those projected. Factors that might cause or contribute to such differences include, but are not
limited to, those discussed in the following Managements Discussion and Analysis of Financial
Condition and Results of Operations as well as in Part II Item 1A Risk Factors. Actual results
could differ materially. Important factors that could cause actual results to differ materially
include, but are not limited to; the level of demand for our products and services; the intensity
of competition; our ability to effectively expand and improve internal infrastructure; and adverse
financial, customer and employee consequences that might result to us if litigation were to be
initiated and resolved in an adverse manner to us. For a more detailed discussion of the risks
relating to our business, readers should refer to Part II Item 1A found later in this report
entitled Risk Factors, as well as the Risk Factors section of the prospectus for the Notes
dated July 30, 2009 and filed with the SEC, as may be amended or supplemented from time to time.
Readers are cautioned not to place undue reliance on the forward-looking statements, including
statements regarding our expectations, beliefs, intentions or strategies regarding the future,
which speak only as of the date of this quarterly report. We assume no obligation to update these
forward-looking statements.
Overview
We are an internet-based social lending platform. We allow qualified borrower members to
obtain loans (which we refer to as member loans) with interest rates that they find attractive.
Since October 13, 2008, investors have had the opportunity to purchase Member Payment Dependent
Notes (which we refer to as the Notes) issued by us, with each series of Notes corresponding to
an individual member loan originated on our platform (which we refer to as CM Loans). The Notes
are dependent for payment on CM Loans and offer interest rates and credit characteristics that the
investors find attractive. From the launch of our platform in May 2007 until April 7, 2008, we did
not offer Notes on our platform. Instead, our platform allowed investor members to purchase
assignments of unsecured member loans directly. Since November 2007, we have also funded member
loans ourselves, which we refer to as member loans held for investment based on our intent and
ability to hold the loans for the foreseeable future or to maturity.
All member loans are unsecured obligations of individual borrower members with fixed interest
rates and three-year maturities. The member loans are posted on our website, funded by WebBank, an
FDIC-insured, state-chartered industrial bank organized under the laws of the state of Utah, at
closing and immediately assigned to us upon closing. As a part of operating our lending platform,
we verify the identity of members, obtain borrower members credit characteristics from consumer
reporting agencies such as TransUnion, Experian or Equifax and screen borrower members for
eligibility to participate in the platform and facilitate the posting of member loans. We also
provide servicing for the member loans on an ongoing basis.
We were incorporated in Delaware in October 2006, and in May 2007, began operations as an
application on Facebook.com. In August 2007, we conducted a venture capital financing round and
expanded our operations with the launch of our public website, www.lendingclub.com. As of December
31, 2009, the lending platform has facilitated approximately 8,277 member loans since our launch in
May 2007.
We have been operating since December 2007 pursuant to an agreement with WebBank. WebBank
serves as the lender for all member loans originated through our platform. Our agreement with
WebBank has enabled us to make our platform available to borrower members on a uniform basis
nationwide, except that as of January 31, 2010, we do not currently offer member loans in Idaho,
Iowa, Indiana, Kansas, Maine, Mississippi, Nebraska, North Carolina, North Dakota and Tennessee. We
pay WebBank a monthly service fee based on the amount of loan proceeds disbursed by WebBank in each
month, subject to a minimum monthly fee.
We have a limited operating history and have incurred net losses since our inception. Our net
loss was $2,124,712 and $7,798,794, respectively, for the three and nine months ended December 31,
2009. We earn revenues from processing fees charged to members, primarily a borrower member
origination fee and an investor service charge. We also earn interest income on member loans that
we fund ourselves. At this stage of our development, we have funded our operations primarily with
proceeds from our venture capital financings, our credit facilities and debt and equity issuances,
which are described below under Liquidity and Capital Resources. We also rely on our credit
facilities and debt issuances to borrow funds, which we have used to fund member loans ourselves.
Over time, we expect that the number of borrower members and investors and the volume of member
loans originated through our platform will increase, and that we will generate increased revenue
from borrower origination fees and investor service charges. Our decision to temporarily stop
accepting investor member commitments, effective from April 7, 2008 until October 13, 2008, slowed
the ramp up of our operations and expended liquidity as we funded member loans ourselves during
this period.
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Our operating plan allows for a continuation of the current strategy of raising capital
through debt and equity financings to finance our operations until we reach profitability and
become cash-flow positive, which we do not expect to occur within the next twelve months. Our
operating plan calls for significant investments in website development, security, loan scoring,
loan processing and marketing before we reach profitability. During the year ended March 31, 2009,
we raised $5,386,893, net of issuance costs, from the sale of 5,112,672 shares of our Series A
convertible preferred stock, $1,054,575 from the conversion of principal and interest on our
convertible notes into 990,212 shares of our Series A convertible preferred stock, and $11,897,738,
net of issuance costs, from the sale of 16,036,346 shares of our Series B convertible preferred
stock. During the year ended March 31, 2008, we raised $9,925,001, net of issuance costs, from the
sale of 9,445,401 shares of our Series A convertible preferred stock and $1,499,265 from the sale
of 2,216,500 shares of our common stock. From October 2007 through March 31, 2009, we also raised
$13,707,964 through the issuance of notes payable in connection with our growth capital term loan,
financing term loan and private placement notes. During the nine months ended December 31, 2009, we
raised $4,200,000 through the issuance of notes payable in connection with our May 2009 term loan
and our private placement notes.
Recently, our platform has become
increasingly demand, or borrower, constrained which is in contrast to the
supply, or investor, constraints we had previously experienced. We are
uncertain if this trend of supply constraints will continue or if the platform
will revert to being demand constrained.
We believe that this shift could be due
to the following three factors:
| our longer track record and current 9% net average annual return that has prompted investors to invest larger amounts and maintain their capital on the platform longer |
| investors are repeat customers while borrowers generally take one loan for a three year term and we do limited repeat business with borrowers given our credit criteria |
| on the macro-economic side, investors appear to be less risk-averse than in prior years. |
In spite of this shift, we do not plan
to revise our credit criteria, which must be approved by WebBank, in order to
attract additional borrowers.
Significant Accounting Policies and Estimates
The preparation of our financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires us to make judgments, assumptions, and
estimates that affect the amounts reported in our financial statements and accompanying notes. We
believe that the judgments, assumptions and estimates upon which we rely are reasonable based upon
information available to us at the time that these judgments, assumptions and estimates are made.
However, any differences between these judgments, assumptions and estimates and actual results
could have a material impact on our statement of operations and financial condition. The accounting
policies that reflect our most significant judgments, assumptions and estimates and which we
believe are critical in understanding and evaluating our reported financial results include: (1)
revenue recognition; (2) fair value; (3) allowance for loan losses; and (4) share-based
compensation. Other than the changes described in Note 2 Summary of Significant Accounting
Policies, Revenue recognition and Note 2 Summary of Significant Accounting Policies, CM
Loans and Notes held for investment at fair value of the Notes to Financial Statements above,
there have been no material changes to any of our significant accounting policies and critical
accounting estimates since March 31, 2009.
(Remainder of page intentionally left blank)
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Table of Contents
Results of Operations
Revenues
Our business model consists primarily of charging transaction fees to both borrower members
and investor members. The borrower member pays a fee to us for providing the services of arranging
the member loan and the investor member pays a fee to us for managing the payments on the member
loans and maintaining account portfolios. We also generate revenue from interest earned on our
member loans held for investment and our CM Loans and recognize interest expense on our Notes.
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest income: |
||||||||||||||||
Member loans held for investment |
$ | 329,423 | $ | 325,787 | $ | 1,016,809 | $ | 763,107 | ||||||||
CM Loans held for investment at fair value |
||||||||||||||||
Interest and fees earned on CM Loans |
1,582,662 | 71,809 | 2,807,892 | 71,809 | ||||||||||||
Credit risk related adjustment (interest expense) |
(1,113,130 | ) | (129,285 | ) | (2,123,782 | ) | (129,285 | ) | ||||||||
Cash and cash equivalents |
2,882 | 13,446 | 23,951 | 13,446 | ||||||||||||
Total interest income |
$ | 801,837 | $ | 281,757 | $ | 1,724,870 | $ | 719,077 | ||||||||
Interest expense: |
||||||||||||||||
Notes held for investment at fair value |
||||||||||||||||
Interest and fees expensed on Notes |
$ | 839,090 | $ | 15,139 | $ | 1,535,422 | $ | 15,139 | ||||||||
Credit risk related adjustment (interest income) |
(1,112,868 | ) | (129,260 | ) | (2,123,280 | ) | (129,260 | ) | ||||||||
Loans payable |
294,324 | 235,515 | 875,236 | 513,411 | ||||||||||||
Convertible notes payable |
| | | 39,890 | ||||||||||||
Amortization of debt discount |
74,834 | 53,895 | 219,366 | 459,267 | ||||||||||||
Amortization of BCF |
| | | 156,410 | ||||||||||||
Total interest expense |
$ | 95,380 | $ | 175,289 | $ | 506,744 | $ | 1,054,857 | ||||||||
Interest Income
The following table presents our quarterly interest income sources in both absolute dollars
and as a percentage of interest income (in thousands):
For the Quarter Ended | ||||||||||||||||||||||||||||||||
Interest | March 31, | June 30, | September 30, | December 31, | ||||||||||||||||||||||||||||
Income | 2008 | 2008 | 2008 | 2008 | ||||||||||||||||||||||||||||
Source | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
Borrower origination fees earned on
third party purchased member loans |
64 | 30 | 20 | 9 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Borrower origination fees and interest
earned on member loans held for
investment |
109 | 50 | 177 | 82 | 240 | 96 | 326 | 116 | ||||||||||||||||||||||||
Borrower origination fees and interest
earned on CM Loans held for
investment, net of interest expense on
the related Notes |
0 | 0 | 0 | 0 | 0 | 0 | (57 | ) | -20 | |||||||||||||||||||||||
Interest earned on cash and investments |
43 | 20 | 18 | 9 | 10 | 4 | 13 | 5 | ||||||||||||||||||||||||
Total Interest Income |
216 | 100 | 215 | 100 | 250 | 100 | 282 | 100 | ||||||||||||||||||||||||
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For the Quarter Ended | ||||||||||||||||||||||||||||||||
Interest | March 31, | June 30, | September 30, | December 31, | ||||||||||||||||||||||||||||
Income | 2009 | 2009 | 2009 | 2009 | ||||||||||||||||||||||||||||
Source | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
Borrower origination fees earned on
third party purchased member loans |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||
Borrower origination fees and interest
earned on member loans held for
investment |
284 | 62 | 316 | 65 | 371 | 49 | 329 | 31 | ||||||||||||||||||||||||
Borrower origination fees and interest
earned on CM Loans held for
investment, net of interest expense on
the related Notes |
166 | 36 | 155 | 32 | 374 | 50 | 743 | 69 | ||||||||||||||||||||||||
Interest earned on cash and investments |
8 | 2 | 17 | 3 | 4 | 1 | 3 | 0 | ||||||||||||||||||||||||
Total Interest Income |
458 | 100 | 488 | 100 | 749 | 100 | 1,075 | 100 | ||||||||||||||||||||||||
Borrower Origination Fees
Our borrower members pay a one-time fee to us for arranging a member loan. This fee is
determined by the loan grade of the member loan.
Prior to June 17, 2008, our origination fees ranged from 0.75% to 2.00% of the aggregate
principal amount of the member loan, as set forth below:
Loan | ||||||||||||||||||||||||||||
Grade | A | B | C | D | E | F | G | |||||||||||||||||||||
Fee |
0.75 | % | 1.00 | % | 1.50 | % | 2.00 | % | 2.00 | % | 2.00 | % | 2.00 | % |
From June 17, 2008 to November 24, 2008, our origination fees ranged from 0.75% to 3.00% of
the aggregate principal amount of the member loan, as set forth below:
Loan | ||||||||||||||||||||||||||||
Grade | A | B | C | D | E | F | G | |||||||||||||||||||||
Fee |
0.75 | % | 1.50 | % | 2.00 | % | 2.50 | % | 2.75 | % | 3.00 | % | 3.00 | % |
Beginning November 25, 2008, our origination fees increased ranging from 0.75% to 3.50% of the
aggregate principal amount of the member loan, as set forth below:
Loan | ||||||||||||||||||||||||||||
Grade | A | B | C | D | E | F | G | |||||||||||||||||||||
Fee |
0.75 | % | 2.50 | % | 3.00 | % | 3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % |
Beginning July 30, 2009, our origination fees increased ranging from 1.25% to 3.75% of the
aggregate principal amount of the member loan, as set forth below:
Loan | ||||||||||||||||||||||||||||
Grade | A | B | C | D | E | F | G | |||||||||||||||||||||
Fee |
1.25 | % | 3.25 | % | 3.75 | % | 3.75 | % | 3.75 | % | 3.75 | % | 3.75 | % |
Beginning November 5, 2009, our origination fees increased ranging from 1.25% to 4.50% of the
aggregate principal amount of the member loan, as set forth below:
Loan | ||||||||||||||||||||||||||||
Grade | A | B | C | D | E | F | G | |||||||||||||||||||||
Fee |
1.25% - 2.25 | % | 3.75 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
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Beginning January 20, 2010, if the loan is for a small business or for a self-employed
borrower, we began charging an additional 1.5% origination fee, and our origination fees increased
ranging from 2.25% to 4.50% of the aggregate principal amount of the member loan, as set forth
below:
Loan | ||||||||||||||||||||||||||||
Grade | A | B | C | D | E | F | G | |||||||||||||||||||||
Fee |
2.25 | % | 3.75 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
The borrower origination fee is included in the APR calculation provided to the borrower
member and is deducted from the gross loan proceeds prior to disbursement of funds to the borrower
member. We do not receive a borrower origination fee if a member loan request does not close and
fund.
Borrower Origination Fees Earned on Member Loans Held for Investment
We compute borrower origination fees for member loans that we fund ourselves by subtracting
the average costs of originating a member loan from the aggregate fee charged to the borrower
member for the member loan. We initially defer this net amount and subsequently amortize the
balance over the servicing period of the member loan, which is currently 36 months for each funded
member loan.
Interest Earned on Member Loans Held for Investment
Between April 7, 2008 and October 13, 2008, while we sought to register the offering of the
Notes, we funded the platform ourselves and generated interest income through investment in member
loans held for investment. Subsequent to the effectiveness of our Registration Statement, we have
continued to fund some of these member loans. But, as we increase our marketing and awareness
efforts, we expect that the ratio of member loans held for investment to CM Loans that we originate
each quarter will diminish over time.
When payments are received on member loans held for investment, the interest portion paid by
our borrower members and the amortization of the origination fees, net of costs of origination, are
recorded as interest income. Interest rates on these member loans, excluding amortization of net
origination fees, range from 6.00% to 21.21% per annum as of December 31, 2009. During the three
and nine months ended December 31, 2009, we funded $12,100 and $5,116,625, respectively, of member
loans while our investor members funded $20,252,700 and $38,460,026, respectively of member loans.
During the three months ended December 31, 2009 and 2008, we recorded interest income on the
member loans we funded of $329,423 and $325,787, respectively, while during the nine months ended
December 31, 2009 and 2008, we recorded interest income on the member loans we funded of $1,016,809
and $763,107, respectively.
Borrower Origination Fees and Interest Earned on CM Loans Held for Investment Net of Interest
Expense on the Related Notes
Beginning October 13, 2008, we began recording interest income, including borrower origination
fees, from CM Loans and corresponding interest expense from the Notes. Interest income from the CM
Loans includes origination fees on these member loans which are recognized in the period
originated. During the three and nine months ended December 31, 2009, we recorded interest income
from CM Loans of $1,582,662 and $2,807,892, respectively, including $694,243 and $1,184,201,
respectively, of origination fees. Under FASB ASC 825 guidance for regarding fair value option for
accounting for financial assets, for the three and nine months ended December 31, 2009, this
interest income was offset by credit risk related adjustments on CM Loans of $1,113,130 and
$2,123,782, respectively, a non-cash interest expense. Conversely, for the Notes, we recorded
interest expense of $839,090 and $1,535,422, respectively, during the three and nine months ended
December 31, 2009, and offset this interest expense by credit risk related adjustments (non-cash
interest income) on Notes of $1,112,868 and $2,123,280, respectively, during that same period.
Over time, we expect that revenues and expenses related to CM Loans and Notes will increase as we
grow our platform.
Interest Earned on Cash and Investments
Interest income from cash and cash equivalents is recorded as it is earned. For the three and
nine months ended December 31, 2009, we recorded $2,882 and $23,951, respectively, in interest
income earned on cash and cash equivalents. Comparatively, for the three and nine months ended
December 31, 2008, we recorded $13,446 and $13,446, respectively, in interest income earned on cash
and cash equivalents. The differences in interest income are a function of the cash on hand
and the declining interest rate climate during the relevant periods. We do not expect interest
income from cash and cash equivalents to be a significant part of our business model.
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Interest Expense on Notes Payable
Interest expense, other than that described above with regard to CM Loans and Notes, consists
primarily of cash and non-cash interest on notes payable and convertible notes. For the three
months ended December 31, 2009 and 2008, we paid cash interest of $294,324 and $235,515,
respectively, for interest due on our notes payable. For the three months ended December 31, 2009
and 2008, we recorded $74,834 and $53,895, respectively, for non-cash interest expense related to
debt discounts due to warrants on our notes payable.
For the nine months ended December 31, 2009 and 2008, we paid cash interest of $875,236 and
$513,411, respectively, for interest due on our notes payable. For the nine months ended December
31, 2009 and 2008, we recorded $219,366 and $459,267, respectively, for non-cash interest expense
related to debt discounts due to warrants on our notes payable. We also recorded non-cash interest
expense on our convertible notes of $0 and $38,890, respectively, for the nine months ended
December 31, 2009 and 2008. In addition, we recorded non-cash interest expense related to the
beneficial conversion feature of the convertible notes in the amount of $0 and $156,410,
respectively, for the nine months ended December 31, 2009 and 2008.
As we have no additional availability under our various notes payable agreements, we expect
interest expense on our notes payable to decrease over the next year as we repay these loans.
Provision for Loan Losses
The allowance for loan losses, which management evaluates on a periodic basis, represents an
estimate of potential credit losses inherent in our portfolio of member loans that we funded
ourselves, in whole or in part, and hold for investment and is 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 (see Note 2 Significant Accounting Policies, Allowance for loan losses).
Moreover, in light of our limited operating history, we do not yet have significant historical
experience unique to our own base of borrowers and underwriting criteria with which to help
estimate expected losses on our portfolio. In the three and nine months ended December 31, 2009,
we recorded a provision for loan losses of $176,376 and $1,170,880, respectively, against our
member loans held for investment. Comparatively, in the three and nine months ended December 31,
2008, we recorded a provision for loan losses of $245,428 and $530,359, respectively, against our
member loans held for investment.
Amortization of loan servicing rights
We charge investor members an ongoing service charge in respect of member loans and Notes that
they have purchased through our platform. The service charge offsets the costs we incur in
servicing member loans, including managing payments from borrower members, payments to investor
members and maintaining account portfolios. This service charge is equal to 1.00% of all amounts
paid by us to an investor member in respect of a member loan. The service charge is deducted from
any payments on a member loan before the net amounts of those payments are allocated to the
investor members LendingClub accounts.
While the servicing fee is recognized as a component of interest income with respect to our
member loans held for investment and as reduction in interest expense with respect to our Notes
held at fair value, for member loans purchased by third parties prior to the registration of our
Notes, we recognize a servicing asset and corresponding servicing liability in accordance with FASB
ASC 860. We then amortize the servicing fee asset into income as payments are received on these
member loans (see Note 2 Summary of Significant Accounting Policies, Revenue recognition,
Third party purchased member loans). During the three and nine months ended December 31, 2009,
we recognized $7,003 and $21,973, respectively, of such income. Comparatively, during the three
and nine months ended December 31, 2008, we recognized $9,260 and $38,221 respectively, of such
income. Because following the registration of the Notes, investor members no longer directly
purchase member loans, the amount of income from amortization of loan servicing rights will
continue to diminish until the underlying member loans are fully discharged.
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Operating Expenses:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
2009 | 2008 | % change | 2009 | 2008 | % change | |||||||||||||||||||
Sales, marketing and customer
service |
$ | 1,586,098 | $ | 600,953 | 164 | % | $ | 4,030,724 | $ | 1,502,372 | 168 | % | ||||||||||||
Engineering |
442,433 | 443,054 | 0 | % | 1,310,687 | 1,427,196 | -8 | % | ||||||||||||||||
General and administrative |
646,940 | 1,381,372 | -53 | % | 2,556,948 | 5,886,815 | -57 | % | ||||||||||||||||
Total operating expenses |
$ | 2,675,471 | $ | 2,425,379 | $ | 7,898,359 | $ | 8,816,383 | ||||||||||||||||
Sales, Marketing and Customer Service Expense
Sales, marketing and customer service expense consists primarily of salaries, benefits and
stock-based compensation expense related to sales, marketing, customer service and credit
personnel, costs of marketing campaigns and costs of borrower acquisitions such as credit scoring
and screening. Sales, marketing and customer service expenses for the three months ended December
31, 2009 and 2008, were $1,586,098 and $600,953, respectively, an increase of approximately 164%,
while for the nine months ended December 31, 2009 and 2008 these expenses were $4,030,724 and
$1,502,372, respectively and increase of approximately 168%. The relative increase in both the
comparative three and nine month periods was primarily due to greater expenses incurred for
marketing programs aimed at acquiring new investors and borrowers, but also included increased
costs for borrower acquisition for services such as credit reporting related to our platform
growth. Spending for these types of programs were significantly lower in the three and nine months
ended December 31, 2008, because we were unable to add new investor members and consequently made
fewer loans as we sought to register our Notes with the SEC. In addition, we significantly
expanded our marketing staff in the both the three and nine months ended December 31, 2009.
Engineering Expense
Engineering expense consists primarily of salaries, benefits and stock-based compensation
expense of personnel, and the cost of subcontractors who work on the development and maintenance of
our platform and software enhancements that run our platform. Engineering expense for the three
months ended December 31, 2009 and 2008, was $442,433 and $443,054, respectively, a decrease of
less than 1%, while engineering expense for the nine months ended December 31, 2009 and 2008, was
$1,310,687 and $1,427,126, respectively, a decrease of approximately 8%. The decrease for the nine
months ended December 31, 2009 versus the same nine months ended December 31, 2008, was primarily
due to decreased salaries, conversion of some contract labor to full time employees and decreased
benefits costs, as we directly contracted for our benefits programs starting in January 2009,
rather than relying on a professional employer organization model as we had prior to January 2009.
Although we enjoyed benefits savings in each category of operating expenses from the new structure,
it was most evident in this category as our other engineering expenses were relatively stable in
the nine months ended December 31, 2009 and 2008. During the three months ended December 31, 2009
we continued to enjoy the benefits of our realigned contractor to employee structure and the new
benefits programs which allowed us to slightly lower engineering expenses compared to the three
months ended December 31, 2008, while enjoying gains in engineering productivity.
General and Administrative Expense
General and administrative expense consists primarily of salaries, benefits and stock-based
compensation expense related to general and administrative personnel, professional fees primarily
related to legal and accounting fees, facilities expenses and the related overhead, and expenses
related to platform fraud prevention and remediation. General and administrative expense for the
three months ended December 31, 2009 and 2008, was $646,940 and $1,381,372, respectively, a
decrease of approximately 53%, while general and administrative expense for the nine months ended
December 31, 2009 and 2008, was $2,556,948 and $5,886,815, respectively, a decrease of
approximately 57%. The decrease in both the three and nine month comparative periods was primarily
the result of much higher legal and consulting expenses related to the preparation of our
Registration Statement incurred in the three and nine months ended December 31, 2008 compared to
the three and nine months ended December 31, 2009. We did however, also enjoy savings from the
conversion of some contract labor to full time employees and the adoption of our new benefits
programs during those same comparative three and nine month periods. We expect that general and
administrative expenses will decrease as a percentage of overall operating expenses as we grow our
marketing and sales efforts in greater proportion than our general and administrative expenses.
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Liquidity and Capital Resources
Nine Months Ended December 31, | ||||||||||||
Cash flows from: | 2009 | 2008 | Change | |||||||||
Operating Activities |
$ | (6,306,156 | ) | $ | (8,393,746 | ) | $ | 2,087,590 | ||||
Investing Activities |
(34,815,479 | ) | (6,530,011 | ) | (28,285,468 | ) | ||||||
Add back/(subtract): |
||||||||||||
Origination of CM Loans held at fair value |
38,460,025 | 2,803,550 | 35,656,475 | |||||||||
Repayment of CM Loans held at fair value |
(5,411,031 | ) | (67,657 | ) | (5,343,374 | ) | ||||||
Investing Activities after removing
activity related to CM Loans held at fair
value |
(1,766,485 | ) | (3,794,118 | ) | 2,027,633 | |||||||
Financing Activities |
33,853,500 | 12,505,919 | 21,347,581 | |||||||||
Add back/(subtract): |
||||||||||||
Origination of Notes held at fair value |
(39,024,105 | ) | (2,803,550 | ) | (36,220,555 | ) | ||||||
Repayment of Notes held at fair value |
5,421,076 | 67,730 | 5,353,346 | |||||||||
Financing Activities after removing
activity related to Notes held at fair
value |
$ | 250,471 | $ | 9,770,099 | $ | (9,519,628 | ) | |||||
Net cash used in operating activities decreased to $6,306,156 in the nine months ended
December 31, 2009, from $8,393,746 in the nine months ended December 31, 2008. Non-cash charges
that most significantly offset our net loss of $7,798,794 in the nine months ended December 31,
2009 were: $1,170,880 of allowances for loan losses on member loans held for investment, $2,123,281
of non-cash interest income due to credit risk related adjustments on our Notes, and $2,343,149 of
non-cash interest expense related to our CM Loans and debt discounts due to warrants issued for our
notes payable. Similarly, non-cash charges that most significantly offset our net loss of
$9,612,908 in the nine months ended December 31, 2008 were: $530,359 of provisions for loan losses
on member loans held for investment, non-cash interest expense of $672,910, and the $151,262 net
positive effect of changes in operating assets and liabilities, mainly accounts payable for legal
services.
Net cash used in investing activities for the nine months ended December 31, 2009 and 2008,
were $34,815,479 and $6,530,011, respectively. However, after removing activity related to the
Notes, which activity was mostly offset by corresponding activity related to the CM Loans reflected
in our cash flow from financing activities, the remaining amounts for the nine months ended
December 31, 2009 and 2008, were $1,766,485 and $3,794,118, respectively. These remaining amounts
in both periods were primarily activities related to our member loans held for investment, and in
the nine months ended December 31, 2009, an increase of $800,000 in restricted cash related to
certificates of deposit pledged as security for our May 2009 term financing and additional security
required by our platform operating banks as loan and transaction volume increased.
Net cash used in financing activities for the three months ended December 31, 2009 and 2008,
were $33,853,500 and $12,505,919 respectively. However, after removing activity related to the
Notes, which activity was mostly offset by corresponding activity related to our CM Loans reflected
in our cash flows from investing activities, the remaining amounts for the three months ended
December 31, 2009 and 2008, were $250,471 and $9,770,099, respectively. Cash provided by financing
activities, after removing activity related to the Notes, consisted primarily of proceeds from the
issuance of loans payable and their related repayment, and in the nine months ended December 31,
2008, the issuance of our Series A preferred stock.
In October 2007, we entered into a loan and security agreement with Silicon Valley Bank, or
SVB, that allows for borrowings of up to $3,000,000 for working capital needs, or the growth
capital term loan. In October 2008, we amended the agreement to increase the available borrowing
to $4,000,000. The loan is secured by substantially all of our assets except our intellectual
property rights, payments received on CM Loans, and certain deposit accounts. The interest rate is
fixed at 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.
In connection with the growth capital term loan, we issued SVB a fully exercisable warrant to
purchase 98,592 shares of Series A convertible preferred stock at an exercise price of $1.065 per
share. The growth capital term loan also required us to maintain a
certificate of deposit of $150,000 with SVB until repayment. This amount is included in
restricted cash in the accompanying balance sheets.
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In December 2008, we drew down the remaining $1,000,000 of available credit under the growth
capital term loan and issued SVB a fully exercisable warrant to purchase 28,170 shares of Series A
convertible preferred stock at $1.065 per share.
In February 2008, we entered into a loan and security agreement, or the financing term loan,
with Gold Hill Venture Lending 03, LP, or Gold Hill, that provides for financing of up to
$5,000,000 to us to fund member loans on the platform (the financing term loan). The financing
term loan was originally 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 required us to
maintain a certificate of deposit with SVB of $250,000 until repayment. This amount is included in
restricted cash in the accompanying balance sheets.
In February and March 2008, we received advances totaling $3,600,000 under the financing term
loan. During the year ended March 31, 2009, we drew down the remaining $1,400,000 available under
the financing term loan. In connection with the financing term loan, from inception through
December 31, 2009, we issued Gold Hill a fully exercisable warrant to purchase an aggregate of
328,637 shares of Series A convertible preferred stock at $1.065 per share.
On October 7, 2008, we entered into amendments to the growth capital term loan and financing
term loan. These amendments became effective as of October 10, 2008, the date of effectiveness of
our Registration Statement, whereby the lenders waived certain past covenant violations by us and
consented to our new operating structure. In connection with the amendments to the financing term
loan, we issued SVB a fully exercisable warrant to purchase 37,558 shares of Series A convertible
preferred stock at an exercise price of $1.065 per share.
On May 18, 2009, we entered into a new secured loan facility, or the May 2009 term loan, with
SVB and Gold Hill, and amended the prior growth capital term loan and financing term loan to
accommodate 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 are to be 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. In connection with this loan
facility, we issued a fully exercisable warrant to purchase 187,090 shares of Series B convertible
preferred stock with an exercise price of $0.7483 per share to SVB, and we issued a fully
exercisable warrant to purchase 187,090 shares of Series B convertible preferred stock with an
exercise price of $0.7483 per share to Gold Hill.
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,
payments we receive on the CM Loans, and certain deposit accounts. 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 December 31, 2009, we had fully drawn down the entire $4,000,000 of combined availability
under the May 2009 term loan and subsequent Newly Restated Agreements.
During the year ended March 31, 2009, we entered into a series of loan and security
agreements, or the private placement notes, with accredited investors providing for loans evidenced
by notes payable totaling $4,704,694. Each note is repayable over three years and bears interest at
the rate of 12% per annum. We are using the proceeds of the private placement notes to fund member
loans on the platform. In connection with the origination of the private placement notes, we issued
the investors fully exercisable warrants to purchase an aggregate of 514,817 shares of Series A
convertible preferred stock at an exercise price of $1.065 per share. During the nine months ended
December 31, 2009, we issued an additional $200,000 of private placement notes repayable over three
years and
which bear interest at the rate of 8% per annum. No warrants were issued in connection the
private placement notes issued in the nine months ended December 31, 2009.
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In January 2008, we issued subordinated convertible promissory notes, or the convertible
notes, to two venture capital stockholders, with principal amounts of $500,000 each, under the
terms of a note and warrant purchase agreement. The convertible notes bore interest at the rate of
8% per annum. On September 29, 2008, the venture capital stockholders converted the convertible
notes, which had an outstanding principal balance of $1,000,000 and accrued interest of $54,575
into shares of Series A convertible preferred stock at a purchase price of $1.065 per share. We
issued 495,106 shares of Series A convertible preferred stock for principal and interest to each
venture capital stockholder for an aggregate of 990,212 shares. Additionally, in connection with
the issuance of the convertible notes, we issued the venture capital stockholders warrants to
purchase an aggregate of 234,742 shares of Series A convertible preferred stock at $1.065 per
share.
We used the proceeds from borrowings under the growth capital term loan, the private placement
notes and the convertible notes primarily to fund member loans ourselves to ensure a sufficient
level of funding for borrowing requests. From April 7, 2008 until October 13, 2008 all member loans
funded on the platform were funded and held us and held for investment. Through our participation
in funding loans ourselves on the platform, as of December 31, 2009, we had funded approximately
$19.5 million in member loans.
We have incurred losses since our inception and we expect we will continue to incur losses for
the foreseeable future as we grow our platform. We require cash to meet our operating expenses and
for capital expenditures and principal and interest payments on our debt, as well as to continue to
fund member loans on the platform we will hold for investment. To date, we have funded our cash
requirements with proceeds from our debt issuances and the sale of equity securities. At December
31, 2009, we had $4,730,406 in unrestricted cash and cash equivalents. We primarily invest our cash
in interest bearing money market funds.
We do not have any committed external source of funds. To the extent our capital resources are
insufficient to meet our future capital requirements, we will need to finance our cash needs
through public or private equity offerings or debt financings. Additional equity or debt financing
may not be available on acceptable terms, if at all.
Income Taxes
We incurred no tax provision for the nine months ended December 31, 2009. Given our history of
operating losses and inability to achieve profitable operations, it is difficult to accurately
forecast how results will be affected by the realization of net operating loss carry forwards.
FASB ASC 740 guidance on income taxes provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. Based upon the weight of available evidence,
which includes our historical operating performance and the reported cumulative net losses in all
prior years, we have provided a full valuation allowance against our net deferred tax assets. We
will continue to evaluate the realizability of the deferred tax assets on a quarterly basis.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities. We do not have any interest in
entities referred to as variable interest entities, which include special purpose entities and
other structured finance entities.
Additional Information about the LendingClub Platform
Historical Information about Our Borrower Members and Outstanding Loans
As of December 31, 2009, LendingClub had facilitated 8,277 member loans with an average original
principal amount of $9,252 and an aggregate original principal amount of $76,581,325, out of which
$49,520,619 of outstanding principal balance had been through at least one billing cycle. Out of
these loans, 594 member loans with an aggregate original principal amount of $5,095,050, or 6.65%
had prepaid, while out of the total outstanding principal balance, 89.22% were current, 0.71% were
16 to 30 days late, 3.36% were more than 30 days late, and 6.67% were defaulted. A member loan is
considered as having defaulted when at least one payment is more than 120 days late.
The 6.67% of defaulted loans as of December 31, 2009 were comprised of 420 member loans, equaling a
total defaulted amount of $3,303,797. Of these defaulted loans, 302 loans representing $2,254,408
in defaulted amount were defaults due to delinquency, while
the remaining 118 loans were loans in which the borrower member filed for a Chapter 7 bankruptcy
seeking liquidation, representing $1,049,389 in defaulted amount.
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During the three months ended December 31, 2009, of the 5,399 member loans which were not
delinquent prior to the start of the quarter, 166 member loans became delinquent for some amount of
time during the quarter, excluding those that entered the 0 15 day grace period. Of those loans
which became delinquent for more than 15 days during the quarter, we charged late fees totaling
$2,653 on 97 loans and received late fees of $484 on those same 97 loans.
The following table presents aggregated information about borrower members and their loans for
the period from May 24, 2007 to December 31, 2009, grouped by the loan grade assigned by us:
Average Total | ||||||||||||||||
Number of | Average Interest | Average Annual | Funded | |||||||||||||
Loan Grade | Borrowers | Rate | Percentage Rate | Commitment | ||||||||||||
A1 |
56 | 7.24 | % | 7.82 | % | $ | 4,372 | |||||||||
A2 |
190 | 7.54 | % | 8.14 | % | 4,214 | ||||||||||
A3 |
350 | 7.89 | % | 8.51 | % | 5,996 | ||||||||||
A4 |
440 | 8.86 | % | 9.48 | % | 6,794 | ||||||||||
A5 |
563 | 9.17 | % | 9.83 | % | 8,629 | ||||||||||
B1 |
347 | 10.57 | % | 12.27 | % | 8,609 | ||||||||||
B2 |
393 | 10.85 | % | 12.49 | % | 10,551 | ||||||||||
B3 |
434 | 11.26 | % | 12.98 | % | 11,154 | ||||||||||
B4 |
466 | 11.59 | % | 13.30 | % | 10,274 | ||||||||||
B5 |
497 | 11.89 | % | 13.55 | % | 9,523 | ||||||||||
C1 |
483 | 12.12 | % | 14.09 | % | 8,897 | ||||||||||
C2 |
418 | 12.48 | % | 14.48 | % | 9,545 | ||||||||||
C3 |
409 | 12.77 | % | 14.73 | % | 9,435 | ||||||||||
C4 |
399 | 13.07 | % | 15.03 | % | 9,240 | ||||||||||
C5 |
360 | 13.44 | % | 15.45 | % | 9,111 | ||||||||||
D1 |
304 | 13.73 | % | 15.95 | % | 10,021 | ||||||||||
D2 |
297 | 14.11 | % | 16.35 | % | 9,793 | ||||||||||
D3 |
278 | 14.35 | % | 16.53 | % | 9,926 | ||||||||||
D4 |
259 | 14.52 | % | 16.63 | % | 9,379 | ||||||||||
D5 |
197 | 14.83 | % | 16.90 | % | 9,685 | ||||||||||
E1 |
163 | 15.11 | % | 17.17 | % | 10,111 | ||||||||||
E2 |
177 | 15.23 | % | 17.26 | % | 9,707 | ||||||||||
E3 |
139 | 15.59 | % | 17.53 | % | 9,830 | ||||||||||
E4 |
115 | 15.55 | % | 17.35 | % | 9,931 | ||||||||||
E5 |
99 | 16.16 | % | 18.07 | % | 10,487 | ||||||||||
F1 |
69 | 16.22 | % | 17.99 | % | 10,636 | ||||||||||
F2 |
68 | 16.81 | % | 18.71 | % | 11,878 | ||||||||||
F3 |
46 | 16.85 | % | 18.69 | % | 12,191 | ||||||||||
F4 |
47 | 17.46 | % | 19.42 | % | 10,934 | ||||||||||
F5 |
38 | 17.78 | % | 19.80 | % | 11,613 | ||||||||||
G1 |
35 | 18.08 | % | 20.05 | % | 11,409 | ||||||||||
G2 |
26 | 18.30 | % | 20.09 | % | 8,562 | ||||||||||
G3 |
22 | 18.23 | % | 19.83 | % | 10,777 | ||||||||||
G4 |
42 | 18.59 | % | 20.28 | % | 13,379 | ||||||||||
G5 |
51 | 19.12 | % | 20.94 | % | $ | 10,574 |
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The following table presents aggregated information for the period from May 24, 2007 to
December 31, 2009, self-reported by borrower members at the time of their loan applications,
grouped by the loan grade assigned by us. We do not independently verify this information:
Percentage of | ||||||||||||||||
Borrowers | ||||||||||||||||
Stating They | Average Job | Average Debt | ||||||||||||||
Own Their Own | Tenure in | Average Annual | to Income | |||||||||||||
Loan Grade | Homes | Months | Gross Income | Ratio (1) | ||||||||||||
A1 |
58.93 | % | 76 | $ | 61,226 | 7.20 | % | |||||||||
A2 |
62.11 | % | 72 | 75,019 | 7.76 | % | ||||||||||
A3 |
56.86 | % | 78 | 70,433 | 8.98 | % | ||||||||||
A4 |
53.41 | % | 72 | 60,745 | 10.31 | % | ||||||||||
A5 |
54.88 | % | 72 | 70,597 | 11.08 | % | ||||||||||
B1 |
44.67 | % | 62 | 66,512 | 10.93 | % | ||||||||||
B2 |
49.11 | % | 72 | 73,466 | 11.19 | % | ||||||||||
B3 |
48.62 | % | 78 | 73,640 | 12.32 | % | ||||||||||
B4 |
46.57 | % | 64 | 68,562 | 12.85 | % | ||||||||||
B5 |
41.65 | % | 58 | 61,650 | 12.28 | % | ||||||||||
C1 |
45.76 | % | 64 | 65,477 | 12.51 | % | ||||||||||
C2 |
44.26 | % | 60 | 60,427 | 12.61 | % | ||||||||||
C3 |
43.03 | % | 56 | 65,862 | 13.35 | % | ||||||||||
C4 |
44.36 | % | 70 | 67,391 | 14.21 | % | ||||||||||
C5 |
39.72 | % | 64 | 72,826 | 13.47 | % | ||||||||||
D1 |
42.43 | % | 64 | 66,846 | 13.37 | % | ||||||||||
D2 |
41.75 | % | 75 | 67,426 | 13.49 | % | ||||||||||
D3 |
46.76 | % | 67 | 63,459 | 13.56 | % | ||||||||||
D4 |
40.15 | % | 55 | 61,884 | 13.33 | % | ||||||||||
D5 |
42.64 | % | 56 | 67,001 | 13.29 | % | ||||||||||
E1 |
42.33 | % | 56 | 66,831 | 13.98 | % | ||||||||||
E2 |
37.29 | % | 55 | 59,909 | 14.02 | % | ||||||||||
E3 |
41.01 | % | 59 | 67,988 | 13.61 | % | ||||||||||
E4 |
46.96 | % | 70 | 69,721 | 14.89 | % | ||||||||||
E5 |
43.43 | % | 57 | 70,475 | 14.87 | % | ||||||||||
F1 |
46.38 | % | 59 | 69,108 | 15.46 | % | ||||||||||
F2 |
44.12 | % | 79 | 78,649 | 15.85 | % | ||||||||||
F3 |
43.48 | % | 82 | 78,010 | 18.38 | % | ||||||||||
F4 |
44.68 | % | 68 | 65,793 | 16.61 | % | ||||||||||
F5 |
44.74 | % | 68 | 73,945 | 12.98 | % | ||||||||||
G1 |
51.43 | % | 43 | 57,068 | 19.08 | % | ||||||||||
G2 |
46.15 | % | 62 | 86,769 | 17.31 | % | ||||||||||
G3 |
50.00 | % | 67 | 77,037 | 18.42 | % | ||||||||||
G4 |
59.52 | % | 58 | 103,235 | 16.49 | % | ||||||||||
G5 |
62.75 | % | 67 | $ | 104,092 | 18.55 | % |
(1) | Average debt to income ratio, excluding mortgage debt, calculated by us based on (i)
the debt reported by a consumer reporting agency, and (ii) the income reported by the
borrower member. |
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Table of Contents
The following table presents aggregated information for the period from May 24, 2007 to
December 31, 2009, reported by a consumer reporting agency about our borrower members at the time
of their loan applications, grouped by the loan grade assigned by us. As used in this table,
Delinquencies in Last Two Years means the number of 30+ days past-due incidences of delinquency
in the borrower members credit file for the past two years. We do not independently verify this
information. All figures other than loan grade are agency reported:
Average | ||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Number of | Average | Average | ||||||||||||||||||||||||||
Open | Total | Revolving | Revolving | Inquiries | Delinquencies | Time Since | ||||||||||||||||||||||||||
Average | Credit | Credit | Credit | Line | in the Last | in Last | Last | |||||||||||||||||||||||||
Loan Grade | FICO | Lines | Lines | Balances | Utilization | Nine Months | Two Years | Delinquency | ||||||||||||||||||||||||
A1 |
777 | 8 | 22 | $ | 12,793 | 17.19 | % | 1 | 0 | 31 | ||||||||||||||||||||||
A2 |
774 | 10 | 23 | 11,940 | 15.52 | % | 1 | 0 | 44 | |||||||||||||||||||||||
A3 |
768 | 9 | 22 | 11,082 | 18.45 | % | 1 | 0 | 44 | |||||||||||||||||||||||
A4 |
756 | 9 | 22 | 13,039 | 23.96 | % | 1 | 0 | 42 | |||||||||||||||||||||||
A5 |
749 | 9 | 22 | 14,583 | 29.24 | % | 1 | 0 | 40 | |||||||||||||||||||||||
B1 |
737 | 9 | 21 | 13,919 | 33.55 | % | 1 | 0 | 36 | |||||||||||||||||||||||
B2 |
736 | 9 | 21 | 15,329 | 34.22 | % | 1 | 0 | 46 | |||||||||||||||||||||||
B3 |
729 | 9 | 21 | 18,575 | 39.57 | % | 1 | 0 | 40 | |||||||||||||||||||||||
B4 |
719 | 9 | 21 | 17,731 | 43.18 | % | 1 | 0 | 40 | |||||||||||||||||||||||
B5 |
712 | 9 | 19 | 17,273 | 46.71 | % | 1 | 0 | 37 | |||||||||||||||||||||||
C1 |
703 | 9 | 20 | 17,527 | 51.68 | % | 1 | 0 | 39 | |||||||||||||||||||||||
C2 |
702 | 9 | 20 | 15,667 | 51.62 | % | 2 | 0 | 41 | |||||||||||||||||||||||
C3 |
696 | 9 | 21 | 17,110 | 54.37 | % | 2 | 0 | 38 | |||||||||||||||||||||||
C4 |
693 | 10 | 21 | 16,705 | 55.72 | % | 2 | 0 | 36 | |||||||||||||||||||||||
C5 |
687 | 9 | 20 | 14,470 | 57.06 | % | 2 | 0 | 34 | |||||||||||||||||||||||
D1 |
686 | 9 | 21 | 19,586 | 56.36 | % | 2 | 0 | 34 | |||||||||||||||||||||||
D2 |
685 | 9 | 20 | 18,327 | 57.96 | % | 2 | 0 | 34 | |||||||||||||||||||||||
D3 |
682 | 10 | 20 | 16,319 | 58.43 | % | 2 | 0 | 36 | |||||||||||||||||||||||
D4 |
678 | 9 | 19 | 16,531 | 61.42 | % | 2 | 0 | 33 | |||||||||||||||||||||||
D5 |
678 | 9 | 20 | 20,184 | 58.84 | % | 2 | 0 | 34 | |||||||||||||||||||||||
E1 |
675 | 10 | 21 | 17,797 | 63.43 | % | 2 | 0 | 34 | |||||||||||||||||||||||
E2 |
672 | 10 | 20 | 18,286 | 62.62 | % | 2 | 0 | 35 | |||||||||||||||||||||||
E3 |
667 | 9 | 19 | 18,086 | 67.77 | % | 2 | 1 | 29 | |||||||||||||||||||||||
E4 |
666 | 10 | 20 | 18,495 | 65.14 | % | 4 | 0 | 37 | |||||||||||||||||||||||
E5 |
668 | 10 | 21 | 18,343 | 65.23 | % | 3 | 0 | 26 | |||||||||||||||||||||||
F1 |
670 | 10 | 23 | 22,755 | 66.08 | % | 3 | 0 | 32 | |||||||||||||||||||||||
F2 |
673 | 10 | 22 | 24,500 | 66.07 | % | 3 | 0 | 30 | |||||||||||||||||||||||
F3 |
668 | 11 | 24 | 25,915 | 62.52 | % | 3 | 0 | 38 | |||||||||||||||||||||||
F4 |
667 | 11 | 22 | 23,906 | 68.47 | % | 3 | 0 | 31 | |||||||||||||||||||||||
F5 |
667 | 10 | 22 | 21,431 | 68.92 | % | 3 | 0 | 27 | |||||||||||||||||||||||
G1 |
672 | 10 | 21 | 16,786 | 64.23 | % | 3 | 0 | 30 | |||||||||||||||||||||||
G2 |
662 | 12 | 23 | 24,168 | 67.41 | % | 3 | 0 | 28 | |||||||||||||||||||||||
G3 |
659 | 13 | 22 | 20,190 | 66.17 | % | 4 | 0 | 33 | |||||||||||||||||||||||
G4 |
656 | 13 | 28 | 38,085 | 67.43 | % | 3 | 0 | 34 | |||||||||||||||||||||||
G5 |
658 | 13 | 30 | $ | 57,534 | 67.71 | % | 4 | 1 | 26 |
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The following table presents additional aggregated information for the period from May 24,
2007 to December 31, 2009, about delinquencies, default and borrower prepayments, grouped by the
loan grade assigned by us. The interest rate, default and delinquency
information presented in the table includes data only for member loans that had been issued
for more than 45 days as of December 31, 2009, and therefore have been through at least one billing
cycle. With respect to late member loans, the following table shows the entire amount of the
principal remaining due, not just that particular payment. The third and fifth columns show the
late member loan amounts as a percentage of member loans issued for more than 45 days. Member loans
are placed on nonaccrual status and considered as defaulted when they become 120 days late. The
data presented in the table below comes from a set of member loans that have been outstanding, on
average, for approximately twenty-one months.
Because of our limited operating history, the data in the following table regarding loss
experience may not be representative of the loss experience that will develop over time as
additional member loans are originated through our platform and the member loans already originated
through our platform have longer payment histories. In addition, because of our limited operating
history, the data in the following table regarding prepayments may not be representative of the
prepayments we expect over time as additional member loans are originated through our platform and
the member loans already originated through our platform have longer payment histories.
Total | ||||||||||||||||||||||||||||||||||||||||
15-30 | 15-30 | 30+ | 30+ | Number | Number of | |||||||||||||||||||||||||||||||||||
Days Late | Days Late | Days Late | Days Late | Default | Default | of | Loans | Prepaid | Prepaid | |||||||||||||||||||||||||||||||
Loan Grade | ($) | (%) | ($) | (%) | ($) | (%) | Loans | Prepaid | ($) | (%) | ||||||||||||||||||||||||||||||
A1 |
0 | 0.00 | % | 0 | 0.00 | % | 0 | 0.00 | % | 56 | 5 | 7,700 | 3.14 | % | ||||||||||||||||||||||||||
A2 |
0 | 0.00 | % | 816 | 0.11 | % | 0 | 0.00 | % | 190 | 26 | 96,800 | 12.09 | % | ||||||||||||||||||||||||||
A3 |
3,027 | 0.16 | % | 11,909 | 0.64 | % | 3,011 | 0.16 | % | 350 | 34 | 180,600 | 8.61 | % | ||||||||||||||||||||||||||
A4 |
0 | 0.00 | % | 17,474 | 0.68 | % | 5,551 | 0.21 | % | 440 | 32 | 223,400 | 7.47 | % | ||||||||||||||||||||||||||
A5 |
0 | 0.00 | % | 55,930 | 1.37 | % | 18,333 | 0.45 | % | 563 | 32 | 208,900 | 4.30 | % | ||||||||||||||||||||||||||
B1 |
18,350 | 0.75 | % | 35,253 | 1.45 | % | 31,096 | 1.28 | % | 347 | 33 | 255,150 | 8.54 | % | ||||||||||||||||||||||||||
B2 |
0 | 0.00 | % | 71,675 | 2.03 | % | 77,788 | 2.20 | % | 393 | 24 | 257,775 | 6.22 | % | ||||||||||||||||||||||||||
B3 |
27,061 | 0.71 | % | 55,197 | 1.45 | % | 74,977 | 1.96 | % | 434 | 29 | 232,000 | 4.79 | % | ||||||||||||||||||||||||||
B4 |
23,964 | 0.62 | % | 78,890 | 2.04 | % | 134,455 | 3.47 | % | 466 | 30 | 318,200 | 6.65 | % | ||||||||||||||||||||||||||
B5 |
0 | 0.00 | % | 126,912 | 3.12 | % | 159,948 | 3.93 | % | 497 | 41 | 384,450 | 8.12 | % | ||||||||||||||||||||||||||
C1 |
29,056 | 0.78 | % | 88,867 | 2.38 | % | 114,162 | 3.06 | % | 483 | 36 | 348,375 | 8.11 | % | ||||||||||||||||||||||||||
C2 |
10,878 | 0.31 | % | 69,264 | 1.97 | % | 142,953 | 4.06 | % | 418 | 30 | 264,500 | 6.63 | % | ||||||||||||||||||||||||||
C3 |
42,015 | 1.22 | % | 82,667 | 2.40 | % | 188,237 | 5.45 | % | 409 | 26 | 243,725 | 6.32 | % | ||||||||||||||||||||||||||
C4 |
24,098 | 0.72 | % | 74,704 | 2.23 | % | 153,789 | 4.60 | % | 399 | 22 | 178,600 | 4.84 | % | ||||||||||||||||||||||||||
C5 |
5,623 | 0.20 | % | 77,285 | 2.78 | % | 170,738 | 6.13 | % | 360 | 19 | 170,625 | 5.20 | % | ||||||||||||||||||||||||||
D1 |
6,000 | 0.22 | % | 74,435 | 2.69 | % | 194,361 | 7.03 | % | 304 | 18 | 150,500 | 4.94 | % | ||||||||||||||||||||||||||
D2 |
14,919 | 0.61 | % | 53,378 | 2.17 | % | 113,932 | 4.64 | % | 297 | 16 | 158,725 | 5.46 | % | ||||||||||||||||||||||||||
D3 |
11,820 | 0.50 | % | 100,687 | 4.24 | % | 127,100 | 5.36 | % | 278 | 13 | 110,650 | 4.01 | % | ||||||||||||||||||||||||||
D4 |
819 | 0.04 | % | 69,731 | 3.36 | % | 192,318 | 9.27 | % | 259 | 17 | 150,225 | 6.18 | % | ||||||||||||||||||||||||||
D5 |
4,255 | 0.26 | % | 58,889 | 3.55 | % | 103,190 | 6.23 | % | 197 | 8 | 63,950 | 3.35 | % | ||||||||||||||||||||||||||
E1 |
34,093 | 2.19 | % | 21,042 | 1.35 | % | 85,937 | 5.51 | % | 163 | 13 | 135,975 | 8.25 | % | ||||||||||||||||||||||||||
E2 |
0 | 0.00 | % | 27,616 | 1.75 | % | 181,069 | 11.49 | % | 177 | 13 | 118,100 | 6.87 | % | ||||||||||||||||||||||||||
E3 |
0 | 0.00 | % | 66,708 | 5.11 | % | 41,097 | 3.15 | % | 139 | 10 | 145,050 | 10.62 | % | ||||||||||||||||||||||||||
E4 |
0 | 0.00 | % | 75,729 | 6.81 | % | 153,992 | 13.84 | % | 115 | 11 | 99,175 | 8.68 | % | ||||||||||||||||||||||||||
E5 |
0 | 0.00 | % | 23,624 | 2.61 | % | 53,358 | 5.90 | % | 99 | 14 | 168,700 | 16.25 | % | ||||||||||||||||||||||||||
F1 |
33,725 | 4.66 | % | 19,632 | 2.71 | % | 119,024 | 16.45 | % | 69 | 8 | 93,625 | 12.76 | % | ||||||||||||||||||||||||||
F2 |
2,602 | 0.33 | % | 21,501 | 2.70 | % | 124,085 | 15.56 | % | 68 | 3 | 40,250 | 4.98 | % | ||||||||||||||||||||||||||
F3 |
16,750 | 3.61 | % | 34,347 | 7.41 | % | 97,710 | 21.07 | % | 46 | 8 | 67,525 | 12.04 | % | ||||||||||||||||||||||||||
F4 |
3,726 | 0.82 | % | 45,846 | 10.13 | % | 85,596 | 18.91 | % | 47 | 3 | 14,500 | 2.82 | % | ||||||||||||||||||||||||||
F5 |
0 | 0.00 | % | 21,566 | 5.33 | % | 53,986 | 13.33 | % | 38 | 2 | 28,000 | 6.34 | % | ||||||||||||||||||||||||||
G1 |
24,486 | 6.70 | % | 1,447 | 0.40 | % | 24,128 | 6.60 | % | 35 | 4 | 59,400 | 14.88 | % | ||||||||||||||||||||||||||
G2 |
0 | 0.00 | % | 18,514 | 8.32 | % | 46,408 | 20.85 | % | 26 | 3 | 10,600 | 4.76 | % | ||||||||||||||||||||||||||
G3 |
4,243 | 1.79 | % | 0 | 0.00 | % | 45,923 | 19.37 | % | 22 | 4 | 46,300 | 19.53 | % | ||||||||||||||||||||||||||
G4 |
0 | 0.00 | % | 9,680 | 1.76 | % | 114,112 | 20.69 | % | 42 | 4 | 47,925 | 8.53 | % | ||||||||||||||||||||||||||
G5 |
7,543 | 1.56 | % | 66,784 | 13.78 | % | 70,730 | 14.59 | % | 51 | 3 | 15,075 | 2.80 | % |
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The following table presents aggregated information for the period from May 24, 2007 to
December 31, 2009 on the results of our collection efforts for all corresponding member loans that
became more than 30 days past due at any time, grouped by credit grade. For purposes of this
analysis, we have excluded the 14 loans that we repurchased due to identity fraud.
Gross | Aggregate | |||||||||||||||||||||||||||
Amount | Principal | Gross | ||||||||||||||||||||||||||
Collected | Number of | Balance of | Amount | |||||||||||||||||||||||||
Number | Aggregate | on | Loans | Loans | Recovered | |||||||||||||||||||||||
of Loans | Amount Sent | Accounts | Charged-Off | Charged-Off | on Loans | |||||||||||||||||||||||
in | Origination | to | Sent to | Due to | Due to | Charged- | ||||||||||||||||||||||
Collection | Amount | Collections | Collections | Delinquency | Delinquency | Off | ||||||||||||||||||||||
Grade | (1) | (1) | (1) | (2) | (3) | (3) | (4) | |||||||||||||||||||||
A |
29 | 206,225 | 22,969 | 12,790 | 5 | 20,480 | 0 | |||||||||||||||||||||
B |
100 | 930,775 | 117,360 | 46,449 | 37 | 237,858 | 3,120 | |||||||||||||||||||||
C |
161 | 1,461,575 | 203,941 | 93,978 | 67 | 456,316 | 0 | |||||||||||||||||||||
D |
133 | 1,210,875 | 160,483 | 69,254 | 61 | 464,158 | 1,538 | |||||||||||||||||||||
E |
105 | 920,425 | 142,601 | 63,298 | 51 | 351,314 | 69 | |||||||||||||||||||||
F |
63 | 787,025 | 125,780 | 35,042 | 36 | 341,093 | 0 | |||||||||||||||||||||
G |
34 | 387,900 | 64,533 | 24,869 | 15 | 162,577 | 140 | |||||||||||||||||||||
Total |
625 | 5,904,800 | 837,667 | 345,680 | 272 | 2,033,797 | 4,867 | |||||||||||||||||||||
1) | Represents accounts 31 to 120 days past due. |
|
2) | Represents the gross amounts collected on corresponding member loans while such
accounts were in collection during the 31-120 days past-due period. This amount does not
represent payments received after an account has been sent to collection, cured and
returned to current status. Of this amount, investors received $363,522 (99%). The
remainder was fees to us of $3,672 (1%). The amounts retained by us are reflected as loan
servicing fees in our consolidated financial statements. |
|
3) | Represents accounts that have been delinquent for 120 days at which time the account is
charged-off. Any money recovered after 120 days is no longer included as amounts collected
on accounts sent to collection. |
|
4) | Represents the gross amounts we received on charged-off accounts after the accounts
were charged-offe.g., a dollar received on an account 122 days past due. |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for smaller reporting companies.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive Officer and Vice
President, Finance and Administration, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, we
recognize that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and we are required to apply
our judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Vice President, Finance and Administration, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the fiscal quarter covered by this report.
Based on the foregoing, our Chief Executive Officer and Vice President, Finance and Administration,
have concluded that our disclosure controls and procedures were effective at the reasonable
assurance level.
There has been no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material changes to report.
Item 1A. Risk Factors
The discussion in this Quarterly Report on Form 10-Q should be read together with the risk
factors contained in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the
fiscal year ended March 31, 2009 and the prospectus for the Notes dated January 20, 2010. These
risk factors describe various risks and uncertainties. These risks and uncertainties have the
potential to affect our business, financial condition, results of operations, cash flows,
strategies or prospects in a material and adverse manner. In addition, these risks could have a
material adverse effect on the value of the Notes you purchase and could cause you to lose all or
part of your initial purchase price or future principal and interest payments you expect to
receive.
In addition, you should consider the following:
We have incurred net losses in the past and expect to incur net losses in the future. If we
become insolvent or bankrupt, you may lose your investment.
We have incurred net losses in the past and we expect to incur net losses in the future. As of
December 31, 2009, our accumulated deficit was $27.7 million and our total stockholders deficit
was $23.9 million. Our net loss for the three months ended December 31, 2009 and 2008, was $2.1
million and $2.6 million, respectively. We have not been profitable since our inception, and we may
not become profitable. In addition, we expect our operating expenses to increase in the future as
we expand our operations. If our operating expenses exceed our expectations, our financial
performance could be adversely affected. If our revenue does not grow to offset these increased
expenses, we may never become profitable. In future periods, we may not have any revenue growth, or
our revenue could decline. Our failure to become profitable could impair the operations of our
platform by limiting our access to working capital to operate the platform. If we were to become
insolvent or bankrupt, an event of default would occur under the terms of the Notes, and you may
lose your investment.
39
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 13, 2008, we commenced a public offering of up to $600,000,000 in principal amount
of our Member Payment Dependent Notes, or Notes, pursuant to the Registration Statement. The
offering is a continuous offering and remains ongoing. The
Registration Statement was declared effective by the SEC on October 10, 2008. From October 13,
2008 to December 31, 2009, we sold $48,187,175 in principal amount of Notes at 100% of their
principal amount. The Notes are offered only through our website, and there are no underwriters or
underwriting discounts. As set forth in the Registration Statement, we incurred estimated expenses
of approximately $3,636,888 in connection with the offering, none of which are being paid by us to
our directors, officers, persons owning 10% or more of any class of our equity securities or
affiliates. As set forth in the prospectus for the offering, we are using the proceeds of each
series of Notes to fund a corresponding member loan originated on our platform. None of the
proceeds from the Notes are paid by us to our directors, officers, persons owning 10% or more of
any class of our equity securities or affiliates.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Other Information
None.
Item 5. Exhibits
See Exhibit Index.
40
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LendingClub Corporation |
||||
By: | /s/ Renaud Laplanche | |||
Name: | Renaud Laplanche | |||
Title: | Chief Executive Officer (principal executive officer) |
|||
By: | /s/ Howard Solovei | |||
Name: | Howard Solovei | |||
Title: | Vice President, Finance and Administration (principal financial officer and principal accounting officer) |
Dated: February 9, 2010
41
Table of Contents
EXHIBIT INDEX
Exhibit No. | Description | |||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Vice President, Finance and Administration, Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer and Vice President, Finance and Administration,
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
42