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EXCEL - IDEA: XBRL DOCUMENT - LendingClub Corp | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - LendingClub Corp | c24173exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - LendingClub Corp | c24173exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - LendingClub Corp | c24173exv31w1.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 September 30, 2011
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 | 51-0605731 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification No.) | |
71 Stevenson St., Suite 300 | ||
San Francisco, California | 94105 | |
(Address of principal executive offices) | (Zip Code) |
(415) 632-5600
(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).
o Yes o No
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 the 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 October 31, 2011, there were 8,816,822 shares of the registrants common stock
outstanding.
LENDINGCLUB CORPORATION
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
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 LendingClub borrower members, credit
scoring, Fair Isaac Corporation (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; |
| expected rates of return and interest rates; |
| our ability to attract additional investors; |
| 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; estimates regarding expenses, future revenue, capital
requirements and needs for additional financing; and |
| changes in the regulatory environment. |
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 cautionary statements
included in this Form 10-Q, particularly in the Risk Factors section, that could cause actual
results or events to differ materially from forward-looking statements contained in this report.
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.
Explanatory Notes
Beginning with this Quarterly Report on Form 10-Q for the period ended September 30, 2011, we
refer to all loans made to borrower members as Member Loans. In previously issued periodic
reports and financial statements, loans financed by Member Payment Dependent Notes (Notes) were
referred to as CM Loans and loans financed by us via sources of funds other than Notes were
referred to as Member Loans. We believe it is no longer meaningful or beneficial to use separate
terms to describe the homogeneous loans issued to borrower members to reflect differences in their
financing sources. Accordingly, we have changed the captions and descriptions of all previously
reported loan-related amounts and information in this Quarterly Report to refer to all such items
as Member Loans.
In connection with the change in terminology described above and beginning with the quarter
ended September 30, 2011, we have revised the format of our consolidated statements of operations
to present the major components of interest income together, the major components of interest
expense together and then net interest income. In
previously issued financial statements, our consolidated statements of operations presented
the interest income, interest expense and net interest income related to Member Loans at amortized
cost separately from the interest income, interest expense and net interest income related to
Member Loans at fair value (formerly known as CM Loans). This revised financial statement format
is a widely used presentation for lending institutions, which we believe is a simple and useful
presentation. As explained more fully in Note 1 (Basis of Presentation) to the consolidated
financial statements, certain amounts in prior quarters consolidated statements of operations
related to interest income on Member Loans, interest income on cash and cash equivalents and
interest expense on loans payable have been reclassified to conform to this new presentation.
These reclassifications had no net impact on previously reported results of consolidated operations
or consolidated stockholders equity.
1
Table of Contents
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. | Consolidated Financial Statements |
LendingClub Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(Unaudited)
September 30, 2011 | March 31, 2011 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 32,205,637 | $ | 13,335,657 | ||||
Restricted cash |
1,022,000 | 862,000 | ||||||
Member Loans at fair value |
227,422,668 | 149,971,989 | ||||||
Member Loans at amortized cost, net of allowance for loan losses |
2,766,573 | 5,253,278 | ||||||
Other receivables |
360,812 | 109,337 | ||||||
Prepaid expenses and other assets |
220,450 | 63,382 | ||||||
Property and equipment, net |
376,746 | 214,991 | ||||||
Deposits |
107,706 | 57,756 | ||||||
Total assets |
$ | 264,482,592 | $ | 169,868,390 | ||||
LIABILITIES |
||||||||
Accounts payable |
$ | 1,258,276 | $ | 259,682 | ||||
Accrued expenses |
1,568,874 | 1,450,936 | ||||||
Notes, at fair value |
225,004,985 | 149,777,817 | ||||||
Loans payable, net of debt discount |
1,329,738 | 2,872,586 | ||||||
Total liabilities |
$ | 229,161,873 | $ | 154,361,021 | ||||
Commitments and contingencies (see Note 13) |
||||||||
PREFERRED STOCK |
||||||||
Preferred stock |
$ | 78,764,113 | $ | 52,850,391 | ||||
Total preferred stock |
$ | 78,764,113 | $ | 52,850,391 | ||||
STOCKHOLDERS DEFICIT |
||||||||
Common stock |
$ | 88,157 | $ | 85,716 | ||||
Additional paid-in capital |
4,376,135 | 4,025,914 | ||||||
Accumulated deficit |
(47,907,686 | ) | (41,454,652 | ) | ||||
Total stockholders deficit |
(43,443,394 | ) | (37,343,022 | ) | ||||
Total liabilities, preferred stock and stockholders deficit |
$ | 264,482,592 | $ | 169,868,390 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Table of Contents
LendingClub Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Unaudited)
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||
Interest Income |
||||||||||||||||||
Member Loans at fair value: |
||||||||||||||||||
Interest revenue |
$ | 6,277,944 | $ | 2,621,387 | $ | 11,269,335 | $ | 4,505,972 | ||||||||||
Origination fees |
2,940,193 | 1,521,953 | 5,384,137 | 2,666,910 | ||||||||||||||
Member Loans at amortized cost, net |
155,376 | 223,512 | 343,528 | 450,339 | ||||||||||||||
Cash and cash equivalents |
4,271 | 10,485 | 10,042 | 16,803 | ||||||||||||||
Total Interest Income |
9,377,784 | 4,377,337 | 17,007,042 | 7,640,024 | ||||||||||||||
Interest Expense |
||||||||||||||||||
Notes interest expense |
(6,224,160 | ) | (2,621,387 | ) | (11,215,551 | ) | (4,505,972 | ) | ||||||||||
Note interest expense reduction for servicing fee |
281,837 | 111,919 | 507,759 | 217,074 | ||||||||||||||
Loans payable |
(69,429 | ) | (254,736 | ) | (171,817 | ) | (550,251 | ) | ||||||||||
Total Interest Expense |
(6,011,752 | ) | (2,764,204 | ) | (10,879,609 | ) | (4,839,149 | ) | ||||||||||
Net interest income |
3,366,032 | 1,613,133 | 6,127,433 | 2,800,875 | ||||||||||||||
Provision for loan losses on Member Loans at amortized cost |
(80,240 | ) | (91,706 | ) | (155,144 | ) | (273,720 | ) | ||||||||||
Fair valuation adjustments, Member Loans at fair value |
(4,230,842 | ) | (2,153,128 | ) | (7,053,662 | ) | (3,817,433 | ) | ||||||||||
Fair valuation adjustments, Notes |
4,136,376 | 2,151,566 | 6,958,939 | 3,814,374 | ||||||||||||||
Net interest income after provision for loan losses and
fair valuation adjustments |
3,191,326 | 1,519,865 | 5,877,566 | 2,524,096 | ||||||||||||||
Other revenue |
212,637 | 64,265 | 311,923 | 165,265 | ||||||||||||||
Total net revenue |
3,403,963 | 1,584,130 | 6,189,489 | 2,689,361 | ||||||||||||||
Operating expenses: |
||||||||||||||||||
Sales, marketing and customer service |
(4,289,476 | ) | (3,076,359 | ) | (8,147,315 | ) | (5,374,725 | ) | ||||||||||
Engineering |
(666,736 | ) | (500,198 | ) | (1,186,875 | ) | (998,569 | ) | ||||||||||
General and administrative |
(1,794,108 | ) | (946,463 | ) | (3,308,334 | ) | (1,780,191 | ) | ||||||||||
Total operating expenses |
(6,750,320 | ) | (4,523,020 | ) | (12,642,524 | ) | (8,153,485 | ) | ||||||||||
Loss before provision for income taxes |
(3,346,357 | ) | (2,938,890 | ) | (6,453,035 | ) | (5,464,124 | ) | ||||||||||
Provision for income taxes |
| | | | ||||||||||||||
Net loss |
$ | (3,346,357 | ) | $ | (2,938,890 | ) | $ | (6,453,035 | ) | $ | (5,464,124 | ) | ||||||
Net loss attributable to common stockholders |
$ | (3,346,357 | ) | $ | (2,938,890 | ) | $ | (6,453,035 | ) | $ | (5,464,124 | ) | ||||||
Basic and diluted net loss per share |
$ | (0.38 | ) | $ | (0.34 | ) | $ | (0.74 | ) | $ | (0.64 | ) | ||||||
Weighted-average shares of common stock used in
computing basic and diluted net loss per share |
8,727,389 | 8,565,011 | 8,665,184 | 8,561,654 |
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
LendingClub Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Unaudited)
For the Six Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (6,453,035 | ) | $ | (5,464,124 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Depreciation |
60,574 | 37,934 | ||||||
Amortization of debt discounts |
57,117 | 149,668 | ||||||
Fair valuation adjustments, net |
94,723 | 3,059 | ||||||
Stock based compensation expense |
268,413 | 173,624 | ||||||
Amortization of net deferred loan fees and costs |
(14,765 | ) | 9,759 | |||||
Other non-cash expenses |
78 | 70,501 | ||||||
Provision for loan losses |
155,144 | 273,720 | ||||||
Changes in operating assets and liabilities |
||||||||
Other receivables |
(251,475 | ) | (6,909 | ) | ||||
Prepaid expenses and other assets |
(157,068 | ) | 157,798 | |||||
Deposits |
(49,950 | ) | (10,983 | ) | ||||
Accounts payable |
998,594 | 199,098 | ||||||
Accrued expenses |
117,938 | 47,179 | ||||||
Deferred revenue |
| (13,597 | ) | |||||
Net cash used in operating activities |
(5,173,712 | ) | (4,373,273 | ) | ||||
Cash flows from investing activities |
||||||||
Origination of Member Loans at fair value |
(123,537,056 | ) | (63,558,925 | ) | ||||
Origination of Member Loans at amortized cost, net |
(1,063,821 | ) | (1,613,925 | ) | ||||
Repayment of Member Loans at fair value |
41,588,088 | 15,853,311 | ||||||
Repayment of Member Loans at amortized cost |
854,697 | 2,717,278 | ||||||
Net change in restricted cash |
(160,000 | ) | 500,000 | |||||
Purchase of property and equipment |
(222,329 | ) | (68,670 | ) | ||||
Net cash used in investing activities |
(82,540,421 | ) | (46,170,931 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of Notes at fair value |
124,210,169 | 63,622,800 | ||||||
Payments on loans payable |
(1,599,965 | ) | (3,077,417 | ) | ||||
Payments on Notes at fair value |
(42,024,062 | ) | (15,912,253 | ) | ||||
Proceeds from issuance of Series C convertible preferred stock, net of issuance costs |
| 24,387,945 | ||||||
Proceeds from issuance of Series D convertible preferred stock, net of issuance costs |
25,913,722 | | ||||||
Proceeds from issuance of common stock |
84,249 | 7,898 | ||||||
Net cash provided by financing activities |
106,584,113 | 69,028,973 | ||||||
Net increase in cash and cash equivalents |
18,869,980 | 18,484,769 | ||||||
Cash and cash equivalents beginning of period |
13,335,657 | 2,572,174 | ||||||
Cash and cash equivalents end of period |
$ | 32,205,637 | $ | 21,056,943 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 10,826,333 | $ | 4,689,481 | ||||
Supplemental disclosure of non-cash investing
and financing activities: |
||||||||
Reclassification of Member Loans held at amortized cost to
Member Loans held at fair value |
$ | 2,555,373 | $ | 38,829 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
LENDINGCLUB CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(Unaudited)
1. Basis of Presentation
The consolidated balance sheets as of September 30, 2011 and March 31, 2011, the consolidated
statements of operations for the three and six months ended September 30, 2011 and 2010,
respectively, and the consolidated statements of cash flows for the six months ended September 30,
2011 and 2010, respectively, have been prepared by LendingClub Corporation (LendingClub)
(referred to herein as we, our the company and us) in conformity with U.S. generally
accepted accounting principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all necessary adjustments (which
include only normal recurring adjustments) have been made for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results for the full
fiscal year.
Certain information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with accounting principles generally accepted in the United
States have been condensed or omitted. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes included in our Annual
Report on Form 10-K for the year ended March 31, 2011.
Beginning with this Quarterly Report on Form 10-Q, we refer to all loans made to borrower
members as Member Loans. In previously issued financial statements, loans financed by Notes were
referred to as CM Loans and loans financed by us via sources of funds other than Notes were
referred to as Member Loans. Accordingly, we have changed the captions and descriptions of all
previously reported loan-related amounts and information in this Quarterly Report to refer to all
such items as Member Loans.
In connection with the change in terminology described above and beginning with this Quarterly
Report on Form 10-Q, we have revised the format of the consolidated statements of operations to
present the major components of interest income together, the major components of interest expense
together and then net interest income. In previously issued financial statements, the consolidated
statements of operations presented the interest income, interest expense and net interest income
related to Member Loans at amortized cost separately from the interest income, interest expense and
net interest income related to Member Loans at fair value (formerly known as CM Loans).
Accordingly, as explained more fully in Note 2 Summary of Significant Accounting
Policies, certain amounts in prior quarters consolidated statements of operations have been
reclassified to conform to the current periods presentation and the reclassifications has had no
net impact on previously reported results of consolidated operations or consolidated stockholders
equity.
2. Summary of Significant Accounting Policies
Consolidation Policies
The consolidated financial statements include the accounts of the Company and its subsidiary,
LC Advisors, LLC, a California limited liability company (LCA) and LC Trust I, a Delaware
business trust (Trust). In determining whether to consolidate an entity, the Companys policy is
to consider factors such as: (i) whether the Company has an equity investment or ownership interest
greater than 50% and control over significant operating, financial and investing decisions, or,
(ii) variable interest entities (VIEs) in which the Companys equity investment at risk is
insufficient to allow the entity to finance its activities without additional subordinated
financial support or when the Companys equity investment at risk in the VIE lacks any of the
following characteristics of a controlling financial interest: the direct or indirect ability
through voting rights or similar rights to make decisions about a legal entitys activities that
have a significant effect on the entitys success, the obligation to absorb the expected losses of
the entity or the right to receive the expected residual returns of the legal entity.
LCA is wholly-owned by the Company, and the Company consolidates LCAs operations and all
intercompany accounts have been eliminated.
5
Table of Contents
The purpose of the Trust is to acquire portions of Member Loans from the Company and hold them
for the benefit of investors that purchase Member Loan Payment Dependent Trust Certificates
(Certificates) issued by the Trust. The Companys capital contributions have been insufficient to
allow the Trust to finance its holdings of Member Loans without the issuance of Certificates.
Additionally, the Certificates are structured so that the Companys equity investment is not
obligated to absorb the expected losses of the entity. The Certificates absorb payment delays and
realized losses on their related Member Loans due to the member loan payment dependent design of
the Certificates. The Company was the initial beneficiary of the Trust at its formation and is now
the residual beneficiary of the Trust, although the residual benefits of the Trust are expected to
be insignificant due to the design of the Trust. Accordingly, under ASC 810-10-15-14, the
Companys capital contributions to the Trust qualify as equity investments in a VIE and the Company
has consolidated the Trusts operations and all intercompany accounts have been eliminated.
Liquidity
We have incurred operating losses since our inception. For the three months ended September
30, 2011 and 2010, we incurred net losses of $3,346,357 and $2,938,890, respectively. For the six
months ended September 30, 2011 and 2010, we incurred net losses of $6,453,035 and $5,464,124,
respectively. For the six months ended September 30, 2011 and 2010, we had negative cash flows
from operations of $5,173,712 and $4,373,273, respectively. Additionally, we have an accumulated
deficit of $47,907,686 since inception and a stockholders deficit of $43,443,394 as of September
30, 2011.
Since our inception, we have financed our operations through debt and equity financing from
various sources. We are dependent upon raising additional capital and/or seeking additional debt
financing to fund our operating plans. Failure to obtain sufficient debt and/or equity financing
in the future 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/or capital might be available in the future, if at all.
During the three months ended September 30, 2011, we issued 7,308,708 shares of Series D
convertible preferred stock for aggregate cash consideration of approximately $26,000,000. In
connection with our private placement of Series D convertible preferred stock, we incurred
transaction expenses of $96,277 that were recorded as an offset to gross proceeds.
Use of Estimates
The preparation of consolidated 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 consolidated
financial statements and accompanying notes. We base our estimates on historical experience,
current information and various other factors we believe to be relevant and reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities. 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 determinations; (3) allowance for loan losses; and (4)
share-based compensation. These estimates and assumptions are inherently subjective in nature,
actual results may differ from these estimates and assumptions, and the differences could be
material.
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.
Restricted Cash
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 processed on our
platform.
6
Table of Contents
Member Loans
All Member Loans originated from the Companys inception through April 7, 2008, either were
sold to third party investors or held for investment on our balance sheet. Sales of loans to third
party investors were discontinued April 7, 2008. All Member Loans originated since April 7, 2008,
have been held for investment on our balance sheet based on managements intent and ability to hold
such loans for the foreseeable future or to maturity. Two alternative accounting methods have been
used to account for Member Loans held for investment and the choice of accounting method roughly
paralleled the method of financing the loans at their origination, as discussed below.
Beginning October 13, 2008, Member Loans were able to be financed by Notes issued by us to
investors, and the majority of Member Loans originated since that date have been financed in that
manner. These Notes are special limited recourse obligations of LendingClub. Each series of Notes
corresponds to a single corresponding Member Loan originated through our platform and the payments
to investors in the Notes are directly dependent on the timing and amounts of payments received on
the related Member Loan. If we do not receive a payment on the Member Loan, we are not obligated
to and will not make any payments on the corresponding Notes. In conjunction with this financing
structure effective as of October 13, 2008, we adopted the provisions of FASB ASC 825-10, which
permits companies to choose to measure certain financial instruments and certain other items at
fair value. Accordingly, since October 13, 2008, we have elected the fair value option for
Member Loan originations that were financed by Notes (Member Loans at fair value) and also
elected the fair value option for the related Notes to reflect the instruments payment dependent
relationship. The accounting standard requires that estimated unrealized gains and losses on
financial instruments for which the fair value option has been elected be reported in earnings.
We also originate some Member Loans and finance them ourselves, with sources of funds other
than Notes, to ensure sufficient financing for loans desired by our borrower members. Funds to
finance such Member Loan originations were obtained through our borrowings under loan facilities
with various entities (see Note 6 Loans Payable) and issuance of various series of
preferred stock (see Note 8 Preferred Stock). Member Loans that are financed by us are
carried at amortized cost, reduced by a valuation allowance for estimated credit losses incurred as
of the balance sheet date (Member Loans at amortized cost). The amortized cost of such Member
Loans includes their unpaid principal balance net of unearned income, which is comprised of
origination fees charged to borrower members and offset by our incremental direct origination costs
for the loans. Unearned income is amortized ratably over the member loans contractual life using
a method that approximates the effective interest method.
Member Loans at Fair Value and Notes at Fair Value
The aggregate fair values of the Member Loans at fair value and Notes are reported as separate
line items in the assets and liabilities sections of our consolidated balance sheets using the
methods and disclosures related to fair value accounting that are described in FASB ASC 820.
Fair value is defined 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 the fair value of the Member Loans at fair value and Notes are predominantly unrealized gains
and losses and are recognized separately in earnings.
We determined the fair value of the Member Loans at fair value and Notes in accordance with
the fair value hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs, which generally requires significant management judgment,
when measuring fair value. FASB ASC 820 establishes the following hierarchy for categorizing these
inputs:
Level 1 | Quoted market prices in active markets for identical assets or liabilities; |
Level 2 | Significant other observable inputs (e.g. quoted prices for similar items in
active markets, quoted prices for identical or similar items in markets that are not
active, inputs other than quoted prices that are observable such as interest rate and yield
curves, and market-corroborated inputs); and |
Level 3 | Significant unobservable inputs. |
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Since observable market prices are not available for similar assets and liabilities, we
believe the Member Loans at fair value and Notes should be considered Level 3 financial
instruments. For Member Loans at fair value, the fair
values are estimated using the loans amortized cost adjusted for our expectation of both the
rate of default of the loans within each credit score band and the amount of loss in the event of
default. A reduction in the expected future cash flows from the Member Loans at fair value due to
expected default and loss results in a reduction of their estimated fair values.
Our obligation to pay principal and interest on any Note is equal to the pro-rata portion of
the payments, if any, received on the related Member Loan at fair value, net of a servicing fee.
As such, any reduction in the expected future payments on a Member Loan at fair value due to
default and loss, reduces the expected future payments on the related Notes by a comparable amount,
thereby reducing the fair value of the Notes. The fair value of a given principal amount of Notes
is approximately equal to the fair value of a comparable principal amount of the related Member
Loan at fair value, adjusted for the servicing fee. The effective interest rate associated with a
Note will be less than the interest rate earned on the related Member Loan at fair value due to the
servicing fee. For additional discussion on this topic, see Note 5 Member Loans at Fair
Value and Notes.
Allowance for Loan Losses
We may incur losses if borrower members fail to pay their monthly scheduled loan payments.
The allowance for loan losses applies only to Member Loans at amortized cost and is a valuation
allowance that is established as losses are estimated to have occurred at the balance sheet date
through a provision for loan losses charged to earnings. Realized loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is confirmed.
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 Member Loans at amortized cost, 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 for Member Loans at
amortized cost is subjective, complex and requires judgment by management about the effects of
matters that are inherently uncertain, and actual losses may differ from our estimates.
Our estimate of the required allowance for loan losses for Member Loans at amortized cost is
developed by estimating both the rate of default of the loans within each credit score band using
the FICO credit scoring model, 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.
Impaired Loans
The Member Loan portfolio is comprised of homogeneous, unsecured loans made to borrower
members. We make an initial assessment of whether a loan is impaired no later than the 90th day of
delinquency of that loan and at least quarterly thereafter based on their payment status and
information gathered through our collection efforts. A Member Loan at amortized cost is
considered impaired when, based on loan specific information gathered through our collection
efforts, it is probable that we will be unable to collect all the scheduled payments of principal
or interest due according to the contractual terms of the original loan agreement. Impaired loans
generally include loans 90 days or more past due. A loan that has reached its 120th day
of delinquency is classified as a nonaccrual loan and we stop accruing interest. Once a loan is
deemed uncollectible, 100% of the outstanding balance is charged-off, no later than the
150th day of delinquency.
Revenue Recognition
Revenues primarily result from interest income and fees earned on Member Loans originated
through our online platform. Fees include loan origination fees (borrower member paid), servicing
fees (investor member paid) and management fees (paid by limited partners in investment funds).
The loan origination fee charged to each borrower member is determined by the credit grade of
that borrower members loan and as of September 30, 2011, ranged from 1.11% to 5.00% of the
aggregate member loan amount. 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 transaction to transfer funds from our platform accounts to the borrower
members bank account.
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The recognition of interest and fee revenue is determined by the accounting method applied to
each Member Loan, which include:
| Member Loans at Fair Value Member Loans originated on or after October 13,
2008 for which fair value accounting was elected. |
| Member Loans at Amortized Cost Member Loans originated at any time since
Company inception through September 30, 2011 and accounted for at amortized cost. |
| Member Loans Sold
Directly to Third Party Investor Members Member loans
originated and sold to third party investor members, with servicing retained, which sales
were discontinued April 7, 2008. |
The recognition of interest and fee revenue for Member Loans under each of the three
accounting methods is described below.
Member Loans at Fair Value
We record interest income on Member Loans at fair value as earned. Loans reaching 120 days
delinquency are classified as nonaccrual loans and we stop accruing interest.
Origination fees on Member Loans at fair value are recognized upon origination of the loan and
included in interest income (See Note 12 Net Interest Income). Direct costs to
originate Member Loans at fair value are recognized as operating expenses as incurred.
When we receive payments of principal and interest on Member Loans at fair value, we make
principal and interest payments on related Notes, net of any applicable servicing fees paid by Note
holders, which range up to 1.00% of the principal and interest payments received on the related
Member Loans. The principal payments reduce the carrying values of both the Member Loans at fair
value and the related Notes. When explicit servicing fees apply, we do not directly record
servicing fee revenue related to payments on the Member Loan at fair value. Instead, we record
interest expense on the corresponding Notes based on the post-service fee interest payments we make
to our investor members which results in an interest expense on these Notes that is lower than the
interest income on the Member Loan at fair value.
Member Loans at Amortized Cost
We record interest income on Member Loans at amortized cost as earned. Loans reaching 120
days delinquency are classified as nonaccrual loans and we stop accruing interest.
Origination fees and direct loan origination costs attributable to originations of Member
Loans at amortized cost are offset and the net amount is deferred and amortized over the lives of
the loans as an adjustment to the interest income earned on the loans (See Note 12 Net
Interest Income).
As discussed later in this Note 2 Summary of Significant Accounting Principles,
effective October 1, 2011, we revised our accounting policy for all Member Loans to elect the fair
value accounting option for all Member Loans originated on and after October 1, 2011. As a result,
there will be no new Member Loan originations that are accounted for at amortized cost after
September 30, 2011.
Management Fees
LCA is the general partner of two private investment funds (Funds) in which it has made no
capital contributions. The Funds invest in Certificates issued by the Trust. Beginning in March
2011, LCA began charging limited partners in the Funds a monthly management fee, payable monthly in
arrears, based on a limited partners capital account balance as of the end of each month. This
management fee can be modified or waived at the
discretion of the general partner. These management fees are classified in the consolidated
statements of operations as a component of other revenue.
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Fair Valuation Adjustments of Member Loans at Fair Value and Notes at Fair Value
We include in earnings the estimated unrealized fair value gains or losses during the period
attributable to changes in the instrument-specific credit risk of Member Loans at fair value, and
the offsetting estimated fair value losses or gains attributable to the expected changes in future
payments on Notes. We estimate the fair value of Member Loans that are accounted for at fair value
by adjusting the loans amortized cost for our expectation of the rate of default on the loans
assuming zero recovery on the defaulted loans. At origination and at each reporting period, we
recognize a fair valuation adjustment for the current estimated defaults and losses for the Member
Loans at fair value and a fair valuation adjustment for the corresponding effects on future
payments due on the Notes. The fair valuation adjustment related to estimated defaults and losses
on a given principal amount of a Member Loan at fair value will always be slightly larger than the
corresponding estimated fair valuation adjustment on the related principal amount of Notes because
the Member Loan that is accounted for at fair value has a slightly higher interest rate than the
effective interest rate on the related Notes due to the impact of the servicing fee.
Concentrations of credit risk
Financial instruments that potentially subject us to significant concentrations of credit
risk, consist principally of cash, cash equivalents, restricted cash, and Member Loans. We hold
our cash, cash equivalents and restricted cash in accounts at various financial institutions. We
are exposed to credit risk in the event of default by these institutions to the extent the amounts
at each institution periodically exceed the applicable 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 expected credit losses, as described
above. Additionally, the potential credit risk to the Company from Member Loans is significantly
mitigated to the extent that loans are financed by Notes or Certificates that contain the member
payment dependency provision.
Stock-Based Compensation
All share-based awards made to employees, including grants of employee stock options,
restricted stock and employee stock purchase rights, are recognized in the consolidated financial
statements based on their respective grant date fair values. Any benefits of tax deductions in
excess of recognized compensation cost are reported as a financing cash flow.
The fair value of share-option awards is estimated on the date of grant using the
Black-Scholes option pricing model. The Black-Scholes option pricing model considers, among other
factors, the expected term of the option award, the expected volatility of our stock price and
expected future dividends, if any.
Forfeitures of awards are estimated at the time of grant and revised, as 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 ASC 718-505-50, Equity-Based Payments to Non-Employees, which requires that equity
awards be recorded at their fair value. We use the Black-Scholes model to estimate the value of
options granted to non-employees at each vesting date to determine the appropriate charge to
stock-based compensation. The assumed volatility of the price of our common stock was based on
comparative company volatility.
Reclassification of Prior Quarter Amounts
Certain amounts in prior quarters consolidated statements of operations for interest income
related to Member Loans at amortized cost and interest income earned on Member Loans at fair value,
interest income on Cash Equivalents, interest expense on Loans Payable, as well as the fair
valuation adjustments recognized in earnings related to Member Loans at fair value and Notes, have
been reclassified to conform to our new financial statement
presentation. These reclassifications had no net impact on previously reported results of
consolidated operations or consolidated stockholders equity.
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New accounting pronouncements
In July 2010, the FASB issued Standards Update (ASU) No. 2010-20, Receivables (Topic 310):
Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
The ASU requires further disaggregated disclosures that improve financial statement users
understanding of: 1) the nature of an entitys credit risk associated with its financing
receivables, and 2) the entitys assessment of that risk in estimating its allowance for credit
losses as well as changes in the allowance and the reasons for those changes. For public entities,
the new and amended disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010, and the disclosures about activity
that occurs during a reporting period are effective for interim and annual reporting periods
beginning on or after December 15, 2010. For nonpublic entities, the disclosures are effective for
annual reporting periods ending on or after December 15, 2011. Since we only file consolidated
financial statements with the SEC and do not meet any of the conditions listed below, we are
considered a nonpublic entity with respect to determination of the effective date of ASU 2010-20:
| Its debt or equity securities, including securities quoted only locally or regionally,
trade in a public market either on stock exchange (domestic or foreign) or in an
over-the-counter market. |
| It is a conduit bond obligor for conduit debt securities that are traded in a public
market (a domestic or foreign stock exchange or an over-the-counter market, including
local or regional markets). |
| It files with a regulatory agency in preparation for the sale of any class of debt or
equity securities in a public market. |
| It is controlled by an entity covered by any of the preceding criteria. |
Thus, we are required to adopt the provisions of ASU 2010-20 for the annual reporting period
ending on March 31, 2012. The adoption of this standard is not expected to have a material effect
on the Companys results of consolidated operations or financial position but will require
expansion of future disclosures.
In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-02, Receivables (Topic 310): A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. The ASU clarifies which loan modifications
constitute troubled debt restructurings. It is intended to assist creditors in determining whether
a modification of the terms of a receivable meets the criteria to be considered a troubled debt
restructuring (TDR), both for purposes of recording an impairment loss and for disclosure of a
TDR. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude
that both of the following exist: (a) the restructuring constitutes a concession; and (b) the
debtor is experiencing financial difficulties. The amendments to ASU Topic 310, Receivables,
clarify the guidance on a creditors evaluation of whether it has granted a concession and whether
a debtor is experiencing financial difficulties. For public entities, ASU No. 2011-02 is effective
for the first interim or annual period beginning on or after June 15, 2011, and applies
retrospectively to restructurings occurring on or after the beginning of the fiscal year of
adoption. For nonpublic entities, the disclosures are effective for the annual period ending after
December 15, 2012, including interim periods within that annual period. The Company is considered
a nonpublic entity with respect to determination of the effective date of this ASU. Therefore, the
Company must adopt this ASU for its fiscal year ending March 31, 2013, and interim periods within
that fiscal year. This guidance is not expected to have a material effect on our identification of
troubled debt restructurings or disclosures.
The FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, in May 2011. This ASU
represents the converged guidance of the FASB and the IASB (the Boards) on fair value
measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have
resulted in common requirements for measuring fair value and for disclosing information about fair
value measurements, including a consistent meaning of the term fair value. The Boards have
concluded the common requirements will result in greater comparability of fair value measurements
presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.
The amendments to the Codification in this ASU are to be applied prospectively. For public
entities, the amendments are effective during interim and annual periods beginning after December
15, 2011. Early application
by public entities is not permitted. For nonpublic entities, the amendments are effective for
annual periods beginning after December 15, 2011, and should be applied prospectively. Nonpublic
entities may elect to apply the amendments early, but no earlier than interim periods beginning
after December 15, 2011. Because of the Companys requirement to file financial statements with
the SEC, the Company is considered a public entity for purposes of determining the effective date
of this ASU. Accordingly, the Company must adopt this ASU for its interim periods beginning
January 1, 2012, and annual periods beginning April 1, 2012. The impact of adoption of this ASU is
not expected to have a material effect on the Companys consolidated financial statements.
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The Comprehensive Income topic of the ASC (Topic 220) was amended in June 2011 by ASU 2011-05.
The amendment eliminates the option to present other comprehensive income as a part of the
statement of changes in stockholders equity. The amendment requires consecutive presentation of
the statements of operations and other comprehensive income and requires an entity to present
reclassification adjustments from other comprehensive income to net income on the face of the
financial statements. The amendment is applicable for public entities for the fiscal year, and
interim periods within that fiscal year, beginning after December 15, 2011, and retrospective
application is required. The amendment is applicable for nonpublic entities for the fiscal year
ending after December 15, 2012, and interim periods thereafter, and must be applied
retrospectively. Early adoption is permitted for public and nonpublic entities. Because of the
Companys requirement to file financial statements with the SEC, the Company is considered a public
entity for purposes of determining the effective date of this ASU. Accordingly, the Company must
adopt the ASU for the fiscal year beginning April 1, 2012, and interim periods within that fiscal
year. The impact of adoption of this ASU is not expected to have a material effect on the
Companys consolidated financial statements.
Change in Accounting Policy for Prospective Member Loan Originations
Effective October 1, 2011, we revised the accounting policy for Member Loans to elect the fair
value accounting option for all Member Loans originated on and after October 1, 2011. Prior to
October 1, 2011, Member Loan originations financed by Notes were accounted for at fair value and
Member Loan originations financed by us via sources of funds other than Notes were accounted for at
amortized cost. We believe this change in accounting policy will further simplify the accounting
and presentation of Member Loans, as all Member Loans eventually will be accounted for at fair
value once the existing Member Loans that are accounted for at amortized cost are no longer
outstanding.
3. Net Loss Attributable to Common Stockholders
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. Diluted
earnings per share, if presented, would include the dilution that would occur upon the exercise or
conversion of all potentially dilutive securities into common stock using the treasury stock
and/or if converted methods as applicable.
The convertible preferred stock (on an as-converted basis) is deemed to be anti-dilutive, and,
therefore is excluded from the computation of basic net loss per share. The following table
details the computation of the basic and diluted net loss per share:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss
attributable to
common
stockholders |
$ | (3,346,357 | ) | $ | (2,938,890 | ) | $ | (6,453,035 | ) | $ | (5,464,124 | ) | ||||
Weighted-average
common shares
outstanding, basic
and diluted |
8,727,389 | 8,565,011 | 8,665,184 | 8,561,654 | ||||||||||||
Net loss per
common share: |
||||||||||||||||
Basic and
diluted |
$ | (0.38 | ) | $ | (0.34 | ) | $ | (0.74 | ) | $ | (0.64 | ) |
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4. Member Loans at Amortized Cost
The outstanding balance of Member Loans at amortized cost are as follows:
September 30, 2011 | March 31, 2011 | |||||||
Principal balance |
$ | 3,200,483 | $ | 5,746,644 | ||||
Deferred origination costs/(revenue), net |
(181,185 | ) | (163,481 | ) | ||||
Net loans |
3,019,298 | 5,583,163 | ||||||
Allowance for loan losses |
(252,725 | ) | (329,885 | ) | ||||
Member Loans at amortized cost, net |
$ | 2,766,573 | $ | 5,253,278 | ||||
Ratio of allowance for loan losses to net loans |
8.4 | % | 5.9 | % |
An analysis of the allowance for loan losses follows:
Six Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Balance at beginning of period |
$ | 329,885 | $ | 781,758 | ||||
Charge-offs |
(232,304 | ) | (507,375 | ) | ||||
Provision for loan losses |
155,144 | 273,720 | ||||||
Balance at end of period |
$ | 252,725 | $ | 548,103 | ||||
The fair value of Member Loans at amortized cost is equivalent to their net carrying value.
As of September 30, 2011, our aggregate allowance for loan losses was $252,725, which
represented 8.4% of Member Loans at amortized cost. As of March 31, 2011, our aggregate allowance
for loan losses was $329,885, which represented 5.9% of Member Loans at amortized cost.
Loan loss provisions were $80,240 and $91,706 for the three months ended September 30, 2011
and 2010, respectively, and $155,144 and $273,720 for the six months ended September 2011 and 2010,
respectively. Loan loss provisions arise only from Member Loans at amortized cost, not from Member
Loans at fair value. For the six months ended September 30, 2011, we charged off a total of 89
Member Loans at amortized cost with an aggregate principal balance of $232,304 and for the six
months ended September 30, 2010, we charged off a total of 135 Member Loans at amortized cost with
an aggregate principal balance of $507,375.
At September 30, 2011, we had 32 Member Loans at amortized cost classified as impaired with a
total outstanding principal balance of $128,928 and specific allowances totaling $91,998. At March
31, 2011, we had 43 Member Loans at amortized cost classified as impaired with a total outstanding
principal balance of $118,171 and specific allowances totaling $66,685. Each impaired loan at each
period end had a specific allowance.
The average balances of impaired Member Loans at amortized cost and the interest income
recognized during the three and six month periods ended September 30, 2011, are as follows:
Three Months Ended | Six Months Ended | |||||||
September 30, 2011 | September 30, 2011 | |||||||
Average principal balance of impaired loans
during the period |
$ | 86,226 | $ | 102,199 | ||||
Interest income received and recognized |
$ | 1,098 | $ | 2,672 |
At September 30, 2011, we had 12 impaired Member Loans at amortized cost representing $57,178
of outstanding principal balance that were on nonaccrual status and at March 31, 2011, we had 16
impaired Member Loans at amortized cost representing $36,615 of outstanding principal balance that
were on nonaccrual status. If such nonaccrual loans reach 150 days delinquency, the outstanding
principal balance will be written off.
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5. Member Loans at Fair Value and Notes at Fair Value
At September 30, 2011 and March 31, 2011, we had the following assets and liabilities measured
at fair value on a recurring basis :
Member Loans at Fair Value | Notes at Fair Value | |||||||||||||||
September 30, | March 31, | September 30, | March 31, | |||||||||||||
2011 | 2011 | 2011 | 2011 | |||||||||||||
Aggregate principal balance outstanding |
$ | 239,860,496 | $ | 158,540,254 | $ | 237,333,455 | $ | 158,330,747 | ||||||||
Fair valuation adjustments |
(12,437,828 | ) | (8,568,265 | ) | (12,328,470 | ) | (8,552,930 | ) | ||||||||
Fair value |
$ | 227,422,668 | $ | 149,971,989 | $ | 225,004,985 | $ | 149,777,817 | ||||||||
We determined the fair values of Member Loans at fair value and Notes at fair value
using inputs and methods that are categorized in the fair value hierarchy of ASC 820, as follows:
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Fair Value | |||||||||||||
September 30, 2011 |
||||||||||||||||
Assets: |
||||||||||||||||
Member Loans at fair value |
$ | | $ | | $ | 227,422,668 | $ | 227,422,668 | ||||||||
Liabilities: |
||||||||||||||||
Notes |
$ | | $ | | $ | 225,004,985 | $ | 225,004,985 | ||||||||
March 31, 2011 |
||||||||||||||||
Assets: |
||||||||||||||||
Member Loans at fair value |
$ | | $ | | $ | 149,971,989 | $ | 149,971,989 | ||||||||
Liabilities: |
||||||||||||||||
Notes |
$ | | $ | | $ | 149,777,817 | $ | 149,777,817 |
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 six months ended September 30, 2011:
Member Loans | ||||||||
at fair value | Notes | |||||||
Fair value at March 31, 2011 |
$ | 149,971,989 | $ | 149,777,817 | ||||
Originations |
123,537,056 | 124,210,169 | ||||||
Reclassification of Member Loans at amortized cost |
2,555,373 | | ||||||
Principal repayments |
(41,588,088 | ) | (42,024,062 | ) | ||||
Carrying value before period-end fair value adjustments |
234,476,330 | 231,963,924 | ||||||
Fair valuation adjustments, included in earnings |
(7,053,662 | ) | (6,958,939 | ) | ||||
Fair value at September 30, 2011 |
$ | 227,422,668 | $ | 225,004,985 | ||||
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Fair value adjustment gains/(losses) for Member Loans at fair value were $(4,230,842) and
$(2,153,128) for the three months ended September 30, 2011 and 2010, respectively, and $(7,053,662)
and $(3,817,433) for the six
months ended September 2011 and 2010, respectively. Fair value adjustment gains/(losses) for
Notes was $4,136,376 and $2,151,566 for the three months ended September 30, 2011 and 2010,
respectively, and $6,958,939 and $3,814,374 for the six months ended September 2011 and 2010,
respectively. The fair value adjustments for Member Loans at fair value were largely offset by the
fair value adjustments of the Notes due to the member-payment-dependent design of the Notes and
because the principal balances of the Member Loans at fair value were very close to the principal
balances of the Notes. Accordingly, the net fair value adjustment gains/(losses) for Member Loans
and Notes was $(94,446) and $(1,562) for the three months ended September 30, 2011 and 2010,
respectively, and $(94,723) and $(3,059) for the six months ended September 2011 and 2010,
respectively.
The majority of fair valuation adjustments included in earnings is attributable to changes in
instrument-specific credit risk. All fair valuation adjustments were related to Level 3
instruments during the six month period ended September 30, 2011. A specific loan that is deemed
to have a higher probability of default than previously estimated lowers the expected future cash
flows of the Member Loans at fair value over its remaining life, which reduces its estimated fair
value. Because the payments to holders of Notes directly reflect the payments received on Member
Loans at fair value, a reduction of the expected future payments on Member Loans at fair value
reduces the estimated fair values of the related Notes. Expected and realized loan losses on
Member Loans at fair value are offset to the extent that the loans are financed by Notes that
absorb the related loan losses. The net change in fair values of Member Loans at fair value and
Notes for the six month period ended September 30, 2011, attributable to instrument-specific credit
risk was a net loss of $94,723, which was included in earnings. The net change in fair values of
Member Loans and Notes for the six months ended September 30, 2010, attributable to
instrument-specific credit risk was a net loss of $3,059, which was included in earnings.
At September 30, 2011, we had 254 Member Loans at fair value that were 90 days or more past
due that had a total outstanding principal balance of $1,859,907, aggregate adverse fair value
adjustments totaling $1,359,426 and an aggregate fair value of $500,481. At March 31, 2011, we had
186 Member Loans at fair value that were 90 days or more past due that had a total outstanding
principal balance of $1,461,924, aggregate adverse fair value adjustments of $909,551 and an
aggregate fair value of 552,373.
At September 30, 2011, we had 94 Member Loans at fair value representing $657,658 of
outstanding principal and $44,664 of fair value, and Notes with a fair value of $44,426 that were
on nonaccrual status. At March 31, 2011, we had 69 Member Loans at fair value representing
$550,652 of outstanding principal and $26,735 of fair value and Notes with a fair value of $26,669
that were on nonaccrual status. If such nonaccrual loans reach 150 days delinquency, the
outstanding principal balance will be written off.
6. Loans Payable
Loans payable consist of the following:
September 30, 2011 | March 31, 2011 | |||||||
Growth capital term loan |
$ | 635,298 | $ | 1,166,268 | ||||
Unamortized discount on growth capital term loan |
(19,175 | ) | (38,189 | ) | ||||
Financing term loan |
607,136 | 1,214,482 | ||||||
Unamortized discount on financing term loan |
(19,255 | ) | (39,792 | ) | ||||
Private placement notes |
128,783 | 590,432 | ||||||
Unamortized discount on notes payable |
(3,049 | ) | (20,615 | ) | ||||
Total loans payable, net of debt discount |
$ | 1,329,738 | $ | 2,872,586 | ||||
At September 30, 2011, future maturities due on all loans payable were as follows:
Fiscal year ending March 31, | ||||
2012 |
$ | 1,001,722 | ||
2013 |
369,495 | |||
1,371,217 | ||||
Less amount representing debt discount |
(41,479 | ) | ||
Total loans payable |
$ | 1,329,738 | ||
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Amended and restated term loan August 2009
Effective August 3, 2009, we consolidated our growth capital term loan, financing term loan
and 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. The terms of these two amended and
restated agreements include that we continue to secure our borrowings by a blanket lien on
substantially all of our assets, except for our intellectual property rights, certain deposit
accounts, and payments we receive on Member Loans that are financed by Notes, maintain combined
certificates of deposit in the amount of $700,000 as collateral until repayment and maintain a
minimum collateral ratio. At September 30, 2011, we do not have any remaining capacity under these
agreements as we have fully drawn the entire $13,000,000 of the combined non-revolving availability
under the amended and restated growth capital term loan and the amended and restated financing term
loan. As of September 30, 2011 and March 31, 2011, the outstanding principal balances under these
agreements totaled $1,242,434 and $2,380,750, respectively.
In connection with the growth capital term loan and its subsequent amendments, we issued fully
exercisable warrants to purchase 164,320 shares of Series A convertible preferred stock at an
exercise price of $1.065 per share, for which we recorded debt discounts of $105,913. Amortization
of the debt discounts recorded for this loan, as amended, was $9,507, $16,529, $19,013 and $33,058
for the three and six months ended September 30, 2011 and 2010, respectively, and were recorded as
interest expense.
In connection with the financing term loan agreement, we issued fully exercisable warrants to
purchase an aggregate of 328,637 shares of Series A convertible preferred stock at a price of
$1.065 per share and recorded total debt discounts of $277,962. Amortization of the debt discounts
recorded for this loan was $10,269, $30,866, $20,537 and $61,732 for the three and six months ended
September 30, 2011 and 2010, respectively, and was recorded as interest expense.
In connection with the May 2009 term loan facility, we issued fully exercisable warrants to
purchase 187,090 shares of Series B convertible preferred stock with an exercise price of $0.7483
per share and recorded total debt discounts of $184,860. Amortization of these debt discounts is
included in the amortization amounts of debt discounts presented above for the growth capital term
loan and the financing term loan.
Private placement notes
During the year ended March 31, 2009, we entered into a series of loan and security agreements
with accredited investors providing for loans evidenced by notes payable totaling $4,707,964. Each
private placement 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 private placement notes which
bear interest at the rate of 8% per annum. The balance of the private placement notes at September
30, 2011 and March 31, 2011 is $125,734 and $569,817, respectively.
We used the proceeds of these private placement notes to fund Member Loans. In connection
with origination of these private placement notes, we issued fully exercisable warrants to purchase
an aggregate of 514,817 shares of Series A convertible preferred stock (see Note 8 Preferred
Stock). Upon issuance of the warrants, we recorded a debt discount of $329,271, and
amortization of the debt discount was recorded as interest expense of $3,359 and $27,439 and
$17,566 and $54,878, respectively, for the three and six months ended September 30, 2011 and 2010.
7. Related Party Transactions
Of the private placement notes described in Note 6 Loans Payable, $450,000 of
original principal was invested by related parties on terms identical to those given to the other
private placement note investors. At September 30, 2011 and March 31, 2011, the outstanding
principal balance of these notes was $0 and $51,108, respectively.
The Company paid to Camelot Financial Capital Management (whose President is Simon Williams,
a member of our Board) during the three and six months ended September 30, 2011 and 2010, $0,
$15,000, $0 and $21,323, respectively, for consulting services that they provided to the Company.
Our affiliates, including our executive officers, directors and 5% stockholders, also have
funded portions of loan requests from time to time in the past, and may do so in the future. For
the three and six months ended September 30, 2011, these affiliates had funded $63,100 and
$130,275, respectively, of new loan requests and their outstanding principal balance was $674,413
as of September 30, 2011. For the three and six months ended September 30, 2010, these affiliates
had funded $189,525 and $646,400, respectively, of new loan requests and their outstanding
principal balance was $759,610 as of March 31, 2011.
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8. Preferred Stock
Convertible preferred stock
In July 2011, we filed an Amended and Restated Certificate of Incorporation with the State of
Delaware, which increased the total number of shares that we are authorized to issue from
117,116,801 shares to 137,471,535 shares, 80,000,000 of which are designated as common stock, and
57,471,535 of which are designated as preferred stock. Of the total shares of preferred stock,
17,006,275 are designated as Series A Preferred Stock, 16,410,526 are designated as Series B
Preferred Stock, 15,621,609 are designated as Series C Preferred Stock and 8,433,125 are designated
as Series D Preferred Stock. The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares of Common Stock then outstanding) by the affirmative
vote of the holders of a majority of the Companys Preferred Stock and Common Stock (voting
together as a single class on an as-converted to Common Stock basis).
A complete description of the rights, preferences, privileges and restrictions of our common
stock and the Series A, Series B, Series C and Series D convertible preferred stock is included in
the Amended and Restated Certificate of Incorporation, as amended. The outstanding shares of
convertible preferred stock are not redeemable. None of our convertible preferred stock is
considered permanent equity based on the guidance of SEC Accounting Series Release No. 268,
Presentation in Consolidated Financial Statements of Redeemable Preferred Stocks. The
significant terms of outstanding Series A, Series B, Series C and Series D convertible preferred
stock are as follows:
Conversion Each share of convertible preferred stock is convertible, at the option of the
holder, initially, into one share of common stock (subject to adjustments for events of dilution).
Each share of convertible preferred stock will automatically be converted upon the earlier of (i)
the closing of an underwritten public offering of our common stock with aggregate gross proceeds
that are at least $30,000,000 or (ii) the consent of the holders of a 65% majority of outstanding
shares of convertible preferred stock, voting together as a single class, on an as-converted to
common stock basis. The Companys preferred stock agreements contain certain anti-dilution
provisions, whereby if the Company issues additional shares of capital stock for an effective price
lower than the conversion price for a
series of preferred stock immediately prior to such issue, then the existing conversion price of
such series of preferred stock will be reduced. The Company determined that while its convertible
preferred stock contains certain anti-dilution features, the conversion feature embedded within its
convertible preferred stock does not require bifurcation under the guidance of FASB ASC 815,
Derivatives and Hedging Activities.
Liquidation preference Upon any liquidation, winding up or dissolution of us, whether
voluntary or involuntary (a Liquidation Event), before any distribution or payment shall be made
to the holders of any common stock, the holders of convertible preferred stock shall, on a pari
passu basis, be entitled to receive by reason of their ownership of such stock, an amount per share
of Series A convertible preferred stock equal to $1.065 (as adjusted for stock splits,
recapitalizations and the like) plus all declared and unpaid dividends (the Series A Preferred
Liquidation Preference), an amount per share of Series B convertible preferred stock equal to
$0.7483 (as adjusted for stock splits, recapitalizations and the like) plus all declared and unpaid
dividends (the Series B Preferred Liquidation Preference), an amount per share of Series C
convertible preferred stock equal to $1.5677 (as adjusted for stock splits, recapitalizations and
the like), and an amount per share of Series D convertible preferred stock equal to $3.5677 (as
adjusted for stock splits, recapitalizations and the like). However, if upon any such Liquidation
Event, our assets 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 based upon
the amounts such series was to receive. Any excess assets, after payment in full of the
liquidation preferences to the convertible preferred stockholders, are then allocated to the
holders of common and preferred stockholders, pro-rata, on an as-if-converted to common stock
basis.
Dividends If and when declared by the Board of Directors, the holders of Series A, Series
B, Series C and Series D convertible preferred stock, on a pari passu basis, will be entitled to
receive non-cumulative dividends at a rate of 6% per annum in preference to any dividends on common
stock (subject to adjustment for certain events). The holders of Series A, Series B, Series C and
Series D convertible preferred stock are also entitled to receive with common stockholders, on an
as-if-converted basis, any additional dividends issued by us.
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Voting rights Generally, preferred stockholders have one vote for each share of common
stock that would be issuable upon conversion of preferred stock. Voting as a separate class, and on
an as-if-converted to common stock basis, the Series A convertible preferred stockholders are
entitled to elect two members of the Board of Directors and the holders of Series B convertible
preferred stockholders are entitled to elect one member of the Board of Directors. The Series C
and Series D convertible preferred stockholders are not entitled to elect a member of the Board of
Directors. The holders of common stock, voting as a separate class, are entitled to elect one
member of the Board of Directors. The remaining directors are elected by the preferred
stockholders and common stockholders voting together as a single class on an as-if-converted to
common stock basis.
9. Stockholders Deficit
Common stock
At September 30, 2011, we have shares of common stock authorized and available for future
issuance as follows:
Convertible preferred stock, Series A |
15,749,674 | |||
Convertible preferred stock, Series B |
16,036,346 | |||
Convertible preferred stock, Series C |
15,621,609 | |||
Convertible preferred stock, Series D |
7,308,708 | |||
Options to purchase common stock |
6,564,155 | |||
Options available for future issuance |
5,591,096 | |||
Convertible preferred Series A stock warrants |
1,256,601 | |||
Convertible preferred Series B stock warrants |
374,180 | |||
Common stock warrants |
259,482 | |||
Total common stock reserved for future issuance |
68,761,851 | |||
During the three and six months ended September 30, 2011, we issued 103,624 and 244,124
shares of common stock in exchange for proceeds of $26,356 and $65,166, respectively, upon the
exercise of employee stock options. During the three and six months ended September 30, 2011, we
issued 9,389 shares of Series A Convertible Preferred Stock in exchange for proceeds of $10,000
upon the exercise of warrants.
During the three and six months ended September 30, 2010, we issued zero and 29,250 shares of
common stock in exchange for proceeds of $0 and $7,898, respectively, upon the exercise of employee
stock options. No warrants were exercised for the three and six months ended September 30, 2010.
In April 2011, we recorded fully exercisable warrants to purchase 155,482 shares of common
stock at $1.5677 per share. The warrants may be exercised at any time on or before February 2021.
The fair value of these warrants was estimated to be $19,086 using the Black-Scholes option pricing
model with the following assumptions: a volatility of 46.31%, a contractual life of 10 years, no
dividend yield and a risk-free interest rate of 3.49%.
Accumulated Deficit
We have incurred operating losses since our inception. For the three months ended September
30, 2011 and 2010, we incurred net losses of $3,346,357 and $2,938,890, respectively. For the six
months ended September 30, 2011 and 2010, we incurred net losses of $6,453,035 and $5,464,124,
respectively. Accordingly, we have an accumulated deficit of $47,907,686 since inception and a
stockholders deficit of $43,443,394, as of September 30, 2011.
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10. 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
12,559,948 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.
There were no stock options granted to purchase shares of common stock for the three and six
months ended September 30, 2011 and for the three months ended September 30, 2010.
For the six months ended September 30, 2010, we granted stock options to purchase 2,535,000
shares of common stock with a weighted average grant date fair value of $0.20 per share. We used
the Black-Scholes option pricing model to estimate the fair value of stock options granted with the
following assumptions:
Expected dividend yield |
0 | % | ||
Expected volatility |
46.65 | % | ||
Risk-free interest rates |
2.45 | % | ||
Expected life |
6.8 years |
We have elected to use the calculated-value method under FASB ASC 718 to calculate the
volatility assumption for the six months ended September 30, 2010. The expected life represents
the period of time that stock options are expected to be outstanding, giving consideration to the
contractual terms of the awards, vesting schedules, and expectations of future exercise patterns
and post-vesting employee termination behavior. Given our limited operating history, the
simplified method was applied to calculate the expected term. 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:
Options Issued and Outstanding | ||||||||
Options Issued | Weighted Average | |||||||
and Outstanding | Exercise Price | |||||||
Balances at March 31, 2011 |
6,878,672 | $ | 0.35 | |||||
Options Granted |
| | ||||||
Options Exercised |
(103,624 | ) | 0.25 | |||||
Options Cancelled |
(210,893 | ) | 0.38 | |||||
Balances at September 30, 2011 |
6,564,155 | $ | 0.35 | |||||
Options outstanding and exercisable at September 30, 2011 were 2,787,381 at a weighted average
exercise price of $0.31.
A summary by exercise price of outstanding options, vested options, and options vested and
expected to vest at September 30, 2011, is as follows:
Weighted Average | ||||||||||||||||
Exercise Price and | Remaining Contractual | Number of Options | ||||||||||||||
Weighted Average | Number of Options | Life of Outstanding | Number of Options | Vested and Expected to | ||||||||||||
Exercise Price | Outstanding | Options (Years) | Vested | Vest | ||||||||||||
$0.23 |
1,047,500 | 7.90 | 577,340 | 1,027,719 | ||||||||||||
$0.27 |
1,294,250 | 6.16 | 1,180,187 | 1,292,024 | ||||||||||||
$0.41 |
4,222,405 | 8.98 | 1,029,854 | 4,032,747 | ||||||||||||
$0.35 |
6,564,155 | 8.25 | 2,787,381 | 6,352,490 | ||||||||||||
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A summary by outstanding options, vested options and options vested and expected to vest at
September 30, 2011, is as follows:
Weighted Average | ||||||||||||
Remaining | ||||||||||||
Number of | Contractual Life | Weighted Average | ||||||||||
Options | (Years) | Exercise Price | ||||||||||
Options Outstanding |
6,564,155 | 8.25 | $ | 0.35 | ||||||||
Vested Options |
2,787,381 | 7.48 | $ | 0.31 | ||||||||
Options Vested
and Expected to
Vest |
6,352,490 | 8.23 | $ | 0.35 |
No income tax benefit has been recognized relating to stock-based compensation expense and no
tax benefits have been realized from exercised stock options.
As of September 30, 2011, total unrecognized compensation cost was $668,977 and these costs
are expected to be recognized through 2014.
11. 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 expenses, for tax and accounting purposes. These
differences, along with the benefit of deducting the Companys operating losses incurred since
inception against future taxable income, 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 September 30, 2011, we continued to have a full valuation allowance against our net
deferred tax assets. Due to the continuation of operating losses for the three and six months ended
September 30, 2011, and our expectations for business growth and profitability in the coming year,
we believe it is more likely than not that all of our deferred tax assets will not be realized. We
did not have any foreign operations and therefore did not record any tax provisions during the
period.
We file income tax returns in the U.S. federal jurisdiction, California, Connecticut and
Indiana jurisdictions. Our tax years for 2006 and forward are subject to examination by the U.S.,
California, Connecticut and Indiana tax authorities as the statutes of limitation remain open.
Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as
a component of income tax expense. We did not have any material changes in unrecognized tax
benefits and associated accrued interest or penalties during the three and six months ended
September 30, 2011 and 2010.
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12. Net Interest Income
Revenues primarily result from interest income and fees. We classify interest and fees earned
on our Member Loans together as interest income on these consolidated financial statements.
The following table summarizes interest income, interest expense and net interest income as
follows:
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest income: |
||||||||||||||||
Member Loans at fair value: |
||||||||||||||||
Interest income |
$ | 6,277,944 | $ | 2,621,387 | $ | 11,269,335 | $ | 4,505,972 | ||||||||
Origination fees |
2,940,193 | 1,521,953 | 5,384,137 | 2,666,910 | ||||||||||||
Total interest income,
Member Loans at fair value |
9,218,137 | 4,143,340 | 16,653,472 | 7,172,882 | ||||||||||||
Member Loans at amortized cost |
155,376 | 223,512 | 343,528 | 450,339 | ||||||||||||
Cash and cash equivalents |
4,271 | 10,485 | 10,042 | 16,803 | ||||||||||||
Total interest income |
$ | 9,377,784 | $ | 4,377,337 | $ | 17,007,042 | $ | 7,640,024 | ||||||||
Interest expense: |
||||||||||||||||
Notes: |
||||||||||||||||
Interest expense |
$ | 6,224,160 | $ | 2,621,387 | $ | 11,215,551 | $ | 4,505,972 | ||||||||
Interest expense reduction for
servicing fee |
(281,837 | ) | (111,919 | ) | (507,759 | ) | (217,074 | ) | ||||||||
Net interest expense, Notes |
5,942,323 | 2,509,468 | 10,707,792 | 4,288,898 | ||||||||||||
Loans Payable: |
||||||||||||||||
Interest expense |
46,295 | 179,902 | 114,700 | 400,583 | ||||||||||||
Amortization of loan discounts |
23,134 | 74,834 | 57,117 | 149,668 | ||||||||||||
Total interest expense,
Loans Payable |
69,429 | 254,736 | 171,817 | 550,251 | ||||||||||||
Total interest expense |
$ | 6,011,752 | $ | 2,764,204 | $ | 10,879,609 | $ | 4,839,149 | ||||||||
Net Interest Income |
$ | 3,366,032 | $ | 1,613,133 | $ | 6,127,433 | $ | 2,800,875 | ||||||||
We had net interest income of $3,366,032 and $1,613,133 for the three months ended
September 30, 2011 and 2010, respectively, and $6,127,433 and $2,800,875 for the six months ended
September 2011 and 2010, respectively. Our net interest revenue is primarily comprised of loan
origination fees we collect from borrower members and, to a lesser extent, the servicing fees we
collect from investor members. Loan origination fees recognized in income at the time of
origination of Member Loans at fair value were $2,940,193 and $1,521,953 for the three months ended
September 30, 2011 and 2010, respectively, and $5,384,137 and $2,666,910 for the six months ended
September 2011 and 2010, respectively. Servicing fees collected from investor members were
$281,837 and $111,919 for the three months ended September 30, 2011 and 2010, respectively, and
$507,759 and $217,074 for the six months ended September 2011 and 2010, respectively.
13. Commitments and Contingencies
In April 2011, we entered into a sublease agreement for approximately 18,200 square feet of
space in San Francisco, CA for our corporate headquarters, including our principal administrative,
marketing, technical support and engineering functions. The sublease has a term of 6 years and
began on May 1, 2011. We can terminate the sublease upon 9 months notice prior to the third
anniversary of the sublease. The average annual rent for our new corporate headquarters is
approximately $42,000 and we pledged $200,000 as a security deposit.
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Effective June 1, 2010, we entered into a 12 month lease for approximately 238 square feet in
Fairfield, Connecticut for use by our EVP, Corporate Development. This lease may be extended for
an additional 12 month lease term if the landlord is notified no later than 60 days prior to the
leases expiration. Currently, this lease is month-to-month. Since July 14, 2010, we have entered
into several month-to-month or short-term lease agreements for the lease of offices, ranging from
250 to 400 square feet, in New York City. At September 30, 2011, we have a lease agreement for the
lease of approximately 250 square feet for a New York City office that expires at the end of
January 2012.
Facilities rental expense for the three months ended September 30, 2011 and 2010 was $133,773
and $61,306, respectively, and for the six months ended September 30, 2011 and 2010 was $273,397
and $104,736, respectively.
14. Subsequent Events
Subsequent to September 30, 2011 and through the date of issuance of these financial
statements, no events have occurred that would require disclosure as a subsequent event.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Consolidated
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 Consolidated 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 August 15, 2011, 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 online financial platform. We allow qualified borrower members to obtain loans
(which we refer to as Member Loans) with interest rates that they find attractive. From the
launch of our platform in May 2007 until April 7, 2008, our platform allowed investor members to
purchase assignments of Member Loans directly. 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. The Notes are dependent for payment on the related Member Loan and offer interest rates
and credit characteristics that the investors find attractive. The vast majority of Member Loans
originated since October 13, 2008, have been financed by Notes. Since November 2007, we have also
financed portions of certain Member Loans ourselves using sources of funds other than Notes, with
the intent and ability to hold these 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 or five-year maturities. The Member Loans are posted on our website, funded
and issued by WebBank, an FDIC-insured, state-chartered industrial bank organized under the laws of
the state of Utah, at closing and immediately sold to us after 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. Also, after acquiring the Member Loans from WebBank, we service 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
September 30, 2011, the lending platform has facilitated 35,918 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 October 1, 2011, we do not currently offer member loans in Idaho,
Iowa, Indiana, Maine, Mississippi, Nebraska, 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.
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We have a limited operating history and have incurred net losses since our inception. Our net
loss was $3,346,357 and $6,453,035 for the three and six months ended September 30, 2011. We earn
revenues from fees, primarily loan origination fees charged to borrower members, investor servicing
fees and, beginning in 2011, management fees charged to limited partners in two private investment
funds that purchase Trust Certificates (Certificates). We also earn net interest income on Member
Loans on our balance sheet. To date, we have funded
our operations primarily with proceeds from our venture capital financings, our credit
facilities and debt and equity issuances, which are described under Liquidity and Capital
Resources.. The remaining borrowing capacity under our non-revolving credit facilities is zero.
Over time, we expect that the number of borrower and investor members and the volume of Member
Loans originated through our platform will increase, and that we will generate increased revenue
from borrower origination fees, investor service fees and management fees.
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 sales, technology development, security, loan
scoring, loan processing and marketing before we reach profitability.
From inception of the Company through September 30, 2011, we have raised approximately $78.8
million through equity financings. Our last equity financing commenced July 28, 2011, and we
raised approximately $26 million from the sale of 7,308,708 shares of our Series D convertible
preferred stock.
Significant Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us to make certain
judgments, assumptions, and estimates that affect the amounts reported in our consolidated
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, which are more fully
described in Note 2 to our consolidated financial statements, 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
determinations; (3) allowance for loan losses; and (4) share-based compensation. These estimates
and assumptions are inherently subjective in nature, actual results may differ from these estimates
and assumptions, and the differences could be material.
Member Loans at Fair Value
We have elected to account for the vast majority of Member Loan originations since October 13,
2008, as well as all related Notes at fair value. The fair value election for these Member Loans
and Notes allows symmetrical accounting for both the timing and amounts recognized for expected
unrealized losses and realized losses on the Member Loans and the related Notes, consistent with
the member payment dependent design of the Notes. Absent the fair value elections, Member Loans
held for investment would be accounted for at amortized cost and would record loan loss provisions
for estimated expected losses, but the related Notes also accounted for at amortized cost would
recognize losses only when and in amounts actually realized, thereby resulting in a mismatch in the
timing and amounts of loss recognition between a Member Loan and related Notes, which is not an
appropriate representation for instruments that are designed to have linked cash flows and loss
realization. The loan origination fees for Member Loans at fair value are recognized as interest
income at the time of the loan origination. The costs to originate Member Loans at fair value are
recognized in operating expenses as incurred. Interest income on Member Loans at fair value is
recorded as earned. The remaining Member Loan originations have been accounted for at amortized
cost as explained more fully below.
When we receive payments of principal and interest on Member Loans at fair value, we make
principal and interest payments on related Notes, net of any applicable servicing fee on the
payments received on the Member Loans at fair value. The principal payments reduce the carrying
values of both the Member Loans at fair value and the related Notes. When explicit servicing fees
apply, we do not directly record servicing fee revenue related to payments on the Member Loans at
fair value. Instead, we record interest expense on the corresponding Notes based on the
post-service fee interest payments we make to our investor members which results in an interest
expense on these Notes that is lower than the interest income on the Member Loans at fair value.
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We include in earnings the estimated unrealized fair value gains or losses during the period
attributable to changes in the instrument-specific credit risk of Member Loans at fair value, and
the offsetting estimated fair value losses or gains attributable to the expected changes in future
payments on Notes. We estimate the fair value of
Member Loans that are accounted for at fair value by adjusting the loans amortized cost for
our expectation of the rate of default on the loans assuming zero recovery on the defaulted loans.
At origination and at each reporting period, we recognize a fair valuation adjustment for the
current estimated defaults and losses for the Member Loans at fair value and a fair valuation
adjustment for the corresponding effects on future payments due on the Notes. The fair valuation
adjustment related to estimated defaults and losses on a given principal amount of Member Loans at
fair value will always be slightly larger than the corresponding estimated fair valuation
adjustment on a comparable principal amount of Notes because a Member Loan that is accounted for at
fair value has a slightly higher interest rate than the effective interest rate on the related
Notes due to the impact of the servicing fee.
Member Loans at Amortized Cost
The loan origination fees for Member Loans at amortized cost are deferred at origination and,
with the related deferred loan origination costs, are amortized to interest income over the
contractual lives of the loans using a method that approximates the effective interest method,
which loans currently have original terms of 36 or 60 months. We record interest income on Member
Loans at amortized cost as earned. Loans reaching 120 days delinquent are classified as nonaccrual
loans.
We may incur losses if the borrower members fail to pay their monthly scheduled loan payments.
An allowance for loan losses applies only to Member Loans at amortized cost and is a valuation
allowance that is established as losses are estimated to have occurred at the balance sheet date
through a provision for loan losses charged to earnings. Realized loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is confirmed.
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 Member Loans at amortized cost, 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 for Member Loans at
amortized cost is subjective, complex and requires judgment by management about the effects of
matters that are inherently uncertain, and actual losses may differ from our estimates.
Our estimate of the allowance for loan losses for Member Loans at amortized cost is developed
by estimating both the rate of default of the loans within each credit score band using the FICO
credit scoring model, 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.
Effective October 1, 2011, we revised the accounting policy for Member Loans to elect the fair
value accounting option for all Member Loans originated on and after October 1, 2011. Prior to
October 1, 2011, Member Loan originations financed by Notes were accounted for at fair value and
Member Loan originations financed by us via sources of funds other than Notes were accounted for at
amortized cost. As a result of the election of fair value accounting for all prospective loan
originations, there will not be any new Member Loan originations accounted for at amortized cost
after September 30, 2011.
Results of Operations
Revenues
Our business model consists primarily of charging fees to both borrower members and investor
members for transactions through our platform. During the three months ended September 30, 2011
and 2010, we originated $68,528,875 and $35,579,050 of loans, respectively, on our lending
platform, an increase of 93%. During the six months ended September 30, 2011 and 2010, we
originated $124,592,575 and $65,172,850 of loans, respectively, on our lending platform, an
increase of 91%.
Upon issuance of a loan, the borrower member pays a fee to us for providing the services of
arranging the Member Loan. The loan origination fee charged to each borrower member is determined
by the credit grade of that borrower members loan and as of September 30, 2011, ranged from 1.11%
to 5.00% of the aggregate member loan amount. The 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. The loan origination fees are recognized in interest income as described
above in Significant Accounting Policies and Estimates.
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Investor members that purchase Notes pay servicing fees to us on the payments for the related
Member Loans and maintaining account portfolios. Beginning in March 2011, we began charging
limited partners in two private investment funds monthly management fees that are based on the
month-end balances of their partners capital accounts. These management fees are recorded in
other revenue.
To a lesser extent, we also generate revenue from the net interest income earned on Member
Loans at amortized cost that we finance with sources of funds other than Notes.
Net Interest Income
The following table summarizes interest income, interest expense and net interest income as
follows:
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest income: |
||||||||||||||||
Member Loans at fair value: |
||||||||||||||||
Interest income |
$ | 6,277,944 | $ | 2,621,387 | $ | 11,269,335 | $ | 4,505,972 | ||||||||
Origination fees |
2,940,193 | 1,521,953 | 5,384,137 | 2,666,910 | ||||||||||||
Total interest income,
Member Loans at fair value |
9,218,137 | 4,143,340 | 16,653,472 | 7,172,882 | ||||||||||||
Member Loans at amortized cost |
155,376 | 223,512 | 343,528 | 450,339 | ||||||||||||
Cash and cash equivalents |
4,271 | 10,485 | 10,042 | 16,803 | ||||||||||||
Total interest income |
$ | 9,377,784 | $ | 4,377,337 | 17,007,042 | $ | 7,640,024 | |||||||||
Interest expense: |
||||||||||||||||
Notes: |
||||||||||||||||
Gross interest expense |
$ | 6,224,160 | $ | 2,621,387 | $ | 11,215,551 | $ | 4,505,972 | ||||||||
Interest expense reduction for
servicing fee |
(281,837 | ) | (111,919 | ) | (507,759 | ) | (217,074 | ) | ||||||||
Net interest expense, Notes |
5,942,323 | 2,509,468 | 10,707,792 | 4,288,898 | ||||||||||||
Loans Payable: |
||||||||||||||||
Interest expense |
46,295 | 179,902 | 114,700 | 400,583 | ||||||||||||
Amortization of loan discounts |
23,134 | 74,834 | 57,117 | 149,668 | ||||||||||||
Total interest expense,
Loans Payable |
69,429 | 254,736 | 171,817 | 550,251 | ||||||||||||
Total interest expense |
$ | 6,011,752 | $ | 2,764,204 | $ | 10,879,609 | $ | 4,839,149 | ||||||||
Net Interest Income |
$ | 3,366,032 | $ | 1,613,133 | $ | 6,127,433 | $ | 2,800,875 | ||||||||
We had net interest income of $3,366,032 and $1,613,133 for the three months ended
September 30, 2011 and 2010, respectively, an increase of 109%, and $6,127,433 and $2,800,875 for
the six months ended September 2011 and 2010, respectively, an increase of 119%. The main drivers
of our net interest revenue are the loan origination fees we collect from borrower members and, to
a lesser extent, the servicing fees we collect from investor members. Loan origination fees are a
function of the volume of Member Loans originated and the average fee charged to the borrower
members.
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The following tables present the components of interest income, interest expense, and net
interest income for the three and six months ended September 30, 2011 and 2010.
Three Months Ended September 30, 2011 | Three Months Ended September 30, 2010 | |||||||||||||||||||||||
Estimated | Interest | Average | Estimated | Interest | Average | |||||||||||||||||||
Average | Income / | Yield / | Average | Income / | Yield / | |||||||||||||||||||
Balance1 | (Expense) | Cost2 | Balance1 | (Expense) | Cost2 | |||||||||||||||||||
Interest-Earning Assets: |
||||||||||||||||||||||||
Member Loans: |
||||||||||||||||||||||||
Member Loans at fair value, principal balance |
216,349,854 | 6,277,944 | 11.51 | % | 93,159,578 | 2,621,387 | 11.16 | % | ||||||||||||||||
Member Loan at fair value, origination fees |
2,940,193 | 1,521,953 | ||||||||||||||||||||||
Member Loans at fair value, interest and fees |
216,349,854 | 9,218,137 | 16.90 | % | 93,159,578 | 4,143,340 | 17.65 | % | ||||||||||||||||
Member Loans at amortized cost |
4,113,177 | 155,376 | 14.99 | % | 7,169,499 | 223,512 | 12.37 | % | ||||||||||||||||
Cash, cash equivalents & restricted cash |
27,891,432 | 4,271 | 0.06 | % | 23,495,501 | 10,485 | 0.18 | % | ||||||||||||||||
Total Interest-Earning Assets |
248,354,463 | 9,377,784 | 14.98 | % | 123,824,578 | 4,377,337 | 14.03 | % | ||||||||||||||||
Interest-Bearing Liabilities: |
||||||||||||||||||||||||
Notes, amortized cost |
214,577,871 | (5,942,323 | ) | 10.99 | % | 93,119,603 | (2,509,468 | ) | 10.69 | % | ||||||||||||||
Loans payable |
1,646,652 | (69,429 | ) | 16.73 | % | 6,326,993 | (254,736 | ) | 15.97 | % | ||||||||||||||
Total Interest-Bearing Liabilities |
216,224,523 | (6,011,752 | ) | 11.03 | % | 99,446,596 | (2,764,204 | ) | 11.03 | % | ||||||||||||||
Net Interest Income |
3,366,032 | 1,613,133 | ||||||||||||||||||||||
Net Interest Spread 3 |
3.95 | % | 3.00 | % | ||||||||||||||||||||
Net Interest Margin 4 |
5.38 | % | 5.17 | % | ||||||||||||||||||||
1. | The estimated average balance represents the average of the month-end balances from the
beginning through the end of the period. |
|
2. | Yields and costs are annualized based on actual number of days in the period. |
|
3. | Net interest spread equals the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities. |
|
4. | Net interest margin equals net interest income divided by average interest-earning assets,
annualized. |
The yield on average interest-earning assets rose 0.95% to 14.98% for the three months
ended September 30, 2011, from 14.03% for the same period in the preceding year primarily due to
the increase in the proportion of balances in higher-yielding Member Loans relative to the balances
in low-yielding cash and cash equivalents, and to a lesser extent, the 0.35% increase in the
average interest rate on Member Loans at fair value, to 11.51% from 11.16%. The cost of average
interest-bearing liabilities was unchanged at 11.03% for the three months ended September 30, 2011,
and 11.03% for the same period in the preceding year as the decline in the proportion of balances
in higher-cost loans payable offset the 0.30% increase in the average interest cost of Notes to
10.99% from 10.69% (which corresponded with the increase in the average interest rate on Member
Loans at fair value). As a result of the factors described above, the net interest margin for the
three months ended September 30, 2011, rose 0.21% to 5.38% from 5.17% for the same period in the
preceding year.
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Table of Contents
We originated $68,574,459 and $34,939,210 of Member Loans at fair value in the three months
ended September 30, 2011, and 2010, respectively, an increase of 96%, and we collected origination
fees on those loan originations of $2,940,193 and $1,521,953 in those periods, respectively, an
increase of 93%. The average loan origination fees were 4.29% and 4.36% of the principal amount of
loans originated in the three months ended September 30, 2011, and 2010, respectively. The
decline in the average loan origination fee in the current period was primarily due to modestly
lower loan fees charged to borrowers of higher credit quality, which was partly offset by modestly
higher fees charged to borrowers of lower credit quality, compared to fees charged to borrowers
across the range of credit qualities in the comparable period in the prior year.
Six Months Ended September 30, 2011 | Six Months Ended September 30, 2010 | |||||||||||||||||||||||
Estimated | Interest | Average | Estimated | Interest | Average | |||||||||||||||||||
Average | Income / | Yield / | Average | Income / | Yield / | |||||||||||||||||||
Balance1 | (Expense) | Cost2 | Balance1 | (Expense) | Cost2 | |||||||||||||||||||
Interest-Earning Assets: |
||||||||||||||||||||||||
Member Loans: |
||||||||||||||||||||||||
Member Loans at fair value, principal balance |
196,252,649 | 11,269,335 | 11.45 | % | 81,732,932 | 4,505,972 | 11.00 | % | ||||||||||||||||
Member Loan at fair value, origination fees |
5,384,137 | 2,666,910 | ||||||||||||||||||||||
Member Loans at fair value, interest and fees |
196,252,649 | 16,653,472 | 16.93 | % | 81,732,932 | 7,172,882 | 17.50 | % | ||||||||||||||||
Member Loans at amortized cost |
4,857,289 | 343,528 | 14.11 | % | 7,483,457 | 450,339 | 12.00 | % | ||||||||||||||||
Cash, cash equivalents & restricted cash |
21,434,112 | 10,042 | 0.09 | % | 21,788,370 | 16,803 | 0.15 | % | ||||||||||||||||
Total Interest-Earning Assets |
222,544,050 | 17,007,042 | 15.24 | % | 111,004,759 | 7,640,024 | 13.73 | % | ||||||||||||||||
Interest-Bearing Liabilities: |
||||||||||||||||||||||||
Notes, amortized cost |
195,153,232 | (10,707,792 | ) | 10.94 | % | 81,701,302 | (4,288,898 | ) | 10.47 | % | ||||||||||||||
Loans payable |
2,033,317 | (171,817 | ) | 16.85 | % | 7,056,319 | (550,251 | ) | 15.55 | % | ||||||||||||||
Total Interest-Bearing Liabilities |
197,186,549 | (10,879,609 | ) | 11.00 | % | 88,757,621 | (4,839,149 | ) | 10.87 | % | ||||||||||||||
Net Interest Income |
6,127,433 | 2,800,875 | ||||||||||||||||||||||
Net Interest Spread 3 |
4.24 | % | 2.85 | % | ||||||||||||||||||||
Net Interest Margin 4 |
5.49 | % | 5.03 | % | ||||||||||||||||||||
1. | The estimated average balance represents the average of the month-end balances from the
beginning through the end of the period. |
|
2. | Yields and costs are annualized based on actual number of days in the period. |
|
3. | Net interest spread equals the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities. |
|
4. | Net interest margin equals net interest income divided by average interest-earning assets,
annualized. |
The yield on average interest-earning assets rose 1.51% to 15.24% for the six months
ended September 30, 2011, from 13.73% for the same period in the preceding year primarily due to
the increase in the proportion of balances in higher-yielding Member Loans relative to the balances
in low-yielding cash and cash equivalents, and to a lesser extent, the 0.45% increase in the
average interest rate on Member Loans at fair value, to 11.45% from 11.00%. The cost of average
interest-bearing liabilities rose 0.13% to 11.00% for the six months ended September 30, 2011, from
10.87% for the same period in the preceding year as the 0.47% increase in the average interest cost
of Notes to 10.94% from 10.47% (which corresponded with the increase in the average interest rate
on Member Loans at fair value) was partially offset by the decline in the proportion of balances in
higher-cost loans payable. As a result of the factors described above, the net interest margin for
the six months ended September 30, 2011, rose 0.46% to 5.49% from 5.03% for the same period in the
preceding year.
We originated $123,537,056 and $63,558,925 of Member Loans at fair value in the six months
ended September 30, 2011, and 2010, respectively, an increase of 94%, and we collected origination
fees on those loan originations of 5,384,137 and $2,666,910, in those periods respectively, an
increase of 102%. The average loan origination fees were 4.36% and 4.20% of the principal amount
of loans originated in the six months ended September 30, 2011, and 2010, respectively. The
increase in the average loan fees in the current period was primarily due to an increase in the
origination of five year loans that carry higher origination fees than three year loans.
Borrower Origination Fees
Our borrower members pay a one-time origination fee to us for arranging a Member Loan. This
fee is determined by the loan grade of the member loan.
Beginning January 7, 2011, our origination fees for three year loans changed, and ranged from
2.00% to 5.00% of the aggregate principal amount of the Member Loan, as set forth below:
Loan | ||||||||||||||||||||||||||||||||
Grade | A1-A2 | A3-A5 | B | C | D | E | F | G | ||||||||||||||||||||||||
Fee |
2.00 | % | 3.00 | % | 4.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
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Beginning January 7, 2011, our origination fees for five year loans changed, and ranged from
3.00% to 5.00% of the aggregate principal amount of the Member Loan, as set forth below:
Loan | ||||||||||||||||||||||||||||
Grade | A | B | C | D | E | F | G | |||||||||||||||||||||
Fee |
3.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
Beginning September 8, 2011, our origination fees for three year loans changed, and ranged
from 1.11% to 5.00% of the aggregate principal amount of the Member Loan, as set forth below:
Loan | ||||||||||||||||||||||||||||||||||||
Grade | A1 | A2 | A3-A5 | B | C | D | E | F | G | |||||||||||||||||||||||||||
Fee |
1.11 | % | 2.00 | % | 3.00 | % | 4.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
We do not receive an origination fee if a member loan request does not close.
Loan origination fees on Member Loans at fair value were $2,940,193 and $1,521,953 for the
three months ended September 30, 2011 and 2010, respectively, an increase of 93%, and $5,384,137
and $2,666,910 for the six months ended September 2011 and 2010, respectively, an increase of 102%.
The increases in these loan fees recognized in interest income was primarily due to increases in
loan origination volumes during the three and six month periods ended September 30, 2011, versus
the comparable periods ended September 30, 2010.
Interest Income on Member Loans at Fair Value and Interest Expense on Notes
Beginning October 13, 2008, we began recording interest income, including borrower origination
fees, from Member Loans at fair value and corresponding interest expense from the Notes. We charge
investor members an ongoing service fee in respect of Member Loans at fair value that are financed
by Notes that the investor members have purchased through our platform. The servicing fee offsets
the costs we incur in servicing Member Loans at fair value, including managing payments from
borrower members, payments to investor members and maintaining investors account portfolios. This
service fee is charged on amounts paid by us to an investor member in respect of a Member Loan.
During the three months ended September 30, 2011 and 2010, we recorded interest income from
Member Loans at fair value, excluding loan origination fees, of $6,277,944 and $2,621,387,
respectively. Conversely, for the Notes, we recorded interest expense of $5,942,323 and
$2,509,468, respectively, for the three months ended September 30, 2011 and 2010. Comparatively,
during the six months ended September 30, 2011 and 2010, we recorded interest income from Member
Loans at fair value, excluding loan origination fees, of $11,269,335 and $4,505,972, respectively.
Conversely, for the Notes, we recorded interest expense of $10,707,792 and $4,288,898,
respectively, for the six months ended September 30, 2011 and 2010.
The servicing fees earned from Note holders, or the difference between the interest on Member
Loans at fair value and interest expense on Notes, were $281,837 and $111,919 for the three months
ended September 30, 2011 and 2010, respectively, an increase of 152%, and $507,759 and $217,073 for
the six months ended September 2011 and 2010, respectively, an increase of 134%. The increases in
the servicing fees earned from Note holders were primarily due to increased balances of Notes
during the three and six month periods ended September 30, 2011, versus the comparable periods
ended September 30, 2010. The amount of servicing fees earned depends on the balances of Notes
that have explicit servicing fees (versus those holders of Certificates that pay management fees)
and the average servicing fee paid by the Note holders.
We expect that interest revenues and expenses related to Member Loans at fair value and Notes
will continue to increase as we grow our platform.
Interest Earned on Member Loans at Amortized Cost
Between April 7, 2008 and October 13, 2008, while we sought to register the offering of the
Notes, we financed Member Loan originations with sources of funds other than Notes, which generate
interest income on Member Loans at amortized cost. Subsequent to the effectiveness of our
registration statement related to our Notes, we have continued to periodically originate some
Member Loans at amortized cost. However, as we have increased our investor marketing efforts, the
originations and outstanding balances of Member Loans at amortized cost have diminished. As such,
during the three and six months ended September 30, 2011, we originated $0 and $1,063,821 of Member
Loans at amortized cost, while during the three and six months ended September 30, 2010, we
originated $632,482 and $1,613,925 of Member Loans at amortized cost, respectively.
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Table of Contents
During the three months ended September 30, 2011 and 2010, we recorded interest income on
Member Loans at amortized cost of $155,376 and $223,512, respectively. Comparatively, during the
six months ended September 30, 2011 and 2010, we recorded interest income on Member Loans at
amortized cost of $343,528 and $450,339, respectively. The decline in interest income on Member
Loans at amortized cost is primarily due to the decline in the balances of Member Loans at
amortized cost for the three and six month periods ended September 30, 2011, versus the balances of
Member Loans at amortized cost in the comparable periods ended September 30, 2010. Given our
change in accounting policy effective October 1, 2011, to elect the fair value accounting option
for all Member Loan originations on and after October 1, 2011, we expect the remaining balance of
Member Loans at amortized cost to decline to zero over the next several years.
Interest Earned on Cash and Investments
Interest income from cash and cash equivalents is recorded as it is earned. For the three and
six months ended September 30, 2011, we recorded $4,271 and $10,042, respectively, of interest
income earned on cash and cash equivalents. Comparatively, for the three and six months ended
September 30, 2010, we recorded $10,485 and $16,803, respectively, in interest income earned on
cash and cash equivalents. The differences in interest income are a function of the balances of
cash on hand and the low 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 future revenue.
Interest Expense on Loans Payable
Interest expense, other than that described above with regard to Notes, consists primarily of
cash and non-cash interest on loans payable. For the three months ended September 30, 2011 and
2010, we incurred interest expense of $46,294 and $179,202, respectively, for interest payments due
on our loans payable. For the three months ended September 30, 2011 and 2010, we also recorded
$23,134 and $74,834, respectively, for non-cash interest expense related to debt discounts due to
warrants on our loans payable. Comparatively, for the six months ended September 30, 2011 and
2010, we incurred interest expense of $114,700 and $400,583, respectively, for interest payments
due on our loans payable. For the six months ended September 30, 2011 and 2010, we also recorded
$57,117 and $149,668, respectively, for non-cash interest expense related to debt discounts due to
warrants on our loans payable.
As we have no additional availability under our various non-revolving loan payable agreements,
we expect interest expense on our loans payable to decrease over the next year as we repay these
loans.
Fair Value Adjustments on Member Loans at Fair Value and Notes
Fair value adjustment gains/(losses) for Member Loans at fair value were $(4,230,842) and
$(2,153,128) for the three months ended September 30, 2011 and 2010, respectively, and $(7,053,662)
and $(3,817,433) for the six months ended September 2011 and 2010, respectively. Fair value
adjustment gains/(losses) for Notes was $4,136,376 and $2,151,566 for the three months ended
September 30, 2011 and 2010, respectively, and $6,958,939 and $3,814,374 for the six months ended
September 2011 and 2010, respectively. The fair value adjustments for Member Loans at fair value
were largely offset by the fair value adjustments of the Notes due to the member payment dependent
design of the Notes and because the principal balances of the Member Loans at fair value were very
close to the principal balances of the Notes. Accordingly, the net fair value adjustment
gains/(losses) for Member Loans and Notes was $(94,446) and $(1,562) for the three months ended
September 30, 2011 and 2010, respectively, and $(94,723) and $(3,059) for the six months ended
September 2011 and 2010, respectively.
Provision for Loan Losses
Loan loss provisions arise only for Member Loans at amortized cost. Loan loss provisions were
$80,240 and $91,706 for the three months ended September 30, 2011 and 2010, respectively, and
$155,144 and $273,720 for the six months ended September 2011 and 2010, respectively.
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Table of Contents
The allowance for loan losses, which management evaluates on a periodic basis, represents an
estimate of potential credit losses inherent in the portfolio of Member Loans at amortized cost
that we 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.
Expected losses on Member Loans at fair value are recognized through their fair value
adjustments and are offset to the extent that the loans are financed by Notes that absorb the
related expected loan losses.
Operating Expenses:
( Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | % change | 2011 | 2010 | % change | |||||||||||||||||||
Sales, marketing and customer service |
$ | 4,289,476 | $ | 3,076,359 | 39 | % | $ | 8,147,315 | $ | 5,374,725 | 52 | % | ||||||||||||
Engineering |
666,736 | 500,198 | 33 | % | 1,186,875 | 998,569 | 19 | % | ||||||||||||||||
General and administrative |
1,794,108 | 946,463 | 90 | % | 3,308,334 | 1,780,191 | 86 | % | ||||||||||||||||
Total operating expenses |
$ | 6,750,320 | $ | 4,523,020 | $ | 12,642,524 | $ | 8,153,485 | ||||||||||||||||
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, credit and
collections 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 September 30, 2011 and 2010, were $4,289,476 and $3,076,359, respectively, an increase of
approximately 39%. Comparatively, sales, marketing and customer service expenses for the six
months ended September 30, 2011 and 2010, were $8,147,315 and $5,374,725, respectively, an increase
of approximately 52%. The increases in spending during the three and six months ended September 30,
2011 relative to the same periods of the prior year primarily occurred in three areas: increases in
personnel related expense, increases in platform related spending such as customer credit scoring
and platform hosting costs, and increases in spending on marketing programs to attract borrowers
and increase investment activity on the platform.
Engineering Expense
Engineering expense consists primarily of salaries, benefits and stock-based compensation
expense of engineering personnel, and the cost of subcontractors who work on the development and
maintenance of our platform and software enhancements that run our platform. Engineering expenses
for the three months ended September 30, 2011 and 2010, were $666,736 and $500,198, respectively,
an increase of 33%. Comparatively, engineering expenses for the six months ended September 30,
2011 and 2010, were $1,186,874 and $998,569, respectively, an increase of 19%. The increase for
the three and six months ended September 30, 2011 versus the same periods prior year was primarily
due to increased contract labor and expensed equipment costs. We expect these expenses to continue
to increase as we grow our business.
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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 expenses for the
three months ended September 30, 2011 and 2010, were $1,794,773 and $946,463, respectively, an
increase of approximately 90%. Comparatively, general and administrative expenses for the six
months ended September 30, 2011, were $3,308,999 and $1,780,191, respectively, an increase of
approximately 86%. The increases were primarily the result of higher expenses for personnel,
facilities costs, licenses, permit and fees, and bank service charges. We expect that general and
administrative expenses will decrease as a percentage of overall operating expenses as we grow our
sales efforts in greater proportion than our general and administrative expenses.
Liquidity and Capital Resources
Six Months Ended | ||||||||||||
September 30, | ||||||||||||
Cash flows from: | 2011 | 2010 | Change | |||||||||
Operating Activities |
$ | (5,173,712 | ) | $ | (4,373,273 | ) | $ | (800,439 | ) | |||
Investing Activities |
(82,540,421 | ) | (46,170,931 | ) | (36,369,490 | ) | ||||||
Add back/(subtract): |
||||||||||||
Origination of Member Loans at fair value |
123,537,056 | 63,558,925 | 59,978,131 | |||||||||
Repayment of Member Loans at fair value |
(41,588,088 | ) | (15,853,311 | ) | (25,734,777 | ) | ||||||
Investing Activities after removing
activity related to Member Loans at fair
value |
(591.453 | ) | 1,534,683 | (2,126,136 | ) | |||||||
Financing Activities |
106,584,113 | 69,028,973 | 37,555,140 | |||||||||
Add back/(subtract): |
||||||||||||
Origination of Notes, fair value |
(124,210,169 | ) | (63,622,800 | ) | (60,587,369 | ) | ||||||
Repayment of Notes, fair value |
42,024,062 | 15,912,253 | 26,111,809 | |||||||||
Financing Activities after removing
activity related to Notes, fair value |
$ | 24,398,006 | $ | 21,318,426 | $ | 3,079,580 | ||||||
Net cash used in operating activities increased to $5,173,712 in the six months ended
September 30, 2011, from $4,373,273 in the six months ended September 30, 2010. Non-cash charges
that most significantly offset our net loss of $6,453,035 in the six months ended September 30,
2011 were $155,144 of allowances for loan losses on member loans, $268,413 of stock based
compensation expense, $57,117 of amortization of debt discounts and $60,574 of depreciation
expense. Similarly, non-cash charges that most significantly offset our net loss of $5,464,124 in
the six months ended September 30, 2010 were: $273,720 of allowances for loan losses on member
loans, $173,624 of stock based compensation expense, $149,668 of amortization of debt discounts and
$37,934 of depreciation expense.
Net cash used in investing activities for the six months ended September 30, 2011 and 2010,
were $82,540,421 and $46,170,931, respectively. However, after removing activity related to the
Member Loans at fair value, which activity was mostly offset by corresponding activity related to
the Notes reflected in our cash flow from financing activities, the remaining amounts provided by
(used for) investing activities in the six months ended September 30, 2011 and 2010, were
$(591,453) and $1,534,683 of cash used, respectively. These remaining amounts in both periods
were primarily activities related to borrower repayments of our Member Loans at amortized cost,
purchases of property and equipment and changes in restricted cash.
Net cash used in financing activities for the six months ended September 30, 2011 and 2010,
were $106,584,113 and $69,028,973, respectively. However, after excluding activity related to the
Notes, which is mostly offset by corresponding activity related to our Member Loans at fair value
(reflected in our cash flows from investing activities), the remaining amounts for the six months
ended September 30, 2011 and 2010, were $24,398,006 and
$21,318,426, respectively. Cash provided by financing activities, after excluding activity
related to the Notes, consisted primarily of excess of proceeds from the issuance our Series D
Preferred Stock over the repayment of loans payable in the six months ended September 30, 2011,
and, in the six months ended September 30, 2010, the excess of the proceeds from the issuance of
our Series C Preferred Stock over the repayment of loans payable.
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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 the extent the loans are not
funded by investors other than us. To date, we have funded our cash requirements with proceeds
from our loan borrowings, debt issuances, and the sale of equity securities. At September 30, 2011
and 2010, we had $1,022,000 and $862,000, respectively, in restricted cash and cash equivalents.
We primarily invest our cash in short-term interest bearing money market funds.
We do not have any committed unused or available external source of funds. To the extent our
existing liquidity and capital resources are insufficient to meet our future liquidity and capital
requirements, we will need to finance our cash needs through public or private equity offerings
and/or debt financings. There can be no assurance that additional equity or debt financing will be
available when needed, in sufficient amounts and on acceptable terms, if at all. Failure to obtain
additional liquidity if and when needed in the future could significantly impair the operations of
our platform and value of any investments on the platform.
Assets Under Management
In October 2010, we formed a subsidiary, LC Advisors, LLC, a California limited liability
company (LCA), which is wholly-owned by LendingClub. LCA has registered with the SEC as an
investment advisor and also acts as the general partner to two private investment funds for
accredited investors with differing investment strategies (Funds). In connection with the Funds,
LendingClub formed a Delaware business trust (LC Trust I or the Trust) as a bankruptcy remote
entity to hold Member Loans purchased from LendingClub. LCA commenced operations after January 1,
2011.
We started offering the Funds in March 2011 through a private placement. As of September 30,
2011, the Funds had approximately $25.2 million in assets with $15.6 million in escrow, which was
contributed to the Funds on October 1, 2011. LCA earns a management fee paid by the limited
partners of the Funds, paid monthly in arrears, and typically ranges from 0.55% to 0.75%
(annualized) of the month-end balances of partners capital accounts. These management fee can be
modified or waived at the discretion of the general partner.
Summary of Changes in Assets Under Management
The table below presents our summary of changes in assets under management, at amortized cost,
for LCA.
Six Months | ||||
Ended | ||||
September 30, | ||||
2011 | ||||
Balance beginning of period |
$ | 804,278 | ||
Net flows |
24,165,677 | |||
Appreciation (depreciation) |
221,202 | |||
Balance end of period |
$ | 25,191,157 | ||
Income Taxes
We incurred no net tax provision or benefit related to our pre-tax losses for the three and
six months ended September 30, 2011 and 2010. Accounting Standards Codification Topic 740,
Income Taxes, provides for the recognition of deferred tax assets, such as the future benefit of
net operating loss deductions against future taxable income, if realization of such tax-related
assets is more likely than not. However, given our history of operating losses, it is difficult to
accurately forecast when and in what amounts future results will be affected by the realization, if
any, of the tax benefits of future deductions for our net operating loss carry forwards. 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. Such valuation allowance against the deferred tax assets fully offsets the
current periods tax benefits attributable to the pre-tax losses.
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Variable Interest Entities
The determination of whether to consolidate a variable interest entity (VIE) under U.S. GAAP
requires a significant amount of analysis and judgment concerning the degree of control over a VIE
by its holders, and other factors related to the design of the VIE such as:(i) whether a holders
equity investment at risk is insufficient to allow the entity to finance its activities without
additional subordinated financial support, or, (ii) when a holders equity investment at risk lacks
any of the following characteristics of a controlling financial interest: the direct or indirect
ability through voting rights or similar rights to make decisions about a legal entitys activities
that have a significant effect on the entitys success, the obligation to absorb the expected
losses of the entity or the right to receive the expected residual returns of the legal entity.
Upon the adoption of amended accounting guidance applicable to VIEs on January 1, 2010, management
considers whether we have an equity investment in a VIE that meets the conditions requiring
consolidation of such entity.
The Trust commenced operations in March 2011 and its purpose is to acquire and hold Member
Loans for the benefit of investors that purchase Trust Certificates (Certificates) issued by the
Trust. The Companys capital contributions have been insufficient to allow the Trust to finance
its holdings of Member Loans without the issuance of Certificates. Additionally, the Certificates
have been structured so that the Companys equity investment is not obligated to absorb the
expected losses of the entity: the Certificates absorb payment delays and realized losses on their
related Member Loans due to the Member Loan Payment Dependent design of the Certificates. The
Company was the initial beneficiary of the Trust at its formation and is now the residual
beneficiary of the Trust, although the residual benefits of the Trust are expected to be
insignificant due to the design of the Trust. Accordingly, the Company has concluded that its
capital contributions to the Trust qualify as equity investments in a VIE and the Company
consolidated the Trusts operations.
The Company reviewed its relationship to the funds in which LCA is the general partner but for
which neither LC or LCA contributed capital. The Company concluded that LCAs contractual
relationship to the funds does not meet the requirements for consolidation of the funds into the
Companys consolidated financial statements. As of September 30, 2011, the Company didnt have any
controlling or other interests in VIEs, other than its interest in the Trust discussed above, to be
included in the Companys consolidated financial statements. Upon the occurrence of future events,
such as redemptions by all unaffiliated investors in any funds and modifications to fund
organization documents and investment management agreements, management reviews and reconsiders its
previous conclusion regarding the status of an entity as a VIE and whether the Company is required
to consolidate such VIE in its consolidated financial statements.
Additional Information about the LendingClub Platform
Historical Information about Our Borrower Members Loans:
In regards to the following historical information, prior performance is no guarantee of
future results or outcomes.
For purposes of the following information and tables, we have excluded from the data all
previously issued loans that would not meet the current credit policy.
From May 24, 2007 to September 30, 2011, we had facilitated member loans with an average
original principal amount of approximately $10,500 and an aggregate original principal amount of
$349,177,350. Out of 33,167 facilitated Member Loans, 4,537 Member Loans with an aggregate
original principal amount of $43,301,225, or 12.40% had fully paid. Including loans which were
fully paid, 30,743 loans representing $320,428,475 of the outstanding principal balance at
September 30, 2011 had been through at least one billing cycle.
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Of the $320,428,475 of original principal balance at September 30, 2011 that had been through
at least one billing cycle, $7,625,561 of outstanding principal balance less interest and fees
received, or 2.38%, was either in default or has been charged off. The defaulted or charged off
loans were comprised of 1,090 Member Loans, of which 770 loans representing $5,206,850 in
outstanding principal balance less interest and fees received, were
defaults and charge offs due to delinquency, while the remaining 320 loans were loans in which
the borrower members filed for a Chapter 7 bankruptcy seeking liquidation. A Member Loan is
considered defaulted when at least one payment is more than 120 days late.
Of remaining loans that had been through at least one billing cycle as of September 30, 2011,
$207,627,192 of principal remained outstanding of which 97.44% was current, 0.21% was 16 to 30 days
late, 1.40% was between 31 and 120 days late and 0.95% was on a performing payment plan. During
the three months ended September 30, 2011, of the 20,025 Member Loans which were not delinquent
prior to the start of the quarter, 631 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 $4,046 on
186 loans and received late fees of $1,114 on 48 loans.
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The following table presents aggregated information about borrower members and their loans for
the period from May 24, 2007 to September 30, 2011, grouped by the loan grade assigned by us:
Loan | Number of | Average | Average Annual | Average Total | ||||||||||||
Grade | Borrowers | Interest Rate | Percentage Rate | Funded Commitment | ||||||||||||
A1 |
790 | 5.71 | % | 6.96 | % | $ | 6,453 | |||||||||
A2 |
1,192 | 6.31 | % | 7.60 | % | 6,710 | ||||||||||
A3 |
1,560 | 7.11 | % | 8.63 | % | 7,369 | ||||||||||
A4 |
2,394 | 7.61 | % | 9.21 | % | 8,558 | ||||||||||
A5 |
2,401 | 8.18 | % | 9.65 | % | 9,098 | ||||||||||
B1 |
1,508 | 10.03 | % | 12.56 | % | 9,344 | ||||||||||
B2 |
1,690 | 10.45 | % | 12.96 | % | 10,019 | ||||||||||
B3 |
2,392 | 10.83 | % | 13.35 | % | 10,997 | ||||||||||
B4 |
2,111 | 11.22 | % | 13.67 | % | 10,578 | ||||||||||
B5 |
2,275 | 11.61 | % | 14.09 | % | 11,078 | ||||||||||
C1 |
1,781 | 12.72 | % | 15.51 | % | 10,570 | ||||||||||
C2 |
1,665 | 13.16 | % | 15.96 | % | 10,662 | ||||||||||
C3 |
1,332 | 13.51 | % | 16.29 | % | 10,352 | ||||||||||
C4 |
1,065 | 13.84 | % | 16.64 | % | 10,140 | ||||||||||
C5 |
1,032 | 14.29 | % | 17.13 | % | 10,032 | ||||||||||
D1 |
809 | 14.64 | % | 17.83 | % | 10,144 | ||||||||||
D2 |
1,157 | 15.11 | % | 17.96 | % | 11,015 | ||||||||||
D3 |
990 | 15.50 | % | 18.31 | % | 11,728 | ||||||||||
D4 |
831 | 15.90 | % | 18.67 | % | 12,780 | ||||||||||
D5 |
733 | 16.34 | % | 19.08 | % | 13,164 | ||||||||||
E1 |
641 | 16.70 | % | 19.40 | % | 13,509 | ||||||||||
E2 |
544 | 17.12 | % | 19.75 | % | 13,909 | ||||||||||
E3 |
450 | 17.45 | % | 20.07 | % | 14,163 | ||||||||||
E4 |
369 | 17.92 | % | 20.50 | % | 15,354 | ||||||||||
E5 |
336 | 18.34 | % | 20.97 | % | 16,582 | ||||||||||
F1 |
263 | 18.78 | % | 21.36 | % | 16,278 | ||||||||||
F2 |
211 | 19.04 | % | 21.61 | % | 16,502 | ||||||||||
F3 |
147 | 19.59 | % | 22.19 | % | 16,513 | ||||||||||
F4 |
134 | 19.96 | % | 22.61 | % | 16,215 | ||||||||||
F5 |
94 | 20.33 | % | 23.00 | % | 18,481 | ||||||||||
G1 |
86 | 20.55 | % | 23.22 | % | 18,084 | ||||||||||
G2 |
70 | 20.83 | % | 23.47 | % | 19,520 | ||||||||||
G3 |
41 | 21.23 | % | 23.80 | % | 20,014 | ||||||||||
G4 |
46 | 21.55 | % | 24.22 | % | 19,104 | ||||||||||
G5 |
27 | 21.65 | % | 24.38 | % | 18,202 | ||||||||||
Total Portfolio |
33,167 | 11.89 | % | 14.26 | % | $ | 10,528 | |||||||||
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The following table presents aggregated information for the period from May 24, 2007 to
September 30, 2011, 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 | ||||||||||||
Loan | They Own Their | Average Annual | Average Debt to | |||||||||
Grade | Own Homes | Gross Income | Income Ratio (1) | |||||||||
A1 |
70.76 | % | $ | 65,620 | 10.36 | % | ||||||
A2 |
65.69 | % | 66,825 | 10.80 | % | |||||||
A3 |
61.73 | % | 69,197 | 11.42 | % | |||||||
A4 |
55.97 | % | 65,938 | 12.03 | % | |||||||
A5 |
56.18 | % | 69,214 | 12.28 | % | |||||||
B1 |
51.59 | % | 66,383 | 12.47 | % | |||||||
B2 |
49.70 | % | 69,294 | 12.71 | % | |||||||
B3 |
53.18 | % | 71,644 | 13.24 | % | |||||||
B4 |
52.20 | % | 69,587 | 13.37 | % | |||||||
B5 |
51.16 | % | 67,436 | 13.52 | % | |||||||
C1 |
48.85 | % | 71,348 | 13.50 | % | |||||||
C2 |
47.09 | % | 68,553 | 13.56 | % | |||||||
C3 |
49.17 | % | 67,297 | 13.40 | % | |||||||
C4 |
47.42 | % | 66,785 | 14.03 | % | |||||||
C5 |
45.16 | % | 67,781 | 13.79 | % | |||||||
D1 |
41.16 | % | 65,575 | 13.48 | % | |||||||
D2 |
45.89 | % | 70,464 | 13.74 | % | |||||||
D3 |
47.78 | % | 68,752 | 13.85 | % | |||||||
D4 |
45.97 | % | 70,530 | 13.77 | % | |||||||
D5 |
48.84 | % | 70,663 | 13.65 | % | |||||||
E1 |
47.43 | % | 71,988 | 13.85 | % | |||||||
E2 |
51.29 | % | 74,226 | 14.06 | % | |||||||
E3 |
48.00 | % | 73,882 | 13.46 | % | |||||||
E4 |
54.47 | % | 77,998 | 13.68 | % | |||||||
E5 |
56.25 | % | 91,560 | 14.09 | % | |||||||
F1 |
53.99 | % | 82,201 | 13.52 | % | |||||||
F2 |
54.50 | % | 83,002 | 13.98 | % | |||||||
F3 |
48.98 | % | 85,660 | 14.50 | % | |||||||
F4 |
53.73 | % | 79,852 | 14.31 | % | |||||||
F5 |
58.51 | % | 86,675 | 13.55 | % | |||||||
G1 |
58.14 | % | 79,565 | 12.29 | % | |||||||
G2 |
60.00 | % | 87,607 | 14.53 | % | |||||||
G3 |
51.22 | % | 90,822 | 15.49 | % | |||||||
G4 |
58.70 | % | 103,150 | 13.48 | % | |||||||
G5 |
44.44 | % | 108,155 | 13.73 | % | |||||||
Total Portfolio |
52.17 | % | $ | 69,696 | 13.01 | % |
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
September 30, 2011, 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 the 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 | Inquiries | Average | Average | |||||||||||||||||||||||||||||
Average | Average | Average | Revolving | in the | Delinquencies | Months | ||||||||||||||||||||||||||
Loan | Average | Open Credit | Total Credit | Revolving | Line | Last Six | in the Last | Since Last | ||||||||||||||||||||||||
Grade | FICO | Lines | Lines | Credit Balance | Utilization | Months | Two Years | Delinquency | ||||||||||||||||||||||||
A1 |
778 | 10 | 25 | $ | 9,639 | 19.62 | % | 0 | 0 | 38 | ||||||||||||||||||||||
A2 |
769 | 10 | 25 | 8,778 | 19.56 | % | 1 | 0 | 38 | |||||||||||||||||||||||
A3 |
761 | 9 | 24 | 10,598 | 24.75 | % | 1 | 0 | 37 | |||||||||||||||||||||||
A4 |
749 | 9 | 23 | 11,597 | 31.49 | % | 1 | 0 | 40 | |||||||||||||||||||||||
A5 |
743 | 9 | 23 | 12,544 | 34.75 | % | 1 | 0 | 39 | |||||||||||||||||||||||
B1 |
735 | 9 | 22 | 11,520 | 39.37 | % | 1 | 0 | 37 | |||||||||||||||||||||||
B2 |
731 | 9 | 22 | 12,626 | 41.36 | % | 1 | 0 | 38 | |||||||||||||||||||||||
B3 |
725 | 9 | 22 | 13,745 | 44.57 | % | 1 | 0 | 36 | |||||||||||||||||||||||
B4 |
719 | 9 | 22 | 14,078 | 45.97 | % | 1 | 0 | 36 | |||||||||||||||||||||||
B5 |
714 | 9 | 22 | 13,932 | 50.26 | % | 1 | 0 | 36 | |||||||||||||||||||||||
C1 |
708 | 9 | 21 | 13,756 | 53.61 | % | 1 | 0 | 35 | |||||||||||||||||||||||
C2 |
704 | 9 | 21 | 13,170 | 55.56 | % | 1 | 0 | 37 | |||||||||||||||||||||||
C3 |
700 | 9 | 21 | 13,328 | 53.54 | % | 1 | 0 | 36 | |||||||||||||||||||||||
C4 |
695 | 9 | 21 | 13,745 | 57.59 | % | 1 | 0 | 35 | |||||||||||||||||||||||
C5 |
691 | 9 | 20 | 13,356 | 58.87 | % | 1 | 0 | 33 | |||||||||||||||||||||||
D1 |
683 | 9 | 20 | 13,171 | 61.94 | % | 1 | 0 | 33 | |||||||||||||||||||||||
D2 |
689 | 9 | 21 | 13,295 | 60.87 | % | 1 | 0 | 35 | |||||||||||||||||||||||
D3 |
689 | 9 | 21 | 14,266 | 61.46 | % | 1 | 0 | 32 | |||||||||||||||||||||||
D4 |
689 | 9 | 21 | 13,957 | 62.81 | % | 1 | 0 | 35 | |||||||||||||||||||||||
D5 |
689 | 9 | 22 | 14,774 | 62.73 | % | 1 | 0 | 35 | |||||||||||||||||||||||
E1 |
686 | 9 | 21 | 14,160 | 64.80 | % | 1 | 0 | 36 | |||||||||||||||||||||||
E2 |
686 | 9 | 22 | 15,333 | 67.07 | % | 1 | 0 | 35 | |||||||||||||||||||||||
E3 |
683 | 9 | 22 | 15,705 | 68.83 | % | 1 | 0 | 31 | |||||||||||||||||||||||
E4 |
682 | 9 | 22 | 16,907 | 67.44 | % | 1 | 0 | 34 | |||||||||||||||||||||||
E5 |
681 | 10 | 24 | 18,533 | 69.10 | % | 1 | 0 | 34 | |||||||||||||||||||||||
F1 |
679 | 10 | 23 | 17,189 | 66.77 | % | 1 | 0 | 36 | |||||||||||||||||||||||
F2 |
677 | 10 | 23 | 18,142 | 70.57 | % | 1 | 0 | 32 | |||||||||||||||||||||||
F3 |
677 | 11 | 25 | 17,235 | 71.88 | % | 1 | 0 | 30 | |||||||||||||||||||||||
F4 |
673 | 10 | 24 | 13,974 | 70.43 | % | 1 | 0 | 32 | |||||||||||||||||||||||
F5 |
674 | 10 | 23 | 17,060 | 69.96 | % | 1 | 0 | 32 | |||||||||||||||||||||||
G1 |
671 | 10 | 22 | 17,088 | 68.12 | % | 1 | 0 | 31 | |||||||||||||||||||||||
G2 |
671 | 10 | 21 | 21,401 | 75.80 | % | 1 | 1 | 33 | |||||||||||||||||||||||
G3 |
670 | 9 | 22 | 16,311 | 83.38 | % | 1 | 1 | 26 | |||||||||||||||||||||||
G4 |
672 | 12 | 26 | 24,376 | 76.65 | % | 1 | 0 | 30 | |||||||||||||||||||||||
G5 |
671 | 14 | 29 | 24,234 | 73.66 | % | 1 | 0 | 36 | |||||||||||||||||||||||
Total Portfolio |
718 | 9 | 22 | $ | 13,188 | 47.64 | % | 1 | 0 | 36 |
The following table presents additional aggregated information for the period from May
24, 2007 to September 30, 2011, about delinquencies, default and borrower paid off loans, grouped
by the loan grade assigned by us. The default and delinquency information presented in the table
includes data only for Member Loans that had been through at least one billing cycle as of
September 30, 2011. 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 that have been through at least one
billing cycle. 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 twelve months.
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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.
Charged-Off | ||||||||||||||||||||||||||||||||||||||||||||||||||||
/ Default of | Number of | |||||||||||||||||||||||||||||||||||||||||||||||||||
Through At | Loans | Number | Number | Total | Charged- | |||||||||||||||||||||||||||||||||||||||||||||||
16-30 | 16-30 | Least One | excl | of Loans | of All | Origination | Off / Default | |||||||||||||||||||||||||||||||||||||||||||||
Loan | Days Late | Days Late | 31+ Days | 31+ Days | Charged-Off | Billing Cycle | Issued / | Fully | Fully Paid | Fully Paid | Issued | Amount for All | of All | |||||||||||||||||||||||||||||||||||||||
Grade | ($) | (%) | Late ($) | Late (%) | / Default ($) | (%) | Fully Paid | Paid | ($) | (%) | Loans | Issued Loans | Issued (%) | |||||||||||||||||||||||||||||||||||||||
A1 |
$ | | 0.00 | % | $ | 3,795 | 0.13 | % | $ | 27,946 | 0.77 | % | 549 | 63 | $ | 246,750 | 4.84 | % | 790 | $ | 5,097,500 | 0.55 | % | |||||||||||||||||||||||||||||
A2 |
6,726 | 0.14 | % | 19,827 | 0.42 | % | 20,746 | 0.31 | % | 891 | 152 | 709,775 | 8.87 | % | 1,192 | 7,998,100 | 0.26 | % | ||||||||||||||||||||||||||||||||||
A3 |
7,844 | 0.12 | % | 42,441 | 0.66 | % | 57,197 | 0.54 | % | 1,182 | 276 | 1,748,200 | 15.21 | % | 1,560 | 11,495,100 | 0.50 | % | ||||||||||||||||||||||||||||||||||
A4 |
28,319 | 0.24 | % | 24,541 | 0.21 | % | 93,685 | 0.52 | % | 1,856 | 331 | 2,523,225 | 12.32 | % | 2,394 | 20,487,000 | 0.46 | % | ||||||||||||||||||||||||||||||||||
A5 |
31,383 | 0.26 | % | 118,703 | 0.98 | % | 224,832 | 1.09 | % | 1,880 | 398 | 3,445,950 | 15.78 | % | 2,401 | 21,843,850 | 1.03 | % | ||||||||||||||||||||||||||||||||||
B1 |
8,633 | 0.11 | % | 49,283 | 0.62 | % | 244,328 | 1.91 | % | 1,137 | 246 | 2,144,525 | 15.22 | % | 1,508 | 14,091,325 | 1.73 | % | ||||||||||||||||||||||||||||||||||
B2 |
| 0.00 | % | 85,030 | 0.95 | % | 331,755 | 2.14 | % | 1,273 | 285 | 3,032,900 | 17.91 | % | 1,690 | 16,931,375 | 1.96 | % | ||||||||||||||||||||||||||||||||||
B3 |
5,141 | 0.03 | % | 77,336 | 0.49 | % | 536,392 | 2.25 | % | 1,873 | 313 | 3,790,900 | 14.41 | % | 2,392 | 26,303,975 | 2.04 | % | ||||||||||||||||||||||||||||||||||
B4 |
19,692 | 0.15 | % | 194,884 | 1.45 | % | 447,790 | 2.16 | % | 1,713 | 272 | 2,897,400 | 12.98 | % | 2,111 | 22,329,125 | 2.01 | % | ||||||||||||||||||||||||||||||||||
B5 |
| 0.00 | % | 164,511 | 1.06 | % | 529,131 | 2.31 | % | 1,801 | 305 | 2,941,350 | 11.67 | % | 2,275 | 25,202,050 | 2.10 | % | ||||||||||||||||||||||||||||||||||
C1 |
30,386 | 0.27 | % | 190,203 | 1.66 | % | 454,122 | 2.64 | % | 1,367 | 278 | 2,546,400 | 13.53 | % | 1,781 | 18,824,350 | 2.41 | % | ||||||||||||||||||||||||||||||||||
C2 |
62,704 | 0.55 | % | 164,576 | 1.45 | % | 428,300 | 2.58 | % | 1,342 | 222 | 2,189,000 | 12.33 | % | 1,665 | 17,753,025 | 2.41 | % | ||||||||||||||||||||||||||||||||||
C3 |
7,234 | 0.09 | % | 160,788 | 1.91 | % | 392,193 | 3.00 | % | 1,063 | 211 | 1,892,350 | 13.72 | % | 1,332 | 13,789,350 | 2.84 | % | ||||||||||||||||||||||||||||||||||
C4 |
3,147 | 0.05 | % | 86,570 | 1.47 | % | 313,894 | 3.09 | % | 803 | 195 | 1,867,600 | 17.29 | % | 1,065 | 10,798,775 | 2.91 | % | ||||||||||||||||||||||||||||||||||
C5 |
| 0.00 | % | 110,585 | 1.76 | % | 423,247 | 4.36 | % | 829 | 149 | 1,355,125 | 13.09 | % | 1,032 | 10,352,750 | 4.09 | % | ||||||||||||||||||||||||||||||||||
D1 |
| 0.00 | % | 61,995 | 1.34 | % | 419,279 | 5.37 | % | 647 | 118 | 1,228,850 | 14.97 | % | 809 | 8,206,150 | 5.11 | % | ||||||||||||||||||||||||||||||||||
D2 |
17,847 | 0.22 | % | 102,841 | 1.27 | % | 347,475 | 2.97 | % | 937 | 133 | 1,488,025 | 11.68 | % | 1,157 | 12,743,925 | 2.73 | % | ||||||||||||||||||||||||||||||||||
D3 |
1,003 | 0.01 | % | 99,797 | 1.42 | % | 408,928 | 3.92 | % | 790 | 126 | 1,422,475 | 12.25 | % | 990 | 11,610,250 | 3.52 | % | ||||||||||||||||||||||||||||||||||
D4 |
| 0.00 | % | 148,376 | 2.00 | % | 337,860 | 3.38 | % | 699 | 86 | 911,850 | 8.59 | % | 831 | 10,620,350 | 3.18 | % | ||||||||||||||||||||||||||||||||||
D5 |
| 0.00 | % | 206,170 | 3.03 | % | 255,028 | 2.81 | % | 619 | 76 | 858,825 | 8.90 | % | 733 | 9,649,300 | 2.64 | % | ||||||||||||||||||||||||||||||||||
E1 |
41,645 | 0.71 | % | 64,696 | 1.10 | % | 230,244 | 2.91 | % | 544 | 60 | 767,750 | 8.87 | % | 641 | 8,659,375 | 2.66 | % | ||||||||||||||||||||||||||||||||||
E2 |
35,550 | 0.66 | % | 73,576 | 1.37 | % | 224,535 | 3.20 | % | 448 | 60 | 758,800 | 10.03 | % | 544 | 7,566,500 | 2.97 | % | ||||||||||||||||||||||||||||||||||
E3 |
33,415 | 0.72 | % | 62,218 | 1.34 | % | 153,591 | 2.58 | % | 379 | 44 | 552,075 | 8.66 | % | 450 | 6,373,400 | 2.41 | % | ||||||||||||||||||||||||||||||||||
E4 |
13,475 | 0.32 | % | 158,232 | 3.76 | % | 180,627 | 3.40 | % | 310 | 39 | 526,325 | 9.29 | % | 369 | 5,665,650 | 3.19 | % | ||||||||||||||||||||||||||||||||||
E5 |
| 0.00 | % | 12,436 | 0.30 | % | 137,471 | 2.67 | % | 293 | 23 | 317,525 | 5.70 | % | 336 | 5,571,700 | 2.47 | % | ||||||||||||||||||||||||||||||||||
F1 |
| 0.00 | % | 79,510 | 2.46 | % | 35,842 | 0.92 | % | 219 | 23 | 256,375 | 5.99 | % | 263 | 4,281,175 | 0.84 | % | ||||||||||||||||||||||||||||||||||
F2 |
22,729 | 0.84 | % | 114,859 | 4.26 | % | 83,488 | 2.55 | % | 185 | 17 | 222,925 | 6.40 | % | 211 | 3,481,975 | 2.40 | % | ||||||||||||||||||||||||||||||||||
F3 |
| 0.00 | % | 43,714 | 2.38 | % | 30,701 | 1.36 | % | 130 | 8 | 189,300 | 7.80 | % | 147 | 2,427,400 | 1.26 | % | ||||||||||||||||||||||||||||||||||
F4 |
49,735 | 3.04 | % | 31,501 | 1.93 | % | 57,924 | 2.91 | % | 115 | 10 | 156,075 | 7.18 | % | 134 | 2,172,850 | 2.67 | % | ||||||||||||||||||||||||||||||||||
F5 |
| 0.00 | % | 7,925 | 0.53 | % | 48,287 | 2.84 | % | 89 | 3 | 36,800 | 2.12 | % | 94 | 1,737,250 | 2.78 | % | ||||||||||||||||||||||||||||||||||
G1 |
| 0.00 | % | 22,600 | 1.80 | % | 44,263 | 2.88 | % | 77 | 7 | 136,800 | 8.80 | % | 86 | 1,555,225 | 2.85 | % | ||||||||||||||||||||||||||||||||||
G2 |
| 0.00 | % | 63,651 | 5.70 | % | 12,908 | 0.99 | % | 65 | 3 | 59,600 | 4.36 | % | 70 | 1,366,425 | 0.94 | % | ||||||||||||||||||||||||||||||||||
G3 |
| 0.00 | % | 17,451 | 2.92 | % | 26,384 | 3.90 | % | 35 | 1 | 17,600 | 2.14 | % | 41 | 820,575 | 3.22 | % | ||||||||||||||||||||||||||||||||||
G4 |
| 0.00 | % | 21,944 | 3.16 | % | 11,739 | 1.46 | % | 43 | | | 0.00 | % | 46 | 878,775 | 1.34 | % | ||||||||||||||||||||||||||||||||||
G5 |
| 0.00 | % | 22,270 | 5.93 | % | 53,429 | 10.87 | % | 23 | 4 | 61,800 | 12.58 | % | 27 | 491,450 | 10.87 | % | ||||||||||||||||||||||||||||||||||
Total Portfolio |
$ | 426,610 | 0.20 | % | $ | 2,908,837 | 1.35 | % | $ | 7,625,561 | 2.38 | % | 26,206 | 4,537 | $ | 43,301,225 | 12.40 | % | 33,167 | $ | 349,177,350 | 2.18 | % | |||||||||||||||||||||||||||||
The following table presents aggregated information for the period from May 24, 2007, to
September 30, 2011, 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 29 loans that we classified as identity fraud. In these cases, we
repaid holders of any related Notes in an amount equal to the unpaid principal and interest
balances due on the loans less any applicable servicing fees.
Aggregate | ||||||||||||||||||||||||||||
Principal | Gross | |||||||||||||||||||||||||||
Gross Amount | Balance of | Amount | ||||||||||||||||||||||||||
Aggregate | Collected on | Number of | Loans Charged- | Recovered | ||||||||||||||||||||||||
Total | Amount Sent | Accounts Sent | Loans Charged- | Off Due to | on Loans | |||||||||||||||||||||||
Loan | Number of Loans | Origination | to Collectons | to Collections | Off Due to | Delinquency | Charged-Off | |||||||||||||||||||||
Grade | In Collection (1) | Amount (1) | (1) | (2) | Delinquency (3) | (3) | (4) | |||||||||||||||||||||
A |
265 | $ | 1,759,375 | $ | 203,475 | $ | 92,074 | 63 | $ | 276,199 | $ | 24,134 | ||||||||||||||||
B |
579 | 5,568,450 | 800,893 | 334,716 | 186 | 1,281,604 | 20,148 | |||||||||||||||||||||
C |
620 | 5,434,825 | 872,981 | 395,057 | 217 | 1,301,934 | 30,691 | |||||||||||||||||||||
D |
430 | 4,519,925 | 807,043 | 358,397 | 184 | 1,291,691 | 28,183 | |||||||||||||||||||||
E |
204 | 2,557,125 | 402,222 | 175,616 | 73 | 653,601 | 2,924 | |||||||||||||||||||||
F |
63 | 980,700 | 204,514 | 90,440 | 20 | 166,242 | 10,260 | |||||||||||||||||||||
G |
32 | 544,975 | 77,711 | 29,979 | 11 | 127,351 | | |||||||||||||||||||||
Total |
2,193 | $ | 21,365,375 | $ | 3,368,839 | $ | 1,476,279 | 754 | $ | 5,098,623 | $ | 116,339 | ||||||||||||||||
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. |
|
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. As of this quarter, a total of 754 loans have been charged off due
to delinquency, of which 3 were on a payment plan as of September 30, 2011. |
|
4) | Represents the gross amounts we received on charged-off accounts after the accounts were
charged-offi.e., a payment received on an account after 120 days past due. |
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Table of Contents
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Not applicable for smaller reporting companies.
Item 4. | Controls and Procedures |
We establish and 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 Chief Financial Officer, 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
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the fiscal year covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer, 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, 2011 and the prospectus for the Notes dated August 15, 2011. 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.
40
Table of Contents
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 September 30, 2011, our accumulated deficit was $47.9 million and our total stockholders
deficit was $43.4 million. Our net loss for the six months ended September 30, 2011 and 2010, was
$6.5 and $5.5 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.
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 the Notes pursuant to the Registration Statement (Registration Statement No. 333-151827). 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 September 30, 2011, we sold
$346,751,625 in principal amount of Notes at 100% of their principal amount. The Notes were
offered only through our website, and there were no underwriters or underwriting discounts. In
connection with the offering, we incurred estimated expenses of approximately $4,754,719, none of
which were 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 at fair value through the
LendingClub platform designated by the lender members purchasing such series of Notes. 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.
On July 28, 2011, we issued and
sold 7,027,604 shares of its Series D Preferred Stock, par value $0.01 per
share for aggregate gross proceeds to LendingClub of approximately
$25 million pursuant to Section 4(2) of the Securities Act of 1933
and Regulation D thereunder. On August 31, 2011, we
issued and sold an additional 281,104 shares of Series D preferred stock
to a foreign accredited investor, pursuant to
Section 4(2). The sale of these shares resulted in
aggregate cash consideration of approximately $26,000,000. In connection with
our private placement of Series D convertible preferred stock, we incurred
transaction expenses of $96,277 that were recorded as an offset to gross
proceeds.
On October 7, 2011, we filed a new Registration Statement registering $1,000,000,000 in
principal amount of Notes. The Registration Statement is currently in a review period with the
SEC.
Item 3. | Defaults Upon Senior Securities |
None.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
See Exhibit Index
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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/ Carrie Dolan | |||
Name: | Carrie Dolan | |||
Title: | Chief Financial Officer (principal financial officer and principal accounting officer) |
Dated: November 14, 2011
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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 Chief Financial Officer, Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer, Pursuant to Section 906
of Sarbanes-Oxley Act of 2002 |
43