UNITED STATES
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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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
(Registrant’s 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 registrant’s common stock outstanding.

 

 

LENDINGCLUB CORPORATION

TABLE OF CONTENTS

Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION			2
Item 1. Consolidated Financial Statements			2
Consolidated Balance Sheets			2
Consolidated Statements of Operations			3
Consolidated Statements of Cash Flows			4
Notes to Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Consolidated Operation			23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			40
Item 4. Controls and Procedures			40
PART II. OTHER INFORMATION			40
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults Upon Senior Securities			41
Item 5. Other Information			41
Item 6. Exhibits			41
SIGNATURES			42
EXHIBIT INDEX			43
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

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.

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1.		Consolidated Financial Statements

LendingClub Corporation and Subsidiaries

Consolidated Balance Sheets
(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.

LendingClub Corporation and Subsidiaries

Consolidated Statements of Operations
(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.

LendingClub Corporation and Subsidiaries

		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.

LENDINGCLUB CORPORATION AND SUBSIDIARIES

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 period’s 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 Company’s 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 (VIE’s) in which the Company’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support or when the Company’s 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 entity’s activities that have a significant effect on the entity’s 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 LCA’s operations and all intercompany accounts have been eliminated.

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 Company’s 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 Company’s 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 Company’s capital contributions to the Trust qualify as equity investments in a VIE and the Company has consolidated the Trust’s 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.

Member Loans

All Member Loans originated from the Company’s 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 management’s 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 loan’s 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.

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 loan’s collection status, the borrower’s FICO score at or near the evaluation date, and the amount of probable loss in the event of a borrower member default.

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 120^th 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 150^th 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 member’s 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 member’s account, following which we initiate an Automated Clearing House transaction to transfer funds from our platform accounts to the borrower member’s bank account.

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 partner’s 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.

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.

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 entity’s credit risk associated with its financing receivables, and 2) the entity’s 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 Company’s 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 Creditor’s 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 creditor’s 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 Company’s 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 Company’s consolidated financial statements.

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 Company’s 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 Company’s 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	)

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.

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

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

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.

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 Company’s 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 Company’s preferred stock agreements contain certain anti-dilution provisions, whereby if the Company issues additional shares of capital stock for an effective price lower than the conversion price for a series of preferred stock immediately prior to such issue, then the existing conversion price of such series of preferred stock will be reduced. The Company determined that while its convertible preferred stock contains certain anti-dilution features, the conversion feature embedded within its convertible preferred stock does not require bifurcation under the guidance of FASB ASC 815, Derivatives and Hedging Activities.

Liquidation preference — Upon any liquidation, winding up or dissolution of us, whether voluntary or involuntary (a “Liquidation Event”), before any distribution or payment shall be made to the holders of any common stock, the holders of convertible preferred stock shall, on a pari passu basis, be entitled to receive by reason of their ownership of such stock, an amount per share of Series A convertible preferred stock equal to $1.065 (as adjusted for stock splits, recapitalizations and the like) plus all declared and unpaid dividends (the “Series A Preferred Liquidation Preference”), an amount per share of Series B convertible preferred stock equal to $0.7483 (as adjusted for stock splits, recapitalizations and the like) plus all declared and unpaid dividends (the “Series B Preferred Liquidation Preference”), 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.

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.

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

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 Company’s 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.

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.

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.

Item 2.		Management’s 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 “Management’s 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.

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.

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 loan’s collection status, the borrower’s FICO score at or near the evaluation date, and the amount of probable loss in the event of a borrower member default.

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 member’s 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.

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.

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	%

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.

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	%