S-1/A 1 d766811ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on December 1, 2014

Registration No. 333-198393

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

Form S-1

REGISTRATION STATEMENT

Under

the Securities Act of 1933

 

 

LendingClub Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   6199   51-0605731

(State or Other Jurisdiction of

Incorporation or Organization

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

LendingClub Corporation

71 Stevenson Street, Suite 300

San Francisco, California 94105

(415) 632-5600

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Renaud Laplanche

Chief Executive Officer

LendingClub Corporation

71 Stevenson Street, Suite 300

San Francisco, California 94105

(415) 632-5600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Please send copies of all communications to:

 

Cynthia C. Hess, Esq.

Jeffrey R. Vetter, Esq.

James D. Evans, Esq.

Fenwick & West LLP

801 California Street

Mountain View, California 94041

(650) 988-8500

 

Jason Altieri, Esq.

General Counsel and Chief Compliance

Officer

LendingClub Corporation

71 Stevenson Street, Suite 300

San Francisco, California 94105

(415) 632-5600

 

Kurt J. Berney, Esq.

Eric C. Sibbitt, Esq.

O’Melveny & Myers LLP

Two Embarcadero Center, 28th Floor

San Francisco, California 94111

(415) 984-8700

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 Securities Exchange Act of 1934, as amended. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be
registered(1)

 

Proposed
maximum
aggregate

offering price
per share

 

Proposed
maximum
aggregate

offering price(2)

 

Amount of

registration fee(3)

Common stock, $0.01 par value per share

  66,355,000 shares   $12.00   $796,260,000   $98,826

 

 

(1)  Includes an additional 8,655,000 shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended.
(3) The Registrant previously paid $64,400 in connection with a prior filing of this Registration Statement.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued December 1, 2014

57,700,000 Shares

 

LOGO

COMMON STOCK

 

 

LendingClub Corporation is offering 50,000,000 shares of its common stock and the selling stockholders are offering 7,700,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares of common stock. We anticipate that the initial public offering price will be between $10.00 and $12.00 per share.

 

 

Our common stock has been authorized for listing on the New York Stock Exchange under the symbol “LC.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 14.

 

 

PRICE $         A SHARE

 

 

 

       Price to
Public
       Underwriting
Discounts  and
Commissions(1)
       Proceeds  to
LendingClub
       Proceeds  to
Selling
Stockholders
 

Per share

       $           $           $           $   

Total

     $                              $                              $                              $                        

 

(1) See “Underwriters” for a description of the compensation payable to the underwriters.

At our request, the underwriters have reserved up to 10% of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers, employees, investors that have invested through our marketplace as of September 30, 2014 and other individuals related to us. See “Underwriters—Directed Share Program.”

We have granted the underwriters the option to purchase up to an additional 8,655,000 shares of common stock.

The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2014.

 

 

 

MORGAN STANLEY   GOLDMAN, SACHS & CO.

 

CREDIT SUISSE

  CITIGROUP

ALLEN & COMPANY LLC

 

STIFEL   BMO CAPITAL MARKETS   WILLIAM BLAIR   WELLS FARGO SECURITIES

                    , 2014


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Table of Contents

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Table of Contents

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Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     14   

Letter from Renaud Laplanche

     40   

Special Note Regarding Forward-Looking Statements

     42   

Use of Proceeds

     43   

Dividend Policy

     43   

Capitalization

     44   

Dilution

     46   

Selected Consolidated Financial and Other Data

     48   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     51   

Business

     87   
 

 

 

Neither we, the selling stockholders nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the selling stockholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: Neither we, the selling stockholders nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.

LENDINGCLUB CORPORATION

Our Mission

Transforming the banking system to make credit more affordable and investing more rewarding.

Overview

Lending Club is the world’s largest online marketplace connecting borrowers and investors. Our marketplace has facilitated over $6 billion in loan originations since it first launched in 2007, of which approximately $1.8 billion were invested in through notes issued pursuant to a shelf registration statement (Note Registration Statement), $2.5 billion were invested in through certificates issued by an independent trust (Trust) and $1.7 billion were invested in through whole loan sales. In the third quarter of 2014, our marketplace facilitated nearly $1.2 billion in loan originations, of which approximately $0.2 billion were invested in through notes issued pursuant to the Note Registration Statement, $0.3 billion were invested in through certificates issued by the Trust and $0.5 billion were invested in through whole loan sales. We believe a technology-powered online marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors. We have built a trusted brand with a track record of delivering exceptional value and satisfaction to both borrowers and investors.

Key advantages we have relative to traditional banks include:

 

    an innovative marketplace model that efficiently connects the supply and demand of capital;

 

    online operations that substantially reduce the need for physical infrastructure and improve convenience; and

 

    automation that increases efficiency, reduces manual processes and improves borrower and investor experience.

For consumers and small business borrowers, we leverage our cost advantages and marketplace model to provide borrowers with affordable credit. We utilize our technology to provide a better experience, offering borrowers a convenient, simple and fast online application that improves the often time-consuming and frustrating loan application process. We design our products to be fair, transparent and borrower-friendly. All of the installment loans offered through our marketplace feature fixed rates, fixed monthly payments, no hidden fees and no prepayment penalties.

For individual and institutional investors, we deliver value by providing them with the opportunity to earn attractive risk-adjusted returns through equal access to standard program loans offered through our marketplace. Our marketplace provides investors with the transparency and flexibility to quickly and easily tailor or modify their portfolio by utilizing specific investment criteria, such as credit attributes, financial data and loan characteristics. We use proprietary credit decisioning and scoring models and extensive historical loan performance data to provide investors with tools to construct loan portfolios confidently and model targeted

 

 

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returns. Our technology-powered marketplace enables broad diversification by allowing investors to invest in individual loans in increments as low as $25.

Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans are three- or five-year personal loans made to borrowers with a FICO score of at least 660 and that meet other strict credit criteria. These loans can be invested in through the purchase of notes issued pursuant to the Note Registration Statement, which are only available through our website. Separately, qualified investors may also invest in standard program loans in private transactions with a separate issuer not facilitated through our website. Custom program loans are only invested in through private transactions with qualified investors and cannot be invested in through notes and are not visible through our public website. Custom program loans are generally new offerings, and currently include loans that do not meet the requirements of the standard program and loans with longer maturities than we believe to be attractive to most note investors. Small business loans, personal loans that do not meet the requirements of the standard program and education and patient finance loans are all part of our custom loan program.

We have developed our proprietary technology platform to support our marketplace and make available a variety of loan products to interested investor channels. Our proprietary technology automates key aspects of our operations, including the borrower application process, data gathering, credit decisioning and scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. Our extensible technology platform has allowed us to expand our offerings from personal loans to include small business loans, and to expand investor classes from individuals to institutions and create various investment vehicles. Our platform also ensures that custom program loans are invested in through private transactions with a separate issuer and only with qualified investors, while at the same time allowing standard program loans to be available for investment through our notes and also through separate, private transactions with a separate issuer.

To further enhance our offerings, we make our marketplace and platform available to complementary partners, such as banks, asset managers, insurance companies, partner websites and technology companies, to offer new investment and borrower products, develop new tools for use on our platform and serve as a referral source for investors and borrowers. Ecosystem partners that serve as a source of referrals include financial websites, as well as consumer product providers. These types of relationships are marketing-focused, referring investors to our website to open note accounts or borrowers to our website to apply for a loan. These partners generally provide a link on their website to our website highlighting it as an alternative investment or financing source. The potential note investor or borrower can then click on the link and, if interested, can start the applicable process. In addition, leveraging our publicly available application program interface and downloadable data files, our technology partners, with whom we have no compensation arrangements, have developed applications to facilitate automated investing based on preset criteria controlled by their clients and to build credit models and filters in addition to those provided by us to investors. We do not pay for the development of these additional models and filters, which are only available to the developer’s clients and are not made publicly available by us. Our financial ecosystem partners provide additional financial products and opportunities for their own clients, such as pooled-investment vehicles with a variety of investment strategies. We believe that the opportunities and technology provided by these ecosystem partners complement our marketplace and that our partners will help expand the attractiveness and availability of our marketplace.

We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. The capital to invest in the loans enabled through our marketplace comes directly from a wide range of investors, including retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans and university endowments, and through a variety of channels, such as borrower

 

 

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payment dependent investment securities and whole loan purchases. We believe our strategy of pursuing a diverse investor base will continue to strengthen our marketplace and improve our ability to facilitate a wide variety of loans through a range of business and economic conditions.

We have experienced significant growth since our marketplace launched in 2007. For the years ended December 31, 2012 and 2013, we facilitated loan originations through our marketplace of $717.9 million and $2.1 billion, respectively, representing an increase of 188%. For the nine months ended September 30, 2013 and 2014, we facilitated loan originations through our marketplace of $1.4 billion and $3.0 billion, respectively, representing an increase of 117%. For the years ended December 31, 2012 and 2013, our total net revenue was $33.8 million and $98.0 million, respectively, representing an increase of 190%. For the nine months ended September 30, 2013 and 2014, our total net revenue was $64.5 million and $143.0 million, respectively, representing an increase of 122%. As our business has grown, we have achieved increasing levels of operational efficiency while continuing to invest in our business. For the years ended December 31, 2012 and 2013, our adjusted EBITDA was $(4.9) million and $15.2 million, respectively. For the nine months ended September 30, 2013 and 2014, our adjusted EBITDA was $8.7 million and $13.4 million, respectively, representing an increase of 54%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliations of Non-GAAP Financial Measures” for a description of adjusted EBITDA and its limitations. See “—Loan Volume” for more information regarding the volume of our loan originations.

Industry Background and Trends

There is an opportunity for the online marketplace model to transform the traditional banking system. We believe a transparent and open marketplace where borrowers and investors have access to information, complemented by technology and tools, can make credit more affordable, redirect existing pools of capital trapped inside the banking system and attract new sources of capital to a new asset class. We believe online marketplaces have the power to facilitate more efficient deployment of capital and improve the global economy.

 

    Personal and Small Business Lending Is Essential to the Economy. We believe the ability of individuals and small businesses to access affordable credit is essential to stimulating and sustaining a healthy, diverse and innovative economy. According to the Board of Governors of the Federal Reserve System, as of September 2014, the balance of outstanding consumer credit in the United States totaled $3.3 trillion. This amount included $882 billion of revolving consumer credit, which many consumers seek to refinance. According to the Federal Deposit Insurance Corporation (FDIC), as of June 30, 2014, there were $298 billion of commercial and industrial loans outstanding under $1 million.

 

    Borrowers Are Inadequately Served by the Current Banking System. We believe that traditional banks have higher fixed costs of underwriting and servicing, are ill-suited to meet personal and small business demand for small balance loans and have instead relied heavily on issuing credit cards, which require less personalized underwriting and have higher interest rates. While credit cards are convenient as a payment mechanism, they are an expensive long-term financing solution. Borrowers who carry a balance on their cards are often subject to high, variable interest rates and the possibility of incurring additional fees and penalties.

 

    Investors Have Limited Options to Participate in Personal and Small Business Credit. We believe many investors generally lack the size and access to invest in structured products directly and are unable to invest in personal and small business credit in a meaningful way. While institutional investors have had some access to this market, most have lacked the tools to customize portfolios to their specific risk tolerance, which is a feature of our marketplace and products. Additionally, banks accessing this market generally hold the loans they generate on their balance sheet. As a result, we believe additional capital that could be invested in personal and small business loans has largely been locked out of the market.

 

 

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Our Solution

We are the world’s largest online marketplace connecting borrowers and investors. Our technology platform supports this innovative marketplace model to efficiently connect the supply and demand of capital. Our marketplace also substantially reduces the need for physical infrastructure and improves convenience and automation, increasing efficiency, reducing manual processes and improving the overall borrower and investor experience.

Benefits to Borrowers

 

    Access to Affordable Credit. Our innovative marketplace model, online delivery and process automation enable us to offer borrowers interest rates that are generally lower on average than the rates charged by traditional banks on credit cards or installment loans. Based on responses from 21,051 borrowers in a survey of 103,439 randomly selected borrowers conducted by us during the nine months ended September 30, 2014, borrowers who received a loan to consolidate existing debt or pay off their credit card balance reported that the interest rate on the loan they received through our marketplace was, on average, 680 basis points lower than the rate on their outstanding debt or credit card balances, representing a 32% savings.

 

    Superior Borrower Experience. We offer a fast and easy-to-use online application process and provide borrowers with access to live support and online tools throughout the process and for the lifetime of the loan. Based on a review of the credit performance of borrowers who received a loan from January 2013 through May 2014 to consolidate existing debt or pay off their credit card balance, such borrowers experienced an average increase of 23 points in their FICO score within three months after obtaining their loan, which we believe is in part attributable to a reduction in interest rate and a reduction in the borrower’s total revolving balance. Our goal is to form long-term relationships with borrowers, facilitating their access to an array of financial products that meet their evolving needs over time.

 

    Transparency and Fairness. All of the installment loans offered through our marketplace feature a fixed rate that is clearly disclosed to the borrower during the application process, with fixed monthly payments, no hidden fees and the ability to prepay the balance at any time without penalty. Our platform utilizes a computerized, rules-based engine for credit decisioning, which removes the human bias associated with reviewing applications.

 

    Fast and Efficient Decisioning. We leverage online data and technology to quickly assess risk, determine a credit rating and assign appropriate interest rates. Qualified applicants receive offers in just minutes and can evaluate loan options without impacting their credit score.

Benefits to Investors

 

    Access to a New Asset Class. All investors can invest in personal loans originated through our standard program. Additionally, qualified investors can invest in loans originated through our custom program, including small business loans, in private transactions. These asset classes have historically been entirely funded and held by financial institutions or large institutional investors on a limited basis.

 

    Attractive Risk-Adjusted Returns. We have historically offered investors attractive risk-adjusted returns across loans offered through our marketplace. We screen loan applicants based on proprietary credit decisioning and scoring models and also factor in historical borrower performance in setting interest rates.

 

   

Transparency. We provide investors with transparency and choice in building their loan portfolios. For each standard program loan, investors can examine credit attributes from the borrower’s credit report and borrower-reported attributes prior to investing in a loan and can monitor ongoing loan performance. We also provide access to credit profile data on each approved loan as well as all of the

 

 

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historical performance data for every loan ever invested in through our marketplace. We specifically indicate the information that is verified on our website.

 

    Easy-to-Use Tools. We provide investors with tools to easily build or modify customized and diversified portfolios by selecting loans tailored to their investment objectives to assess the returns on their portfolios and, if desired, to enroll in automated investing.

Our Competitive Strengths

We believe the following strengths differentiate us from our competitors and provide us with competitive advantages in realizing the potential of our market opportunity:

 

    Leading Online Marketplace. We are the world’s largest online marketplace connecting borrowers and investors, based on over $6 billion in loan originations, of which approximately $1.8 billion were invested in through notes issued pursuant to the Note Registration Statement, $2.5 billion were invested in through certificates issued by the Trust, and $1.7 billion were invested in through whole loan sales. We believe that our brand, reputation and scale allow us to attract top talent, quickly develop and deploy new products, attract marketplace participants and leverage a lower cost structure to benefit borrowers and investors.

 

    Robust Network Effects. We believe the attractiveness of our online marketplace will continue to grow to the extent the number of participants and investments enabled through our marketplace increases. We refer to this as a “network effect.” Additionally, increased participation also results in the generation of substantial data that is used to improve the effectiveness of our credit decisioning and scoring models, enhancing our performance record and generating increasing trust in our marketplace. As trust increases, we believe investors will continue to demonstrate a willingness to accept lower risk premiums that will allow us to offer lower interest rates and attract additional high-quality borrowers. We believe that these network effects reinforce our market leadership position.

 

    High Borrower and Investor Satisfaction. Borrowers have validated our approach with an aggregate net promoter score (NPS)(1) in the 70s since we began surveying borrowers in January 2013, which places us at the upper end of customer satisfaction ratings for traditional financial services companies. Additionally, investors are confident transacting on our marketplace, as evidenced by high reinvestment rates.

 

    Technology Platform. Our technology platform automates our operations and, we believe, provides a significant time and cost advantage over traditional banks that run on legacy systems that are inflexible and slow to evolve.

 

    Sophisticated Risk Assessment. We use proprietary algorithms that leverage behavioral data, transactional data and employment information to supplement traditional risk assessment tools. We have built our technology platform to automate the application of these proprietary algorithms to each individual borrower’s application profile at scale. This approach allows us to evaluate and segment each potential borrower’s risk profile and price it accordingly.

 

    Efficient and Attractive Financial Model. We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. Our technology platform significantly reduces the need for physical infrastructure and lowers our costs, which provides us with significant operating leverage.

 

(1) NPS is a commonly used measure of customer loyalty and satisfaction, ranging from negative 100 to positive 100, based on direct questions to borrowers.

 

 

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As described in “Risk Factors” and elsewhere in this prospectus, maintaining these strengths is subject to a number of risks. For example, we may experience a decline in the network effect of our marketplace or in borrower and investor satisfaction if we are unable to maintain borrower and investor trust, promote and maintain our brand in a cost-effective manner or introduce new loan products or marketplace enhancements that achieve acceptance by borrowers and investors. We may be unable to maintain the strength of our technology platform or sophisticated risk assessment tools if we experience errors, inaccuracies or fraud in the technology or data underlying our platform or are unable to effectively use new data generated through participation in our marketplace to enhance our credit decisioning and scoring models, which could also adversely affect the efficiency of our financial model. Therefore, we cannot assure you that we will maintain these competitive strengths in the future.

Our Strategy for Growth

Key elements of our growth strategy include:

 

    Execute in Our Core Markets. We believe we have substantial opportunities for future growth, and we estimate that in September 2014, approximately $390 billion in outstanding consumer credit would meet our marketplace’s standard program credit policy.

 

    Broaden Our Loan Product Offerings. We intend to continue to enhance our marketplace’s existing loan products and add new loan products to attract a greater number and broader variety of consumers and small business owners.

 

    Widen the Spectrum of Borrowers Served. We have a diverse set of investors, some of which seek to invest in loans that are different from the loans currently offered through our standard program loans, such as loans with longer maturities, lower returns, shorter credit history or higher risk. Given the lack of performance data on many of these custom loan types, we only make them available through limited private transactions to qualified investors to allow us to gather data to assess the future viability of these loans. Because our technology can efficiently assess risk and set efficient pricing for individual borrowers, we plan to extend our marketplace to widen the spectrum of borrowers to meet this investor demand over time.

 

    Increase Supply of Capital Available to Borrowers. As confidence in our marketplace’s performance increases, we are able to attract additional investors with different thresholds for risk, yield and maturity. We plan to leverage this increasing confidence to increase our depth and breadth within each investor category, capture a larger proportion of total investible capital by introducing new products, offer our products in additional states and expand the channels through which our marketplace is available.

 

    Grow Our Ecosystem. We plan to foster existing relationships and develop new relationships with complementary partners to our marketplace and platform in order to create, or help create, new tools, products and referral sources for investors and borrowers.

 

    Continue to Invest in Our Innovative Technology Platform. We believe that investing in our technology platform and continuing to build our data sources will enable us to connect an increasing number of borrowers and investors, continue to identify new borrowers, detect and prevent fraud and maintain the security of our marketplace.

 

    Enter New Geographies. While we believe our largest near-term growth opportunity is domestic, over time we intend to expand our marketplace to address similar banking system inefficiencies, market dislocations, investor needs and borrower dissatisfaction globally.

If we are unable to timely and successfully execute the key elements of our growth strategy, our business and results of operations could be harmed.

 

 

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Loan Volume

For the year ended December 31, 2013, our marketplace facilitated approximately $2.1 billion in loans, comprised of approximately $2.0 billion in standard program and $0.1 billion in custom program loans. Of the standard program loans, notes issued pursuant to the Note Registration Statement accounted for $543 million, or 28%, of investments during the period, certificates issued by the Trust accounted for $1.1 billion, or 54%, and whole loan sales accounted for $364 million, or 18%. For the year ended December 31, 2013, of the capital invested in standard program loans, $1.2 billion, or 59%, was invested by individuals through investment vehicles or managed accounts, $569 million, or 29%, was invested by self-managed, individual investors and $245 million, or 12%, was invested by institutional investors. During the year ended December 31, 2013, all of the custom program loans were invested in through whole loan sales to institutional investors.

For the three months ended September 30, 2014, our marketplace facilitated nearly $1.2 billion in loans, comprised of approximately $0.9 billion in standard program and $0.3 billion in custom program loans. Of the standard program loans, notes issued pursuant to the Note Registration Statement accounted for $223 million, or 26%, of investments during the period, certificates issued by the Trust accounted for $284 million, or 32%, and whole loan sales accounted for $367 million, or 42%. For the three months ended September 30, 2014, of the capital invested in standard program loans, $383 million, or 44%, was invested by individuals through investment vehicles or managed accounts, $226 million, or 26%, was invested by self-managed, individual investors and $262 million, or 30%, was invested by institutional investors. Of the custom program loans, certificates issued by the Trust accounted for $25 million, or 9%, whole loan sales accounted for $150 million, or 51%, and education and patient finance loans facilitated through Springstone Financial LLC’s (Springstone) platform, a company we acquired in April 2014, accounted for $116 million, or 40%, of the investments during the three months ended September 30, 2014. Of the capital invested in custom program loans during this period, $22 million, or 8%, was invested by individuals through investment vehicles or managed accounts and $269 million, or 92%, was invested by institutional investors. Loans facilitated through the custom program are not invested in through notes and are invested in through private transactions or are loans facilitated through Springstone’s platform.

Selected Risks Related to Our Business

Our business is subject to numerous risks described in the section titled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:

 

    We have a relatively limited operating history at our current scale.

 

    We may continue to incur net losses.

 

    We may be unable to maintain or increase loan originations facilitated through our marketplace.

 

    We may be unable to maintain a relationship with an issuing bank.

 

    Our quarterly results may fluctuate significantly.

 

    We may not compete effectively in our target markets.

 

    We may be subject to negative publicity.

 

    We may fail to promote and maintain our brand in a cost-effective manner.

 

    Our marketing efforts may be unsuccessful.

 

    Our new loan products and enhancements may not achieve sufficient market acceptance.

 

    We and our issuing bank partners may fail to comply with federal and state consumer protection laws.

See “Risk Factors” beginning on page 14.

 

 

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Corporate Information

We were incorporated in Delaware as SocBank Corporation in October 2006 and changed our name to LendingClub Corporation in November 2006. Unless expressly indicated or the context requires otherwise, the terms “Lending Club,” “company,” “we,” “us,” and “our” in this prospectus refer to LendingClub Corporation, a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. Our principal executive offices are located at 71 Stevenson Street, Suite 300, San Francisco, California 94105, and our telephone number is (415) 632-5600. Our website address is www.lendingclub.com. The information on or that can be accessed through our website is not part of this prospectus.

LendingClub Corporation, the Lending Club logo and other Lending Club formative marks are trademarks of LendingClub Corporation in the United States. This prospectus also includes other trademarks of Lending Club and trademarks of other persons. Other trademarks, service marks or trade names appearing in this prospectus are the property of their respective owners.

 

 

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The Offering

 

Common stock offered by us

  

50,000,000 shares

Common stock offered by the selling stockholders

  

7,700,000 shares

Common stock to be outstanding after our initial public
offering

  


361,111,491 shares

Option to purchase additional shares from us

  

8,655,000 shares

Use of proceeds

   We estimate that the net proceeds to us from the sale of common stock in this offering will be approximately $512.3 million, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
   The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds to us from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We also expect to use a portion of the net proceeds to us from this offering to repay the full $49.2 million of indebtedness outstanding under our term loan. Additionally, we may use a portion of the net proceeds to us to acquire businesses, products, services or assets. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

Conflict of interest

   Genesis VC Partners X, LLC (Genesis) is the general partner of Norwest Venture Partners X, L.P., a beneficial owner of more than 10% of our outstanding common stock. The managing member of Genesis is NVP Associates, LLC, which is a subsidiary of an affiliate of Wells Fargo Securities, LLC, an underwriter in this offering.

Proposed New York Stock Exchange symbol

  

“LC”

The number of shares of common stock to be outstanding after this offering is based on (i) 310,272,201 shares of common stock outstanding as of September 30, 2014, (ii) 629,948 shares that we issued upon the exercise of warrants after September 30, 2014 and (iii) 209,342 shares that we expect to issue upon the exercise of warrants that would otherwise expire immediately prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and excludes:

 

    54,587,814 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2014, with a weighted-average exercise price of $2.63 per share;

 

 

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    3,179,171 shares of common stock issuable upon the exercise of options granted after September 30, 2014, with a weighted-average exercise price of $10.55 per share;

 

    975,792 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2014, with a weighted-average exercise price of $0.27 per share (after giving effect to items (ii) and (iii) above); and

 

    42,759,320 shares of common stock reserved for future issuance under our equity compensation plans, consisting of (i) 3,359,320 shares of common stock available for issuance under our 2007 Stock Incentive Plan (2007 Plan) as of September 30, 2014 and an additional 1,400,000 shares of common stock reserved for issuance on October 31, 2014, which shares will be added to the shares to be reserved under our 2014 Equity Incentive Plan (2014 Plan) upon its effectiveness, (ii) 35,000,000 shares of common stock reserved for future issuance under our 2014 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii) 3,000,000 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan (ESPP), which will become effective on the date of this prospectus.

Our 2014 Plan and ESPP each provide for annual automatic increases in the number of shares reserved under such plans. In addition, our 2014 Plan provides for increases in the number of shares that may be granted under the plan based on shares granted under our 2007 Plan that expire, are forfeited or otherwise repurchased by us at cost. On the date of this prospectus, any remaining shares available for issuance under our 2007 Plan will be added to the shares reserved under our 2014 Plan, and we will cease granting awards under our 2007 Plan. See “Executive Compensation—Employee Benefit Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

    a two-for-one stock split of our common stock, which became effective on September 5, 2014;

 

    the conversion of all outstanding shares of our convertible preferred stock as of September 30, 2014 into an aggregate of 249,351,011 shares of common stock in connection with this offering;

 

    the filing and effectiveness of our restated certificate of incorporation in Delaware and the adoption of our restated bylaws, each of which will occur upon the completion of this offering;

 

    no exercise by the underwriters of their option to purchase from us up to an additional 8,655,000 shares of our common stock; and

 

    no exercise of options or warrants outstanding on the date of this prospectus, except for 629,948 shares that we issued upon the exercise of warrants after September 30, 2014 and 209,342 shares that we expect to issue upon the exercise of warrants that would otherwise expire immediately prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus.

 

 

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Summary Consolidated Financial and Other Data

We have derived the selected consolidated statement of operations data for the year ended December 31, 2013 from the audited consolidated financial statements included in this prospectus. We have derived the selected consolidated statement of operations data for the nine months ended September 30, 2013 and 2014, and our selected consolidated balance sheet data as of September 30, 2014, from the unaudited interim consolidated financial statements included in this prospectus. We have derived the selected consolidated statement of operations data for the years ended December 31, 2011 and 2012 from unaudited consolidated financial statements not included in this prospectus. In December 2012, we changed our fiscal year end from March 31 to December 31. The change was effective as of December 31, 2012, and the nine months ended December 31, 2012 represent the transition period. The historical financial information presented for the years ended December 31, 2011 and 2012 (i) combines the unaudited interim consolidated financial statements for the three months ended March 31 and the nine months ended December 31 in each year and (ii) is unaudited and has been prepared by management for illustrative purposes only. The unaudited consolidated financial statements and unaudited historical financial information have been prepared on the same basis as the audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year or any other period. The following selected consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this prospectus.

 

    Years Ended December 31,      Nine Months Ended
September 30,
 
    2011     2012     2013      2013      2014  
    (in thousands, except share and per share data and percentages)  
    (unaudited)     (audited)      (unaudited)  

Consolidated Statement of Operations Data:

           

Operating revenue:

           

Transaction fees(1)

  $ 10,981      $ 30,576      $ 85,830       $ 55,214       $ 133,835   

Servicing fees

    951        1,929        3,951         2,485         6,301   

Management fees

    103        824        3,083         2,083         4,163   

Other revenue (expense)

    495        716        5,111         4,708         (438
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total operating revenue

    12,530        34,045        97,975         64,490         143,861   

Net interest income (expense) and other adjustments

    222        (238     27         15         (854
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total net revenue

    12,752        33,807        98,002         64,505         143,007   
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses(2):

           

Sales and marketing

    11,402        18,201        39,037         26,577         60,808   

Origination and servicing

    4,758        7,589        17,217         11,044         26,135   

General and administrative:

           

Engineering and product development(3)

    2,289        4,855        13,922         9,140         22,987   

Other

    6,572        10,024        20,518         13,294         55,875   
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

    25,021        40,669        90,694         60,055         165,805   
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

    (12,269     (6,862     7,308         4,450         (22,798

Income tax expense

                                  1,059   
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss)

  $ (12,269   $ (6,862   $ 7,308       $ 4,450       $ (23,857
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

 

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     Years Ended December 31,     Nine Months Ended
September 30,
 
     2011     2012     2013     2013     2014  
     (in thousands, except share and per share data and percentages)  
     (unaudited)     (audited)     (unaudited)  

Net income (loss) per share attributable to common stockholders(4):

          

Basic

   $ (0.35   $ (0.17   $ 0.00      $ 0.00      $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.35   $ (0.17   $ 0.00      $ 0.00      $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares of common stock used in computing net income (loss) per common share(4):

          

Basic

     34,744,860        39,984,876        51,557,136        50,457,948        57,958,838   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    
34,744,860
  
    39,984,876        81,426,976        79,153,912       
57,958,838
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share(4)(5) (unaudited):

          

Basic

       $ 0.03        $ (0.08
      

 

 

     

 

 

 

Diluted

       $ 0.02        $ (0.08
      

 

 

     

 

 

 

Weighted-average shares outstanding used to calculate pro forma net income (loss) per common share(4)(5) (unaudited):

          

Basic

         291,766,192          303,608,800   
      

 

 

     

 

 

 

Diluted

         323,331,550         
303,608,800
  
      

 

 

     

 

 

 

Other Data(6) (unaudited):

          

Loan originations

   $ 257,364      $ 717,943      $ 2,064,626      $ 1,366,253      $ 2,962,520   

Contribution

   $ (3,591   $ 8,632      $ 43,458      $ 27,806      $ 63,374   

Contribution margin

     (28.7 )%      25.4     44.4     43.1     44.1

Adjusted EBITDA

   $ (12,067   $ (4,924   $ 15,227      $ 8,713      $ 13,384   

Adjusted EBITDA margin

     (96.3 )%      (14.5 )%      15.5     13.5     9.3

 

(1) Previously referred to as Origination Fees.
(2) Includes stock-based compensation expense as follows:

 

     Years Ended
December 31,
     Nine Months
Ended September 30,
 
     2011      2012      2013          2013              2014      
     (in thousands)  

Stock-Based Compensation Expense:

              

Sales and marketing

   $ 30       $ 302       $ 1,313       $ 767       $ 5,029   

Origination and servicing

     9         75         424         170         1,427   

General and administrative:

              

Engineering and product development

     71         449         2,171         1,019         3,487   

Other

     181         586         2,375         1,390         15,946   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $      291       $   1,412       $   6,283       $   3,346       $ 25,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3) Previously referred to as Technology.
(4) In April 2014, our board of directors approved a two-for-one stock split of our outstanding capital stock and in August 2014, our board of directors approved another two-for-one stock split of our outstanding capital stock, which became effective in September 2014. All share and per share data in this table has been adjusted to reflect these stock splits. See Note 3 to consolidated financial statements included in this prospectus for a description of how we compute basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income (loss) per share.

 

 

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(5) For additional information regarding the pro forma presentation, see the unaudited pro forma condensed combined statements of operations beginning on page F-67, which include both the acquisition of Springstone and the conversion of all of the outstanding shares of our convertible preferred stock.
(6) For more information regarding loan originations, contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Financial Metrics.” Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliations of Non-GAAP Financial Measures.”

 

     As of September 30, 2014  
     Actual      As Adjusted(1)(2)  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

   $ 82,674       $ 547,758   

Loans(3)

     2,533,671         2,533,671   

Total assets

     2,814,846         3,275,996   

Notes and certificates(3)

     2,551,640         2,551,640   

Total liabilities

     2,673,306         2,623,034   

Total stockholders’ equity

     141,540         652,962   

 

(1) The as adjusted consolidated balance sheet data gives effect to (i) the conversion of all of our outstanding shares of convertible preferred stock into 249,351,011 shares of common stock, (ii) the sale and issuance of 50,000,000 shares of common stock by us in this offering at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (iii) the issuance of 629,948 shares of common stock upon the exercise of warrants after September 30, 2014, (iv) the issuance of 209,342 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and (v) repayment of the full $49.2 million of indebtedness outstanding under our term loan and the elimination of the related debt discount and unamortized debt issuance costs upon the completion of this offering.
(2) Each $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase (decrease) our as adjusted cash and cash equivalents, total assets and total stockholders’ equity by approximately $47.1 million, assuming that the number of shares offered by us, as set forth on the front cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.
(3) Loans represent unsecured obligations of borrowers originated through our marketplace. Notes and certificates are issued to investors and represent repayment obligations dependent upon receipt of borrower payments as to a corresponding loan. For more information regarding notes and certificates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.” Period-end differences between the two line items are largely driven by timing of applying and distributing loan payments to investors.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes, before making a decision to invest in our common stock. While we believe the risks and uncertainties described below include all material risks currently known by us, it is possible that these may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

As a rapidly growing company with a relatively limited operating history at our current scale, we face increased risks, uncertainties, expenses and difficulties.

We have a limited operating history at our current scale, and we have encountered and will continue to encounter risks, uncertainties, expenses and difficulties, including:

 

    navigating complex and evolving regulatory and competitive environments;

 

    increasing the number of borrowers and investors utilizing our marketplace;

 

    increasing the volume of loans facilitated through our marketplace and transaction fees received for matching borrowers and investors through our marketplace;

 

    entering into new markets and introducing new loan products;

 

    continuing to revise our marketplace’s proprietary credit decisioning and scoring models;

 

    continuing to develop, maintain and scale our platform;

 

    effectively using limited personnel and technology resources;

 

    effectively maintaining and scaling our financial and risk management controls and procedures;

 

    maintaining the security of our platform and the confidentiality of the information provided and utilized across our platform; and

 

    attracting, integrating and retaining an appropriate number of qualified employees.

If we are not able to timely and effectively address these requirements, our business and results of operations may be harmed.

We have incurred net losses in the past and may incur net losses in the future.

As of September 30, 2014, our accumulated deficit was $74.2 million. We anticipate that our operating expenses will increase in the foreseeable future as we seek to continue to grow our business, attract borrowers, investors and partners and further enhance and develop our loan products, marketplace and platform. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We may incur additional net losses in the future and may not maintain profitability on a quarterly or annual basis.

If we are unable to maintain or increase loan originations facilitated through our marketplace or if existing borrowers or investors do not continue to participate on our marketplace, our business and results of operations will be adversely affected.

We have experienced rapid revenue and origination growth through our marketplace in recent periods, with loan originations through our marketplace more than doubling each year from 2008 through 2013 and with originations totaling $2.1 billion for the year ended December 31, 2013 and $3.0 billion for the nine months ended September 30, 2014. To continue to grow our business, we must continue to increase loan originations

 

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through our marketplace by attracting a large number of new borrowers who meet our platform’s lending standards and new and existing investors interested in investing in these loans. The number of unique borrowers on our marketplace increased over the prior year by 104%, 125% and 151% for the years ending December 31, 2011, 2012 and 2013, respectively. The number of unique investors on our marketplace increased over the prior year by 32%, 37% and 44% for the years ending December 31, 2011, 2012 and 2013, respectively. There can be no assurance that this increase in the number of unique borrowers and investors will continue to increase. Furthermore, we have experienced a high number of inquiries from potential borrowers who do not meet the criteria for loan application approval. If there are not sufficient qualified loan requests, investors may be unable to deploy their capital in a timely or efficient manner and may seek other investment opportunities. If there are insufficient investor commitments, borrowers may be unable to obtain investment capital for their loans and may stop using our marketplace for their borrowing needs.

A relatively small number of investors account for a large dollar amount of investment in loans funded through our marketplace.

A relatively small number of investors account for a large dollar amount of investment in loans funded through our marketplace. Although we believe there is substantial excess investor demand to replace any investors who may choose not to continue to invest through our marketplace, if we are unable to attract sufficient investor commitments or investors do not continue to participate in our marketplace at the current rates, we may be unable to increase our loan originations and our revenue may grow more slowly than expected or decline over the short term. In addition, if a large number of our existing investors ceased utilizing our marketplace over a short period of time, our business could be temporarily interrupted as new investors complete the administrative and diligence updating processes necessary to enable their investments.

If we are unable to maintain a relationship with an issuing bank, our business will suffer.

We rely on issuing banks to originate all loans and to comply with various federal, state and other laws. Our primary issuing bank is WebBank, a Utah-chartered industrial bank that handles a variety of consumer and commercial financing programs. Springstone Financial, LLC (Springstone), which we acquired in April 2014, relies on NBT Bank and Comenity Bank as issuing banks for its education and patient finance loans.

Our agreements with WebBank are non-exclusive and do not prohibit WebBank from working with our competitors or from offering competing services. Our current agreements with WebBank have initial terms ending in November 2018, with the possibility of two, one-year renewal terms, subject to certain early termination provisions as set forth in the agreements. WebBank currently offers loan programs through another online marketplace. WebBank could decide that working with us is not in its interest, could make working with it cost prohibitive or could decide to enter into exclusive or more favorable relationships with our competitors. In addition, WebBank may not perform as expected under our agreements. We could in the future have disagreements or disputes with WebBank, which could negatively impact or threaten our relationship.

WebBank is subject to oversight by the FDIC and the State of Utah and must comply with complex rules and regulations, licensing and examination requirements, including requirements to maintain a certain amount of regulatory capital relative to its outstanding loans. We are a service provider to WebBank, and as such, we are subject to audit by WebBank in accordance with FDIC guidance related to management of third-party vendors. We may also be subject to the examination and enforcement authority of the FDIC as a bank service company covered by the Bank Service Company Act. If WebBank were to suspend, limit or cease its operations or our relationship with WebBank were to otherwise terminate, we would need to implement a substantially similar arrangement with another issuing bank, obtain additional state licenses or curtail our operations. Although we currently have a non-exclusive arrangement with Cross River Bank, another issuing bank, to date Cross River Bank has not originated any loans through our platform. If we need to enter into alternative arrangements with a different issuing bank to replace our existing arrangements, we may not be able to negotiate a comparable alternative arrangement. Transitioning loan originations to a new issuing bank is untested and may result in

 

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delays in the issuance of loans or, if our platform becomes inoperable, may result in our inability to facilitate loans through our platform. If we were unable to enter in an alternative arrangement with a different issuing bank, we would need to obtain a state license in each state in which we operate in order to enable us to originate loans, as well as comply with other state and federal laws, which would be costly and time-consuming. If we are unsuccessful in maintaining our relationships with WebBank or other issuing banks, our ability to provide loan products could be materially impaired and our operating results would suffer.

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations, including the levels of our operating revenue, expenses, contribution margin and other key metrics, may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Our quarterly financial results may fluctuate due to a variety of factors, some of which are outside of our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may adversely affect the price of our common stock. Factors that may cause fluctuations in our quarterly financial results include:

 

    our ability to attract new investors or borrowers and maintain relationships with existing borrowers and investors;

 

    loan volumes, loan grades, loan mix and the channels through which the loans and corresponding investors are sourced;

 

    the amount and timing of operating expenses related to acquiring borrowers and investors and the maintenance and expansion of our business, operations and infrastructure;

 

    network outages or security breaches;

 

    general economic, industry and market conditions;

 

    our emphasis on borrower and investor experience instead of near-term growth; and

 

    the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired technologies or businesses.

In addition, we experience some seasonality in demand for personal loans, which is generally lower in the first and fourth quarters. While our growth has somewhat masked this seasonality, our operating results could be affected by such seasonality in the future.

If we do not compete effectively in our target markets, our operating results could be harmed.

The personal and small business lending market is competitive and evolving. We compete with financial products and companies that attract borrowers, investors or both. With respect to borrowers, we primarily compete with traditional financial institutions, such as banks, credit unions, credit card issuers and other consumer finance companies. With respect to investors, we primarily compete with other investment vehicles and asset classes, such as equities, bonds and short-term fixed income securities. We also compete with other online credit marketplaces.

Many of our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current or potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels. Our potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and brand loyalty and broader customer and partner relationships than we have. For example, more

 

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established Internet companies that possess large, existing customer bases, substantial financial resources and established distribution channels could enter the market. Additionally, a current or potential competitor may acquire one of our existing competitors or form a strategic alliance with one of our competitors. Our competitors may be better at developing new products, responding quickly to new technologies and undertaking more extensive marketing campaigns. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our marketplace could stagnate or substantially decline, we could experience reduced revenue or our marketplace could fail to achieve or maintain more widespread market acceptance, any of which could harm our business.

Negative publicity could adversely affect our business and operating results.

Negative publicity about our industry or our company, including the quality and reliability of our marketplace, effectiveness of the credit decisioning and scoring models used in the marketplace, changes to our marketplace, our ability to effectively manage and resolve borrower and investor complaints, privacy and security practices, litigation, regulatory activity and the experience of borrowers and investors with our marketplace or services, even if inaccurate, could adversely affect our reputation and the confidence in, and the use of, our marketplace, which could harm our business and operating results. Harm to our reputation can arise from many sources, including employee misconduct, misconduct by our partners, outsourced service providers or other counterparties, failure by us or our partners to meet minimum standards of service and quality, inadequate protection of borrower and investor information and compliance failures and claims.

If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share and our revenue may decrease.

We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to attracting new and retaining existing borrowers and investors to our marketplace. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the experience of borrowers and investors in our marketplace. Our efforts to build our brand have involved significant expense, and it is likely that our future marketing efforts will require us to incur significant additional expense. These brand promotion activities may not result in increased revenue and, even if they do, any increases may not offset the expenses incurred. If we fail to successfully promote and maintain our brand or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may lose our existing borrowers and investors to our competitors or be unable to attract new borrowers and investors.

Our success and future growth depend significantly on our successful marketing efforts, and if we are unable to attract borrowers and investors to our marketplace, our business and financial results may be harmed.

We intend to continue to dedicate significant resources to our marketing efforts, particularly as we continue to grow our marketplace, introduce new loan products and expand into new states. Our ability to attract qualified borrowers and sufficient investors depends in large part on the success of these marketing efforts and the success of the marketing channels we use to promote our marketplace. Our marketing channels include social media and the press, online partnerships, search engine optimization, search engine marketing, offline partnerships, mail-to-web and radio and television advertising. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers and investors in a cost-effective manner or convert potential borrowers and investors into active borrowers and investors in our marketplace. As a result, our revenue and results of operations would be adversely affected, which may impair our ability to grow our business.

If new loan products and enhancements do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.

We incur expenses and expend resources upfront to develop, acquire and market new loan products and platform enhancements to incorporate additional features, improve functionality or otherwise make our

 

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marketplace more desirable to borrowers and investors. New loan products or marketplace or platform enhancements must achieve high levels of market acceptance in order for us to recoup our investment in developing and bringing them to market.

Any new loan products and changes to our marketplace or platform could fail to attain sufficient market acceptance for many reasons, including:

 

    our failure to predict market demand accurately and supply loan products that meet this demand in a timely fashion;

 

    borrowers and investors using our marketplace may not like, find useful or agree with any changes;

 

    defects, errors or failures in our platform;

 

    negative publicity about our loan products or our marketplace or platform’s performance or effectiveness;

 

    delays in releasing to the market new loan products or marketplace or platform enhancements; and

 

    the introduction or anticipated introduction of competing products by our competitors.

If our new loan products or marketplace or platform enhancements do not achieve adequate acceptance in the market, our competitive position, revenue and operating results could be harmed. The adverse effect on our financial results may be particularly acute because of the significant development, marketing, sales and other expenses we will have incurred in connection with the new loan products or enhancements.

If we are unable to successfully expand our marketplace to new markets, we may not succeed in growing our business.

Although historically we have focused on the personal loan market, we recently expanded our marketplace to include small business borrowers and have also introduced education and patient finance loans through our acquisition of Springstone. We plan to address additional markets and loan products and expand the types of borrowers and investors to further grow our business. Any failure to successfully address additional market segments and loan products or develop a broader base of borrowers and investors could result in loss of market share or slower growth, which would harm our business, financial condition and results of operations.

Successful strategic relationships with ecosystem partners are important for our future success.

We anticipate that we will continue to depend on relationships with ecosystem partners to grow our business. We continue to pursue additional relationships with ecosystem partners, such as banks, asset managers and insurance companies. For example, we intend to enter into strategic relationships with community banks and other financial partners to facilitate co-branded loan offerings to their borrower customers through our marketplace. Identifying, negotiating and documenting relationships with ecosystem partners require significant time and resources as does integrating third-party data and services. Our current agreements with ecosystem partners often do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to ecosystem partners to favor their products or services or in reducing the volume of loans facilitated through our marketplace. In addition, these ecosystem partners may not perform as expected under our agreements with them, and we may have disagreements or disputes with such partners, which could adversely affect our brand and reputation. If we cannot successfully enter into and maintain effective strategic relationships with ecosystem partners, our business will be harmed.

If the credit decisioning and scoring models we use contain errors or are otherwise ineffective, our reputation and relationships with borrowers and investors could be harmed and our market share could decline.

Our ability to attract borrowers and investors to, and build trust in, our marketplace is significantly dependent on our ability to effectively evaluate a borrower’s credit profile and likelihood of default. To conduct

 

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this evaluation, we utilize credit decisioning and scoring models that assign each loan offered on our marketplace a grade and a corresponding interest rate. Our marketplace’s credit decisioning and scoring models are based on algorithms that evaluate a number of factors, including behavioral data, transactional data and employment information, which may not effectively predict future loan losses. If we are unable to effectively segment borrowers into relative risk profiles, we may be unable to offer attractive interests rates for borrowers and returns for investors. We refine these algorithms based on new data and changing macro and economic conditions. If any of these credit decisioning and scoring models contain programming or other errors, are ineffective or the data provided by borrowers or third parties is incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans. While we have not incurred any material liabilities to date, if these errors were to occur in the future, investors may try to rescind their affected investments or decide not to invest in loans or borrowers may seek to revise the terms of their loans or reduce the use of our marketplace for loans.

Credit and other information that we receive from third parties about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may cause us to inaccurately price loans facilitated through our marketplace.

We obtain borrower credit information from consumer reporting agencies, such as TransUnion, Experian or Equifax, and assign loan grades to loan requests based on our marketplace’s credit decisioning and scoring models that take into account reported credit score, other information reported by the consumer reporting agencies and the requested loan amount, in addition to a variety of other factors. A credit score or loan grade assigned to a borrower may not reflect that borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verify the information obtained from the borrower’s credit report. Additionally, there is a risk that, following the date of the credit report that we obtain and review, a borrower may have:

 

    become delinquent in the payment of an outstanding obligation;

 

    defaulted on a pre-existing debt obligation;

 

    taken on additional debt; or

 

    sustained other adverse financial events.

If borrowers default on loans that are not priced correctly, investors may try to rescind their affected investments in these loans and our reputation may be harmed.

Our reputation may be harmed if information supplied by borrowers is inaccurate, misleading or incomplete.

Borrowers supply a variety of information that is included in the loan listings on our marketplace. Other than as described below, we do not verify this information, and it may be inaccurate or incomplete. For example, we often do not verify a borrower’s stated tenure, job title, home ownership status or intention for the use of loan proceeds. Moreover, investors do not, and will not, have access to financial statements of borrowers or to other detailed financial information about borrowers. If investors invest in loans through our marketplace based on information supplied by borrowers that is inaccurate, misleading or incomplete, those investors may not receive their expected returns and our reputation may be harmed.

Fraudulent activity associated with our marketplace could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease and our fraud losses to increase.

We are subject to the risk of fraudulent activity associated with our marketplace, issuing banks, borrowers, investors and third parties handling borrower and investor information. Our resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud. Under our agreements with investors, we are obligated to repurchase loans in cases of confirmed identity theft. The level of our fraud charge-offs and

 

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results of operations could be materially adversely affected if fraudulent activity were to significantly increase. High profile fraudulent activity or significant increases in fraudulent activity could lead to regulatory intervention, negatively impact our operating results, brand and reputation and lead us to take steps to reduce fraud risk, which could increase our costs.

We rely on data from third parties for the successful operation of our platform.

Our ability to review and select qualified borrowers and sufficient investors depends on credit, identification, employment and other relevant information that we receive from third parties, including credit bureaus. If this information becomes unavailable or becomes more expensive to access, it could increase our costs as we seek alternative sources of information. If this third-party data is incorrect, our ability to identify qualified borrowers and investors or approve and price loans may suffer and our business may be harmed.

Fluctuations in interest rates could negatively affect transaction volume.

All personal and small business loans facilitated through our marketplace are issued with fixed interest rates, and education and patient finance loans facilitated by Springstone are issued with fixed or variable rates, depending on the type of loan. If interest rates rise, investors who have already committed capital may lose the opportunity to take advantage of the higher rates. Additionally, potential borrowers could seek to defer loans as they wait for interest rates to settle, and borrowers of variable rate loans through Springstone’s platform may be subject to increased interest rates. If interest rates decrease after a loan is made, borrowers through our marketplace may prepay their loans to take advantage of the lower rates. Investors through our marketplace would lose the opportunity to collect the above-market interest rate payable on the corresponding loan and may delay or reduce future loan investments. As a result, fluctuations in the interest rate environment may discourage investors and borrowers from participating in our marketplace and may reduce our loan originations, which may adversely affect our business.

If loan default rates are in excess of the expected default rates, we may be unable to collect our entire servicing fee.

Personal loans facilitated through our marketplace are not secured by any collateral, not guaranteed or insured by any third party and not backed by any governmental authority in any way. We are therefore limited in our ability to collect on the loans if a borrower is unwilling or unable to repay. A borrower’s ability to repay us can be negatively impacted by increases in their payment obligations to other lenders under mortgage, credit card and other loans, including student loans and home equity lines of credit. These changes can result from increases in base lending rates or structured increases in payment obligations and could reduce the ability of our borrowers to meet their payment obligations to other lenders and to us. If a borrower defaults on a loan, we typically outsource subsequent servicing efforts to third-party collection agencies, which may be unsuccessful in their efforts to collect the amount of the loan. Because our servicing fees depend on the collectability of the loans, if we experience an unexpected significant increase in the number of borrowers who fail to repay their loans or an increase in the principal amount of the loans that are not repaid, we will be unable to collect our entire servicing fee for such loans and our revenue could be adversely affected.

If we experience an increase in defaults on loans facilitated through our marketplace, the return on investment for investors in those loans would be adversely affected and investors may not find investing through our marketplace desirable.

We make payments ratably on an investor’s investment only if we receive the borrower’s payments on the corresponding loan. If we do not receive payments on the corresponding loan related to an investment, the investor will not be entitled to any payments under the terms of the investment. Further, investors may have to pay us an additional servicing fee of up to 35% of any amount recovered by our third-party collection agencies assigned to collect on the loan. An investor may become dissatisfied with our marketplace if a loan underlying its investment is not repaid and it does not receive full payment. As a result, our reputation may suffer and we may lose investor confidence, which could adversely affect investor participation on our marketplace.

 

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Our business and operating results may be impacted by adverse economic conditions.

General economic factors and conditions in the United States or worldwide, including the general interest rate environment, unemployment rates and residential home values, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. For example, during the 2008 financial crisis, banks severely constrained lending activities, which caused a decline in loan issuances. A similar crisis could negatively impact the willingness of investors and borrowers to participate on our marketplace. Although the U.S. and global economies have shown improvement, the recovery remains modest and uncertain. If present U.S. and global economic uncertainties persist, many of our investors may delay or reduce their investment in the loans facilitated through our marketplace. Adverse economic conditions could also reduce the number of individuals seeking to invest in loans facilitated on our marketplace, reduce the number of qualified borrowers seeking loans on our marketplace and result in borrowers being unable to make payments. Should any of these situations occur, our revenue and transactions on our marketplace would decline and our business would be negatively impacted.

Limited liquidity for investments facilitated through our marketplace may make these investments less attractive to investors.

No trading market currently exists for the certificates issued by the Trust or for the limited partnership interests issued by separate investment funds in which LC Advisors, LLC (LCA) acts as the general partner, each of which are privately placed. Note investors can only sell their notes through the resale trading platform operated by FOLIOfn Investments, Inc. (FOLIOfn), an unaffiliated registered broker-dealer. During 2013, it took an average of approximately four days to sell a note on FOLIOfn with an offer price at or below par. We cannot assure you that FOLIOfn will continue to maintain a market for the trading of notes or that another market may arise. Given the lack of liquidity for certificates and the limited liquidity for notes, investors and potential investors may consider these investments to be less appealing and demand for these investments may decrease, which may adversely affect our business.

Borrowers may prepay a loan at any time without penalty and investors may stop investing in loans, which could reduce our servicing or management fees.

A borrower may decide to prepay all or a portion of the remaining principal amount on a loan at any time without penalty. If the entire remaining unpaid principal amount of a loan is prepaid, we will not receive a servicing fee on the anticipated future loan payments and investors will not receive related payments. If a significant volume of prepayments occurs, investors may stop investing in loans and the amount of our servicing or management fees would decline, either of which could harm our business.

Our ability to protect the confidential information of our borrowers and investors may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions.

The highly automated nature of our marketplace may make it an attractive target and potentially vulnerable to cyber attacks, computer viruses, physical or electronic break-ins or similar disruptions. Our marketplace processes certain sensitive data from our borrowers and investors. While we have taken steps to protect confidential information that we have access to, our security measures could be breached. Any accidental or willful security breaches or other unauthorized access to our marketplace could cause confidential borrower and investor information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, our relationships with borrowers and investors could be severely damaged, and we could incur significant liability.

Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, federal regulators and many

 

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federal and state laws and regulations require companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause borrowers and investors to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, we could lose borrowers, investors and ecosystem partners and our business and operations could be adversely affected.

Any significant disruption in service on our platform or in our computer systems, including events beyond our control, could prevent us from processing or posting payments on loans, reduce the attractiveness of our marketplace and result in a loss of borrowers or investors.

In the event of a platform outage and physical data loss, our ability to perform our servicing obligations, process applications or make loans available on our marketplace would be materially and adversely affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability to attract new and retain existing borrowers and investors. Much of our system hardware is hosted in a facility located in Las Vegas, Nevada that is owned and operated by SwitchNet. We also maintain a real-time backup system at a third-party owned and operated facility located in Santa Clara, California. Our operations depend on SwitchNet’s ability to protect its and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If our arrangement with SwitchNet is terminated or if there is a lapse of service or damage to SwitchNet facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.

Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our borrowers and investors and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing or posting payments on the loans, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause borrowers and investors to abandon our marketplace, any of which could adversely affect our business, financial condition and results of operations.

Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by man-made problems such as strikes and terrorism.

A significant natural disaster, such as an earthquake, fire, power outage, flood or other catastrophic event, or interruptions by strikes, terrorism or other made-made problems, could have a material adverse effect on our business, operating results and financial condition. Our headquarters and our real-time disaster recovery data center are located in the San Francisco Bay Area, a region known for seismic activity. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our data centers could result in lengthy interruptions in our services. In addition, acts of strikes, terrorism and other geo-political unrest could cause disruptions in our business and lead to interruptions, delays or loss of critical data. All of the aforementioned risks may be further increased if our disaster recovery plans prove to be inadequate. We have implemented a disaster recovery program that allows us to move production to a back-up data center in the event of a catastrophe. Although this program is functional, we do not currently serve network traffic equally from each data center. If our primary data center shuts down, there will be a period of time that our loan products or services, or certain of our loan products or services, will remain inaccessible to our users or our users may experience severe issues accessing our loan products and services.

We do not currently maintain business interruption insurance to compensate us for potentially significant losses, including potential harm to our business that may result from interruptions in our ability to provide our loan products and services.

 

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Our platform and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.

Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for borrowers and investors, delay introductions of new features or enhancements, result in errors or compromise our ability to protect borrower or investor data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of borrowers or investors, loss of revenue or liability for damages, any of which could adversely affect our business and financial results.

Because some investors may come to our website via hyperlinks from websites of ecosystem partners, it is possible that an unsatisfied investor could make a claim against us based on the content of these third-party websites that could result in claims that are costly to defend and distracting to management.

Some investors in notes may come to our website after reviewing the website of an ecosystem partner via a hyperlink from this third-party website to a landing page on our website. We compensate ecosystem partners based on whether a person “clicks through” to our web page, and do not pay any compensation based on whether or how much an investor may invest. While all investors are provided with access to a note prospectus on the landing page and during the account opening process, it is possible that an investor could have reviewed additional content on the ecosystem partner’s website. We do not review, approve or adopt any content on an ecosystem partner’s website and, while we do not believe we would have liability for content on a partner website, it is possible that an unsatisfied investor could bring claims against us based on such content. Such claims could be costly and time consuming to defend and would distract management’s attention from the operation of the business.

Misconduct and errors by our employees and third-party service providers could harm our business and reputation.

We are exposed to many types of operational risk, including the risk of misconduct and errors by our employees and other third-party service providers. Our business depends on our employees and third-party service providers to process a large number of increasingly complex transactions, including treasury transactions that involve significant dollar amounts and loan transactions that involve the use and disclosure of personal and business information. We could be materially adversely affected if treasury transactions were redirected, misappropriated or otherwise improperly executed, personal and business information was disclosed to unintended recipients or an operational breakdown or failure in the processing of other transactions occurred, whether as a result of human error, a purposeful sabotage or a fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal information and interact with borrowers and investors is governed by various federal and state laws. If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. Any of these occurrences could result in our diminished ability to operate our business, potential liability to borrowers and investors, inability to attract future borrowers and investors, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.

We may be sued by third parties for alleged infringement of their proprietary rights, which could harm our business.

Our success depends on not infringing on the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our

 

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industry. From time to time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to be infringing on such rights. In the future, others may claim that our applications and underlying technology infringe or violate their intellectual property rights. We may, however, be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our loan products or operating our platform or require that we comply with other unfavorable terms. We may also be obligated to indemnify parties or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

Any failure to protect our own intellectual property rights could impair our brand, negatively impact our business or both.

Our success and ability to compete also depend in part on protecting our own intellectual property. We rely on a combination of copyright, trade secret, trademark and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property. However, the steps we take to protect our intellectual property rights may be inadequate. Third parties may seek to challenge, invalidate or circumvent our copyright, trade secret, trademark and other rights or applications for any of the foregoing. In order to protect our intellectual property rights, we may be required to spend significant resources. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Our failure to secure, protect and enforce our intellectual property rights could seriously adversely affect our brand and adversely impact our business.

Some aspects of our platform include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

Aspects of our platform include software covered by open source licenses, which may include, by way of example, GNU General Public License and the Apache License. The terms of various open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our platform. If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and loan products. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with use of open source software cannot be eliminated, and could adversely affect our business.

If we fail to manage the integration of Springstone effectively, our results of operations and business could be harmed.

We are in the process of integrating Springstone into our business. Risks associated with any such integration include:

 

    our inability to integrate smoothly Springstone’s technologies and loan products with our current technologies and products;

 

    possible changes to Springstone’s loan products and sales and operational processes; and

 

    our inability to assimilate and retain the management and other personnel, culture and operations of Springstone, including back-office functions and systems, such as accounting, human resources, internal controls and others.

 

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This integration may be difficult and unpredictable. We may invest resources in the acquisition and integration efforts would have been better utilized developing technology and loan products for our marketplace or on other strategic development initiatives.

Further, this acquisition may disrupt our ongoing operations, divert management’s attention from their primary responsibilities and our other strategic initiatives, subject us to additional liabilities, increase our expenses and otherwise adversely affect our business, financial condition, operating results and cash flows.

From time to time we may evaluate and potentially consummate acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.

We may evaluate and consider strategic transactions, combinations, acquisitions or alliances to enhance our existing business or develop new loan products and services. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

Any acquisition will involve risks commonly encountered in business relationships, including:

 

    difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;

 

    inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;

 

    difficulties in retaining, training, motivating and integrating key personnel;

 

    diversion of management’s time and resources from our normal daily operations;

 

    difficulties in successfully incorporating licensed or acquired technology and rights into our platform;

 

    difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

 

    difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

 

    risks of entering markets in which we have no or limited direct prior experience;

 

    regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;

 

    assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;

 

    failure to successfully further develop the acquired technology;

 

    liability for activities of the acquired business before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

    potential disruptions to our ongoing businesses; and

 

    unexpected costs and unknown risks and liabilities associated with the acquisition.

We may not make any acquisitions, or any future acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenue to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future acquisition of new businesses or technology will lead to the successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if developed, will achieve market acceptance or prove to be profitable.

 

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Expanding our operations internationally could subject us to new challenges and risks.

Although we currently only operate in the United States, we may seek to expand our business internationally. Managing any international expansion will require additional resources and controls. Any expansion internationally could subject our business to risks associated with international operations, including:

 

    adjusting the proprietary risk algorithms that we use to account for the differences in information available on borrowers;

 

    conformity with applicable business customs, including translation into foreign languages and associated expenses;

 

    potential changes to our established business model;

 

    the need to support and integrate with local third-party service providers;

 

    competition with service providers that have greater experience in the local markets than we do or that have pre-existing relationships with potential borrowers and investors in those markets;

 

    difficulties in staffing and managing foreign operations in an environment of diverse culture, laws and customers, and the increased travel, infrastructure and legal and compliance costs associated with international operations;

 

    compliance with multiple, potentially conflicting and changing governmental laws and regulations, including banking, securities, employment, tax, privacy and data protection laws and regulations, such as the EU Data Privacy Directive;

 

    compliance with U.S. and foreign anti-bribery laws, including the Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act;

 

    difficulties in collecting payments in foreign currencies and associated foreign currency exposure;

 

    restrictions on repatriation of earnings;

 

    compliance with potentially conflicting and changing laws of taxing jurisdictions where we conduct business and applicable U.S. tax laws as they relate to international operations, the complexity and adverse consequences of such tax laws and potentially adverse tax consequences due to changes in such tax laws; and

 

    regional economic and political conditions.

As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful.

We have incurred substantial debt and may issue debt securities or otherwise incur substantial debt in the future, which may adversely affect our financial condition and negatively impact our operations.

We have in the past incurred, and may in the future incur, substantial debt. The incurrence of debt could have a variety of negative effects, including:

 

    default and foreclosure on our assets if our operating revenue is insufficient to repay debt obligations;

 

    acceleration of obligations to repay the indebtedness (or other outstanding indebtedness), even if we make all principal and interest payments when due, if we breach any covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;

 

    our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding;

 

    diverting a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and

 

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    creating potential limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate.

The occurrence of any of these risks could adversely affect our operations or financial condition.

Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees needed to support our business.

We believe our success depends on the efforts and talents of our employees, including software engineers, financial personnel and marketing professionals. Our future success depends on our continued ability to attract, develop, motivate and retain highly qualified and skilled employees. Competition for highly skilled technical and financial personnel, particularly in the San Francisco Bay Area, is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect on our business.

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

In addition to attracting and retaining highly skilled employees in general, our future performance depends, in part, on our ability to attract and retain key personnel, including our executive officers, senior management team and other key personnel, all of whom would be difficult to replace. In particular, Mr. Laplanche, our founder and Chief Executive Officer, is critical to the management of our business and operations and the development of our strategic direction. The loss of the services of Mr. Laplanche, our other executive officers or members of our senior management team, and the process to replace any of them, would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.

We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.

If we discover a material weakness in our internal control over financial reporting that we are unable to remedy or otherwise fail to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to report our financial results on a timely and accurate basis and the market price of our common stock may be adversely affected.

The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. Although we did not discover any material weaknesses in internal control over financial reporting at December 31, 2013, subsequent testing by us or our independent registered public accounting firm, which has not performed an audit of our internal control over financial reporting, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. To comply with Section 404A, we may incur substantial cost, expend significant

 

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management time on compliance-related issues and hire additional accounting, financial and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404A in a timely manner or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the Securities and Exchange Commission (SEC) or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results, and cause a decline in the price of our common stock.

Our ability to use our deferred tax assets to offset future taxable income may be subject to certain limitations that could subject our business to higher tax liability.

We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. At December 31, 2013, we had federal and state net operating loss carry-forwards (NOLs) of approximately $43.9 million and $40.7 million, respectively, to offset future taxable income. These federal and state net operating loss carry-forwards will begin expiring in 2027 and 2016, respectively. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Future changes in our stock ownership, including this or future offerings, as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. Additionally, at December 31, 2013, we had federal and state research and development tax credit carry-forwards of approximately $0.6 million and $0.5 million, respectively. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has historically been recorded to recognize only deferred tax assets that are more likely than not to be realized. Our deferred tax assets may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.

Risks Related to Compliance and Regulation

We and our issuing bank partners are subject to borrower protection laws and federal and state consumer protection laws.

We and our issuing bank partners must comply with regulatory regimes, including those applicable to consumer credit transactions, various aspects of which are untested as applied to our marketplace. Certain state laws generally regulate interest rates and other charges and require certain disclosures. In addition, other federal and state laws may apply to the origination and servicing of loans originated through our marketplace. In particular, through our marketplace, we may be subject to laws, such as:

 

    state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, debt servicing and collection and unfair or deceptive business practices;

 

    the Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions;

 

    Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service;

 

   

the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national

 

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origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law;

 

    the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, which promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies;

 

    the Fair Debt Collection Practices Act and similar state debt collection laws, which provide guidelines and limitations on the conduct of third-party debt collectors in connection with the collection of consumer debts;

 

    the Gramm-Leach-Bliley Act, which includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;

 

    the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;

 

    the Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties;

 

    the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts;

 

    the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures; and

 

    the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures.

We may not always have been, and may not always be, in compliance with these laws. Compliance with these laws is also costly, time-consuming and limits our operational flexibility.

Failure to comply with these laws and regulatory requirements applicable to our business may, among other things, limit our or a collection agency’s ability to collect all or part of the principal of or interest on loans. As a result, we may not be able to collect our servicing fee with respect to the uncollected principal or interest, and investors may be discouraged from investing in loans. In addition, non-compliance could subject us to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, rescission rights held by investors in securities offerings and civil and criminal liability, which may harm our business and our ability to maintain our marketplace and may result in borrowers rescinding their loans.

Where applicable, we will seek to comply with state small loan, loan broker, servicing and similar statutes. Currently, we do not facilitate loans to borrowers in Idaho, Iowa, Maine, Nebraska and North Dakota. In all other U.S. jurisdictions with licensing or other requirements that we believe may be applicable to us, we comply with the relevant requirements through the operation of our marketplace with issuing banks or we will be seeking to obtain required licenses. Nevertheless, if we are found to not have complied with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or penalties or be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to continue to facilitate loans through our marketplace, perform our servicing obligations or make our marketplace available to borrowers in particular states, which may harm our business.

 

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If our marketplace was found to violate a state’s usury laws, we may have to alter our business model and our business could be harmed.

The interest rates that are charged to borrowers and that form the basis of payments to investors through our marketplace are based upon the ability under federal law of the issuing bank that originates the loan to export the interest rates of its jurisdiction of incorporation to provide uniform rates to all borrowers in all states that have not opted out. WebBank, our primary issuing bank, exports the interest rates of Utah, which allows parties to generally agree by contract to any interest rate. The current annual percentage rates offered by WebBank through our marketplace for personal loans range from 6.78% to 29.99%, which equate to interest rates for investors that range from 6.03% to 26.06%. Of the forty-six jurisdictions whose residents may obtain loans (including the District of Columbia), certain states, including Utah, have no statutory interest rate limitations on personal loans, while other jurisdictions have a maximum rate less than the current maximum rate offered by WebBank through our platform. If a borrower were to successfully bring claims against us for state usury law violations, and the rate on that borrower’s personal loan was greater than that allowed under applicable state law, we could be subject to fines and penalties. Further, if we were unable to partner with another issuing bank, we would have to substantially modify our business operations from the manner currently contemplated and would be required to maintain state-specific licenses and only provide a limited range of interest rates for personal loans, all of which would substantially reduce our operating efficiency and attractiveness to investors and possibly result in a decline in our operating results.

Several lawsuits have sought to re-characterize certain loan marketers and other originators as lenders. If litigation on similar theories were successful against us, loans facilitated through our marketplace could be subject to state consumer protection laws in a greater number of states.

Several lawsuits have brought under scrutiny the association between high-interest “payday loan” marketers and out-of-state banks. These lawsuits assert that payday loan marketers use out-of-state lenders in order to evade the consumer protection laws imposed by the states where they do business. Such litigation has sought to re-characterize the loan marketer as the lender for purposes of state consumer protection law and usury restrictions. Similar civil actions have been brought in the context of gift cards and retail purchase finance. Although we believe that our activities are generally distinguishable from the activities involved in these cases, a court or regulatory authority could disagree.

Additional state consumer protection laws would be applicable to the loans facilitated through our marketplace if we were re-characterized as a lender, and the loans could be voidable or unenforceable. In addition, we could be subject to claims by borrowers, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial cost on us.

The increased scrutiny of third-party medical financing by governmental agencies may lead to increased regulatory burdens on Springstone and adversely affect our consolidated revenue or results of operations.

Springstone, through its issuing bank partners, provides education and patient finance loans, including for elective medical procedures. Recently, regulators increased scrutiny of third-party providers of financing for medical procedures that are generally not covered by health insurance. For example, in December 2013, the Consumer Financial Protection Bureau (CFPB) fined GE Capital Retail Bank $34.1 million for insufficient training, disclosures and practices related to their medical financing services. In addition, attorneys general in New York and Minnesota have conducted investigations on alleged abusive lending practices or exploitation regarding third-party medical financing services.

In June 2014, Springstone received a civil investigative demand from the CFPB for documents and other tangible items related to its programs that provide healthcare financing. If Springstone’s practices are ultimately found to be deficient, resulting in fines, penalties or increased burdens on Springstone’s activities, our

 

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consolidated operating costs could increase. Additionally, such regulatory inquiries or actions could damage Springstone’s and our reputations and limit Springstone’s ability to conduct operations, which could adversely affect our consolidated financial statements.

The adoption of any law, rule or regulation affecting this industry may also increase Springstone’s administrative costs, modify its practices to comply with applicable requirements and reduce its ability to participate competitively, which could have a material adverse effect on our consolidated revenue or results of operations.

The CFPB is a new agency, and there continues to be uncertainty as to how the agency’s actions or the actions of any other new agency could impact our business or that of our issuing banks.

The CFPB, which commenced operations in July 2011, has broad authority over the businesses in which we engage. This includes authority to write regulations under federal consumer financial protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act, and to enforce those laws against and examine large financial institutions, such as our issuing banks, for compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. To assist in its enforcement, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including the loan products we facilitate. This system could inform future CFPB decisions with respect to its regulatory, enforcement or examination focus.

We are subject to the CFPB’s jurisdiction, including its enforcement authority, as a servicer and acquirer of consumer credit. The CFPB may request reports concerning our organization, business conduct, markets and activities. The CFPB may also conduct on-site examinations of our business on a periodic basis if the CFPB were to determine, through its complaint system, that we were engaging in activities that pose risks to consumers.

There continues to be uncertainty as to how the CFPB’s strategies and priorities, including in both its examination and enforcement processes, will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements to alter or cease offering affected loan products and services, making them less attractive and restricting our ability to offer them.

Although we have committed resources to enhancing our compliance programs, actions by the CFPB or other regulators against us, our issuing banks or our competitors that discourage the use of the marketplace model or suggest to consumers the desirability of other loan products or services could result in reputational harm and a loss of borrowers or investors. Our compliance costs and litigation exposure could increase materially if the CFPB or other regulators enact new regulations, change regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing regulations in a manner different or stricter than have been previously interpreted.

The collection, processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.

We receive, transmit and store a large volume of personally identifiable information and other user data. There are federal, state and foreign laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable information is increasingly subject to legislation and regulations in numerous U.S. and international jurisdictions, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. This regulatory framework for privacy issues worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. We could be adversely affected if legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations.

Our failure to comply with applicable privacy policies or federal, state or foreign laws and regulations or any compromise of security that results in the unauthorized release of personally identifiable information or other user

 

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data could damage our reputation, discourage potential borrowers or investors from using our marketplace or result in fines or proceedings brought against us, our issuing banks or other third parties by governmental agencies, borrowers, investors or other third parties, one or all of which could adversely affect our business, financial condition and results of operations. In addition to laws, regulations and other applicable common law rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards. We could also be subject to liability for the inappropriate use of information made available by us. Because the interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit use of our marketplace and harm our business.

We will incur significantly increased costs and devote substantial management time as a result of the listing of our common stock.

Although we have been a reporting company under the Securities Exchange Act of 1934, as amended (Exchange Act), since 2008, we will incur additional legal, accounting and other expenses that we did not incur as a private reporting company. For example, we will be required to comply with additional requirements of the rules and regulations of the SEC and requirements of the New York Stock Exchange, including applicable corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

Our ability to offer our notes depends upon our compliance with requirements under federal or state securities laws.

All notes publicly offered through our marketplace are offered and sold pursuant to a registration statement filed with the SEC. We also qualify as a “well-known seasoned issuer,” which allows us to file automatically effective registration statements with the SEC. Under SEC rules, for certain material updates, we must file post-effective amendments, which, if we do not qualify as a “well-known seasoned issuer,” do not become effective until declared effective by the SEC. We may fail to maintain our “well-known seasoned issuer” status if we do not file SEC reports on a timely manner or for other reasons. In addition, if we fail to file our annual reports on Form 10-K or quarterly reports on Form 10-Q on a timely basis or are otherwise required to suspend use of a registration statement for the notes, we could be required to suspend offering of our notes until such deficiency is resolved. Because we offer notes on a continuous basis, securities law restrictions may also limit our ability to market or advertise to potential investors.

We are also currently required to register or qualify for an exemption in every state in which we offer securities. Qualification in a state can be a time-consuming process, often requiring periodic renewals. Failure to

 

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timely renew these registrations may require us to pay penalties, suspend further offerings until we regain compliance and make rescission offers in connection with previously completed investments. Certain states also impose special suitability standards and other conditions for operation in their states, restricting the persons and conditions under which we may make offerings in these states. We do not offer our notes in all states due to the restrictions of certain states. While we believe that upon the completion of this offering we may rely on federal preemption of state registration and qualification requirements, states may interpret federal law as applied to our notes differently, possibly requiring us to continue to make filings in or limit operations in those states. Regardless of any such registration, qualification or preemption, we are subject to both state and federal antifraud rules of each state in which we operate. Although we seek to verify information provided to us by borrowers, we cannot verify all such information and may be liable for any material misstatements or omissions in such information received from borrowers or from other third parties.

As a result of these requirements, actual or alleged non-compliance with federal or state laws or changes in federal or state law or regulatory policy or could limit our ability to offer notes in certain states, require us to pay fines or penalties, or curtail our operations.

We may have to constrain our business activities to avoid being deemed an investment company under the Investment Company Act.

In general, a company that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities may be deemed to be an investment company under the Investment Company Act of 1940, as amended (Investment Company Act). The Investment Company Act contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. We believe we have conducted, and we intend to continue to conduct, our business in a manner that does not result in our company being characterized as an investment company. To avoid being deemed an investment company, we may not be able to broaden our offerings, which could require us to forego attractive opportunities. We may also apply for formal exemptive relief to provide additional clarity on our status under the Investment Company Act. We may not receive such relief on a timely basis, if at all, and such relief may require us to modify or curtail our operations. If we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which would materially adversely affect our business, financial condition and results of operations.

If our registered investment advisor, LC Advisors, LLC, were found to have violated the Investment Advisers Act, our ability to raise sufficient investor commitments to meet borrower demand could be impaired.

Our subsidiary LCA acts as an advisor to certain private funds and accredited investors, including those that invest in managed accounts that rely on a third-party adviser or manager to manage their investment through our marketplace. Registered investment advisers are subject to a number of regulatory and legal requirements, including conflicts of interest, advertising restrictions and custody requirements. We believe we have conducted, and we intend to continue to conduct, the business of LCA in substantial compliance with the Investment Advisers Act of 1940, as amended (Investment Advisers Act) and applicable fiduciary duties. If, however, we are deemed to have breached any of our obligations under the Investment Advisers Act, the activities of LCA could be restricted, suspended or even terminated. If this were to occur, our ability to provide investors with the opportunity to invest through managed accounts could be severely curtailed, and we may not be able to sufficiently meet borrower and investor demand for loans, which could harm our business.

If we were required to register as a broker-dealer under federal or state law, our costs could significantly increase or our operations could be impaired.

The securities offered to investors are offered directly by us. We do not operate as a registered broker-dealer in any jurisdiction. Although we do not believe we are obligated to do so, if a regulatory body were to find that

 

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our activities require us to register as a broker-dealer or to sell the investment securities only through a registered broker-dealer, we could be subject to fines, rescission offers or other penalties, and our compliance costs and other costs of operation could increase significantly. Further, our ability to issue and distribute the securities could be significantly impaired or curtailed.

Because we may have issued stock options and underlying shares of common stock in violation of federal and state securities laws, we may be required to offer to repurchase those securities and incur other costs.

We have been a reporting company under the Exchange Act since October 2008. As a result, subsequent to that time, we were no longer entitled to rely on the exemption provided under Rule 701 under the Securities Act of 1933, as amended (Securities Act), and other exemptions from state securities laws for grants of certain equity awards to, and exercises of such awards by, some of our employees, directors and consultants. Therefore, it is possible that some current or former employees, directors and consultants could assert that the options and issuance of shares prior to filing our Form S-8 in July 2014 may have violated U.S. federal and state securities laws, and that such persons could have the right to require us to repurchase those securities.

In connection with such issuances of options and shares, we were recently required by the California Department of Business Oversight (Department) to undertake a rescission offer in accordance with applicable California securities laws to (i) grantees of options to purchase shares of common stock and (ii) to stockholders who acquired their shares of common stock upon exercise of stock options, each during the past two years. Once the Department approves our application, we intend to register this rescission offer on a separate registration statement on Form S-1. Eligible participants in this rescission offer might not accept our offer. The weighted average option exercise price for eligible option grants in respect of 39,480,568 shares was $3.68 per share, and the weighted average purchase price for sales of 3,593,295 shares was $0.79 per share. As it is unclear if a rescission offer under federal securities laws will terminate a purchaser’s right to rescind a transaction that was not registered or exempt from such registration requirements, we may be required to honor such rescission rights in future periods. Our aggregate liability may be up to $31.9 million. We believe that any remedies a person might have after the rescission offer expires would not be greater than the amount that person would have received in the rescission offer.

We have not reviewed our compliance with foreign laws regarding the participation of non-U.S. residents on our marketplace.

From time to time, non-U.S. residents invest in loans directly through our marketplace. Through September 30, 2014, the percentage of notes purchased (based upon dollar amounts) by such persons since inception was less than 2% of all loans issued. We are not experts with respect to all applicable laws in the various foreign jurisdictions, and we cannot be sure that we are complying with applicable foreign laws. Failure to comply with such laws could result in fines and penalties payable by us, which could reduce our profitability or cause us to modify or delay planned expansions and expenditures, including investments in our growth. In addition, any such fines and penalties could create negative publicity, result in additional regulatory oversight that could limit our operations and ability to succeed, or otherwise hinder our plans to expand our business internationally.

Recent legislative and regulatory initiatives have imposed restrictions and requirements on financial institutions that could have an adverse effect on our business.

The Dodd-Frank Act and other legislation and regulations relating to financial institutions and markets, including alternative asset management funds, has resulted in increased oversight and taxation. There has been, and may continue to be, a related increase in regulatory investigations of the trading and other investment activities of alternative investment funds. Such investigations may impose additional expenses by us, may require the attention of senior management and may result in fines if any of our funds are deemed to have violated any regulations.

 

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The Dodd-Frank Act is extensive and significant legislation enacting changes that broadly affect most aspects of the financial services industry. The Dodd-Frank Act, among other things:

 

    created a liquidation framework under which the FDIC may be appointed as receiver following a “systemic risk determination” by the Secretary of Treasury (in consultation with the President) for the resolution of certain nonbank financial companies and other entities, defined as “covered financial companies,” and commonly referred to as “systemically important entities,” in the event such a company is in default or in danger of default and the resolution of such a company under other applicable law would have serious adverse effects on financial stability in the United States, and also for the resolution of certain of their subsidiaries;

 

    strengthened the regulatory oversight of securities and capital markets activities by the SEC; and

 

    increased regulation of the securitization markets through, among other things, a mandated risk retention requirement for securitizers, which, if applied to our business, would change our business model, and a direction to the SEC to regulate credit rating agencies and adopt regulations governing these organizations and their activities.

With respect to the new liquidation framework for systemically important entities, we cannot assure you that such framework would not apply to us. Guidance from the FDIC indicates that such new framework will largely be exercised in a manner consistent with the existing bankruptcy laws, which is the insolvency regime that would otherwise apply to us. The SEC has proposed significant changes to the rules applicable to issuers and sponsors of asset-backed securities under the Securities Act and the Exchange Act. With the proposed changes, our access to the asset-backed securities capital markets could be affected and our financing programs could be less effective. Compliance with such legislation or regulation may significantly increase our costs, limit our product offerings and operating flexibility, require significant adjustments in our internal business processes and potentially require us to maintain our regulatory capital at levels above historical practices.

As the regulatory framework for our business evolves, federal and state governments may draft and propose new laws to regulate online marketplaces such as ours, which may negatively affect our business.

The regulatory framework for Internet commerce, including online marketplaces such as ours, is evolving, and it is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect the operation of our marketplace and the way in which we interact with borrowers and investors. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass those costs on to our borrowers and investors in the form of increased fees. In addition, federal and state governmental or regulatory agencies may decide to impose taxes on services provided over the Internet or by online marketplaces. These taxes could discourage the use of our marketplace, which would adversely affect the viability of our business.

Some investors in limited partnership interests offered by LCA or certificates offered by the Trust may be deemed to have been solicited by general solicitation or general advertising, and such investors could seek to rescind their purchase.

We offer notes through a public offering. In addition, the Trust and LCA invest in loans through our marketplace. The Trust and LCA offer certificates and limited partnership interests, respectively, to raise capital for their investments. The offerings by the Trust and LCA are made privately with potential investors with whom they have, or have established through a diligence process, a substantive, pre-existing relationship outside of the public offering for the notes prior to an investment in the certificates or limited partnership interests and separate from the public offering of the notes. Because of the fact-specific nature of what constitutes a substantive, pre-existing relationship and the means by which it is created, as well as what types of activities might constitute a general solicitation or general advertising with regard to the private offerings of the certificates and limited partnership interests, it is possible that some of these investors could assert that they became interested in an

 

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investment in these private offerings by LCA or the Trust through a general solicitation or general advertising with regard to those offerings. We believe that both LCA and the Trust have in place the necessary and appropriate processes and procedures, including substantial diligence regarding an investor’s financial sophistication, a cooling-off period between introduction and investment, and specific representations and warranties to counter any such claim by an investor. If it was determined that an investor’s interest in purchasing certificates or limited partnership interests resulted from a general solicitation or general advertising, the investor could claim that the sale of certificates or limited partnership interests to that investor violated Section 5 of the Securities Act and the investor could seek to rescind the transaction for a period of one year following the date of the investor’s purchase of the securities. We would contest vigorously any claim that a violation of the Securities Act occurred, however, litigation is inherently uncertain and can be expensive and time consuming.

Risks Related to Our Initial Public Offering and Ownership of Our Common Stock

The stock price of our common stock may be volatile or may decline regardless of our operating performance.

The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    overall performance of the equity markets;

 

    our operating performance and the performance of other similar companies;

 

    changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;

 

    regulatory developments;

 

    announcements of innovations, new loan products or acquisitions, strategic alliances or significant agreements by our competitors;

 

    disruptions in our platform due to computer hardware, software or network problems;

 

    recruitment or departure of key personnel;

 

    the economy as a whole or market conditions in our industry;

 

    trading activity by stockholders who beneficially own large amounts of our outstanding common stock;

 

    the expiration of market standoff or contractual lock-up agreements; and

 

    the size of our market float.

In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

Substantial blocks of our total outstanding shares may be sold into the market when “lock-up” or “market standoff” periods end. If there are substantial sales of shares of our common stock, the price of our common stock could decline.

The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our common stock available for sale. Upon completion of this offering, we will have outstanding 361,111,491 shares of common stock, based on the number of shares outstanding as of September 30, 2014, and including 629,948 shares issued upon the exercise of warrants after September 30, 2014 and 209,342 shares that we expect to issue upon the exercise of warrants that would otherwise expire upon the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set

 

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forth on the cover page of this prospectus. All of the shares of common stock sold in this offering will be available for sale in the public market. All of our security holders have entered into market standoff agreements with us restricting the sale of any shares of our common stock or have entered into lock-up agreements with the underwriters under which they have agreed, subject to certain exceptions, not to sell any shares of our common stock until at least 180 days after the date of this prospectus, as described in “Shares Eligible for Future Sale.” Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act. Morgan Stanley & Co. LLC may, in its discretion, permit our stockholders to sell shares prior to the expiration of the restrictive provisions contained in these lock-up agreements.

After our initial public offering, certain of our stockholders will have rights, subject to some conditions, to require us to file registration statements covering their shares that we may file for ourselves or our stockholders. All of these shares are subject to market standoff or lock-up agreements restricting their sale until at least 180 days after the date of this prospectus. In addition, shares issued or issuable upon exercise of options or warrants vested as of the expiration of the lock-up agreements will be eligible for sale at that time.

The price of our common stock could decline as a result of the sale of a substantial number of shares of common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

There has been no prior market for our common stock and an active market may not develop or be sustained, and you may not be able to resell your shares at or above the initial public offering price, if at all.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations among the underwriters, the selling stockholders and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable, which could adversely affect your ability to sell your shares and could depress the market price of our common stock.

We may invest or spend the net proceeds to us from this offering in ways with which you may not agree or in ways which may not yield a return or increase the price of our common stock.

We intend to use the net proceeds to us from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds to us to repay indebtedness outstanding under our term loan. Additionally, we may use a portion of the net proceeds to us to acquire businesses, products, services or assets. We do not, however, have agreements or commitments for any material acquisitions at this time. Our management will have discretion in the application of the net proceeds to us from this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the net proceeds to us are being used appropriately. Until the net proceeds to us are used, they may be placed in investments that do not yield a favorable return. See “Use of Proceeds.”

Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.

Upon the completion of this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, 54.4% of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company.

 

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If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $9.61 per share, based on the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of capital stock. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans or if we otherwise issue additional shares of our common stock. See “Dilution.”

We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new loan products or enhance our marketplace, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be impaired and our business may be harmed.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends for the foreseeable future.

Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our restated certificate of incorporation and restated bylaws, as we expect they will be in effect upon the completion of this offering, contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. The provisions, among other things:

 

    establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

    permit only our board of directors to establish the number of directors and fill vacancies on the board;

 

    provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;

 

    require two-thirds vote to amend some provisions in our restated certificate of incorporation and restated bylaws;

 

    authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan (also known as a “poison pill”);

 

    eliminate the ability of our stockholders to call special meetings of stockholders;

 

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    prohibit stockholder action by written consent, which will require that all stockholder actions must be taken at a stockholder meeting;

 

    do not provide for cumulative voting; and

 

    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Any provision of our restated certificate of incorporation or restated bylaws, as we expect they will be in effect upon the completion of this offering, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

In making your investment decision, you should not rely on information in public media that is published by third parties. You should rely only on statements made in this prospectus in determining whether to purchase our shares.

You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees. We cannot confirm the accuracy of such coverage. You should rely only on the information contained in this prospectus in determining whether to purchase our shares of common stock.

If securities or industry analysts do not publish research or reports about our business or publish negative reports about our business, our share price and trading volume could decline, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will depend, to some extent, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who may in the future cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

If we were to become subject to a bankruptcy or similar proceeding, the right of payment of investors in our notes may be senior to the right of payment of our stockholders and there may not be value recoverable by our stockholders.

Under the terms of the notes offered through our marketplace, we are obligated to pay principal and interest on each note on a non-recourse basis only if and to the extent that we receive principal, interest or late fee payments from the borrower on the corresponding loan, but the notes become fully recourse to us if we fail to pay such obligation, which would include being prohibited from making such payments as a result of a bankruptcy or similar proceeding, or if we breach a covenant under the indenture governing the notes. In a bankruptcy or similar proceeding due to a default under current or future indebtedness, an action for repurchase or rescission of securities or other event, there is uncertainty regarding whether a holder of a note has any right of payment from our assets other than the corresponding loan. It is possible that a note holder could be deemed to have a right of payment from both the corresponding loan and from some or all of our other assets, in which case the note holder would have a claim to the proceeds of our assets that is senior to any right of payment of the holders of our common stock, regardless of whether we have received any payments from the underlying borrower, making it highly unlikely that there would be any value recoverable by our stockholders.

 

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LETTER FROM RENAUD LAPLANCHE

I believe Lending Club has the potential to profoundly improve people’s financial lives over the coming decades. Our mission of transforming the banking system is both audacious and achievable. Technology has successfully disrupted many industries to the benefit of society at large, and I believe banking is next.

It all started in the summer of 2006 when I opened a credit card statement charging me a 16.99% interest rate, and a savings account statement from the same bank where I was earning a 0.48% interest rate on my deposits. The extreme difference between these two rates – one paid by me to the bank and the other paid by the bank to me – made me wonder whether the existing banking system was indeed the most efficient mechanism to allocate capital from savers and depositors into the hands of people and businesses looking for affordable credit. At that point, I considered the idea that an online marketplace could be a far more cost-efficient solution. Now, with a seven-year track record and billions of dollars of credit extended, we have clear evidence that our platform delivers extraordinary value and a considerably better experience to borrowers and investors than traditional banks.

Affordable capital provides more financial flexibility to consumers and gives small businesses an opportunity to drive growth and create jobs. Our model furthermore lowers systemic risk, because our marketplace has at all times a perfect match of assets and liabilities: loans and investments are in equal amount and identical terms at any point in time.

I believe we can transform the current banking system into a frictionless, transparent and highly efficient online marketplace that provides affordable credit to borrowers and creates great investment opportunities for investors, helping millions of people achieve their financial goals.

Cutting out the Middleman

To understand the transformation we are proposing, it is useful to understand the way banks operate today. A bank can be summarized as a combination of operations and capital. Operations are performed through thousands of branches staffed by tens of thousands of employees, while capital comes from deposits and borrowed money. When a bank takes deposits and then later extends a loan using those deposits, it acts as an intermediary. An online marketplace directly and simultaneously accessible to both borrowers and investors essentially cuts out the middleman and lowers intermediation costs.

Building Confidence

We are not only bringing cost efficiency to the credit markets but also a more transparent and customer-friendly experience. Unlike traditional banks, we do not build confidence by establishing a branch at every street corner. Instead, we earn the trust of our customers by offering maximum transparency into our products’ terms and performance.

We offer responsible credit products with a fixed rate, fixed monthly payment, no prepayment penalty and no hidden fees, at a lower interest rate than prevailing alternatives, and disclose all terms upfront in a manner that is easy for borrowers to understand.

We have established investor confidence by demonstrating the effectiveness of our risk ranking technology, as well as through the accuracy, transparency and granularity of our reporting. We post on our platform the detailed performance of every single loan offered publicly to investors since inception, along with more aggregated performance statistics.

We are continuing to earn investor confidence every day by providing equal access and with a level playing field with the same tools, data and access for all investors, small and large, within a fair and efficient marketplace.

 

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People and Technology Matter

The idea of people lending money to other people is not new – it goes back thousands of years and predates the banks. We are now able to advance that idea and implement it at scale given technological innovation, processing capabilities, the evolution of consumer behavior and the greater availability of online data. Our platform allows investors to diversify their investment across hundreds or thousands of loans within seconds. That same technology enables us to service loans at a lower cost and distribute millions of payments each day to borrowers and investors in a seamless manner.

While we build highly sophisticated and complex products, we strive to shelter our customers from that complexity and make our products intuitive and easy to use.

As important and sophisticated as our technology is, Lending Club would not be what it is today without the hundreds of team members and their devotion to delivering a great customer experience. Our team is passionate about innovation and energized by our mission. We have created a culture that fosters learning and innovation, and encourages team members to constantly question the status quo and relentlessly drive improvements. Everything from our recruiting process to our operating mechanisms and the way our workspace is designed encourages open communication, collaboration and innovation.

It Feels Good to Share

The sharing economy that emerged after the 2008 financial crisis was initially motivated by financial considerations and the economic efficiency derived from putting underutilized assets to better use. I believe the sharing economy has now given birth to a socially desirable way of life that is gaining ground in every aspect of our lives from transportation and hospitality to financial transactions, with money being one of the most underutilized assets. I believe the reason our users choose Lending Club goes beyond the desire to obtain a better deal or a better experience than they’re getting from their bank. There is strong satisfaction in investing in people and having them invest in you.

The Long Run

Over time we plan to address a wide range of credit needs for a broad population of consumers and businesses globally. We are building a very big company and it’s going to take a very long time.

Transforming the banking system will not happen overnight, and we will not do it alone. We are building a large ecosystem of partners and marketplace participants and are planning to lead the transformation over the span of a decade or two. There are over 6,000 banks in the United States; I believe many of them will join our ecosystem and participate in the transformation, guided by a desire to operate more efficiently and better serve their customers. Some may resist but the history of technology-powered innovation has shown how unlikely it is for incumbents to successfully lower their cost structure and enhance their customer experience to the level of a technology disruptor like Lending Club.

As we go through the important milestone of offering our shares to the public, I am hoping to build long term relationships with shareholders who believe in our mission, share our long term perspective, and are excited at the prospect of transforming an industry in dire need of transformation. As a public company, I believe we will be even better positioned to continue to deliver great value to both investors and borrowers, make credit more affordable and fuel economic growth and prosperity.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including statements regarding our future operating results, future growth and statements other than statements of historical fact, in the sections titled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “predict,” “plan” and “expect,” and similar expressions that convey uncertainty of future events or outcomes, are intended to identify forward-looking statements.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of common stock in this offering will be approximately $512.3 million, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of common stock from us is exercised in full, we estimate that the net proceeds to us would be approximately $602.0 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders.

Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $47.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $10.4 million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. Currently, we intend to use the net proceeds to us from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We also expect to use a portion of the net proceeds to us to repay in full the indebtedness outstanding under our term loan with several lenders led by Morgan Stanley Senior Funding, Inc., which we entered into to fund a portion of the cash purchase price of Springstone. As of September 30, 2014, we had an outstanding balance of $49.2 million under this term loan with an interest rate of 2.57% per annum. This term loan matures in April 2017. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Term Loan.”

Additionally, we may use a portion of the net proceeds to us to acquire businesses, products, services or assets. We do not, however, have agreements or commitments for any material acquisitions at this time. Accordingly, our management will have discretion in the application of the net proceeds to us from this offering, and investors will be relying on the judgment of our management regarding the use of these net proceeds. Pending the use of the net proceeds to us as described above, we plan to invest the net proceeds to us in short-term and long-term interest-bearing obligations, including government and investment-grade debt securities and money market funds. We cannot predict whether the proceeds invested will yield a favorable return.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions, contractual restrictions and other factors that our board of directors considers relevant. In addition, the agreements governing our term loan contain restrictions on our ability to declare and pay cash dividends on our capital stock.

 

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CAPITALIZATION

The following table sets forth cash and cash equivalents, as well as our capitalization, as of September 30, 2014 as follows:

 

    on an actual basis;

 

    on a pro forma basis to give effect to (i) the conversion of all of our outstanding shares of convertible preferred stock into 249,351,011 shares of common stock, (ii) the automatic net exercise of a warrant to purchase 27,848 shares of common stock, which, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would result in the issuance of 27,550 shares of common stock, and (iii) the filing of our restated certificate of incorporation; and

 

    on a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above, (ii) the sale and issuance of 50,000,000 shares of common stock by us in this offering at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (iii) the issuance of 629,948 shares of common stock upon the exercise of warrants after September 30, 2014, (iv) the issuance of 181,792 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering and (v) repayment of the full $49.2 million of indebtedness outstanding under our term loan and the elimination of the related debt discount and unamortized debt issuance costs upon the completion of this offering.

You should read this table together with the consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included in this prospectus.

 

     As of September 30, 2014  
     Actual     Pro Forma     Pro Forma
As Adjusted(1)(2)
 
     (in thousands, except share data)  
     (unaudited)  

Cash and cash equivalents

   $ 82,674      $ 82,674      $ 547,758   
  

 

 

   

 

 

   

 

 

 

Term loan

   $ 49,219      $ 49,219      $   

Stockholders’ equity:

      

Preferred stock, $0.01 par value; 250,614,174 shares authorized, 249,351,011 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma; 10,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

     177,300                 

Common stock, $0.01 par value; 372,000,000 shares authorized, 60,921,190 shares issued and outstanding, actual; 900,000,000 shares authorized, 310,300,049 shares issued and outstanding, pro forma; 900,000,000 shares authorized, 361,111,491 shares issued and outstanding, pro forma as adjusted

     609        3,103        3,611   

Additional paid-in capital

     37,817        212,623        724,687   

Accumulated deficit

     (74,186     (74,186     (75,336
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     141,540        141,540        652,962   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 190,759      $ 190,759      $ 652,962   
  

 

 

   

 

 

   

 

 

 

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $47.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

 

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(2) The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

The table above excludes the following shares:

 

    54,587,814 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2014, with a weighted-average exercise price of $2.63 per share;

 

    3,179,171 shares of common stock issuable upon the exercise of options granted after September 30, 2014, with a weighted-average exercise price of $10.55 per share;

 

    975,792 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2014, with a weighted-average exercise price of $0.27 per share (after giving effect to the adjustments set forth in (ii) of the second bullet above and (iii) and (iv) of the third bullet above); and

 

    42,759,320 shares of common stock reserved for future issuance under our equity compensation plans, consisting of (i) 3,359,320 shares of common stock available for issuance under our 2007 Plan as of September 30, 2014 and an additional 1,400,000 shares of common stock reserved for issuance on October 31, 2014, which shares will be added to the shares to be reserved under our 2014 Plan upon its effectiveness, (ii) 35,000,000 shares of common stock reserved for future issuance under our 2014 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii) 3,000,000 shares of common stock reserved for future issuance under our ESPP, which will become effective on the date of this prospectus.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our pro forma net tangible book value as of September 30, 2014 was $(14.7) million, or $(0.05) per share, based on the total number of shares of common stock outstanding as of September 30, 2014, after giving effect to the conversion of all outstanding shares of convertible preferred stock into 249,351,011 shares of common stock.

After giving effect to (i) the sale and issuance of 50,000,000 shares of common stock by us in this offering at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the issuance of 629,948 shares of common stock upon the exercise of warrants after September 30, 2014 (iii) the issuance of 209,342 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and (iv) repayment of the full $49.2 million of indebtedness outstanding under our term loan and the elimination of the related debt discount and unamortized debt issuance costs upon the completion of this offering, our pro forma as adjusted net tangible book value as of September 30, 2014 would have been $500.7 million, or $1.39 per share. This represents an immediate increase in pro forma net tangible book value of $1.44 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $9.61 per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 11.00   

Pro forma net tangible book value per share as of September 30, 2014

   $ (0.05  

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     1.44     
  

 

 

   

Pro forma as adjusted net tangible book value per share immediately after this offering

       1.39   
    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     $ 9.61   
    

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $0.13, and would increase or decrease, as applicable, dilution per share to new investors in this offering by $0.87, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $0.02 per share and increase or decrease, as applicable, the dilution to new investors by $(0.02) per share, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

If the underwriters’ option to purchase additional shares of common stock from us is exercised in full, the pro forma as adjusted net tangible book value per share of our common stock would be $1.60 per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $9.40 per share.

The following table presents, as of September 30, 2014, after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock, the differences between the existing stockholders and the

 

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new investors purchasing shares of common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our common stock and preferred stock, cash received from the exercise of stock options and warrants and the average price per share paid or to be paid to us at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     310,272,201         86 %   $ 255,095,170         32 %   $ 0.82   

New investors

     50,000,000         14        550,000,000         68      $ 11.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     360,272,201         100 %   $ 805,095,170         100 %  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $142.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 302,572,201, or approximately 84% of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to 57,700,000, or approximately 16% of the total shares of common stock outstanding after this offering.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of common stock from us. If the underwriters’ option to purchase additional shares of common stock were exercised in full, our existing stockholders would own 84% and our new investors would own 16% of the total number of shares of common stock outstanding upon completion of this offering.

The number of shares of our common stock outstanding at September 30, 2014 excludes:

 

    54,587,814 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2014, with a weighted-average exercise price of $2.63 per share;

 

    3,179,171 shares of common stock issuable upon the exercise of options granted after September 30, 2014, with a weighted-average exercise price of $10.55 per share;

 

    975,792 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2014, with a weighted-average exercise price of $0.27 per share (after giving effect to the adjustments set forth in (ii) and (iii) above); and

 

    42,759,320 shares of common stock reserved for future issuance under our equity compensation plans, consisting of (i) 3,359,320 shares of common stock available for issuance under our 2007 Plan as of September 30, 2014 and an additional 1,400,000 shares of common stock reserved for issuance on October 31, 2014, which shares will be added to the shares to be reserved under our 2014 Plan upon its effectiveness, (ii) 35,000,000 shares of common stock reserved for future issuance under our 2014 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii) 3,000,000 shares of common stock reserved for future issuance under our ESPP, which will become effective on the date of this prospectus.

To the extent that any outstanding options or other outstanding warrants are exercised or new awards are granted under our equity compensation plans, there will be further dilution to investors.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

We have derived the selected consolidated statement of operations data for the year ended December 31, 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 from the audited consolidated financial statements included in this prospectus. We have derived the selected consolidated statement of operations data for the nine months ended September 30, 2013 and 2014, and our selected consolidated balance sheet data as of September 30, 2014, from the unaudited interim consolidated financial statements included in this prospectus. We have derived the selected consolidated statement of operations data for the calendar years ended December 31, 2009, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2009, 2010 and 2011 from unaudited consolidated financial statements not included in this prospectus. In December 2012, we changed our fiscal year end from March 31 to December 31. The change was effective as of December 31, 2012, and the nine months ended December 31, 2012 represent the transition period. The historical financial information presented for the years ended December 31, 2009, 2010, 2011 and 2012 (i) combines the unaudited interim consolidated financial statements for the three months ended March 31 and the nine months ended December 31 in each year and (ii) is unaudited and has been prepared by management for illustrative purposes only. The unaudited interim consolidated financial statements and unaudited historical financial information have been prepared on the same basis as the audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year or any other period. The following selected consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this prospectus.

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2009     2010     2011     2012     2013     2013     2014  
    (in thousands, except share and per share data)  
    (unaudited)     (audited)     (unaudited)  

Consolidated Statement of Operations Data:

             

Operating revenue:

             

Transaction fees

  $ 1,307      $ 4,975      $ 10,981      $ 30,576      $ 85,830      $ 55,214      $ 133,835   

Servicing fees

    31        459        951        1,929        3,951        2,485        6,301   

Management fees

                  103        824        3,083        2,083        4,163   

Other revenue (expense)

    34        289        495        716        5,111        4,708        (438
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

    1,372        5,723        12,530        34,045        97,975        64,490        143,861   

Net interest income (expense) and other adjustments

    (1,550     (708     222        (238     27        15        (854
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    (178     5,015        12,752        33,807        98,002        64,505        143,007   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(1):

             

Sales and marketing

    3,561        7,751        11,402        18,201        39,037        26,577        60,808   

Origination and servicing

    1,320        2,790        4,758        7,589        17,217        11,044        26,135   

General and administrative:

             

Engineering and product development

    1,766        1,951        2,289        4,855        13,922        9,140        22,987   

Other

    3,430        3,330        6,572        10,024        20,518        13,294        55,875   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    10,077        15,822        25,021        40,669        90,694        60,055        165,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (10,255     (10,807     (12,269     (6,862     7,308        4,450        (22,798

Income tax expense

                                              1,059   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (10,255   $ (10,807   $ (12,269   $ (6,862   $ 7,308      $ 4,450      $ (23,857
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Years Ended December 31,     Nine Months Ended
September 30,
 
    2009     2010     2011     2012     2013     2013     2014  
    (in thousands, except share and per share data)  
    (unaudited)     (audited)     (unaudited)  

Net income (loss) per share attributable to common stockholders(2):

             

Basic

  $ (0.31   $ (0.32   $ (0.35   $ (0.17   $ 0.00      $ 0.00      $ (0.41
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.31   $ (0.32   $ (0.35   $ (0.17   $ 0.00      $ 0.00      $ (0.41
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares of common stock used in computing net income (loss) per common share(2):

             

Basic

    33,093,296        34,200,300        34,744,860        39,984,876        51,557,136        50,457,948        57,958,838   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   
33,093,296
  
   
34,200,300
  
   
34,744,860
  
   
39,984,876
  
    81,426,976        79,153,912       
57,958,838
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share(2)(3) (unaudited):

             

Basic

          $ 0.03        $ (0.08
         

 

 

     

 

 

 

Diluted

          $ 0.02        $ (0.08
         

 

 

     

 

 

 

Weighted-average shares outstanding used to calculate pro forma net income (loss) per common share(2)(3) (unaudited):

             

Basic

            291,766,192          303,608,800   
         

 

 

     

 

 

 

Diluted

            323,331,550          303,608,800   
         

 

 

     

 

 

 

 

(1) Includes stock-based compensation expense as follows:

 

     Years Ended December 31,      Nine Months Ended
September 30,
 
     2009      2010      2011      2012      2013      2013      2014  
     (in thousands)  

Stock-Based Compensation Expense:

                    

Sales and marketing

   $ 28       $ 94       $ 30       $ 302       $ 1,313       $ 767       $ 5,029   

Origination and servicing

     5         15         9         75         424         170         1,427   

General and administrative:

                    

Engineering and product development

     51         60         71         449         2,171         1,019         3,487   

Other

            50              150              181              586           2,375            1,390         15,946   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 134       $ 319       $ 291       $ 1,412       $ 6,283       $ 3,346       $ 25,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) In April 2014, our board of directors approved a two-for-one stock split of our outstanding capital stock and in August 2014, our board of directors approved another two-for-one stock split of our outstanding capital stock, which became effective in September 2014. All share and per share data in this table has been adjusted to reflect these stock splits. See Note 3 to consolidated financial statements included in this prospectus for a description of how we compute basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income (loss) per share.
(3) For more information regarding the pro forma presentation, see the unaudited pro forma condensed combined statements of operations beginning on page F-67, which include both the acquisition of Springstone and the conversion of all of the outstanding shares of our convertible preferred stock.

 

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     As of December 31,      As of September 30,
2014
 
     2009      2010      2011      2012      2013     
     (in thousands)  
    

(unaudited)

     (audited)      (unaudited)  

Consolidated Balance Sheet Data:

                 

Cash and cash equivalents

   $ 4,730       $ 17,265       $ 24,712       $ 52,551       $ 49,299       $ 82,674   

Loans(1)

          48,797            128,241            296,100            781,215         1,829,042         2,533,671   

Total assets

     55,304         146,743         326,797         850,830         1,943,395         2,814,846   

Notes and certificates(1)

     39,718         122,532         290,768         785,316         1,839,990         2,551,640   

Total liabilities

     50,698         128,221         294,262         798,620         1,875,301         2,673,306   

Total stockholders’ equity

     4,606         18,522         32,535         52,210         68,094         141,540   

 

(1) Loans represent unsecured obligations of borrowers originated through our marketplace. Notes and certificates are issued to investors and represent repayment obligations dependent upon receipt of borrower payments as to a corresponding loan. For more information regarding notes and certificates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.” Period-end differences between the two line items are largely driven by timing of applying and distributing loan payments to investors.

Key Operating and Financial Metrics

We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2012     2013     2013     2014  
     (in thousands, except percentages)  
                 (unaudited)        

Loan originations

   $ 51,815      $ 126,351      $ 257,364      $ 717,943      $ 2,064,626      $ 1,366,253      $ 2,962,520   

Contribution

   $ (3,476   $ (4,709   $ (3,591   $ 8,632      $ 43,458      $ 27,806      $ 63,374   

Contribution margin

     (253.4 )%      (82.3 )%      (28.7 )%      25.4     44.4     43.1     44.1

Adjusted EBITDA

   $ (8,498   $ (9,693   $ (12,067   $ (4,924   $ 15,227      $ 8,713      $ 13,384   

Adjusted EBITDA margin

     (619.4 )%      (169.4 )%      (96.3 )%      (14.5 )%      15.5     13.5     9.3

For more information regarding loan originations, contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Financial Metrics.” Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliations of Non-GAAP Financial Measures.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this prospectus, particularly in the section titled “Risk Factors.”

Overview

Lending Club is the world’s largest online marketplace connecting borrowers and investors. We believe a technology-powered marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors.

Since beginning operations in 2007, our marketplace has facilitated over $6 billion in loan originations. These loans were facilitated through the following investment channels: (i) the issuance of notes pursuant to the Note Registration Statement, (ii) the sale of loans to the Trust, which acquires capital through the sale of certificates through private transactions, or (iii) the sale of whole loans to qualified investors through private transactions. Approximately $1.8 billion of our loan originations since inception were invested in through notes pursuant to the Note Registration Statement, $2.5 billion were invested in through certificates issued by the Trust and $1.7 billion were invested in through whole loan sales. In the third quarter of 2014, our marketplace facilitated nearly $1.2 billion of loan originations, of which approximately $0.2 billion were invested in through notes issued pursuant to the Note Registration Statement, $0.3 billion were invested in through certificates issued by the Trust and $0.5 billion were invested in through whole loan sales.

The following graphic highlights key milestones in our history and illustrates the total amount of loans originated through our marketplace cumulatively on a quarterly basis.

 

LOGO

 

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Our trusted brand, scale and network effect drives significant borrowing and investing activity on our marketplace. We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. The capital to invest in the loans enabled through our marketplace comes directly from investors. From time to time, we may make limited investments in loans; however, such amounts have been, and we expect to continue to be, immaterial. Our proprietary technology automates key aspects of our operations, including the borrower application process, data gathering, credit decisioning and scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. We operate with a lower cost structure than traditional banks due to our innovative model, online delivery and process automation, without the physical branches, legacy technology or high overhead associated with the traditional banking system.

Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans are unsecured, fixed rate, three or five-year personal loans in amounts ranging from $1,000 to $35,000 made to borrowers meeting strict credit criteria, including a FICO score of at least 660. Custom program loans are generally new offerings and loans that do not meet the requirements of the standard program or loans with longer maturities than we believe to be attractive to most note investors. Currently, custom program loans include small business and education and patient finance loans. Small business loans are fixed rate loans in amounts ranging from $15,000 to $100,000, with various maturities of between one and five years. Education and patient finance loans are issued in amounts ranging from $499 to $40,000 with various maturities between 24 and 84 months for term loans as well as a revolving product with a promotional period ranging from six to 24 months that is interest free if the loan balance is paid in full during that period. Standard program loans are visible through our public website and can be invested in through notes. Separately, qualified investors may also invest in standard or custom program loans in private transactions not facilitated through our website. Custom program loans cannot be invested in through notes and are not visible through our website. Securities issued in these private transactions are not offered by us and have different terms than notes.

The transaction fees we receive from issuing banks in connection with our marketplace’s role in enabling loan originations range from 1% to 6% of the initial principal amount of the loan as of September 30, 2014. In addition, for education and patient finance loans, transaction fees may exceed 6% as they include fees earned from issuing banks and service providers. Servicing fees paid to us vary based on investment channel. Note investors pay us a servicing fee equal to 1% of each payment amount received from the borrower; whole loan purchasers pay a monthly servicing fee up to 1.3% per annum on the month-end principal balance of loans serviced; and certificate holders generally pay a monthly management fee typically ranging from 0.7% to 1.2% per annum of the month-end balance of assets under management.

Loans to qualified borrowers are originated by our issuing banks. Investors can invest in loans that are offered through our marketplace in one or all of the following channels:

 

    Notes. Pursuant to an effective shelf registration statement, investors who meet the applicable financial suitability requirements and have completed our investor account opening process may purchase unsecured, borrower payment dependent notes that correspond to payments received on an underlying standard program loan selected by the investor.

 

    Certificates and Funds. Accredited investors and qualified purchasers may establish a relationship with LC Advisors, LLC (LCA), a registered investment advisor and our wholly owned subsidiary, or another third-party advisor in order to indirectly invest in certificates, or they may directly purchase a certificate from the Trust or interests in separate limited partnership entities that purchase certificates from the Trust. The certificates are settled with cash flows from underlying standard or custom program loans selected by the investor. Neither certificates nor limited partnership interests can be purchased through our website.

 

   

Whole Loan Purchases. Certain institutional investors, such as banks, seek to hold the actual loan on their balance sheet. To meet this need, we sell entire standard or custom program loans to these

 

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investors. In connection with these sales, the investor owns all right, title and interest in each loan. For regulatory purposes, the investor also has access to the underlying borrower information, but is prohibited from contacting or marketing to the borrower in any manner and agrees to hold such borrower information in compliance with all applicable privacy laws. We continue to service these loans after they are sold and can only be removed as the servicer in limited circumstances.

Our note channel consists of the notes that we issue. When an investor registers, the investor enters into an investor agreement with us that governs the investor’s purchases of notes. Our note channel is supported by our website knowledge base and our investor services group who provide basic customer support to these investors.

Our certificate channel consists of funds and accounts managed by LCA, a registered investment advisor with operations distinct from those of Lending Club, or managed by other third-party advisors, or direct purchasers. Certificate investors typically seek to invest larger amounts as compared to the average note investor and often desire a more “hands off” approach to investing. Certificates are sold in private transactions by the Trust, which acquires and holds loans for the sole benefit of certificate investors. Investors in certificates generally pay an asset-based management fee instead of the cash flow-based servicing fee paid by investors in notes.

LCA manages several funds that purchase certificates. Each fund provides a passive investment strategy around target loan grade and term allocation, such as 36-month 60% A and 40% B loans, and allows investors to more easily deploy large investment amounts and reinvest payments of principal and investment returns. LCA also manages separately managed accounts (SMAs). Investors who utilize SMAs often have investment criteria that differ from the LCA funds’ investment strategies and desire more control over their investment strategies. LCA’s management practices are guided by a three-member investment policy committee. Day-to-day operations are conducted by LCA employees and by certain personnel who have been engaged to provide specific services to LCA and its clients.

Our whole loan channel consists of the whole loans that we or our issuing banks sell in their entirety to investors through private transactions. Our institutional group is the primary point of contact for whole loan purchasers throughout the life of the relationship, from sourcing and establishing the relationship, negotiating the purchase and servicing agreement, undertaking diligence and ultimately managing the ongoing relationship. Under the whole loan purchase agreements, we establish the investors’ accounts and set out the procedures for the purchase of loans, including any purchase amount limitations, which we control in our discretion. We and the purchaser also make limited representations and warranties and agree to indemnify each other for breaches of the purchase agreement. The purchaser also agrees to simultaneously enter into a servicing agreement with us acting as servicer.

For all investment channels, we agree to repurchase loans in cases of confirmed identity theft.

Our unit economics are attractive given our low cost of borrower and investor acquisition, low capital costs and high operational leverage from automation. We optimize borrower acquisition channels by understanding risk profiles to maximize conversion of potential loan applicants. Investor acquisitions come mostly from referrals, due to our historical ability to provide attractive risk-adjusted returns. We measure contribution margin as a way to evaluate the unit economics of loans originated through our marketplace. As our marketplace has become more efficient, our contribution margin has generally increased over time and, for the nine months ended September 30, 2014, was 44.1%.

We have experienced significant growth since our marketplace launched in 2007. For the years ended December 31, 2012 and 2013, we facilitated loan originations through our marketplace of $717.9 million and $2.1 billion, respectively, representing an increase of 188%. For the nine months ended September 30, 2013 and 2014, we facilitated loan originations through our marketplace of $1.4 billion and $3.0 billion, respectively, representing an increase of 117%. For the years ended December 31, 2012 and 2013, our total net revenue was $33.8 million and $98.0 million, respectively, representing an increase of 190%. For the nine months ended September 30, 2013 and

 

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2014, our total net revenue was $64.5 million and $143.0 million, respectively, representing an increase of 122%. Our historical growth rates in facilitating loan originations through our marketplace reflect a deliberate strategy that allowed us to build and develop the various enterprise functions to support our scale, including customer support, operations, risk controls, compliance and technology. Borrower and investor demand will continue to inform our business and loan product decisions, but we will not compromise the long-term viability of our marketplace to pursue excessive near-term growth rates that we believe would result in borrower or investor experiences below our standards.

Change in Fiscal Year

In December 2012, we changed our fiscal year end from March 31 to December 31. The change was effective as of December 31, 2012, and the nine months ended December 31, 2012 represent the transition period.

Springstone

In April 2014, we acquired all of the outstanding limited liability company interests of Springstone, a company that facilitates education and patient finance loans through two issuing banks. For its role in loan facilitation, Springstone earns transaction fees paid by the issuing bank and service provider at the time of origination, which averaged approximately 5.0% of the initial loan balance as of September 30, 2014. Currently, Springstone does not earn any servicing fees, as loans are originated, retained and serviced by the respective issuing bank. We currently intend to continue to have these loans funded and serviced through existing issuing banks while we develop plans to integrate these loans into our standard program over time.

Key Operating and Financial Metrics

We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

 

     Year Ended
March 31, 2012
    Nine Months Ended
December 31, 2012
    Year Ended
December 31, 2013
    Nine Months Ended
September 30,
 
         2013     2014  
     (in thousands, except percentages)  
    

(unaudited)

 

Loan originations

   $ 321,010      $ 608,348      $ 2,064,626      $ 1,366,253      $ 2,962,520   

Contribution(1)

   $ 15,536      $ 28,927      $ 43,458      $ 27,806      $ 63,374   

Contribution margin(1)

     (12.6 )%      28.9     44.4     43.1     44.1

Adjusted EBITDA(1)

   $ (11,395   $ (2,557   $ 15,227      $ 8,713      $ 13,384   

Adjusted EBITDA margin(1)

     (73.3 )%      (8.8 )%      15.5     13.5     9.3

 

(1) Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see “—Reconciliations of Non-GAAP Financial Measures.”

Loan Originations

Loans to qualified borrowers are originated by our issuing bank partners. We generate revenue from transaction fees paid by issuing banks for our role in matching borrowers with investors to enable loan originations. Loan originations consist of loans acquired by us, which are either retained by us and financed primarily by the issuance of notes pursuant to the Note Registration Statement or loans sold to the Trust, which acquires capital through the sale of certificates, or are sold to unrelated third parties, and other loan originations by our issuing bank partners that we facilitated but did not purchase. We believe originations are a key indicator of the adoption rate of our marketplace, growth of our brand, scale of our business, strength of our network effect, economic competitiveness of our products and future growth. Loan originations have increased significantly over time due to the increased awareness of our brand, our high borrower and investor satisfaction rates, the effectiveness of our borrower acquisition channels, a strong track record of loan performance and the expansion of

 

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our capital sources. Factors that could affect loan originations include the interest rate and economic environment, the competitiveness of our products, the success of our operational efforts to balance investor and borrower demands, any limitations on the ability of our issuing banks to originate loans, our ability to develop new products or enhance existing products for borrowers and investors, the success of our sales and marketing initiatives and the success of borrower and investor acquisition and retention.

Contribution and Contribution Margin

Contribution is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, general and administrative expense, stock-based compensation expense and income tax expense (benefit). Contribution margin is calculated by dividing contribution by total operating revenue. Contribution and contribution margin are measures used by our management and board of directors to understand and evaluate our core operating performance and trends. Contribution and contribution margin have varied from period to period and have generally increased over time. Factors that affect our contribution and contribution margin include revenue mix, variable marketing expenses and origination and servicing expenses. For more information regarding the limitations of contribution and contribution margin and a reconciliation of net income (loss) to contribution, see “—Reconciliations of Non-GAAP Financial Measures.”

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, acquisition and related expense, depreciation and amortization, amortization of intangible assets, stock-based compensation expense and income tax expense (benefit). Adjusted EBITDA margin is calculated as adjusted EBITDA divided by total operating revenue. Adjusted EBITDA is a measure used by our management and board of directors to understand and evaluate our core operating performance and trends. Adjusted EBITDA has generally improved over time due to our increased revenue and efficiencies in the scale of our operations. For more information regarding the limitations of adjusted EBITDA and adjusted EBITDA margin and a reconciliation of net income (loss) to adjusted EBITDA, see “—Reconciliations of Non-GAAP Financial Measures.”

Factors Affecting Our Results

Economic Environment

The demand for our loan products from borrowers and investors is dependent upon interest rates offered and the return earned relative to other comparable or substitute products. While borrower appetite for consumer and small business credit has typically remained strong in most economic environments, general economic factors and conditions, including the general interest rate environment and unemployment rates, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. For example, a significant interest rate increase could cause potential borrowers to defer seeking loans as they wait for rates to settle. Additionally, if weakness in the economy emerges and actual or expected default rates increase, our investors may delay or reduce their loan investments. However, we believe our marketplace will continue to offer an attractive value proposition to borrowers and investors in all economic and interest rate environments relative to other alternatives.

Effectiveness of Scoring Models

Our ability to attract borrowers and investors to our marketplace is significantly dependent on our ability to effectively evaluate a borrower’s credit profile and likelihood of default. Our ability to effectively segment borrowers into relative risk profiles impacts our ability to offer attractive interest rates for borrowers as well as our ability to offer investors attractive returns, both of which directly relate to our users’ confidence in our marketplace. We utilize credit decisioning and scoring models that assign each loan offered on our marketplace a corresponding interest rate and origination fee. Our investors’ returns are a function of the assigned interest rates for each particular loan invested in less any defaults over the term of the applicable loan. We believe we have a history of effectively evaluating borrower’s credit profiles and likelihood of defaults, as evidenced by the performance of various loan vintages facilitated through our

 

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marketplace. The following charts display the historical lifetime cumulative net charge-off rates through September 30, 2014, by booking year, for all grades and 36- and 60-month terms of standard program loans for each of the years shown.

 

LOGO

 

LOGO

We evaluate our marketplace’s credit decisioning and scoring models on a regular basis and leverage the additional data on loan history experience, borrower behavior, economic factors and prepayment trends that we accumulate to continually improve the models. If we are unable to effectively evaluate borrowers’ credit profiles, borrowers and investors may lose confidence in our marketplace.

Product Innovation

We have made and intend to continue to make substantial investments and incur expenses to research and develop or otherwise acquire new financial products for borrowers and investors. Our revenue growth to date has been a function of, and our future success will depend in part on, successfully meeting borrower and investor demand with new and innovative loan and investment options. For example, in early 2014, we began offering small business loans to qualified investors in private transactions, bringing the benefit of our innovative marketplace model, online delivery and process automation to small business owners. For investors, we have introduced automated investing, an application programming interface (API), investment funds and other separately managed accounts that make investing in loans easier. We also recently acquired Springstone and plan to incorporate its education and patient finance loans into our standard program over time. Failure to successfully

 

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develop and offer innovative products could adversely affect our operating results and we may not recoup the costs of new products.

Marketing Effectiveness and Strategic Relationships

We intend to continue to dedicate significant resources to our marketing and brand advertising efforts and strategic relationships. Our marketing efforts are designed to build awareness of Lending Club and attract borrowers and investors to our marketplace. We use a diverse array of marketing channels and are constantly seeking to improve and optimize our experience both on- and offline to achieve efficiency and a high level of borrower and investor satisfaction. We also continue to invest in our strategic relationships to raise awareness of our platform and attract borrowers and investors to our marketplace. Our operating results and ability to sustain and grow loan volume will depend, in part, on our ability to continue to make effective investments in marketing and the effectiveness of our strategic relationships.

Regulatory Environment

The regulatory environment for credit is complex and evolving, creating both challenges and opportunities that could affect our financial performance. We expect to continue to spend significant resources to comply with various federal and state laws and various licensing requirements designed to, among other things, protect borrowers (such as truth in lending, equal credit opportunity, fair credit reporting and fair debt collections practices) and investors. Our marketplace incorporates a number of automated features to help comply with these laws in an efficient and cost effective manner. While new laws and regulations or changes under existing laws and regulations could make facilitating loans or investment opportunities more difficult to achieve on acceptable terms, or at all, these events could also provide new product and market opportunities. To the extent we seek to grow internationally, we would become subject to additional foreign regulation and related compliance requirements and expense.

Components of Results of Operations

Total Net Revenue

Our primary sources of revenue consist of fees charged for transactions through or related to our marketplace. Our fees include transaction, servicing and management fees.

Transaction Fees

Transaction fees are fees paid by the issuing banks to us for the work we perform through our marketplace in facilitating originations. The amount of these fees is based upon the terms of the loan, including grade, rate, term and other factors. As of September 30, 2014, these fees ranged from 1% to 6% of the initial principal amount of a loan. In addition, for education and patient finance loans, transaction fees may exceed 6% as they include fees earned from issuing banks and service providers. These fees are recognized as a component of operating revenue at the time of loan issuance.

Effective July 1, 2013, we elected to account for loans we intend to sell to whole loan purchasers at fair value. Under this election, the purchase of such loans is recorded at fair value and all related transaction fees and costs are recorded when earned or incurred, respectively. Prior to this change, from December 1, 2012 through June 30, 2013, transaction fees and costs were included in the computation of the gain or loss on the sale of the loan, which was recorded in other revenue on the consolidated statement of operations. As such, transaction fees are now reflected in transaction fees and not in other revenue on the statement of operations. In accordance with GAAP, for this type of accounting change, we are not permitted to reclassify the prior period amounts to conform to this current presentation.

Servicing Fees

Servicing fees paid to us vary based on investment channel. Note investors pay us a servicing fee equal to 1% of each payment amount received from the borrower and whole loan purchasers pay a monthly servicing fee

 

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up to 1.3% per annum on the month-end principal balance of loans serviced. The servicing fee compensates us for the costs we incur in servicing the related loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios.

We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third parties or when the servicing contract commences. Over the life of the loan, changes in the estimated fair value of servicing assets and liabilities are included in servicing fees in the period in which the changes occur.

The following table provides the outstanding principal balance of loans that we serviced at the end of the periods indicated, by the method that the loans were financed.

 

Loans Serviced by Method Financed

   March 31, 2012      December 31, 2012      December 31, 2013      September 30, 2014  
     (in millions)  
    

(unaudited)

 

Notes

   $ 273.7       $ 397.1       $ 688.3       $ 983.3   

Certificates

     93.2         398.7         1,171.7         1,601.1   

Whole loans sold

             9.6         406.5         1,372.1   

Financed by Lending Club

     5.2         0.5         0.4         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $    372.1       $    805.9       $ 2,266.9       $ 3,956.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management Fees

Accredited investors and qualified purchasers can invest in limited partner interests in investment funds managed by LCA. LCA typically charges these interest holders a monthly management fee based on the month-end balance of their assets under management, ranging from 0.7% to 1.2% per annum. This fee may be waived or reduced for individual limited partners at the discretion of the general partner. LCA does not earn any carried interest from the investment funds. For separately managed account certificate holders, LCA earns a management fee typically ranging from 0.85% to 1.2% per annum of the month-end balance of their assets under management. This fee may be waived or reduced for individual separately managed accounts at the discretion of LCA.

Other Revenue

Other revenue consists of revenue from gains and losses on sales of whole loans and referral revenue. Certain investors investing through our marketplace acquire standard or custom program loans in their entirety. In connection with these whole loan sales, in addition to the transaction fee earned in respect of the corresponding loan, we recognize a gain or loss on the sale of that loan based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee (loans are typically sold at par). From December 1, 2012 through June 30, 2013, we included in the gain calculation on whole loan sales the amount of the transaction fees earned in respect of those loans, resulting in higher gains on sale and lower transaction fees.

Net Interest Income (Expense) and Other Adjustments

Net Interest Income (Expense). We do not assume principal or interest risk on loans originated through our marketplace as it matches borrowers and investors. We only make principal and interest payments on notes issued pursuant to the Note Registration Statement to the extent we receive borrower payments. We are only required to deliver payments as a servicer on loans held by third parties and to the Trust for certificates issued by it related to the corresponding loans only to the extent we actually receive borrower payments. As a result, on our statement of operations for any period and balance sheet as of any date (i) interest income on loans corresponds to the interest expense on notes and certificates and (ii) loan balances correspond to note and certificate balances, with any variations largely resulting from timing differences between the crediting of principal and interest payments on loans versus the disbursement of those payments to investors.

 

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From time to time, however, we may make limited loan investments without us issuing a corresponding note to investors, resulting in differences between total interest income and expense amounts on our statement of operations and total loan and notes and certificates balances on our balance sheets. These loan investments have been related primarily to customer accommodations and have been insignificant. We do not anticipate that such investments will be material in the foreseeable future.

Additionally, interest income (expense) includes interest income earned on cash and cash equivalents and interest expense incurred on the term loan.

Other Adjustments: Fair Value Adjustments on Loans, Notes and Certificates and Benefit (Provision) for Losses on Loans at Amortized Cost. We estimate the fair value of loans and their related notes and certificates using a discounted cash flow valuation methodology. The discounted cash flow valuation methodology uses the historical defaults and losses and recoveries on our loans over the past several years to project future losses and net cash flows on loans. The changes in the fair values of loans, notes and certificates are shown on our consolidated statement of operations on a gross basis. Due to the payment dependent feature of the notes and certificates, fair value adjustments on the loans offset the effect of fair value adjustments on the notes and certificates, resulting in no net effect on our earnings. As discussed above, we invest in a limited amount of loans for customer accommodation purposes. These loans are included on our balance sheet with no corresponding note or certificate, and as such the change in fair value of these loans are recorded through the statement of operations with no offsetting affect. These fair value adjustments have been immaterial for the periods presented, and we do not anticipate that such investments will be material in the foreseeable future.

We previously financed certain loans using sources of funds other than our issuance of notes or sales of loans to the Trust or unaffiliated third parties and accounted for those loans at amortized cost, reduced by a valuation allowance for loan losses incurred as of the balance sheet date. All loans acquired and held after September 2011 have been accounted for at fair value. The balance of loans at amortized cost declined to zero during the quarter ended December 31, 2012.

Operating Expenses

Our primary operating expenses consist of sales and marketing expense, origination and servicing expense and general and administrative expense, including engineering and product development and other general and administrative expense.

Sales and Marketing

Sales and marketing expense consists primarily of variable marketing expenses, including those related to borrower and investor acquisition and retention and general brand and awareness building, and salaries, benefits and stock-based compensation expense related to our sales and marketing staff.

Origination and Servicing

Origination and servicing expense consists primarily of salaries, benefits and stock-based compensation expense related to our credit, collections, customer support and payment processing staff and vendor costs associated with facilitating and servicing loans.

General and Administrative

Engineering and Product Development. Engineering and product development expense consists primarily of salaries, benefits and stock-based compensation expense for our engineering and product development team and the cost of subcontractors who work on the development and maintenance of our platform. Engineering and product development expense also includes non-capitalized hardware and software costs and depreciation and amortization of technology assets.

 

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Other. Other general and administrative expense consists primarily of salaries, benefits and stock-based compensation expense for our accounting and finance, business development, legal, human resources and facilities staff, professional fees related to legal and accounting, facilities expense and compensation expense related to the acquisition of Springstone. The amount of this compensation expense that we expect to record during the years ended December 31, 2014, 2015, 2016 and 2017 is $10.8 million, $10.6 million, $3.7 million and $0.5 million, respectively, which assumes satisfaction of vesting and other obligations.

Income Tax

Provision for income taxes consists of federal and state income taxes in the United States and deferred income taxes and changes in the related valuation allowance reflecting the net tax effects of temporary difference between the carrying amounts of assets and liabilities for financial reporting purpose and the amounts used for income tax purposes.

At December 31, 2013, we had federal and state net operating loss carry-forwards of approximately $43.9 million and $40.7 million, respectively, to offset future taxable income. These federal and state net operating loss carry-forwards will begin expiring in 2027 and 2016, respectively. Additionally, at December 31, 2013, we had federal and state research and development tax credit carry-forwards of approximately $0.6 million and $0.5 million, respectively. The federal credit carry-forwards will begin expiring in 2016 and the state credits may be carried forward indefinitely. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has historically been recorded to recognize only deferred tax assets that are more likely than not to be realized.

Results of Operations

The following tables set forth the consolidated statement of operations data for each of the periods presented:

 

    Year Ended
March 31,
2012
    Nine Months
Ended
December 31,
2012
    Year Ended
December 31,
2013
    Nine Months Ended
September 30,
 
          2013     2014  
    (in thousands)  
    (audited)     (unaudited)  

Consolidated Statement of Operations Data:

         

Operating revenues:

         

Transaction fees

  $ 13,701      $ 26,013      $ 85,830      $ 55,214      $ 133,835   

Servicing fees

    1,222        1,474        3,951        2,485        6,301   

Management fees

    206        720        3,083        2,083        4,163   

Other revenue (expense)

    407        720        5,111        4,708        (438
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

    15,536        28,927        97,975        64,490        143,861   

Net interest income (expense) and other adjustments

    261        (334     27        15        (854
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    15,797        28,593        98,002        64,505        143,007   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(1):

         

Sales and marketing

    12,571        14,723        39,037        26,577        60,808   

Origination and servicing

    5,099        6,134        17,217        11,044        26,135   

General and administrative:

         

Engineering and product development

    2,712        3,994        13,922        9,140        22,987   

Other

    7,359        7,980        20,518        13,294        55,875   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27,741        32,831        90,694        60,055        165,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (11,944     (4,238     7,308        4,450        (22,798

Income tax expense

                                1,059   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (11,944   $ (4,238   $ 7,308      $ 4,450      $ (23,857
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Includes stock-based compensation expense as follows:

 

    Year Ended
March 31,

2012
    Nine Months
Ended
December 31,

2012
    Year Ended
December 31,

2013
    Nine Months Ended
September 30,
 
          2013     2014  
    (in thousands)  

Stock-Based Compensation Expense:

         

Sales and marketing

  $ 152      $ 216      $ 1,313      $ 767      $ 5,029   

Origination and servicing

    31        60        424        170        1,427   

General and administrative:

         

Engineering and product development

    95        406        2,171        1,019        3,487   

Other

                    382             428                    2,375                        1,390                    15,946   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 660      $             1,110      $ 6,283      $     3,346      $   25,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the consolidated statement of operations data for each of the periods presented as a percentage of total net revenue:

 

     Year Ended
March 31,
2012
    Nine Months
Ended
December 31,
2012
    Year Ended
December 31,
2013
    Nine Months Ended
September 30,
 
           2013     2014  

Consolidated Statement of Operations Data:

          

Operating revenue:

          

Transaction fees

     87     91     88     86     94

Servicing fees

     8        5        4        4        4   

Management fees

     1        2.5        3        3        3   

Other revenue (expense)

     2        2.5        5        7        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     98        101        100        100        101   

Net interest income (expense) and other adjustments

     2        (1     0        0        (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     100        100        100        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(1):

          

Sales and marketing

     80        52        40        41        43   

Origination and servicing

     32        21        18        17        18   

General and administrative:

          

Engineering and product development

     17        14        14        14        16   

Other

     47        28        21        21        39   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     176        115        93        93        116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (76     (15     7        7        (16

Income tax expense

     0        0        0        0        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (76 )%      (15 )%      7     7     (17 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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(1) Include stock-based compensation expense as follows:

 

     Year Ended
March 31,
2012
    Nine Months
Ended
December 31,

2012
    Year Ended
December 31,

2013
   

 

 

Nine Months Ended
September 30,

 
                 2013                     2014          

Stock-Based Compensation Expense:

          

Sales and marketing

     1     1     1     1     4

Origination and servicing

     0        0        1        0        1   

General and administrative:

      

Engineering and product development

     1        1        2        2        2   

Other

             2                2                2                2            11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     4     4     6     5     18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2014 and 2013

Total Net Revenue

 

     Nine Months Ended
September 30,
    Change ($)     Change (%)  
     2013      2014      
     (in thousands, expect percentages)  
     (unaudited)  

Transaction fees

   $ 55,214       $ 133,835      $ 78,621        142

Servicing fees

     2,485         6,301        3,816        154   

Management fees

     2,083         4,163        2,080        100   

Other revenue (expense)

     4,708         (438     (5,146     N/M   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating revenue

     64,490         143,861        79,371        123
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income (expense) and other adjustments

     15         (854     (869     N/M   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total net revenue

   $ 64,505       $ 143,007      $ 78,502        122
  

 

 

    

 

 

   

 

 

   

 

 

 

Transaction Fees. Transaction fees were $133.8 million and $55.2 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 142%. This increase was primarily due to an increase in loan originations through our marketplace. Originations were $2,962.5 million and $1,366.3 million for the nine months ended September 30, 2014 and 2013 respectively, an increase of 117%. In addition, during the nine months ended September 30, 2013, $4.9 million in transaction fees were included in the gain on sale of whole loans, which was included in other revenue. The average transaction fees as a percentage of the initial principal amount of the loan, including the $4.9 million in other revenue, were 4.5% and 4.4% for the nine months ended September 30, 2014 and 2013, respectively. This increase was primarily due to higher percentages of 60-month loans and loans with higher risk grades, each of which have higher corresponding transaction fees, and the addition of education and patient finance loans.

Servicing Fees. Servicing fees were $6.3 million and $2.5 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 154%. The increase was primarily due to increased loan payments and balances of notes and certain certificates and sold loans outstanding serviced by us for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, partially offset by changes in the fair value of servicing assets and liabilities.

Management Fees. Management fees were $4.2 million and $2.1 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 100%. The increase in management fees was primarily due to an increase in assets under management and outstanding certificate balances.

 

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Other Revenue (Expense). Other revenue (expense) was $(0.4) million and $4.7 million for the nine months ended September 30, 2014 and 2013, respectively, a decrease of 109%. The decrease was primarily due to a $6.0 million decrease in gain on sale of whole loans to unrelated purchasers, which was partially offset by an increase in referral commissions. From January 1, 2013 through June 30, 2013, we included $4.9 million of transaction fees that were earned in respect of those loans in the gain on whole loan sales, which resulted in higher gains on sale and lower transaction fees.

Components of Net Interest Income (Expense) and Other Adjustments

 

     Nine Months Ended September 30,  
         2013                 2014        
     (in thousands)  
    

(unaudited)

 

Interest income:

    

Loans

   $ 124,760      $
252,293
  

Cash and cash equivalents

     11        5   
  

 

 

   

 

 

 

Total interest income

     124,771        252,298   
  

 

 

   

 

 

 

Interest expense:

    

Notes and certificates

     (124,727     (252,212

Term loan

            (842
  

 

 

   

 

 

 

Total interest expense

     (124,727     (253,054
  

 

 

   

 

 

 

Net interest income (expense)

     44        (756

Fair value adjustments on loans, notes and certificates, net

     (29     (98
  

 

 

   

 

 

 

Net interest income (expense) and other adjustments

   $ 15      $ (854
  

 

 

   

 

 

 

Average outstanding balances:

    

Loans

   $ 1,138,193      $ 2,246,575   

Notes and certificates

   $ 1,144,528      $ 2,258,254   

Interest Income on Loans. Interest income from loans was $252.3 million and $124.8 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in interest income was primarily due to the increase in the outstanding balances of loans.

Interest Expense on Notes and Certificates. Interest expense for notes and certificates was $252.2 million and $124.7 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of notes and certificates.

Interest Expense on Term Loan. Interest expense on term loan was $0.8 million for the nine months ended September 30, 2014, which was related to the borrowing incurred in April 2014 related to the Springstone acquisition. We did not have any term loans outstanding during the nine months ended September 30, 2013 and did not incur any interest expense for that period.

Fair Value Adjustments on Loans, Notes and Certificates. The fair value adjustments on loans were largely offset by the fair value adjustments on the notes and certificates at fair value due to the borrower payment dependent design of the notes and certificates and to the principal balances of the loans being similar to the combined principal balances of the notes and certificates. Accordingly, the net fair value adjustment losses on loans and notes and certificates were immaterial for the nine months ended September 30, 2014 and 2013.

Net Interest Income (Expense) and Other Adjustments. Net interest income (expense) and other adjustments were $(0.9) million and $15,000 for the nine months ended September 30, 2014 and 2013, respectively. The decrease in net interest income (expense) and other adjustments was primarily due to the interest expense incurred on the term loan.

 

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Operating Expenses

 

     Nine Months Ended
September 30,
     Change ($)      Change (%)  
   2013      2014        
     (in thousands, except percentages)  
    

(unaudited)

 

Sales and marketing

   $ 26,577       $ 60,808       $ 34,231         129

Origination and servicing

     11,044         26,135         15,091         137   

General and administrative:

           

Engineering and product development

     9,140         22,987         13,847         151   

Other

     13,294         55,875         42,581         320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 60,055       $ 165,805       $ 105,750         176
  

 

 

    

 

 

    

 

 

    

 

 

 

Sales and Marketing. Sales and marketing expense was $60.8 million and $26.6 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 129%. The increase was due to a $29.1 million increase in variable marketing expenses.

Origination and Servicing. Origination and servicing expense was $26.1 million and $11.0 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 137%. The increase was primarily due to a $10.3 million increase in compensation expense as we expanded our credit and customer support teams due to increasing loan applications and a $4.2 million increase in consumer reporting agency and loan processing costs, which was primarily driven by higher loan volume.

General and Administrative

Engineering and Product Development. Engineering and product development expense was $23.0 million and $9.1 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 151%. The increase was primarily due to a $9.7 million increase in personnel-related expenses resulting from increased headcount and contract labor expense as we enhanced our website tools and functionality and a $3.8 million increase in expensed equipment and software, support and maintenance and depreciation expense reflecting our continued investment in technology infrastructure.

We capitalized $8.2 million and $2.0 million of software development costs for the nine months ended September 30, 2014 and 2013, respectively. These costs generally are amortized over a three year period.

Other. Other general and administrative expense was $55.9 million and $13.3 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 320%. The increase was primarily due to a $26.7 million increase in compensation expense, $6.4 million of which was the amortization of the compensation arrangement related to certain key continuing employees of Springstone, with the remainder primarily related to an increase in headcount and stock-based compensation expense, an $8.3 million increase in professional services and amortization of intangibles and a $2.1 million increase in contingent legal liabilities.

Income Taxes

For the nine months ended September 30, 2014, we recorded $1.1 million of income tax expense. The $1.1 million of income tax expense related to the amortization of tax-deductible goodwill from the acquisition of Springstone, which gives rise to an indefinite-lived deferred tax liability. There was no income tax benefit recorded on the pretax loss due to an increase in the deferred tax asset valuation allowance. We recorded no income tax expense for the nine months ended September 30, 2013 because the corporate income tax liabilities due on our taxable income were offset by usage of prior years’ net operating losses and tax credit carry-forwards.

 

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Fiscal Year Ended December 31, 2013, Nine Months Ended December 31, 2012 and Fiscal Year Ended March 31, 2012

Total Net Revenue

 

     Nine Months Ended
December 31, 2012
    Year Ended
December 31, 2013
     Change ($)      Change (%)  
     (in thousands, except percentages)  

Transaction fees

   $ 26,013      $ 85,830       $ 59,817         230

Servicing fees

     1,474        3,951         2,477         168   

Management fees

     720        3,083         2,363         328   

Other revenue

     720        5,111         4,391         610   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total operating revenue

     28,927        97,975         69,048         239   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income (expense) and other adjustments

     (334     27         361         108   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 28,593      $ 98,002       $ 69,409         243
  

 

 

   

 

 

    

 

 

    

 

 

 
     Year Ended
March 31, 2012
     Nine Months Ended
December 31, 2012
    Change ($)     Change (%)  
     (in thousands, except percentages)  

Transaction fees

   $ 13,701       $ 26,013      $ 12,312        90

Servicing fees

     1,222         1,474        252        21   

Management fees

     206         720        514        250   

Other revenue

     407         720        313        77   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating revenue

     15,536         28,927        13,391        86   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income (expense) and other adjustments

     261         (334     (595     (228
  

 

 

    

 

 

   

 

 

   

 

 

 

Net revenue

   $ 15,797       $ 28,593      $ 12,796        81
  

 

 

    

 

 

   

 

 

   

 

 

 

Transaction Fees. Transaction fees were $85.8 million and $26.0 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 230%. The increase in these fees was primarily due to an increase in loans originated through our marketplace from $608.2 million for the nine months ended December 31, 2012 to $2,064.6 million for the fiscal year ended December 31, 2013, an increase of 239%. In addition, during the six months ended June 30, 2013, $4.9 million in transaction fees were included in the gain on sale of whole loans, which was included in other revenue. The average transaction fees as a percentage of the initial principal balance of the loan, including the $4.9 million in other revenue, were 4.4% and 4.3% for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively. The increase was primarily due to a higher percentage of 60-month loans and loans with higher risk grades, each of which have higher corresponding transaction fees.

Transaction fees were $26.0 million and $13.7 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 90%. The increase in these fees was primarily due to an increase in loans originated through our marketplace from $321.1 million for the fiscal year ended March 31, 2012 to $608.2 million for the nine months ended December 31, 2012, an increase of 90%.

Servicing Fees. Servicing fees were $4.0 million and $1.5 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 168%. The increase in servicing fees was primarily due to increased balances of notes and certain certificates and sold loans outstanding serviced by us for the fiscal year ended December 31, 2013 as compared to the nine months ended December 31, 2012.

 

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Servicing fees were $1.5 million and $1.2 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 21%. The increase in servicing fees was primarily due to an increase in the aggregate amount of outstanding note and certain certificate balances for the fiscal year ended December 31, 2012 as compared to the fiscal year ended March 31, 2012.

Management Fees. Management fees were $3.1 million and $0.7 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 328%. The increase in management fees was due primarily to an increase in the total assets under management and outstanding certificate balances.

Management fees were $0.7 million and $0.2 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 250%. The increase in management fees was due primarily to an increase in the total assets under management and outstanding certificate balances.

Other Revenue. Other revenue was $5.1 million and $0.7 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 610%. The increase in other revenue was primarily due to a $3.5 million increase in gain on sale of whole loans to unrelated purchasers. The $3.5 million increase included $4.9 million in transaction fees, which are included in the gain on sale of whole loans from January 1, 2013 to June 30, 2013.

Other revenue was $0.7 million and $0.4 million for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, respectively, an increase of 77%. The increase in other revenue was primarily due to an increase in gain on sale of whole loans to unrelated purchasers.

Components of Net Interest Income (Expense) and Other Adjustments

 

     Nine Months Ended
December 31, 2012
    Year Ended
December 31, 2013
    Change ($)     Change (%)  
     (in thousands, except percentages)  

Interest income:

        

Loans

   $ 56,829      $ 187,495      $ 130,666        230

Cash and cash equivalents

     32        12        (20     (63
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     56,861        187,507        130,646        230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Notes and certificates

     (56,631     (187,447     (130,816     231   

Loans payable

     (11            11        (100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (56,642     (187,447     (130,805     231   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     219        60        (159     (73

Fair value adjustments on loans, notes and certificates, net

     (595     (33     562        (94

Benefit from loss reversal on loans at amortized cost

     42               (42     (100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense) and other adjustments

   $ (334   $ 27      $ 361        (108 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Average outstanding balances:

        

Loans

   $ 551,923      $ 1,278,631      $ 726,708        132

Notes and certificates

   $ 552,523      $ 1,285,764      $ 733,241        133

 

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     Year Ended
March 31, 2012
    Nine Months Ended
December 31, 2012
    Change ($)     Change (%)  
     (in thousands, except percentages)  

Interest income:

        

Loans

   $ 32,636      $ 56,829      $ 24,193        74

Cash and cash equivalents

     24        32        8        33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     32,660        56,861        24,201        74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Notes and certificates

     (31,777     (56,631     (24,854     78   

Loans payable

     (253     (11     242        (96
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (32,030     (56,642     (24,612     77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     630        219        (411     (65

Fair value adjustments on loans, notes and certificates, net

     (1     (595     (594     N/M   

Benefit (provision) for losses on loans at amortized cost

     (368     42        410        (111
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense) and other adjustments

   $ 261      $ (334   $ (595     (228 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Average outstanding balances:

        

Loans

   $ 255,281      $ 551,923      $ 296,642        116

Notes and certificates

   $ 250,291      $ 552,523      $ 302,232        121

Interest Income on Loans. For the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, interest income from loans was $187.5 million and $56.8 million, respectively. The increase in interest income was primarily due to the increase in the outstanding balances of loans.

For the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, interest income from loans was $56.8 million and $32.6 million, respectively. The increase in interest income was primarily due to the increase in the outstanding balances of loans.

Interest Expense on Notes and Certificates. For the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, we recorded interest expense for notes and certificates of $187.4 million and $56.6 million, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of notes and certificates.

For the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, we recorded interest expense for notes and certificates of $56.6 million and $31.8 million, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of notes and certificates.

Interest Expense on Loans Payable. We did not incur any interest expense for loans payable for the fiscal year ended December 31, 2013. For loans payable that were paid in full in July 2012, we recorded interest expense for loans payable of $11,000 and $0.3 million, for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, respectively.

Fair Value Adjustments on Loans, Notes and Certificates. The fair value adjustment losses on loans were largely offset by the fair value adjustment gains on the notes and certificates at fair value due to the borrower payment dependent design of the notes and certificates and due to the principal balances of the loans being similar to the combined principal balances of the notes and certificates. Accordingly, the net fair value adjustment losses for loans, notes and certificates were $33,000, $0.6 million and $1,000 for the fiscal year ended December 31, 2013, the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, respectively.

 

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Benefit (Provision) for Losses on Loans at Amortized Cost. We formerly financed certain loans using sources of funds other than notes and certificates and accounted for those loans at amortized cost, reduced by a valuation allowance for loan losses incurred as of the balance sheet date. All loans acquired and held after September 2011 have been accounted for at fair value. The balance of loans at amortized cost declined to zero during the quarter ended December 31, 2012.

There was no provision or benefit related to loans at amortized cost for the year ended December 31, 2013 because there were no such loans outstanding during that period. We recorded provisions (benefits) for losses on loans at amortized cost of $(42,000) and $0.4 million during the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, respectively. The reduction in the loan loss provision was due to the roll-off of the remaining balance of loans at amortized cost.

Net Interest Income (Expense) and Other Adjustments. Net interest income (expense) and other adjustments were $27,000 and $(0.3) million for the year ended December 31, 2013 and nine months ended December 31, 2012, respectively. The increase was primarily due to a reduction in the net fair value adjustment losses on loans, notes and certificates of $0.6 million, which was partially offset by a decline in net interest income of $0.2 million.

Net interest income (expense) and other adjustments were $(0.3) million and $0.3 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively. The net decline was primarily due to a decline in net interest income of $0.4 million and an increase in the net fair value adjustment losses on loans, notes and certificates of $0.6 million, which was partially offset by a decline in provision for losses on loans at amortized cost of $0.4 million.

Operating Expenses

 

    Nine Months Ended
December 31, 2012
    Year Ended
December 31, 2013
           Change ($)                   Change (%)         
    (in thousands, except percentages)  

Sales and marketing

  $ 14,723      $ 39,037      $ 24,314        165

Origination and servicing

    6,134        17,217        11,083        181   

General and administrative:

       

Engineering and product development

    3,994        13,922        9,928        249   

Other

    7,980        20,518        12,538        157   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 32,831      $ 90,694      $ 57,863        176
 

 

 

   

 

 

   

 

 

   

 

 

 
    Year Ended
March 31, 2012
    Nine Months Ended
December 31, 2012
    Change ($)     Change (%)  
    (in thousands, except percentages)  

Sales and marketing

  $ 12,571      $ 14,723      $ 2,152        17

Origination and servicing

    5,099        6,134        1,035        20   

General and administrative:

       

Engineering and product development

    2,712        3,994        1,282        47   

Other

    7,359        7,980        621        8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 27,741      $ 32,831      $ 5,090        18
 

 

 

   

 

 

   

 

 

   

 

 

 

Sales and Marketing. Sales and marketing expense was $39.0 million and $14.7 million for the fiscal year ended December 31, 2013 and nine months ended December 31, 2012, respectively, an increase of 165%. The increase was primarily due to an $18.7 million increase in variable marketing expenses driven by higher loan originations and a $5.1 million increase in personnel-related expenses.

 

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Sales and marketing expense was $14.7 million and $12.6 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 17%. The increase was primarily due to a $1.4 million increase in variable marketing expenses driven by higher loan originations and a $1.3 million increase in personnel-related expenses.

Origination and Servicing. Origination and servicing expense was $17.2 million and $6.1 million for the fiscal year ended December 31, 2013 and nine months ended December 31, 2012, respectively, an increase of 181%. The increase was primarily due to a $7.3 million increase in personnel-related expenses and a $3.9 million increase in consumer reporting agency and loan processing costs, both driven by higher loan volumes.

Origination and servicing expense was $6.1 million and $5.1 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 20%. The increase was primarily due to a $0.6 million increase in personnel-related expenses.

General and Administrative

Engineering and Product Development. Engineering and product development expense was $13.9 million and $4.0 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 249%. The increase was primarily driven by continued investment in our platform, which included a $7.1 million increase in personnel-related expenses resulting from increased headcount and contract labor expense and a $2.1 million increase in expensed equipment and software and depreciation expense.

Engineering and product development expense was $4.0 million and $2.7 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 47%. The increase was primarily driven by continued investment in our platform, which included an $0.8 million increase in personnel-related expenses resulting from increased headcount and contract labor expense and a $0.2 million increase in expensed equipment and software and depreciation expense.

We capitalized $3.8 million and $0.4 million in software development costs for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively.

Other. Other general and administrative expense was $20.5 million and $8.0 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 157%. The increase was primarily due to a $7.3 million increase in personnel-related expenses from increased headcount and a $2.3 million increase in rent and facilities expenses.

Other general and administrative expense was $8.0 million and $7.4 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 8%. The increase was primarily due to a $0.3 million increase in personnel-related expenses from increased headcount.

Income Taxes

We recorded no income tax expense related to the pre-tax income for the fiscal year ended December 31, 2013 due to the availability of deferred tax assets subject to a full valuation to offset current year income. We recorded no tax benefit related to our pre-tax losses for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012 because the tax benefit on such losses were offset by increases in the valuation allowance. Deferred tax assets, such as the future benefit of net operating loss deductions against future taxable income, can be recognized if realization of such tax-related assets is more likely than not. Given our history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for our net operating loss carry-forwards. Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets.

 

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Quarterly Results of Operations

The following table sets forth our unaudited consolidated statement of operations data for each of the seven quarters ended September 30, 2014. The unaudited quarterly statement of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited quarterly statement of operations data. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Three Months Ended  
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
 
    (in thousands, except percentages)        
   

(unaudited)

       

Consolidated Statement of Operations Data:

             

Operating revenue:

             

Transaction fees

  $ 13,582      $ 16,393      $ 25,239      $ 30,616      $ 35,412      $ 45,801      $ 52,622   

Servicing fees

    715        882        888        1,466        1,780        1,468        3,053   

Management fees

    494        720        869        1,000        1,094        1,461        1,608   

Other revenue (expense), net

    1,452        2,847        409        403        416        (109     (745
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

    16,243        20,842        27,405        33,485        38,702        48,621        56,538   

Net interest income (expense) and other adjustments

    8        (3     10        12        16        (396     (474
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    16,251        20,839        27,415        33,497        38,718        48,225        56,064   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(1):

             

Sales and marketing

    7,707        8,410        10,460        12,460        20,582        19,225        21,001   

Origination and servicing

    2,634        3,414        4,996        6,173        7,402        8,566        10,167   

General and administrative:

             

Engineering and product development

    2,248        3,043        3,849        4,782        5,722        8,030        9,235   

Other

    3,622        4,190        5,482        7,224        12,311        20,951        22,613   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    16,211        19,057        24,787        30,639        46,017        56,772        63,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    40        1,782        2,628        2,858        (7,299     (8,547     (6,952

Income tax expense (benefit)

           85        (85                   640        419   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 40      $ 1,697      $ 2,713      $ 2,858      $ (7,299   $ (9,187     (7,371
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data(2):

             

Loan originations

  $    352,885      $    446,225      $    567,142      $    698,373      $    791,348      $ 1,005,946      $ 1,165,226   

Contribution(3)

  $ 6,015      $ 9,231      $ 12,560      $ 15,654      $ 14,578      $ 21,915      $ 26,881   

Contribution margin(3)

    37.0     44.3     45.8     46.7     37.7     45.1     47.5

Adjusted EBITDA(3)

  $ 732      $ 3,054      $ 4,927      $ 6,514      $ 1,866      $ 4,002      $ 7,517   

Adjusted EBITDA margin(3)

    4.5     14.7     18.0     19.5     4.8     8.2     13.3

 

(footnotes appear on following page)

 

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(1) Includes stock-based compensation as follows:

 

     Three Months Ended  
      Mar. 31, 
2013
      Jun. 30, 
2013
      Sep. 30, 
2013
      Dec. 31, 
2013
      Mar. 31, 
2014
      Jun. 30, 
2014
     Sep. 30,
2014
 
     (in thousands)  

Stock-Based Compensation Expense:

                    

Sales and marketing

   $ 87       $ 174       $ 506       $ 547       $ 3,502       $ 615       $ 912   

Origination and servicing

     26         39         105         255         358         470         599   

General and administrative:

                    

Engineering and product development

     174         326         519           1,151         737         1,258         1,492   

Other

          239              410              741         983           2,436           5,976         7,534   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 526       $ 949       $ 1,871       $ 2,936       $ 7,033       $ 8,319       $ 10,537   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) For more information about loan originations, contribution margin, adjusted EBITDA and adjusted EBITDA margin, see “—Key Operating and Financial Metrics.”
(3) Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see “—Reconciliations of Non-GAAP Financial Measures.”

Quarterly Trends

Our total net revenue has generally increased since our inception, including the seven quarters ended September 30, 2014. This increase has been driven primarily from an increase in loan originations and an increase in the outstanding principal balances of loans, notes and certificates. There is some seasonality in demand for personal loans, which is generally lower in the first and fourth quarters. While our growth has somewhat masked this seasonality, our operating results could be affected by such seasonality in the future.

Beyond growth in originations, revenues have also fluctuated due to changes in the mix of loans, notes and certificates. Historically, mix changes within our loan grades, which have differing transaction fees by loan grade, have driven some variability within transaction fees when measured as a percentage of originations. Mix changes in notes, certificates and loan sales drive changes in servicing fees and management fees. Net revenue for the quarter ended September 30, 2014 included $5.7 million of revenue from Springstone, which was acquired in April 2014. Effective July 1, 2013, we changed our accounting for loans sold, which resulted in transaction fees associated with loans sold being recorded in transactions fees in the statement of operations. In the future, we expect grade mix changes, product mix changes and mix changes in notes, certificates and loan sales to continue to drive variability in our revenues.

Operating expenses have increased over the last seven quarters primarily due to an increase in loan originations and an increase in the outstanding principal balances of loans that we service. Sales and marketing expenses have generally increased sequentially from quarter-to-quarter, primarily due to increases in originations and headcount-related growth, which includes stock-based compensation expense. Specifically in the quarter ended March 31, 2014, sales and marketing expense increased due to higher marketing expenditures on a new product, sales and marketing channel testing and seasonality. Origination and servicing expenses have increased sequentially from quarter-to-quarter, primarily due to increases in originations, in the total outstanding principal balances of loans that we service and in headcount-related growth, which includes stock-based compensation expense.

For the three months ended September 30, 2014, our marketplace facilitated $1,165 million in loans, comprised of $874 million in standard program and $291 million in custom program loans. Of the standard program loans, notes issued pursuant to the Note Registration Statement accounted for $223 million, or 26%, of investments during the period, certificates issued by the Trust accounted for $284 million, or 32%, and whole

 

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loan sales accounted for $367 million, or 42%. For the three months ended September 30, 2014, of the capital invested in standard program loans, $383 million, or 44%, was invested by individuals through investment vehicles or managed accounts, $226 million, or 26%, was invested by self-managed, individual investors and $262 million, or 30%, was invested by institutional investors. Of the custom program loans, certificates issued by the Trust accounted for $25 million, or 9%, whole loan sales accounted for $150 million, or 51%, and education and patient finance loans facilitated through Springstone’s platform accounted for $116 million, or 40%, of the investments during the three months ended September 30, 2014. Of the capital invested in custom program loans during this period, $22 million, or 8%, was invested by individuals through investment vehicles or managed accounts and $269 million, or 92%, was invested by institutional investors.

As a result of these quarterly trends and fluctuations in revenue, sales and marketing and origination and servicing expenses, our contribution margin has fluctuated over the periods and will continue to fluctuate quarterly based on continued investment in the business.

Engineering and product development expenses have increased quarterly due to headcount-related growth, which includes stock-based compensation expense, and increases in hardware and software investments, including amortization of capitalized software. Specifically, we increased hiring in 2014, which increased our personnel-related expenses in 2014.

Other general and administrative expense has increased quarterly primarily due to headcount-related expenses, including accounting, finance, risk management, business development, legal, human resources and facilities staff as well as external legal, audit and facilities expenses. In addition, expenses increased in 2014 due to the acquisition of Springstone, which increased compensation expense, acquisition-related expenses and amortization of intangibles. Stock-based compensation expense also increased in 2014 due to increased hiring and as a result of retention stock option grants to key employees.

Reconciliations of Non-GAAP Financial Measures

Contribution is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, general and administrative expense, stock-based compensation expense and income tax expense (benefit). Contribution margin is calculated by dividing contribution by total operating revenue. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, acquisition and related expense, depreciation and amortization, amortization of intangible assets, stock-based compensation expense and income tax expense (benefit). Adjusted EBITDA margin is calculated as adjusted EBITDA divided by total operating revenue.

Our non-GAAP measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin should not be viewed as substitutes for, or superior to, net income (loss) as prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate these measures differently, which may reduce their usefulness as a comparative measure. Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin do not consider the potentially dilutive impact of stock-based compensation. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA and adjusted EBITDA margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements. Adjusted EBITDA and adjusted EBITDA margin do not reflect tax payments that may represent a reduction in cash available to us.

In evaluating contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation.

 

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The following tables present a reconciliation of net income (loss) to contribution for each of the periods indicated:

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2009     2010     2011     2012     2013     2013     2014  
    (in thousands, except percentages)  
   

(unaudited)

 

Reconciliation of Net Income (Loss) to Contribution:

             

Net income (loss)

  $ (10,255   $ (10,807   $ (12,269   $ (6,862   $ 7,308      $ 4,450      $ (23,857

Net interest expense (income) and other adjustments.

    1,550        708        (222     238        (27     (15     854   

General and administrative expense:

             

Engineering and product development

    1,766        1,951        2,289        4,855        13,922        9,140        22,987   

Other

    3,430        3,330        6,572        10,024        20,518        13,294        55,875   

Stock-based compensation expense(1)

    33        109        39        377        1,737        937        6,456   

Income tax expense

                                              1,059   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution

  $ (3,476   $ (4,709   $ (3,591   $ 8,632      $ 43,458      $ 27,806      $ 63,374   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

  $ 1,372      $ 5,723      $ 12,530      $ 34,045      $ 97,975      $ 64,490      $ 143,861   

Contribution margin

    (253.4 )%      (82.3 )%      (28.7 )%      25.4     44.4     43.1     44.1

 

(1) Consists of stock-based compensation expense not included in general and administrative expense as follows:

 

     Years Ended December 31,      Nine
Months Ended

September 30,
 
     2009      2010      2011      2012      2013      2013      2014  
     (in thousands)  

Stock-Based Compensation Expense:

                    

Sales and marketing

   $ 28       $ 94       $ 30       $ 302       $ 1,313       $ 767       $ 5,029   

Origination and servicing

            5              15                9              75         424            170         1,427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33       $ 109       $ 39       $ 377       $ 1,737       $ 937       $ 6,456   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

    Year Ended
March 31,
2012
    Nine Months
Ended
December 31,
2012
    Year Ended
December 31,
2013
    Nine Months Ended
September 30,
 
          2013     2014  
    (in thousands, except percentages)  
   

(unaudited)

 

Reconciliation of Net Income (Loss) to Contribution:

         

Net income (loss)

  $ (11,944   $ (4,238   $ 7,308      $ 4,450      $ (23,857

Net interest expense (income) and other adjustments

    (261     334        (27     (15     854   

General and administrative expense:

         

Engineering and product development

    2,712        3,994        13,922        9,140        22,987   

Other

    7,359           7,980         20,518        13,294        55,875   

Stock-based compensation expense(1)

    183        276        1,737        937        6,456   

Income tax expense

                                1,059   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution

  $ (1,951   $ 8,346      $ 43,458      $ 27,806      $ 63,374   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

  $ 15,536      $ 28,927      $ 97,975      $ 64,490      $ 143,861   

Contribution margin

    (12.6 )%      28.9     44.4     43.1     44.1

 

(footnote appears on following page)

 

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(1) Consists of stock-based compensation expense not included in general and administrative expense as follows:

 

    Year Ended
March 31,

2012
    Nine
Months
Ended
December 31,

2012
    Year Ended
December 31,
2013
   

 

Nine Months Ended September 30,

 
              2013             2014      
    (in thousands)  

Stock-Based Compensation Expense:

         

Sales and marketing

  $ 152      $ 216      $ 1,313      $ 767      $ 5,029   

Origination and servicing

         31             60           424         170        1,427   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 183      $ 276      $ 1,737      $ 937      $ 6,456   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended  
     Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
 
     (in thousands, except percentages)        
    

(unaudited)

       

Reconciliation of Net Income (Loss) to Contribution:

              

Net income (loss)

   $ 40      $ 1,697      $ 2,713      $ 2,858      $ (7,299   $ (9,187   $ (7,371

Net interest expense (income) and other adjustments.

     (8     3        (10     (12     (16     396        474   

General and administrative expense:

              

Engineering and product development

     2,248        3,043        3,849        4,782        5,722        8,030        9,235   

Other

     3,622        4,190        5,482        7,224        12,311        20,951        22,613   

Stock-based compensation expense(1)

     113        213        611        802        3,860        1,085        1,511   

Income tax expense (benefit)

            85        (85                   640        419   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution

   $ 6,015      $ 9,231      $ 12,560      $ 15,654      $ 14,578      $ 21,915      $ 26,881   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

   $ 16,243      $ 20,842      $ 27,405      $ 33,485      $ 38,702      $ 48,621      $ 56,538   

Contribution margin

     37.0     44.3     45.8     46.7     37.7     45.1     47.5

 

(1) Consists of stock-based compensation expense not included in general and administrative expense as follows:

 

     Three Months Ended  
     Mar. 31,
2013
     Jun. 30,
2013
     Sep. 30,
2013
     Dec. 31,
2013
     Mar. 31,
2014
     Jun. 30,
2014
     Sep. 30,
2014
 
     (in thousands)         

Stock-Based Compensation Expense:

                    

Sales and marketing

   $ 87       $ 174       $ 506       $ 547       $ 3,502       $ 615       $ 912   

Origination and servicing

          26              39            105           255         358         470         599   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 113       $ 213       $ 611       $ 802       $ 3,860       $ 1,085       $ 1,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following tables present a reconciliation of net income (loss) to adjusted EBITDA for each of the periods indicated:

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2009     2010     2011     2012     2013     2013     2014  
    (in thousands, except percentages)  
   

(unaudited)

 

Reconciliation of Net Income (Loss) to Adjusted EBITDA:

             

Net income (loss)

  $ (10,255   $ (10,807   $ (12,269   $ (6,862   $ 7,308      $ 4,450      $ (23,857

Net interest expense (income) and other adjustments.

    1,550        708        (222     238        (27     (15     854   

Acquisition and related expense

                                              2,819   

Depreciation and amortization:

             

Engineering and product development

                  47        260        1,336       
761
  
   
3,327
  

Other

    73        87        86        28        327       
171
  
   
783
  

Amortization of intangible assets