Lending Club Liquidity and Capital Resources | P2P Lending, Peer to Peer Lending, People to People Lending

I read through the Lending Club S1 finally… I found a few parts of the S1 interesting… Over the next few day I will lighlight a few of my favorite sections. I am not a lawyer nor do I claim to fully understand everything that I am reading. I am simply copying verbatim parts of the Lending Club S1 that I found interesting…

The financial statements included in this registration statement have been prepared assuming that the Company will continue as a going concern; however, the conditions discussed below raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

The Company has incurred operating losses since its inception. For fiscal 2008, the Company incurred a net loss of $7.0 million and had negative cash flow from operations of $6.0 million. Additionally, the Company has an accumulated deficit of $7.8 million since inception and a stockholder deficit of $4.8 million as of March 31, 2008.

Since its inception, the Company has financed its operations through debt and equity financing from various sources. The Company is dependent upon raising additional capital or seeking additional debt financing to fund its current operating plans for the foreseeable future. Failure to obtain sufficient debt and equity financing and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect the Company’s ability to achieve its business objectives and continue as a going concern. Further, there can be no assurance as to the availability or terms upon which the required financing and capital might be available.

Net cash used in operating activities from inception through March 31, 2008 consisted mostly of increases in headcount costs, expenses for consultants and temporary personnel and other professional service providers to the Company.

Net cash used in investing activities was $7.3 million for the fiscal year ended March 31, 2008, and $38,100 for the fiscal year ended December 31, 2007. In fiscal 2008, net cash used in investing activities consisted mainly of our $7.0 million investment in loans to borrower members. Other investment activities included opening certificates of deposits tied to our loans payable and from capital expenditures for purchases of property and equipment. Net cash provided by financing activities was $18.6 million for the fiscal year ended March 31, 2008, and $0.7 million for the fiscal year ended March 31, 2007. Cash provided by financing activities consisted primarily of proceeds from the issuance of our convertible preferred stock in our first round of venture capital funding in August 2007 and our issuance of long-term debt.

On October 29, 2007, we entered into a secured $3.0 million loan facility with Silicon Valley Bank (“SVB”). As of March 31, 2008, we had drawn down the entire amount of the facility. Interest on borrowings under the loan facility is at a per annum rate fixed as of the funding date of each advance equal to the greater of (i) SVB’s prime rate of interest plus 0.75% or (ii) 8.50%. We also paid a commitment fee of $15,000 on the effective date of the loan facility and $11,400 of SVB’s expenses in connection with the facility. The borrowings under the credit facility are secured by a blanket lien on substantially all of our assets, except for our intellectual property rights. Following the date of this prospectus, payments we receive in respect of borrower member loans on which the Notes are dependent will also be excluded from the blanket lien. In connection with this facility, we issued a fully vested warrant to purchase 98,592 shares of Series A convertible preferred stock to SVB. SVB also received the right to invest up to $500,000 in our next round of equity financing on the same terms as offered to other investors. Additionally, the SVB facility requires us to maintain a certificate of deposit with SVB of $150,000 until repayment.

On February 20, 2008, we entered into a secured $5.0 million credit facility with Gold Hill Venture Lending 03, LP (“Gold Hill”). As of March 31, 2008, we had drawn down $3.6 million under this facility. Interest on the borrowings under the credit facility is at a fixed rate of 10% per annum. Under the terms of this facility, we agreed to remit to Gold Hill, at the end of the amortization period, an amount equal to 1% of the total amount borrowed under that facility. We also paid a commitment fee of $25,000 on the effective date of the credit facility. Borrowings under the credit facility are secured by a lien on substantially all of our assets, except for our intellectual property rights. Following the date of this prospectus, payments we receive in respect of borrower member loans on which the Notes are dependent will also be excluded from the blanket lien. Gold Hill’s lien is pari passu with SVB’s lien described above. In connection with this facility, we issued fully vested warrants to purchase an aggregate of 289,201 shares of Series A convertible preferred stock and Gold Hill received the right to invest up to $500,000 in our next round of equity financing on the same terms as offered to other investors. The Gold Hill facility requires us to maintain a certificate of deposit with SVB of $250,000 until repayment.

As of the date of this filing, we are in violation of certain covenants under our SVB and Gold Hill facilities because we stopped accepting lender member commitments during the SEC registration process and also because we have not maintained our primary operating account with SVB. Although the continuing existence of these covenant violations constitutes events of default under the facilities, we entered into forbearance agreements with SVB and Gold Hill in June 2008, under which they agreed to forbear from exercising their rights against us with respect to these events of default through September 15, 2008.

In January 2008, we issued subordinated convertible promissory notes to Norwest Venture Partners X, LP and Canaan VII L.P., with principal sums of $500,000 each, under the terms of a note and warrant purchase agreement. The convertible notes are subordinate to our capital loan facility and our credit facility and bear interest at a rate of 8% per annum. Principal and interest are due in full on the maturity date of January 24, 2010, unless an equity financing with total proceeds of at least $3 million occurs prior to such date. If such an equity financing occurs, the principal balance and accrued interest of the notes will automatically convert into equity securities at the same price and under the same terms as those offered to the other equity investors. In connection with the issuance of the convertible notes, we issued warrants to purchase an aggregate of 234,742 shares of Series A convertible preferred stock to the convertible note holders.

From April to June 2008, we issued a series of promissory notes to accredited investors totaling $3,632,964. Each note is repayable over three years and bears interest at the rate of 12% per annum. In addition, investors in these promissory notes will receive warrants to purchase a total of 355,197 shares of our Series A convertible preferred stock. We used the proceeds of these notes to fund loans to qualified borrower members.

We used the proceeds from borrowings under the SVB and Gold Hill facilities, the sale of our convertible notes and the sale of promissory notes primarily to participate in the lending platform as a lender in order to insure a sufficient level of funding for borrowing requests. Beginning April 7, 2008, and until the date of this prospectus, all loans funded on the platform have been and will continue to be funded and held only by Lending Club. As of June 10, 2008, we had provided approximately $8.5 million in funding to borrower members. We expect that we will continue to fund loans to borrower members ourselves for some time, although there can be no assurance that will do so or if we do so, what level of funding we will be able to provide. Furthermore, following the date of this prospectus, if we fund loans ourselves we will hold the loans directly and will not hold Notes for our own account. Following the date of this prospectus, we will reopen the lender side of our platform to accept new lender member registrations and funding commitments to purchase Notes.

We have incurred losses since our inception and we expect we will continue to incur losses for the foreseeable future. We require cash to meet our operating expenses and for capital expenditures and principal and interest payments on our debt, as well as to fund loans we will hold for investment. To date, we have funded our cash requirements with proceeds from our debt issuances and the sale of equity securities. At March 31, 2008, we had approximately $5.6 million in cash and cash equivalents. We primarily invest our cash in interest bearing money market funds.

We anticipate that we will continue to incur substantial net losses for a number of years as we grow our online platform. We do not have any committed external source of funds. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through public or private equity offerings or debt financings. Additional equity or debt financing may not be available on acceptable terms, if at all.

Since our inception, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

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