UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 333-151827

LendingClub Corporation

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		51-0605731 (I.R.S. Employer Identification No.)
370 Convention Way
Redwood City, California (Address of principal executive offices)		94063 (Zip Code)

800-964-7937
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of January 31, 2010, there were 8,504,261 shares of the registrant’s common stock outstanding.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Condensed Balance Sheets			4
Condensed Statements of Operations			5
Condensed Statements of Cash Flows			6
Notes to Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			39
PART II. OTHER INFORMATION			39
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3. Defaults Upon Senior Securities			40
Item 4. Submission of Matters to a Vote of Security Holders			40
Item 5. Other Information			40
Item 6. Exhibits			40
SIGNATURES			41
EXHIBIT INDEX			42
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our borrower members, credit scoring, FICO scores, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

•

the status of borrower members, the ability of borrower members to repay member loans and the plans of borrower members;

•

our ability to attract additional investor members;

•

expected rates of return and interest rates;

•

the attractiveness of our lending platform;

•

our financial performance;

•

the availability and functionality of the trading platform;

•

our ability to retain and hire competent employees and appropriately staff our operations;

•

regulatory developments;

•

our intellectual property; and

•

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in forward-looking statements. We have included important factors in the “Risk Factors” section that could cause actual results or events to differ materially from these forward-looking statements. You should carefully review those factors and also the risks outlined in other documents we have filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, and the Prospectus for the Member Payment Dependent Notes dated January 20, 2010. In this Quarterly Report on Form 10-Q, we refer to the Member Payment Dependent Notes that we issue to investors as the “Notes,” and we refer to the corresponding loans made to borrower members as “CM Loans.” Forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Quarterly Report on Form 10-Q completely and with the understanding that actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

LendingClub Corporation

		December 31,				March 31,
		2009				2009
		(unaudited)
ASSETS
Cash and cash equivalents		$	4,730,406			$	11,998,541
Restricted cash			1,252,000				452,000
Member loans held for investment, net of allowance for loan losses			9,067,857				9,918,479
CM Loans held for investment, at fair value			39,729,200				8,239,909
Other receivables			49,138				71,594
Loan servicing rights, at fair value			29,133				56,116
Prepaid expenses and other assets			260,642				63,620
Property and equipment, net			132,451				139,993
Deposits			53,350				146,548
Total assets		$	55,304,177			$	31,086,800
LIABILITIES
Accounts payable		$	377,519			$	630,452
Accrued expenses			657,092				424,249
Notes, at fair value			39,718,345				8,238,597
Deferred revenue			29,133				56,117
Loans payable, net of debt discount			9,915,886				9,647,804
Total liabilities			50,697,975				18,997,219
Commitments and contingencies (see Note 14)
PREFERRED STOCK
Preferred Stock			28,462,446				28,462,446
Total preferred stock			28,462,446				28,462,446
STOCKHOLDERS’ DEFICIT
Common stock			85,043				82,207
Additional paid-in capital			3,756,880				3,444,301
Accumulated deficit			(27,698,167	)			(19,899,373	)
Total stockholders’ deficit			(23,856,244	)			(16,372,865	)
Total liabilities, preferred stock and stockholders’ deficit		$	55,304,177			$	31,086,800

The accompanying notes are an integral part of these condensed financial statements.

LendingClub Corporation

		Three Months Ended December 31,								Nine Months Ended December 31,
		2009				2008				2009				2008
Revenues
Member loans held for investment
Interest income, net		$	332,305			$	339,233			$	1,040,760			$	804,466
Interest expense			(369,158	)			(289,410	)			(1,094,602	)			(1,168,978	)
Net interest loss, member loans held for investment			(36,853	)			49,823				(53,842	)			(364,512	)
Provision for loan losses			(176,376	)			(245,428	)			(1,170,880	)			(530,359	)
Net interest loss after provision for loan losses			(213,229	)			(195,605	)			(1,224,722	)			(894,871	)
CM Loans and Notes held for investment at fair value
Interest income, CM Loans, net			469,532				(57,476	)			684,110				(57,476	)
Interest income, Notes, net			273,778				114,121				587,858				114,121
Net interest income, CM Loans and Notes, held for investment at fair value			743,310				56,645				1,271,968				56,645
Amortization of loan servicing rights			7,003				9,260				21,973				38,221
Other Revenue			13,675				2,514				30,346				3,480
Total income/(losses)			550,759				(127,186	)			99,565				(796,525	)
Operating expenses
Sales, marketing and customer service			1,586,098				600,953				4,030,724				1,502,372
Engineering			442,433				443,054				1,310,687				1,427,196
General and administrative			646,940				1,381,372				2,556,948				5,886,815
Total operating expenses			2,675,471				2,425,379				7,898,359				8,816,383
Loss before provision for income taxes			(2,124,712	)			(2,552,565	)			(7,798,794	)			(9,612,908	)
Provision for income taxes			—				—				—				—
Net loss			(2,124,712	)			(2,552,565	)			(7,798,794	)			(9,612,908	)
Amortization of beneficial conversion feature on convertible preferred stock			—				—				—				156,410
Net loss attributable to common stockholders		$	(2,124,712	)		$	(2,552,565	)		$	(7,798,794	)		$	(9,456,498	)
Basic and diluted net loss per share		$	(0.25	)		$	(0.31	)		$	(0.94	)		$	(1.15	)
Weighted-average shares of common stock used in computing basic and diluted net loss per share			8,419,466				8,190,000				8,297,515				8,190,000

The accompanying notes are an integral part of these condensed financial statements.

LendingClub Corporation

		For the Nine months Ended December 31,
		2009				2008
Cash flows from operating activities
Net loss		$	(7,798,794	)		$	(9,612,908	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			51,646				44,606
Non-cash interest expense			2,343,149				672,910
Non-cash interest income			(2,123,281	)			(129,260	)
Stock based compensation expense			113,660				53,354
Change in fair value of loan servicing rights			26,983				22,722
Interest capitalized on loans			38,043				(126,791	)
Provision for loan losses			1,170,880				530,359
Changes in operating assets and liabilities
Other receivables			22,456				(9,124	)
Deposits			93,198				(185,200	)
Prepaid expenses and other assets			(197,022	)			(25,594	)
Accounts payable			(252,934	)			333,204
Accrued expenses			232,843				60,698
Deferred revenue			(26,983	)			(22,722	)
Net cash used in operating activities			(6,306,156	)			(8,393,746	)
Cash flows from investing activities
Member loans originated			(5,116,625	)			(6,155,225	)
Origination of CM Loans held at fair value			(38,460,025	)			(2,803,550	)
Repayment of member loans originated			4,194,244				2,425,051
Repayment of CM Loans held at fair value			5,411,031				67,657
Increase in restricted cash			(800,000	)			(42,000	)
Purchase of property and equipment			(44,104	)			(21,944	)
Net cash used in investing activities			(34,815,479	)			(6,530,011	)
Cash flows from financing activities:
Proceeds from issuance of notes payable			4,200,000				6,807,966
Proceeds from issuance of Notes held at fair value			39,024,105				2,803,550
Payments on notes payable			(3,966,424	)			(2,443,322	)
Payments on Notes held at fair value			(5,421,076	)			(67,730	)
Proceeds from issuance of Series A convertible preferred stock, net of issuance costs			—				5,405,455
Proceeds from issuance of common stock			16,895				—
Net cash provided by financing activities			33,853,500				12,505,919
Net increase (decrease) in cash and cash equivalents			(7,268,135	)			(2,417,838	)
Cash and cash equivalents — beginning of period			11,998,541				5,605,179
Cash and cash equivalents — end of period			4,730,406				3,187,341
Supplemental disclosure of cash flow information:
Cash paid for interest		$	2,410,657			$	528,550
Supplemental disclosure of non-cash investing and financing activities:
Convertible preferred debt converted to Series A preferred stock		$	—			$	1,504,575
Reclassification of member loans held for investment to CM Loans held at fair value		$	564,080			$	—
Issuance of Series B convertible preferred stock warrants in exchange for term loan agreement		$	184,860			$	—

The accompanying notes are an integral part of these condensed financial statements.

LENDINGCLUB CORPORATION

Notes to Condensed Financial Statements

1. Basis of Presentation

The condensed balance sheet as of December 31, 2009, the condensed statements of operations for the three months and nine months ended December 31, 2009 and 2008, respectively, and the condensed statements of cash flows for the nine months ended December 31, 2009 and 2008, respectively, have been prepared by LendingClub Corporation, or LendingClub, and are unaudited. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made for a fair presentation of interim results. Interim results are not necessarily indicative of the results for a full fiscal year. The condensed balance sheet as of March 31, 2009 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed financial statements should be read in conjunction with the audited financial statements and notes included in our Annual Report on Form 10-K for the year ended March 31, 2009.

2. Summary of Significant Accounting Policies

Other than the changes described under Revenue Recognition in this footnote below and Note 5 — CM Loans and Notes Held for Investment at Fair Value, which we implemented beginning on October 13, 2008, there have been no material changes to any of our significant accounting policies and estimates.

Liquidity

We have incurred operating losses since our inception. For the three and nine months ended December 31, 2009, we incurred net losses of $2,124,712 and $7,798,794, respectively. For the nine months ended December 31, 2009 and 2008, we had negative cash flows from operations of $6,306,156 and $8,393,746, respectively. Additionally, we have an accumulated deficit of $27,698,167 since inception and a stockholders’ deficit of $23,856,244 as of December 31, 2009.

Since our inception, we have financed our operations through debt and equity financing from various sources. We are dependent upon raising additional capital or seeking additional debt financing to fund our current operating plans. Failure to obtain sufficient debt and equity financing and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve our business objectives and continue as a going concern. Further, there can be no assurance as to the availability or terms upon which any required financing and capital might be available, if at all.

During the nine months ended December 31, 2009, we raised $4,200,000 through the issuance of notes payable in connection with our May 2009 term loan and our private placement notes, see Note 6 — Loans Payable.

Use of estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make judgments and estimates that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

Cash and cash equivalents

Cash and cash equivalents include various deposits with financial institutions in checking and short-term money market accounts. We consider all highly liquid investments with original maturity dates of three months or less to be cash equivalents. Such deposits periodically exceed amounts insured by the FDIC.

Restricted cash

At December 31, 2009 and March 31, 2009, restricted cash consisted primarily of funds held in escrow in certificates of deposit or money market accounts, at the banks associated with the loan facilities described in Note 6 — Loans Payable, and by our operating banks as security for transactions on our platform.

Member loans held for investment

We fund member loans ourselves from time to time to ensure a sufficient level of funding for borrower members. The majority of funds for such loans were obtained through our borrowings under loan facilities with various entities (see Note 6 — Loans Payable). As of December 31, 2009 and March 31, 2009, we had funded and retained an aggregate total of $19,542,675 and $13,109,700, respectively, of member loans to borrower members. These member loans are classified as held for investment based on management’s intent and ability to hold such member loans for the foreseeable future or to maturity. Member loans held for investment are carried at amortized cost reduced by a valuation allowance for estimated credit losses incurred as of the balance sheet date. A member loan’s cost includes its unpaid principal balance along with unearned income, comprised of fees charged to borrower members offset by incremental direct costs for loans originated by us. Unearned income is amortized ratably over the member loan’s contractual life using the effective interest method.

Allowance for loan losses

We may incur losses in connection with member loans we hold for investment if the borrower members fail to pay their monthly scheduled loan payments. We provide for incurred losses on these loans with an allowance for loan losses in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 310-10-35 guidance on the subsequent measurement of receivables and FASB ASC 450 guidance on accounting for contingencies. The allowance for loan losses is a valuation allowance established to provide for estimated incurred credit losses in the portfolio of member loans held for investment at the balance sheet date.

The allowance for loan losses is evaluated on a periodic basis by management, and represents an estimate of potential credit losses based on a variety of factors, including the composition and quality of the loan portfolio, loan specific information gathered through our collection efforts, delinquency levels, probable expected losses, current and historical charge-off and loss experience, current industry charge-off and loss experience, and general economic conditions. Determining the adequacy of the allowance for loan losses is subjective, complex and requires judgment by management about the effect of matters that are inherently uncertain, and actual losses may differ from our estimates.

A member loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the original loan agreement. Our member loan portfolio is comprised primarily of small groups of homogeneous, unsecured loans made to borrower members, which loans are evaluated for impairment at least every 120 days based on their payment status and information gathered through our collection efforts. Our estimate of the required allowance for loan losses is developed by estimating both the rate of default of the loans within each FICO band, a loan’s collection status, the borrower’s FICO score at or near the evaluation date, and the amount of probable loss in the event of a borrower member default. Loan losses are charged against the allowance when management believes the loss is confirmed. We make an initial assessment of whether a specific reserve is required on each delinquent loan no later than the 150th day of delinquency of that loan. As of December 31, 2009, we had identified and fully reserved $70,718 on 18 loans. Our aggregate allowance for loan losses was $881,607 at December 31, 2009, while as of March 31, 2009, we had identified and fully reserved $221,801 on 34 loans, and our aggregate allowance for loan losses was $1,110,726. For the three months ended December 31, 2009, we charged off a total of 179 loans with an aggregate principal balance of $890,558. There were no loans charged off in the three months ended December 31, 2008.

CM Loans and Notes held for investment at fair value

Starting October 13, 2008, our investors have had the opportunity to buy Notes issued by us. These Notes are special limited recourse obligations of LendingClub. Each series of Notes corresponds to a single CM Loan originated through our platform. In conjunction with this new operating structure effective as of October 13, 2008, for CM Loans and Notes, we adopted the provisions of FASB ASC 825-10 guidance on the fair value option for financial assets, which permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that estimated unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We applied the provisions of FASB ASC 825-10 to the Notes and CM Loans.

In accordance with the provisions of FASB ASC 825-10, we report the aggregate fair value of the CM Loans and Notes as separate line items in the assets and liabilities sections of our balance sheet using the methods and disclosures related to fair value accounting that are described in FASB ASC 820.

FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Changes in fair value of the CM Loans and Notes, subject to the provisions of FASB ASC 825-10, are recognized in earnings, and fees and costs associated with the origination or acquisition of CM Loans are recognized as incurred rather than deferred.

We determined the fair value of the CM Loans and Notes in accordance with the fair value hierarchy established in FASB ASC 820 which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs, which generally requires significant management judgment, when measuring fair value. FASB ASC 820 establishes the following hierarchy for categorizing these inputs:

	Level 1 —		Quoted market prices in active markets for identical assets or liabilities
	Level 2 —		Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs)
	Level 3 —		Significant unobservable inputs.

As observable market prices are not available for similar assets and liabilities, we believe the CM Loans and Notes should be considered Level 3 financial instruments under FASB ASC 820. For CM Loans and Notes, the fair value is estimated using discounted cash flow methodologies adjusted for our expectation of both the rate of default of the CM Loans and Notes and the amount of loss in the event of default under those CM Loans and Notes. These estimates of default are recorded as interest expense related to our CM Loan originations and a corresponding interest income against the Notes in the period of loan origination.

Our obligation to pay principal and interest on any Note is equal to the pro-rata portion of the CM Loan payments, if any, we receive on the related CM Loan, net of our 1.00% service charge. As such, the fair value of the Notes is approximately equal to the fair value of the CM Loans, adjusted for the 1.00% service charge. Any unrealized gains or losses on the CM Loans and Notes for which the fair value option has been elected are reported separately in earnings. The effective interest rate associated with a Note will be less than the interest rate earned on the related CM Loan due to the 1.00% service charge. Accordingly, as market interest rates fluctuate, the resulting change in fair value of the fixed rate CM Loans and fixed rate Notes will not be the same. For additional discussion on this topic, see Note 5 — CM Loans and Notes Held for Investment at Fair Value.

Revenue recognition

Revenues primarily result from interest income and transaction fees earned on member loans originated through our online platform. Transaction fees include origination fees (borrower member paid) and servicing fees (investor paid). Together we classify interest and fees earned on member loans as interest income (See Note 13 — Net Interest Income).

Revenues related to member loan origination fees are recognized in accordance with FASB ASC 310-20 guidance on nonrefundable fees and other costs. The loan origination fee charged to each borrower member is determined by the credit grade of that borrower member’s loan and as of December 31, 2009, ranged from 1.25% to 4.50% of the aggregate member loan amount. If the loan is for a small business or for a self-employed borrower, we charge an additional 1.5% origination fee. The member loan origination fees are included in the annual percentage rate (“APR”) calculation provided to the borrower member and is subtracted from the gross loan proceeds prior to disbursement of the loan funds to the borrower member. A member loan is considered issued when we move funds on our platform from the investor members’ accounts to the borrower member’s account, following which we initiate an Automated Clearing House (“ACH”) transaction to transfer funds from our platform accounts to the borrower member’s bank account.

Lender servicing fee revenue is recognized in accordance with Statement FASB ASC 860 guidance on transfers and servicing of financial assets. Currently, a 1.00% service charge, based on any payments received, is charged to the investor at the time that we receive any payments from the borrower member. The service charge is deducted from any payments received on a member loan before the net amounts of those payments are allocated to the investors’ accounts.

Our treatment of interest and fee income is determined by the category that each member loan origination falls into, which are:

	•		Third Party Purchased Member Loans — Member loans originated through our platform and sold to third party investor members through April 7, 2008.
	•		Member Loans Originated as CM Loans — CM Loans originated on or after October 13, 2008.
	•		LendingClub Funded Member Loans — Member loans we funded ourselves, irrespective of when originated.

Third Party Purchased Member Loans

These member loans are considered to have been sold to the investor members. As such, we recognize only origination fee and servicing fee revenue on these member loans and do not provide an allowance for loan losses. We recognize a servicing asset and corresponding servicing liability as a result of this sale in accordance with FASB ASC 860, and amortize the asset into income as payments are received on the member loans.

At December 31, 2009, gross future expected servicing fees related to these member loans was estimated to be $29,133 net of estimated future loan losses that would impair the value of this asset, which losses were estimated using those methods described in Allowance for loan losses in this footnote above. We have insufficient history to predict prepayments. However we believe that, based on our competitive interest rates, borrower members are unlikely to prepay their member loans in any great volume. Indeed for many borrower members, the main reason for securing a member loan with us is to provide needed cash flow at more attractive interest rates than could be obtained from other sources.

Further, because the earnings process is deemed to be complete at the time these member loans were transferred to the investors, and because there is no recourse to us in the event of default by the borrower member, we recognized 100% of the origination fee as revenue at the time the member loan was transferred to the purchaser and included the fee in interest income.

Member Loans Originated as CM Loans

Investor members are no longer able to purchase member loans. Rather, as described above, each member loan, or CM Loan, is recorded as a note receivable funded by us, while Notes, which are special limited recourse obligations of LendingClub corresponding to those CM Loans, are recorded as notes payable issued by us to investors. After we receive payments of principal and interest on the CM Loans, we in turn make principal and interest payments on the Notes. These principal payments reduce the carrying value of both the CM Loans and Notes. If we do not receive a payment on the CM Loan, we are not obligated to and will not make any payments on the corresponding Notes. In light of this new structure, we adopted and account for the CM Loans and Notes under the provisions of FASB ASC 825 as described above.

We do not directly record servicing fee revenue from these CM Loans, but rather recognize interest income on our CM Loans related to these member loans based on the full amount of the loan payment at the stated interest rate to the borrower member without regard to the servicing fee. We correspondingly record interest expense on the corresponding Note based on the post-service fee payment we make to our investor members, which results in an interest rate and an interest expense on these Notes which is lower than that for the CM Loans. Origination fees on these CM Loans are recognized upon origination and included in interest income.

In accordance with FASB ASC 825, we include the estimated amount of unrealized gains or losses included in earnings during the period attributable to changes in instrument-specific credit risk and how the estimated unrealized gains or losses attributed to changes in instrument-specific credit risk were determined. As such, we do not record a specific loan loss allowance related to CM Loans and Notes in which we have elected the fair value option. Rather, we estimate the fair value of CM Loans and Notes using discounted cash flow methodologies adjusted for our expectation of both the rate of default of the CM Loans and Notes and the amount of loss in the event of default using methodologies similar to those used for member loans we have funded ourselves. At origination and at each reporting period, we recognize as interest expense an amount equal to our estimated loan losses for the CM Loans, and interest income in an amount equal to our estimated loan losses on these Notes. As the CM Loans are amortizing at slightly higher interest rates than the Notes, the amount of interest expense related to estimated loan losses on the CM Loans will always be slightly higher than the estimated interest income from loan losses on the Notes. Our net interest income related to these CM Loans and Notes is further described in Note 13— Net Interest Income.

LendingClub Funded Member Loans

We have ourselves funded approximately $19.5 million of member loans originated through the platform. When a member loan has been funded in whole, or in part, by us, we retain the portion of the borrower member’s monthly loan payment that corresponds to the percentage of the member loan that we have funded. In these cases, we record interest income on these notes receivable.

Origination fees from member loans funded by us are offset by our direct loan origination costs. The net amount is initially deferred and subsequently amortized ratably over the term of the member loan as an adjustment to yield, and is reported in the accompanying statements of operations as interest income. As of December 31, 2009 and 2008, we had net unamortized deferred loan origination costs of $63,421 and $71,546, respectively (see Note 4 — Member Loans Held for Investment). These deferred loan origination costs will be amortized monthly as interest expense/(income) through the remaining life of the related, member loans.

Concentrations of credit risk

Financial instruments that potentially subject us to significant concentrations of credit risk, consist principally of cash, cash equivalents, restricted cash, member loans held for investment, and CM Loans held at fair value. We hold our cash, cash equivalents and restricted cash in accounts at high-credit quality financial institutions. We are exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet periodically exceeds the FDIC insured amounts. We perform credit evaluations of our borrower members’ financial condition and do not allow borrower members to have more than two member loans outstanding at any one time. We do not require collateral for member loans, but we maintain allowances for potential credit losses, as described above.

Stock-based compensation

We apply FASB ASC 718 guidance regarding the stock based compensation to account for equity awards made to employees. FASB ASC 718 requires all share-based payments made to employees, including grants of employee stock options, restricted stock and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values, and does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement recognition. FASB ASC 718 also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under previous literature.

FASB ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of each award as of the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model considers, among other factors, the expected life of the award and the expected volatility of our stock price.

FASB ASC 718 also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of estimated forfeitures, such that expense is recorded only for those stock-based awards that are expected to vest. Share-based awards issued to non-employees are accounted for in accordance with provisions of FASB ASC 718 and FASB ASC 505-50 guidance on equity based payment to non-employees.

New accounting pronouncements

In June 2008, the FASB revised the definition of “indexed to a company’s own stock” under FASB ASC 815, Derivatives and Hedging Activities, in response to practice questions about whether an instrument or embedded feature is indexed to the reporting company’s own stock by establishing a framework for the determinations and by nullifying some previous requirements. The revision will affect issuers’ accounting for warrants and many convertible instruments with provisions that protect holders from declines in the stock price (“down-round” provisions). Warrants with such provisions will no longer be recorded in equity, and many of the convertible instruments with such provisions will have to be “bifurcated,” with the conversion option separately accounted for as a derivative under FASB ASC 815. The revision is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. It will initially be applied by recording a cumulative-effect adjustment to opening retained earnings at the date of adoption for the effect on outstanding instruments. We are still evaluating whether the adoption of the revision will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. FASB ASC 105 establishes a single source of authoritative, nongovernmental U.S. GAAP, except for rules and interpretive releases of the SEC. The effective date of FASB ASC 105 is for interim and annual reporting periods ending after September 15, 2009. FASB ASC 105 does not have an impact on our financial position or results of operations as it does not change authoritative guidance.

In May 2009, the FASB issued ASC 855, Subsequent Events. FASB ASC 855 provides guidance on the disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The date through which any subsequent events have been evaluated and the basis for that date must be disclosed. FASB ASC 855 requires that we disclose the analysis of subsequent events through the date that our Financial Statements are issued. FASB ASC 855 also defines the circumstances under which an entity should recognize such events or transactions and the related disclosures of such events or transactions that occur after the balance sheet date. FASB ASC 855 is effective for our interim or annual financial periods ending after June 15, 2009.

In April 2009, the FASB issued ASC 825-10-65, Interim Disclosures about Fair Value of Financial Instruments, which expands the fair value disclosures for all financial instruments within the scope of FASB ASC 825-10-50 to interim reporting periods. We have adopted FASB ASC 825-10-65, and it is effective for interim reporting periods ending after June 15, 2009. ASC 825-10-65 does not have an impact on our financial position or results of operations as it focuses on additional disclosures. This disclosure is presented in Note 4 — Member Loans Held for Investment.

In April 2009, the FASB issued ASC 820-10-65-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FASB ASC 820-10-65-4 is an amendment of FASB ASC 820-10, Fair Value Measurements. FASB ASC 820-10-65-4 applies to all assets and liabilities and provides guidance on measuring fair value when the volume and level of activity has significantly decreased and guidance on identifying transactions that are not orderly. FASB ASC 820-10-65-4 requires interim and annual disclosures of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, which occurred during the period. We have adopted FASB ASC 820-10-65-4, which is effective for interim and annual reporting periods ending after June 15, 2009. ASC 820-10-65-4 does not have a material impact on our financial position or results of operations.

In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value,” which updates FASB ASC 820-10. The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:

•

A valuation technique that uses a) the quoted price of an identical liability when traded as an asset, or b) quoted prices for similar liabilities or similar liabilities when traded as assets.

•

Another valuation technique that is consistent with the principles of FASB ASC 820, examples include an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.

This standard is effective for financial statements issued for interim and annual periods beginning after August 2009. We adopted ASU 2009-05 during the quarter ending December 31, 2009. The adoption did not have a material impact on our consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures,” that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. The new and revised disclosures are required to be implemented in fiscal years beginning after December 15, 2009. The Company is currently evaluating the impact of adopting this standard on its financial position and results of operations.

3. Net Loss Attributable to Common Stockholders

We compute net loss per share in accordance with FASB ASC 260 guidance on this subject. Under FASB ASC 260, basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.

In January 2008, as detailed in Note 7 — Convertible Notes Payable, we issued two subordinated convertible promissory notes totaling $1,000,000. Additionally, in connection with the issuance of these subordinated convertible promissory notes, we issued warrants to purchase 234,742 shares of Series A convertible preferred stock, and we recorded a beneficial conversion feature of $178,755 of which a total of $0 and $156,410 was amortized to interest expense during the three and nine months ended December 31, 2008, respectively. In September 2008, these notes were converted into 990,212 shares of our Series A preferred stock.

Because our convertible preferred stock and the subordinated convertible promissory notes on an as-converted basis are deemed to be anti-dilutive, and were therefore excluded from the computation of basic earnings per share, we have also decreased the net loss attributable to common stockholders by the value of our amortized beneficial conversion feature.

The following table details the computation of the net loss per share (unaudited):

		Three Months Ended December 31,								Nine Months Ended December 31,
		2009				2008				2009				2008
Net loss		$	(2,124,712	)		$	(2,552,565	)		$	(7,798,794	)		$	(9,612,908	)
Add: amortization of beneficial conversion feature on convertible preferred stock			—				—				—				156,410
Net loss attributable to common stockholders		$	(2,124,712	)		$	(2,552,565	)		$	(7,798,794	)		$	(9,456,498	)
Weighted-average common shares outstanding, basic and diluted			8,419,446				8,190,000				8,297,515				8,190,000
Net loss per common share:
Basic and diluted		$	(0.25	)		$	(0.31	)		$	(0.94	)		$	(1.15	)

Due to the losses attributable to common stockholders for each of the periods presented in the table below, the following potentially dilutive shares are excluded from the basic and diluted net loss per share calculation as including such shares in the calculation would be anti-dilutive.

		Three Months Ended December 31,								Nine Months Ended December 31,
(Unaudited)		2009				2008				2009				2008
Excluded Securities:
Weighted-average Series A convertible preferred stock			15,740,285				14,779,988				15,740,285				12,010,700
Weighted-average Series B convertible preferred stock			16,036,346				—				16,036,346				—
Weighted-average restricted stock options issued to employees			2,626,118				2,042,175				2,687,619				1,715,068
Weighted-average warrants and contingent shares outstanding			1,818,637				1,502,484				1,852,197				1,356,158
Total common stock equivalents excluded from diluted net loss per share			36,221,386				18,324,647				36,316,447				15,081,926

Member loans funded by us and held for investment are as follows:

		As of December 31,				As of March 31,
		2009				2009
		(unaudited)
Unsecured member loans, net of chargeoffs		$	9,886,044			$	10,927,941
Deferred origination costs/(revenue), net			63,421				101,464
			9,949,464				11,029,205
Allowance for loan losses			(881,607	)			(1,110,726	)
Member loans held for investment, net		$	9,067,857			$	9,918,749

We provide an allowance for loan losses for member loans funded by us in accordance with FASB ASC 310-10-35 and FASB ASC 450. The allowance for loan losses is a valuation allowance established to provide for estimated credit losses in the portfolio of member loans held for investment at the balance sheet date. As of December 31, 2009, we had fully reserved for our portion of 18 member loans with an aggregate principal balance of $70,718.

Changes in the allowance for loan losses, the composition of the allowance for loan losses and the allowance for loan losses were as follows (unaudited):

Balance at March 31, 2009		$	1,110,726
Chargeoffs			(228,876	)
Provision for loan losses			463,676
Balance at June 30, 2009			1,345,526
Chargeoffs			(280,566	)
Provision for loan losses			530,828
Balance at Sept 30, 2009			1,595,789
Chargeoffs			(890,558	)
Provision for loan losses			176,376
Balance at Dec 31, 2009		$	881,607

We believe that the credit and interest rate risks of our member loans held for investment are substantially similar to those of our CM Loans, which we measure at fair value (see Note 5 — CM Loans and Notes Held for Investment at Fair Value). In fact, both of these instruments are originated through our lending platform, and in many instances a portion of a member loan may be carried as a member loan held for investment, while another portion of that same member loan will become a CM Loan against which related Notes will be issued. Further, because of the similarity of these two instruments, our methodology for recording realized and unrealized gains on our CM Loans is substantially similar to the methodologies we use to measure our provision for loan loss allowances and chargeoffs on our member loans held for investment (see Note 2 — Summary of Significant Accounting Policies, Revenue Recognition, Member Loans Originated as CM Loans). Based on these similarities, we therefore believe that the fair value of our member loans held for investment is equivalent to their carrying value.

Of the $5,116,625 of member loans held for investment that we originated during the nine months ended December 31, 2009, we reclassified $564,080 to CM Loans held at fair value upon the sale to investor members of a like amount of Notes to which those member loans corresponded. The Notes were sold for an amount equal to the par value of the corresponding member loans, and therefore no gain or loss was recorded on the sale of the Notes or transfer of the member loans held for investment to CM Loans held at fair value.

5. CM Loans and Notes Held for Investment at Fair Value

At December 31, 2009, we had the following assets and liabilities measured at fair value on a recurring basis (unaudited):

		Level 1 Inputs				Level 2 Inputs				Level 3 Inputs				Fair Value
Assets
CM Loans			—				—			$	39,729,200			$	39,729,200
Liabilities
Notes			—				—			$	39,718,345			$	39,718,345

Both observable and unobservable inputs may be used to determine the fair value of positions that we have classified within the Level 3 category. As a result, the realized and unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs. The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended December 31, 2009 (unaudited):

		CM Loans				Notes
Fair value at March 31, 2009		$	8,239,909			$	8,238,597
Originations			6,119,200				6,119,200
Principal repayments			(904,606	)			(906,116	)
Outstanding principal			13,454,503				13,451,681
Realized and unrealized gains/(losses) included in earnings			(255,268	)			(255,191	)
Fair value at June 30, 2009			13,199,235				13,196,490
Originations			12,088,125				12,652,205
Reclassification from member loans held for investment			564,080				—
Principal repayments			(1,536,522	)			(1,538,503	)
Outstanding principal			24,314,918				24,310,192
Realized and unrealized gains/(losses) included in earnings			(755,384	)			(755,222	)
Fair value at September 30, 2009			23,559,534				23,554,970
Originations			20,252,700				20,252,700
Principal repayments			(2,969,618	)			(2,979,129	)
Outstanding principal			40,842,616				40,828,541
Realized and unrealized gains/(losses) included in earnings			(1,113,416	)			(1,110,196	)
Fair value at December 30, 2009		$	39,729,200			$	39,718,345

The majority of realized and unrealized gains/(losses) included in earnings are attributable to changes in instrument-specific credit risk and are reported on the “Interest income, CM Loans, net” and “Interest income, Notes, net” line items. The majority of total realized and unrealized gains/(losses) were related to Level 3 instruments held at December 31, 2009.

At December 31, 2009, we had twelve CM Loans representing $82,210 of outstanding CM Loan principal and $48,180 of CM Loan fair value which were 90 days or more delinquent, and $48,166 of Notes principal fair value which had not been paid for 90 days or more. At December 31, 2009, we had thirty-five CM Loans representing $192,026 of outstanding CM Loan principal and $73,481 of CM Loan fair value which were on non-accrual status, and $73,445 of Notes principal fair value which were on non-accrual status.

6. Loans Payable

Loans payable consists of the following:

		As of December 31,				As of March 31,
		2009				2009
		(unaudited)
Growth capital term loan		$	3,407,676			$	2,704,571
Unamortized discount on growth capital term loan			(106,788	)			(61,376	)
Financing term loan			4,176,220				3,697,067
Unamortized discount on financing term loan			(181,461	)			(179,061	)
Notes payable to private placement investors			2,778,050				3,726,731
Unamortized discount on notes payable			(157,811	)			(240,128	)
Total loans payable		$	9,915,886			$	9,647,804

At December 31, 2009, future maturities due on all loans payable were as follows (unaudited):

Year ending March 31,
2010		$	1,483,613
2011			5,907,151
2012			2,601,694
2013			369,488
			10,361,946
Less amount representing debt discount			(446,060	)
Total loans payable		$	9,915,886

Growth capital term loan

In October 2007, we entered into a loan and security agreement with a bank that allowed for borrowings of up to $3,000,000 for working capital needs. In October 2008, we amended the agreement to increase available borrowing to $4,000,000. The loan is secured by substantially all of our assets except our intellectual property rights, payments received on our CM Loans, and certain deposit accounts. Borrowings bear interest at a fixed rate of 8.5% per annum. Each advance is repayable in 36 equal monthly installments of principal and interest commencing the first day of the month following the advance.

In connection with this loan agreement, we issued a fully exercisable warrant to purchase 98,592 shares of Series A convertible preferred stock at an exercise price of $1.065 per share, for which we recorded a debt discount of $84,263. The growth capital term loan also requires us to maintain a certificate of deposit with the bank of $150,000 until repayment. This amount is included in restricted cash in the accompanying balance sheets. At December 31, 2009, no amounts were available for future financing under this agreement.

On October 7, 2008, we entered into amendments to our growth capital term loan and financing term loan. These amendments became effective as of October 10, 2008, whereby the lenders waived certain or our past covenant violations and consented to our new operating structure. In connection with the amendments to one of these facilities, we issued the growth capital term loan lender a fully exercisable warrant to purchase 37,558 shares of Series A convertible preferred stock at an exercise price of $1.065 per share and recorded an debt discount of $29,782.

In December 2008, we drew down the remaining $1,000,000 of availability under this line and issued a fully exercisable warrant to purchase 28,170 shares of Series A convertible preferred stock at an exercise price of $1.065 per share, and recorded a debt discount of $21,651.

Amortization of the debt discounts recorded for this loan, as amended, were $16,529 and $7,623 in the three months ended December 31, 2009 and 2008, respectively, and $47,018 and $21,667, respectively, for the nine months ended December 31, 2009 and 2008, and were recorded as interest expense.

Financing term loan

In February 2008, we entered into a loan and security agreement with a lender that provides for financing of up to $5,000,000 to be lent out to borrower members funded by us. The financing term loan was available for advances through June 30, 2008, but was subsequently amended in October 2008 to allow availability through December 31, 2008. The interest rate is fixed at 10.0% per annum. The agreement requires that proceeds received from borrower member payments on member loans funded by us be used to pay down the financing term loan. The financing term loan is secured by substantially all of our assets except our intellectual property rights, payments received on the CM Loans, and certain deposit accounts. The financing term loan requires us to maintain a certificate of deposit with a bank of $250,000 until repayment. This amount is included in restricted cash in the accompanying balance sheets.

In February and March 2008, we received advances totaling $3,600,000. During the year ended March 31, 2009, we drew down the remaining $1,400,000 available under the financing term loan. In connection with this loan agreement, from inception through December 31, 2009, we issued fully exercisable warrants to purchase an aggregate of 328,637 shares of Series A convertible preferred stock at a price of $1.065 per share and recorded total debt discounts of $277,962. At December 31, 2009, the financing term loan was fully drawn.

Amortization of the debt discounts recorded for this loan were $30,866 and $21,881 in the three months ended December 31, 2009 and 2008, respectively, and $90,031 and $63,076, respectively, for the nine months ended December 31, 2009 and 2008, and were recorded as interest expense.

May 2009 term loan

On May 18, 2009, we entered into another secured loan facility, or the May 2009 term loan, with our growth capital term loan and financing term loan lenders, and amended our prior growth capital term loan and financing term loan to accommodate the new borrowing. The May 2009 term loan allows us to borrow up to $4,000,000 at an interest rate of 10.0% per annum. We also paid a commitment fee of $20,000 and $9,850 of the lenders’ expenses in connection with the facility. The borrowings were used to fund member loans. The borrowings are secured by a blanket lien on substantially all of our assets, except our intellectual property rights, certain deposit accounts and payments received on CM Loans. Additionally, the May 2009 term loan was secured with a certificate of deposit in the amount of $300,000 until repayment. This amount is included in restricted cash in the accompanying balance sheets. The lenders also received the right to invest up to $500,000 each in our next round of equity financing on the same terms offered to other investors. On a monthly basis, we also agreed to maintain a minimum collateral ratio calculated as (i) the sum of the certificate of deposit collateral and the outstanding balance of member loans funded with the borrowing which are current in their payment status to (ii) the outstanding balance under the loan facility. In the event that the minimum collateral ratio is less than the minimum allowed under the agreement, we must increase the certificate of deposit to meet the minimum collateral ratio. In connection with this loan facility, we issued each lender a fully exercisable warrant to purchase 187,090 shares of Series B convertible preferred stock with an exercise price of $0.7483 per share, (see Note 9 — Preferred Stock). We recorded a debt discount related to the issuance of these warrants of $184,860. Amortization of the debt discount related to this warrant is included in interest expense for the growth capital term loan and financing term loan, as further explained immediately below.

Effective August 3, 2009, we consolidated the growth capital term loan, the financing term loan and the May 2009 term loan into two loan agreements by executing an amended and restated growth capital term loan and an amended and restated financing term loan, together the “Newly Restated Agreements.” The terms of the Newly Restated Agreements are substantially the same as those of the three prior agreements, including that the borrowings continue to be secured by a blanket lien on substantially all of our assets, except for our intellectual property rights, certain deposit accounts, and payments we receive on the CM Loans. Additionally, the Newly Restated Agreement continues to require that Lending Club maintain combined certificates of deposit in the amount of $700,000 as collateral until repayment. Further, we agreed in the Newly Restated Agreements to maintain the same minimum collateral ratio as established in the May 2009 term loan. As of December 31, 2009, we had fully drawn down the entire $13,000,000 of combined availability under the Newly Restated Agreements.

Notes payable to private placement investors

During the year ended March 31, 2009, we entered into a series of loan and security agreements with accredited investors providing for loans evidenced by notes payable totaling $4,707,964. Each note is repayable over three years and bears interest at the rate of 12% per annum. In June and July 2009, we issued an additional $200,000 of notes which bear interest at the rate of 8% per annum. We are using the proceeds of these notes to fund member loans. In connection with origination of these notes payable, we issued fully exercisable warrants to purchase an aggregate of 514,817 shares of Series A convertible preferred stock (see Note 9 — Preferred Stock). We recorded a debt discount of $329,271, and amortization of the debt discount was recorded as interest expense of $27,439 and $24,390 for the three months ended December 31, 2009 and 2008, respectively. During the nine months ended December 31, 2009 and 2008, we recorded interest expense of $82,318 and $61,703, respectively, related to amortization of debt discounts.

7. Convertible Notes Payable

In January 2008, we issued subordinated convertible promissory notes, or the convertible notes, to two venture capital stockholders with principal amounts of $500,000 each, under the terms of a note and warrant purchase agreement. The convertible notes bore interest at the rate of 8% per annum, and principal and interest are due in full on January 24, 2010. In connection with the issuance of the convertible notes, we issued warrants to purchase an aggregate of 234,742 shares of Series A convertible preferred stock to the convertible notes holders and recorded a debt discount of $178,755. This debt discount was amortized into interest expense over the life of the convertible notes. At December 31, 2009, the unamortized balance of the debt discount was $0, and both the related interest expense recognized during the three months ended December 31, 2009 and 2008 was $0. During the nine months ended December 31, 2009 and 2008, the related interest expense was $0 and $156,410, respectively.

On September 29, 2008, the lenders converted the convertible notes, which had an outstanding principal balance of $1,000,000 and accrued interest of $54,575 into shares of Series A convertible preferred stock at a purchase price of $1.065 per share. We issued 495,106 shares of Series A convertible preferred stock for principal and interest to each venture capital stockholder for an aggregate total of 990,212 shares.

In accordance with FASB ASC 470-20 guidance on accounting for debt with conversion features and other options, the intrinsic value of the beneficial conversion feature (“BCF”) was determined to be equal to the fair value of the warrants as estimated above. Accordingly, we recorded a beneficial conversion feature of $178,755. This amount was amortized into interest expense over the life of the convertible notes. At December 31, 2009, the unamortized balance of the BCF was $0, and both the related interest expense recognized during the three months ended December 31, 2009 and 2008 was $0. During the nine months ended December 31, 2009 and 2008, the related interest expense was $0 and $156,410, respectively.

8. Related Party Transactions

Of the notes payable to private placement investors described in Note 6 — Loans Payable, $625,000 of original principal was invested by related parties on terms identical to those of given to the other private placement note investors.

9. Preferred Stock

Convertible preferred stock

In March 2009, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the State of Delaware, which increased the total number of shares which we are authorized to issue from 49,500,000 shares to 83,200,000 shares, 50,000,000 of which are designated as common stock, and 33,200,000 of which are designated as preferred stock.

In July 2009, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the State of Delaware, which increased the total number of shares which we are authorized to issue from 83,200,000 shares to 83,600,000 shares, 50,000,000 of which are designated as common stock, and 33,600,000 of which are designated as preferred stock.

A complete description of the rights, preferences, privileges and restrictions of our common stock and the Series A and Series B convertible preferred stock is included in the Amended and Restated Certificate of Incorporation, as amended, which was attached as an exhibit to our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. There are significant restrictions on the obligation or right to redeem the outstanding convertible preferred stock. None of our convertible preferred stock is considered permanent equity based on the guidance of SEC Accounting Series Release No. 268, “Presentation in Financial Statements of Redeemable Preferred Stocks.” The significant terms of outstanding Series A and Series B convertible preferred stock are as follows:

Conversion — Each share of Series A and Series B convertible preferred stock is convertible, at the option of the holder, initially, into one share of common stock (subject to adjustments for events of dilution). The Series A and Series B convertible preferred stock will each automatically be converted upon the earlier of (i) the closing of an underwritten public offering of our common stock with aggregate gross proceeds that are at least $20,000,000 or (ii) the consent of the holders of a 55% majority of outstanding shares of Series A and Series B convertible preferred stock, voting together as a single class, on an as-converted to common stock basis.

Liquidation preference — Upon any liquidation, winding up or dissolution of us, whether voluntary or involuntary (a “Liquidation Event”), before any distribution or payment shall be made to the holders of any common stock, the holders of Series A and Series B convertible preferred stock shall, on a pari passu basis, be entitled to receive by reason of their ownership of such stock, an amount per share of Series A convertible preferred stock equal to the original issue price of $1.065 for the Series A convertible preferred stock plus all declared and unpaid dividends (the “Series A Preferred Liquidation Preference”) and an amount per share of Series B convertible preferred stock equal to the original issue price of $0.7483 for the Series B convertible preferred stock plus all declared and unpaid dividends (the “Series B Preferred Liquidation Preference”). However, if upon any such Liquidation Event, the assets of ours shall be insufficient to make payment in full to all holders of convertible preferred stock of their respective liquidation preferences, then the entire assets of ours legally available for distribution shall be distributed with equal priority between the holders of Series A convertible preferred stock and Series B convertible preferred stock such that an equal amount of such assets shall be distributed to the holders of Series A convertible preferred stock, in the aggregate, and the holders of Series B convertible preferred stock, in the aggregate (such assets being distributed ratably among the holders of each respective series of convertible preferred stock). Furthermore, if the holders of Series B convertible preferred stock have received their full Series B Preferred Liquidation Preference but the holders of Series A convertible preferred stock have not received their full Series A Preferred Liquidation Preference, any remaining assets of ours legally available for distribution shall be distributed ratably to the holders of Series A convertible preferred stock, prior to any further payment to the holders of shares of Series B convertible preferred stock or payment to the holders of common stock, until such holders have received their full Series A Preferred Liquidation Preference. Any excess distributions, after payment in full of the liquidation preferences to the convertible preferred stockholders, are then allocated to the holders of common and convertible preferred stockholders, on an as-if-converted to common stock basis.

Dividends — If and when declared by the Board of Directors, the holders of Series A and Series B convertible preferred stock, on a pari passu basis, will be entitled to receive non-cumulative dividends at a rate of 6% per annum in preference to any dividends on common stock (subject to adjustment for certain events). The holders of Series A and Series B convertible preferred stock are also entitled to receive with common stockholders, on an as-if-converted basis, any additional dividends issued by us.

Voting rights — Generally, preferred stockholders have one vote for each share of common stock that would be issuable upon conversion of preferred stock. Voting as a separate class, and on an as-if-converted to common stock basis, the Series A convertible preferred stockholders are entitled to elect two members of the Board of Directors and the holders of Series B convertible preferred stockholders are entitled to elect one member of the Board of Directors. The holders of common stock, voting as a separate class, are entitled to elect one member of the Board of Directors. The remaining directors are elected by the preferred stockholders and common stockholders voting together as a single class on an as-if-converted to common stock basis.

Preferred stock warrants

In May 2009, in connection with the May 2009 term loan (See Note 6 — Loans Payable, May 2009 term loan), we issued fully exercisable warrants to purchase 374,180 shares of Series B convertible preferred stock at $0.7483 per share. The warrants may be exercised at any time on or before May 2019. The fair value of these warrants was estimated to be $184,860 using the Black-Scholes option pricing model with the following assumptions: a volatility of 57.4%, a contractual life of 10 years, no dividend yield and a risk-free interest rate of 3.22%. These values were capitalized as debt discounts and are being amortized to interest expense over the life of the term loans.

10. Stockholders’ Deficit

Common stock

As of December 31, 2009, we have reserved shares of common stock for future issuance as follows (unaudited):

Convertible preferred stock, Series A			15,740,285
Convertible preferred stock, Series B			16,036,346
Options to purchase common stock			2,979,750
Options available for future issuance			3,474,989
Convertible preferred Series A stock warrants			1,265,990
Convertible preferred Series B stock warrants			374,180
Common stock warrants			104,000
Total common stock reserved for future issuance			39,975,540

During the three months ended December 31, 2009, we issued 16,263 shares of common stock in exchange for proceeds of $4,391 upon the exercise of employee stock options and 221,000 shares upon the exercise of warrants for $0.

11. Stock-Based Compensation

Under our 2007 Stock Incentive Plan, or the Option Plan, we may grant options to purchase shares of common stock to employees, executives, directors and consultants at exercise prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory options. An aggregate of 6,548,000 shares have been authorized for issuance under the Option Plan. These options generally expire ten years from the date of grant and generally vest 25% twelve months from the date of grant, and ratably over the next 12 quarters thereafter.

The Option Plan allows for employees to early exercise options on the first anniversary date of employment, regardless of the vested status of granted options. If an employee’s employment is terminated prior to fully vesting in options that have been early exercised, we may repurchase the common stock associated with unvested options at the original exercise price. As of December 31, 2009, none of the option holders have chosen to early exercise.

We used the Black-Scholes option pricing model for estimating the fair value of stock options granted with the following assumptions for the three and nine months ended December 31, 2009 and 2008 (unaudited):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Expected dividend yield			0	%			—				0	%			0	%
Expected volatility			59.4% – 61.5	%			—				53.8% – 61.5	%			63.6	%
Risk-free interest rates			2.72% – 3.60	%			—				2.72% – 3.60	%			3.38	%
Expected life		6.00 – 10.00 years					—			5.92 – 10.00 years				6.11 years

We have elected to use the calculated-value method under FASB ASC 718 to calculate the volatility assumption for fiscal 2009 and 2008. The expected life assumption was determined based upon historical data gathered from public peer companies. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. We have paid no cash dividends and do not anticipate paying any cash dividends in the foreseeable future and therefore used an expected dividend yield of zero in our option-pricing models.

Options activity under the Option Plan is summarized as follows (unaudited except for balances at March 31, 2009):

										Options Exercisable and Not Subject to
		Options Outstanding								Repurchase
														Weighted Average
		Shares Available												Exercise Price per
		for Grant				Number of Shares				Number of Shares				Share
Balances at March 31, 2009			4,638,765				1,878,550				756,312			$	0.27
Options Granted			(2,195,978	)			2,195,978				—				0.23
Options Exercised			—				(62,576	)			—				0.27
Options Cancelled			1,032,202				(1,032,202	)			—				0.24
Balances at December 31, 2009			3,474,989				2,979,750				947,830			$	0.25

A summary by exercise price of outstanding options and options exercisable and not subject to repurchase at December 31, 2009, is as follows (unaudited):

Options Exercisable and

Options Outstanding

Not Subject to Repurchase

Weighted

Weighted

Weighted

Average

Average

Average

Exercise

Remaining

Exercise

Number of

Price per

Contractual

Number of

Price per

Shares

Share

Life (Years)

Shares

Share

Exercise price $0.23

1,464,500

$

0.23

9.43

105,250

$

0.23

Exercise price $0.27

1,515,250

$

0.27

7.89

842,580

$

0.27

The following table presents details of stock-based compensation expenses by functional line item for the periods indicated (unaudited):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Sales, marketing and customer service		$	9,536			$	2,710			$	29,896			$	7,383
Engineering			15,173				8,686				43,093				24,042
General and administrative			13,715				8,926				40,671				21,929
			38,424				20,322				113,660				53,354
Less stock-based compensation expense for non-employees			(1,416	)			(1,416	)			(4,247	)			(3,163	)
Total employee stock-based compensation expense		$	37,008			$	18,906			$	109,413			$	50,191

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

During the nine months ended December 31, 2009 and 2008, we granted stock options to purchase 2,195,978 and 964,800 shares, respectively, of common stock with a weighted average grant date fair value of $0.13 and $0.17, respectively, per share. We granted stock options to purchase 571,500 shares of common stock in the three months ended December 31, 2009 with a weighted average grant date fair value of $0.14 per share. As of December 31, 2009, total unrecognized compensation cost was $241,417. These costs are expected to be recognized through October 2013.

12. Income Taxes

As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves determining our income tax expense or benefit together with calculating the deferred income tax expense or benefit related to temporary differences resulting from differing treatment of items, such as deferred revenue or deductibility of certain intangible assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the accompanying balance sheet. We must then assess the likelihood that the deferred tax assets will be recovered through the generation of future taxable income.

As of December 31, 2009, we continued to have a full valuation allowance against our net deferred tax assets. We believe that our deferred tax assets will more likely than not be realized. For the three months ended December 31, 2009, we were in a loss position. We did not have any foreign operations and therefore did not record any tax provisions during the period.

We adopted the provisions of FASB ASC 740 on April 1, 2007. FASB ASC 740 clarifies the accounting for uncertainty in tax positions and requires that companies recognize in their financial statements the largest amount of a tax position that is more-likely-than-not to be sustained upon audit, based on the technical merits of the position. The adoption of FASB ASC 740 did not affect our financial condition, results of operations or cash flows for the fiscal year ended March 31, 2009.

We file income tax returns in the U.S. federal jurisdiction and California jurisdictions. Our tax years for 2006 and forward are subject to examination by the U.S. and California tax authorities as the statutes of limitation are still open.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FASB ASC 740, we did not have any unrecognized tax benefits and associated accrued interest or penalties nor was any interest expense or penalties recognized during the fiscal year ended March 31, 2009.

13. Net Interest Income

Revenues primarily result from interest income and transaction fees. Transaction fees include origination fees (borrower member paid) and investor service charges (investor paid). Interest income is accrued and recorded in the accompanying statements of operations as collected. We classify interest and fees earned on our member loans together as interest income in these financial statements.

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The following table summarizes net interest income (expense) as follows (unaudited):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Interest income:
Member loans held for investment		$	329,423			$	325,787			$	1,016,809			$	763,107
CM Loans held for investment at fair value
Interest and fees earned on CM Loans			1,582,662				71,809				2,807,892				71,809
Credit risk related adjustment (interest expense)			(1,113,130	)			(129,285	)			(2,123,782	)			(129,285	)
Cash and cash equivalents			2,882				13,446				23,951				13,446
Total interest income		$	801,837			$	281,757			$	1,724,870			$	719,077
Interest expense:
Notes held for investment at fair value
Interest and fees expensed on Notes		$	839,090			$	15,139			$	1,535,422			$	15,139
Credit risk related adjustment (interest income)			(1,112,868	)			(129,260	)			(2,123,280	)			(129,260	)
Loans payable			294,324				235,515				875,236				513,411
Convertible notes payable			—				—				—				39,890
Amortization of debt discount			74,834				53,895				219,366				459,267
Amortization of BCF			—				—				—				156,410
Total interest expense		$	95,380			$	175,289			$	506,744			$	1,054,857

A reconciliation of the table above to our Condensed Statements of Operations is as follows (unaudited):

Per table above:
Total interest income		$	801,837			$	281,757			$	1,724,870			$	719,077
Total interest expense			(95,380	)			(175,289	)			(506,744	)			(1,054,857	)
		$	706,457			$	106,468			$	1,218,126			$	(335,780	)
Per Condensed Statements of Operations:
Net interest income (loss), loans held for investment		$	(36,853	)		$	49,823			$	(53,842	)		$	(364,512	)
Net interest income (loss), CM Loans and Notes held for investment at fair value			743,310				56,645				1,271,968				56,645
		$	706,457			$	106,468			$	1,218,126			$	(307,867	)

14. Commitments and Contingencies

Operating leases

We lease our principal administrative and service facilities, as well as office equipment, under a two year operating lease. Rent expense was $36,275 and $36,500 for the three months ended December 31, 2009 and 2008, respectively, and $109,977 and $110,900 for the nine months ended December 31, 2009 and 2008, respectively.

Securities law compliance

From May 2007 through April 2008, we sold approximately $7.4 million of member loans to investor members who were unaffiliated with us through our platform whereby we assigned promissory notes directly to investor members. We did not register the offer and sale of the promissory notes offered and sold through our platform under the Securities Act of 1933 or under the registration or qualification provisions of the state securities laws. Our management believes that the question of whether or not the operation of our platform involved an offer or sale of a “security” involved a complicated factual and legal analysis that was uncertain. If the sales of promissory notes offered through our platform were viewed as a securities offering, we would have failed to comply with the registration and qualification requirements of federal and state law, and investor members who hold these promissory notes may be entitled to rescission of unpaid principal, plus statutory interest. Generally, the federal statute of limitations for noncompliance with the requirement to register securities under the Securities Act of 1933 is one year from the violation. The statute of limitations periods under state securities laws for sales of unregistered securities may extend for a longer period of time, and certain state securities laws empower state officials to seek restitution or rescission remedies for purchasers of unregistered securities. We have received inquiries from a number of states in respect of these prior sales of loans; neither the SEC nor any state, however, has taken or threatened administrative action or litigation over such loan sales.

Our decision to restructure our operations and cease sales of promissory notes offered through the platform effective April 7, 2008 limited this contingent liability so that it only relates to the period from the launch of our platform in May 2007 until April 7, 2008, the termination of sales under our prior operating structure.

We have not recorded an accrued loss contingency under FASB ASC 450 in connection with this contingent liability. Accounting for loss contingencies pursuant to FASB ASC 450 involves the existence of a condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future event(s) occur or fail to occur. Additionally, accounting for a loss contingency requires management to assess each event as probable, reasonably possible or remote. Probable is defined as the future event or events are likely to occur. Reasonably possible is defined as the chance of the future event or events occurring is more than remote but less than probable, while remote is defined as the chance of the future event or events occurring is slight. An estimated loss in connection with a loss contingency shall be recorded by a charge to current operations if both of the following conditions are met: first, the amount can be reasonably estimated; and second, the information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements. We have assessed the contingent liability related to prior sales of member loans on the platform in accordance with FASB ASC 450 and have determined that the occurrence of the contingency is reasonably possible. In accordance with FASB ASC 450, we have estimated the range of loss as of December 31, 2009 as between $0 and $2.54 million, which is, as of December 31, 2009, the aggregate outstanding principal balance of member loans sold to persons unaffiliated with us from inception through April 7, 2008. In making this assessment, we considered our view, described above, that analyzing whether or not the operation of our platform involved an offer or sale of a “security” involved a complicated factual and legal analysis that was uncertain. In addition, we considered our belief that investor members have received what they expected to receive in the transactions under our prior operating structure. Generally, the performance of the outstanding member loans had, in our view, delivered to investor members the benefits they expected to receive in using our platform.

Due to the legal uncertainty regarding the sales of promissory notes offered through our platform under our prior operating structure as described above, we decided to restructure our operations to resolve such uncertainty. We began our implementation of this decision on April 7, 2008, when we ceased offering investor members the opportunity to make purchases on our platform, ceased accepting new investor member registrations and ceased allowing new funding commitments from existing investor members. We then filed the registration statement (the “Registration Statement”) with the SEC to register the issuance and sale of Notes under our new operating structure. We resumed accepting new investor members and allowing transactions with investor members starting October 13, 2008, after the date the Registration Statement became effective.

The change in the operation of our platform, as well as our adoption of new accounting pronouncements, had a significant impact on our financial statements and results of operations for periods following the effective date of the Registration Statement. Because the Notes are a novel financing structure, we will continue to evaluate the impact the changes this shift in our operations will have on our financial condition, results of operations and cash flows.

We adopted the provisions of FASB ASC 820 and FASB ASC 825. FASB ASC 825 permits companies to choose to measure certain financial instruments and certain other items at fair value. FASB ASC 825 requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We applied the provisions of FASB ASC 825 to the CM Loans and Notes issued under our prospectus, but did not apply the provisions of FASB ASC 825 to prior member loans which were sold to our investor members.

15. Subsequent Events

Subsequent to December 31, 2009 and through the date immediately prior to the release of these financial statement, we increased by $100,000 the amount of restricted cash that supports certain state surety bonds required to allow us to offer loans in certain states.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in Part II Item 1A “Risk Factors.” Actual results could differ materially. Important factors that could cause actual results to differ materially include, but are not limited to; the level of demand for our products and services; the intensity of competition; our ability to effectively expand and improve internal infrastructure; and adverse financial, customer and employee consequences that might result to us if litigation were to be initiated and resolved in an adverse manner to us. For a more detailed discussion of the risks relating to our business, readers should refer to Part II Item 1A found later in this report entitled “Risk Factors,” as well as the “Risk Factors” section of the prospectus for the Notes dated July 30, 2009 and filed with the SEC, as may be amended or supplemented from time to time. Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report. We assume no obligation to update these forward-looking statements.

Overview

We are an internet-based social lending platform. We allow qualified borrower members to obtain loans (which we refer to as “member loans”) with interest rates that they find attractive. Since October 13, 2008, investors have had the opportunity to purchase Member Payment Dependent Notes (which we refer to as the “Notes”) issued by us, with each series of Notes corresponding to an individual member loan originated on our platform (which we refer to as “CM Loans”). The Notes are dependent for payment on CM Loans and offer interest rates and credit characteristics that the investors find attractive. From the launch of our platform in May 2007 until April 7, 2008, we did not offer Notes on our platform. Instead, our platform allowed investor members to purchase assignments of unsecured member loans directly. Since November 2007, we have also funded member loans ourselves, which we refer to as “member loans held for investment” based on our intent and ability to hold the loans for the foreseeable future or to maturity.

All member loans are unsecured obligations of individual borrower members with fixed interest rates and three-year maturities. The member loans are posted on our website, funded by WebBank, an FDIC-insured, state-chartered industrial bank organized under the laws of the state of Utah, at closing and immediately assigned to us upon closing. As a part of operating our lending platform, we verify the identity of members, obtain borrower members’ credit characteristics from consumer reporting agencies such as TransUnion, Experian or Equifax and screen borrower members for eligibility to participate in the platform and facilitate the posting of member loans. We also provide servicing for the member loans on an ongoing basis.

We were incorporated in Delaware in October 2006, and in May 2007, began operations as an application on Facebook.com. In August 2007, we conducted a venture capital financing round and expanded our operations with the launch of our public website, www.lendingclub.com. As of December 31, 2009, the lending platform has facilitated approximately 8,277 member loans since our launch in May 2007.

We have been operating since December 2007 pursuant to an agreement with WebBank. WebBank serves as the lender for all member loans originated through our platform. Our agreement with WebBank has enabled us to make our platform available to borrower members on a uniform basis nationwide, except that as of January 31, 2010, we do not currently offer member loans in Idaho, Iowa, Indiana, Kansas, Maine, Mississippi, Nebraska, North Carolina, North Dakota and Tennessee. We pay WebBank a monthly service fee based on the amount of loan proceeds disbursed by WebBank in each month, subject to a minimum monthly fee.

We have a limited operating history and have incurred net losses since our inception. Our net loss was $2,124,712 and $7,798,794, respectively, for the three and nine months ended December 31, 2009. We earn revenues from processing fees charged to members, primarily a borrower member origination fee and an investor service charge. We also earn interest income on member loans that we fund ourselves. At this stage of our development, we have funded our operations primarily with proceeds from our venture capital financings, our credit facilities and debt and equity issuances, which are described below under “Liquidity and Capital Resources.” We also rely on our credit facilities and debt issuances to borrow funds, which we have used to fund member loans ourselves. Over time, we expect that the number of borrower members and investors and the volume of member loans originated through our platform will increase, and that we will generate increased revenue from borrower origination fees and investor service charges. Our decision to temporarily stop accepting investor member commitments, effective from April 7, 2008 until October 13, 2008, slowed the ramp up of our operations and expended liquidity as we funded member loans ourselves during this period.

Our operating plan allows for a continuation of the current strategy of raising capital through debt and equity financings to finance our operations until we reach profitability and become cash-flow positive, which we do not expect to occur within the next twelve months. Our operating plan calls for significant investments in website development, security, loan scoring, loan processing and marketing before we reach profitability. During the year ended March 31, 2009, we raised $5,386,893, net of issuance costs, from the sale of 5,112,672 shares of our Series A convertible preferred stock, $1,054,575 from the conversion of principal and interest on our convertible notes into 990,212 shares of our Series A convertible preferred stock, and $11,897,738, net of issuance costs, from the sale of 16,036,346 shares of our Series B convertible preferred stock. During the year ended March 31, 2008, we raised $9,925,001, net of issuance costs, from the sale of 9,445,401 shares of our Series A convertible preferred stock and $1,499,265 from the sale of 2,216,500 shares of our common stock. From October 2007 through March 31, 2009, we also raised $13,707,964 through the issuance of notes payable in connection with our growth capital term loan, financing term loan and private placement notes. During the nine months ended December 31, 2009, we raised $4,200,000 through the issuance of notes payable in connection with our May 2009 term loan and our private placement notes.

Recently, our platform has become increasingly demand, or borrower, constrained which is in contrast to the supply, or investor, constraints we had previously experienced.  We are uncertain if this trend of supply constraints will continue or if the platform will revert to being demand constrained.

We believe that this shift could be due to the following three factors:

•

our longer track record and current 9% net average annual return that has prompted investors to invest larger amounts and maintain their capital on the platform longer

•

investors are repeat customers while borrowers generally take one loan for a three year term and we do limited repeat business with borrowers given our credit criteria

•

on the macro-economic side, investors appear to be less risk-averse than in prior years.

In spite of this shift, we do not plan to revise our credit criteria, which must be approved by WebBank, in order to attract additional borrowers.

Significant Accounting Policies and Estimates

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in our financial statements and accompanying notes. We believe that the judgments, assumptions and estimates upon which we rely are reasonable based upon information available to us at the time that these judgments, assumptions and estimates are made. However, any differences between these judgments, assumptions and estimates and actual results could have a material impact on our statement of operations and financial condition. The accounting policies that reflect our most significant judgments, assumptions and estimates and which we believe are critical in understanding and evaluating our reported financial results include: (1) revenue recognition; (2) fair value; (3) allowance for loan losses; and (4) share-based compensation. Other than the changes described in Note 2 — Summary of Significant Accounting Policies, Revenue recognition and Note 2 — Summary of Significant Accounting Policies, CM Loans and Notes held for investment at fair value of the Notes to Financial Statements above, there have been no material changes to any of our significant accounting policies and critical accounting estimates since March 31, 2009.

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Results of Operations

Revenues

Our business model consists primarily of charging transaction fees to both borrower members and investor members. The borrower member pays a fee to us for providing the services of arranging the member loan and the investor member pays a fee to us for managing the payments on the member loans and maintaining account portfolios. We also generate revenue from interest earned on our member loans held for investment and our CM Loans and recognize interest expense on our Notes.

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Interest income:
Member loans held for investment		$	329,423			$	325,787			$	1,016,809			$	763,107
CM Loans held for investment at fair value
Interest and fees earned on CM Loans			1,582,662				71,809				2,807,892				71,809
Credit risk related adjustment (interest expense)			(1,113,130	)			(129,285	)			(2,123,782	)			(129,285	)
Cash and cash equivalents			2,882				13,446				23,951				13,446
Total interest income		$	801,837			$	281,757			$	1,724,870			$	719,077
Interest expense:
Notes held for investment at fair value
Interest and fees expensed on Notes		$	839,090			$	15,139			$	1,535,422			$	15,139
Credit risk related adjustment (interest income)			(1,112,868	)			(129,260	)			(2,123,280	)			(129,260	)
Loans payable			294,324				235,515				875,236				513,411
Convertible notes payable			—				—				—				39,890
Amortization of debt discount			74,834				53,895				219,366				459,267
Amortization of BCF			—				—				—				156,410
Total interest expense		$	95,380			$	175,289			$	506,744			$	1,054,857

Interest Income

The following table presents our quarterly interest income sources in both absolute dollars and as a percentage of interest income (in thousands):

		For the Quarter Ended
Interest		March 31,								June 30,								September 30,								December 31,
Income		2008								2008								2008								2008
Source		$				%				$				%				$				%				$				%
Borrower origination fees earned on third party purchased member loans			64				30				20				9				0				0				0				0
Borrower origination fees and interest earned on member loans held for investment			109				50				177				82				240				96				326				116
Borrower origination fees and interest earned on CM Loans held for investment, net of interest expense on the related Notes			0				0				0				0				0				0				(57	)			-20
Interest earned on cash and investments			43				20				18				9				10				4				13				5
Total Interest Income			216				100				215				100				250				100				282				100

		For the Quarter Ended
Interest		March 31,								June 30,								September 30,								December 31,
Income		2009								2009								2009								2009
Source		$				%				$				%				$				%				$				%
Borrower origination fees earned on third party purchased member loans			0				0				0				0				0				0
Borrower origination fees and interest earned on member loans held for investment			284				62				316				65				371				49				329				31
Borrower origination fees and interest earned on CM Loans held for investment, net of interest expense on the related Notes			166				36				155				32				374				50				743				69
Interest earned on cash and investments			8				2				17				3				4				1				3				0
Total Interest Income			458				100				488				100				749				100				1,075				100

Borrower Origination Fees

Our borrower members pay a one-time fee to us for arranging a member loan. This fee is determined by the loan grade of the member loan.

Prior to June 17, 2008, our origination fees ranged from 0.75% to 2.00% of the aggregate principal amount of the member loan, as set forth below:

Loan
Grade		A				B				C				D				E				F				G
Fee			0.75	%			1.00	%			1.50	%			2.00	%			2.00	%			2.00	%			2.00	%

From June 17, 2008 to November 24, 2008, our origination fees ranged from 0.75% to 3.00% of the aggregate principal amount of the member loan, as set forth below:

Loan
Grade		A				B				C				D				E				F				G
Fee			0.75	%			1.50	%			2.00	%			2.50	%			2.75	%			3.00	%			3.00	%

Beginning November 25, 2008, our origination fees increased ranging from 0.75% to 3.50% of the aggregate principal amount of the member loan, as set forth below:

Loan
Grade		A				B				C				D				E				F				G
Fee			0.75	%			2.50	%			3.00	%			3.50	%			3.50	%			3.50	%			3.50	%

Beginning July 30, 2009, our origination fees increased ranging from 1.25% to 3.75% of the aggregate principal amount of the member loan, as set forth below:

Loan
Grade		A				B				C				D				E				F				G
Fee			1.25	%			3.25	%			3.75	%			3.75	%			3.75	%			3.75	%			3.75	%