As filed with the Securities and Exchange Commission on December 1, 2014
Registration No. 333-198393
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
Under
the Securities Act of 1933
LendingClub Corporation
(Exact name of Registrant as specified in its charter)
Delaware | 6199 | 51-0605731 | ||
(State or Other Jurisdiction of Incorporation or Organization |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
LendingClub Corporation
71 Stevenson Street, Suite 300
San Francisco, California 94105
(415) 632-5600
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)
Renaud Laplanche
Chief Executive Officer
LendingClub Corporation
71 Stevenson Street, Suite 300
San Francisco, California 94105
(415) 632-5600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Please send copies of all communications to:
Cynthia C. Hess, Esq. Jeffrey R. Vetter, Esq. James D. Evans, Esq. Fenwick & West LLP 801 California Street Mountain View, California 94041 (650) 988-8500 |
Jason Altieri, Esq. General Counsel and Chief Compliance Officer LendingClub Corporation 71 Stevenson Street, Suite 300 San Francisco, California 94105 (415) 632-5600 |
Kurt J. Berney, Esq. Eric C. Sibbitt, Esq. OMelveny & Myers LLP Two Embarcadero Center, 28th Floor San Francisco, California 94111 (415) 984-8700 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered |
Amount
to be
|
Proposed
offering price
|
Proposed
offering price (2) |
Amount of registration fee (3) |
||||
Common stock, $0.01 par value per share |
66,355,000 shares | $12.00 | $796,260,000 | $98,826 | ||||
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(1) | Includes an additional 8,655,000 shares that the underwriters have the option to purchase. |
(2) | Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended. |
(3) | The Registrant previously paid $64,400 in connection with a prior filing of this Registration Statement. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued December 1, 2014
57,700,000 Shares
COMMON STOCK
LendingClub Corporation is offering 50,000,000 shares of its common stock and the selling stockholders are offering 7,700,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares of common stock. We anticipate that the initial public offering price will be between $10.00 and $12.00 per share.
Our common stock has been authorized for listing on the New York Stock Exchange under the symbol LC.
Investing in our common stock involves risks. See Risk Factors beginning on page 14.
PRICE $ A SHARE
Price to
Public |
Underwriting
Discounts and Commissions (1) |
Proceeds
to
LendingClub |
Proceeds
to
Selling Stockholders |
|||||||||||||
Per share |
$ | $ | $ | $ | ||||||||||||
Total |
$ | $ | $ | $ |
(1) | See Underwriters for a description of the compensation payable to the underwriters. |
At our request, the underwriters have reserved up to 10% of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers, employees, investors that have invested through our marketplace as of September 30, 2014 and other individuals related to us. See UnderwritersDirected Share Program.
We have granted the underwriters the option to purchase up to an additional 8,655,000 shares of common stock.
The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to purchasers on , 2014.
MORGAN STANLEY | GOLDMAN, SACHS & CO. |
CREDIT SUISSE |
CITIGROUP |
ALLEN & COMPANY LLC
STIFEL | BMO CAPITAL MARKETS | WILLIAM BLAIR | WELLS FARGO SECURITIES |
, 2014
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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87 |
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Material U.S. Federal Tax Consequences to Non-U.S. Holders of Our Common Stock |
150 | |||
154 | ||||
159 | ||||
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159 | ||||
F-1 |
Neither we, the selling stockholders nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the selling stockholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
For investors outside the United States: Neither we, the selling stockholders nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.
i
This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.
LENDINGCLUB CORPORATION
Our Mission
Transforming the banking system to make credit more affordable and investing more rewarding.
Overview
Lending Club is the worlds largest online marketplace connecting borrowers and investors. Our marketplace has facilitated over $6 billion in loan originations since it first launched in 2007, of which approximately $1.8 billion were invested in through notes issued pursuant to a shelf registration statement (Note Registration Statement), $2.5 billion were invested in through certificates issued by an independent trust (Trust) and $1.7 billion were invested in through whole loan sales. In the third quarter of 2014, our marketplace facilitated nearly $1.2 billion in loan originations, of which approximately $0.2 billion were invested in through notes issued pursuant to the Note Registration Statement, $0.3 billion were invested in through certificates issued by the Trust and $0.5 billion were invested in through whole loan sales. We believe a technology-powered online marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors. We have built a trusted brand with a track record of delivering exceptional value and satisfaction to both borrowers and investors.
Key advantages we have relative to traditional banks include:
| an innovative marketplace model that efficiently connects the supply and demand of capital; |
| online operations that substantially reduce the need for physical infrastructure and improve convenience; and |
| automation that increases efficiency, reduces manual processes and improves borrower and investor experience. |
For consumers and small business borrowers, we leverage our cost advantages and marketplace model to provide borrowers with affordable credit. We utilize our technology to provide a better experience, offering borrowers a convenient, simple and fast online application that improves the often time-consuming and frustrating loan application process. We design our products to be fair, transparent and borrower-friendly. All of the installment loans offered through our marketplace feature fixed rates, fixed monthly payments, no hidden fees and no prepayment penalties.
For individual and institutional investors, we deliver value by providing them with the opportunity to earn attractive risk-adjusted returns through equal access to standard program loans offered through our marketplace. Our marketplace provides investors with the transparency and flexibility to quickly and easily tailor or modify their portfolio by utilizing specific investment criteria, such as credit attributes, financial data and loan characteristics. We use proprietary credit decisioning and scoring models and extensive historical loan performance data to provide investors with tools to construct loan portfolios confidently and model targeted
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returns. Our technology-powered marketplace enables broad diversification by allowing investors to invest in individual loans in increments as low as $25.
Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans are three- or five-year personal loans made to borrowers with a FICO score of at least 660 and that meet other strict credit criteria. These loans can be invested in through the purchase of notes issued pursuant to the Note Registration Statement, which are only available through our website. Separately, qualified investors may also invest in standard program loans in private transactions with a separate issuer not facilitated through our website. Custom program loans are only invested in through private transactions with qualified investors and cannot be invested in through notes and are not visible through our public website. Custom program loans are generally new offerings, and currently include loans that do not meet the requirements of the standard program and loans with longer maturities than we believe to be attractive to most note investors. Small business loans, personal loans that do not meet the requirements of the standard program and education and patient finance loans are all part of our custom loan program.
We have developed our proprietary technology platform to support our marketplace and make available a variety of loan products to interested investor channels. Our proprietary technology automates key aspects of our operations, including the borrower application process, data gathering, credit decisioning and scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. Our extensible technology platform has allowed us to expand our offerings from personal loans to include small business loans, and to expand investor classes from individuals to institutions and create various investment vehicles. Our platform also ensures that custom program loans are invested in through private transactions with a separate issuer and only with qualified investors, while at the same time allowing standard program loans to be available for investment through our notes and also through separate, private transactions with a separate issuer.
To further enhance our offerings, we make our marketplace and platform available to complementary partners, such as banks, asset managers, insurance companies, partner websites and technology companies, to offer new investment and borrower products, develop new tools for use on our platform and serve as a referral source for investors and borrowers. Ecosystem partners that serve as a source of referrals include financial websites, as well as consumer product providers. These types of relationships are marketing-focused, referring investors to our website to open note accounts or borrowers to our website to apply for a loan. These partners generally provide a link on their website to our website highlighting it as an alternative investment or financing source. The potential note investor or borrower can then click on the link and, if interested, can start the applicable process. In addition, leveraging our publicly available application program interface and downloadable data files, our technology partners, with whom we have no compensation arrangements, have developed applications to facilitate automated investing based on preset criteria controlled by their clients and to build credit models and filters in addition to those provided by us to investors. We do not pay for the development of these additional models and filters, which are only available to the developers clients and are not made publicly available by us. Our financial ecosystem partners provide additional financial products and opportunities for their own clients, such as pooled-investment vehicles with a variety of investment strategies. We believe that the opportunities and technology provided by these ecosystem partners complement our marketplace and that our partners will help expand the attractiveness and availability of our marketplace.
We generate revenue from transaction fees from our marketplaces role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. The capital to invest in the loans enabled through our marketplace comes directly from a wide range of investors, including retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans and university endowments, and through a variety of channels, such as borrower
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payment dependent investment securities and whole loan purchases. We believe our strategy of pursuing a diverse investor base will continue to strengthen our marketplace and improve our ability to facilitate a wide variety of loans through a range of business and economic conditions.
We have experienced significant growth since our marketplace launched in 2007. For the years ended December 31, 2012 and 2013, we facilitated loan originations through our marketplace of $717.9 million and $2.1 billion, respectively, representing an increase of 188%. For the nine months ended September 30, 2013 and 2014, we facilitated loan originations through our marketplace of $1.4 billion and $3.0 billion, respectively, representing an increase of 117%. For the years ended December 31, 2012 and 2013, our total net revenue was $33.8 million and $98.0 million, respectively, representing an increase of 190%. For the nine months ended September 30, 2013 and 2014, our total net revenue was $64.5 million and $143.0 million, respectively, representing an increase of 122%. As our business has grown, we have achieved increasing levels of operational efficiency while continuing to invest in our business. For the years ended December 31, 2012 and 2013, our adjusted EBITDA was $(4.9) million and $15.2 million, respectively. For the nine months ended September 30, 2013 and 2014, our adjusted EBITDA was $8.7 million and $13.4 million, respectively, representing an increase of 54%. See Managements Discussion and Analysis of Financial Condition and Results of OperationsReconciliations of Non-GAAP Financial Measures for a description of adjusted EBITDA and its limitations. See Loan Volume for more information regarding the volume of our loan originations.
Industry Background and Trends
There is an opportunity for the online marketplace model to transform the traditional banking system. We believe a transparent and open marketplace where borrowers and investors have access to information, complemented by technology and tools, can make credit more affordable, redirect existing pools of capital trapped inside the banking system and attract new sources of capital to a new asset class. We believe online marketplaces have the power to facilitate more efficient deployment of capital and improve the global economy.
| Personal and Small Business Lending Is Essential to the Economy . We believe the ability of individuals and small businesses to access affordable credit is essential to stimulating and sustaining a healthy, diverse and innovative economy. According to the Board of Governors of the Federal Reserve System, as of September 2014, the balance of outstanding consumer credit in the United States totaled $3.3 trillion. This amount included $882 billion of revolving consumer credit, which many consumers seek to refinance. According to the Federal Deposit Insurance Corporation (FDIC), as of June 30, 2014, there were $298 billion of commercial and industrial loans outstanding under $1 million. |
| Borrowers Are Inadequately Served by the Current Banking System . We believe that traditional banks have higher fixed costs of underwriting and servicing, are ill-suited to meet personal and small business demand for small balance loans and have instead relied heavily on issuing credit cards, which require less personalized underwriting and have higher interest rates. While credit cards are convenient as a payment mechanism, they are an expensive long-term financing solution. Borrowers who carry a balance on their cards are often subject to high, variable interest rates and the possibility of incurring additional fees and penalties. |
| Investors Have Limited Options to Participate in Personal and Small Business Credit . We believe many investors generally lack the size and access to invest in structured products directly and are unable to invest in personal and small business credit in a meaningful way. While institutional investors have had some access to this market, most have lacked the tools to customize portfolios to their specific risk tolerance, which is a feature of our marketplace and products. Additionally, banks accessing this market generally hold the loans they generate on their balance sheet. As a result, we believe additional capital that could be invested in personal and small business loans has largely been locked out of the market. |
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Our Solution
We are the worlds largest online marketplace connecting borrowers and investors. Our technology platform supports this innovative marketplace model to efficiently connect the supply and demand of capital. Our marketplace also substantially reduces the need for physical infrastructure and improves convenience and automation, increasing efficiency, reducing manual processes and improving the overall borrower and investor experience.
Benefits to Borrowers
| Access to Affordable Credit. Our innovative marketplace model, online delivery and process automation enable us to offer borrowers interest rates that are generally lower on average than the rates charged by traditional banks on credit cards or installment loans. Based on responses from 21,051 borrowers in a survey of 103,439 randomly selected borrowers conducted by us during the nine months ended September 30, 2014, borrowers who received a loan to consolidate existing debt or pay off their credit card balance reported that the interest rate on the loan they received through our marketplace was, on average, 680 basis points lower than the rate on their outstanding debt or credit card balances, representing a 32% savings. |
| Superior Borrower Experience. We offer a fast and easy-to-use online application process and provide borrowers with access to live support and online tools throughout the process and for the lifetime of the loan. Based on a review of the credit performance of borrowers who received a loan from January 2013 through May 2014 to consolidate existing debt or pay off their credit card balance, such borrowers experienced an average increase of 23 points in their FICO score within three months after obtaining their loan, which we believe is in part attributable to a reduction in interest rate and a reduction in the borrowers total revolving balance. Our goal is to form long-term relationships with borrowers, facilitating their access to an array of financial products that meet their evolving needs over time. |
| Transparency and Fairness. All of the installment loans offered through our marketplace feature a fixed rate that is clearly disclosed to the borrower during the application process, with fixed monthly payments, no hidden fees and the ability to prepay the balance at any time without penalty. Our platform utilizes a computerized, rules-based engine for credit decisioning, which removes the human bias associated with reviewing applications. |
| Fast and Efficient Decisioning. We leverage online data and technology to quickly assess risk, determine a credit rating and assign appropriate interest rates. Qualified applicants receive offers in just minutes and can evaluate loan options without impacting their credit score. |
Benefits to Investors
| Access to a New Asset Class. All investors can invest in personal loans originated through our standard program. Additionally, qualified investors can invest in loans originated through our custom program, including small business loans, in private transactions. These asset classes have historically been entirely funded and held by financial institutions or large institutional investors on a limited basis. |
| Attractive Risk-Adjusted Returns. We have historically offered investors attractive risk-adjusted returns across loans offered through our marketplace. We screen loan applicants based on proprietary credit decisioning and scoring models and also factor in historical borrower performance in setting interest rates. |
|
Transparency . We provide investors with transparency and choice in building their loan portfolios. For each standard program loan, investors can examine credit attributes from the borrowers credit report and borrower-reported attributes prior to investing in a loan and can monitor ongoing loan performance. We also provide access to credit profile data on each approved loan as well as all of the |
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historical performance data for every loan ever invested in through our marketplace. We specifically indicate the information that is verified on our website. |
| Easy-to-Use Tools. We provide investors with tools to easily build or modify customized and diversified portfolios by selecting loans tailored to their investment objectives to assess the returns on their portfolios and, if desired, to enroll in automated investing. |
Our Competitive Strengths
We believe the following strengths differentiate us from our competitors and provide us with competitive advantages in realizing the potential of our market opportunity:
| Leading Online Marketplace . We are the worlds largest online marketplace connecting borrowers and investors, based on over $6 billion in loan originations, of which approximately $1.8 billion were invested in through notes issued pursuant to the Note Registration Statement, $2.5 billion were invested in through certificates issued by the Trust, and $1.7 billion were invested in through whole loan sales. We believe that our brand, reputation and scale allow us to attract top talent, quickly develop and deploy new products, attract marketplace participants and leverage a lower cost structure to benefit borrowers and investors. |
| Robust Network Effects . We believe the attractiveness of our online marketplace will continue to grow to the extent the number of participants and investments enabled through our marketplace increases. We refer to this as a network effect. Additionally, increased participation also results in the generation of substantial data that is used to improve the effectiveness of our credit decisioning and scoring models, enhancing our performance record and generating increasing trust in our marketplace. As trust increases, we believe investors will continue to demonstrate a willingness to accept lower risk premiums that will allow us to offer lower interest rates and attract additional high-quality borrowers. We believe that these network effects reinforce our market leadership position. |
| High Borrower and Investor Satisfaction . Borrowers have validated our approach with an aggregate net promoter score (NPS) (1) in the 70s since we began surveying borrowers in January 2013, which places us at the upper end of customer satisfaction ratings for traditional financial services companies. Additionally, investors are confident transacting on our marketplace, as evidenced by high reinvestment rates. |
| Technology Platform . Our technology platform automates our operations and, we believe, provides a significant time and cost advantage over traditional banks that run on legacy systems that are inflexible and slow to evolve. |
| Sophisticated Risk Assessment . We use proprietary algorithms that leverage behavioral data, transactional data and employment information to supplement traditional risk assessment tools. We have built our technology platform to automate the application of these proprietary algorithms to each individual borrowers application profile at scale. This approach allows us to evaluate and segment each potential borrowers risk profile and price it accordingly. |
| Efficient and Attractive Financial Model . We generate revenue from transaction fees from our marketplaces role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. Our technology platform significantly reduces the need for physical infrastructure and lowers our costs, which provides us with significant operating leverage. |
(1) | NPS is a commonly used measure of customer loyalty and satisfaction, ranging from negative 100 to positive 100, based on direct questions to borrowers. |
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As described in Risk Factors and elsewhere in this prospectus, maintaining these strengths is subject to a number of risks. For example, we may experience a decline in the network effect of our marketplace or in borrower and investor satisfaction if we are unable to maintain borrower and investor trust, promote and maintain our brand in a cost-effective manner or introduce new loan products or marketplace enhancements that achieve acceptance by borrowers and investors. We may be unable to maintain the strength of our technology platform or sophisticated risk assessment tools if we experience errors, inaccuracies or fraud in the technology or data underlying our platform or are unable to effectively use new data generated through participation in our marketplace to enhance our credit decisioning and scoring models, which could also adversely affect the efficiency of our financial model. Therefore, we cannot assure you that we will maintain these competitive strengths in the future.
Our Strategy for Growth
Key elements of our growth strategy include:
| Execute in Our Core Markets . We believe we have substantial opportunities for future growth, and we estimate that in September 2014, approximately $390 billion in outstanding consumer credit would meet our marketplaces standard program credit policy. |
| Broaden Our Loan Product Offerings . We intend to continue to enhance our marketplaces existing loan products and add new loan products to attract a greater number and broader variety of consumers and small business owners. |
| Widen the Spectrum of Borrowers Served . We have a diverse set of investors, some of which seek to invest in loans that are different from the loans currently offered through our standard program loans, such as loans with longer maturities, lower returns, shorter credit history or higher risk. Given the lack of performance data on many of these custom loan types, we only make them available through limited private transactions to qualified investors to allow us to gather data to assess the future viability of these loans. Because our technology can efficiently assess risk and set efficient pricing for individual borrowers, we plan to extend our marketplace to widen the spectrum of borrowers to meet this investor demand over time. |
| Increase Supply of Capital Available to Borrowers . As confidence in our marketplaces performance increases, we are able to attract additional investors with different thresholds for risk, yield and maturity. We plan to leverage this increasing confidence to increase our depth and breadth within each investor category, capture a larger proportion of total investible capital by introducing new products, offer our products in additional states and expand the channels through which our marketplace is available. |
| Grow Our Ecosystem . We plan to foster existing relationships and develop new relationships with complementary partners to our marketplace and platform in order to create, or help create, new tools, products and referral sources for investors and borrowers. |
| Continue to Invest in Our Innovative Technology Platform . We believe that investing in our technology platform and continuing to build our data sources will enable us to connect an increasing number of borrowers and investors, continue to identify new borrowers, detect and prevent fraud and maintain the security of our marketplace. |
| Enter New Geographies . While we believe our largest near-term growth opportunity is domestic, over time we intend to expand our marketplace to address similar banking system inefficiencies, market dislocations, investor needs and borrower dissatisfaction globally. |
If we are unable to timely and successfully execute the key elements of our growth strategy, our business and results of operations could be harmed.
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Loan Volume
For the year ended December 31, 2013, our marketplace facilitated approximately $2.1 billion in loans, comprised of approximately $2.0 billion in standard program and $0.1 billion in custom program loans. Of the standard program loans, notes issued pursuant to the Note Registration Statement accounted for $543 million, or 28%, of investments during the period, certificates issued by the Trust accounted for $1.1 billion, or 54%, and whole loan sales accounted for $364 million, or 18%. For the year ended December 31, 2013, of the capital invested in standard program loans, $1.2 billion, or 59%, was invested by individuals through investment vehicles or managed accounts, $569 million, or 29%, was invested by self-managed, individual investors and $245 million, or 12%, was invested by institutional investors. During the year ended December 31, 2013, all of the custom program loans were invested in through whole loan sales to institutional investors.
For the three months ended September 30, 2014, our marketplace facilitated nearly $1.2 billion in loans, comprised of approximately $0.9 billion in standard program and $0.3 billion in custom program loans. Of the standard program loans, notes issued pursuant to the Note Registration Statement accounted for $223 million, or 26%, of investments during the period, certificates issued by the Trust accounted for $284 million, or 32%, and whole loan sales accounted for $367 million, or 42%. For the three months ended September 30, 2014, of the capital invested in standard program loans, $383 million, or 44%, was invested by individuals through investment vehicles or managed accounts, $226 million, or 26%, was invested by self-managed, individual investors and $262 million, or 30%, was invested by institutional investors. Of the custom program loans, certificates issued by the Trust accounted for $25 million, or 9%, whole loan sales accounted for $150 million, or 51%, and education and patient finance loans facilitated through Springstone Financial LLCs (Springstone) platform, a company we acquired in April 2014, accounted for $116 million, or 40%, of the investments during the three months ended September 30, 2014. Of the capital invested in custom program loans during this period, $22 million, or 8%, was invested by individuals through investment vehicles or managed accounts and $269 million, or 92%, was invested by institutional investors. Loans facilitated through the custom program are not invested in through notes and are invested in through private transactions or are loans facilitated through Springstones platform.
Selected Risks Related to Our Business
Our business is subject to numerous risks described in the section titled Risk Factors and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:
| We have a relatively limited operating history at our current scale. |
| We may continue to incur net losses. |
| We may be unable to maintain or increase loan originations facilitated through our marketplace. |
| We may be unable to maintain a relationship with an issuing bank. |
| Our quarterly results may fluctuate significantly. |
| We may not compete effectively in our target markets. |
| We may be subject to negative publicity. |
| We may fail to promote and maintain our brand in a cost-effective manner. |
| Our marketing efforts may be unsuccessful. |
| Our new loan products and enhancements may not achieve sufficient market acceptance. |
| We and our issuing bank partners may fail to comply with federal and state consumer protection laws. |
See Risk Factors beginning on page 14.
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Corporate Information
We were incorporated in Delaware as SocBank Corporation in October 2006 and changed our name to LendingClub Corporation in November 2006. Unless expressly indicated or the context requires otherwise, the terms Lending Club, company, we, us, and our in this prospectus refer to LendingClub Corporation, a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. Our principal executive offices are located at 71 Stevenson Street, Suite 300, San Francisco, California 94105, and our telephone number is (415) 632-5600. Our website address is www.lendingclub.com. The information on or that can be accessed through our website is not part of this prospectus.
LendingClub Corporation, the Lending Club logo and other Lending Club formative marks are trademarks of LendingClub Corporation in the United States. This prospectus also includes other trademarks of Lending Club and trademarks of other persons. Other trademarks, service marks or trade names appearing in this prospectus are the property of their respective owners.
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The Offering
Common stock offered by us |
50,000,000 shares |
|
Common stock offered by the selling stockholders |
7,700,000 shares |
|
Common stock to be outstanding after our initial public
|
361,111,491 shares |
|
Option to purchase additional shares from us |
8,655,000 shares |
|
Use of proceeds |
We estimate that the net proceeds to us from the sale of common stock in this offering will be approximately $512.3 million, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. | |
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds to us from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We also expect to use a portion of the net proceeds to us from this offering to repay the full $49.2 million of indebtedness outstanding under our term loan. Additionally, we may use a portion of the net proceeds to us to acquire businesses, products, services or assets. We will not receive any proceeds from the sale of shares by the selling stockholders. See Use of Proceeds. | ||
Conflict of interest |
Genesis VC Partners X, LLC (Genesis) is the general partner of Norwest Venture Partners X, L.P., a beneficial owner of more than 10% of our outstanding common stock. The managing member of Genesis is NVP Associates, LLC, which is a subsidiary of an affiliate of Wells Fargo Securities, LLC, an underwriter in this offering. | |
Proposed New York Stock Exchange symbol |
LC |
The number of shares of common stock to be outstanding after this offering is based on (i) 310,272,201 shares of common stock outstanding as of September 30, 2014, (ii) 629,948 shares that we issued upon the exercise of warrants after September 30, 2014 and (iii) 209,342 shares that we expect to issue upon the exercise of warrants that would otherwise expire immediately prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and excludes:
| 54,587,814 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2014, with a weighted-average exercise price of $2.63 per share; |
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| 3,179,171 shares of common stock issuable upon the exercise of options granted after September 30, 2014, with a weighted-average exercise price of $10.55 per share; |
| 975,792 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2014, with a weighted-average exercise price of $0.27 per share (after giving effect to items (ii) and (iii) above); and |
| 42,759,320 shares of common stock reserved for future issuance under our equity compensation plans, consisting of (i) 3,359,320 shares of common stock available for issuance under our 2007 Stock Incentive Plan (2007 Plan) as of September 30, 2014 and an additional 1,400,000 shares of common stock reserved for issuance on October 31, 2014, which shares will be added to the shares to be reserved under our 2014 Equity Incentive Plan (2014 Plan) upon its effectiveness, (ii) 35,000,000 shares of common stock reserved for future issuance under our 2014 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii) 3,000,000 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan (ESPP), which will become effective on the date of this prospectus. |
Our 2014 Plan and ESPP each provide for annual automatic increases in the number of shares reserved under such plans. In addition, our 2014 Plan provides for increases in the number of shares that may be granted under the plan based on shares granted under our 2007 Plan that expire, are forfeited or otherwise repurchased by us at cost. On the date of this prospectus, any remaining shares available for issuance under our 2007 Plan will be added to the shares reserved under our 2014 Plan, and we will cease granting awards under our 2007 Plan. See Executive CompensationEmployee Benefit Plans.
Except as otherwise indicated, all information in this prospectus assumes:
| a two-for-one stock split of our common stock, which became effective on September 5, 2014; |
| the conversion of all outstanding shares of our convertible preferred stock as of September 30, 2014 into an aggregate of 249,351,011 shares of common stock in connection with this offering; |
| the filing and effectiveness of our restated certificate of incorporation in Delaware and the adoption of our restated bylaws, each of which will occur upon the completion of this offering; |
| no exercise by the underwriters of their option to purchase from us up to an additional 8,655,000 shares of our common stock; and |
| no exercise of options or warrants outstanding on the date of this prospectus, except for 629,948 shares that we issued upon the exercise of warrants after September 30, 2014 and 209,342 shares that we expect to issue upon the exercise of warrants that would otherwise expire immediately prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus. |
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Summary Consolidated Financial and Other Data
We have derived the selected consolidated statement of operations data for the year ended December 31, 2013 from the audited consolidated financial statements included in this prospectus. We have derived the selected consolidated statement of operations data for the nine months ended September 30, 2013 and 2014, and our selected consolidated balance sheet data as of September 30, 2014, from the unaudited interim consolidated financial statements included in this prospectus. We have derived the selected consolidated statement of operations data for the years ended December 31, 2011 and 2012 from unaudited consolidated financial statements not included in this prospectus. In December 2012, we changed our fiscal year end from March 31 to December 31. The change was effective as of December 31, 2012, and the nine months ended December 31, 2012 represent the transition period. The historical financial information presented for the years ended December 31, 2011 and 2012 (i) combines the unaudited interim consolidated financial statements for the three months ended March 31 and the nine months ended December 31 in each year and (ii) is unaudited and has been prepared by management for illustrative purposes only. The unaudited consolidated financial statements and unaudited historical financial information have been prepared on the same basis as the audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year or any other period. The following selected consolidated financial and other data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in this prospectus.
Years Ended December 31, |
Nine Months Ended
September 30, |
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2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||
(in thousands, except share and per share data and percentages) | ||||||||||||||||||||
(unaudited) | (audited) | (unaudited) | ||||||||||||||||||
Consolidated Statement of Operations Data: |
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Operating revenue: |
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Transaction fees (1) |
$ | 10,981 | $ | 30,576 | $ | 85,830 | $ | 55,214 | $ | 133,835 | ||||||||||
Servicing fees |
951 | 1,929 | 3,951 | 2,485 | 6,301 | |||||||||||||||
Management fees |
103 | 824 | 3,083 | 2,083 | 4,163 | |||||||||||||||
Other revenue (expense) |
495 | 716 | 5,111 | 4,708 | (438 | ) | ||||||||||||||
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Total operating revenue |
12,530 | 34,045 | 97,975 | 64,490 | 143,861 | |||||||||||||||
Net interest income (expense) and other adjustments |
222 | (238 | ) | 27 | 15 | (854 | ) | |||||||||||||
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Total net revenue |
12,752 | 33,807 | 98,002 | 64,505 | 143,007 | |||||||||||||||
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Operating expenses (2) : |
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Sales and marketing |
11,402 | 18,201 | 39,037 | 26,577 | 60,808 | |||||||||||||||
Origination and servicing |
4,758 | 7,589 | 17,217 | 11,044 | 26,135 | |||||||||||||||
General and administrative: |
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Engineering and product development (3) |
2,289 | 4,855 | 13,922 | 9,140 | 22,987 | |||||||||||||||
Other |
6,572 | 10,024 | 20,518 | 13,294 | 55,875 | |||||||||||||||
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Total operating expenses |
25,021 | 40,669 | 90,694 | 60,055 | 165,805 | |||||||||||||||
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Income (loss) before income taxes |
(12,269 | ) | (6,862 | ) | 7,308 | 4,450 | (22,798 | ) | ||||||||||||
Income tax expense |
| | | | 1,059 | |||||||||||||||
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Net income (loss) |
$ | (12,269 | ) | $ | (6,862 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||
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Years Ended December 31, |
Nine Months Ended
September 30, |
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2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||
(in thousands, except share and per share data and percentages) | ||||||||||||||||||||
(unaudited) | (audited) | (unaudited) | ||||||||||||||||||
Net income (loss) per share attributable to common stockholders (4) : |
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Basic |
$ | (0.35 | ) | $ | (0.17 | ) | $ | 0.00 | $ | 0.00 | $ | (0.41 | ) | |||||||
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Diluted |
$ | (0.35 | ) | $ | (0.17 | ) | $ | 0.00 | $ | 0.00 | $ | (0.41 | ) | |||||||
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Weighted-average shares of common stock used in computing net income (loss) per common share (4) : |
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Basic |
34,744,860 | 39,984,876 | 51,557,136 | 50,457,948 | 57,958,838 | |||||||||||||||
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Diluted |
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34,744,860
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39,984,876 | 81,426,976 | 79,153,912 |
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57,958,838
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Pro forma net income (loss) per share (4)(5) (unaudited): |
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Basic |
$ | 0.03 | $ | (0.08 | ) | |||||||||||||||
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Diluted |
$ | 0.02 | $ | (0.08 | ) | |||||||||||||||
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Weighted-average shares outstanding used to calculate pro forma net income (loss) per common share (4)(5) (unaudited): |
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Basic |
291,766,192 | 303,608,800 | ||||||||||||||||||
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Diluted |
323,331,550 |
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303,608,800
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Other Data (6) (unaudited): |
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Loan originations |
$ | 257,364 | $ | 717,943 | $ | 2,064,626 | $ | 1,366,253 | $ | 2,962,520 | ||||||||||
Contribution |
$ | (3,591 | ) | $ | 8,632 | $ | 43,458 | $ | 27,806 | $ | 63,374 | |||||||||
Contribution margin |
(28.7 | )% | 25.4 | % | 44.4 | % | 43.1 | % | 44.1 | % | ||||||||||
Adjusted EBITDA |
$ | (12,067 | ) | $ | (4,924 | ) | $ | 15,227 | $ | 8,713 | $ | 13,384 | ||||||||
Adjusted EBITDA margin |
(96.3 | )% | (14.5 | )% | 15.5 | % | 13.5 | % | 9.3 | % |
(1) | Previously referred to as Origination Fees. |
(2) | Includes stock-based compensation expense as follows: |
Years Ended
December 31, |
Nine Months
Ended September 30, |
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2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Stock-Based Compensation Expense: |
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Sales and marketing |
$ | 30 | $ | 302 | $ | 1,313 | $ | 767 | $ | 5,029 | ||||||||||
Origination and servicing |
9 | 75 | 424 | 170 | 1,427 | |||||||||||||||
General and administrative: |
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Engineering and product development |
71 | 449 | 2,171 | 1,019 | 3,487 | |||||||||||||||
Other |
181 | 586 | 2,375 | 1,390 | 15,946 | |||||||||||||||
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Total stock-based compensation expense |
$ | 291 | $ | 1,412 | $ | 6,283 | $ | 3,346 | $ | 25,889 | ||||||||||
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(3) | Previously referred to as Technology. |
(4) | In April 2014, our board of directors approved a two-for-one stock split of our outstanding capital stock and in August 2014, our board of directors approved another two-for-one stock split of our outstanding capital stock, which became effective in September 2014. All share and per share data in this table has been adjusted to reflect these stock splits. See Note 3 to consolidated financial statements included in this prospectus for a description of how we compute basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income (loss) per share. |
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(5) | For additional information regarding the pro forma presentation, see the unaudited pro forma condensed combined statements of operations beginning on page F-67, which include both the acquisition of Springstone and the conversion of all of the outstanding shares of our convertible preferred stock. |
(6) | For more information regarding loan originations, contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin, see Managements Discussion and Analysis of Financial Condition and Results of OperationsKey Operating and Financial Metrics. Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see Managements Discussion and Analysis of Financial Condition and Results of OperationsReconciliations of Non-GAAP Financial Measures. |
As of September 30, 2014 | ||||||||
Actual | As Adjusted (1)(2) | |||||||
(in thousands) | ||||||||
Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
$ | 82,674 | $ | 547,758 | ||||
Loans (3) |
2,533,671 | 2,533,671 | ||||||
Total assets |
2,814,846 | 3,275,996 | ||||||
Notes and certificates (3) |
2,551,640 | 2,551,640 | ||||||
Total liabilities |
2,673,306 | 2,623,034 | ||||||
Total stockholders equity |
141,540 | 652,962 |
(1) | The as adjusted consolidated balance sheet data gives effect to (i) the conversion of all of our outstanding shares of convertible preferred stock into 249,351,011 shares of common stock, (ii) the sale and issuance of 50,000,000 shares of common stock by us in this offering at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (iii) the issuance of 629,948 shares of common stock upon the exercise of warrants after September 30, 2014, (iv) the issuance of 209,342 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and (v) repayment of the full $49.2 million of indebtedness outstanding under our term loan and the elimination of the related debt discount and unamortized debt issuance costs upon the completion of this offering. |
(2) | Each $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase (decrease) our as adjusted cash and cash equivalents, total assets and total stockholders equity by approximately $47.1 million, assuming that the number of shares offered by us, as set forth on the front cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. |
(3) | Loans represent unsecured obligations of borrowers originated through our marketplace. Notes and certificates are issued to investors and represent repayment obligations dependent upon receipt of borrower payments as to a corresponding loan. For more information regarding notes and certificates, see Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview. Period-end differences between the two line items are largely driven by timing of applying and distributing loan payments to investors. |
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Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes, before making a decision to invest in our common stock. While we believe the risks and uncertainties described below include all material risks currently known by us, it is possible that these may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
As a rapidly growing company with a relatively limited operating history at our current scale, we face increased risks, uncertainties, expenses and difficulties.
We have a limited operating history at our current scale, and we have encountered and will continue to encounter risks, uncertainties, expenses and difficulties, including:
| navigating complex and evolving regulatory and competitive environments; |
| increasing the number of borrowers and investors utilizing our marketplace; |
| increasing the volume of loans facilitated through our marketplace and transaction fees received for matching borrowers and investors through our marketplace; |
| entering into new markets and introducing new loan products; |
| continuing to revise our marketplaces proprietary credit decisioning and scoring models; |
| continuing to develop, maintain and scale our platform; |
| effectively using limited personnel and technology resources; |
| effectively maintaining and scaling our financial and risk management controls and procedures; |
| maintaining the security of our platform and the confidentiality of the information provided and utilized across our platform; and |
| attracting, integrating and retaining an appropriate number of qualified employees. |
If we are not able to timely and effectively address these requirements, our business and results of operations may be harmed.
We have incurred net losses in the past and may incur net losses in the future.
As of September 30, 2014, our accumulated deficit was $74.2 million. We anticipate that our operating expenses will increase in the foreseeable future as we seek to continue to grow our business, attract borrowers, investors and partners and further enhance and develop our loan products, marketplace and platform. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We may incur additional net losses in the future and may not maintain profitability on a quarterly or annual basis.
If we are unable to maintain or increase loan originations facilitated through our marketplace or if existing borrowers or investors do not continue to participate on our marketplace, our business and results of operations will be adversely affected.
We have experienced rapid revenue and origination growth through our marketplace in recent periods, with loan originations through our marketplace more than doubling each year from 2008 through 2013 and with originations totaling $2.1 billion for the year ended December 31, 2013 and $3.0 billion for the nine months ended September 30, 2014. To continue to grow our business, we must continue to increase loan originations
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through our marketplace by attracting a large number of new borrowers who meet our platforms lending standards and new and existing investors interested in investing in these loans. The number of unique borrowers on our marketplace increased over the prior year by 104%, 125% and 151% for the years ending December 31, 2011, 2012 and 2013, respectively. The number of unique investors on our marketplace increased over the prior year by 32%, 37% and 44% for the years ending December 31, 2011, 2012 and 2013, respectively. There can be no assurance that this increase in the number of unique borrowers and investors will continue to increase. Furthermore, we have experienced a high number of inquiries from potential borrowers who do not meet the criteria for loan application approval. If there are not sufficient qualified loan requests, investors may be unable to deploy their capital in a timely or efficient manner and may seek other investment opportunities. If there are insufficient investor commitments, borrowers may be unable to obtain investment capital for their loans and may stop using our marketplace for their borrowing needs.
A relatively small number of investors account for a large dollar amount of investment in loans funded through our marketplace.
A relatively small number of investors account for a large dollar amount of investment in loans funded through our marketplace. Although we believe there is substantial excess investor demand to replace any investors who may choose not to continue to invest through our marketplace, if we are unable to attract sufficient investor commitments or investors do not continue to participate in our marketplace at the current rates, we may be unable to increase our loan originations and our revenue may grow more slowly than expected or decline over the short term. In addition, if a large number of our existing investors ceased utilizing our marketplace over a short period of time, our business could be temporarily interrupted as new investors complete the administrative and diligence updating processes necessary to enable their investments.
If we are unable to maintain a relationship with an issuing bank, our business will suffer.
We rely on issuing banks to originate all loans and to comply with various federal, state and other laws. Our primary issuing bank is WebBank, a Utah-chartered industrial bank that handles a variety of consumer and commercial financing programs. Springstone Financial, LLC (Springstone), which we acquired in April 2014, relies on NBT Bank and Comenity Bank as issuing banks for its education and patient finance loans.
Our agreements with WebBank are non-exclusive and do not prohibit WebBank from working with our competitors or from offering competing services. Our current agreements with WebBank have initial terms ending in November 2018, with the possibility of two, one-year renewal terms, subject to certain early termination provisions as set forth in the agreements. WebBank currently offers loan programs through another online marketplace. WebBank could decide that working with us is not in its interest, could make working with it cost prohibitive or could decide to enter into exclusive or more favorable relationships with our competitors. In addition, WebBank may not perform as expected under our agreements. We could in the future have disagreements or disputes with WebBank, which could negatively impact or threaten our relationship.
WebBank is subject to oversight by the FDIC and the State of Utah and must comply with complex rules and regulations, licensing and examination requirements, including requirements to maintain a certain amount of regulatory capital relative to its outstanding loans. We are a service provider to WebBank, and as such, we are subject to audit by WebBank in accordance with FDIC guidance related to management of third-party vendors. We may also be subject to the examination and enforcement authority of the FDIC as a bank service company covered by the Bank Service Company Act. If WebBank were to suspend, limit or cease its operations or our relationship with WebBank were to otherwise terminate, we would need to implement a substantially similar arrangement with another issuing bank, obtain additional state licenses or curtail our operations. Although we currently have a non-exclusive arrangement with Cross River Bank, another issuing bank, to date Cross River Bank has not originated any loans through our platform. If we need to enter into alternative arrangements with a different issuing bank to replace our existing arrangements, we may not be able to negotiate a comparable alternative arrangement. Transitioning loan originations to a new issuing bank is untested and may result in
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delays in the issuance of loans or, if our platform becomes inoperable, may result in our inability to facilitate loans through our platform. If we were unable to enter in an alternative arrangement with a different issuing bank, we would need to obtain a state license in each state in which we operate in order to enable us to originate loans, as well as comply with other state and federal laws, which would be costly and time-consuming. If we are unsuccessful in maintaining our relationships with WebBank or other issuing banks, our ability to provide loan products could be materially impaired and our operating results would suffer.
Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations, including the levels of our operating revenue, expenses, contribution margin and other key metrics, may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Our quarterly financial results may fluctuate due to a variety of factors, some of which are outside of our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may adversely affect the price of our common stock. Factors that may cause fluctuations in our quarterly financial results include:
| our ability to attract new investors or borrowers and maintain relationships with existing borrowers and investors; |
| loan volumes, loan grades, loan mix and the channels through which the loans and corresponding investors are sourced; |
| the amount and timing of operating expenses related to acquiring borrowers and investors and the maintenance and expansion of our business, operations and infrastructure; |
| network outages or security breaches; |
| general economic, industry and market conditions; |
| our emphasis on borrower and investor experience instead of near-term growth; and |
| the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired technologies or businesses. |
In addition, we experience some seasonality in demand for personal loans, which is generally lower in the first and fourth quarters. While our growth has somewhat masked this seasonality, our operating results could be affected by such seasonality in the future.
If we do not compete effectively in our target markets, our operating results could be harmed.
The personal and small business lending market is competitive and evolving. We compete with financial products and companies that attract borrowers, investors or both. With respect to borrowers, we primarily compete with traditional financial institutions, such as banks, credit unions, credit card issuers and other consumer finance companies. With respect to investors, we primarily compete with other investment vehicles and asset classes, such as equities, bonds and short-term fixed income securities. We also compete with other online credit marketplaces.
Many of our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current or potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels. Our potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and brand loyalty and broader customer and partner relationships than we have. For example, more
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established Internet companies that possess large, existing customer bases, substantial financial resources and established distribution channels could enter the market. Additionally, a current or potential competitor may acquire one of our existing competitors or form a strategic alliance with one of our competitors. Our competitors may be better at developing new products, responding quickly to new technologies and undertaking more extensive marketing campaigns. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our marketplace could stagnate or substantially decline, we could experience reduced revenue or our marketplace could fail to achieve or maintain more widespread market acceptance, any of which could harm our business.
Negative publicity could adversely affect our business and operating results.
Negative publicity about our industry or our company, including the quality and reliability of our marketplace, effectiveness of the credit decisioning and scoring models used in the marketplace, changes to our marketplace, our ability to effectively manage and resolve borrower and investor complaints, privacy and security practices, litigation, regulatory activity and the experience of borrowers and investors with our marketplace or services, even if inaccurate, could adversely affect our reputation and the confidence in, and the use of, our marketplace, which could harm our business and operating results. Harm to our reputation can arise from many sources, including employee misconduct, misconduct by our partners, outsourced service providers or other counterparties, failure by us or our partners to meet minimum standards of service and quality, inadequate protection of borrower and investor information and compliance failures and claims.
If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share and our revenue may decrease.
We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to attracting new and retaining existing borrowers and investors to our marketplace. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the experience of borrowers and investors in our marketplace. Our efforts to build our brand have involved significant expense, and it is likely that our future marketing efforts will require us to incur significant additional expense. These brand promotion activities may not result in increased revenue and, even if they do, any increases may not offset the expenses incurred. If we fail to successfully promote and maintain our brand or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may lose our existing borrowers and investors to our competitors or be unable to attract new borrowers and investors.
Our success and future growth depend significantly on our successful marketing efforts, and if we are unable to attract borrowers and investors to our marketplace, our business and financial results may be harmed.
We intend to continue to dedicate significant resources to our marketing efforts, particularly as we continue to grow our marketplace, introduce new loan products and expand into new states. Our ability to attract qualified borrowers and sufficient investors depends in large part on the success of these marketing efforts and the success of the marketing channels we use to promote our marketplace. Our marketing channels include social media and the press, online partnerships, search engine optimization, search engine marketing, offline partnerships, mail-to-web and radio and television advertising. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers and investors in a cost-effective manner or convert potential borrowers and investors into active borrowers and investors in our marketplace. As a result, our revenue and results of operations would be adversely affected, which may impair our ability to grow our business.
If new loan products and enhancements do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.
We incur expenses and expend resources upfront to develop, acquire and market new loan products and platform enhancements to incorporate additional features, improve functionality or otherwise make our
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marketplace more desirable to borrowers and investors. New loan products or marketplace or platform enhancements must achieve high levels of market acceptance in order for us to recoup our investment in developing and bringing them to market.
Any new loan products and changes to our marketplace or platform could fail to attain sufficient market acceptance for many reasons, including:
| our failure to predict market demand accurately and supply loan products that meet this demand in a timely fashion; |
| borrowers and investors using our marketplace may not like, find useful or agree with any changes; |
| defects, errors or failures in our platform; |
| negative publicity about our loan products or our marketplace or platforms performance or effectiveness; |
| delays in releasing to the market new loan products or marketplace or platform enhancements; and |
| the introduction or anticipated introduction of competing products by our competitors. |
If our new loan products or marketplace or platform enhancements do not achieve adequate acceptance in the market, our competitive position, revenue and operating results could be harmed. The adverse effect on our financial results may be particularly acute because of the significant development, marketing, sales and other expenses we will have incurred in connection with the new loan products or enhancements.
If we are unable to successfully expand our marketplace to new markets, we may not succeed in growing our business.
Although historically we have focused on the personal loan market, we recently expanded our marketplace to include small business borrowers and have also introduced education and patient finance loans through our acquisition of Springstone. We plan to address additional markets and loan products and expand the types of borrowers and investors to further grow our business. Any failure to successfully address additional market segments and loan products or develop a broader base of borrowers and investors could result in loss of market share or slower growth, which would harm our business, financial condition and results of operations.
Successful strategic relationships with ecosystem partners are important for our future success.
We anticipate that we will continue to depend on relationships with ecosystem partners to grow our business. We continue to pursue additional relationships with ecosystem partners, such as banks, asset managers and insurance companies. For example, we intend to enter into strategic relationships with community banks and other financial partners to facilitate co-branded loan offerings to their borrower customers through our marketplace. Identifying, negotiating and documenting relationships with ecosystem partners require significant time and resources as does integrating third-party data and services. Our current agreements with ecosystem partners often do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to ecosystem partners to favor their products or services or in reducing the volume of loans facilitated through our marketplace. In addition, these ecosystem partners may not perform as expected under our agreements with them, and we may have disagreements or disputes with such partners, which could adversely affect our brand and reputation. If we cannot successfully enter into and maintain effective strategic relationships with ecosystem partners, our business will be harmed.
If the credit decisioning and scoring models we use contain errors or are otherwise ineffective, our reputation and relationships with borrowers and investors could be harmed and our market share could decline.
Our ability to attract borrowers and investors to, and build trust in, our marketplace is significantly dependent on our ability to effectively evaluate a borrowers credit profile and likelihood of default. To conduct
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this evaluation, we utilize credit decisioning and scoring models that assign each loan offered on our marketplace a grade and a corresponding interest rate. Our marketplaces credit decisioning and scoring models are based on algorithms that evaluate a number of factors, including behavioral data, transactional data and employment information, which may not effectively predict future loan losses. If we are unable to effectively segment borrowers into relative risk profiles, we may be unable to offer attractive interests rates for borrowers and returns for investors. We refine these algorithms based on new data and changing macro and economic conditions. If any of these credit decisioning and scoring models contain programming or other errors, are ineffective or the data provided by borrowers or third parties is incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans. While we have not incurred any material liabilities to date, if these errors were to occur in the future, investors may try to rescind their affected investments or decide not to invest in loans or borrowers may seek to revise the terms of their loans or reduce the use of our marketplace for loans.
Credit and other information that we receive from third parties about a borrower may be inaccurate or may not accurately reflect the borrowers creditworthiness, which may cause us to inaccurately price loans facilitated through our marketplace.
We obtain borrower credit information from consumer reporting agencies, such as TransUnion, Experian or Equifax, and assign loan grades to loan requests based on our marketplaces credit decisioning and scoring models that take into account reported credit score, other information reported by the consumer reporting agencies and the requested loan amount, in addition to a variety of other factors. A credit score or loan grade assigned to a borrower may not reflect that borrowers actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verify the information obtained from the borrowers credit report. Additionally, there is a risk that, following the date of the credit report that we obtain and review, a borrower may have:
| become delinquent in the payment of an outstanding obligation; |
| defaulted on a pre-existing debt obligation; |
| taken on additional debt; or |
| sustained other adverse financial events. |
If borrowers default on loans that are not priced correctly, investors may try to rescind their affected investments in these loans and our reputation may be harmed.
Our reputation may be harmed if information supplied by borrowers is inaccurate, misleading or incomplete.
Borrowers supply a variety of information that is included in the loan listings on our marketplace. Other than as described below, we do not verify this information, and it may be inaccurate or incomplete. For example, we often do not verify a borrowers stated tenure, job title, home ownership status or intention for the use of loan proceeds. Moreover, investors do not, and will not, have access to financial statements of borrowers or to other detailed financial information about borrowers. If investors invest in loans through our marketplace based on information supplied by borrowers that is inaccurate, misleading or incomplete, those investors may not receive their expected returns and our reputation may be harmed.
Fraudulent activity associated with our marketplace could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease and our fraud losses to increase.
We are subject to the risk of fraudulent activity associated with our marketplace, issuing banks, borrowers, investors and third parties handling borrower and investor information. Our resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud. Under our agreements with investors, we are obligated to repurchase loans in cases of confirmed identity theft. The level of our fraud charge-offs and
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results of operations could be materially adversely affected if fraudulent activity were to significantly increase. High profile fraudulent activity or significant increases in fraudulent activity could lead to regulatory intervention, negatively impact our operating results, brand and reputation and lead us to take steps to reduce fraud risk, which could increase our costs.
We rely on data from third parties for the successful operation of our platform.
Our ability to review and select qualified borrowers and sufficient investors depends on credit, identification, employment and other relevant information that we receive from third parties, including credit bureaus. If this information becomes unavailable or becomes more expensive to access, it could increase our costs as we seek alternative sources of information. If this third-party data is incorrect, our ability to identify qualified borrowers and investors or approve and price loans may suffer and our business may be harmed.
Fluctuations in interest rates could negatively affect transaction volume.
All personal and small business loans facilitated through our marketplace are issued with fixed interest rates, and education and patient finance loans facilitated by Springstone are issued with fixed or variable rates, depending on the type of loan. If interest rates rise, investors who have already committed capital may lose the opportunity to take advantage of the higher rates. Additionally, potential borrowers could seek to defer loans as they wait for interest rates to settle, and borrowers of variable rate loans through Springstones platform may be subject to increased interest rates. If interest rates decrease after a loan is made, borrowers through our marketplace may prepay their loans to take advantage of the lower rates. Investors through our marketplace would lose the opportunity to collect the above-market interest rate payable on the corresponding loan and may delay or reduce future loan investments. As a result, fluctuations in the interest rate environment may discourage investors and borrowers from participating in our marketplace and may reduce our loan originations, which may adversely affect our business.
If loan default rates are in excess of the expected default rates, we may be unable to collect our entire servicing fee.
Personal loans facilitated through our marketplace are not secured by any collateral, not guaranteed or insured by any third party and not backed by any governmental authority in any way. We are therefore limited in our ability to collect on the loans if a borrower is unwilling or unable to repay. A borrowers ability to repay us can be negatively impacted by increases in their payment obligations to other lenders under mortgage, credit card and other loans, including student loans and home equity lines of credit. These changes can result from increases in base lending rates or structured increases in payment obligations and could reduce the ability of our borrowers to meet their payment obligations to other lenders and to us. If a borrower defaults on a loan, we typically outsource subsequent servicing efforts to third-party collection agencies, which may be unsuccessful in their efforts to collect the amount of the loan. Because our servicing fees depend on the collectability of the loans, if we experience an unexpected significant increase in the number of borrowers who fail to repay their loans or an increase in the principal amount of the loans that are not repaid, we will be unable to collect our entire servicing fee for such loans and our revenue could be adversely affected.
If we experience an increase in defaults on loans facilitated through our marketplace, the return on investment for investors in those loans would be adversely affected and investors may not find investing through our marketplace desirable.
We make payments ratably on an investors investment only if we receive the borrowers payments on the corresponding loan. If we do not receive payments on the corresponding loan related to an investment, the investor will not be entitled to any payments under the terms of the investment. Further, investors may have to pay us an additional servicing fee of up to 35% of any amount recovered by our third-party collection agencies assigned to collect on the loan. An investor may become dissatisfied with our marketplace if a loan underlying its investment is not repaid and it does not receive full payment. As a result, our reputation may suffer and we may lose investor confidence, which could adversely affect investor participation on our marketplace.
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Our business and operating results may be impacted by adverse economic conditions.
General economic factors and conditions in the United States or worldwide, including the general interest rate environment, unemployment rates and residential home values, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. For example, during the 2008 financial crisis, banks severely constrained lending activities, which caused a decline in loan issuances. A similar crisis could negatively impact the willingness of investors and borrowers to participate on our marketplace. Although the U.S. and global economies have shown improvement, the recovery remains modest and uncertain. If present U.S. and global economic uncertainties persist, many of our investors may delay or reduce their investment in the loans facilitated through our marketplace. Adverse economic conditions could also reduce the number of individuals seeking to invest in loans facilitated on our marketplace, reduce the number of qualified borrowers seeking loans on our marketplace and result in borrowers being unable to make payments. Should any of these situations occur, our revenue and transactions on our marketplace would decline and our business would be negatively impacted.
Limited liquidity for investments facilitated through our marketplace may make these investments less attractive to investors.
No trading market currently exists for the certificates issued by the Trust or for the limited partnership interests issued by separate investment funds in which LC Advisors, LLC (LCA) acts as the general partner, each of which are privately placed. Note investors can only sell their notes through the resale trading platform operated by FOLIOfn Investments, Inc. (FOLIOfn), an unaffiliated registered broker-dealer. During 2013, it took an average of approximately four days to sell a note on FOLIOfn with an offer price at or below par. We cannot assure you that FOLIOfn will continue to maintain a market for the trading of notes or that another market may arise. Given the lack of liquidity for certificates and the limited liquidity for notes, investors and potential investors may consider these investments to be less appealing and demand for these investments may decrease, which may adversely affect our business.
Borrowers may prepay a loan at any time without penalty and investors may stop investing in loans, which could reduce our servicing or management fees.
A borrower may decide to prepay all or a portion of the remaining principal amount on a loan at any time without penalty. If the entire remaining unpaid principal amount of a loan is prepaid, we will not receive a servicing fee on the anticipated future loan payments and investors will not receive related payments. If a significant volume of prepayments occurs, investors may stop investing in loans and the amount of our servicing or management fees would decline, either of which could harm our business.
Our ability to protect the confidential information of our borrowers and investors may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions.
The highly automated nature of our marketplace may make it an attractive target and potentially vulnerable to cyber attacks, computer viruses, physical or electronic break-ins or similar disruptions. Our marketplace processes certain sensitive data from our borrowers and investors. While we have taken steps to protect confidential information that we have access to, our security measures could be breached. Any accidental or willful security breaches or other unauthorized access to our marketplace could cause confidential borrower and investor information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, our relationships with borrowers and investors could be severely damaged, and we could incur significant liability.
Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, federal regulators and many
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federal and state laws and regulations require companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause borrowers and investors to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, we could lose borrowers, investors and ecosystem partners and our business and operations could be adversely affected.
Any significant disruption in service on our platform or in our computer systems, including events beyond our control, could prevent us from processing or posting payments on loans, reduce the attractiveness of our marketplace and result in a loss of borrowers or investors.
In the event of a platform outage and physical data loss, our ability to perform our servicing obligations, process applications or make loans available on our marketplace would be materially and adversely affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability to attract new and retain existing borrowers and investors. Much of our system hardware is hosted in a facility located in Las Vegas, Nevada that is owned and operated by SwitchNet. We also maintain a real-time backup system at a third-party owned and operated facility located in Santa Clara, California. Our operations depend on SwitchNets ability to protect its and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If our arrangement with SwitchNet is terminated or if there is a lapse of service or damage to SwitchNet facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.
Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our borrowers and investors and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing or posting payments on the loans, damage our brand and reputation, divert our employees attention, reduce our revenue, subject us to liability and cause borrowers and investors to abandon our marketplace, any of which could adversely affect our business, financial condition and results of operations.
Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by man-made problems such as strikes and terrorism.
A significant natural disaster, such as an earthquake, fire, power outage, flood or other catastrophic event, or interruptions by strikes, terrorism or other made-made problems, could have a material adverse effect on our business, operating results and financial condition. Our headquarters and our real-time disaster recovery data center are located in the San Francisco Bay Area, a region known for seismic activity. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our data centers could result in lengthy interruptions in our services. In addition, acts of strikes, terrorism and other geo-political unrest could cause disruptions in our business and lead to interruptions, delays or loss of critical data. All of the aforementioned risks may be further increased if our disaster recovery plans prove to be inadequate. We have implemented a disaster recovery program that allows us to move production to a back-up data center in the event of a catastrophe. Although this program is functional, we do not currently serve network traffic equally from each data center. If our primary data center shuts down, there will be a period of time that our loan products or services, or certain of our loan products or services, will remain inaccessible to our users or our users may experience severe issues accessing our loan products and services.
We do not currently maintain business interruption insurance to compensate us for potentially significant losses, including potential harm to our business that may result from interruptions in our ability to provide our loan products and services.
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Our platform and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for borrowers and investors, delay introductions of new features or enhancements, result in errors or compromise our ability to protect borrower or investor data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of borrowers or investors, loss of revenue or liability for damages, any of which could adversely affect our business and financial results.
Because some investors may come to our website via hyperlinks from websites of ecosystem partners, it is possible that an unsatisfied investor could make a claim against us based on the content of these third-party websites that could result in claims that are costly to defend and distracting to management.
Some investors in notes may come to our website after reviewing the website of an ecosystem partner via a hyperlink from this third-party website to a landing page on our website. We compensate ecosystem partners based on whether a person clicks through to our web page, and do not pay any compensation based on whether or how much an investor may invest. While all investors are provided with access to a note prospectus on the landing page and during the account opening process, it is possible that an investor could have reviewed additional content on the ecosystem partners website. We do not review, approve or adopt any content on an ecosystem partners website and, while we do not believe we would have liability for content on a partner website, it is possible that an unsatisfied investor could bring claims against us based on such content. Such claims could be costly and time consuming to defend and would distract managements attention from the operation of the business.
Misconduct and errors by our employees and third-party service providers could harm our business and reputation.
We are exposed to many types of operational risk, including the risk of misconduct and errors by our employees and other third-party service providers. Our business depends on our employees and third-party service providers to process a large number of increasingly complex transactions, including treasury transactions that involve significant dollar amounts and loan transactions that involve the use and disclosure of personal and business information. We could be materially adversely affected if treasury transactions were redirected, misappropriated or otherwise improperly executed, personal and business information was disclosed to unintended recipients or an operational breakdown or failure in the processing of other transactions occurred, whether as a result of human error, a purposeful sabotage or a fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal information and interact with borrowers and investors is governed by various federal and state laws. If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. Any of these occurrences could result in our diminished ability to operate our business, potential liability to borrowers and investors, inability to attract future borrowers and investors, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.
We may be sued by third parties for alleged infringement of their proprietary rights, which could harm our business.
Our success depends on not infringing on the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our
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industry. From time to time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to be infringing on such rights. In the future, others may claim that our applications and underlying technology infringe or violate their intellectual property rights. We may, however, be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our loan products or operating our platform or require that we comply with other unfavorable terms. We may also be obligated to indemnify parties or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.
Any failure to protect our own intellectual property rights could impair our brand, negatively impact our business or both.
Our success and ability to compete also depend in part on protecting our own intellectual property. We rely on a combination of copyright, trade secret, trademark and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property. However, the steps we take to protect our intellectual property rights may be inadequate. Third parties may seek to challenge, invalidate or circumvent our copyright, trade secret, trademark and other rights or applications for any of the foregoing. In order to protect our intellectual property rights, we may be required to spend significant resources. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Our failure to secure, protect and enforce our intellectual property rights could seriously adversely affect our brand and adversely impact our business.
Some aspects of our platform include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Aspects of our platform include software covered by open source licenses, which may include, by way of example, GNU General Public License and the Apache License. The terms of various open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our platform. If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and loan products. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with use of open source software cannot be eliminated, and could adversely affect our business.
If we fail to manage the integration of Springstone effectively, our results of operations and business could be harmed.
We are in the process of integrating Springstone into our business. Risks associated with any such integration include:
| our inability to integrate smoothly Springstones technologies and loan products with our current technologies and products; |
| possible changes to Springstones loan products and sales and operational processes; and |
| our inability to assimilate and retain the management and other personnel, culture and operations of Springstone, including back-office functions and systems, such as accounting, human resources, internal controls and others. |
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This integration may be difficult and unpredictable. We may invest resources in the acquisition and integration efforts would have been better utilized developing technology and loan products for our marketplace or on other strategic development initiatives.
Further, this acquisition may disrupt our ongoing operations, divert managements attention from their primary responsibilities and our other strategic initiatives, subject us to additional liabilities, increase our expenses and otherwise adversely affect our business, financial condition, operating results and cash flows.
From time to time we may evaluate and potentially consummate acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.
We may evaluate and consider strategic transactions, combinations, acquisitions or alliances to enhance our existing business or develop new loan products and services. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
Any acquisition will involve risks commonly encountered in business relationships, including:
| difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business; |
| inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits; |
| difficulties in retaining, training, motivating and integrating key personnel; |
| diversion of managements time and resources from our normal daily operations; |
| difficulties in successfully incorporating licensed or acquired technology and rights into our platform; |
| difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations; |
| difficulties in retaining relationships with customers, employees and suppliers of the acquired business; |
| risks of entering markets in which we have no or limited direct prior experience; |
| regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business; |
| assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability; |
| failure to successfully further develop the acquired technology; |
| liability for activities of the acquired business before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; |
| potential disruptions to our ongoing businesses; and |
| unexpected costs and unknown risks and liabilities associated with the acquisition. |
We may not make any acquisitions, or any future acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenue to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future acquisition of new businesses or technology will lead to the successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if developed, will achieve market acceptance or prove to be profitable.
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Expanding our operations internationally could subject us to new challenges and risks.
Although we currently only operate in the United States, we may seek to expand our business internationally. Managing any international expansion will require additional resources and controls. Any expansion internationally could subject our business to risks associated with international operations, including:
| adjusting the proprietary risk algorithms that we use to account for the differences in information available on borrowers; |
| conformity with applicable business customs, including translation into foreign languages and associated expenses; |
| potential changes to our established business model; |
| the need to support and integrate with local third-party service providers; |
| competition with service providers that have greater experience in the local markets than we do or that have pre-existing relationships with potential borrowers and investors in those markets; |
| difficulties in staffing and managing foreign operations in an environment of diverse culture, laws and customers, and the increased travel, infrastructure and legal and compliance costs associated with international operations; |
| compliance with multiple, potentially conflicting and changing governmental laws and regulations, including banking, securities, employment, tax, privacy and data protection laws and regulations, such as the EU Data Privacy Directive; |
| compliance with U.S. and foreign anti-bribery laws, including the Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act; |
| difficulties in collecting payments in foreign currencies and associated foreign currency exposure; |
| restrictions on repatriation of earnings; |
| compliance with potentially conflicting and changing laws of taxing jurisdictions where we conduct business and applicable U.S. tax laws as they relate to international operations, the complexity and adverse consequences of such tax laws and potentially adverse tax consequences due to changes in such tax laws; and |
| regional economic and political conditions. |
As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful.
We have incurred substantial debt and may issue debt securities or otherwise incur substantial debt in the future, which may adversely affect our financial condition and negatively impact our operations.
We have in the past incurred, and may in the future incur, substantial debt. The incurrence of debt could have a variety of negative effects, including:
| default and foreclosure on our assets if our operating revenue is insufficient to repay debt obligations; |
| acceleration of obligations to repay the indebtedness (or other outstanding indebtedness), even if we make all principal and interest payments when due, if we breach any covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant; |
| our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding; |
| diverting a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and |
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| creating potential limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate. |
The occurrence of any of these risks could adversely affect our operations or financial condition.
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees needed to support our business.
We believe our success depends on the efforts and talents of our employees, including software engineers, financial personnel and marketing professionals. Our future success depends on our continued ability to attract, develop, motivate and retain highly qualified and skilled employees. Competition for highly skilled technical and financial personnel, particularly in the San Francisco Bay Area, is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect on our business.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
In addition to attracting and retaining highly skilled employees in general, our future performance depends, in part, on our ability to attract and retain key personnel, including our executive officers, senior management team and other key personnel, all of whom would be difficult to replace. In particular, Mr. Laplanche, our founder and Chief Executive Officer, is critical to the management of our business and operations and the development of our strategic direction. The loss of the services of Mr. Laplanche, our other executive officers or members of our senior management team, and the process to replace any of them, would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
If we discover a material weakness in our internal control over financial reporting that we are unable to remedy or otherwise fail to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to report our financial results on a timely and accurate basis and the market price of our common stock may be adversely affected.
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. Although we did not discover any material weaknesses in internal control over financial reporting at December 31, 2013, subsequent testing by us or our independent registered public accounting firm, which has not performed an audit of our internal control over financial reporting, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. To comply with Section 404A, we may incur substantial cost, expend significant
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management time on compliance-related issues and hire additional accounting, financial and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404A in a timely manner or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the Securities and Exchange Commission (SEC) or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results, and cause a decline in the price of our common stock.
Our ability to use our deferred tax assets to offset future taxable income may be subject to certain limitations that could subject our business to higher tax liability.
We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. At December 31, 2013, we had federal and state net operating loss carry-forwards (NOLs) of approximately $43.9 million and $40.7 million, respectively, to offset future taxable income. These federal and state net operating loss carry-forwards will begin expiring in 2027 and 2016, respectively. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (Code), a corporation that undergoes an ownership change is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Future changes in our stock ownership, including this or future offerings, as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. Additionally, at December 31, 2013, we had federal and state research and development tax credit carry-forwards of approximately $0.6 million and $0.5 million, respectively. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has historically been recorded to recognize only deferred tax assets that are more likely than not to be realized. Our deferred tax assets may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Risks Related to Compliance and Regulation
We and our issuing bank partners are subject to borrower protection laws and federal and state consumer protection laws.
We and our issuing bank partners must comply with regulatory regimes, including those applicable to consumer credit transactions, various aspects of which are untested as applied to our marketplace. Certain state laws generally regulate interest rates and other charges and require certain disclosures. In addition, other federal and state laws may apply to the origination and servicing of loans originated through our marketplace. In particular, through our marketplace, we may be subject to laws, such as:
| state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, debt servicing and collection and unfair or deceptive business practices; |
| the Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions; |
| Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service; |
|
the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national |
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origin, marital status, the fact that all or part of the applicants income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law; |
| the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, which promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies; |
| the Fair Debt Collection Practices Act and similar state debt collection laws, which provide guidelines and limitations on the conduct of third-party debt collectors in connection with the collection of consumer debts; |
| the Gramm-Leach-Bliley Act, which includes limitations on financial institutions disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations; |
| the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection; |
| the Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties; |
| the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers bank accounts; |
| the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures; and |
| the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures. |
We may not always have been, and may not always be, in compliance with these laws. Compliance with these laws is also costly, time-consuming and limits our operational flexibility.
Failure to comply with these laws and regulatory requirements applicable to our business may, among other things, limit our or a collection agencys ability to collect all or part of the principal of or interest on loans. As a result, we may not be able to collect our servicing fee with respect to the uncollected principal or interest, and investors may be discouraged from investing in loans. In addition, non-compliance could subject us to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, rescission rights held by investors in securities offerings and civil and criminal liability, which may harm our business and our ability to maintain our marketplace and may result in borrowers rescinding their loans.
Where applicable, we will seek to comply with state small loan, loan broker, servicing and similar statutes. Currently, we do not facilitate loans to borrowers in Idaho, Iowa, Maine, Nebraska and North Dakota. In all other U.S. jurisdictions with licensing or other requirements that we believe may be applicable to us, we comply with the relevant requirements through the operation of our marketplace with issuing banks or we will be seeking to obtain required licenses. Nevertheless, if we are found to not have complied with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or penalties or be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to continue to facilitate loans through our marketplace, perform our servicing obligations or make our marketplace available to borrowers in particular states, which may harm our business.
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If our marketplace was found to violate a states usury laws, we may have to alter our business model and our business could be harmed.
The interest rates that are charged to borrowers and that form the basis of payments to investors through our marketplace are based upon the ability under federal law of the issuing bank that originates the loan to export the interest rates of its jurisdiction of incorporation to provide uniform rates to all borrowers in all states that have not opted out. WebBank, our primary issuing bank, exports the interest rates of Utah, which allows parties to generally agree by contract to any interest rate. The current annual percentage rates offered by WebBank through our marketplace for personal loans range from 6.78% to 29.99%, which equate to interest rates for investors that range from 6.03% to 26.06%. Of the forty-six jurisdictions whose residents may obtain loans (including the District of Columbia), certain states, including Utah, have no statutory interest rate limitations on personal loans, while other jurisdictions have a maximum rate less than the current maximum rate offered by WebBank through our platform. If a borrower were to successfully bring claims against us for state usury law violations, and the rate on that borrowers personal loan was greater than that allowed under applicable state law, we could be subject to fines and penalties. Further, if we were unable to partner with another issuing bank, we would have to substantially modify our business operations from the manner currently contemplated and would be required to maintain state-specific licenses and only provide a limited range of interest rates for personal loans, all of which would substantially reduce our operating efficiency and attractiveness to investors and possibly result in a decline in our operating results.
Several lawsuits have sought to re-characterize certain loan marketers and other originators as lenders. If litigation on similar theories were successful against us, loans facilitated through our marketplace could be subject to state consumer protection laws in a greater number of states.
Several lawsuits have brought under scrutiny the association between high-interest payday loan marketers and out-of-state banks. These lawsuits assert that payday loan marketers use out-of-state lenders in order to evade the consumer protection laws imposed by the states where they do business. Such litigation has sought to re-characterize the loan marketer as the lender for purposes of state consumer protection law and usury restrictions. Similar civil actions have been brought in the context of gift cards and retail purchase finance. Although we believe that our activities are generally distinguishable from the activities involved in these cases, a court or regulatory authority could disagree.
Additional state consumer protection laws would be applicable to the loans facilitated through our marketplace if we were re-characterized as a lender, and the loans could be voidable or unenforceable. In addition, we could be subject to claims by borrowers, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial cost on us.
The increased scrutiny of third-party medical financing by governmental agencies may lead to increased regulatory burdens on Springstone and adversely affect our consolidated revenue or results of operations.
Springstone, through its issuing bank partners, provides education and patient finance loans, including for elective medical procedures. Recently, regulators increased scrutiny of third-party providers of financing for medical procedures that are generally not covered by health insurance. For example, in December 2013, the Consumer Financial Protection Bureau (CFPB) fined GE Capital Retail Bank $34.1 million for insufficient training, disclosures and practices related to their medical financing services. In addition, attorneys general in New York and Minnesota have conducted investigations on alleged abusive lending practices or exploitation regarding third-party medical financing services.
In June 2014, Springstone received a civil investigative demand from the CFPB for documents and other tangible items related to its programs that provide healthcare financing. If Springstones practices are ultimately found to be deficient, resulting in fines, penalties or increased burdens on Springstones activities, our
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consolidated operating costs could increase. Additionally, such regulatory inquiries or actions could damage Springstones and our reputations and limit Springstones ability to conduct operations, which could adversely affect our consolidated financial statements.
The adoption of any law, rule or regulation affecting this industry may also increase Springstones administrative costs, modify its practices to comply with applicable requirements and reduce its ability to participate competitively, which could have a material adverse effect on our consolidated revenue or results of operations.
The CFPB is a new agency, and there continues to be uncertainty as to how the agencys actions or the actions of any other new agency could impact our business or that of our issuing banks.
The CFPB, which commenced operations in July 2011, has broad authority over the businesses in which we engage. This includes authority to write regulations under federal consumer financial protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act, and to enforce those laws against and examine large financial institutions, such as our issuing banks, for compliance. The CFPB is authorized to prevent unfair, deceptive or abusive acts or practices through its regulatory, supervisory and enforcement authority. To assist in its enforcement, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including the loan products we facilitate. This system could inform future CFPB decisions with respect to its regulatory, enforcement or examination focus.
We are subject to the CFPBs jurisdiction, including its enforcement authority, as a servicer and acquirer of consumer credit. The CFPB may request reports concerning our organization, business conduct, markets and activities. The CFPB may also conduct on-site examinations of our business on a periodic basis if the CFPB were to determine, through its complaint system, that we were engaging in activities that pose risks to consumers.
There continues to be uncertainty as to how the CFPBs strategies and priorities, including in both its examination and enforcement processes, will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements to alter or cease offering affected loan products and services, making them less attractive and restricting our ability to offer them.
Although we have committed resources to enhancing our compliance programs, actions by the CFPB or other regulators against us, our issuing banks or our competitors that discourage the use of the marketplace model or suggest to consumers the desirability of other loan products or services could result in reputational harm and a loss of borrowers or investors. Our compliance costs and litigation exposure could increase materially if the CFPB or other regulators enact new regulations, change regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing regulations in a manner different or stricter than have been previously interpreted.
The collection, processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.
We receive, transmit and store a large volume of personally identifiable information and other user data. There are federal, state and foreign laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable information is increasingly subject to legislation and regulations in numerous U.S. and international jurisdictions, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. This regulatory framework for privacy issues worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. We could be adversely affected if legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations.
Our failure to comply with applicable privacy policies or federal, state or foreign laws and regulations or any compromise of security that results in the unauthorized release of personally identifiable information or other user
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data could damage our reputation, discourage potential borrowers or investors from using our marketplace or result in fines or proceedings brought against us, our issuing banks or other third parties by governmental agencies, borrowers, investors or other third parties, one or all of which could adversely affect our business, financial condition and results of operations. In addition to laws, regulations and other applicable common law rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards. We could also be subject to liability for the inappropriate use of information made available by us. Because the interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit use of our marketplace and harm our business.
We will incur significantly increased costs and devote substantial management time as a result of the listing of our common stock.
Although we have been a reporting company under the Securities Exchange Act of 1934, as amended (Exchange Act), since 2008, we will incur additional legal, accounting and other expenses that we did not incur as a private reporting company. For example, we will be required to comply with additional requirements of the rules and regulations of the SEC and requirements of the New York Stock Exchange, including applicable corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of managements time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
Our ability to offer our notes depends upon our compliance with requirements under federal or state securities laws.
All notes publicly offered through our marketplace are offered and sold pursuant to a registration statement filed with the SEC. We also qualify as a well-known seasoned issuer, which allows us to file automatically effective registration statements with the SEC. Under SEC rules, for certain material updates, we must file post-effective amendments, which, if we do not qualify as a well-known seasoned issuer, do not become effective until declared effective by the SEC. We may fail to maintain our well-known seasoned issuer status if we do not file SEC reports on a timely manner or for other reasons. In addition, if we fail to file our annual reports on Form 10-K or quarterly reports on Form 10-Q on a timely basis or are otherwise required to suspend use of a registration statement for the notes, we could be required to suspend offering of our notes until such deficiency is resolved. Because we offer notes on a continuous basis, securities law restrictions may also limit our ability to market or advertise to potential investors.
We are also currently required to register or qualify for an exemption in every state in which we offer securities. Qualification in a state can be a time-consuming process, often requiring periodic renewals. Failure to
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timely renew these registrations may require us to pay penalties, suspend further offerings until we regain compliance and make rescission offers in connection with previously completed investments. Certain states also impose special suitability standards and other conditions for operation in their states, restricting the persons and conditions under which we may make offerings in these states. We do not offer our notes in all states due to the restrictions of certain states. While we believe that upon the completion of this offering we may rely on federal preemption of state registration and qualification requirements, states may interpret federal law as applied to our notes differently, possibly requiring us to continue to make filings in or limit operations in those states. Regardless of any such registration, qualification or preemption, we are subject to both state and federal antifraud rules of each state in which we operate. Although we seek to verify information provided to us by borrowers, we cannot verify all such information and may be liable for any material misstatements or omissions in such information received from borrowers or from other third parties.
As a result of these requirements, actual or alleged non-compliance with federal or state laws or changes in federal or state law or regulatory policy or could limit our ability to offer notes in certain states, require us to pay fines or penalties, or curtail our operations.
We may have to constrain our business activities to avoid being deemed an investment company under the Investment Company Act.
In general, a company that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities may be deemed to be an investment company under the Investment Company Act of 1940, as amended (Investment Company Act). The Investment Company Act contains substantive legal requirements that regulate the manner in which investment companies are permitted to conduct their business activities. We believe we have conducted, and we intend to continue to conduct, our business in a manner that does not result in our company being characterized as an investment company. To avoid being deemed an investment company, we may not be able to broaden our offerings, which could require us to forego attractive opportunities. We may also apply for formal exemptive relief to provide additional clarity on our status under the Investment Company Act. We may not receive such relief on a timely basis, if at all, and such relief may require us to modify or curtail our operations. If we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which would materially adversely affect our business, financial condition and results of operations.
If our registered investment advisor, LC Advisors, LLC, were found to have violated the Investment Advisers Act, our ability to raise sufficient investor commitments to meet borrower demand could be impaired.
Our subsidiary LCA acts as an advisor to certain private funds and accredited investors, including those that invest in managed accounts that rely on a third-party adviser or manager to manage their investment through our marketplace. Registered investment advisers are subject to a number of regulatory and legal requirements, including conflicts of interest, advertising restrictions and custody requirements. We believe we have conducted, and we intend to continue to conduct, the business of LCA in substantial compliance with the Investment Advisers Act of 1940, as amended (Investment Advisers Act) and applicable fiduciary duties. If, however, we are deemed to have breached any of our obligations under the Investment Advisers Act, the activities of LCA could be restricted, suspended or even terminated. If this were to occur, our ability to provide investors with the opportunity to invest through managed accounts could be severely curtailed, and we may not be able to sufficiently meet borrower and investor demand for loans, which could harm our business.
If we were required to register as a broker-dealer under federal or state law, our costs could significantly increase or our operations could be impaired.
The securities offered to investors are offered directly by us. We do not operate as a registered broker-dealer in any jurisdiction. Although we do not believe we are obligated to do so, if a regulatory body were to find that
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our activities require us to register as a broker-dealer or to sell the investment securities only through a registered broker-dealer, we could be subject to fines, rescission offers or other penalties, and our compliance costs and other costs of operation could increase significantly. Further, our ability to issue and distribute the securities could be significantly impaired or curtailed.
Because we may have issued stock options and underlying shares of common stock in violation of federal and state securities laws, we may be required to offer to repurchase those securities and incur other costs.
We have been a reporting company under the Exchange Act since October 2008. As a result, subsequent to that time, we were no longer entitled to rely on the exemption provided under Rule 701 under the Securities Act of 1933, as amended (Securities Act), and other exemptions from state securities laws for grants of certain equity awards to, and exercises of such awards by, some of our employees, directors and consultants. Therefore, it is possible that some current or former employees, directors and consultants could assert that the options and issuance of shares prior to filing our Form S-8 in July 2014 may have violated U.S. federal and state securities laws, and that such persons could have the right to require us to repurchase those securities.
In connection with such issuances of options and shares, we were recently required by the California Department of Business Oversight (Department) to undertake a rescission offer in accordance with applicable California securities laws to (i) grantees of options to purchase shares of common stock and (ii) to stockholders who acquired their shares of common stock upon exercise of stock options, each during the past two years. Once the Department approves our application, we intend to register this rescission offer on a separate registration statement on Form S-1. Eligible participants in this rescission offer might not accept our offer. The weighted average option exercise price for eligible option grants in respect of 39,480,568 shares was $3.68 per share, and the weighted average purchase price for sales of 3,593,295 shares was $0.79 per share. As it is unclear if a rescission offer under federal securities laws will terminate a purchasers right to rescind a transaction that was not registered or exempt from such registration requirements, we may be required to honor such rescission rights in future periods. Our aggregate liability may be up to $31.9 million. We believe that any remedies a person might have after the rescission offer expires would not be greater than the amount that person would have received in the rescission offer.
We have not reviewed our compliance with foreign laws regarding the participation of non-U.S. residents on our marketplace.
From time to time, non-U.S. residents invest in loans directly through our marketplace. Through September 30, 2014, the percentage of notes purchased (based upon dollar amounts) by such persons since inception was less than 2% of all loans issued. We are not experts with respect to all applicable laws in the various foreign jurisdictions, and we cannot be sure that we are complying with applicable foreign laws. Failure to comply with such laws could result in fines and penalties payable by us, which could reduce our profitability or cause us to modify or delay planned expansions and expenditures, including investments in our growth. In addition, any such fines and penalties could create negative publicity, result in additional regulatory oversight that could limit our operations and ability to succeed, or otherwise hinder our plans to expand our business internationally.
Recent legislative and regulatory initiatives have imposed restrictions and requirements on financial institutions that could have an adverse effect on our business.
The Dodd-Frank Act and other legislation and regulations relating to financial institutions and markets, including alternative asset management funds, has resulted in increased oversight and taxation. There has been, and may continue to be, a related increase in regulatory investigations of the trading and other investment activities of alternative investment funds. Such investigations may impose additional expenses by us, may require the attention of senior management and may result in fines if any of our funds are deemed to have violated any regulations.
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The Dodd-Frank Act is extensive and significant legislation enacting changes that broadly affect most aspects of the financial services industry. The Dodd-Frank Act, among other things:
| created a liquidation framework under which the FDIC may be appointed as receiver following a systemic risk determination by the Secretary of Treasury (in consultation with the President) for the resolution of certain nonbank financial companies and other entities, defined as covered financial companies, and commonly referred to as systemically important entities, in the event such a company is in default or in danger of default and the resolution of such a company under other applicable law would have serious adverse effects on financial stability in the United States, and also for the resolution of certain of their subsidiaries; |
| strengthened the regulatory oversight of securities and capital markets activities by the SEC; and |
| increased regulation of the securitization markets through, among other things, a mandated risk retention requirement for securitizers, which, if applied to our business, would change our business model, and a direction to the SEC to regulate credit rating agencies and adopt regulations governing these organizations and their activities. |
With respect to the new liquidation framework for systemically important entities, we cannot assure you that such framework would not apply to us. Guidance from the FDIC indicates that such new framework will largely be exercised in a manner consistent with the existing bankruptcy laws, which is the insolvency regime that would otherwise apply to us. The SEC has proposed significant changes to the rules applicable to issuers and sponsors of asset-backed securities under the Securities Act and the Exchange Act. With the proposed changes, our access to the asset-backed securities capital markets could be affected and our financing programs could be less effective. Compliance with such legislation or regulation may significantly increase our costs, limit our product offerings and operating flexibility, require significant adjustments in our internal business processes and potentially require us to maintain our regulatory capital at levels above historical practices.
As the regulatory framework for our business evolves, federal and state governments may draft and propose new laws to regulate online marketplaces such as ours, which may negatively affect our business.
The regulatory framework for Internet commerce, including online marketplaces such as ours, is evolving, and it is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect the operation of our marketplace and the way in which we interact with borrowers and investors. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass those costs on to our borrowers and investors in the form of increased fees. In addition, federal and state governmental or regulatory agencies may decide to impose taxes on services provided over the Internet or by online marketplaces. These taxes could discourage the use of our marketplace, which would adversely affect the viability of our business.
Some investors in limited partnership interests offered by LCA or certificates offered by the Trust may be deemed to have been solicited by general solicitation or general advertising, and such investors could seek to rescind their purchase.
We offer notes through a public offering. In addition, the Trust and LCA invest in loans through our marketplace. The Trust and LCA offer certificates and limited partnership interests, respectively, to raise capital for their investments. The offerings by the Trust and LCA are made privately with potential investors with whom they have, or have established through a diligence process, a substantive, pre-existing relationship outside of the public offering for the notes prior to an investment in the certificates or limited partnership interests and separate from the public offering of the notes. Because of the fact-specific nature of what constitutes a substantive, pre-existing relationship and the means by which it is created, as well as what types of activities might constitute a general solicitation or general advertising with regard to the private offerings of the certificates and limited partnership interests, it is possible that some of these investors could assert that they became interested in an
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investment in these private offerings by LCA or the Trust through a general solicitation or general advertising with regard to those offerings. We believe that both LCA and the Trust have in place the necessary and appropriate processes and procedures, including substantial diligence regarding an investors financial sophistication, a cooling-off period between introduction and investment, and specific representations and warranties to counter any such claim by an investor. If it was determined that an investors interest in purchasing certificates or limited partnership interests resulted from a general solicitation or general advertising, the investor could claim that the sale of certificates or limited partnership interests to that investor violated Section 5 of the Securities Act and the investor could seek to rescind the transaction for a period of one year following the date of the investors purchase of the securities. We would contest vigorously any claim that a violation of the Securities Act occurred, however, litigation is inherently uncertain and can be expensive and time consuming.
Risks Related to Our Initial Public Offering and Ownership of Our Common Stock
The stock price of our common stock may be volatile or may decline regardless of our operating performance.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
| overall performance of the equity markets; |
| our operating performance and the performance of other similar companies; |
| changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock; |
| regulatory developments; |
| announcements of innovations, new loan products or acquisitions, strategic alliances or significant agreements by our competitors; |
| disruptions in our platform due to computer hardware, software or network problems; |
| recruitment or departure of key personnel; |
| the economy as a whole or market conditions in our industry; |
| trading activity by stockholders who beneficially own large amounts of our outstanding common stock; |
| the expiration of market standoff or contractual lock-up agreements; and |
| the size of our market float. |
In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.
Substantial blocks of our total outstanding shares may be sold into the market when lock-up or market standoff periods end. If there are substantial sales of shares of our common stock, the price of our common stock could decline.
The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our common stock available for sale. Upon completion of this offering, we will have outstanding 361,111,491 shares of common stock, based on the number of shares outstanding as of September 30, 2014, and including 629,948 shares issued upon the exercise of warrants after September 30, 2014 and 209,342 shares that we expect to issue upon the exercise of warrants that would otherwise expire upon the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set
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forth on the cover page of this prospectus. All of the shares of common stock sold in this offering will be available for sale in the public market. All of our security holders have entered into market standoff agreements with us restricting the sale of any shares of our common stock or have entered into lock-up agreements with the underwriters under which they have agreed, subject to certain exceptions, not to sell any shares of our common stock until at least 180 days after the date of this prospectus, as described in Shares Eligible for Future Sale. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act. Morgan Stanley & Co. LLC may, in its discretion, permit our stockholders to sell shares prior to the expiration of the restrictive provisions contained in these lock-up agreements.
After our initial public offering, certain of our stockholders will have rights, subject to some conditions, to require us to file registration statements covering their shares that we may file for ourselves or our stockholders. All of these shares are subject to market standoff or lock-up agreements restricting their sale until at least 180 days after the date of this prospectus. In addition, shares issued or issuable upon exercise of options or warrants vested as of the expiration of the lock-up agreements will be eligible for sale at that time.
The price of our common stock could decline as a result of the sale of a substantial number of shares of common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.
There has been no prior market for our common stock and an active market may not develop or be sustained, and you may not be able to resell your shares at or above the initial public offering price, if at all.
There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations among the underwriters, the selling stockholders and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable, which could adversely affect your ability to sell your shares and could depress the market price of our common stock.
We may invest or spend the net proceeds to us from this offering in ways with which you may not agree or in ways which may not yield a return or increase the price of our common stock.
We intend to use the net proceeds to us from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds to us to repay indebtedness outstanding under our term loan. Additionally, we may use a portion of the net proceeds to us to acquire businesses, products, services or assets. We do not, however, have agreements or commitments for any material acquisitions at this time. Our management will have discretion in the application of the net proceeds to us from this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the net proceeds to us are being used appropriately. Until the net proceeds to us are used, they may be placed in investments that do not yield a favorable return. See Use of Proceeds.
Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.
Upon the completion of this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, 54.4% of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company.
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If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.
If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $9.61 per share, based on the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of capital stock. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans or if we otherwise issue additional shares of our common stock. See Dilution.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new loan products or enhance our marketplace, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be impaired and our business may be harmed.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends for the foreseeable future.
Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.
Our restated certificate of incorporation and restated bylaws, as we expect they will be in effect upon the completion of this offering, contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. The provisions, among other things:
| establish a classified board of directors so that not all members of our board of directors are elected at one time; |
| permit only our board of directors to establish the number of directors and fill vacancies on the board; |
| provide that directors may only be removed for cause and only with the approval of two-thirds of our stockholders; |
| require two-thirds vote to amend some provisions in our restated certificate of incorporation and restated bylaws; |
| authorize the issuance of blank check preferred stock that our board of directors could use to implement a stockholder rights plan (also known as a poison pill); |
| eliminate the ability of our stockholders to call special meetings of stockholders; |
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| prohibit stockholder action by written consent, which will require that all stockholder actions must be taken at a stockholder meeting; |
| do not provide for cumulative voting; and |
| establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. |
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.
Any provision of our restated certificate of incorporation or restated bylaws, as we expect they will be in effect upon the completion of this offering, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
In making your investment decision, you should not rely on information in public media that is published by third parties. You should rely only on statements made in this prospectus in determining whether to purchase our shares.
You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees. We cannot confirm the accuracy of such coverage. You should rely only on the information contained in this prospectus in determining whether to purchase our shares of common stock.
If securities or industry analysts do not publish research or reports about our business or publish negative reports about our business, our share price and trading volume could decline, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will depend, to some extent, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who may in the future cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
If we were to become subject to a bankruptcy or similar proceeding, the right of payment of investors in our notes may be senior to the right of payment of our stockholders and there may not be value recoverable by our stockholders.
Under the terms of the notes offered through our marketplace, we are obligated to pay principal and interest on each note on a non-recourse basis only if and to the extent that we receive principal, interest or late fee payments from the borrower on the corresponding loan, but the notes become fully recourse to us if we fail to pay such obligation, which would include being prohibited from making such payments as a result of a bankruptcy or similar proceeding, or if we breach a covenant under the indenture governing the notes. In a bankruptcy or similar proceeding due to a default under current or future indebtedness, an action for repurchase or rescission of securities or other event, there is uncertainty regarding whether a holder of a note has any right of payment from our assets other than the corresponding loan. It is possible that a note holder could be deemed to have a right of payment from both the corresponding loan and from some or all of our other assets, in which case the note holder would have a claim to the proceeds of our assets that is senior to any right of payment of the holders of our common stock, regardless of whether we have received any payments from the underlying borrower, making it highly unlikely that there would be any value recoverable by our stockholders.
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I believe Lending Club has the potential to profoundly improve peoples financial lives over the coming decades. Our mission of transforming the banking system is both audacious and achievable. Technology has successfully disrupted many industries to the benefit of society at large, and I believe banking is next.
It all started in the summer of 2006 when I opened a credit card statement charging me a 16.99% interest rate, and a savings account statement from the same bank where I was earning a 0.48% interest rate on my deposits. The extreme difference between these two rates one paid by me to the bank and the other paid by the bank to me made me wonder whether the existing banking system was indeed the most efficient mechanism to allocate capital from savers and depositors into the hands of people and businesses looking for affordable credit. At that point, I considered the idea that an online marketplace could be a far more cost-efficient solution. Now, with a seven-year track record and billions of dollars of credit extended, we have clear evidence that our platform delivers extraordinary value and a considerably better experience to borrowers and investors than traditional banks.
Affordable capital provides more financial flexibility to consumers and gives small businesses an opportunity to drive growth and create jobs. Our model furthermore lowers systemic risk, because our marketplace has at all times a perfect match of assets and liabilities: loans and investments are in equal amount and identical terms at any point in time.
I believe we can transform the current banking system into a frictionless, transparent and highly efficient online marketplace that provides affordable credit to borrowers and creates great investment opportunities for investors, helping millions of people achieve their financial goals.
Cutting out the Middleman
To understand the transformation we are proposing, it is useful to understand the way banks operate today. A bank can be summarized as a combination of operations and capital. Operations are performed through thousands of branches staffed by tens of thousands of employees, while capital comes from deposits and borrowed money. When a bank takes deposits and then later extends a loan using those deposits, it acts as an intermediary. An online marketplace directly and simultaneously accessible to both borrowers and investors essentially cuts out the middleman and lowers intermediation costs.
Building Confidence
We are not only bringing cost efficiency to the credit markets but also a more transparent and customer-friendly experience. Unlike traditional banks, we do not build confidence by establishing a branch at every street corner. Instead, we earn the trust of our customers by offering maximum transparency into our products terms and performance.
We offer responsible credit products with a fixed rate, fixed monthly payment, no prepayment penalty and no hidden fees, at a lower interest rate than prevailing alternatives, and disclose all terms upfront in a manner that is easy for borrowers to understand.
We have established investor confidence by demonstrating the effectiveness of our risk ranking technology, as well as through the accuracy, transparency and granularity of our reporting. We post on our platform the detailed performance of every single loan offered publicly to investors since inception, along with more aggregated performance statistics.
We are continuing to earn investor confidence every day by providing equal access and with a level playing field with the same tools, data and access for all investors, small and large, within a fair and efficient marketplace.
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People and Technology Matter
The idea of people lending money to other people is not new it goes back thousands of years and predates the banks. We are now able to advance that idea and implement it at scale given technological innovation, processing capabilities, the evolution of consumer behavior and the greater availability of online data. Our platform allows investors to diversify their investment across hundreds or thousands of loans within seconds. That same technology enables us to service loans at a lower cost and distribute millions of payments each day to borrowers and investors in a seamless manner.
While we build highly sophisticated and complex products, we strive to shelter our customers from that complexity and make our products intuitive and easy to use.
As important and sophisticated as our technology is, Lending Club would not be what it is today without the hundreds of team members and their devotion to delivering a great customer experience. Our team is passionate about innovation and energized by our mission. We have created a culture that fosters learning and innovation, and encourages team members to constantly question the status quo and relentlessly drive improvements. Everything from our recruiting process to our operating mechanisms and the way our workspace is designed encourages open communication, collaboration and innovation.
It Feels Good to Share
The sharing economy that emerged after the 2008 financial crisis was initially motivated by financial considerations and the economic efficiency derived from putting underutilized assets to better use. I believe the sharing economy has now given birth to a socially desirable way of life that is gaining ground in every aspect of our lives from transportation and hospitality to financial transactions, with money being one of the most underutilized assets. I believe the reason our users choose Lending Club goes beyond the desire to obtain a better deal or a better experience than theyre getting from their bank. There is strong satisfaction in investing in people and having them invest in you.
The Long Run
Over time we plan to address a wide range of credit needs for a broad population of consumers and businesses globally. We are building a very big company and its going to take a very long time.
Transforming the banking system will not happen overnight, and we will not do it alone. We are building a large ecosystem of partners and marketplace participants and are planning to lead the transformation over the span of a decade or two. There are over 6,000 banks in the United States; I believe many of them will join our ecosystem and participate in the transformation, guided by a desire to operate more efficiently and better serve their customers. Some may resist but the history of technology-powered innovation has shown how unlikely it is for incumbents to successfully lower their cost structure and enhance their customer experience to the level of a technology disruptor like Lending Club.
As we go through the important milestone of offering our shares to the public, I am hoping to build long term relationships with shareholders who believe in our mission, share our long term perspective, and are excited at the prospect of transforming an industry in dire need of transformation. As a public company, I believe we will be even better positioned to continue to deliver great value to both investors and borrowers, make credit more affordable and fuel economic growth and prosperity.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including statements regarding our future operating results, future growth and statements other than statements of historical fact, in the sections titled Prospectus Summary, Risk Factors, Use of Proceeds, Managements Discussion and Analysis of Financial Condition and Results of Operations and Business, contains forward-looking statements. The words believe, may, will, potentially, estimate, continue, anticipate, intend, could, would, predict, plan and expect, and similar expressions that convey uncertainty of future events or outcomes, are intended to identify forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Risk Factors and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
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We estimate that the net proceeds to us from the sale of common stock in this offering will be approximately $512.3 million, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters option to purchase additional shares of common stock from us is exercised in full, we estimate that the net proceeds to us would be approximately $602.0 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders.
Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $47.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $10.4 million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. Currently, we intend to use the net proceeds to us from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We also expect to use a portion of the net proceeds to us to repay in full the indebtedness outstanding under our term loan with several lenders led by Morgan Stanley Senior Funding, Inc., which we entered into to fund a portion of the cash purchase price of Springstone. As of September 30, 2014, we had an outstanding balance of $49.2 million under this term loan with an interest rate of 2.57% per annum. This term loan matures in April 2017. For additional information, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesTerm Loan.
Additionally, we may use a portion of the net proceeds to us to acquire businesses, products, services or assets. We do not, however, have agreements or commitments for any material acquisitions at this time. Accordingly, our management will have discretion in the application of the net proceeds to us from this offering, and investors will be relying on the judgment of our management regarding the use of these net proceeds. Pending the use of the net proceeds to us as described above, we plan to invest the net proceeds to us in short-term and long-term interest-bearing obligations, including government and investment-grade debt securities and money market funds. We cannot predict whether the proceeds invested will yield a favorable return.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions, contractual restrictions and other factors that our board of directors considers relevant. In addition, the agreements governing our term loan contain restrictions on our ability to declare and pay cash dividends on our capital stock.
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The following table sets forth cash and cash equivalents, as well as our capitalization, as of September 30, 2014 as follows:
| on an actual basis; |
| on a pro forma basis to give effect to (i) the conversion of all of our outstanding shares of convertible preferred stock into 249,351,011 shares of common stock, (ii) the automatic net exercise of a warrant to purchase 27,848 shares of common stock, which, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would result in the issuance of 27,550 shares of common stock, and (iii) the filing of our restated certificate of incorporation; and |
| on a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above, (ii) the sale and issuance of 50,000,000 shares of common stock by us in this offering at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (iii) the issuance of 629,948 shares of common stock upon the exercise of warrants after September 30, 2014, (iv) the issuance of 181,792 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering and (v) repayment of the full $49.2 million of indebtedness outstanding under our term loan and the elimination of the related debt discount and unamortized debt issuance costs upon the completion of this offering. |
You should read this table together with the consolidated financial statements and related notes, and the sections titled Selected Consolidated Financial and Other Data and Managements Discussion and Analysis of Financial Condition and Results of Operations that are included in this prospectus.
As of September 30, 2014 | ||||||||||||
Actual | Pro Forma |
Pro Forma
As Adjusted (1)(2) |
||||||||||
(in thousands, except share data) | ||||||||||||
(unaudited) | ||||||||||||
Cash and cash equivalents |
$ | 82,674 | $ | 82,674 | $ | 547,758 | ||||||
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|
|
|
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Term loan |
$ | 49,219 | $ | 49,219 | $ | | ||||||
Stockholders equity: |
||||||||||||
Preferred stock, $0.01 par value; 250,614,174 shares authorized, 249,351,011 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma; 10,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted |
177,300 | | | |||||||||
Common stock, $0.01 par value; 372,000,000 shares authorized, 60,921,190 shares issued and outstanding, actual; 900,000,000 shares authorized, 310,300,049 shares issued and outstanding, pro forma; 900,000,000 shares authorized, 361,111,491 shares issued and outstanding, pro forma as adjusted |
609 | 3,103 | 3,611 | |||||||||
Additional paid-in capital |
37,817 | 212,623 | 724,687 | |||||||||
Accumulated deficit |
(74,186 | ) | (74,186 | ) | (75,336 | ) | ||||||
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|
|
|
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Total stockholders equity |
141,540 | 141,540 | 652,962 | |||||||||
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|
|
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Total capitalization |
$ | 190,759 | $ | 190,759 | $ | 652,962 | ||||||
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(1) | Each $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders equity and total capitalization by $47.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. |
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(2) | The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. |
The table above excludes the following shares:
| 54,587,814 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2014, with a weighted-average exercise price of $2.63 per share; |
| 3,179,171 shares of common stock issuable upon the exercise of options granted after September 30, 2014, with a weighted-average exercise price of $10.55 per share; |
| 975,792 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2014, with a weighted-average exercise price of $0.27 per share (after giving effect to the adjustments set forth in (ii) of the second bullet above and (iii) and (iv) of the third bullet above); and |
| 42,759,320 shares of common stock reserved for future issuance under our equity compensation plans, consisting of (i) 3,359,320 shares of common stock available for issuance under our 2007 Plan as of September 30, 2014 and an additional 1,400,000 shares of common stock reserved for issuance on October 31, 2014, which shares will be added to the shares to be reserved under our 2014 Plan upon its effectiveness, (ii) 35,000,000 shares of common stock reserved for future issuance under our 2014 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii) 3,000,000 shares of common stock reserved for future issuance under our ESPP, which will become effective on the date of this prospectus. |
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If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock.
Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our pro forma net tangible book value as of September 30, 2014 was $ (14.7) million, or $ (0.05) per share, based on the total number of shares of common stock outstanding as of September 30, 2014, after giving effect to the conversion of all outstanding shares of convertible preferred stock into 249,351,011 shares of common stock.
After giving effect to (i) the sale and issuance of 50,000,000 shares of common stock by us in this offering at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the issuance of 629,948 shares of common stock upon the exercise of warrants after September 30, 2014 (iii) the issuance of 209,342 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, and (iv) repayment of the full $49.2 million of indebtedness outstanding under our term loan and the elimination of the related debt discount and unamortized debt issuance costs upon the completion of this offering, our pro forma as adjusted net tangible book value as of September 30, 2014 would have been $500.7 million, or $1.39 per share. This represents an immediate increase in pro forma net tangible book value of $1.44 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $9.61 per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this per share dilution:
Assumed initial public offering price per share |
$ | 11.00 | ||||||
Pro forma net tangible book value per share as of September 30, 2014 |
$ | (0.05 | ) | |||||
Increase in pro forma net tangible book value per share attributable to new investors in this offering |
1.44 | |||||||
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Pro forma as adjusted net tangible book value per share immediately after this offering |
1.39 | |||||||
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|
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Dilution in pro forma net tangible book value per share to new investors in this offering |
$ | 9.61 | ||||||
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Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $0.13, and would increase or decrease, as applicable, dilution per share to new investors in this offering by $0.87, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $0.02 per share and increase or decrease, as applicable, the dilution to new investors by $(0.02) per share, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions payable by us.
If the underwriters option to purchase additional shares of common stock from us is exercised in full, the pro forma as adjusted net tangible book value per share of our common stock would be $1.60 per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $9.40 per share.
The following table presents, as of September 30, 2014, after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock, the differences between the existing stockholders and the
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new investors purchasing shares of common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our common stock and preferred stock, cash received from the exercise of stock options and warrants and the average price per share paid or to be paid to us at the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased | Total Consideration |
Average
Price Per Share |
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Number | Percent | Amount | Percent | |||||||||||||||||
Existing stockholders |
310,272,201 | 86 | % | $ | 255,095,170 | 32 | % | $ | 0.82 | |||||||||||
New investors |
50,000,000 | 14 | 550,000,000 | 68 | $ | 11.00 | ||||||||||||||
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Total |
360,272,201 | 100 | % | $ | 805,095,170 | 100 | % | |||||||||||||
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Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $142.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.
Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 302,572,201, or approximately 84% of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to 57,700,000, or approximately 16% of the total shares of common stock outstanding after this offering.
Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters option to purchase additional shares of common stock from us. If the underwriters option to purchase additional shares of common stock were exercised in full, our existing stockholders would own 84% and our new investors would own 16% of the total number of shares of common stock outstanding upon completion of this offering.
The number of shares of our common stock outstanding at September 30, 2014 excludes:
| 54,587,814 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2014, with a weighted-average exercise price of $2.63 per share; |
| 3,179,171 shares of common stock issuable upon the exercise of options granted after September 30, 2014, with a weighted-average exercise price of $10.55 per share; |
| 975,792 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2014, with a weighted-average exercise price of $0.27 per share (after giving effect to the adjustments set forth in (ii) and (iii) above); and |
| 42,759,320 shares of common stock reserved for future issuance under our equity compensation plans, consisting of (i) 3,359,320 shares of common stock available for issuance under our 2007 Plan as of September 30, 2014 and an additional 1,400,000 shares of common stock reserved for issuance on October 31, 2014, which shares will be added to the shares to be reserved under our 2014 Plan upon its effectiveness, (ii) 35,000,000 shares of common stock reserved for future issuance under our 2014 Plan, which will become effective on the date immediately prior to the date of this prospectus, and (iii) 3,000,000 shares of common stock reserved for future issuance under our ESPP, which will become effective on the date of this prospectus. |
To the extent that any outstanding options or other outstanding warrants are exercised or new awards are granted under our equity compensation plans, there will be further dilution to investors.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
We have derived the selected consolidated statement of operations data for the year ended December 31, 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 from the audited consolidated financial statements included in this prospectus. We have derived the selected consolidated statement of operations data for the nine months ended September 30, 2013 and 2014, and our selected consolidated balance sheet data as of September 30, 2014, from the unaudited interim consolidated financial statements included in this prospectus. We have derived the selected consolidated statement of operations data for the calendar years ended December 31, 2009, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2009, 2010 and 2011 from unaudited consolidated financial statements not included in this prospectus. In December 2012, we changed our fiscal year end from March 31 to December 31. The change was effective as of December 31, 2012, and the nine months ended December 31, 2012 represent the transition period. The historical financial information presented for the years ended December 31, 2009, 2010, 2011 and 2012 (i) combines the unaudited interim consolidated financial statements for the three months ended March 31 and the nine months ended December 31 in each year and (ii) is unaudited and has been prepared by management for illustrative purposes only. The unaudited interim consolidated financial statements and unaudited historical financial information have been prepared on the same basis as the audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year or any other period. The following selected consolidated financial and other data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in this prospectus.
Years Ended December 31, |
Nine Months Ended
September 30, |
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2009 | 2010 | 2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||||||||||||||
(unaudited) | (audited) | (unaudited) | ||||||||||||||||||||||||||
Consolidated Statement of Operations Data: |
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Operating revenue: |
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Transaction fees |
$ | 1,307 | $ | 4,975 | $ | 10,981 | $ | 30,576 | $ | 85,830 | $ | 55,214 | $ | 133,835 | ||||||||||||||
Servicing fees |
31 | 459 | 951 | 1,929 | 3,951 | 2,485 | 6,301 | |||||||||||||||||||||
Management fees |
| | 103 | 824 | 3,083 | 2,083 | 4,163 | |||||||||||||||||||||
Other revenue (expense) |
34 | 289 | 495 | 716 | 5,111 | 4,708 | (438 | ) | ||||||||||||||||||||
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Total operating revenue |
1,372 | 5,723 | 12,530 | 34,045 | 97,975 | 64,490 | 143,861 | |||||||||||||||||||||
Net interest income (expense) and other adjustments |
(1,550 | ) | (708 | ) | 222 | (238 | ) | 27 | 15 | (854 | ) | |||||||||||||||||
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Total net revenue |
(178 | ) | 5,015 | 12,752 | 33,807 | 98,002 | 64,505 | 143,007 | ||||||||||||||||||||
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Operating expenses (1) : |
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Sales and marketing |
3,561 | 7,751 | 11,402 | 18,201 | 39,037 | 26,577 | 60,808 | |||||||||||||||||||||
Origination and servicing |
1,320 | 2,790 | 4,758 | 7,589 | 17,217 | 11,044 | 26,135 | |||||||||||||||||||||
General and administrative: |
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Engineering and product development |
1,766 | 1,951 | 2,289 | 4,855 | 13,922 | 9,140 | 22,987 | |||||||||||||||||||||
Other |
3,430 | 3,330 | 6,572 | 10,024 | 20,518 | 13,294 | 55,875 | |||||||||||||||||||||
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Total operating expenses |
10,077 | 15,822 | 25,021 | 40,669 | 90,694 | 60,055 | 165,805 | |||||||||||||||||||||
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Income (loss) before income taxes |
(10,255 | ) | (10,807 | ) | (12,269 | ) | (6,862 | ) | 7,308 | 4,450 | (22,798 | ) | ||||||||||||||||
Income tax expense |
| | | | | | 1,059 | |||||||||||||||||||||
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Net income (loss) |
$ | (10,255 | ) | $ | (10,807 | ) | $ | (12,269 | ) | $ | (6,862 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||||
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Years Ended December 31, |
Nine Months Ended
September 30, |
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2009 | 2010 | 2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||||||||||||||
(unaudited) | (audited) | (unaudited) | ||||||||||||||||||||||||||
Net income (loss) per share attributable to common stockholders (2) : |
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Basic |
$ | (0.31 | ) | $ | (0.32 | ) | $ | (0.35 | ) | $ | (0.17 | ) | $ | 0.00 | $ | 0.00 | $ | (0.41 | ) | |||||||||
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Diluted |
$ | (0.31 | ) | $ | (0.32 | ) | $ | (0.35 | ) | $ | (0.17 | ) | $ | 0.00 | $ | 0.00 | $ | (0.41 | ) | |||||||||
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Weighted-average shares of common stock used in computing net income (loss) per common share (2) : |
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Basic |
33,093,296 | 34,200,300 | 34,744,860 | 39,984,876 | 51,557,136 | 50,457,948 | 57,958,838 | |||||||||||||||||||||
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Diluted |
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33,093,296
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34,200,300
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34,744,860
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39,984,876
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81,426,976 | 79,153,912 |
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57,958,838
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Pro forma net income (loss) per share (2)(3) (unaudited): |
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Basic |
$ | 0.03 | $ | (0.08 | ) | |||||||||||||||||||||||
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Diluted |
$ | 0.02 | $ | (0.08 | ) | |||||||||||||||||||||||
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Weighted-average shares outstanding used to calculate pro forma net income (loss) per common share (2)(3) (unaudited): |
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Basic |
291,766,192 | 303,608,800 | ||||||||||||||||||||||||||
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Diluted |
323,331,550 | 303,608,800 | ||||||||||||||||||||||||||
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(1) | Includes stock-based compensation expense as follows: |
Years Ended December 31, |
Nine Months Ended
September 30, |
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2009 | 2010 | 2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Stock-Based Compensation Expense: |
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Sales and marketing |
$ | 28 | $ | 94 | $ | 30 | $ | 302 | $ | 1,313 | $ | 767 | $ | 5,029 | ||||||||||||||
Origination and servicing |
5 | 15 | 9 | 75 | 424 | 170 | 1,427 | |||||||||||||||||||||
General and administrative: |
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Engineering and product development |
51 | 60 | 71 | 449 | 2,171 | 1,019 | 3,487 | |||||||||||||||||||||
Other |
50 | 150 | 181 | 586 | 2,375 | 1,390 | 15,946 | |||||||||||||||||||||
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Total stock-based compensation expense |
$ | 134 | $ | 319 | $ | 291 | $ | 1,412 | $ | 6,283 | $ | 3,346 | $ | 25,889 | ||||||||||||||
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(2) | In April 2014, our board of directors approved a two-for-one stock split of our outstanding capital stock and in August 2014, our board of directors approved another two-for-one stock split of our outstanding capital stock, which became effective in September 2014. All share and per share data in this table has been adjusted to reflect these stock splits. See Note 3 to consolidated financial statements included in this prospectus for a description of how we compute basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income (loss) per share. |
(3) | For more information regarding the pro forma presentation, see the unaudited pro forma condensed combined statements of operations beginning on page F-67, which include both the acquisition of Springstone and the conversion of all of the outstanding shares of our convertible preferred stock. |
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As of December 31, |
As of September 30,
2014 |
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2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
(unaudited) |
(audited) | (unaudited) | ||||||||||||||||||||||
Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
$ | 4,730 | $ | 17,265 | $ | 24,712 | $ | 52,551 | $ | 49,299 | $ | 82,674 | ||||||||||||
Loans (1) |
48,797 | 128,241 | 296,100 | 781,215 | 1,829,042 | 2,533,671 | ||||||||||||||||||
Total assets |
55,304 | 146,743 | 326,797 | 850,830 | 1,943,395 | 2,814,846 | ||||||||||||||||||
Notes and certificates (1) |
39,718 | 122,532 | 290,768 | 785,316 | 1,839,990 | 2,551,640 | ||||||||||||||||||
Total liabilities |
50,698 | 128,221 | 294,262 | 798,620 | 1,875,301 | 2,673,306 | ||||||||||||||||||
Total stockholders equity |
4,606 | 18,522 | 32,535 | 52,210 | 68,094 | 141,540 |
(1) | Loans represent unsecured obligations of borrowers originated through our marketplace. Notes and certificates are issued to investors and represent repayment obligations dependent upon receipt of borrower payments as to a corresponding loan. For more information regarding notes and certificates, see Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview. Period-end differences between the two line items are largely driven by timing of applying and distributing loan payments to investors. |
Key Operating and Financial Metrics
We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.
Years Ended December 31, |
Nine Months Ended
September 30, |
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2009 | 2010 | 2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
Loan originations |
$ | 51,815 | $ | 126,351 | $ | 257,364 | $ | 717,943 | $ | 2,064,626 | $ | 1,366,253 | $ | 2,962,520 | ||||||||||||||
Contribution |
$ | (3,476 | ) | $ | (4,709 | ) | $ | (3,591 | ) | $ | 8,632 | $ | 43,458 | $ | 27,806 | $ | 63,374 | |||||||||||
Contribution margin |
(253.4 | )% | (82.3 | )% | (28.7 | )% | 25.4 | % | 44.4 | % | 43.1 | % | 44.1 | % | ||||||||||||||
Adjusted EBITDA |
$ | (8,498 | ) | $ | (9,693 | ) | $ | (12,067 | ) | $ | (4,924 | ) | $ | 15,227 | $ | 8,713 | $ | 13,384 | ||||||||||
Adjusted EBITDA margin |
(619.4 | )% | (169.4 | )% | (96.3 | )% | (14.5 | )% | 15.5 | % | 13.5 | % | 9.3 | % |
For more information regarding loan originations, contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin, see Managements Discussion and Analysis of Financial Condition and Results of OperationsKey Operating and Financial Metrics. Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see Managements Discussion and Analysis of Financial Condition and Results of OperationsReconciliations of Non-GAAP Financial Measures.
50
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this prospectus, particularly in the section titled Risk Factors.
Overview
Lending Club is the worlds largest online marketplace connecting borrowers and investors. We believe a technology-powered marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors.
Since beginning operations in 2007, our marketplace has facilitated over $6 billion in loan originations. These loans were facilitated through the following investment channels: (i) the issuance of notes pursuant to the Note Registration Statement, (ii) the sale of loans to the Trust, which acquires capital through the sale of certificates through private transactions, or (iii) the sale of whole loans to qualified investors through private transactions. Approximately $1.8 billion of our loan originations since inception were invested in through notes pursuant to the Note Registration Statement, $2.5 billion were invested in through certificates issued by the Trust and $1.7 billion were invested in through whole loan sales. In the third quarter of 2014, our marketplace facilitated nearly $1.2 billion of loan originations, of which approximately $0.2 billion were invested in through notes issued pursuant to the Note Registration Statement, $0.3 billion were invested in through certificates issued by the Trust and $0.5 billion were invested in through whole loan sales.
The following graphic highlights key milestones in our history and illustrates the total amount of loans originated through our marketplace cumulatively on a quarterly basis.
51
Our trusted brand, scale and network effect drives significant borrowing and investing activity on our marketplace. We generate revenue from transaction fees from our marketplaces role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. The capital to invest in the loans enabled through our marketplace comes directly from investors. From time to time, we may make limited investments in loans; however, such amounts have been, and we expect to continue to be, immaterial. Our proprietary technology automates key aspects of our operations, including the borrower application process, data gathering, credit decisioning and scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. We operate with a lower cost structure than traditional banks due to our innovative model, online delivery and process automation, without the physical branches, legacy technology or high overhead associated with the traditional banking system.
Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans are unsecured, fixed rate, three or five-year personal loans in amounts ranging from $1,000 to $35,000 made to borrowers meeting strict credit criteria, including a FICO score of at least 660. Custom program loans are generally new offerings and loans that do not meet the requirements of the standard program or loans with longer maturities than we believe to be attractive to most note investors. Currently, custom program loans include small business and education and patient finance loans. Small business loans are fixed rate loans in amounts ranging from $15,000 to $100,000, with various maturities of between one and five years. Education and patient finance loans are issued in amounts ranging from $499 to $40,000 with various maturities between 24 and 84 months for term loans as well as a revolving product with a promotional period ranging from six to 24 months that is interest free if the loan balance is paid in full during that period. Standard program loans are visible through our public website and can be invested in through notes. Separately, qualified investors may also invest in standard or custom program loans in private transactions not facilitated through our website. Custom program loans cannot be invested in through notes and are not visible through our website. Securities issued in these private transactions are not offered by us and have different terms than notes.
The transaction fees we receive from issuing banks in connection with our marketplaces role in enabling loan originations range from 1% to 6% of the initial principal amount of the loan as of September 30, 2014. In addition, for education and patient finance loans, transaction fees may exceed 6% as they include fees earned from issuing banks and service providers. Servicing fees paid to us vary based on investment channel. Note investors pay us a servicing fee equal to 1% of each payment amount received from the borrower; whole loan purchasers pay a monthly servicing fee up to 1.3% per annum on the month-end principal balance of loans serviced; and certificate holders generally pay a monthly management fee typically ranging from 0.7% to 1.2% per annum of the month-end balance of assets under management.
Loans to qualified borrowers are originated by our issuing banks. Investors can invest in loans that are offered through our marketplace in one or all of the following channels:
| Notes . Pursuant to an effective shelf registration statement, investors who meet the applicable financial suitability requirements and have completed our investor account opening process may purchase unsecured, borrower payment dependent notes that correspond to payments received on an underlying standard program loan selected by the investor. |
| Certificates and Funds. Accredited investors and qualified purchasers may establish a relationship with LC Advisors, LLC (LCA), a registered investment advisor and our wholly owned subsidiary, or another third-party advisor in order to indirectly invest in certificates, or they may directly purchase a certificate from the Trust or interests in separate limited partnership entities that purchase certificates from the Trust. The certificates are settled with cash flows from underlying standard or custom program loans selected by the investor. Neither certificates nor limited partnership interests can be purchased through our website. |
|
Whole Loan Purchases. Certain institutional investors, such as banks, seek to hold the actual loan on their balance sheet. To meet this need, we sell entire standard or custom program loans to these |
52
investors. In connection with these sales, the investor owns all right, title and interest in each loan. For regulatory purposes, the investor also has access to the underlying borrower information, but is prohibited from contacting or marketing to the borrower in any manner and agrees to hold such borrower information in compliance with all applicable privacy laws. We continue to service these loans after they are sold and can only be removed as the servicer in limited circumstances. |
Our note channel consists of the notes that we issue. When an investor registers, the investor enters into an investor agreement with us that governs the investors purchases of notes. Our note channel is supported by our website knowledge base and our investor services group who provide basic customer support to these investors.
Our certificate channel consists of funds and accounts managed by LCA, a registered investment advisor with operations distinct from those of Lending Club, or managed by other third-party advisors, or direct purchasers. Certificate investors typically seek to invest larger amounts as compared to the average note investor and often desire a more hands off approach to investing. Certificates are sold in private transactions by the Trust, which acquires and holds loans for the sole benefit of certificate investors. Investors in certificates generally pay an asset-based management fee instead of the cash flow-based servicing fee paid by investors in notes.
LCA manages several funds that purchase certificates. Each fund provides a passive investment strategy around target loan grade and term allocation, such as 36-month 60% A and 40% B loans, and allows investors to more easily deploy large investment amounts and reinvest payments of principal and investment returns. LCA also manages separately managed accounts (SMAs). Investors who utilize SMAs often have investment criteria that differ from the LCA funds investment strategies and desire more control over their investment strategies. LCAs management practices are guided by a three-member investment policy committee. Day-to-day operations are conducted by LCA employees and by certain personnel who have been engaged to provide specific services to LCA and its clients.
Our whole loan channel consists of the whole loans that we or our issuing banks sell in their entirety to investors through private transactions. Our institutional group is the primary point of contact for whole loan purchasers throughout the life of the relationship, from sourcing and establishing the relationship, negotiating the purchase and servicing agreement, undertaking diligence and ultimately managing the ongoing relationship. Under the whole loan purchase agreements, we establish the investors accounts and set out the procedures for the purchase of loans, including any purchase amount limitations, which we control in our discretion. We and the purchaser also make limited representations and warranties and agree to indemnify each other for breaches of the purchase agreement. The purchaser also agrees to simultaneously enter into a servicing agreement with us acting as servicer.
For all investment channels, we agree to repurchase loans in cases of confirmed identity theft.
Our unit economics are attractive given our low cost of borrower and investor acquisition, low capital costs and high operational leverage from automation. We optimize borrower acquisition channels by understanding risk profiles to maximize conversion of potential loan applicants. Investor acquisitions come mostly from referrals, due to our historical ability to provide attractive risk-adjusted returns. We measure contribution margin as a way to evaluate the unit economics of loans originated through our marketplace. As our marketplace has become more efficient, our contribution margin has generally increased over time and, for the nine months ended September 30, 2014, was 44.1%.
We have experienced significant growth since our marketplace launched in 2007. For the years ended December 31, 2012 and 2013, we facilitated loan originations through our marketplace of $717.9 million and $2.1 billion, respectively, representing an increase of 188%. For the nine months ended September 30, 2013 and 2014, we facilitated loan originations through our marketplace of $1.4 billion and $3.0 billion, respectively, representing an increase of 117%. For the years ended December 31, 2012 and 2013, our total net revenue was $33.8 million and $98.0 million, respectively, representing an increase of 190%. For the nine months ended September 30, 2013 and
53
2014, our total net revenue was $64.5 million and $143.0 million, respectively, representing an increase of 122%. Our historical growth rates in facilitating loan originations through our marketplace reflect a deliberate strategy that allowed us to build and develop the various enterprise functions to support our scale, including customer support, operations, risk controls, compliance and technology. Borrower and investor demand will continue to inform our business and loan product decisions, but we will not compromise the long-term viability of our marketplace to pursue excessive near-term growth rates that we believe would result in borrower or investor experiences below our standards.
Change in Fiscal Year
In December 2012, we changed our fiscal year end from March 31 to December 31. The change was effective as of December 31, 2012, and the nine months ended December 31, 2012 represent the transition period.
Springstone
In April 2014, we acquired all of the outstanding limited liability company interests of Springstone, a company that facilitates education and patient finance loans through two issuing banks. For its role in loan facilitation, Springstone earns transaction fees paid by the issuing bank and service provider at the time of origination, which averaged approximately 5.0% of the initial loan balance as of September 30, 2014. Currently, Springstone does not earn any servicing fees, as loans are originated, retained and serviced by the respective issuing bank. We currently intend to continue to have these loans funded and serviced through existing issuing banks while we develop plans to integrate these loans into our standard program over time.
Key Operating and Financial Metrics
We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
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2013 | 2014 | |||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||
(unaudited) |
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Loan originations |
$ | 321,010 | $ | 608,348 | $ | 2,064,626 | $ | 1,366,253 | $ | 2,962,520 | ||||||||||
Contribution (1) |
$ | 15,536 | $ | 28,927 | $ | 43,458 | $ | 27,806 | $ | 63,374 | ||||||||||
Contribution margin (1) |
(12.6 | )% | 28.9 | % | 44.4 | % | 43.1 | % | 44.1 | % | ||||||||||
Adjusted EBITDA (1) |
$ | (11,395 | ) | $ | (2,557 | ) | $ | 15,227 | $ | 8,713 | $ | 13,384 | ||||||||
Adjusted EBITDA margin (1) |
(73.3 | )% | (8.8 | )% | 15.5 | % | 13.5 | % | 9.3 | % |
(1) | Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see Reconciliations of Non-GAAP Financial Measures. |
Loan Originations
Loans to qualified borrowers are originated by our issuing bank partners. We generate revenue from transaction fees paid by issuing banks for our role in matching borrowers with investors to enable loan originations. Loan originations consist of loans acquired by us, which are either retained by us and financed primarily by the issuance of notes pursuant to the Note Registration Statement or loans sold to the Trust, which acquires capital through the sale of certificates, or are sold to unrelated third parties, and other loan originations by our issuing bank partners that we facilitated but did not purchase. We believe originations are a key indicator of the adoption rate of our marketplace, growth of our brand, scale of our business, strength of our network effect, economic competitiveness of our products and future growth. Loan originations have increased significantly over time due to the increased awareness of our brand, our high borrower and investor satisfaction rates, the effectiveness of our borrower acquisition channels, a strong track record of loan performance and the expansion of
54
our capital sources. Factors that could affect loan originations include the interest rate and economic environment, the competitiveness of our products, the success of our operational efforts to balance investor and borrower demands, any limitations on the ability of our issuing banks to originate loans, our ability to develop new products or enhance existing products for borrowers and investors, the success of our sales and marketing initiatives and the success of borrower and investor acquisition and retention.
Contribution and Contribution Margin
Contribution is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, general and administrative expense, stock-based compensation expense and income tax expense (benefit). Contribution margin is calculated by dividing contribution by total operating revenue. Contribution and contribution margin are measures used by our management and board of directors to understand and evaluate our core operating performance and trends. Contribution and contribution margin have varied from period to period and have generally increased over time. Factors that affect our contribution and contribution margin include revenue mix, variable marketing expenses and origination and servicing expenses. For more information regarding the limitations of contribution and contribution margin and a reconciliation of net income (loss) to contribution, see Reconciliations of Non-GAAP Financial Measures.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, acquisition and related expense, depreciation and amortization, amortization of intangible assets, stock-based compensation expense and income tax expense (benefit). Adjusted EBITDA margin is calculated as adjusted EBITDA divided by total operating revenue. Adjusted EBITDA is a measure used by our management and board of directors to understand and evaluate our core operating performance and trends. Adjusted EBITDA has generally improved over time due to our increased revenue and efficiencies in the scale of our operations. For more information regarding the limitations of adjusted EBITDA and adjusted EBITDA margin and a reconciliation of net income (loss) to adjusted EBITDA, see Reconciliations of Non-GAAP Financial Measures.
Factors Affecting Our Results
Economic Environment
The demand for our loan products from borrowers and investors is dependent upon interest rates offered and the return earned relative to other comparable or substitute products. While borrower appetite for consumer and small business credit has typically remained strong in most economic environments, general economic factors and conditions, including the general interest rate environment and unemployment rates, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. For example, a significant interest rate increase could cause potential borrowers to defer seeking loans as they wait for rates to settle. Additionally, if weakness in the economy emerges and actual or expected default rates increase, our investors may delay or reduce their loan investments. However, we believe our marketplace will continue to offer an attractive value proposition to borrowers and investors in all economic and interest rate environments relative to other alternatives.
Effectiveness of Scoring Models
Our ability to attract borrowers and investors to our marketplace is significantly dependent on our ability to effectively evaluate a borrowers credit profile and likelihood of default. Our ability to effectively segment borrowers into relative risk profiles impacts our ability to offer attractive interest rates for borrowers as well as our ability to offer investors attractive returns, both of which directly relate to our users confidence in our marketplace. We utilize credit decisioning and scoring models that assign each loan offered on our marketplace a corresponding interest rate and origination fee. Our investors returns are a function of the assigned interest rates for each particular loan invested in less any defaults over the term of the applicable loan. We believe we have a history of effectively evaluating borrowers credit profiles and likelihood of defaults, as evidenced by the performance of various loan vintages facilitated through our
55
marketplace. The following charts display the historical lifetime cumulative net charge-off rates through September 30, 2014, by booking year, for all grades and 36- and 60-month terms of standard program loans for each of the years shown.
We evaluate our marketplaces credit decisioning and scoring models on a regular basis and leverage the additional data on loan history experience, borrower behavior, economic factors and prepayment trends that we accumulate to continually improve the models. If we are unable to effectively evaluate borrowers credit profiles, borrowers and investors may lose confidence in our marketplace.
Product Innovation
We have made and intend to continue to make substantial investments and incur expenses to research and develop or otherwise acquire new financial products for borrowers and investors. Our revenue growth to date has been a function of, and our future success will depend in part on, successfully meeting borrower and investor demand with new and innovative loan and investment options. For example, in early 2014, we began offering small business loans to qualified investors in private transactions, bringing the benefit of our innovative marketplace model, online delivery and process automation to small business owners. For investors, we have introduced automated investing, an application programming interface (API), investment funds and other separately managed accounts that make investing in loans easier. We also recently acquired Springstone and plan to incorporate its education and patient finance loans into our standard program over time. Failure to successfully
56
develop and offer innovative products could adversely affect our operating results and we may not recoup the costs of new products.
Marketing Effectiveness and Strategic Relationships
We intend to continue to dedicate significant resources to our marketing and brand advertising efforts and strategic relationships. Our marketing efforts are designed to build awareness of Lending Club and attract borrowers and investors to our marketplace. We use a diverse array of marketing channels and are constantly seeking to improve and optimize our experience both on- and offline to achieve efficiency and a high level of borrower and investor satisfaction. We also continue to invest in our strategic relationships to raise awareness of our platform and attract borrowers and investors to our marketplace. Our operating results and ability to sustain and grow loan volume will depend, in part, on our ability to continue to make effective investments in marketing and the effectiveness of our strategic relationships.
Regulatory Environment
The regulatory environment for credit is complex and evolving, creating both challenges and opportunities that could affect our financial performance. We expect to continue to spend significant resources to comply with various federal and state laws and various licensing requirements designed to, among other things, protect borrowers (such as truth in lending, equal credit opportunity, fair credit reporting and fair debt collections practices) and investors. Our marketplace incorporates a number of automated features to help comply with these laws in an efficient and cost effective manner. While new laws and regulations or changes under existing laws and regulations could make facilitating loans or investment opportunities more difficult to achieve on acceptable terms, or at all, these events could also provide new product and market opportunities. To the extent we seek to grow internationally, we would become subject to additional foreign regulation and related compliance requirements and expense.
Components of Results of Operations
Total Net Revenue
Our primary sources of revenue consist of fees charged for transactions through or related to our marketplace. Our fees include transaction, servicing and management fees.
Transaction Fees
Transaction fees are fees paid by the issuing banks to us for the work we perform through our marketplace in facilitating originations. The amount of these fees is based upon the terms of the loan, including grade, rate, term and other factors. As of September 30, 2014, these fees ranged from 1% to 6% of the initial principal amount of a loan. In addition, for education and patient finance loans, transaction fees may exceed 6% as they include fees earned from issuing banks and service providers. These fees are recognized as a component of operating revenue at the time of loan issuance.
Effective July 1, 2013, we elected to account for loans we intend to sell to whole loan purchasers at fair value. Under this election, the purchase of such loans is recorded at fair value and all related transaction fees and costs are recorded when earned or incurred, respectively. Prior to this change, from December 1, 2012 through June 30, 2013, transaction fees and costs were included in the computation of the gain or loss on the sale of the loan, which was recorded in other revenue on the consolidated statement of operations. As such, transaction fees are now reflected in transaction fees and not in other revenue on the statement of operations. In accordance with GAAP, for this type of accounting change, we are not permitted to reclassify the prior period amounts to conform to this current presentation.
Servicing Fees
Servicing fees paid to us vary based on investment channel. Note investors pay us a servicing fee equal to 1% of each payment amount received from the borrower and whole loan purchasers pay a monthly servicing fee
57
up to 1.3% per annum on the month-end principal balance of loans serviced. The servicing fee compensates us for the costs we incur in servicing the related loan, including managing payments from borrowers, payments to investors and maintaining investors account portfolios.
We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third parties or when the servicing contract commences. Over the life of the loan, changes in the estimated fair value of servicing assets and liabilities are included in servicing fees in the period in which the changes occur.
The following table provides the outstanding principal balance of loans that we serviced at the end of the periods indicated, by the method that the loans were financed.
Loans Serviced by Method Financed |
March 31, 2012 | December 31, 2012 | December 31, 2013 | September 30, 2014 | ||||||||||||
(in millions) | ||||||||||||||||
(unaudited) |
||||||||||||||||
Notes |
$ | 273.7 | $ | 397.1 | $ | 688.3 | $ | 983.3 | ||||||||
Certificates |
93.2 | 398.7 | 1,171.7 | 1,601.1 | ||||||||||||
Whole loans sold |
| 9.6 | 406.5 | 1,372.1 | ||||||||||||
Financed by Lending Club |
5.2 | 0.5 | 0.4 | 0.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 372.1 | $ | 805.9 | $ | 2,266.9 | $ | 3,956.8 | ||||||||
|
|
|
|
|
|
|
|
Management Fees
Accredited investors and qualified purchasers can invest in limited partner interests in investment funds managed by LCA. LCA typically charges these interest holders a monthly management fee based on the month-end balance of their assets under management, ranging from 0.7% to 1.2% per annum. This fee may be waived or reduced for individual limited partners at the discretion of the general partner. LCA does not earn any carried interest from the investment funds. For separately managed account certificate holders, LCA earns a management fee typically ranging from 0.85% to 1.2% per annum of the month-end balance of their assets under management. This fee may be waived or reduced for individual separately managed accounts at the discretion of LCA.
Other Revenue
Other revenue consists of revenue from gains and losses on sales of whole loans and referral revenue. Certain investors investing through our marketplace acquire standard or custom program loans in their entirety. In connection with these whole loan sales, in addition to the transaction fee earned in respect of the corresponding loan, we recognize a gain or loss on the sale of that loan based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee (loans are typically sold at par). From December 1, 2012 through June 30, 2013, we included in the gain calculation on whole loan sales the amount of the transaction fees earned in respect of those loans, resulting in higher gains on sale and lower transaction fees.
Net Interest Income (Expense) and Other Adjustments
Net Interest Income (Expense). We do not assume principal or interest risk on loans originated through our marketplace as it matches borrowers and investors. We only make principal and interest payments on notes issued pursuant to the Note Registration Statement to the extent we receive borrower payments. We are only required to deliver payments as a servicer on loans held by third parties and to the Trust for certificates issued by it related to the corresponding loans only to the extent we actually receive borrower payments. As a result, on our statement of operations for any period and balance sheet as of any date (i) interest income on loans corresponds to the interest expense on notes and certificates and (ii) loan balances correspond to note and certificate balances, with any variations largely resulting from timing differences between the crediting of principal and interest payments on loans versus the disbursement of those payments to investors.
58
From time to time, however, we may make limited loan investments without us issuing a corresponding note to investors, resulting in differences between total interest income and expense amounts on our statement of operations and total loan and notes and certificates balances on our balance sheets. These loan investments have been related primarily to customer accommodations and have been insignificant. We do not anticipate that such investments will be material in the foreseeable future.
Additionally, interest income (expense) includes interest income earned on cash and cash equivalents and interest expense incurred on the term loan.
Other Adjustments: Fair Value Adjustments on Loans, Notes and Certificates and Benefit (Provision) for Losses on Loans at Amortized Cost. We estimate the fair value of loans and their related notes and certificates using a discounted cash flow valuation methodology. The discounted cash flow valuation methodology uses the historical defaults and losses and recoveries on our loans over the past several years to project future losses and net cash flows on loans. The changes in the fair values of loans, notes and certificates are shown on our consolidated statement of operations on a gross basis. Due to the payment dependent feature of the notes and certificates, fair value adjustments on the loans offset the effect of fair value adjustments on the notes and certificates, resulting in no net effect on our earnings. As discussed above, we invest in a limited amount of loans for customer accommodation purposes. These loans are included on our balance sheet with no corresponding note or certificate, and as such the change in fair value of these loans are recorded through the statement of operations with no offsetting affect. These fair value adjustments have been immaterial for the periods presented, and we do not anticipate that such investments will be material in the foreseeable future.
We previously financed certain loans using sources of funds other than our issuance of notes or sales of loans to the Trust or unaffiliated third parties and accounted for those loans at amortized cost, reduced by a valuation allowance for loan losses incurred as of the balance sheet date. All loans acquired and held after September 2011 have been accounted for at fair value. The balance of loans at amortized cost declined to zero during the quarter ended December 31, 2012.
Operating Expenses
Our primary operating expenses consist of sales and marketing expense, origination and servicing expense and general and administrative expense, including engineering and product development and other general and administrative expense.
Sales and Marketing
Sales and marketing expense consists primarily of variable marketing expenses, including those related to borrower and investor acquisition and retention and general brand and awareness building, and salaries, benefits and stock-based compensation expense related to our sales and marketing staff.
Origination and Servicing
Origination and servicing expense consists primarily of salaries, benefits and stock-based compensation expense related to our credit, collections, customer support and payment processing staff and vendor costs associated with facilitating and servicing loans.
General and Administrative
Engineering and Product Development. Engineering and product development expense consists primarily of salaries, benefits and stock-based compensation expense for our engineering and product development team and the cost of subcontractors who work on the development and maintenance of our platform. Engineering and product development expense also includes non-capitalized hardware and software costs and depreciation and amortization of technology assets.
59
Other. Other general and administrative expense consists primarily of salaries, benefits and stock-based compensation expense for our accounting and finance, business development, legal, human resources and facilities staff, professional fees related to legal and accounting, facilities expense and compensation expense related to the acquisition of Springstone. The amount of this compensation expense that we expect to record during the years ended December 31, 2014, 2015, 2016 and 2017 is $10.8 million, $10.6 million, $3.7 million and $0.5 million, respectively, which assumes satisfaction of vesting and other obligations.
Income Tax
Provision for income taxes consists of federal and state income taxes in the United States and deferred income taxes and changes in the related valuation allowance reflecting the net tax effects of temporary difference between the carrying amounts of assets and liabilities for financial reporting purpose and the amounts used for income tax purposes.
At December 31, 2013, we had federal and state net operating loss carry-forwards of approximately $43.9 million and $40.7 million, respectively, to offset future taxable income. These federal and state net operating loss carry-forwards will begin expiring in 2027 and 2016, respectively. Additionally, at December 31, 2013, we had federal and state research and development tax credit carry-forwards of approximately $0.6 million and $0.5 million, respectively. The federal credit carry-forwards will begin expiring in 2016 and the state credits may be carried forward indefinitely. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has historically been recorded to recognize only deferred tax assets that are more likely than not to be realized.
Results of Operations
The following tables set forth the consolidated statement of operations data for each of the periods presented:
Year Ended
March 31, 2012 |
Nine Months
Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||
(audited) | (unaudited) | |||||||||||||||||||
Consolidated Statement of Operations Data: |
||||||||||||||||||||
Operating revenues: |
||||||||||||||||||||
Transaction fees |
$ | 13,701 | $ | 26,013 | $ | 85,830 | $ | 55,214 | $ | 133,835 | ||||||||||
Servicing fees |
1,222 | 1,474 | 3,951 | 2,485 | 6,301 | |||||||||||||||
Management fees |
206 | 720 | 3,083 | 2,083 | 4,163 | |||||||||||||||
Other revenue (expense) |
407 | 720 | 5,111 | 4,708 | (438 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating revenue |
15,536 | 28,927 | 97,975 | 64,490 | 143,861 | |||||||||||||||
Net interest income (expense) and other adjustments |
261 | (334 | ) | 27 | 15 | (854 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total net revenue |
15,797 | 28,593 | 98,002 | 64,505 | 143,007 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses (1) : |
||||||||||||||||||||
Sales and marketing |
12,571 | 14,723 | 39,037 | 26,577 | 60,808 | |||||||||||||||
Origination and servicing |
5,099 | 6,134 | 17,217 | 11,044 | 26,135 | |||||||||||||||
General and administrative: |
||||||||||||||||||||
Engineering and product development |
2,712 | 3,994 | 13,922 | 9,140 | 22,987 | |||||||||||||||
Other |
7,359 | 7,980 | 20,518 | 13,294 | 55,875 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
27,741 | 32,831 | 90,694 | 60,055 | 165,805 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
(11,944 | ) | (4,238 | ) | 7,308 | 4,450 | (22,798 | ) | ||||||||||||
Income tax expense |
| | | | 1,059 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (11,944 | ) | $ | (4,238 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
(footnote appears on following page)
60
(1) | Includes stock-based compensation expense as follows: |
Year Ended
March 31, 2012 |
Nine Months
Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Stock-Based Compensation Expense:
|
||||||||||||||||||||
Sales and marketing |
$ | 152 | $ | 216 | $ | 1,313 | $ | 767 | $ | 5,029 | ||||||||||
Origination and servicing |
31 | 60 | 424 | 170 | 1,427 | |||||||||||||||
General and administrative: |
||||||||||||||||||||
Engineering and product development |
95 | 406 | 2,171 | 1,019 | 3,487 | |||||||||||||||
Other |
382 | 428 | 2,375 | 1,390 | 15,946 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stock-based compensation expense |
$ | 660 | $ | 1,110 | $ | 6,283 | $ | 3,346 | $ | 25,889 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The following table sets forth the consolidated statement of operations data for each of the periods presented as a percentage of total net revenue:
Year Ended
March 31, 2012 |
Nine Months
Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
Consolidated Statement of Operations Data: |
||||||||||||||||||||
Operating revenue: |
||||||||||||||||||||
Transaction fees |
87 | % | 91 | % | 88 | % | 86 | % | 94 | % | ||||||||||
Servicing fees |
8 | 5 | 4 | 4 | 4 | |||||||||||||||
Management fees |
1 | 2.5 | 3 | 3 | 3 | |||||||||||||||
Other revenue (expense) |
2 | 2.5 | 5 | 7 | 0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating revenue |
98 | 101 | 100 | 100 | 101 | |||||||||||||||
Net interest income (expense) and other adjustments |
2 | (1 | ) | 0 | 0 | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total net revenue |
100 | 100 | 100 | 100 | 100 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses (1) : |
||||||||||||||||||||
Sales and marketing |
80 | 52 | 40 | 41 | 43 | |||||||||||||||
Origination and servicing |
32 | 21 | 18 | 17 | 18 | |||||||||||||||
General and administrative: |
||||||||||||||||||||
Engineering and product development |
17 | 14 | 14 | 14 | 16 | |||||||||||||||
Other |
47 | 28 | 21 | 21 | 39 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
176 | 115 | 93 | 93 | 116 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
(76 | ) | (15 | ) | 7 | 7 | (16 | ) | ||||||||||||
Income tax expense |
0 | 0 | 0 | 0 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
(76 | )% | (15 | )% | 7 | % | 7 | % | (17 | )% | ||||||||||
|
|
|
|
|
|
|
|
|
|
(footnote appears on following page)
61
(1) | Include stock-based compensation expense as follows: |
Year Ended
March 31, 2012 |
Nine Months
Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
|
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
Stock-Based Compensation Expense: |
||||||||||||||||||||
Sales and marketing |
1 | % | 1 | % | 1 | % | 1 | % | 4 | % | ||||||||||
Origination and servicing |
0 | 0 | 1 | 0 | 1 | |||||||||||||||
General and administrative: |
||||||||||||||||||||
Engineering and product development |
1 | 1 | 2 | 2 | 2 | |||||||||||||||
Other |
2 | 2 | 2 | 2 | 11 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stock-based compensation expense |
4 | % | 4 | % | 6 | % | 5 | % | 18 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2014 and 2013
Total Net Revenue
Nine Months Ended
September 30, |
Change ($) | Change (%) | ||||||||||||||
2013 | 2014 | |||||||||||||||
(in thousands, expect percentages) | ||||||||||||||||
(unaudited) | ||||||||||||||||
Transaction fees |
$ | 55,214 | $ | 133,835 | $ | 78,621 | 142 | % | ||||||||
Servicing fees |
2,485 | 6,301 | 3,816 | 154 | ||||||||||||
Management fees |
2,083 | 4,163 | 2,080 | 100 | ||||||||||||
Other revenue (expense) |
4,708 | (438 | ) | (5,146 | ) | N/M | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating revenue |
64,490 | 143,861 | 79,371 | 123 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income (expense) and other adjustments |
15 | (854 | ) | (869 | ) | N/M | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net revenue |
$ | 64,505 | $ | 143,007 | $ | 78,502 | 122 | % | ||||||||
|
|
|
|
|
|
|
|
Transaction Fees. Transaction fees were $133.8 million and $55.2 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 142%. This increase was primarily due to an increase in loan originations through our marketplace. Originations were $2,962.5 million and $1,366.3 million for the nine months ended September 30, 2014 and 2013 respectively, an increase of 117%. In addition, during the nine months ended September 30, 2013, $4.9 million in transaction fees were included in the gain on sale of whole loans, which was included in other revenue. The average transaction fees as a percentage of the initial principal amount of the loan, including the $4.9 million in other revenue, were 4.5% and 4.4% for the nine months ended September 30, 2014 and 2013, respectively. This increase was primarily due to higher percentages of 60-month loans and loans with higher risk grades, each of which have higher corresponding transaction fees, and the addition of education and patient finance loans.
Servicing Fees. Servicing fees were $6.3 million and $2.5 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 154%. The increase was primarily due to increased loan payments and balances of notes and certain certificates and sold loans outstanding serviced by us for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, partially offset by changes in the fair value of servicing assets and liabilities.
Management Fees. Management fees were $4.2 million and $2.1 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 100%. The increase in management fees was primarily due to an increase in assets under management and outstanding certificate balances.
62
Other Revenue (Expense). Other revenue (expense) was $(0.4) million and $4.7 million for the nine months ended September 30, 2014 and 2013, respectively, a decrease of 109%. The decrease was primarily due to a $6.0 million decrease in gain on sale of whole loans to unrelated purchasers, which was partially offset by an increase in referral commissions. From January 1, 2013 through June 30, 2013, we included $4.9 million of transaction fees that were earned in respect of those loans in the gain on whole loan sales, which resulted in higher gains on sale and lower transaction fees.
Components of Net Interest Income (Expense) and Other Adjustments
Nine Months Ended September 30, | ||||||||
2013 | 2014 | |||||||
(in thousands) | ||||||||
(unaudited) |
||||||||
Interest income: |
||||||||
Loans |
$ | 124,760 |
$
|
252,293
|
|
|||
Cash and cash equivalents |
11 | 5 | ||||||
|
|
|
|
|||||
Total interest income |
124,771 | 252,298 | ||||||
|
|
|
|
|||||
Interest expense: |
||||||||
Notes and certificates |
(124,727 | ) | (252,212 | ) | ||||
Term loan |
| (842 | ) | |||||
|
|
|
|
|||||
Total interest expense |
(124,727 | ) | (253,054 | ) | ||||
|
|
|
|
|||||
Net interest income (expense) |
44 | (756 | ) | |||||
Fair value adjustments on loans, notes and certificates, net |
(29 | ) | (98 | ) | ||||
|
|
|
|
|||||
Net interest income (expense) and other adjustments |
$ | 15 | $ | (854 | ) | |||
|
|
|
|
|||||
Average outstanding balances: |
||||||||
Loans |
$ | 1,138,193 | $ | 2,246,575 | ||||
Notes and certificates |
$ | 1,144,528 | $ | 2,258,254 |
Interest Income on Loans. Interest income from loans was $252.3 million and $124.8 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in interest income was primarily due to the increase in the outstanding balances of loans.
Interest Expense on Notes and Certificates. Interest expense for notes and certificates was $252.2 million and $124.7 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of notes and certificates.
Interest Expense on Term Loan . Interest expense on term loan was $0.8 million for the nine months ended September 30, 2014, which was related to the borrowing incurred in April 2014 related to the Springstone acquisition. We did not have any term loans outstanding during the nine months ended September 30, 2013 and did not incur any interest expense for that period.
Fair Value Adjustments on Loans, Notes and Certificates. The fair value adjustments on loans were largely offset by the fair value adjustments on the notes and certificates at fair value due to the borrower payment dependent design of the notes and certificates and to the principal balances of the loans being similar to the combined principal balances of the notes and certificates. Accordingly, the net fair value adjustment losses on loans and notes and certificates were immaterial for the nine months ended September 30, 2014 and 2013.
Net Interest I ncome (Expense) and Other Adjustments . Net interest income (expense) and other adjustments were $(0.9) million and $15,000 for the nine months ended September 30, 2014 and 2013, respectively. The decrease in net interest income (expense) and other adjustments was primarily due to the interest expense incurred on the term loan.
63
Operating Expenses
Nine Months Ended
September 30, |
Change ($) | Change (%) | ||||||||||||||
2013 | 2014 | |||||||||||||||
(in thousands, except percentages) | ||||||||||||||||
(unaudited) |
||||||||||||||||
Sales and marketing |
$ | 26,577 | $ | 60,808 | $ | 34,231 | 129 | % | ||||||||
Origination and servicing |
11,044 | 26,135 | 15,091 | 137 | ||||||||||||
General and administrative: |
||||||||||||||||
Engineering and product development |
9,140 | 22,987 | 13,847 | 151 | ||||||||||||
Other |
13,294 | 55,875 | 42,581 | 320 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
$ | 60,055 | $ | 165,805 | $ | 105,750 | 176 | % | ||||||||
|
|
|
|
|
|
|
|
Sales and Marketing. Sales and marketing expense was $60.8 million and $26.6 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 129%. The increase was due to a $29.1 million increase in variable marketing expenses.
Origination and Servicing. Origination and servicing expense was $26.1 million and $11.0 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 137%. The increase was primarily due to a $10.3 million increase in compensation expense as we expanded our credit and customer support teams due to increasing loan applications and a $4.2 million increase in consumer reporting agency and loan processing costs, which was primarily driven by higher loan volume.
General and Administrative
Engineering and Product Development. Engineering and product development expense was $23.0 million and $9.1 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 151%. The increase was primarily due to a $9.7 million increase in personnel-related expenses resulting from increased headcount and contract labor expense as we enhanced our website tools and functionality and a $3.8 million increase in expensed equipment and software, support and maintenance and depreciation expense reflecting our continued investment in technology infrastructure.
We capitalized $8.2 million and $2.0 million of software development costs for the nine months ended September 30, 2014 and 2013, respectively. These costs generally are amortized over a three year period.
Other. Other general and administrative expense was $55.9 million and $13.3 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of 320%. The increase was primarily due to a $26.7 million increase in compensation expense, $6.4 million of which was the amortization of the compensation arrangement related to certain key continuing employees of Springstone, with the remainder primarily related to an increase in headcount and stock-based compensation expense, an $8.3 million increase in professional services and amortization of intangibles and a $2.1 million increase in contingent legal liabilities.
Income Taxes
For the nine months ended September 30, 2014, we recorded $1.1 million of income tax expense. The $1.1 million of income tax expense related to the amortization of tax-deductible goodwill from the acquisition of Springstone, which gives rise to an indefinite-lived deferred tax liability. There was no income tax benefit recorded on the pretax loss due to an increase in the deferred tax asset valuation allowance. We recorded no income tax expense for the nine months ended September 30, 2013 because the corporate income tax liabilities due on our taxable income were offset by usage of prior years net operating losses and tax credit carry-forwards.
64
Fiscal Year Ended December 31, 2013, Nine Months Ended December 31, 2012 and Fiscal Year Ended March 31, 2012
Total Net Revenue
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Change ($) | Change (%) | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Transaction fees |
$ | 26,013 | $ | 85,830 | $ | 59,817 | 230 | % | ||||||||
Servicing fees |
1,474 | 3,951 | 2,477 | 168 | ||||||||||||
Management fees |
720 | 3,083 | 2,363 | 328 | ||||||||||||
Other revenue |
720 | 5,111 | 4,391 | 610 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating revenue |
28,927 | 97,975 | 69,048 | 239 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income (expense) and other adjustments |
(334 | ) | 27 | 361 | 108 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net revenue |
$ | 28,593 | $ | 98,002 | $ | 69,409 | 243 | % | ||||||||
|
|
|
|
|
|
|
|
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Change ($) | Change (%) | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Transaction fees |
$ | 13,701 | $ | 26,013 | $ | 12,312 | 90 | % | ||||||||
Servicing fees |
1,222 | 1,474 | 252 | 21 | ||||||||||||
Management fees |
206 | 720 | 514 | 250 | ||||||||||||
Other revenue |
407 | 720 | 313 | 77 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating revenue |
15,536 | 28,927 | 13,391 | 86 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income (expense) and other adjustments |
261 | (334 | ) | (595 | ) | (228 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net revenue |
$ | 15,797 | $ | 28,593 | $ | 12,796 | 81 | % | ||||||||
|
|
|
|
|
|
|
|
Transaction Fees. Transaction fees were $85.8 million and $26.0 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 230%. The increase in these fees was primarily due to an increase in loans originated through our marketplace from $608.2 million for the nine months ended December 31, 2012 to $2,064.6 million for the fiscal year ended December 31, 2013, an increase of 239%. In addition, during the six months ended June 30, 2013, $4.9 million in transaction fees were included in the gain on sale of whole loans, which was included in other revenue. The average transaction fees as a percentage of the initial principal balance of the loan, including the $4.9 million in other revenue, were 4.4% and 4.3% for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively. The increase was primarily due to a higher percentage of 60-month loans and loans with higher risk grades, each of which have higher corresponding transaction fees.
Transaction fees were $26.0 million and $13.7 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 90%. The increase in these fees was primarily due to an increase in loans originated through our marketplace from $321.1 million for the fiscal year ended March 31, 2012 to $608.2 million for the nine months ended December 31, 2012, an increase of 90%.
Servicing Fees. Servicing fees were $4.0 million and $1.5 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 168%. The increase in servicing fees was primarily due to increased balances of notes and certain certificates and sold loans outstanding serviced by us for the fiscal year ended December 31, 2013 as compared to the nine months ended December 31, 2012.
65
Servicing fees were $1.5 million and $1.2 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 21%. The increase in servicing fees was primarily due to an increase in the aggregate amount of outstanding note and certain certificate balances for the fiscal year ended December 31, 2012 as compared to the fiscal year ended March 31, 2012.
Management Fees. Management fees were $3.1 million and $0.7 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 328%. The increase in management fees was due primarily to an increase in the total assets under management and outstanding certificate balances.
Management fees were $0.7 million and $0.2 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 250%. The increase in management fees was due primarily to an increase in the total assets under management and outstanding certificate balances.
Other Revenue. Other revenue was $5.1 million and $0.7 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 610%. The increase in other revenue was primarily due to a $3.5 million increase in gain on sale of whole loans to unrelated purchasers. The $3.5 million increase included $4.9 million in transaction fees, which are included in the gain on sale of whole loans from January 1, 2013 to June 30, 2013.
Other revenue was $0.7 million and $0.4 million for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, respectively, an increase of 77%. The increase in other revenue was primarily due to an increase in gain on sale of whole loans to unrelated purchasers.
Components of Net Interest Income (Expense) and Other Adjustments
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Change ($) | Change (%) | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 56,829 | $ | 187,495 | $ | 130,666 | 230 | % | ||||||||
Cash and cash equivalents |
32 | 12 | (20 | ) | (63 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest income |
56,861 | 187,507 | 130,646 | 230 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest expense: |
||||||||||||||||
Notes and certificates |
(56,631 | ) | (187,447 | ) | (130,816 | ) | 231 | |||||||||
Loans payable |
(11 | ) | | 11 | (100 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest expense |
(56,642 | ) | (187,447 | ) | (130,805 | ) | 231 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income (expense) |
219 | 60 | (159 | ) | (73 | ) | ||||||||||
Fair value adjustments on loans, notes and certificates, net |
(595 | ) | (33 | ) | 562 | (94 | ) | |||||||||
Benefit from loss reversal on loans at amortized cost |
42 | | (42 | ) | (100 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income (expense) and other adjustments |
$ | (334 | ) | $ | 27 | $ | 361 | (108 | %) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Average outstanding balances: |
||||||||||||||||
Loans |
$ | 551,923 | $ | 1,278,631 | $ | 726,708 | 132 | % | ||||||||
Notes and certificates |
$ | 552,523 | $ | 1,285,764 | $ | 733,241 | 133 | % |
66
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Change ($) | Change (%) | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 32,636 | $ | 56,829 | $ | 24,193 | 74 | % | ||||||||
Cash and cash equivalents |
24 | 32 | 8 | 33 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest income |
32,660 | 56,861 | 24,201 | 74 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest expense: |
||||||||||||||||
Notes and certificates |
(31,777 | ) | (56,631 | ) | (24,854 | ) | 78 | |||||||||
Loans payable |
(253 | ) | (11 | ) | 242 | (96 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest expense |
(32,030 | ) | (56,642 | ) | (24,612 | ) | 77 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income (expense) |
630 | 219 | (411 | ) | (65 | ) | ||||||||||
Fair value adjustments on loans, notes and certificates, net |
(1 | ) | (595 | ) | (594 | ) | N/M | |||||||||
Benefit (provision) for losses on loans at amortized cost |
(368 | ) | 42 | 410 | (111 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income (expense) and other adjustments |
$ | 261 | $ | (334 | ) | $ | (595 | ) | (228 | %) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Average outstanding balances: |
||||||||||||||||
Loans |
$ | 255,281 | $ | 551,923 | $ | 296,642 | 116 | % | ||||||||
Notes and certificates |
$ | 250,291 | $ | 552,523 | $ | 302,232 | 121 | % |
Interest Income on Loans. For the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, interest income from loans was $187.5 million and $56.8 million, respectively. The increase in interest income was primarily due to the increase in the outstanding balances of loans.
For the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, interest income from loans was $56.8 million and $32.6 million, respectively. The increase in interest income was primarily due to the increase in the outstanding balances of loans.
Interest Expense on Notes and Certificates. For the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, we recorded interest expense for notes and certificates of $187.4 million and $56.6 million, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of notes and certificates.
For the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, we recorded interest expense for notes and certificates of $56.6 million and $31.8 million, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of notes and certificates.
Interest Expense on Loans Payable. We did not incur any interest expense for loans payable for the fiscal year ended December 31, 2013. For loans payable that were paid in full in July 2012, we recorded interest expense for loans payable of $11,000 and $0.3 million, for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, respectively.
Fair Value Adjustments on Loans, Notes and Certificates . The fair value adjustment losses on loans were largely offset by the fair value adjustment gains on the notes and certificates at fair value due to the borrower payment dependent design of the notes and certificates and due to the principal balances of the loans being similar to the combined principal balances of the notes and certificates. Accordingly, the net fair value adjustment losses for loans, notes and certificates were $33,000, $0.6 million and $1,000 for the fiscal year ended December 31, 2013, the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, respectively.
67
Benefit (Provision) for Losses on Loans at Amortized Cost. We formerly financed certain loans using sources of funds other than notes and certificates and accounted for those loans at amortized cost, reduced by a valuation allowance for loan losses incurred as of the balance sheet date. All loans acquired and held after September 2011 have been accounted for at fair value. The balance of loans at amortized cost declined to zero during the quarter ended December 31, 2012.
There was no provision or benefit related to loans at amortized cost for the year ended December 31, 2013 because there were no such loans outstanding during that period. We recorded provisions (benefits) for losses on loans at amortized cost of $(42,000) and $0.4 million during the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, respectively. The reduction in the loan loss provision was due to the roll-off of the remaining balance of loans at amortized cost.
Net Interest Income (Expense) and Other Adjustments. Net interest income (expense) and other adjustments were $27,000 and $(0.3) million for the year ended December 31, 2013 and nine months ended December 31, 2012, respectively. The increase was primarily due to a reduction in the net fair value adjustment losses on loans, notes and certificates of $0.6 million, which was partially offset by a decline in net interest income of $0.2 million.
Net interest income (expense) and other adjustments were $(0.3) million and $0.3 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively. The net decline was primarily due to a decline in net interest income of $0.4 million and an increase in the net fair value adjustment losses on loans, notes and certificates of $0.6 million, which was partially offset by a decline in provision for losses on loans at amortized cost of $0.4 million.
Operating Expenses
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Change ($) | Change (%) | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Sales and marketing |
$ | 14,723 | $ | 39,037 | $ | 24,314 | 165 | % | ||||||||
Origination and servicing |
6,134 | 17,217 | 11,083 | 181 | ||||||||||||
General and administrative: |
||||||||||||||||
Engineering and product development |
3,994 | 13,922 | 9,928 | 249 | ||||||||||||
Other |
7,980 | 20,518 | 12,538 | 157 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
$ | 32,831 | $ | 90,694 | $ | 57,863 | 176 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Change ($) | Change (%) | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Sales and marketing |
$ | 12,571 | $ | 14,723 | $ | 2,152 | 17 | % | ||||||||
Origination and servicing |
5,099 | 6,134 | 1,035 | 20 | ||||||||||||
General and administrative: |
||||||||||||||||
Engineering and product development |
2,712 | 3,994 | 1,282 | 47 | ||||||||||||
Other |
7,359 | 7,980 | 621 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
$ | 27,741 | $ | 32,831 | $ | 5,090 | 18 | % | ||||||||
|
|
|
|
|
|
|
|
Sales and Marketing. Sales and marketing expense was $39.0 million and $14.7 million for the fiscal year ended December 31, 2013 and nine months ended December 31, 2012, respectively, an increase of 165%. The increase was primarily due to an $18.7 million increase in variable marketing expenses driven by higher loan originations and a $5.1 million increase in personnel-related expenses.
68
Sales and marketing expense was $14.7 million and $12.6 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 17%. The increase was primarily due to a $1.4 million increase in variable marketing expenses driven by higher loan originations and a $1.3 million increase in personnel-related expenses.
Origination and Servicing. Origination and servicing expense was $17.2 million and $6.1 million for the fiscal year ended December 31, 2013 and nine months ended December 31, 2012, respectively, an increase of 181%. The increase was primarily due to a $7.3 million increase in personnel-related expenses and a $3.9 million increase in consumer reporting agency and loan processing costs, both driven by higher loan volumes.
Origination and servicing expense was $6.1 million and $5.1 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 20%. The increase was primarily due to a $0.6 million increase in personnel-related expenses.
General and Administrative
Engineering and Product Development. Engineering and product development expense was $13.9 million and $4.0 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 249%. The increase was primarily driven by continued investment in our platform, which included a $7.1 million increase in personnel-related expenses resulting from increased headcount and contract labor expense and a $2.1 million increase in expensed equipment and software and depreciation expense.
Engineering and product development expense was $4.0 million and $2.7 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 47%. The increase was primarily driven by continued investment in our platform, which included an $0.8 million increase in personnel-related expenses resulting from increased headcount and contract labor expense and a $0.2 million increase in expensed equipment and software and depreciation expense.
We capitalized $3.8 million and $0.4 million in software development costs for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively.
Other. Other general and administrative expense was $20.5 million and $8.0 million for the fiscal year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 157%. The increase was primarily due to a $7.3 million increase in personnel-related expenses from increased headcount and a $2.3 million increase in rent and facilities expenses.
Other general and administrative expense was $8.0 million and $7.4 million for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, respectively, an increase of 8%. The increase was primarily due to a $0.3 million increase in personnel-related expenses from increased headcount.
Income Taxes
We recorded no income tax expense related to the pre-tax income for the fiscal year ended December 31, 2013 due to the availability of deferred tax assets subject to a full valuation to offset current year income. We recorded no tax benefit related to our pre-tax losses for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012 because the tax benefit on such losses were offset by increases in the valuation allowance. Deferred tax assets, such as the future benefit of net operating loss deductions against future taxable income, can be recognized if realization of such tax-related assets is more likely than not. Given our history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for our net operating loss carry-forwards. Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets.
69
Quarterly Results of Operations
The following table sets forth our unaudited consolidated statement of operations data for each of the seven quarters ended September 30, 2014. The unaudited quarterly statement of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited quarterly statement of operations data. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this prospectus.
Three Months Ended | ||||||||||||||||||||||||||||
Mar. 31,
2013 |
Jun. 30,
2013 |
Sep. 30,
2013 |
Dec. 31,
2013 |
Mar. 31,
2014 |
Jun. 30,
2014 |
Sep. 30,
2014 |
||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||
(unaudited) |
||||||||||||||||||||||||||||
Consolidated Statement of Operations Data: |
||||||||||||||||||||||||||||
Operating revenue: |
||||||||||||||||||||||||||||
Transaction fees |
$ | 13,582 | $ | 16,393 | $ | 25,239 | $ | 30,616 | $ | 35,412 | $ | 45,801 | $ | 52,622 | ||||||||||||||
Servicing fees |
715 | 882 | 888 | 1,466 | 1,780 | 1,468 | 3,053 | |||||||||||||||||||||
Management fees |
494 | 720 | 869 | 1,000 | 1,094 | 1,461 | 1,608 | |||||||||||||||||||||
Other revenue (expense), net |
1,452 | 2,847 | 409 | 403 | 416 | (109 | ) | (745 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating revenue |
16,243 | 20,842 | 27,405 | 33,485 | 38,702 | 48,621 | 56,538 | |||||||||||||||||||||
Net interest income (expense) and other adjustments |
8 | (3 | ) | 10 | 12 | 16 | (396 | ) | (474 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total net revenue |
16,251 | 20,839 | 27,415 | 33,497 | 38,718 | 48,225 | 56,064 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating expenses (1) : |
||||||||||||||||||||||||||||
Sales and marketing |
7,707 | 8,410 | 10,460 | 12,460 | 20,582 | 19,225 | 21,001 | |||||||||||||||||||||
Origination and servicing |
2,634 | 3,414 | 4,996 | 6,173 | 7,402 | 8,566 | 10,167 | |||||||||||||||||||||
General and administrative: |
||||||||||||||||||||||||||||
Engineering and product development |
2,248 | 3,043 | 3,849 | 4,782 | 5,722 | 8,030 | 9,235 | |||||||||||||||||||||
Other |
3,622 | 4,190 | 5,482 | 7,224 | 12,311 | 20,951 | 22,613 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating expenses |
16,211 | 19,057 | 24,787 | 30,639 | 46,017 | 56,772 | 63,016 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income (loss) before income taxes |
40 | 1,782 | 2,628 | 2,858 | (7,299 | ) | (8,547 | ) | (6,952 | ) | ||||||||||||||||||
Income tax expense (benefit) |
| 85 | (85 | ) | | | 640 | 419 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income (loss) |
$ | 40 | $ | 1,697 | $ | 2,713 | $ | 2,858 | $ | (7,299 | ) | $ | (9,187 | ) | (7,371 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Other Data (2) : |
||||||||||||||||||||||||||||
Loan originations |
$ | 352,885 | $ | 446,225 | $ | 567,142 | $ | 698,373 | $ | 791,348 | $ | 1,005,946 | $ | 1,165,226 | ||||||||||||||
Contribution (3) |
$ | 6,015 | $ | 9,231 | $ | 12,560 | $ | 15,654 | $ | 14,578 | $ | 21,915 | $ | 26,881 | ||||||||||||||
Contribution margin (3) |
37.0 | % | 44.3 | % | 45.8 | % | 46.7 | % | 37.7 | % | 45.1 | % | 47.5 | % | ||||||||||||||
Adjusted EBITDA (3) |
$ | 732 | $ | 3,054 | $ | 4,927 | $ | 6,514 | $ | 1,866 | $ | 4,002 | $ | 7,517 | ||||||||||||||
Adjusted EBITDA margin (3) |
4.5 | % | 14.7 | % | 18.0 | % | 19.5 | % | 4.8 | % | 8.2 | % | 13.3 | % |
(footnotes appear on following page)
70
(1) | Includes stock-based compensation as follows: |
Three Months Ended | ||||||||||||||||||||||||||||
Mar. 31,
2013 |
Jun. 30,
2013 |
Sep. 30,
2013 |
Dec. 31,
2013 |
Mar. 31,
2014 |
Jun. 30,
2014 |
Sep. 30,
2014 |
||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Stock-Based Compensation Expense: |
||||||||||||||||||||||||||||
Sales and marketing |
$ | 87 | $ | 174 | $ | 506 | $ | 547 | $ | 3,502 | $ | 615 | $ | 912 | ||||||||||||||
Origination and servicing |
26 | 39 | 105 | 255 | 358 | 470 | 599 | |||||||||||||||||||||
General and administrative: |
||||||||||||||||||||||||||||
Engineering and product development |
174 | 326 | 519 | 1,151 | 737 | 1,258 | 1,492 | |||||||||||||||||||||
Other |
239 | 410 | 741 | 983 | 2,436 | 5,976 | 7,534 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total stock-based compensation expense |
$ | 526 | $ | 949 | $ | 1,871 | $ | 2,936 | $ | 7,033 | $ | 8,319 | $ | 10,537 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) | For more information about loan originations, contribution margin, adjusted EBITDA and adjusted EBITDA margin, see Key Operating and Financial Metrics. |
(3) | Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of these measures to the most comparable GAAP measure, see Reconciliations of Non-GAAP Financial Measures. |
Quarterly Trends
Our total net revenue has generally increased since our inception, including the seven quarters ended September 30, 2014. This increase has been driven primarily from an increase in loan originations and an increase in the outstanding principal balances of loans, notes and certificates. There is some seasonality in demand for personal loans, which is generally lower in the first and fourth quarters. While our growth has somewhat masked this seasonality, our operating results could be affected by such seasonality in the future.
Beyond growth in originations, revenues have also fluctuated due to changes in the mix of loans, notes and certificates. Historically, mix changes within our loan grades, which have differing transaction fees by loan grade, have driven some variability within transaction fees when measured as a percentage of originations. Mix changes in notes, certificates and loan sales drive changes in servicing fees and management fees. Net revenue for the quarter ended September 30, 2014 included $5.7 million of revenue from Springstone, which was acquired in April 2014. Effective July 1, 2013, we changed our accounting for loans sold, which resulted in transaction fees associated with loans sold being recorded in transactions fees in the statement of operations. In the future, we expect grade mix changes, product mix changes and mix changes in notes, certificates and loan sales to continue to drive variability in our revenues.
Operating expenses have increased over the last seven quarters primarily due to an increase in loan originations and an increase in the outstanding principal balances of loans that we service. Sales and marketing expenses have generally increased sequentially from quarter-to-quarter, primarily due to increases in originations and headcount-related growth, which includes stock-based compensation expense. Specifically in the quarter ended March 31, 2014, sales and marketing expense increased due to higher marketing expenditures on a new product, sales and marketing channel testing and seasonality. Origination and servicing expenses have increased sequentially from quarter-to-quarter, primarily due to increases in originations, in the total outstanding principal balances of loans that we service and in headcount-related growth, which includes stock-based compensation expense.
For the three months ended September 30, 2014, our marketplace facilitated $1,165 million in loans, comprised of $874 million in standard program and $291 million in custom program loans. Of the standard program loans, notes issued pursuant to the Note Registration Statement accounted for $223 million, or 26%, of investments during the period, certificates issued by the Trust accounted for $284 million, or 32%, and whole
71
loan sales accounted for $367 million, or 42%. For the three months ended September 30, 2014, of the capital invested in standard program loans, $383 million, or 44%, was invested by individuals through investment vehicles or managed accounts, $226 million, or 26%, was invested by self-managed, individual investors and $262 million, or 30%, was invested by institutional investors. Of the custom program loans, certificates issued by the Trust accounted for $25 million, or 9%, whole loan sales accounted for $150 million, or 51%, and education and patient finance loans facilitated through Springstones platform accounted for $116 million, or 40%, of the investments during the three months ended September 30, 2014. Of the capital invested in custom program loans during this period, $22 million, or 8%, was invested by individuals through investment vehicles or managed accounts and $269 million, or 92%, was invested by institutional investors.
As a result of these quarterly trends and fluctuations in revenue, sales and marketing and origination and servicing expenses, our contribution margin has fluctuated over the periods and will continue to fluctuate quarterly based on continued investment in the business.
Engineering and product development expenses have increased quarterly due to headcount-related growth, which includes stock-based compensation expense, and increases in hardware and software investments, including amortization of capitalized software. Specifically, we increased hiring in 2014, which increased our personnel-related expenses in 2014.
Other general and administrative expense has increased quarterly primarily due to headcount-related expenses, including accounting, finance, risk management, business development, legal, human resources and facilities staff as well as external legal, audit and facilities expenses. In addition, expenses increased in 2014 due to the acquisition of Springstone, which increased compensation expense, acquisition-related expenses and amortization of intangibles. Stock-based compensation expense also increased in 2014 due to increased hiring and as a result of retention stock option grants to key employees.
Reconciliations of Non-GAAP Financial Measures
Contribution is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, general and administrative expense, stock-based compensation expense and income tax expense (benefit). Contribution margin is calculated by dividing contribution by total operating revenue. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding net interest income (expense) and other adjustments, acquisition and related expense, depreciation and amortization, amortization of intangible assets, stock-based compensation expense and income tax expense (benefit). Adjusted EBITDA margin is calculated as adjusted EBITDA divided by total operating revenue.
Our non-GAAP measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin should not be viewed as substitutes for, or superior to, net income (loss) as prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate these measures differently, which may reduce their usefulness as a comparative measure. Contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin do not consider the potentially dilutive impact of stock-based compensation. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA and adjusted EBITDA margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements. Adjusted EBITDA and adjusted EBITDA margin do not reflect tax payments that may represent a reduction in cash available to us.
In evaluating contribution, contribution margin, adjusted EBITDA and adjusted EBITDA margin, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation.
72
The following tables present a reconciliation of net income (loss) to contribution for each of the periods indicated:
Years Ended December 31, |
Nine Months Ended
September 30, |
|||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||
(unaudited) |
||||||||||||||||||||||||||||
Reconciliation of Net Income (Loss) to Contribution: |
||||||||||||||||||||||||||||
Net income (loss) |
$ | (10,255 | ) | $ | (10,807 | ) | $ | (12,269 | ) | $ | (6,862 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||||
Net interest expense (income) and other adjustments. |
1,550 | 708 | (222 | ) | 238 | (27 | ) | (15 | ) | 854 | ||||||||||||||||||
General and administrative expense: |
||||||||||||||||||||||||||||
Engineering and product development |
1,766 | 1,951 | 2,289 | 4,855 | 13,922 | 9,140 | 22,987 | |||||||||||||||||||||
Other |
3,430 | 3,330 | 6,572 | 10,024 | 20,518 | 13,294 | 55,875 | |||||||||||||||||||||
Stock-based compensation expense (1) |
33 | 109 | 39 | 377 | 1,737 | 937 | 6,456 | |||||||||||||||||||||
Income tax expense |
| | | | | | 1,059 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Contribution |
$ | (3,476 | ) | $ | (4,709 | ) | $ | (3,591 | ) | $ | 8,632 | $ | 43,458 | $ | 27,806 | $ | 63,374 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating revenue |
$ | 1,372 | $ | 5,723 | $ | 12,530 | $ | 34,045 | $ | 97,975 | $ | 64,490 | $ | 143,861 | ||||||||||||||
Contribution margin |
(253.4 | )% | (82.3 | )% | (28.7 | )% | 25.4 | % | 44.4 | % | 43.1 | % | 44.1 | % |
(1) | Consists of stock-based compensation expense not included in general and administrative expense as follows: |
Years Ended December 31, |
Nine
Months Ended September 30, |
|||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Stock-Based Compensation Expense: |
||||||||||||||||||||||||||||
Sales and marketing |
$ | 28 | $ | 94 | $ | 30 | $ | 302 | $ | 1,313 | $ | 767 | $ | 5,029 | ||||||||||||||
Origination and servicing |
5 | 15 | 9 | 75 | 424 | 170 | 1,427 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 33 | $ | 109 | $ | 39 | $ | 377 | $ | 1,737 | $ | 937 | $ | 6,456 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31, 2012 |
Nine Months
Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||
(unaudited) |
||||||||||||||||||||
Reconciliation of Net Income (Loss) to Contribution: |
||||||||||||||||||||
Net income (loss) |
$ | (11,944 | ) | $ | (4,238 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||
Net interest expense (income) and other adjustments |
(261 | ) | 334 | (27 | ) | (15 | ) | 854 | ||||||||||||
General and administrative expense: |
||||||||||||||||||||
Engineering and product development |
2,712 | 3,994 | 13,922 | 9,140 | 22,987 | |||||||||||||||
Other |
7,359 | 7,980 | 20,518 | 13,294 | 55,875 | |||||||||||||||
Stock-based compensation expense (1) |
183 | 276 | 1,737 | 937 | 6,456 | |||||||||||||||
Income tax expense |
| | | | 1,059 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Contribution |
$ | (1,951 | ) | $ | 8,346 | $ | 43,458 | $ | 27,806 | $ | 63,374 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating revenue |
$ | 15,536 | $ | 28,927 | $ | 97,975 | $ | 64,490 | $ | 143,861 | ||||||||||
Contribution margin |
(12.6 | )% | 28.9 | % | 44.4 | % | 43.1 | % | 44.1 | % |
(footnote appears on following page)
73
(1) | Consists of stock-based compensation expense not included in general and administrative expense as follows: |
Year Ended
March 31, 2012 |
Nine
Months Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Stock-Based Compensation Expense: |
||||||||||||||||||||
Sales and marketing |
$ | 152 | $ | 216 | $ | 1,313 | $ | 767 | $ | 5,029 | ||||||||||
Origination and servicing |
31 | 60 | 424 | 170 | 1,427 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 183 | $ | 276 | $ | 1,737 | $ | 937 | $ | 6,456 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Three Months Ended | ||||||||||||||||||||||||||||
Mar. 31,
2013 |
Jun. 30,
2013 |
Sep. 30,
2013 |
Dec. 31,
2013 |
Mar. 31,
2014 |
Jun. 30,
2014 |
Sep. 30,
2014 |
||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||
(unaudited) |
||||||||||||||||||||||||||||
Reconciliation of Net Income (Loss) to Contribution: |
||||||||||||||||||||||||||||
Net income (loss) |
$ | 40 | $ | 1,697 | $ | 2,713 | $ | 2,858 | $ | (7,299 | ) | $ | (9,187 | ) | $ | (7,371 | ) | |||||||||||
Net interest expense (income) and other adjustments. |
(8 | ) | 3 | (10 | ) | (12 | ) | (16 | ) | 396 | 474 | |||||||||||||||||
General and administrative expense: |
||||||||||||||||||||||||||||
Engineering and product development |
2,248 | 3,043 | 3,849 | 4,782 | 5,722 | 8,030 | 9,235 | |||||||||||||||||||||
Other |
3,622 | 4,190 | 5,482 | 7,224 | 12,311 | 20,951 | 22,613 | |||||||||||||||||||||
Stock-based compensation expense (1) |
113 | 213 | 611 | 802 | 3,860 | 1,085 | 1,511 | |||||||||||||||||||||
Income tax expense (benefit) |
| 85 | (85 | ) | | | 640 | 419 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Contribution |
$ | 6,015 | $ | 9,231 | $ | 12,560 | $ | 15,654 | $ | 14,578 | $ | 21,915 | $ | 26,881 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating revenue |
$ | 16,243 | $ | 20,842 | $ | 27,405 | $ | 33,485 | $ | 38,702 | $ | 48,621 | $ | 56,538 | ||||||||||||||
Contribution margin |
37.0 | % | 44.3 | % | 45.8 | % | 46.7 | % | 37.7 | % | 45.1 | % | 47.5 | % |
(1) | Consists of stock-based compensation expense not included in general and administrative expense as follows: |
Three Months Ended | ||||||||||||||||||||||||||||
Mar. 31,
2013 |
Jun. 30,
2013 |
Sep. 30,
2013 |
Dec. 31,
2013 |
Mar. 31,
2014 |
Jun. 30,
2014 |
Sep. 30,
2014 |
||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Stock-Based Compensation Expense: |
||||||||||||||||||||||||||||
Sales and marketing |
$ | 87 | $ | 174 | $ | 506 | $ | 547 | $ | 3,502 | $ | 615 | $ | 912 | ||||||||||||||
Origination and servicing |
26 | 39 | 105 | 255 | 358 | 470 | 599 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 113 | $ | 213 | $ | 611 | $ | 802 | $ | 3,860 | $ | 1,085 | $ | 1,511 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
The following tables present a reconciliation of net income (loss) to adjusted EBITDA for each of the periods indicated:
Years Ended December 31, |
Nine Months Ended
September 30, |
|||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | 2013 | 2014 | ||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||
(unaudited) |
||||||||||||||||||||||||||||
Reconciliation of Net Income (Loss) to Adjusted EBITDA: |
||||||||||||||||||||||||||||
Net income (loss) |
$ | (10,255 | ) | $ | (10,807 | ) | $ | (12,269 | ) | $ | (6,862 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||||
Net interest expense (income) and other adjustments. |
1,550 | 708 | (222 | ) | 238 | (27 | ) | (15 | ) | 854 | ||||||||||||||||||
Acquisition and related expense |
| | | | | | 2,819 | |||||||||||||||||||||
Depreciation and amortization: |
||||||||||||||||||||||||||||
Engineering and product development |
| | 47 | 260 | 1,336 |
|
761
|
|
|
3,327
|
|
|||||||||||||||||
Other |
73 | 87 | 86 | 28 | 327 |
|
171
|
|
|
783
|
|
|||||||||||||||||
Amortization of intangible assets |
| | | | | | 2,510 | |||||||||||||||||||||
Stock-based compensation expense |
134 | 319 | 291 | 1,412 | 6,283 | 3,346 | 25,889 | |||||||||||||||||||||
Income tax expense |
| | | | | | 1,059 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Adjusted EBITDA |
$ | (8,498 | ) | $ | (9,693 | ) | $ | (12,067 | ) | $ | (4,924 | ) | $ | 15,227 | $ | 8,713 | $ | 13,384 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating revenue |
$ | 1,372 | $ | 5,723 | $ | 12,530 | $ | 34,045 | $ | 97,975 | $ | 64,490 | $ | 143,861 | ||||||||||||||
Adjusted EBITDA margin |
(619.4 | )% | (169.4 | )% | (96.3 | )% | (14.5 | )% | 15.5 | % | 13.5 | % | 9.3 | % |
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Reconciliation of Net Income (Loss) to Adjusted EBITDA: |
||||||||||||||||||||
Net income (loss) |
$ | (11,944 | ) | $ | (4,238 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||
Net interest expense (income) and other adjustments. |
(261 | ) | 334 | (27 | ) | (15 | ) | 854 | ||||||||||||
Acquisition and related expense |
| | | | 2,819 | |||||||||||||||
Depreciation and amortization: |
||||||||||||||||||||
Engineering and product development |
90 | 219 | 1,336 | 761 | 3,327 | |||||||||||||||
Other |
60 | 18 | 327 | 171 | 783 | |||||||||||||||
Amortization of intangible assets |
| | | | 2,510 | |||||||||||||||
Stock-based compensation expense |
660 | 1,110 | 6,283 | 3,346 | 25,889 | |||||||||||||||
Income tax expense |
| | | | 1,059 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted EBITDA |
$ | (11,395 | ) | $ | (2,557 | ) | $ | 15,227 | $ | 8,713 | $ | 13,384 | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating revenue |
$ | 15,536 | $ | 28,927 | $ | 97,975 | $ | 64,490 | $ | 143,861 | ||||||||||
Adjusted EBITDA margin |
(73.3 | )% | (8.8 | )% | 15.5 | % | 13.5 | % | 9.3 | % |
75
Three Months Ended | ||||||||||||||||||||||||||||
Mar. 31,
2013 |
Jun. 30,
2013 |
Sep. 30,
2013 |
Dec. 31,
2013 |
Mar. 31,
2014 |
Jun. 30,
2014 |
Sep. 30,
2014 |
||||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||||||
(unaudited) |
||||||||||||||||||||||||||||
Reconciliation of Net Income (Loss) to Adjusted EBITDA: |
||||||||||||||||||||||||||||
Net income (loss) |
$ | 40 | $ | 1,697 | $ | 2,713 | $ | 2,858 | $ | (7,299 | ) | $ | (9,187 | ) | $ | (7,371 | ) | |||||||||||
Net interest expense (income) and other adjustments. |
(8 | ) | 3 | (10 | ) | (12 | ) | (16 | ) | 396 | 474 | |||||||||||||||||
Acquisition and related expense |
| | | | 1,141 | 1,378 | 301 | |||||||||||||||||||||
Depreciation and amortization: |
||||||||||||||||||||||||||||
Engineering and product development |
153 | 258 | 349 | 577 | 791 | 1,088 | 1,447 | |||||||||||||||||||||
Other |
21 | 62 | 89 | 155 | 216 | 245 | 322 | |||||||||||||||||||||
Amortization of intangible assets |
| | | | | 1,123 | 1,388 | |||||||||||||||||||||
Stock-based compensation expense |
526 | 949 | 1,871 | 2,936 | 7,033 | 8,319 | 10,537 | |||||||||||||||||||||
Income tax expense (benefit) |
| 85 | (85 | ) | | | 640 | 419 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Adjusted EBITDA |
$ | 732 | $ | 3,054 | $ | 4,927 | $ | 6,514 | $ | 1,866 | $ | 4,002 | $ | 7,517 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating revenue |
$ | 16,243 | $ | 20,842 | $ | 27,405 | $ | 33,485 | $ | 38,702 | $ | 48,621 | $ | 56,538 | ||||||||||||||
Adjusted EBITDA margin |
4.5 | % | 14.7 | % | 18.0 | % | 19.5 | % | 4.8 | % | 8.2 | % | 13.3 | % |
Springstone Acquisition
In April 2014, we acquired all of the outstanding limited liability company interests of Springstone, which offers education and patient finance loans. Springstone utilizes two issuing banks and a network of providers. The financial results of Springstone are included in our consolidated financial statements from April 17, 2014, the date of acquisition.
Under the terms of the purchase agreement, the sellers received at the closing an aggregate of $113 million in cash and $25 million worth of shares of our Series F convertible preferred stock. In connection with the acquisition, we also paid $2.4 million for transaction costs incurred by Springstone. For accounting purposes, the purchase price was $111.8 million, which was comprised of $109.0 million in cash and shares of Series F convertible preferred stock with an aggregate value of $2.8 million. To secure the retention of certain key employees, a total of $25.6 million comprised of $22.1 million of shares of Series F convertible preferred stock (Escrow Shares) and $3.5 million of cash were placed in a third-party escrow and are subject to certain vesting and forfeiture conditions applicable to these employees continuing employment over a three-year period from the closing. These amounts will be accounted for as a compensation arrangement and expensed over the three-year vesting period. Additionally, $19.0 million of the cash consideration and certain Escrow Shares were placed in a third-party escrow for 15 months from the closing date to secure, in part, the indemnification obligations of the sellers under the purchase agreement. We funded the cash portion of the purchase price with proceeds from our Series F convertible preferred stock financing and a $50.0 million term loan with a syndicate of lenders led by Morgan Stanley Senior Funding, Inc.
Liquidity and Capital Resources
From inception through September 30, 2014, we have raised approximately $168.0 million, net of issuance costs, through preferred stock financings. Historically, we have funded our operations with proceeds from debt financing, preferred stock issuances and common stock issuances. For the fiscal year ended December 31, 2013 and the nine months ended September 30, 2014, we generated positive cash flows from operations.
At September 30, 2014, we had $82.7 million in available cash and cash equivalents. We primarily hold our excess unrestricted cash in short-term interest-bearing money market funds at highly-rated financial institutions. We believe that our current cash position is sufficient to meet our current liquidity needs for at least the next 12 months.
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At September 30, 2014, we also had $25.2 million in restricted cash that consisted primarily of pledged cash of $3.0 million as security for our primary issuing bank, $3.4 million for an investor as part of a credit support agreement, $16.8 million of cash received from investors and not yet applied to their accounts and $1.5 million as security for a correspondent bank that clears our borrowers and investors cash transactions.
The following table sets forth certain cash flow information for the periods presented:
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended September 30, | |||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||
(audited) | (unaudited) | |||||||||||||||||||
Cash provided by (used in) |
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Operating activities |
$ | (11,086 | ) | $ | (393 | ) | $ | 1,139 | $ | 16,202 | $ | 35,395 | ||||||||
Investing activities (1) |
(218,806 | ) | (441,145 | ) | (1,120,615 | ) | (782,338 | ) | (925,478 | ) | ||||||||||
Financing activities (1) |
247,800 | 462,845 | 1,116,224 | 775,771 | 923,458 | |||||||||||||||
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Net increase (decrease) in cash |
$ | 17,908 | $ | 21,307 | $ | (3,252 | ) | $ | 9,635 | $ | 33,375 | |||||||||
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(1) | Cash used in investing activities includes the purchase of loans and repayment of loans originated through our marketplace. Cash provided by financing activities includes our issuance of notes and the Trusts issuance of certificates to investors and the repayment of those notes and certificates. These amounts generally correspond to each other. |
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2014 was $35.4 million. Cash flow provided by operating activities was primarily driven by changes in certain components of our working capital, including a decrease in other assets of $13.2 million that was primarily related to payments of receivables due from investors and an increase in accrued expenses and other liabilities of $10.8 million. Additionally, $10.4 million of net cash provided by operating activities was generated by the net loss for the nine months ended September 30, 2014 of $23.9 million, adjusted for non-cash stock-based compensation and warrant expense of $25.9 million, depreciation and amortization expense of $6.6 million and non-cash changes in the fair values of servicing assets and liabilities of $1.8 million, net. Also included in cash flows from operations were the purchases and sales of loans that we intended to sell, along with the gain or loss on such sales, and changes in accrued interest receivable and payable, which largely offset one another.
Net cash provided by operating activities for the year ended December 31, 2013 was $1.1 million. Cash flow from operating activities was generated primarily by net income for the year ended December 31, 2013 of $7.3 million, adjusted for non-cash stock-based compensation and warrant expense of $6.5 million, depreciation and amortization expense of $1.7 million and net non-cash changes in the fair values of servicing assets and liabilities of $0.4 million. Additionally, operating cash flows were generated due to changes in certain components of our working capital, including increases in accrued expenses and other liabilities of $4.1 million and accounts payable of $1.8 million. These cash inflows were largely offset by increases in other assets of $21.1 million that were related to increases in receivables due from investors. Also included in cash flows from operations were the purchases and sales of loans that we intended to sell, along with the gain or loss on such sales, and changes in accrued interest receivable and payable, which largely offset one another.
Net cash used in operating activities for the nine months ended December 31, 2012 was $0.4 million. The cash used in operating activities primarily related to the net loss for the nine months ended December 31, 2012 of $4.2 million, adjusted for non-cash stock-based compensation and warrant expense of $1.1 million, depreciation and amortization expense of $0.2 million and net non-cash changes in the fair values of loans, note and certificates of $0.6 million, as well as an increase in other assets of $0.6 million. This cash outflow was partially offset by net operating cash inflows from changes in certain components of our working capital, including an increase in accrued expenses and other liabilities of $1.6 million and a net increase in accrued interest receivable
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and accrued interest payable of $0.9 million. Also included in cash flows from operations were the purchases and sales of loans that we intended sell along, with the gain or loss on such sales, which largely offset one another.
Net cash used in operating activities for the year ended March 31, 2012 was $11.1 million. The cash used in operating activities primarily related to the net loss for the year ended March 31, 2012 of $11.9 million, adjusted for non-cash stock-based compensation and warrant expense of $0.7 million, depreciation and amortization expense of $0.2 million and a non-cash provision for losses on loans at amortized cost of $0.4 million. Additionally, net uses of operating cash flow resulted in changes in certain components of our working capital, including an increase in other assets of $1.5 million, which was partially offset by increases in accounts payable of $0.6 million and accrued expenses and other liabilities of $0.4 million.
Net Cash Used in Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2014 was $925.5 million. Cash used in investing activities primarily resulted from $1.5 billion of cash used to purchase loans at fair value, $109.5 million for the Springstone acquisition, $15.0 million of purchases of property, equipment and software and a $11.4 million increase in restricted cash, partially offset by $739.5 million of principal payments received on loans at fair value.
Net cash used in investing activities for the year ended December 31, 2013 was $1.1 billion, which primarily resulted from $1.6 billion of cash used to purchase loans at fair value, $10.4 million of purchases of property, equipment and software and a $4.7 million increase in restricted cash, partially offset by $511.2 million of principal payments received on loans at fair value.
Net cash used in investing activities for the nine months ended December 31, 2012 was $441.1 million, which primarily resulted from $598.6 million of cash used to purchase loans at fair value, a $2.6 million increase in restricted cash and $1.3 million of purchases of property, equipment and software, partially offset by $160.8 million of principal payments received on loans at fair value.
Net cash used in investing activities for the year ended March 31, 2012 was $218.8 million, which primarily resulted from $320.0 million of cash used to purchase loans at fair value and a $4.0 million increase in restricted cash, partially offset by $105.3 million of cash received as principal payments on loans at fair value.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2014 was $923.5 million. Cash provided by financing activities primarily resulted from $1.5 billion of proceeds from our issuance of notes and sale of loans to the Trust in connection with its issuance of certificates, $64.8 million net proceeds from our sale of Series F convertible preferred stock in connection with the Springstone acquisition, $49.8 million of net proceeds from the issuance of a term loan and an $12.9 million increase in the amount payable to investors, partially offset by $732.3 million in principal payments made on notes and certificates.
Net cash provided by financing activities for the year ended December 31, 2013 was $1.1 billion, which primarily resulted from $1.6 billion of proceeds from our issuance of notes and sale of loans to the Trust in connection with its issuance of certificates, which was partially offset by $504.3 million of principal payments made on notes and certificates.
Net cash provided by financing activities for the nine months ended December 31, 2012 was $462.8 million, which primarily resulted from $606.9 million of proceeds from our issuance of notes and sale of loans to the Trust in connection with its issuance of certificates and $17.3 million net proceeds from our sale of Series E convertible preferred stock, partially offset by $163.9 million of principal payments made on notes and certificates.
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Net cash provided by financing activities for the year ended March 31, 2012 was $247.8 million, which primarily resulted from $319.7 million in proceeds from our issuance of notes and sale of loans to the Trust in connection with its issuance of certificates and $31.9 million in net proceeds from our sale of Series D convertible preferred stock, partially offset by $101.9 million of principal payments made on notes and certificates and $2.6 million of payments on loans payable.
Term Loan
In connection with the Springstone acquisition, we entered into a Credit and Guaranty Agreement with several lenders in April 2014, under which the lenders made a $50.0 million term loan to us. At September 30, 2014, the net outstanding balance on the term loan was $49.2 million. In connection with our entry into the credit agreement, we entered into a Pledge and Security Agreement with Morgan Stanley Senior Funding, Inc.
The term loan matures in April 2017 and requires principal payments of $0.3 million per quarter plus interest, with the remaining then-unpaid principal amount payable at maturity. The term loan can be prepaid at any time without premium or penalty, subject to a minimum prepayment of $1.0 million. The term loan is required to be prepaid in certain circumstances, including upon sales of assets other than loans and upon the issuance of debt or redeemable capital stock. Borrowings under the credit agreement accrued interest at a weighted-average rate of 2.65% per annum for the nine months ended September 30, 2014.
The term loan is also guaranteed by Springstone and LCA and is secured by a first priority lien and security interest in substantially all of our and our subsidiaries assets, not otherwise pledged or restricted, subject to certain exceptions.
The credit and pledge agreements contain certain affirmative and negative covenants applicable to us and our subsidiaries. These include restrictions on our ability to make certain restricted payments, including restrictions on our ability to pay dividends, incur indebtedness, place liens on assets, merge or consolidate, make investments and enter into certain transactions with our affiliates. The credit agreement also requires us to maintain a maximum total leverage ratio (as defined in the credit agreement) of 5.50:1 initially, and decreasing to 3.50:1 after September 30, 2015 (on a consolidated basis). The total leverage ratio as of September 30, 2014 was 2.25:1.
The credit agreement also contains customary events of default, including nonpayment of principal when due, nonpayment of interest, fees or other amounts after a grace period, material inaccuracies of representations and warranties and breaches of covenants, subject in certain cases to a grace period, cross-default to defaults in indebtedness in excess of $25.0 million, bankruptcy, judgments, change in control and other material events. The credit agreement and ancillary agreements provide customary remedies upon an event of default.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements in the fiscal year ended March 31, 2012, the nine months ended December 31, 2012, the fiscal year ended December 31, 2013 or the nine months ended September 30, 2014.
Contingencies
Loan Funding Commitments
For loans listed in the marketplace as a result of direct marketing efforts, we have committed to invest in such loans if investors do not provide funding for all or a portion of such loans. At September 30, 2014, there were 722 such loans in the marketplace with an unfunded balance of $9.0 million. All of these loans were fully funded by investors by October 8, 2014.
In connection with transitional activities following our acquisition of Springstone, in June 2014, we entered into a contingent loan purchase agreement with an issuing bank that originates loans facilitated by Springstone
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and a third-party investor that has agreed to purchase certain of those loans from such bank. The contingent loan purchase commitment provides that we will purchase such loans from the bank if the third-party investor defaults on its loan purchase obligations through December 31, 2014. The contingent loan purchase commitment limits the aggregate amount of such loan originations from inception of the contingent loan purchase commitment through December 31, 2014 to a maximum of $5.0 million. As of September 30, 2014, the amount remaining under the overall limit on the cumulative amount of such loan originations through December 31, 2014 was $2.2 million. We were not required to purchase any such loans pursuant to the contingent loan purchase commitment in the quarter ended September 30, 2014. We do not expect we will be required to purchase any such loans under the contingent loan purchase commitment through its expiration on December 31, 2014.
Credit Support Agreement
We are subject to a credit support agreement with a certificate investor. The credit support agreement requires us to pledge and restrict cash in support of our contingent obligation to reimburse the investor for credit losses on loans underlying the investors certificate that are in excess of a specified aggregate loss threshold. We are contingently obligated to pledge cash, not to exceed $5.0 million, to support this contingent obligation, which cash balance is premised upon the investors certificate purchase volume. As of September 30, 2014, approximately $3.4 million was pledged and restricted to support this contingent obligation.
As of September 30, 2014, the credit losses pertaining to the investors certificate have not exceeded the specified threshold, nor are future credit losses expected to exceed the specified threshold, and no expense or liability has been recorded. We currently do not anticipate recording losses resulting from our contingent obligation under this credit support agreement. If losses related to the credit support agreement are later determined to be likely to occur and are estimable, our results of operations could be affected in the period in which such losses are recorded.
Commitments
Our principal commitments consist of obligations under our loan funding operation in connection with direct marketing efforts, operating leases for office space and contractual commitments for other support services. The following table summarizes our contractual obligations as of December 31, 2013:
Payments Due by Period | ||||||||||||||||||||
Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
(unaudited) |
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Purchase obligations |
$ | 2,267 | $ | 546 | $ | | $ | | $ | 2,813 | ||||||||||
Loan funding obligations (1) |
1,188 | | | | 1,188 | |||||||||||||||
Operating lease obligations (2) |
2,748 | 6,672 | 7,406 | 1,925 | 18,751 | |||||||||||||||
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Total contractual obligations (3) |
$ | 6,203 | $ | 7,218 | $ | 7,406 | $ | 1,925 | $ | 22,752 | ||||||||||
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(1) | For loans listed in our marketplace as a result of direct marketing efforts, we have committed to invest in such loans if investors do not provide funding for all or a portion of such loans. At December 31, 2013, there were 145 of such loans listed in our marketplace with an unfunded balance of $1.2 million. All of these loans were fully invested in by investors as of January 4, 2014. |
(2) | Subsequent to December 31, 2013, we entered into additional operating lease agreements for office space. The payments due in less than 1 year, 1 to 3 years, 3 to 5 years, more than 5 years and total, for these additional leases are $0.6 million, $6.0 million, $7.6 million, $20.6 million and $34.8 million, respectively. |
(3) | The notes and certificates, special purpose limited obligations of us and the Trust, a consolidated variable-interest entity, have been excluded from the table of contractual obligations shown above because payments on those liabilities are only required to be made by us if and when we receive the related loan payments from borrowers. Our own liquidity resources are not required to make any contractual payments on the notes or certificates, except in limited instances of proven identity fraud on a related loan. |
Critical Accounting Policies and Estimates
The accounting policies which are more fully described in Note 2 to the consolidated financial statements reflect our most significant judgments, assumptions and estimates which we believe are critical in understanding and evaluating our reported financial results, including (i) fair value estimates for loans, notes and certificates;
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(ii) stock-based compensation expense; (iii) provision for income taxes, net of valuation allowance for deferred tax assets; (iv) consolidation of variable interest entities; and (v) fair value estimates for servicing assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.
Fair Value of Loans, Notes and Certificates
We have elected fair value accounting for loans and our related notes and the Trusts certificates. The fair value election for these loans, notes and certificates allows symmetrical accounting for the timing and amounts recognized for both expected unrealized losses and charge-off losses on the loans and the related notes and certificates, consistent with the borrower payment dependent design of the notes and certificates.
We estimate the fair values of loans and their related notes and certificates using a discounted cash flow valuation methodology. The fair valuation methodology considers projected prepayments, if significant, and uses the historical actual defaults, losses and recoveries on our loans over the past several years to project future losses and net cash flows on loans.
We include in earnings the estimated unrealized fair value gains or losses during the period of loans, and the offsetting estimated fair value losses or gains attributable to the expected changes in future payments on notes and certificates. See Note 4 to consolidated financial statements included in this prospectus.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. As a result, we are required to estimate the amount of stock-based compensation we expect to be forfeited based on our historical experience. If actual forfeitures differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially impacted.
Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of variables. These variables include the fair value of our common stock, our expected common stock price volatility over the expected life of the options, expected term of the stock option, risk-free interest rates and expected dividends, which are estimated as follows:
| Fair Value of Our Common Stock . The fair value of the shares of common stock underlying stock options has historically been established by our board of directors primarily based upon a valuation provided by an independent third-party valuation firm. Because there has been no public market for our common stock, our board of directors has relied upon this independent valuation and other factors, including, but not limited to, the current status of the technical and commercial success of our operations, our financial condition, the stage of our development and competition to establish the fair value of our common stock at the time of grant of the option. |
| Expected Life . The expected term was estimated using the simplified method allowed under SEC guidance. |
| Volatility . The expected stock price volatility for our common stock was estimated by taking the average historical price volatility for industry peers based on daily price observations. Industry peers consist of several public companies in the technology industry similar in size, stage of life cycle and financial leverage. |
| Risk-Free Rate . The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group. |
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| Dividend Yield . We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero. |
The following table presents the range of assumptions used to estimate the fair value of stock-based awards granted during the periods presented:
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
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Assumed forfeiture rate (annual %) |
8.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||
Expected dividend yield |
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Weighted-average assumed stock price volatility |
63.5 | % | 63.5 | % | 59.1 | % | 63.5 | % | 54.0 | % | ||||||||||
Weighted-average risk-free rate |
1.15 | % | 1.01 | % | 1.46 | % | 1.10 | % | 1.90 | % | ||||||||||
Weighted-average expected life (years) |
6.26 | 6.28 | 6.30 | 6.25 | 6.38 |
Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock, including the following:
| unrelated third party valuations of our common stock; |
| the prices at which we sold shares of our convertible preferred stock to outside investors in arms-length transactions; |
| the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; |
| our results of operations, financial position and capital resources; |
| current business conditions and projections; |
| the lack of marketability of our common stock; |
| the hiring of key personnel and the experience of our management; |
| the introduction of new products; |
| the risk inherent in the development and expansion of our loan products; |
| our stage of development and material risks related to our business; |
| the fact that the option grants involve illiquid securities in a private company; |
| the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given the prevailing market conditions and the nature and history of our business; |
| industry trends and competitive environment; |
| trends in consumer spending, including consumer confidence; |
| overall economic indicators, including gross domestic product, employment, inflation and interest rates; and |
| the general economic outlook. |
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We performed valuations of our common stock that took into account the factors described above and used a combination of financial and market-based methodologies to determine our business enterprise value (BEV) including the following approaches:
| Public Traded Company Method (PTCM) . PTCM is a market approach methodology and assumes that businesses operating in the same industry will share similar characteristics and that the subject businesss value will correlate to those characteristics. Therefore, by comparing the subject business to similar businesses whose financial information and public market value are available may provide a reasonable basis to estimate the subject businesss value. The PTCM provides an estimate of BEV using financial multiples derived from the stock prices of publicly traded companies. In selecting guideline public companies for this analysis, we focused primarily on size, business model and industry. In the selection of the appropriate multiples to apply to our financial metrics, we incorporated any differences between us and the comparable companies around certain characteristics, such as differences in growth, profitability and risk. |
| Market Transaction Method (MTM) . MTM is a market approach methodology and considers transactions in the equity securities of the business being valued. Preferred stock issuances by us and private preferred and common stock sale transactions were considered if they occurred with or among willing and unrelated parties. We evaluated these transactions with particular focus on whether the transaction was relatively close to the valuation date. We choose the weighting for the MTM at each valuation date based on factors such as the volume of transactions, the timing of these transactions and whether the transactions involved investors with access to our financial information. |
We used both of these valuation methodologies at each valuation date and weighted the methodologies based on the facts and circumstances on such date. The resulting value was then allocated to shares of preferred stock, common stock, warrants and options using an option pricing model (OPM) or a probability weighted expected return model (PWERM). Additionally, we have applied a discount for lack of marketability to the value of the common stock to account for a lack of access to an active public market.
Based on an assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, the intrinsic value of stock options outstanding as of September 30, 2014 was $457.2 million, of which $209.8 million and $247.4 million related to stock options that were vested and unvested, respectively.
Goodwill and Intangible Assets
Goodwill represents the fair value of acquired businesses in excess of the aggregate fair value of the identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. Our annual impairment testing date is April 1. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit (defined as a business for which financial information is available and reviewed regularly by our management) exceeds its carrying value. A qualitative assessment may consider macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, or company-specific factors, such as market capitalization in excess of net assets, trends in revenue generating activities and merger or acquisition activity.
If we elect to bypass qualitatively assessing goodwill or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, our management will estimate the fair values of our reporting units and compare them to their carrying values. The estimated fair values of the reporting units are generally established using an income approach based on a discounted cash flow model or a market approach, which compares each reporting unit to comparable companies in its respective industry.
Intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We do not have any indefinite-lived intangible assets.
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Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.
Consolidation of Variable Interest Entities
The determination of whether to consolidate a variable interest entity (VIE) in which we have a variable interest requires a significant amount of analysis and judgment whether we are the primary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIEs activities that most significantly affect the VIEs economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entitys equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support or (ii) when a holders equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entitys activities that have a significant effect on the entitys success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity.
We established the Trust in February 2011 to acquire and hold loans for the benefit of investors who have invested in certificates issued by the Trust. The Trust conducts no other business other than purchasing and retaining loans or portions thereof for the benefit of the funds and their underlying limited partners. The Trust holds loans, the cash flows of which are used to repay obligations under the certificates invested in by the funds, but does not hold any portions of loans that are financed by us directly or through the purchase and sale of notes.
In the event of our insolvency, it is anticipated that the assets of the Trust would not become part of the bankruptcy estate, but that outcome is uncertain. As a result of this risk and uncertainty and in connection with the formation of the funds, it was determined that in order to achieve any reasonable success in raising investment capital, the assets to be invested in by the funds must be held by an entity that was separate and distinct from us (i.e. bankruptcy remote) in order to reduce this risk and uncertainty.
Our capital contributions have been insufficient to allow the Trust to finance its purchase of any significant amount of loans without the issuance of certificates to investors. The Trusts capitalization levels and structure, wherein investors have beneficial interests in loans via the certificates, qualifies the Trust as a VIE. That is, the Trusts equity investment at risk is not sufficient. We believe we are the primary beneficiary of the Trust because of our controlling financial interest in the Trust. Further the Trust is designed to pass along interest rate risk and credit risk to investors in the certificates. Our exposure to the Trust includes our servicing fee revenue from the Trust, our right to reimbursement for expenses and our obligation to repurchase loans from the Trust in certain instances. We perform or direct activities that significantly affect the Trusts economic performance through (i) operation of the platform that enables borrowers to apply for loans purchased by the Trust; (ii) credit underwriting and servicing of loans purchased by the Trust; and (iii) LCAs role to source investors that ultimately purchase certificates that supply the funds for the Trust to purchase loans. Collectively, the activities described above allow us to fund more loans, and to collect the related loan transaction fees, and for LCA to collect the management fees on the investors capital used to purchase certificates, than would be the case without the existence of the Trust. Therefore, we receive significant economic benefits from the existence and activities conducted by the Trust. Accordingly, because we have concluded that capital contributions to the Trust qualify as equity investments in a VIE in which we are the primary beneficiary, we have consolidated the Trusts operations and all intercompany accounts have been eliminated.
We reviewed our relationship with the funds in which LCA is the general partner but in which neither we nor LCA has contributed capital. We concluded that LCAs contractual relationship to the funds does not meet
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the requirements for consolidation of the funds into the consolidated financial statements. Further we determined that our interest as general partner does not represent a variable interest in the funds. As of September 30, 2014, we did not have any controlling interests in funds, other than our interest in the Trust discussed above, that would require inclusion in the consolidated financial statements. Management regularly reviews and reconsiders its previous conclusion regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.
Servicing Assets and Liabilities
We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third-party whole loan buyers or when the servicing contract commences. The gain or loss on a loan sale is recorded in Other Revenue while the component of the gain or loss that is based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee is recorded as an offset in servicing assets or liabilities. Servicing assets and liabilities are recorded in Other Assets and Accrued Expenses and Other Liabilities, respectively, on the consolidated balance sheets. Over the life of the loan, changes in the estimated fair value of servicing assets and liabilities are reported in Servicing Fees on the consolidated statement of operations in the period in which the changes occur.
We use a discounted cash flow model to estimate the fair value of the loan servicing asset or liability, which considers the contractual servicing fee revenue we earn on the loans, estimated market rate servicing fee to service such loans, the current principal balances of the loans and projected servicing revenues over the remaining terms of the loans.
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and interest rates.
Interest Rate Sensitivity
We had cash and cash equivalents of $82.7 million as of September 30, 2014. These amounts were held primarily in cash on deposit with banks and interest-bearing money market accounts, which are short-term. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, we believe that we do not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not reduce interest income because of the low rates currently earned on the liquid investments. Increases in short-term interest rates will modestly increase the interest income earned on the investments.
Because the amounts, interest rates and maturities of loans are almost completely matched and offset by an equal amount of notes and certificates with the exact same interest rates and maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined loan, note and certificate portfolios as a result of changes in interest rates.
We do not hold or issue financial instruments for trading purposes.
Fair Value of Financial Instruments
We use fair value measurements to record fair value adjustments to loans and the related notes and certificates that are recorded at fair value on a recurring basis. Loans and the related notes and certificates do not trade in an active market with readily observable prices. Accordingly, the fair value of loans and the related notes and certificates are determined using a discounted cash flow methodology utilizing assumptions market participants use for credit losses, changes in the interest rate environment and other factors. The fair value
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adjustments for loans are largely offset by the fair value adjustments of the notes and certificates due to the borrower payment dependent design of the notes and certificates and due to the total principal balances of the loans being very close to the combined principal balances of the notes and certificates. Accordingly, we do not have material exposure to market risk with respect to the fair value of these financial instruments.
We also use fair value measurements to record fair value adjustments to loan servicing rights that are recorded at fair value on a recurring basis. Loan servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value of loan servicing assets and liabilities are determined using a discounted cash flow methodology utilizing assumptions market participants use for adequate servicing compensation, credit losses, discount rates and contractual fee income. We do not have a material exposure to market risk with respect to the fair value of these financial instruments.
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Our Mission
Transforming the banking system to make credit more affordable and investing more rewarding.
Overview
Lending Club is the worlds largest online marketplace connecting borrowers and investors. Our marketplace has facilitated over $6 billion in loan originations since it first launched in 2007, of which approximately $1.8 billion were invested in through notes issued pursuant to the Note Registration Statement, $2.5 billion were invested in through certificates issued by the Trust and $1.7 billion were invested in through whole loan sales. In the third quarter of 2014, our marketplace facilitated nearly $1.2 billion in loan originations, of which approximately $0.2 billion were invested in through notes issued pursuant to the Note Registration Statement, $0.3 billion were invested in through certificates issued by the Trust and $0.5 billion were invested in through whole loan sales. We believe a technology-powered online marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors. We have built a trusted brand with a track record of delivering exceptional value and satisfaction to both borrowers and investors.
Key advantages we have relative to traditional banks include:
| an innovative marketplace model that efficiently connects the supply and demand of capital; |
| online operations that substantially reduce the need for physical infrastructure and improve convenience; and |
| automation that increases efficiency, reduces manual processes and improves borrower and investor experience. |
For consumers and small business borrowers, we leverage our cost advantages and marketplace model to provide borrowers with affordable credit. We utilize our technology to provide a better experience, offering borrowers a convenient, simple and fast online application that improves the often time-consuming and frustrating loan application process. We design our products to be fair, transparent and borrower-friendly. All of the installment loans offered through our marketplace feature fixed rates, fixed monthly payments, no hidden fees and no prepayment penalties.
For individual and institutional investors, we deliver value by providing them with the opportunity to earn attractive risk-adjusted returns through equal access to standard program loans offered through our marketplace. Our marketplace provides investors with the transparency and flexibility to quickly and easily tailor or modify their portfolio by utilizing specific investment criteria, such as credit attributes, financial data and loan characteristics. We use proprietary credit decisioning and scoring models and extensive historical loan performance data to provide investors with tools to construct loan portfolios confidently and model targeted returns. We provide investors access to data on each listed loan and all of the historical performance data for every loan ever invested in through our marketplace. Our technology-powered marketplace enables broad diversification by allowing investors to invest in individual loans in increments as low as $25. Investors can be as active as they wish to be in loan selection and investment decisions. For less active investors, we provide investment funds, managed accounts and automated investment tools that offer the same access and diversification but do not require any active involvement beyond the initial account setup, review and ongoing reporting.
Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans are three- or five-year personal loans made to borrowers with a FICO score of at least 660 and that meet other strict credit criteria. These loans can be invested in through the purchase of notes issued pursuant to the Note Registration Statement, which are only available through our website. Separately, qualified investors may also invest in standard program loans in private transactions with a separate issuer not facilitated through
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our website. Custom program loans are only invested in through private transactions with qualified investors and cannot be invested in through notes and are not visible through our public website. Custom program loans are generally
new offerings, and currently include loans that do not meet the requirements of the standard program and loans with longer maturities than we believe to be attractive to most note investors. Small business loans, personal loans that do not meet the requirements of the standard program and education and patient finance loans are all part of our custom loan program.
We have developed our proprietary technology platform to support our marketplace and make available a variety of loan products to interested investor channels. Our proprietary technology automates key aspects of our operations, including the borrower application process, data gathering, credit decisioning and scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. Our platform offers sophisticated analytical tools and data to enable investors to make informed decisions and assess their portfolios. Our extensible technology platform has allowed us to expand our offerings from personal loans to include small business loans, and to expand investor classes from individuals to institutions and create various investment vehicles. Our platform also ensures that custom program loans are invested in through private transactions with a separate issuer and only with qualified investors, while at the same time allowing standard program loans to be available for investment through our notes and also through separate, private transactions with a separate issuer. Our API provides investors and partners access to publicly available loan attributes and allows them to analyze the data and place orders meeting their criteria without visiting our website.
To further enhance our offerings, we make our marketplace and platform available to complementary partners, such as banks, asset managers, insurance companies, partner websites and technology companies, to offer new investment and borrower products and develop new tools for use on our platform. These ecosystem partners can transact directly with our marketplace as investors or serve as a source of referrals for investors and borrowers. Ecosystem partners that serve as a source of referrals include financial websites, such as Mint, Credit Karma, Lending Tree and others, as well as consumer product providers. These types of relationships are marketing-focused, referring investors to our website to open note accounts or borrowers to our website to apply for a loan. These partners generally provide a link on their website to our website highlighting it as either an alternative investment or financing source or as a method of refinancing existing debt obligations. The potential note investor or borrower can then click on the link and, if interested, can start the applicable process.
Our platform and tools have been leveraged by technology partners to build and provide additional investment filters and tools for investors in our marketplace and by financial partners, such as registered investment advisors, to provide additional financial products and opportunities to potential investors. For example, leveraging our publicly available application program interface and downloadable data files, our technology partners have developed applications to facilitate automatic investing based on preset criteria controlled by their clients and to build credit models and filters in addition to those provided by us to investors. We do not pay for the development of these additional models and filters, which are only available to the developers clients, are not made publicly available by us, and we have no compensation arrangements with these technology providers for the services or tools they provide; moreover, many of these partners provide their tools for free. In addition to the tools and models provided by technology ecosystem partners, our financial ecosystem partners provide additional financial products and opportunities for their own clients, such as pooled-investment vehicles with a variety of investment strategies or products that incorporate leverage to the vehicle to enhance returns, and separately managed accounts. We believe that the opportunities and technology provided by these ecosystem partners complement our marketplace and that our partners will help expand the attractiveness and availability of our marketplace.
We generate revenue from transaction fees from our marketplaces role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. The capital to invest in the loans enabled through our marketplace comes directly from a wide range of investors, including retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans and university endowments, and through a variety of channels, such as borrower payment dependent investment securities and whole loan purchases.
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We have experienced significant growth since our marketplace launched in 2007. For the years ended December 31, 2012 and 2013, we facilitated loan originations through our marketplace of $717.9 million and $2.1 billion, respectively, representing an increase of 188%. For the nine months ended September 30, 2013 and 2014, we facilitated loan originations through our marketplace of $1.4 billion and $3.0 billion, respectively, representing an increase of 117%. For the years ended December 31, 2012 and 2013, our total net revenue was $33.8 million and $98.0 million, respectively, representing an increase of 190%. For the nine months ended September 30, 2013 and 2014, our total net revenue was $64.5 million and $143.0 million, respectively, representing an increase of 122%. As our business has grown, we have achieved increasing levels of operational efficiency while continuing to invest in our business. For the years ended December 31, 2012 and 2013, our adjusted EBITDA was $(4.9) million and $15.2 million, respectively. For the nine months ended September 30, 2013 and 2014, our adjusted EBITDA was $8.7 million and $13.4 million, respectively, representing an increase of 54%. See Managements Discussion and Analysis of Financial Condition and Results of OperationsReconciliations of Non-GAAP Financial Measures for a description of adjusted EBITDA and its limitations.
For the year ended December 31, 2013, our marketplace facilitated approximately $2.1 billion in loans, comprised of approximately $2.0 billion in standard program and $0.1 billion in custom program loans. Of the standard program loans, notes issued pursuant to the Note Registration Statement accounted for $543.4 million, or 28%, of investments during the period, certificates issued by the Trust accounted for $1.1 billion, or 54%, and whole loan sales accounted for $364 million, or 18%. For the year ended December 31, 2013, of the capital invested in standard program loans, $1.2 billion, or 59%, was invested by individuals through investment vehicles or managed accounts, $569 million, or 29%, was invested by self-managed, individual investors and $245 million, or 12%, was invested by institutional investors. During the year ended December 31, 2013, all of the custom program loans were invested in through whole loan sales to institutional investors.
For the three months ended September 30, 2014, our marketplace facilitated nearly $1.2 billion in loans, comprised of approximately $0.9 billion in standard program and $0.3 billion in custom program loans. Of the standard program loans, notes issued pursuant to the Note Registration Statement accounted for $223 million, or 26%, of investments during the period, certificates issued by the Trust accounted for $284 million, or 32%, and whole loan sales accounted for $367 million, or 42%. For the three months ended September 30, 2014, of the capital invested in standard program loans, $383 million, or 44%, was invested by individuals through investment vehicles or managed accounts, $226 million, or 26%, was invested by self-managed, individual investors and $262 million, or 30%, was invested by institutional investors. Of the custom program loans, certificates issued by the Trust accounted for $25 million, or 9%, whole loan sales accounted for $150 million, or 51%, and education and patient finance loans facilitated through Springstones platform accounted for $116 million, or 40%, of the investments during the three months ended September 30, 2014. Of the capital invested in custom program loans during this period, $22 million, or 8%, was invested by individuals through investment vehicles or managed accounts and $269 million, or 92%, was invested by institutional investors. Loans facilitated through the custom program are not invested in through notes and are invested in through private transactions or are loans facilitated through Springstones platform.
Industry Background and Trends
There is an opportunity for the online marketplace model to transform the traditional banking system. We believe a transparent and open marketplace where borrowers and investors have access to information, complemented by technology and tools, can make credit more affordable, redirect existing pools of capital trapped inside the banking system and attract new sources of capital to a new asset class. We believe that online marketplaces have the power to facilitate more efficient deployment of capital and improve the global economy.
Personal and Small Business Lending Is Essential to the Economy
We believe the ability of individuals and small businesses to access affordable credit is essential to stimulating and sustaining a healthy, diverse and innovative economy. Lending to consumers can provide them financial
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flexibility and give households better control over when and how to purchase goods and services. While borrower appetite for consumer and small business credit has typically remained strong in most economic environments, general economic factors and conditions, including the general interest rate environment and unemployment rates, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. According to the Board of Governors of the Federal Reserve System, as of September 2014, the balance of outstanding consumer credit in the United States totaled $3.3 trillion. This amount included $882 billion of revolving consumer credit, which many consumers seek to refinance. Small businesses generated 63% of net new jobs in the United States between 1993 and the first quarter of 2014 according to the U.S. Small Business Administration, Office of Advocacy. According to the FDIC, as of June 30, 2014, there were $298 billion of commercial and industrial loans outstanding under $1 million. The market for personal and small business credit in the United States also includes an additional several trillion dollars in mortgages and other categories of secured and unsecured loans, such as those for education and motor vehicles. International markets offer similarly large opportunities.
Borrowers Are Inadequately Served by the Current Banking System
We believe the traditional banking system generally is burdened by its high fixed cost of underwriting and services, in part due to its physical infrastructure and labor- and paper-intensive business processes, compounded by an increasingly complex regulatory environment. As a result, we believe the traditional banking system is ill-suited to meet personal and small business demand for small balance loans and has instead relied heavily on issuing credit cards, which require less personalized underwriting and have higher interest rates. While credit cards are convenient as a payment mechanism, they are an expensive long-term financing solution. Borrowers who carry a balance on their cards are often subject to high, variable interest rates and the possibility of incurring additional fees and penalties. Additionally, many borrowers are charged the same high interest rates on their balances, regardless of an individuals specific risk profile, so lower risk borrowers often subsidize higher risk borrowers. In the limited instances when traditional banks make personal loans available, the loan application process is often opaque, frustrating and time consuming.
Investors Have Limited Options to Participate in Personal and Small Business Credit
Historically, access to most personal and small business loans as an investment product was limited to the banks that hold loans on their balance sheet or to structured securitized products that were syndicated to large institutional investors. Depositors effectively fund the loans made by the banking system, but they share little in the direct returns of these loans as evidenced by the low yields on various fixed income investment or deposit products offered by banks. We believe many investors generally lack the size and access to invest in structured products directly and are unable to invest in personal and small business credit in a meaningful way. While institutional investors have had some access to this market, most have lacked the tools to customize portfolios to their specific risk tolerance, which is a feature of our marketplace and products. As a result, we believe additional capital that could be invested in personal and small business loans has largely been locked out of the market.
Online Marketplaces Have Proliferated Throughout the Economy
Online marketplaces have emerged to connect buyers and sellers across many industries to increase choice, improve quality, accelerate the speed of decision making and lower costs. We believe a successful online marketplace must act as a trusted intermediary providing transparency, security, supply and demand balance and ease of use to give marketplace participants an incentive to interact and the confidence to do business together. Initial online marketplaces connected buyers and sellers of goods and servicesprimarily moving demand from offline to online and making the transaction process more efficient. Online marketplaces have more recently evolved to unlock supply and demand that could not previously be matched in an efficient manner offline. The sharing economy, a term that describes this new marketplace trend, enables a better use of resources by allowing owners of underutilized assets to offer them to people who want them while capturing an economic benefit.
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Our Solution
We are the worlds largest online marketplace connecting borrowers and investors. Our technology platform supports this innovative marketplace model to efficiently connect the supply and demand of capital. Our marketplace also substantially reduces the need for physical infrastructure and improves convenience and automation, increasing efficiency, reducing manual processes and improving the overall borrower and investor experience.
Our borrowers consist of consumers and small businesses seeking to obtain loans for one of the many uses allowed under our product offerings. Our goal is to form long-term relationships with consumers and small businesses, facilitating their access to an array of financial products that meet their evolving needs over time.
Benefits to Borrowers
| Access to Affordable Credit. Our innovative marketplace model, online delivery and process automation enable us to offer borrowers interest rates that are generally lower on average than the rates charged by traditional banks on credit cards or installment loans. Based on responses from 21,051 borrowers in a survey of 103,439 randomly selected borrowers conducted by us during the nine months ended September 30, 2014, borrowers who received a loan to consolidate existing debt or pay off their credit card balance reported that the interest rate on the loan they received through our marketplace was on average 680 basis points lower than the rate on their outstanding debt or credit card balances, representing a 32% savings. |
| Superior Borrower Experience. We offer a fast and easy-to-use online application process and provide borrowers with access to live support and online tools throughout the process and for the lifetime of the loan. Based on a review of the credit performance of borrowers who received a loan from January 2013 through May 2014 to consolidate existing debt or pay off their credit card balance, such borrowers experienced an average increase of 23 points in their FICO score within three months after obtaining their loan, which we believe is in part attributable to a reduction in interest rate and a reduction in the borrowers total revolving balance. Our goal is to form long-term relationships with borrowers, facilitating their access to an array of financial products that meet their evolving needs over time. |
| Transparency and Fairness. All of the installment loans offered through our marketplace feature a fixed rate that is clearly disclosed to the borrower during the application process, with fixed monthly payments, no hidden fees and the ability to prepay the balance at any time without penalty. Our platform utilizes a computerized, rules-based engine for credit decisioning, which removes the human bias associated with reviewing applications. We also keep borrowers informed throughout the process. |
| Fast and Efficient Decisioning. We leverage online data and technology to quickly assess risk, determine a credit rating and assign appropriate interest rates. Qualified applicants receive offers in just minutes and can evaluate loan options without impacting their credit score. |
Benefits to Investors
| Access to a New Asset Class. All investors can invest in personal loans originated through our standard program. Additionally, qualified investors can invest in loans originated through our custom program, including small business loans, in private transactions. These asset classes have historically been entirely funded and held by financial institutions or large institutional investors on a limited basis. We offer all investors equal access to standard program loans through our marketplace and offer qualified private investors access to custom program loans. |
| Attractive Risk-Adjusted Returns. We have historically offered investors attractive risk-adjusted returns across loans offered through our marketplace. We screen loan applicants based on proprietary credit decisioning and scoring models and also factor in historical borrower performance in setting interest rates. We also segment loans into $25 increments to enable diversification across different borrowers and investment criteria. |
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| Transparency. We provide investors with transparency and choice in building their loan portfolios. For each standard program loan, investors can examine credit attributes from the borrowers credit report and borrower-reported attributes prior to investing in a loan and can monitor ongoing loan performance. We also provide access to credit profile data on each approved loan as well as all of the historical performance data for every loan ever invested in through our marketplace. We specifically indicate the information that is verified on our website. |
| Easy-to-Use Tools. We provide investors with tools to easily build or modify customized and diversified portfolios by selecting loans tailored to their investment objectives and assess the returns on their portfolios. Additionally, investors can enroll in automated investing, a free service that automatically invests any available cash in loans according to investor-specified criteria and allocation targets. |
Our Competitive Strengths
We believe the following strengths differentiate us from our competitors and provide us with competitive advantages in realizing the potential of our market opportunity:
| Leading Online Marketplace. We are the worlds largest online marketplace connecting borrowers and investors, based on over $6 billion in loan originations through September 30, 2014, of which approximately $1.8 billion were invested in through notes issued pursuant to the Note Registration Statement, $2.5 billion were invested in through certificates issued by the Trust and $1.7 billion were invested in through whole loan sales. We have built a trusted brand with a track record of delivering exceptional satisfaction and value to both borrowers and investors. We believe that our brand, reputation and scale allow us to attract top talent, quickly develop and deploy new products, attract marketplace participants and leverage a lower cost structure to benefit borrowers and investors. |
| Robust Network Effects. Our online marketplace exhibits network effects that are driven by the number of participants and investments enabled through our marketplace. More participation leads to greater potential to match borrowers with investors. Additionally, increased participation also results in the generation of substantial data that is used to improve the effectiveness of our credit decisioning and scoring models, enhancing our performance record and generating increasing trust in our marketplace. As trust increases, we believe investors will continue to demonstrate a willingness to accept lower risk premiums that will allow us to offer lower interest rates and attract additional high-quality borrowers, thereby reinforcing our track record and fueling a virtuous cycle for our business. We believe that these network effects reinforce our market leadership position. |
| High Borrower and Investor Satisfaction. Our online marketplace is designed to eliminate the customary pain points a borrower encounters while applying for a loan and provides investors access to a new asset class with attractive risk-adjusted returns. Borrowers have validated our approach with an aggregate NPS in the 70s since we began surveying borrowers in January 2013, which places us at the upper end of customer satisfaction ratings for traditional financial services companies. Additionally, investors are confident transacting on our marketplace, as evidenced by high reinvestment rates. |
| Technology Platform. Our technology platform powers our online marketplace and enables us to deliver innovative solutions to borrowers and investors. Our technology platform automates our operations and, we believe, provides a significant time and cost advantage over traditional banks that run on legacy systems that are inflexible and slow to evolve. |
| Sophisticated Risk Assessment. We use proprietary algorithms that leverage behavioral data, transactional data and employment information to supplement traditional risk assessment tools, such as FICO scores. We have built our technology platform to automate the application of these proprietary algorithms to each individual borrowers application profile at scale. This approach allows us to evaluate and segment each potential borrowers risk profile and price it accordingly. In contrast, traditional lenders aggregate borrowers into large pools of risk profiles, which for some borrowers results in higher interest rates despite a more favorable credit profile. |
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Efficient and Attractive Financial Model. Our trusted brand, scale and network effect drives significant borrowing and investing activity on our marketplace. We generate revenue from transaction fees from our |
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marketplaces role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace, except in limited circumstances and in amounts that are not material. Our technology platform significantly reduces the need for physical infrastructure and lowers our costs, which provides us with significant operating leverage. |
Our Strategy for Growth
Our historical growth rates reflect a deliberate strategy of balancing loan originations in a manner that allowed us to build and develop the various enterprise functions to support our scale, including customer support, operations, risk controls, compliance and technology. Borrower and investor demand will continue to inform our business and loan product decisions, but we will not compromise the long-term viability of our marketplace to pursue excessive near-term growth rates that we believe would result in borrower or investor experiences below our standards.
Key elements of our growth strategy include:
| Execute in Our Core Markets. According to the Board of Governors of the Federal Reserve System, as of September 2014, the balance of outstanding consumer credit in the United States totaled $3.3 trillion. This amount included $882 billion of revolving consumer credit, which many consumers are seeking to refinance. We estimate that in September 2014 approximately $390 billion in outstanding consumer credit would meet our marketplaces standard program credit policy based on proprietary models. We believe we have opportunities for substantial future growth in our core market. |
| Broaden Our Loan Product Offerings. We believe that the introduction of new products will increase our ability to attract new and repeat borrowers by providing them with more options and increased financial flexibility over time. For example, in 2010, we broadened our personal loan offering through our standard program to include five-year terms, in 2011, we increased the size of our maximum loan amount to $35,000 and, in 2014, we introduced small business loans and began offering education and patient finance loans as a result of our acquisition of Springstone. We intend to continue to enhance our marketplaces existing loan products and add new loan products to attract a greater number and broader variety of consumers and small business owners. |
| Widen the Spectrum of Borrowers Served. We have a diverse set of investors, some of which seek to invest in loans that are different from the loans currently offered through our standard program loans, such as loans with longer maturities, lower returns, shorter credit history or higher risk. Given the lack of performance data on many of these custom loan types, we only make them available through limited private transactions to qualified investors to allow us to gather data to assess the future viability of these loans. Because our technology can efficiently assess risk across a wide range of borrower classes and assign interest rates tailored to each individual borrower, we plan to extend our marketplace to widen the spectrum of borrowers to meet this investor demand over time. |
| Increase Supply of Capital Available to Borrowers. We have attracted a diverse set of investors having a wide range of investment strategies and thresholds for risk, yield and maturity, including retail investors, high-net-worth individuals and family offices, bank and finance companies, and institutional investors, such as insurance companies, hedge funds, foundations, pension plans and university endowments, to participate through our marketplace. As confidence in our marketplaces performance increases, we are able to attract additional investors with different risk thresholds. We plan to leverage this increasing confidence to increase our depth and breadth within these categories, capture a larger proportion of total investable capital by introducing new products, offer our products in additional states and expand the channels through which our marketplace is available. |
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Grow Our Ecosystem. To continue to grow our marketplace, we need to create a vibrant ecosystem to further drive innovation and deepen supply and demand on our marketplace. We plan to foster existing |
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relationships and develop new relationships with complementary partners to our marketplace and platform in order to create, or help create, new tools, products and referral sources for investors and borrowers. |
| Continue to Invest in Our Innovative Technology Platform. We have made, and will continue to make, significant investments in our proprietary technologies, algorithms and data sources to increase the precision, speed and scale at which we can make capital and investments available to the market. We believe that these investments will enable us to connect an increasing number of borrowers and investors, continue to identify new borrowers, detect and prevent fraud and maintain the security of our marketplace. |
| Enter New Geographies. Since launching our marketplace in 2007, we have focused on developing an online marketplace and growing our business in the United States. While we believe our largest near-term growth opportunity is domestic, over time we intend to expand our marketplace to address similar banking system inefficiencies, market dislocations, investor needs and borrower dissatisfaction globally. |
Products
Borrowers
Our marketplace facilitates several types of loan products for consumers and small businesses.
Standard Program Personal Loans. Our marketplace enables personal loans through our standard program that can be used to make major purchases, refinance credit card balances or other uses, at generally lower rates than other alternatives. Personal loan terms include amounts from $1,000 to $35,000, terms of three or five years and no prepayment penalties or fees. We believe that these loans are simple, fair and responsible credit products that make it easier for consumers to budget for monthly repayment and meet their financial goals.
Simple Application Process
To apply for a loan, a consumer completes a short application that allows us to obtain a credit report from a credit bureau. The application and report data is then analyzed with the marketplaces proprietary credit decisioning and scoring models to decide whether to approve the applicant based upon the issuing banks underwriting guidelines. An approved applicant then sees loan offers with a variety of amounts, terms and rates. After selecting an offer, the applicant completes one more page of information, submits bank account information and then is able to list the loan on our marketplace. While the loan is listed and attracting investment interest, we have verification processes and teams to verify an applicants identity, income or employment. Once the verification and fraud checks are completed and sufficient investor commitments are received, the issuing bank issues the loan and pays us a transaction fee. We also service the loans and earn a management fee or a servicing fee.
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Personal loans that are approved through the standard program are offered to all investors on our marketplace. These loans must meet certain minimum credit requirements, including a FICO score of at least 660, satisfactory debt-to-income ratios, 36 months of credit history and a limited number of credit inquiries in the last six months. These and many other elements contribute to our proprietary credit decisioning and scoring models that process over 50 data points. Loans that do not meet the requirements in terms of credit criteria, maturity or longevity of track record might qualify as a custom program loan. Custom program loans are offered to private investors only and are not made available to all investors on the marketplace. These custom program loans include new offerings, such as small business and education and patient finance, loans that fall outside of the credit criteria of the standard program or loans with a longer maturity than we believe to be attractive to most note investors. We expect to migrate some of these custom program loans into our standard program over time as they gain a longer performance record.
Education and Patient Finance Loans. In April 2014, we acquired Springstone, which facilitates education and patient finance loans. Installment loans through Springstone are in amounts ranging from $2,000 to $40,000, have terms from 24 to 84 months, fixed rates from 3.99% to 17.99%, fixed monthly payments and no prepayment penalties. The deferred interest loan option is in amounts ranging from $499 to $32,000 and provides for no interest if the balance is paid in full during the promotional period, which can be six, 12, 18 or 24 months. If the loan is not paid in full during the promotional period, interest is imposed from the issuance date at a variable rate based upon the prime rate. There is no prepayment penalty and borrowers have the flexibility to pay as much or as little, subject to applicable minimums, of the outstanding balance per month during the promotional period as they choose. To apply for an education or patient finance loan, the borrower completes a short application that allows us to obtain a credit report from a credit bureau. The application and report data is then analyzed by the respective issuing banks credit decisioning and scoring models to decide whether to approve the applicant based upon the issuing banks underwriting guidelines. An approved applicant then sees offers with a variety of terms and rates. While we plan to integrate these loans into our standard program over time, we currently intend to continue to have these loans originated, held and serviced through the existing issuing banks for the foreseeable future.
Small Business Loans. In March 2014, we began facilitating small business loans through our marketplace in private transactions with qualified investors. These loans enable small business owners to expand their business, purchase equipment or inventory, or meet other obligations at an affordable rate. Small business loans are fixed rate loans in amounts ranging from $15,000 to $100,000, with various maturities of between one and five years. To apply for a small business loan, a company completes a short application that allows us to obtain a credit report from a credit bureau. The application and report data is then analyzed with the marketplaces proprietary small business credit decisioning and scoring models to decide whether to approve the applicant based upon the issuing banks underwriting guidelines. An approved applicant then sees offers with a variety of amounts, terms and rates. After selecting an offer, the applicant completes one more page of information, submits bank account information and then is able to list the loan through our marketplace for investment or purchase in a private transaction. Similar to personal loans, we perform verification of revenue, good standing and other matters, as well as fraud checks. Once the verification and fraud checks are completed and sufficient investor interest is received, the issuing bank issues the loan and pays us a transaction fee. We also service the loan and earn a management fee or a servicing fee. Small business loans are currently not included in our standard loan program.
Investors
Through our marketplace, investors have the opportunity to invest in a wide range of loans based on term and credit characteristics. Investors receive monthly cash flow and attractive risk-adjusted returns. Investors are provided with a proprietary credit grade and access to credit profile data on each approved loan as well as access to data on each listed loan and all of the historical performance data for every loan ever invested in through our marketplace. The marketplace enables broad diversification by allowing distribution of investments in loans in increments as small as $25.
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We attract a wide range of investors, including retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans and university endowments. We provide these investors with access to a variety of tools and products that seek to address their level of sophistication and desired level of interaction, which can range from low-touch self-directed accounts to high-touch funds and managed accounts. We believe our strategy of pursuing a diverse investor base will continue to strengthen our marketplace and improve our ability to facilitate a wide variety of loans through a range of business and economic conditions.
We provide several investment options depending on investor type.
Self-Directed Accounts. Self-directed investors use tools provided on our website to help them conduct research and make ongoing investments:
| Filters. The marketplace provides filters based on credit and application data, such as credit rating, interest rate, term, verified income, debt-to-income ratio and other data. These filters create a subset of loans that the investor can then further review for potential investment. Filters can be combined to create a custom, savable query that can be used repeatedly. |
| Portfolio Tool. This tool allows a note investor to input a variety of individualized investment criteria, including aggregate amount to invest, amount per note, grade, term, debt-to-income ratio and other factors, which are used to quickly sort the marketplaces available inventory and create a subset of available loans matching the criteria. After the list is generated, the note investor can modify the list as the investor sees fit and then continue on to invest in those loans. |
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| Automated Investing. Note investors can enroll in automated investing, a free service that automatically invests any available cash in loans according to investor-specified criteria and allocation targets. This service enables the note investor to speed reinvestment of cash flows without having to continually revisit the site. Note investors may update their investing criteria, pause or cancel this service at any time. |
Funds and Managed Accounts. Our marketplace offers investors several fund and managed account options.
| LCA Investment Funds. Accredited investors and qualified purchasers can invest in limited partner interests in funds managed by LCA, a registered investment advisor and our wholly owned subsidiary. Each fund provides a passive investment strategy around loan grade and term allocation and allows investors to more easily deploy large investment amounts and reinvest returns through the marketplace. |
| Separately Managed Accounts. Accredited investors may also invest through LCAs SMAs. Investors who utilize SMAs often have investment criteria that differ from the LCA funds investment strategies and desire more control over their investment strategies. |
In addition, external parties can access our marketplace to provide fund and managed account services to their clients.
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In connection with the creation of LCA, in February 2011, the Trust was established and entered into a purchase and servicing agreement for loans with us. The Trust purchases loans from us as directed by the funds, LCA or other third-party advisors, or direct holders of certificates who do not have managed accounts. The Trust funds these purchases by using investment proceeds from its sale of certificates to qualified investors in private transactions.
Whole Loan Purchases. We or our issuing banks also sell loans in their entirety to certain investors in private transactions. After the sale of the asset, we continue to service the loan. Whole loan purchases are attractive for some banks as it enables them to account for the loan as an asset, which can offer favorable financial reporting and capital reserve treatment.
Marketplace Mechanics
Technology
Key elements of our technology include:
| Highly Automated . Our borrower and investor acquisition process, registration, credit decisioning and scoring, servicing and payment systems are highly automated using our internally developed software. We developed our own cash management software to process electronic cash movements, record book entries and calculate cash balances in our borrower and investor fund accounts. In nearly all payment transactions, Automated Clearing House (ACH) is used to disburse loan proceeds, pull borrower payments on outstanding loans, receive funds from investors and disburse payments to investors. |
| Scalable Platform . Our scalable infrastructure utilizes standard techniques, such as virtualization, load-balancing and high-availability platforms. Our application and database tiers are designed to be scaled horizontally by adding servers as needed. |
| Proprietary Fraud Detection . We use a combination of third-party data, sophisticated analytical tools and current and historical data obtained during the application process to help determine an applications fraud risk. High-risk applications are subject to further investigation. In cases where we confirm fraud, the application is cancelled, and we identify and flag characteristics of the loan to help refine our fraud detection efforts. |
| Data Integrity and Security . We maintain an effective information security program based on well-established security standards and best practices, such as ISO2700x and NIST 800 series. The program establishes policies and procedures to safeguard the confidentiality, integrity and availability of borrower and investor information. The program also addresses risk assessment, training, access control, encryption, service provider oversight, an incident response program and continuous monitoring and review. |
| Application Programming Interface . Our API provides investors and partners access to publicly available loan attributes and allows them to analyze the data and place orders meeting their criteria without visiting our website. Investors and partners may create their own software that uses the API or they may use a variety of third-party services that invest via our API on behalf of their members. |
Our engineering and product development expense was $2.7 million, $4.0 million, $13.9 million and $23.0 million for the year ended March 31, 2012, the nine months ended December 31, 2012, the year ended December 31, 2013 and the nine months ended September 30, 2014, respectively.
Credit Decisioning and Scoring Process
Our marketplace provides an integrated and automated application and credit decisioning and scoring process that is extensible to a variety of loan products. Borrowers come to our marketplace to apply online for a loan. During the simple application process, our marketplace uses proprietary risk algorithms that leverage
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behavioral data, transactional data and employment information to supplement traditional risk assessment tools, such as FICO scores, to assess the borrowers risk profile. The marketplace then presents an approved borrower with various loan options, including term, rate and amount, for which they qualify. After the borrower selects their desired loan terms and the rest of the application is completed, our verification processes and teams verify an applicants identity, income or employment by connecting to various data sources, directly or through third-party service providers, or by contacting the human resources department of the borrowers stated employer to ultimately approve the loan request.
As of September 30, 2014, the minimum credit standards for standard program loans were:
| minimum FICO score of 660 (as reported by a consumer reporting agency); |
| debt-to-income ratio (excluding mortgage) below 40%; |
| acceptable debt-to-income ratio (including mortgage and the requested standard program loan amount); and |
| credit report (as reported by a consumer reporting agency) reflecting: |
| at least two revolving accounts currently open; |
| five or fewer inquiries (or recently opened accounts) in the last six months (excluding mortgages and auto loans); and |
| a minimum credit history of 36 months. |
Effective as of October 29, 2014, the LC Scores, which are the scores derived from our proprietary credit-scoring algorithm and corresponding interest rates, for standard program loans were as follows:
LC Score |
Base Risk Grade |
Interest Rate |
||
1 |
A1 | 6.03 | ||
2 |
A2 | 6.49 | ||
3 |
A3 | 6.99 | ||
4 |
A4 | 7.49 | ||
5 |
A5 | 8.19 | ||
6 |
B1 | 8.67 | ||
7 |
B2 | 9.49 | ||
8 |
B3 | 10.49 | ||
9 |
B4 | 11.44 | ||
10 |
B5 | 11.99 | ||
11 |
C1 | 12.39 | ||
12 |
C2 | 12.99 | ||
13 |
C3 | 13.66 | ||
14 |
C4 | 14.31 | ||
15 |
C5 | 14.99 | ||
16 |
D1 | 15.59 | ||
17 |
D2 | 15.99 | ||
18 |
D3 | 16.49 | ||
19 |
D4 | 17.14 | ||
20 |
D5 | 17.86 | ||
21 |
E1 | 18.54 | ||
22 |
E2 | 19.24 | ||
23 |
E3 | 19.99 | ||
24 |
E4 | 20.99 | ||
25 |
E5 | 21.99 |
Risk grades from F1-G5 are modified from an E5 base risk grade based upon channel, term, amount and other factors. These loans have interest rates that range from 22.99%-26.06%. Our 1% service fee charged to note
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holders results in a decrease in return on a note ranging from 0.42% to 0.76% depending on the original term and interest rate of the associated loan.
Certain of the criteria that impact a borrowers loan grade include:
Loan Term |
FICO Score |
|
Revolving Balance |
Public Records |
|
Average Bankcard Line |
Referral Source |
|
Number of Installment Loans |
Average Non-Mortgage Balance |
|
Loan Amount |
Number of Open Trade Lines | |
Number of Inquiries |
Number and Term of Delinquencies |
In addition to identity, we may also verify a borrowers income or employment. Income and employment is verified by connecting to various data sources, directly or through third-party service providers, or by contacting the human resources department of the borrowers stated employer.
For standard program loans, the following credit profile information is provided for each borrower:
Credit Score Range |
Delinquent Amount | |
Earliest Credit Line |
Delinquencies (last two years) | |
Open Credit Lines |
Months Since Last Delinquency | |
Total Credit Lines |
Public Records on File | |
Revolving Credit Balance |
Months Since Last Record | |
Revolving Line Utilization |
Months Since Last Major Derogatory | |
Inquiries in Last Six Months |
Collections Excluding Medical | |
Accounts Now Delinquent |
Regulatory and Compliance Framework
Our marketplace provides a compliance framework that allows investors to participate in consumer and commercial credit as an asset class. We believe that our relationship with an issuing bank is a key component of the compliance framework that we provide to investors. The bank issues loans to borrowers that apply on our marketplace, and we subsequently purchase these loans with funds provided by investors through a variety of investment channels, thereby enabling investors to capture the interest rate return on each loan. Our primary issuing bank is WebBank, a Utah-chartered industrial bank that handles a variety of consumer and commercial financing programs. We also executed an agreement with Cross River Bank, a New Jersey chartered bank, to operate as our back-up issuing bank in the event WebBank can no longer be an issuing bank.
We have entered into a loan account program agreement with WebBank that governs the terms and conditions between us and WebBank with respect to loans facilitated through our marketplace and issued by WebBank, including our obligations for servicing the loans during the period of time that the loans are owned by WebBank. Under the terms of the loan account program agreement, we pay WebBank a monthly service fee based on the amount of loans issued by WebBank and purchased by us or our partners in each month, subject to a minimum monthly fee. WebBank also retains ownership of all loans for two business days and earns any interest received on the loans during that time. WebBank pays us a transaction fee for our marketplaces role in processing loan applications on WebBanks behalf. Under a loan sale agreement that we entered into with WebBank, two business days after a loan is closed, WebBank sells the loan to us, including all rights related to the loan, without recourse. The loan sale agreement prohibits us from securitizing the loans without prior written consent of WebBank. The initial terms of the loan account program agreement and the loan sale agreement end in November 2018, with the possibility of two, one-year renewal terms, subject to certain early termination provisions as set forth in the agreements.
As part of our ongoing compliance program, we also have customer identification processes in place to enable us to identify user identification fraud and compare user identity against applicable governmental lists, such as the
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Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network. We compare all users identities against these lists at least twice a month for continued compliance and oversight. If a user were to appear on a list, we would take appropriate action to resolve the issue. In addition to our continued identification compliance program, we use our robust technology to assist in identifying and stopping potential money laundering schemes. See Regulations and Licensing for more information regarding our regulatory framework.
Loan Issuance Mechanism
We have developed an extensible, automated platform that allows us to work with issuing banks to originate and issue a variety of loan products to an array of applicants. Our service is provided in a seamless fashion to the applicant. A borrower comes to our website and completes a simple application for a loan product. We then use proprietary risk algorithms to analyze an applicants risk profile based upon the issuing banks underwriting guidelines. Once an application is approved, we present the borrower with various loan options. After the applicant selects its personalized financing option and completes the application process, the loan is then listed on our marketplace to attract investor commitments. Simultaneously to listing the loan on our marketplace, we perform additional verifications on the borrower. Once the verifications are completed and sufficient investor commitments are received, the issuing bank originates and issues the loan to the borrower, net of the origination fee. After the loan is issued, we use the proceeds from these investors to purchase the loan. Investor cash balances (excluding payments in process) are held in a segregated bank or custodial accounts and are not commingled with our monies. We receive a transaction fee from the issuing bank for our marketplaces role in originating the loan. We also earn a recurring servicing or management fee from the investors for the subsequent servicing of loans.
Loan Servicing
We service all personal and small business loans originated through our marketplace, except for loans facilitated through Springstones platform. Servicing is comprised of account maintenance, collections, processing payments from borrowers and distributions to investors.
For September 2014, approximately 99% of loan payments were made through an ACH withdrawal from the borrowers bank account. Loan repayments are remitted utilizing ACH to segregated bank accounts maintained for the benefit of investors or custodial or other accounts designated by our investors. This automated process allows us to avoid the time and expense of processing a significant volume of mailed payments and provides a higher degree of certainty for timely payments. This process also provides us with prompt notice in the event of a missed payment, which allows us to react quickly to resolve the issue with the borrower. Generally, in the first 30 days that a loan is delinquent, our in-house collection team works to bring the account current. After that time, we typically outsource subsequent servicing efforts to third-party collection agencies.
The servicing fee paid by investors is designed to cover the day-to-day processing costs of loans. If a loan needs more intensive collection focus, whether internal or external, we may charge investors an additional fee to
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compensate for the costs of this collection activity. This fee varies, with a maximum of up to 35% of the amount recovered. There is no fee charged if there is no recovery, and the fee cannot exceed the proceeds collected. For loans that are ultimately charged-off, we may sell the account to a third party. All proceeds received on this sale are subject to the standard servicing fee, and the net balance goes to investors.
Springstone Acquisition
In April 2014, we acquired all of the outstanding limited liability company interests of Springstone, which offers education and patient finance loans. Springstone utilizes two issuing banks and a network of providers. Springstone facilitates two loan products:
| An installment loan with amounts ranging from $2,000 to $40,000, terms from 24 to 84 months, fixed rates from 3.99% to 17.99%, fixed monthly payments and no prepayment penalties. |
| A deferred interest loan with amounts ranging from $499 to $32,000 that provides for no interest if the balance is paid in full during the promotional period, which can be six, 12, 18 or 24 months. If the loan is not paid in full during the promotional period, interest is imposed from the issuance date at variable rate based upon the prime rate. There is no prepayment penalty and borrowers have the flexibility to pay as much or as little, subject to applicable minimums, of the outstanding balance per month during the promotional period as they choose. |
Currently, each of Springstones issuing banks originates, holds and services each issued loan. For its role in loan facilitation, Springstone earns transaction fees paid by the issuing bank and service provider at the time of origination, which averaged approximately 5% of the initial loan balance as of September 30, 2014. Currently, Springstone does not earn any servicing fees, as loans are originated, retained and serviced by the issuing bank. We currently intend to continue to have these loans funded and serviced through existing issuing banks while we develop plans to integrate these loans into our standard program over time.
Competition
We compete with financial products and companies that attract borrowers, investors or both. With respect to borrowers, we primarily compete with traditional financial institutions, such as banks, credit unions, credit card issuers and other consumer finance companies. We believe our innovative marketplace model, online delivery and process automation enable us to operate more efficiently and with more competitive rates and higher borrower satisfaction than these competitors.
With respect to investors, we primarily compete with other investment vehicles and asset classes, such as equities, bonds and short-term fixed income securities. We believe that our diverse and customizable investment options give us the flexibility to offer attractive risk-adjusted returns that are uncorrelated with other asset classes.
We compete with other online credit marketplaces, such as Prosper Marketplace, Inc. and Funding Circle Limited. We are the worlds largest online marketplace connecting borrowers to investors, which we believe provides us with a major competitive advantage. We believe that our network effects and marketplace dynamics at play make us more attractive and efficient to both borrowers and investors. We anticipate that more established internet, technology and financial services companies that possess large, existing customer bases, substantial financial resources and established distribution channels may enter the market in the future. We believe that our brand, scale, network effect, historical data and performance record provide us with significant competitive advantages over current and future competitors.
Sales and Marketing
Our marketing efforts are designed to attract and retain borrowers and investors and build brand awareness and reputation. Currently, we believe reputation and word of mouth drives continued organic growth in our
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investor base. We believe most marketplace investors are satisfied with their experience, often adding funds to their account and referring their friends and colleagues to us.
We use a diverse array of online and offline marketing channels to attract borrowers, including:
| Social Media and Press. We leverage social media outlets and the press to help drive brand awareness. |
| Online Partnerships. We work with companies that sell products or services that are suitable for financing or that help potential borrowers manage their finances, manage their credit or find the best lending options. |
| Search Engine Optimization. We seek to ensure that our marketplace is optimized to achieve meaningful organic traffic from search engines. |
| Search Engine Marketing. We also use paid placement on major online search engines. |
| Offline Partnerships. We work with companies that sell products offline that often require affordable financing, such as pools, home improvement providers and furniture sellers. |
| Mail-to-Web. We have developed a highly-targeted direct marketing program that selects from a given population of consumers and small business owners who would benefit from our products. |
| Radio and Television Advertising. We utilize radio and television advertising to enhance the impact of our other marketing channels. |
Regulations and Licensing
The lending and securities industries are highly regulated. However, we are regulated very differently than a bank. While a bank has capital risk from both credit and interest rate risk, investor capital and borrower loans through our marketplace are almost completely matched. Additionally, we do not take deposits and are therefore not regulated by the FDIC in that respect. Our current issuing banks originate all of the loans offered through our marketplace and are subject to regulation by the FDIC or other relevant federal and state regulators.
However, we and the loans made through our marketplace are subject to extensive and complex rules and regulations, licensing and examination by various federal, state and local government authorities. For example, our primary issuing bank, WebBank, is subject to oversight by the FDIC and the State of Utah. These authorities impose obligations and restrictions on our activities and the loans made through our marketplace. For example, these rules limit the fees that may be assessed on the loans, require extensive disclosure to, and consents from, the borrowers and lenders, prohibit discrimination and unfair and deceptive acts or practices and may impose multiple qualification and licensing obligations on our activities. Failure to comply with any of these requirements may result in, among other things, revocation of required licenses or registration, loss of approved status, voiding of the loan contracts, class action lawsuits, administrative enforcement actions and civil and criminal liability. While compliance with such requirements is at times complicated by our novel business model, we believe we are in substantial compliance with these rules and regulations.
State Licensing Requirements
In most states we believe that the applicable issuing bank, as originator of loans made through our marketplace, satisfies any relevant licensing requirements with respect to the origination of loans applicable to our operations. As needed, we will seek authorizations to conduct activities on a uniform basis in all other states and the District of Columbia, with the exceptions of Idaho, Iowa, Maine, Nebraska and North Dakota. State licensing statutes impose a variety of requirements and restrictions on us, including:
| record-keeping requirements; |
| restrictions on servicing practices, including limits on finance charges and fees; |
| disclosure requirements; |
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| examination requirements; |
| surety bond and minimum net worth requirements; |
| financial reporting requirements; |
| notification requirements for changes in principal officers, stock ownership or corporate control; |
| restrictions on advertising; and |
| review requirements for loan forms. |
The statutes also subject us to the supervisory and examination authority of state regulators in certain cases.
Consumer Protection Laws
State Usury Limitations . Section 521 of the Depository Institution Deregulation and Monetary Control Act of 1980 (DIDA) and Section 85 of the National Bank Act (NBA), federal case law interpreting the NBA such as Tiffany v. National Bank of Missouri and Marquette National Bank of Minneapolis v. First Omaha Service Corporation and FDIC advisory opinion 92-47 permit FDIC-insured depository institutions, such as WebBank, to export the interest rate permitted under the laws of the state or U.S. territory where the bank is located, regardless of the usury limitations imposed by the state law of the borrowers residence unless the state has chosen to opt out of the exportation regime. WebBank is located in Utah, and Title 70C of the Utah Code does not limit the amount of fees or interest that may be charged by WebBank on loans of the type offered through our marketplace. Only Iowa and Puerto Rico have opted out of the exportation regime under Section 525 of DIDA and we do not operate in either jurisdiction. We believe, however, if a state or U.S. territory in which we operate opted out of rate exportation, judicial interpretations support the view that such opt outs would apply only to loans made in those states. We believe that the opt-out of any state would not affect the ability of our marketplace to benefit from the exportation of rates. If a loan made through our marketplace were deemed to be subject to the usury laws of a state or U.S. territory that had opted-out of the exportation regime, we could become subject to fines, penalties and possible forfeiture of amounts charged to borrowers, and we could decide not to originate loans in that jurisdiction, which could adversely impact our growth.
State Disclosure Requirements and Other Substantive Lending Regulations . We are subject to state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, debt collection and unfair or deceptive business practices. Our ongoing compliance program seeks to comply with these requirements.
Truth in Lending Act. The Truth in Lending Act (TILA), and Regulation Z, which implements it, require lenders to provide consumers with uniform, understandable information concerning certain terms and conditions of their loan and credit transactions. These rules apply to WebBank as the creditor for loans facilitated through our marketplace, but because the transactions are carried out on our hosted website, we facilitate compliance. For closed-end credit transactions of the type provided through our marketplace, these disclosures include, among others, providing the annual percentage rate, the finance charge, the amount financed, the number of payments and the amount of the monthly payment. The creditor must provide the disclosures before the loan is closed. TILA also regulates the advertising of credit and gives borrowers, among other things, certain rights regarding updated disclosures and the treatment of credit balances. Our marketplace provides borrowers with a TILA disclosure at the time a borrower posts a loan request on the marketplace. If the borrowers request is not fully funded and the borrower chooses to accept a lesser amount offered, we provide an updated TILA disclosure. We also seek to comply with TILAs disclosure requirements related to credit advertising.
Equal Credit Opportunity Act. The federal Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicants income derives from any public assistance program or the fact that the applicant
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has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law. Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from loan applicants and from using advertising or making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application. These requirements apply both to a lender such as WebBank as the creditor for loans facilitated through our marketplace as well as to a party such as ourselves that regularly participates in a credit decision. Investors may also be subject to the ECOA in their capacity as purchasers of notes if they are deemed to regularly participate in credit decisions. In the underwriting of loans offered through our marketplace, and in all aspects of operations, both WebBank and we seek to comply with ECOAs provisions prohibiting discouragement and discrimination. ECOA also requires creditors to provide consumers and certain small businesses with timely notices of adverse action taken on credit applications. WebBank and we provide prospective borrowers who apply for a loan through our marketplace but are denied credit with an adverse action notice in compliance with applicable requirements.
Fair Credit Reporting Act . The federal Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act, administered by the CFPB, promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. FCRA requires a permissible purpose to obtain a consumer credit report and requires persons to report loan payment information to credit bureaus accurately. FCRA also imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in a credit report. WebBank and we have a permissible purpose for obtaining credit reports on potential borrowers, and we also obtain explicit consent from borrowers to obtain such reports. As the servicer for the loan, we accurately report loan payment and delinquency information to appropriate consumer reporting agencies. We provide an adverse action notice to a rejected borrower on WebBanks behalf at the time the borrower is rejected that includes all the required disclosures. We also have processes in place to ensure that consumers are given opt-out opportunities, as required by the FCRA, regarding the sharing of their personal information. We have implemented an identity theft prevention program.
Fair Debt Collection Practices Act . The federal Fair Debt Collection Practices Act (FDCPA) provides guidelines and limitations on the conduct of third-party debt collectors in connection with the collection of consumer debts. The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA applies to third-party debt collectors, debt collection laws of certain states impose similar requirements on creditors who collect their own debts. In addition, the CFPB prohibits unfair, deceptive or abusive acts or practices in debt collection, including first-party debt collection. Our agreement with investors prohibits investors from attempting to collect directly on the loan. Actual collection efforts in violation of this agreement are unlikely given that investors do not learn the identity of borrowers. We use our internal collection team and a professional third-party debt collection agent to collect delinquent accounts. They are required to comply with the FDCPA and all other applicable laws in collecting delinquent accounts of our borrowers.
Privacy and Data Security Laws . The federal Gramm-Leach-Bliley Act (GLBA) includes limitations on financial institutions disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information. We have a detailed privacy policy, which complies with GLBA and is accessible from every page of our website. We maintain consumers personal information securely, and we do not sell, rent or share such information with third parties for marketing purposes unless previously agreed to by the consumer. In addition, we take measures to safeguard the personal information of our borrowers and investors and protect against unauthorized access to this information.
Servicemembers Civil Relief Act . The federal Servicemembers Civil Relief Act (SCRA) allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties. The SCRA requires us to adjust the interest rate of borrowers who qualify for and
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request relief. If a borrower with an outstanding loan qualifies for SCRA protection, we will reduce the interest rate on the loan to 6% for the duration of the borrowers active duty. During this period, the investors who have invested in such a loan will not receive the difference between 6% and the loans original interest rate. For a borrower to obtain an interest rate reduction on a loan due to military service, we require the borrower to send us a written request and a copy of the borrowers mobilization orders. We do not take military service into account in assigning loan grades to borrower loan requests and we do not disclose the military status of borrowers to investors.
The Dodd-Frank Wall Street Reform and Consumer Protection Act . In July 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act is extensive and significant legislation that includes consumer protection provisions. Among other things, the Dodd-Frank Act created the CFPB, which commenced operations in July 2011 and has authority to write regulations under federal consumer financial protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act, and to enforce those laws against and examine large financial institutions, such as our issuing banks, for compliance. The CFPB is authorized to prevent unfair, deceptive or abusive acts or practices through its regulatory, supervisory and enforcement authority. We are subject to the CFPBs jurisdiction, including its enforcement authority, as a servicer and acquirer of consumer credit. The CFPB may request reports concerning our organization, business conduct, markets and activities. The CFPB may also conduct on-site examinations of our business on a periodic basis if the CFPB were to determine, through its complaint system, that we were engaging in activities that pose risks to consumers.
Other Regulations
Electronic Fund Transfer Act and NACHA Rules. The federal Electronic Fund Transfer Act (EFTA) and Regulation E that implements it provide guidelines and restrictions on the electronic transfer of funds from consumers bank accounts. In addition transfers performed by ACH electronic transfers are subject to detailed timing and notification rules and guidelines administered by the National Automated Clearinghouse Association (NACHA). Most transfers of funds in connection with the origination and repayment of loans are performed by ACH. We obtain necessary electronic authorization from borrowers and investors for such transfers in compliance with such rules. We also comply with the requirement that a loan cannot be conditioned on the borrowers agreement to repay the loan through automatic fund transfers. Transfers of funds through our platform are executed by Wells Fargo and conform to the EFTA, its regulations and NACHA guidelines.
Electronic Signatures in Global and National Commerce Act/Uniform Electronic Transactions Act. The federal Electronic Signatures in Global and National Commerce Act (ESIGN) and similar state laws, particularly the Uniform Electronic Transactions Act (UETA), authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures. ESIGN and UETA require businesses that want to use electronic records or signatures in consumer transactions and provide disclosures to consumers, to obtain the consumers consent to receive information electronically. When a borrower or investor registers on our platform, we obtain his or her consent to transact business electronically, receive electronic disclosures and maintain electronic records in compliance with ESIGN and UETA requirements.
Bank Secrecy Act. In cooperation with WebBank, we have implemented various anti-money laundering policy and procedures to comply with applicable federal law. With respect to new borrowers, we apply the customer identification and verification program rules and screen names against the list of specially designated nationals maintained by the U.S. Department of the Treasury and OFAC pursuant to the USA PATRIOT Act amendments to the Bank Secrecy Act and its implementing regulation.
New Laws and Regulations. From time to time, various types of federal and state legislation are proposed and new regulations are introduced that could result in additional regulation of, and restrictions on, the business of consumer lending. We cannot predict whether any such legislation or regulations will be adopted or how this would affect our business or our important relationships with third parties. In addition, the interpretation of existing legislation may change or may prove different than anticipated when applied to our novel business model. Compliance with such requirements could involve additional costs, which could have a material adverse
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effect on our business. As a consequence of the extensive regulation of commercial lending in the United States, our business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the cost of doing business.
In addition, see Risk FactorsRisks Related to Compliance and Regulation.
Foreign Laws and Regulations. We do not permit non-U.S. based individuals to register as borrowers on the platform and the lending platform does not operate outside the United States. Therefore, we do not believe that we are subject to foreign laws or regulations for borrowers.
Intellectual Property
We rely on a combination of copyright, trade secret and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property. Although the protection afforded by copyright, trade secret and trademark law, written agreements and common law may provide some advantages, we believe that the following factors help us to maintain a competitive advantage: technological skills and focus on innovation of our software development team and other team members across the organization; frequent enhancements to our platform; and borrower and investor satisfaction. Our competitors may develop products that are similar to our technology. We enter into agreements with our employees, consultants and partners and through these agreements we attempt to control access to and distribution of our other proprietary technology and information. Despite our efforts to protect our proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our solution. Policing all unauthorized use of our intellectual property rights is nearly impossible. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.
Employees
At September 30, 2014, we had 742 employees and contractors. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Legal Proceedings
In the second quarter of 2014, we offered to settle a dispute with a consultant that previously performed work for us. The dispute arose over how much compensation for the work performed was to be provided in cash and in equity and as to equity what valuations were to be used. We offered the claimant 80,000 shares of common stock, options to purchase 40,000 shares of common stock and cash consideration of $215,000. Based upon an assumed price of $11.00 per share of common stock, the midpoint of the offering price range set forth on the cover page of this prospectus, the total value of the consideration offered to the claimant was $1.3 million.
During the second quarter of 2014, we also received notice from the California Employment Development Department (EDD) that it had commenced an examination of our records concerning the employment relationship of certain individuals who performed services for us from 2011 through 2014. Based on the EDDs preliminary determination, certain of these individuals should have been classified as employees with appropriate tax withholding and employer-related taxes incurred and paid. EDD has completed its examination and issued a Final Notice of Assessment, which serves as the EDDs official notice of the EDDs determination relating to this matter. We intend to pay the assessment in full for the payroll taxes related to the misclassified workers during the fourth quarter of 2014.
We received a Civil Investigative Demand from the CFPB dated June 5, 2014 related to the operations of Springstone. The purpose of the investigation is to determine whether the Springstone is engaging in unlawful acts or practices in connection with the marketing, issuance and servicing of loans for healthcare related financing. As of
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September 2014, we had provided all of the documents requested by the CFPB. We are continuing to evaluate this matter. As of September 30, 2014, there are no probable or estimable losses related to this matter.
In addition to the foregoing, we may be subject to legal proceedings and regulatory actions in the ordinary course of business. We do not anticipate that the ultimate liability, if any, arising out of any such matter will have a material effect on our financial condition, results of operations or cash flows.
Facilities
Our corporate headquarters is located in San Francisco, California and consists of approximately 141,000 square feet of space under lease agreements that expire in February 2019 and June 2022. Under these lease agreements, we have an option to extend nearly all of the space under the leases for five years. We have additional office space in Westborough, Massachusetts. We also have data centers located in Las Vegas, Nevada and Santa Clara, California. We believe that our facilities are adequate for our current needs.
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Executive Officers, Key Employees and Directors
The following table sets forth information regarding our executive officers, key employees and directors as of November 1, 2014:
Name |
Age |
Position |
||
Renaud Laplanche |
44 |
Founder, Chief Executive Officer and Director |
||
Chaomei Chen |
56 |
Chief Risk Officer |
||
Carrie Dolan |
49 |
Chief Financial Officer |
||
John MacIlwaine |
45 |
Chief Technology Officer |
||
Scott Sanborn |
45 |
Chief Operating and Marketing Officer |
||
Jason Altieri |
49 |
General Counsel and Chief Compliance Officer |
||
Jeff Bogan |
34 |
Head of Institutional Group |
||
Angela Loeffler |
37 |
Chief People Officer |
||
Daniel Ciporin (1)(4) |
56 |
Director |
||
Jeffrey Crowe (1) |
57 |
Director |
||
Rebecca Lynn (1)(3) |
41 |
Director |
||
John J. Mack (1)(2) |
69 |
Director |
||
Mary Meeker (2)(3) |
58 |
Director |
||
John C. (Hans) Morris (3)(4) |
55 |
Director |
||
Lawrence Summers (2)(4) |
59 |
Director |
||
Simon Williams (3) |
56 |
Director |
(1) | Member of the Compensation Committee. |
(2) | Member of the Nominating and Corporate Governance Committee. |
(3) | Member of the Audit Committee. |
(4) | Member of the Risk Committee. |
Executive Officers and Key Employees
Renaud Laplanche is our founder and has served as our Chief Executive Officer and as a member of our board of directors since October 2006. From June 2005 to October 2006, Mr. Laplanche served as Head of Product Management, Search Technologies, for Oracle Corporation, a computer technology corporation. From September 1999 to June 2005, Mr. Laplanche served as the founder and Chief Executive Officer of TripleHop Technologies, an enterprise software company, the assets of which were acquired by Oracle Corporation in June 2005. Mr. Laplanche holds a post-graduate DESS-DJCE degree (tax and corporate law) from the Université de Montpellier, Montpellier, France and an M.B.A. from HEC Business School, Paris, France. Mr. Laplanche was chosen to serve on our board of directors because of the perspective and experience he brings as our founder and Chief Executive Officer and his experience with high growth technology companies.
Chaomei Chen has served as our Chief Risk Officer since June 2011. From September 2008 to August 2009, Ms. Chen served as the Chief Risk Officer at JP Morgan Chase Card Services, a credit card company, where she was responsible for business and credit risk in the Washington Mutual portfolio. Ms. Chen holds a B.S. in mathematics from Southwestern Jiaotong University in China and an M.S.E. in mathematical science from The Johns Hopkins University.
Carrie Dolan has served as our Chief Financial Officer since August 2010. From May 2007 to January 2010, Ms. Dolan served as Treasurer for The Charles Schwab Corporation, a financial advisory company, where she also served as Schwab Bank Chief Financial Officer from January 2008 to January 2010. Ms. Dolan holds a B.S. in finance and accounting and an M.B.A. from the University of California, Berkeleys Haas School of Business.
John MacIlwaine has served as our Chief Technology Officer since July 2012. From December 2011 to July 2012, Mr. MacIlwaine served as the Chief Information Officer at Green Dot Corporation, a provider of prepaid financial services. From April 2007 to November 2011, Mr. MacIlwaine served as head of global development at
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Visa, Inc., a credit card company, where he led program management and information services, including web application development, data warehousing, business intelligence and mobile development, and oversaw all new technology initiatives. Mr. MacIlwaine holds a B.S.E. in computer engineering from the University of Michigan.
Scott Sanborn has served as our Chief Operating and Marketing Officer since April 2013 and served as our Chief Marketing Officer from May 2010 to March 2013. From November 2008 to February 2010, Mr. Sanborn served as the Chief Marketing and Revenue Officer for eHealthInsurance, an e-commerce company. Mr. Sanborn holds a B.A. in literature from Tufts University.
Jason Altieri has served as our General Counsel and Chief Compliance Officer since October 2009. From October 2008 to October 2009, Mr. Altieri served as the General Counsel and VP, Partnerships for Corefino, Inc., an outsourced accounting solution and technology provider. Mr. Altieri has also been a corporate partner for the international law firms of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo P.C. and Sonnenschein Nath & Rosenthal, LLP (now Dentons) and an associate with Wilson Sonsini Goodrich & Rosati, PC. Mr. Altieri holds a B.A. (with honors) in economics from the University of California, Davis, an M.A. in international relations and public policy (China emphasis) from the University of California, San Diego and a J.D. (magna cum laude) from the University of San Francisco School of Law.
Jeff Bogan has served as our Head of Institutional Group since April 2013 and served as our Vice President of Corporate Development from April 2012 to March 2013. From January 2011 to February 2012, Mr. Bogan served as Vice President, and from June 2010 to January 2011 as an associate, at Morgan Stanley, a financial services company. Mr. Bogan has also served in financial advisory roles at Greenhill & Co. and SunTrust Robinson Humphrey. Mr. Bogan holds a B.B.A. in finance and management information systems from the University of Georgia and an M.B.A. from Harvard Business School.
Angela Loeffler has served as our Chief People Officer since November 2012. From February 2004 to May 2012, Ms. Loeffler served in various roles, including as the Chief Administrative Officer at Ask.com, an online brand for questions and answers. Ms. Loeffler has also served as the Senior Compensation Analyst at Openwave Systems Inc. and as a compensation analyst for William M. Mercer Human Resources Consulting. Ms. Loeffler holds an A.B. in psychology from the University of California, Berkeley.
Non-Employee Directors
Daniel Ciporin has been a member of our board of directors since August 2007. Mr. Ciporin joined Canaan Partners, an investment firm, in March 2007 and is currently a general partner specializing in digital media, financial technology and e-commerce investments. From March 2006 to March 2007, Mr. Ciporin served as Chairman of the Internet Lab. From January 1999 to June 2005, Mr. Ciporin served as Chairman and Chief Executive Officer of Shopping.com. Mr. Ciporin currently serves on the board of directors of Borderfree, Inc. and several privately-held companies. Previously, Mr. Ciporin served on the board of directors of Primedia Inc. from 2006 to 2011 and Corel Corporation from 2007 to 2010. Mr. Ciporin holds an A.B. from Princeton Universitys Woodrow Wilson School of Public and International Affairs and an M.B.A. from Yale University. Mr. Ciporin was chosen to serve on our board of directors because of his extensive experience in the technology and e-commerce industries and his investment and operational expertise.
Jeffrey Crowe has been a member of our board of directors since August 2007. Mr. Crowe joined Norwest Venture Partners, an investment firm, in 2004 and became managing partner in 2013. Mr. Crowe focuses on investments in the internet, consumer and software arenas and currently serves on the board of directors of RetailMeNot, Inc. and several privately held companies. From December 1999 to April 2001, Mr. Crowe served as President, Chief Operating Officer and Director of DoveBid. From May 1990 to November 1999, Mr. Crowe served as the Chief Executive Officer and director of Edify Corporation. Mr. Crowe holds a B.A. in history from Dartmouth College and an M.B.A. from the Stanford University Graduate School of Business. Mr. Crowe was chosen to serve on our board of directors because of his extensive experience advising internet and consumer companies.
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Rebecca Lynn has been a member of our board of directors since March 2009. Ms. Lynn joined Morgenthaler Ventures, a venture capital firm, in 2007 and became a partner in 2010. She is also a partner at Canvas Venture Fund, a venture capital firm she co-founded in 2013. From 2003 to 2007, Ms. Lynn ran her own consulting business, Marengo Marketing. From 1998 to 2002, Ms. Lynn served as the Vice President of Marketing at NextCard, Inc., after beginning her career at Procter and Gamble. Ms. Lynn also serves on the board of directors of several private companies. Ms. Lynn holds a B.S. in chemical engineering from the University of Missouri and a J.D./M.B.A. from the Haas School of Business and the University of California, Berkeley School of Law at the University of California, Berkeley. Ms. Lynn was chosen to serve on our board of directors because of her extensive experience advising financial services and internet companies and her investment expertise.
John J. Mack joined our board of directors in April 2012. Mr. Mack served as Chairman of the Board of Morgan Stanley, a financial services company, from 2005 to 2011, and served as the Chief Executive Officer of Morgan Stanley from June 2005 until December 2009, during which time he oversaw the firms conversion into a bank holding company. Mr. Mack was Co-Chief Executive Officer of Credit Suisse Group from 2003 to 2004 and the President, Chief Executive Officer and a director of Credit Suisse First Boston from 2001 to 2004. He became the President, Chief Operating Officer and a director of Morgan Stanley Dean Witter & Co. in 1997 and served in that position until 2001. Mr. Mack joined Morgan Stanley in 1972 in the bond department and served as head of the Worldwide Taxable Fixed Income Division from 1985 to 1992, became Chairman of the Operating Committee in 1992 and became President in 1993. Mr. Mack is a senior advisor of both Morgan Stanley & Co. LLC and KKR & Co. L.P. Mr. Mack holds a B.A. in history from Duke University. Mr. Mack was chosen to serve on our board of directors because of his extensive experience advising and managing banking and financial services companies.
Mary Meeker joined our board of directors in June 2012. Ms. Meeker is a general partner at Kleiner Perkins Caulfield and Byers (KPCB), a venture capital firm. Ms. Meeker joined KPCB in December 2010. She focuses on investments in KPCBs digital practice and helps lead KPCBs Digital Growth Fund. From 1991 to 2010, Ms. Meeker worked at Morgan Stanley, where she served as a managing director and research analyst. Ms. Meeker holds a B.A. in psychology and Honorary Doctor of Letters degree from DePauw University and an M.B.A. from Cornell University. Ms. Meeker was chosen to serve on our board of directors because of her extensive experience advising and analyzing technology companies.
John C. (Hans) Morris joined our board of directors in February 2013. Mr. Morris founded Nyca Partners, a venture capital and advisory company, in 2014 and is the managing partner. From January 2010 until January 2014, he also served as a managing director and special advisor at General Atlantic, a growth equity firm. Mr. Morris previously served as the President of Visa, Inc. from 2007 to 2009. Prior to Visa, Mr. Morris spent 27 years at Citigroup, a banking and financial services company, and its predecessor companies in various leadership positions, with his final position as Chief Financial Officer and Head of Finance, Technology and Operations for Citi Markets and Banking. Mr. Morris also serves as on the board of directors of KCG Holdings, Inc. and a privately held company. Mr. Morris holds a B.A. in government from Dartmouth College. Mr. Morris was chosen to serve on our board of directors because of his extensive experience in the banking and financial services industry and his financial expertise.
Lawrence Summers joined our board of directors in December 2012. Mr. Summers is the Charles W. Eliot University Professor & President Emeritus of Harvard University and the Weil Director of the Mossavar-Rahmani Center for Business & Government at Harvards Kennedy School. He became a tenured member of Harvard Universitys faculty in 1983, served as President from 2001 to 2006 and returned to Harvard in 2011. He has served in various senior policy positions in Washington, D.C., including Secretary of the Treasury from 1999 to 2001, Director of the National Economic Council for President Obama from 2009 to 2011 and Vice President of Development Economics and Chief Economist of the World Bank from 1991 to 1993. He holds a B.S. in economics from the Massachusetts Institute of Technology and a Ph.D. in economics from Harvard University. Mr. Summers was chosen to serve on our board of directors because of his extensive economic, financial and business experience.
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Simon Williams has been a member of our board of directors since November 2014 and previously served as a member of our board of directors from November 2010 to October 2011 . Since July 2011, Mr. Williams has served as the Group General Manager, Group Head of Wealth Management at HSBC Banks wealth management business. Prior to joining HSBC Bank, Mr. Williams served as the Chairman and Chief Executive Officer of Camelot Financial Capital Management, a global investment group, which he founded in 2007. Previously, he served as a Senior Executive at Citigroup, Inc., holding various roles during his career, including Chief Risk Officer of Citibank Global Consumer Group. In addition, Mr. Williams has held senior management roles at GE Capital, Bain & Co. and PricewaterhouseCoopers LLP. Mr. Williams holds a degree in Mathematics from Exeter University and an M.B.A from INSEAD in France, where he graduated with Distinction. Mr. Williams is also a member of the Institute of Chartered Accountants in England and Wales. Mr. Williams was chosen to serve on our board of directors because of his extensive experience in the financial industry and his investment, financial and operational expertise.
Election of Officers
Each executive officer serves at the discretion of our board of directors and holds office until his or her successor is duly appointed or until his or her earlier resignation or removal. There are no family relationships among any of our directors or executive officers.
Board Composition and Election of Directors
Our board of directors consists of nine members, all of whom were elected as directors pursuant to the terms of the amended and restated voting agreement, dated April 16, 2014, among us and certain of our stockholders and investors.
Our amended and restated voting agreement will terminate and the provisions of our current certificate of incorporation by which our directors were elected will be restated in connection with this offering. After this offering, the number of directors will be fixed by our board of directors, subject to the terms of our restated certificate of incorporation and restated bylaws that we expect to be in effect upon the completion of this offering. Each of our current directors will continue to serve as a director until the election and qualification of his or her successor or until his or her earlier death, resignation or removal.
Classified Board of Directors
Our restated certificate of incorporation and restated bylaws that we expect to be in effect upon the completion of this offering provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. Our directors will be divided among the three classes as follows:
| Class I directors, whose initial term will expire at the annual meeting of stockholders to be held in 2015, will consist of Mr. Ciporin, Mr. Crowe and Ms. Lynn; |
| Class II directors, whose initial term will expire at the annual meeting of stockholders to be held in 2016, will consist of Mr. Mack, Ms. Meeker and Mr. Morris; and |
| Class III directors, whose initial term will expire at the annual meeting of stockholders to be held in 2017, will consist of Mr. Laplanche, Mr. Summers and Mr. Williams. |
Directors in a particular class will be elected for three-year terms at the annual meeting of stockholders in the year in which their terms expire. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Each directors term continues until the election and qualification of his or her successor or his or her earlier death, resignation or removal.
The classification of our board of directors may have the effect of delaying or preventing changes in our control or management. See Description of Capital StockAnti-Takeover ProvisionsRestated Certificate of Incorporation and Restated Bylaws Provisions.
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Director Independence
Under the rules of the New York Stock Exchange, independent directors must comprise a majority of a listed companys board of directors within a specified period of the completion of this offering. In addition, the rules of the New York Stock Exchange require that, subject to specified exceptions, each member of a listed companys audit, compensation and nominating and corporate governance committees be independent. Under the rules of the New York Stock Exchange, a director will only qualify as an independent director if, in the opinion of that companys board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that Daniel Ciporin, Jeffrey Crowe, Rebecca Lynn, John J. Mack, Mary Meeker, John C. (Hans) Morris, Lawrence Summers and Simon Williams, representing eight of our nine directors, do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is independent as that term is defined under the listing requirements and rules of the New York Stock Exchange. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.
In addition, audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other committee of the board of directors (i) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries or (ii) be an affiliated person of the listed company or any of its subsidiaries. Additionally, compensation committee members must not have a relationship with us that is material to the directors ability to be independent from management in connection with the duties of a compensation committee member.
Board of Directors Role in Risk Management
Our board of directors oversees an enterprise-wide approach to risk management designed to support the achievement of organizational objectives, including strategic objectives, improving long-term organizational performance and enhancing stockholder value. Risk management includes not only understanding our specific risks and the steps management implements to manage those risks, but also what level of risk is acceptable and appropriate for us. Management is responsible for establishing our business strategy, identifying and assessing the related risks and implementing appropriate risk management practices. Our board of directors and our Risk Committee review our business strategy and managements assessment of the related risk and discuss with management our appropriate level of risk.
Our board of directors and our Audit Committee also oversee financial risk exposures, including monitoring the integrity of the consolidated financial statements, internal control over financial reporting and the independence of our independent registered public accounting firm. Our board of directors, through our Audit Committee, receives periodic internal controls and related assessments from our finance department. In fulfilling its oversight responsibility with respect to compliance matters, our board of directors, through our Audit Committee, meets at least quarterly with our finance department, independent registered public accounting firm and internal or external legal counsel to discuss risks related to our financial reporting function.
Board Leadership
Our board of directors has no formal chair and the duties are performed by our Chief Executive Officer who (i) works with our board of directors to schedule meetings and set meeting agendas; (ii) presides as the chair
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at executive sessions of directors; (iii) serves as the principal liaison between our board of directors and our executive officers; (iv) briefs our board of directors on issues or concerns arising between meetings of our board of directors, which are generally held monthly; (v) participates actively in corporate governance; and (vi) performs such other duties as our board of directors may, from time to time, delegate. Our board of directors believes that the performance of these duties by our Chief Executive Officer provides more consistent communication and coordination throughout the organization, which results in a more effective and efficient implementation of corporate strategy. Our board of directors further believes that this combination is important in unifying our strategy behind a single vision. We believe this structure provides consistent and effective oversight of our management and is optimal for us, our operations, stockholders and investors.
Code of Business Conduct and Ethics
In connection with this offering, our board of directors will adopt a new code of business conduct and ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of the code of business conduct and ethics will be posted on the investor relations section of our website. We intend to disclose future amendments to certain provisions of our code of business conduct and ethics, or waivers of these provisions, on our website or in public filings.
Board Committees
Audit Committee
The members of our Audit Committee are Rebecca Lynn, Mary Meeker, John C. (Hans) Morris (chair) and Simon Williams. All of the members of our Audit Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the New York Stock Exchange. Our board of directors has determined that Mr. Morris is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of the New York Stock Exchange. All of the members of our Audit Committee are independent directors as defined under the applicable rules and regulations of the SEC and the New York Stock Exchange.
Our Audit Committee oversees financial risk exposures, including monitoring the integrity of our consolidated financial statements, internal controls over financial reporting and the independence of our independent registered public accounting firm. Our Audit Committee receives internal control-related assessments and reviews and discusses our annual and quarterly consolidated financial statements with management. In fulfilling its oversight responsibilities with respect to compliance matters, our Audit Committee meets at least quarterly with management, our internal audit department, our independent registered public accounting firm and our internal legal counsel to discuss risks related to our financial reporting function.
Compensation Committee
The members of our Compensation Committee are Daniel Ciporin, Jeffrey Crowe (chair), Rebecca Lynn and John J. Mack. All of the members of our Compensation Committee are independent under the applicable rules and regulations of the SEC and the New York Stock Exchange.
Our Compensation Committee oversees our executive officer and director compensation arrangements, plans, policies and programs and administers our cash-based and equity-based compensation plans and arrangements for employees generally, including issuance of stock options and other equity-based awards granted other than pursuant to a plan.
Nominating and Corporate Governance Committee
The members of our Nominating and Corporate Governance Committee are John J. Mack (chair), Mary Meeker and Lawrence Summers. All of the members of our Nominating and Corporate Governance Committee are independent under the applicable rules and regulations of the New York Stock Exchange.
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Our Nominating and Corporate Governance Committee ensures that our board of directors is properly constituted to meet its statutory, fiduciary and corporate governance oversight. Our Nominating and Corporate Governance Committee will advise our board of directors on corporate governance matters and board performance matters, including making recommendations regarding the structure and composition of our board of directors and board committees and developing, recommending and monitoring compliance with corporate governance guidelines and policies and our code of business conduct and ethics.
Risk Committee
The members of our Risk Committee are Daniel Ciporin, John C. (Hans) Morris (chair) and Lawrence Summers.
Our Risk Committee assists our board of directors in its oversight of our key risks, including credit, technology and security, strategic, legal and compliance and operational risks, as well as the guidelines, policies and processes for monitoring and mitigating such risks. The chair of our Risk Committee assists our Audit Committee in its review of the risks that have been delegated to our Audit Committee in its charter. The chair of our Risk Committee also coordinates with the chair of our Compensation Committee to assist our Compensation Committee in its consideration of the relationship between risk management policies and practices, corporate strategy and senior executive compensation.
Compensation Committee Interlocks and Insider Participation
None of the members of our Compensation Committee is or has at any time during the past fiscal year been one of our officers or employees. None of our executive officers currently serves or in the past fiscal year has served as a member of our board of directors or Compensation Committee of any entity that has one or more executive officers serving on our board of directors or our Compensation Committee.
Director Compensation
The non-employee members of our board of directors who are not affiliated with our significant stockholders generally receive a stock option award upon commencement of their service as a director. During the year ended December 31, 2013, none of our directors received any cash compensation for services as a member of our board of directors. From time to time, we reimburse certain of our non-employee directors for travel and other expenses incurred in connection with attending our board and committee meetings.
The following table presents the total compensation for Mr. Morris in the year ended December 31, 2013. None of the other non-employee members of our board of directors earned any compensation in the year ended December 31, 2013. Mr. Laplanche, our Chief Executive Officer, receives no compensation for his service as a director.
Name of Director (1) |
Option
Awards (2) |
Total | ||||||
John C. (Hans) Morris |
$ | 1,251,593 | (3) | $ | 1,251,593 |
(1) | As of December 31, 2013, Mr. Mack held outstanding options to purchase 1,585,532 shares of our common stock at an exercise price of $0.18 per share, Mr. Morris held outstanding options to purchase 660,000 shares of our common stock at an exercise price of $0.70 per share and Mr. Summers held outstanding options to purchase 1,332,424 shares of our common stock at an exercise price of $0.70 per share. As of December 31, 2013, Messrs. Ciporin and Crowe and Mses. Lynn and Meeker did not hold any options to purchase shares of common stock. |
(2) | The amount reported in this column does not reflect the amount actually received by our non-employee directors. Instead, this amount reflects the aggregate grant date fair value of the stock option granted to our non-employee director during 2013, as computed in accordance with FASB ASC 718. Assumptions used in the calculation of this amount are included in Note 13 to consolidated financial statements included in this prospectus. As required by SEC rules, the amount shown excludes the impact of estimated forfeitures related to service-based vesting conditions. Our non-employee directors who have received options will only realize compensation with regard to these options to the extent the price of our common stock is greater than the exercise price of such options. |
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(3) | Based on options to purchase 660,000 shares of common stock at an exercise price of $0.70 per share, granted on February 22, 2013. The options will vest in equal quarterly installments over sixteen quarters from the grant date, subject to continued service on our board of directors. |
In July 2014, our Compensation Committee approved a non-employee director compensation policy, which will take effect following the completion of this offering. Pursuant to this policy, our non-employee directors will receive (i) an annual retainer of $40,000, (ii) an equity award upon initial election to our board of directors having a value equal to $574,000 and a four-year term, of which 25% will vest on the one-year anniversary of the grant date and the remaining will vest in equal monthly installments over the remaining three years and (iii) and an annual equity award having a value of $200,000 and a one-year term, of which 100% will vest on the one-year anniversary of the grant date. The first annual retainer payment and first annual equity award will be made following our 2015 annual meeting of stockholders. In the event of a change in control, the equity awards granted under our non-employee director compensation policy will immediately vest in full.
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Compensation Discussion and Analysis
Overview
This section explains our executive compensation philosophy, objectives and design, our compensation-setting process, our executive compensation program components and the decisions made in 2013 and in the first half of 2014 for our named executive officers (NEOs), who were the following executive officers for the year ended December 31, 2013:
| Renaud Laplanche, our founder and Chief Executive Officer; |
| Carrie Dolan, our Chief Financial Officer; |
| Scott Sanborn, our Chief Operating and Marketing Officer; |
| John MacIlwaine, our Chief Technology Officer; and |
| Chaomei Chen, our Chief Risk Officer. |
The compensation provided to our NEOs for 2013 is set forth in detail in the Summary Compensation Table and other tables and the accompanying footnotes and narrative that follow this section.
Executive Compensation Philosophy, Objectives and Design
Philosophy . Our mission is to transform the banking system. To succeed, we must develop new products, update existing products, attract borrowers and investors, operate within an efficient cost structure and deliver a great borrower and investor experience. To achieve these objectives, we need a highly talented team of engineering, product, marketing and general and administrative professionals. We also expect our team to possess and demonstrate strong leadership and management capabilities.
We believe that to attract, retain and motivate highly talented employees, including our executives, we must foster our company culture and continue to review and, when necessary, make changes to our executive compensation program, which serves as the basis on which we hire, evaluate and reward the performance of our employees.
Objectives. The objectives of our executive compensation program are to:
| recruit an exceptional executive team; |
| incentivize and reward the achievement of strategic and financial goals of the company, with an emphasis on long-term goals; |
| ensure each of our executive officers receives a total compensation package that encourages his or her long-term retention; and |
| align the interests of our executives with those of our stockholders. |
Design. Our executive compensation has been principally weighted toward equity, in the form of stock options. Our board of directors believes that this form of compensation focuses our executives on achieving our strategic and financial goals. Our board of directors also believes that making equity awards a key component of executive compensation aligns the executive team with the long-term interests of our stockholders. To maintain a competitive compensation program, we also offer cash compensation in the form of (i) base salaries to reward individual contributions and compensate our employees for their day-to-day responsibilities and (ii) annual bonuses to drive leadership and incentivize achievement of our shorter-term objectives.
As part of our planning for the transition to being a publicly-traded company, our management and board of directors engaged Compensia, a national compensation consulting firm, in October 2013 to assess our executive
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pay levels relative to public company market norms and, in December 2013, our board of directors formed a Compensation Committee. Our Compensation Committee, with the assistance of Compensia, evaluated our executive compensation program, including our mix of cash and equity compensation in 2014 and approved changes to our program.
We will continue to evaluate our executive compensation program at least annually or as circumstances require based on our business objectives and the competitive environment for talent. We anticipate continuing our emphasis on pay-for-performance and long-term incentive compensation for our executive officers. Our Compensation Committee has retained Compensia to provide executive compensation advisory services for 2014.
Compensation-Setting Process
Role of Our Board of Directors. Prior to the formation of our Compensation Committee in December 2013, our board of directors oversaw our executive officer (including our NEO) and director compensation arrangements, plans, policies and programs and administered our cash-based and equity-based compensation plans and arrangements for employees generally.
Role of Management. In setting compensation for 2013, our Chief Executive Officer, Chief Financial Officer and Chief People Officer worked closely with our board of directors in managing our executive compensation program. Our Chief Executive Officer made recommendations to our board of directors regarding compensation for our executive officers other than himself because of his daily involvement with our executive team. No executive officer participated directly in the final deliberations or determinations regarding his or her own compensation package.
Role of Our Compensation Committee. Our Compensation Committee, which was formed in December 2013, currently oversees our executive officer and director compensation. Our Compensation Committee is expected to meet at least twice a year or more frequently, as determined appropriate by our Compensation Committee.
Role of Compensation Consultant. Our board of directors selected Compensia to advise on executive compensation matters given its expertise in the technology industry and its knowledge of our peer companies. During the year ended December 31, 2013 and in the first half of 2014, Compensia provided the following services:
| advised on our transitioning of executive pay from private company practices to those of a publicly-traded company compensation program; |
| assisted in the development of the peer group of companies we use to understand market competitive compensation practices; |
| reviewed and assessed our Chief Executive Officer and other executive officer base salaries, cash bonuses and equity compensation levels and plan structures relative to the market and our peers; |
| reviewed and assessed market and best practice with respect to executive severance and change in control arrangements; |
| assisted in the development of our equity compensation strategy, including the development of award guidelines and an aggregate spending budget; and |
| reviewed and assessed board of director compensation market practices. |
Compensia does not provide any services to us other than the services described above. Our board of directors believes that Compensia does not have any conflicts of interest in advising our board of directors under applicable rules and regulations.
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Use of Comparative Market Data. Prior to 2014, our management and board of directors used publicly available data on the compensation policies and practices of comparable publicly-traded companies as a reference to understand our competitive market for executive talent, but they did not specifically identify a peer group or seek to benchmark our executive compensation to any particular level.
In connection with our retention of Compensia, our board of directors directed management to conduct a market analysis for purposes of understanding the competitive market for executive talent and making executive compensation comparisons. As part of this undertaking, we formalized our process of identifying a peer group for comparative purposes. Following discussions with our management team, our board of directors and Compensia identified comparative peer group companies that they believed would be useful in determining a reference point for what we should consider to be market levels of cash and equity compensation.
In developing our compensation peer group, we focused primarily on public technology companies whose shares are listed in the United States. We considered the revenue, revenue growth, net income and market capitalization of these companies, and determined that selecting peer companies with levels both above and below our own financial metrics was appropriate. Our management, board of directors and Compensation Committee believed that including companies with higher revenues, an income and market capitalization was appropriate due to our historical and recent rapid growth. The compensation peer group includes a combination of internet and technology companies where, as a result of rapid growth, the scope and complexity of the peer companies senior executive positions were comparable to the scope and complexity of our executive positions.
In February 2014, our Compensation Committee determined to use the following peer group of companies:
Angies List |
Pandora Media | |
CoStar Group |
ServiceNow | |
Financial Engines |
Splunk | |
HomeAway |
Trulia | |
|
Workday | |
MarketAxess Holdings |
Yelp | |
MercadoLibre |
Zillow | |
OpenTable |
Our Compensation Committee expects to periodically review and update this peer group.
Our management and our Compensation Committee also reviewed compensation data from a group of technology companies headquartered in the San Francisco Bay Area with revenues between $200 million and $1 billion in the Radford Global Technology and Global Sales Survey published by AON (Radford Survey).
In 2014, our Compensation Committee reviewed our executive compensation against our peer group and the Radford Survey to ensure that our executive officer compensation program is sufficient to achieve its objectives. Management provided our Compensation Committee with total compensation data at various percentiles within both the peer group and the Radford Survey. Overall, based on our peer group analysis, annual base compensation for each of our NEOs was generally below the median of similarly situated executives in both our peer group and the Radford Survey.
Our Compensation Committee also reviewed the in-the-money value of current equity holdings of our executive officers against a reference group of recent technology company initial public offerings with post-offering market capitalizations of greater than $500 million.
While our Compensation Committee considered this data in determining executive officer compensation, it did not seek to benchmark our executive compensation to any particular level. The total compensation for our NEOs was not determined based on any pre-set target percentile of market. Rather, we sought to compensate
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our executive officers at a level that would allow us to successfully recruit and retain the best possible talent for our executive team. We relied heavily on the knowledge and experience of our Compensation Committee and management in determining the appropriate compensation levels for our executive officers.
Executive Compensation Program Components
Elements of Executive Compensation. Our executive officer compensation packages generally include:
| equity-based compensation in the form of stock options; |
| base salary; and |
| cash bonuses. |
We believe that our compensation mix supports our objective of focusing on at-risk compensation having significant financial upside based on company and individual performance. We expect to continue to emphasize equity awards because of the direct link that equity compensation provides between stockholder interests and the interests of our executive officers, thereby motivating our executive officers to focus on increasing our value over the long term.
Equity Compensation. We have used stock options as the principal component of our executive compensation program. Consistent with our compensation objectives, we believe this approach aligns our executive teams contributions with our long-term interests and allows our executive team to participate in any future appreciation in our common stock. We believe that stock options also serve as an effective retention tool due to vesting requirements that are based on continued service with us and help create an ownership culture. In granting stock options, we customarily considered, among other things, the executive officers cash compensation, the need to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value, our financial results, an evaluation of the expected and actual performance of each executive officer, his or her individual contributions and responsibilities and market conditions.
In 2013, our board of directors did not grant any stock options to our NEOs. In making this determination, our board of directors reviewed our historical stock option grants and the number of shares subject to outstanding stock options held by each of our NEOs and concurred with our Chief Executive Officers recommendation that the stock options held by our NEOs, taking into consideration the unvested portion and the value of such stock options, appropriately met our retention and incentive goals, and that no additional stock options were necessary.
In 2014, our Compensation Committee undertook a review of the aggregate stock options held by each NEO. This review involved a comparison of the aggregate equity awards held by our NEOs compared to our peer group, as well as an analysis of each NEOs total equity holdings in light of the objective of long-term retention. A review of the stock options held by our NEOs showed that a significant portion of the stock options would become vested in 2015 and the remaining unvested portion would be almost entirely vested in 2016. As a result, in February 2014, at the recommendation of our Compensation Committee, our board of directors granted stock options to our NEOs. Our Compensation Committee reviewed the aggregate number of shares subject to stock options held by each of our NEOs, taking into consideration the unvested portion and the value of such stock options, as well as the need to maintain the retention value of unvested stock options. Based on such review, our Compensation Committee recommended, and our board of directors approved, the grant of stock options to purchase 2,701,884, 1,350,944, 665,388, 483,920 and 326,644 shares of our common stock to Mr. Laplanche, Mr. Sanborn, Ms. Dolan, Mr. MacIlwaine and Ms. Chen, respectively. These new awards will vest in 16 quarterly increments beginning one year after the date of grant, for a total vesting period of five years.
Base Salary. In determining base salaries for 2013, our board of directors considered the overall compensation package of our executives and, in particular, the fact that we have assigned greater emphasis on providing compensation in the form of stock options in order to motivate our executive team and foster long-term
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growth for the benefit of our stockholders. Historically, our executive officers have received base salaries within a very narrow range that was established when we were a smaller company and that was based on our desire to maintain internal pay equity between executive officers. As we have grown, we have gradually increased base salaries for our executive officers with the goal of bringing salaries closer to market over time. In June 2013, our board of directors reviewed executive salaries, including the salaries of our NEOs, and approved a base salary increase from $300,000 per year to $325,000 per year for each Mr. Laplanche, Mr. Sanborn and Ms. Dolan. Ms. Chens and Mr. MacIlwaines salaries of $270,000 and $300,000 per year, respectively, did not change.
In January 2014, our Compensation Committee reviewed executive salaries. Our Compensation Committee approved base salaries of $461,500, $350,000, $330,000 and $300,000 for Mr. Laplanche, Mr. Sanborn, Ms. Dolan and Ms. Chen, respectively. Mr. MacIlwaines base salary did not change. The changes were made in order to bring salaries of each of our NEOs closer to the median of similarly situated executives in our peer group.
Cash Bonuses. Our board of directors approved bonuses for 2013 for our executive officers, including our NEOs, in order to reward our executive officers for achieving our financial and operational goals. Historically, target cash bonuses for executive officers, which had been established as target dollar amounts, varied based on specific negotiations with the individual, usually in connection with the individuals hiring. In August 2013, our board of directors reviewed and approved an increased bonus target for each of Mr. Sanborn and Ms. Dolan from $100,000 to $125,000. The change was made in order to bring bonus targets more in line with market, which included technology companies headquartered in the San Francisco Bay Area noted in the Radford Survey.
In 2012, we changed our fiscal year end from March 31 to December 31. However, during the 2012 transition year, we still awarded bonuses on a March 31 year-end basis and, therefore, awarded 2012 bonuses based on performance from April 1, 2012 to March 31, 2013 and awarded 2013 bonuses based on performance from April 1, 2013 to December 31, 2013.
Executive bonuses during each of these periods were based on the achievement of corporate performance metrics during such period, with pro-rata payout between 25% and 150% of the target performance level established for each metric. For each of these periods, 100% of our Chief Executive Officers bonus was based on the achievement of performance metrics, while 75% of each other executives bonus was based on the achievement of performance metrics and 25% of the bonus target was based on individual performance as determined by our Chief Executive Officer.
Corporate Performance Metrics. Our board of directors established total revenue and adjusted EBITDA as the two financial measures to be used as our corporate performance metrics for bonuses. Our total revenue target for the period from April 1, 2013 to December 31, 2013 was $94 million, which was weighted at 60%, and our adjusted EBITDA target was $10 million, which was weighted at 40%. Our total revenue target for the period from April 1, 2012 to March 31, 2013 was $32 million, which was weighted at 60%, and our adjusted EBITDA target was $5 million, which was weighted at 40%. For additional information about adjusted EBITDA, see Managements Discussion and Analysis of Financial Condition and Results of OperationsReconciliations of Non-GAAP Financial Measures.
At the time these performance metrics were set, our board of directors believed that the corporate performance metrics were challenging and aggressive. In order to reach target payouts, we would have had to achieve an exceptional year-over-year increase in our annual total revenue and adjusted EBITDA. Our board of directors believed that the achievement of the performance metrics at the target levels would require excellent leadership, effective leveraging of our competencies and a clear focus on driving and achieving results throughout the period.
Individual Performance Measures. We expect a high level of performance from each of our executive officers in carrying out his or her respective responsibilities to achieve results effectively. As a result, each executive officer is evaluated based on his or her overall performance. Our Chief Executive Officer evaluates
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each executive officers individual performance (other than his own) and, for purposes of determining bonuses, made a recommendation to our board of directors or Compensation Committee.
Bonus Payments for the April 1, 2013 to December 31, 2013 Period . In early 2014, our Compensation Committee reviewed our April 1, 2013 to December 31, 2013 corporate performance against our performance metrics and determined that we exceeded our two performance metrics, yielding an aggregate of 131% achievement. This percentage was used to establish the size of the bonuses available to executives, including our NEOs, for the noted period.
The following table summarizes the calculations that were used in determining the cash bonus paid to each of our NEOs for the April 1, 2013 to December 31, 2013 performance period:
Bonus Target
($) |
Individual
Bonus Component (%) |
Individual
Bonus Achievement (%) |
Company
Bonus Component (%) |
Company
Bonus Achievement (%) |
Individual
Bonus Payout ($) |
|||||||||||||||||||
Renaud Laplanche |
150,000 | 0 | 100 | 100 | 131 | 147,375 | ||||||||||||||||||
Carrie Dolan |
125,000 | 25 | 110 | 75 | 131 | 117,891 | ||||||||||||||||||
Scott Sanborn |
125,000 | 25 | 150 | 75 | 131 | 127,266 | ||||||||||||||||||
John MacIlwaine |
100,000 | 25 | 110 | 75 | 131 | 94,313 | ||||||||||||||||||
Chaomei Chen |
50,000 | 25 | 347 | 75 | 131 | 69,328 |
Bonus Payments for the April 1, 2012 to March 31, 2013 Period . In mid-2013, our board of directors reviewed our April 1, 2102 to March 31, 2013 corporate performance against our performance metrics and determined that we exceeded our two performance metrics, yielding an aggregate of 150% achievement. This percentage was used to establish the size of the bonuses available to executives, including our NEOs, for the noted period.
The following table summarizes the calculations that were used in determining the cash bonus paid to each of our NEOs for the April 1, 2012 to March 31, 2013 performance period:
Bonus Target
($) |
Individual
Bonus Component (%) |
Individual
Bonus Achievement (%) |
Company
Bonus Component (%) |
Company
Bonus Achievement (%) |
Individual
Bonus Payout ($) |
|||||||||||||||||||
Renaud Laplanche |
150,000 | 0 | 100 | 100 | 150 | 225,000 | ||||||||||||||||||
Carrie Dolan |
100,000 | 25 | 100 | 75 | 150 | 137,500 | ||||||||||||||||||
Scott Sanborn |
100,000 | 25 | 114 | 75 | 150 | 141,000 | ||||||||||||||||||
John MacIlwaine (1) |
100,000 | 25 | 100 | 75 | 150 | 91,541 | ||||||||||||||||||
Chaomei Chen |
50,000 | 25 | 100 | 75 | 150 | 68,750 |
(1) | Mr. MacIlwaine began serving as our Chief Technology Officer on July 31, 2012. |
Compensation Governance
Our Compensation Committee seeks to ensure sound executive compensation practices to adhere to our pay-for-performance philosophy while appropriately managing risk and aligning our compensation programs with long-term stockholder interests. We expect the following practices to be in effect following the completion of this offering:
| our Compensation Committee will be comprised solely of independent directors under the standards of the exchange on which our common stock is listed; |
| our Compensation Committee will conduct an annual review and approval of our compensation strategy; and |
| our Compensation Committee will retain discretion on bonus payouts to enable it to respond to unforeseen events and adjust bonus payouts as appropriate. |
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Benefits Programs
Our employee benefit programs, including our 401(k) plan, our ESPP, which will become effective on the date of this prospectus, and health and welfare programs, are designed to provide a competitive level of benefits to our employees generally, including our executive officers and their families. We adjust our employee benefit programs as needed based on regular monitoring of applicable laws and practices and the competitive market. Our executive officers are entitled to participate in the same employee benefit plans, and on the same terms and conditions, as all other U.S. full-time employees.
Perquisites and Other Personal Benefits
Currently, we do not view perquisites or other personal benefits as a significant component of our executive compensation program. Accordingly, we do not generally provide perquisites to our executive team. In the future, we may provide perquisites or other personal benefits in limited circumstances, such as where we believe it is appropriate to assist an individual executive in the performance of his or her duties, to make our executive team more efficient and effective and for recruitment, motivation or retention purposes. All future practices with respect to perquisites or other personal benefits will be subject to review and approval by our Compensation Committee.
Post-Employment Compensation
We intend to enter into new employment agreements with each of our NEOs in connection with this offering. For additional information regarding these employment agreements, see Employment Agreements.
In hiring our executive officers, we recognized that it would be necessary to recruit candidates from outside our company with the requisite experience and skills. Accordingly, we sought to develop competitive compensation packages to attract qualified candidates who could fill our most critical positions. At the same time, we were sensitive to the need to integrate new executive officers into our existing executive compensation structure, balancing both competitive and internal equity considerations.
The new employment agreements that we intend to enter into with our NEOs will also provide for certain protection in the event of their termination of employment under specified circumstances, including following a change in control. We believe that these protections are necessary to induce these individuals to forego other opportunities. We also believe that entering into these arrangements will help our executives maintain continued focus and dedication to their responsibilities to help maximize stockholder value if there is a potential transaction that could involve a change in control of our company.
For additional information regarding these severance and change in control arrangements, see Potential Payments Upon Termination or Change in Control.
162(m) Tax Deductibility
Section 162(m) of the Code limits the amount that we may deduct from our federal income taxes for remuneration paid to our NEOs to $1 million per executive officer per year, unless certain requirements are met. Section 162(m) provides an exception from this deduction limitation for certain forms of performance-based compensation, as well as for the gain recognized by covered executive officers on the exercise of qualifying compensatory stock options. In addition, grandfather provisions may apply to certain compensation arrangements that were entered into by a corporation before it was publicly held. We believe that, to date, all of our compensation that has been granted has been exempt from the Section 162(m) deduction limitation. While our Compensation Committee is mindful of the benefit to us of the full deductibility of compensation, our Compensation Committee believes that it should not be constrained by the requirements of Section 162(m) where those requirements would impair flexibility in compensating our executive officers in a manner that can best promote our corporate objectives. Therefore, our Compensation Committee has not adopted a policy that requires that all compensation be deductible. Our Compensation Committee intends to continue to compensate our executive officers in a manner consistent with the best interests of our company and stockholders.
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Summary Compensation Table
The following table provides information regarding the compensation earned during the year ended December 31, 2013 (FY 2013), the nine months ended December 31, 2012, the year ended March 31, 2012 (FY 2012) and the year ended March 31, 2011 (FY 2011) by each of our NEOs:
Name and Principal Position |
Year (1) |
Salary ($) | Bonus ($) |
Non-Equity
Incentive Plan Compensation ($) (2) |
Option
Awards ($) (3) |
Total ($) | ||||||||||||||||
Renaud Laplanche |
FY 2013 | 314,583 | | 203,625 | | 518,208 | ||||||||||||||||
Chief Executive Officer |
9 Months 2012 | 216,667 | | 168,750 | 813,738 | 1,199,155 | ||||||||||||||||
FY 2012 | 250,000 | | 100,000 | | 350,000 | |||||||||||||||||
FY 2011 | 218,750 | | 93,750 | 327,394 | 639,894 | |||||||||||||||||
Carrie Dolan |
FY 2013 | 314,583 | | 152,266 | | 466,849 | ||||||||||||||||
Chief Financial Officer (4) |
9 Months 2012 | 220,833 | | 103,125 | 325,495 | 649,453 | ||||||||||||||||
FY 2012 | 275,000 | | 87,500 | | 362,500 | |||||||||||||||||
FY 2011 | 171,875 | | 44,100 | 131,683 | 347,658 | |||||||||||||||||
Scott Sanborn |
FY 2013 | 314,583 | | 162,516 | | 477,099 | ||||||||||||||||
Chief Operating Officer (5) |
9 Months 2012 | 220,833 | | 105,750 | 406,869 | 733,452 | ||||||||||||||||
FY 2012 | 275,000 | | 90,000 | | 365,000 | |||||||||||||||||
FY 2011 | 235,513 | | 68,685 | 198,391 | 502,589 | |||||||||||||||||
John MacIlwaine |
FY 2013 | 300,000 | 87,500 | (7) | 117,198 | | 504,698 | |||||||||||||||
Chief Technology Officer (6) |
9 Months 2012 | 126,154 | 87,500 | (7) | 68,656 | 598,901 | 881,211 | |||||||||||||||
Chaomei Chen |
FY 2013 | 270,000 | | 86,516 | | 356,516 | ||||||||||||||||
Chief Risk Officer (8) |
9 Months 2012 | 199,167 | | 51,563 | | 250,730 | ||||||||||||||||
FY 2012 | 208,333 | | 34,356 | 306,786 | 549,475 |
(1) | Effective December 31, 2012, we changed our fiscal year end from March 31 to December 31. Amounts in the FY 2013 row reflect compensation earned from January 1, 2013 to December 31, 2013. Amounts in the 9 Months 2012 row reflect compensation earned from April 1, 2012 to December 31, 2012. Amounts in the FY 2012 row reflect compensation earned from April 1, 2011 to March 31, 2012. Amounts in the FY 2011 row reflect compensation earned from April 1, 2010 to March 31, 2011. |
(2) | For more information regarding our non-equity incentive plan awards, see Compensation Discussion and AnalysisExecutive Compensation Program ComponentsCash Bonuses. |
(3) | The amounts reported in this column do not reflect the amounts actually received by our NEOs. These amounts instead reflect the aggregate grant date fair value of each stock option granted to our NEOs during the period presented, as computed in accordance with FASB ASC 718. Assumptions used in the calculation of these amounts are included in Note 13 to consolidated financial statements included in this prospectus. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. Our NEOs who have received options will only realize compensation with regard to these options to the extent the trading price of our common stock is greater than the exercise price of such options. |
(4) | Ms. Dolan began serving as our Chief Financial Officer in August 2010. |
(5) | Mr. Sanborn began serving as our Chief Marketing Officer in May 2010 and as our Chief Operating Officer in April 2013. |
(6) | Mr. MacIlwaine began serving as our Chief Technology Officer in July 2012. |
(7) | Includes two installments of $43,750 each for Mr. MacIlwaines starting bonus. |
(8) | Ms. Chen began serving as our Chief Risk Officer in June 2011. |
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Grants of Plan-Based Awards In 2013
The following table sets forth certain information regarding grants of plan-based awards to our NEOs during 2013. Our NEOs did not receive any equity awards in 2013.
Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) | ||||||||||||||
Name |
Grant Date | Threshold | Target | Maximum | ||||||||||
Renaud Laplanche |
8/13/2013 | $ | 37,500 | $ | 150,000 | $ | 225,000 | |||||||
Carrie Dolan |
8/13/2013 | 31,250 | 125,000 | 187,500 | ||||||||||
Scott Sanborn |
8/13/2013 | 31,250 | 125,000 | 187,500 | ||||||||||
John MacIlwaine |
8/13/2013 | 25,000 | 100,000 | 150,000 | ||||||||||
Chaomei Chen |
8/13/2013 | 12,500 | 50,000 | 75,000 |
(1) | For more information regarding the achievement of these non-equity incentive plan awards, see Compensation Discussion and AnalysisExecutive Compensation Program ComponentsCash Bonuses. |
2013 Outstanding Equity Awards at Fiscal Year End
The following table sets forth certain information regarding outstanding equity awards held by our NEOs that remained outstanding as of December 31, 2013.
Number of Securities
Underlying Unexercised Options (#) Exercisable |
Number of Securities
Underlying Unexercised Options (#) Unexercisable |
Option
Exercise Price ($) |
Option
Expiration Date |
|||||||||||||||||
Name |
Grant Date | |||||||||||||||||||
Renaud Laplanche |
10/16/2012 | (1) | 500,000 | 1,500,000 | 0.70 | 10/16/2022 | ||||||||||||||
5/28/2010 | (2) | 4,620,000 | 660,000 | 0.10 | 5/28/2020 | |||||||||||||||
Carrie Dolan |
10/16/2012 | (1) | 121,064 | 600,000 | 0.70 | 10/16/2022 | ||||||||||||||
2/23/2011 | (3) | 166,640 | 499,928 | 0.10 | 2/23/2021 | |||||||||||||||
Scott Sanborn |
10/16/2012 | (1) | 250,000 | 750,000 | 0.70 | 10/16/2022 | ||||||||||||||
5/28/2010 | (4) | 967,120 | 399,940 | 0.10 | 5/28/2020 | |||||||||||||||
John MacIlwaine |
10/16/2012 | (5) | 349,224 | 872,516 | 0.70 | 10/16/2022 | ||||||||||||||
Chaomei Chen |
2/16/2012 | (6) | 183,736 | 1,102,400 | 0.18 | 2/16/2022 |
(1) | The holders right to purchase the shares subject to the option vests ratably over 16 calendar quarters beginning October 1, 2012. |
(2) | The holders right to purchase 25% of the shares subject to the options vested on April 1, 2011, and the holders right to purchase the remaining shares subject to the option vests ratably over the following 12 calendar quarters. |
(3) | The holders right to purchase 25% of the shares subject to the options vested on August 16, 2011, and the holders right to purchase the remaining shares subject to the option vests ratably over the following 12 calendar quarters. |
(4) | The holders right to purchase 25% of the shares subject to the options vested on May 24, 2011, and the holders right to purchase the remaining shares subject to the option vests ratably over the following 12 calendar quarters. |
(5) | The holders right to purchase 25% of the shares subject to the options vested on July 31, 2013, and the holders right to purchase the remaining shares subject to the option vests ratably over the following 12 calendar quarters. |
(6) | The holders right to purchase 25% of the shares subject to the options vested on June 1, 2012, and the holders right to purchase the remaining shares subject to the option vests ratably over the following 12 calendar quarters. |
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2013 Option Exercises
The following table sets forth for each of our NEOs the number of shares of our common stock acquired upon the exercise of stock options during 2013 and the aggregate value realized upon exercise.
Option Awards | ||||||||
Name |
Number of Shares
Acquired on Exercise |
Value Realized on
Exercise (1) |
||||||
Renaud Laplanche |
| $ | | |||||
Carrie Dolan |
1,618,636 | $ | 2,069,050 | |||||
Scott Sanborn |
1,432,520 | $ | 1,702,820 | |||||
John MacIlwaine |
73,600 | $ | 204,650 | |||||
Chaomei Chen |
551,200 | $ | 1,384,423 |
(1) | The value realized on exercise was calculated as the difference between the actual sales price to a third party of the shares underlying the options exercised and the applicable exercise price of those options. |
Employment Agreements
We intend to enter into new employment agreements with each of our NEOs in connection with this offering, which will provide for at-will employment, a base salary in an amount determined by our board of directors or a committee thereof, a cash bonus based on a target percentage of the NEOs then-current base salary determined by our board of directors and standard employee benefit programs.
If an NEO other than Mr. Laplanche is terminated without cause or for good reason within 12 months following a change in control, he or she will be entitled to receive (i) a lump sum payment equal to 12 months of the NEOs base salary, (ii) a lump sum payment equal to the greater of 100% of the NEOs target bonus or most recent actual bonus payout, (iii) 12 monthly cash payments equal to the monthly COBRA premium at the time of the NEOs termination and (iv) accelerated vesting with respect to all of the NEOs unvested equity awards. If an NEO other than Mr. Laplanche is terminated without cause or for good reason not within 12 months following a change in control, he or she will be entitled to receive (i) a lump sum payment equal to six months of the NEOs base salary, (ii) a lump sum payment of the pro-rated amount of the NEOs bonus as if he or she had been employed through the calendar year, to be determined in our sole discretion and (iii) six monthly cash payments equal to the monthly COBRA premium at the time of the NEOs termination.
If Mr. Laplanche is terminated without cause or for good reason within 12 months following a change in control, he will be entitled to receive (i) a lump sum payment equal to 18 months of his base salary, (ii) a lump sum payment equal to the greater of 150% of his target bonus or most recent actual bonus payout, (iii) 18 monthly cash payments equal to the monthly COBRA premium at the time of his termination and (iv) accelerated vesting with respect to all of his unvested equity awards. If Mr. Laplanche is terminated without cause or for good reason not within 12 months following a change in control, he will be entitled to receive (i) a lump sum payment equal to 12 months of his base salary, (ii) a lump sum payment of the pro-rated amount of his bonus as if he had been employed through the calendar year, to be determined in our sole discretion and (iii) 12 monthly cash payments equal to the monthly COBRA premium at the time of his termination.
All payments upon termination are subject to the NEOs return of our property and release of claims against us. If the NEOs employment is terminated for cause or voluntarily, then he or she will not receive any payments upon termination. Under the employment agreements, the NEOs are also subject to covenants regarding confidentiality, invention assignment and prohibition on solicitation of our employees or independent contractors for a period of six months following the termination of employment.
Under the employment agreements, cause means: (i) conviction in a criminal proceeding involving fraud, embezzlement, bribery, forgery, counterfeiting, extortion, dishonesty or moral turpitude, or any felony or misdemeanor charge; (ii) any act or omission by the NEO involving dishonesty, disloyalty or fraud; (iii) a breach
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of fiduciary duty; (iv) substantial, willful or repeated disregard of the lawful and reasonable directives of our board of directors or our Chief Executive Officer clearly communicated in writing to the NEO, if not remedied within 30 days of the notice; (v) a breach of any non-solicitation or other restrictive covenant set forth in any agreement between the NEO and us, if not cured within 30 days of the notice; (vi) gross negligence or willful misconduct with respect to us or our customers, clients, contractors or vendors; (vii) an order, ruling or determination by a government body, court or self-regulatory organization that imposes a bar or disqualification on the NEOs employment with us; (viii) violation of our policies against unlawful discrimination and harassment; (ix) repeated alcohol or substance abuse while performing services for us; or (x) abandonment or gross dereliction of work duties.
Under the employment agreements, change in control means: (i) any merger or consolidation of us with or into another entity (other than any such merger or consolidation in which our stockholders immediately prior to such merger or consolidation continue to hold at least a majority of the voting power of the outstanding capital stock or other ownership interests in the surviving corporation); (ii) any sale, transfer or other disposition, in a single transaction or series of related transactions, of all or substantially all of our assets; or (iii) any other transaction or series of related transactions pursuant to which a single person or entity (or group of affiliated persons or entities) acquires from us or our stockholders a majority of our outstanding voting power or other ownership interest.
Under the employment agreements, good reason means: (i) a material diminution in base compensation unless the base salary of a majority of other employees at the same level as the NEO is also proportionately reduced; (ii) a change in the geographic location at which the NEO must perform services of greater than 50 miles; or (iii) any other action or inaction that constitutes a material breach by us of the employment agreement, subject to certain exceptions.
Potential Payments Upon Termination or Change in Control
Under the terms of the new employment agreements that we intend to enter into with each of our NEOs in connection with this offering, our NEOs will be eligible to receive certain benefits in connection with the termination of their employment, depending on the circumstances, as further described above.
The actual amounts that would be paid or distributed to our NEOs as a result of a termination event occurring in the future may be different than those set forth below as many factors will affect the amount of any payments and benefits upon a termination of employment. For example, some of the factors that could affect the amounts payable include the NEOs base salary and the market price of our common stock at the time of the termination event. Additionally, we or an acquirer may mutually agree with the NEOs on severance terms that vary from those provided in pre-existing agreements.
The tables below set forth the value of the benefits that each of our NEOs would be entitled to receive upon a qualifying termination event as of December 31, 2013. As used in the tables below, involuntary termination means termination without cause or for good reason, as described above.
Renaud Laplanche
Involuntary Termination | ||||||||
No Change
in Control |
Change in
Control |
|||||||
Benefit |
||||||||
Cash severance |
$ 314,583 | $ | 471,875 | |||||
Bonus (1) |
150,000 | 225,000 | ||||||
Health, dental and vision benefits |
16,937 | 25,405 | ||||||
Equity vesting acceleration (2) |
| 22,649,850 | ||||||
|
|
|
|
|||||
Total potential severance payment |
$ 481,520 | $ | 23,372,130 | |||||
|
|
|
|
(1) | Assumes in the no change in control and the change in control scenarios a cash bonus payment equal to 100% and 150%, respectively, of Mr. Laplanches target bonus for the performance period from April 1, 2013 to December 31, 2013. |
(2) | Calculated based on the amount by which the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, exceeds the per share exercise price of the applicable stock option. |
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Carrie Dolan
Involuntary Termination | ||||||||
No Change
in Control |
Change in
Control |
|||||||
Benefit |
||||||||
Cash severance |
$ | 157,292 | $ | 314,583 | ||||
Bonus (1) |
125,000 | 125,000 | ||||||
Health, dental and vision benefits |
6,666 | 13,332 | ||||||
Equity vesting acceleration (2) |
| 11,630,965 | ||||||
|
|
|
|
|||||
Total potential severance payment |
$ | 288,958 | $ | 12,083,880 | ||||
|
|
|
|
(1) | Assumes a cash bonus payment equal to 100% of Ms. Dolans target bonus for the performance period from April 1, 2013 to December 31, 2013. |
(2) | Calculated based on the amount by which the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, exceeds the per share exercise price of the applicable stock option. |
Scott Sanborn
Involuntary Termination | ||||||||
No Change
in Control |
Change in
Control |
|||||||
Benefit |
||||||||
Cash severance |
$ | 157,292 | $ | 314,583 | ||||
Bonus (1) |
125,000 | 125,000 | ||||||
Health, dental and vision benefits |
8,468 | 16,937 | ||||||
Equity vesting acceleration (2) |
| 12,087,096 | ||||||
|
|
|
|
|||||
Total potential severance payment |
$ | 290,760 | $ | 12,543,616 | ||||
|
|
|
|
(1) | Assumes a cash bonus payment equal to 100% of Mr. Sanborns target bonus for the performance period from April 1, 2013 to December 31, 2013. |
(2) | Calculated based on the amount by which the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, exceeds the per share exercise price of the applicable stock option. |
John MacIlwaine
Involuntary Termination | ||||||||
No Change
in Control |
Change in
Control |
|||||||
Benefit |
||||||||
Cash severance |
$ | 150,000 | $ | 300,000 | ||||
Bonus (1) |
100,000 | 100,000 | ||||||
Health, dental and vision benefits |
6,808 | 13,617 | ||||||
Equity vesting acceleration (2) |
| 8,991,277 | ||||||
|
|
|
|
|||||
Total potential severance payment |
$ | 256,808 | $ | 9,404,894 | ||||
|
|
|
|
(1) | Assumes a cash bonus payment equal to 100% of Mr. MacIlwaines target bonus for the performance period from April 1, 2013 to December 31, 2013. |
(2) | Calculated based on the amount by which the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, exceeds the per share exercise price of the applicable stock option. |
128
Chaomei Chen
Involuntary Termination | ||||||||
No Change
in Control |
Change in
Control |
|||||||
Benefit |
||||||||
Cash severance |
$ | 135,000 | $ | 270,000 | ||||
Bonus (1) |
50,000 | 50,000 | ||||||
Health, dental and vision benefits |
5,891 | 11,782 | ||||||
Equity vesting acceleration (2) |
| 11,930,724 | ||||||
|
|
|
|
|||||
Total potential severance payment |
$ | 190,891 | $ | 12,262,506 | ||||
|
|
|
|
(1) | Assumes a cash bonus payment equal to 100% of Ms. Chens target bonus for the performance period from April 1, 2013 to December 31, 2013. |
(2) | Calculated based on the amount by which the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, exceeds the per share exercise price of the applicable stock option. |
Employee Benefit Plans
2007 Stock Incentive Plan
We previously adopted the 2007 Stock Incentive Plan (2007 Plan). The 2007 Plan provides for the grant of both incentive stock options, which qualify for favorable tax treatment to their recipients under Section 422 of the Code, and non-statutory stock options, as well as for the issuance of shares of restricted stock and other stock-based awards. We may grant incentive stock options only to our employees. We may grant non-statutory stock options to our employees, directors and consultants. The exercise price of each stock option must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of the fair market value of our common stock on the date of grant. The maximum permitted term of options granted under our 2007 Plan is 10 years, except that the maximum permitted term of incentive stock options granted to 10% stockholders is five years. In the event of our merger or consolidation, the 2007 Plan provides that, unless the applicable option agreement provides otherwise, options held by current employees, directors and consultants will vest in full if they are not assumed or substituted and all unexercised options shall expire on the consummation of the merger or consolidation.
As of September 30, 2014, we had reserved 83,954,536 shares of our common stock for issuance under our 2007 Plan, of which 3,359,320 were unissued and remained available for future grant. On October 31, 2014, we reserved an additional 1,400,000 shares of our common stock for issuance under our 2007 Plan. We will cease issuing awards under our 2007 Plan upon the implementation of our 2014 Equity Incentive Plan (2014 Plan). Our 2014 Plan will be effective on the date immediately prior to the date of this prospectus. As a result, we will not grant any additional options under the 2007 Plan following that date, and the 2007 Plan will terminate at that time. However, any outstanding options granted under the 2007 Plan will remain outstanding, subject to the terms of our 2007 Plan and stock option agreements, until such outstanding options are exercised or until they terminate or expire by their terms. Options granted under the 2007 Plan have terms similar to those described below with respect to options to be granted under our 2014 Plan.
All shares of our common stock reserved but not issued or subject to outstanding grants under our 2007 Plan on the date of this prospectus will become available for grant and issuance under our 2014 Plan. In addition, shares issued under the 2007 Plan will become available for grant and issuance under our 2014 Plan if they are (i) subject to stock options or other awards that cease to be subject to those options or other awards by forfeiture or otherwise, (ii) issued pursuant to the exercise of options that are forfeited after the date of this prospectus, (iii) repurchased by us at the original issue price or (iv) used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any award.
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2014 Equity Incentive Plan
Our board of directors adopted the 2014 Plan, which will become effective on the date immediately prior to the date of this prospectus. The 2014 Plan will terminate in 2024, unless sooner terminated by our board of directors. The purpose of the 2014 Plan is to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards. The 2014 Plan is also designed to permit us to make cash-based awards and equity-based awards intended to qualify as performance-based compensation under Section 162(m) of the Code.
Stock Awards . The 2014 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units (RSUs), performance-based stock awards and other forms of equity compensation. In addition, the 2014 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees, subject to certain limitation described below. All other awards may be granted to employees, as well as directors and consultants.
The principal features of the 2014 Plan are summarized below. This summary is qualified in its entirety by reference to the text of the 2014 Plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.
Share Reserve . We reserved 35,000,000 shares of our common stock to be issued under our 2014 Plan. The number of shares reserved for issuance under our 2014 Plan will automatically increase on January 1 of each year beginning January 1, 2015 through the termination of the plan by the lesser of 5% of the total outstanding shares of our common stock and common stock equivalents as of the immediately preceding December 31 or a number determined by our board of directors. In addition, shares reserved but not issued or subject to outstanding awards under our 2007 Plan on the effective date of the 2014 Plan will be available for grant and issuance under our 2014 Plan and the following shares will again be available for grant and issuance under our 2014 Plan:
| shares subject to options or stock appreciation rights granted under our 2014 Plan that cease to be subject to the option or stock appreciation right for any reason other than exercise of the option or stock appreciation right; |
| shares subject to awards granted under our 2014 Plan that are subsequently forfeited or repurchased by us at the original issue price; |
| shares subject to awards granted under our 2014 Plan that otherwise terminate without shares being issued; |
| shares surrendered, cancelled or exchanged for cash or a different award (or combination thereof); |
| shares subject to stock options or other awards under our 2007 Plan that cease to be subject to those options or other awards by forfeiture or otherwise; |
| shares issued pursuant to the exercise of options under our 2007 Plan that are forfeited after the effective date of the 2014 Plan; |
| shares issued under our 2007 Plan that are repurchased by us at the original issue price; and |
| shares subject to awards under our 2007 Plan that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any award. |
As of the date of this prospectus, no shares of our common stock have been issued under the 2014 Plan. No person may be granted stock awards covering more than 4,000,000 shares of our common stock under the 2014 Plan during any calendar year pursuant to stock options or stock appreciation rights other than a new employee of ours, who will be eligible to receive no more than 6,000,000 shares of common stock under the 2014 Plan in the calendar year in which the employee commences employment. Such limitations are designed to help ensure that any deductions to which we would otherwise be entitled with respect to such stock awards will not be subject to
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the $1.0 million limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code. The aggregate number of shares of our common stock that may be subject to awards granted to any one non-employee director pursuant to the 2014 Plan in any calendar year shall not exceed 1,500,000.
Administration . Our 2014 Plan will be administered by our Compensation Committee, all of the members of which are outside directors as defined under applicable federal tax laws, or by our board of directors acting in place of our Compensation Committee. Our Compensation Committee will have the authority to construe and interpret our 2014 Plan, grant awards and make all other determinations necessary or advisable for the administration of the 2014 Plan.
Our Compensation Committee has the authority to reprice any outstanding stock award (by reducing the exercise price of any outstanding option, canceling an option in exchange for cash or another equity award or any other action that may be deemed a repricing under generally accepted accounting provisions) under the 2014 Plan without the approval of our stockholders.
Stock Options . Incentive and non-statutory stock options are granted pursuant to incentive and non-statutory stock option agreements. Our Compensation Committee determines the exercise price for a stock option, within the terms and conditions of the 2014 Plan, provided that the exercise price of a stock option cannot be less than 100% of the fair market value of our common stock on the date of grant, except where a higher exercise price is required in the case of certain incentive stock options, as described below.
Options may vest based on time or achievement of performance conditions. Our Compensation Committee may provide for options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being subject to our right of repurchase that lapses as the shares vest. The maximum term of options granted under our 2014 Plan will be 10 years. Our Compensation Committee will determine the term of stock options granted under the 2014 Plan, up to a maximum of 10 years, except in the case of certain incentive stock options, as described below. Unless the terms of an optionholders stock option agreement provide otherwise, if an optionholders relationship with us, or any of our affiliates, ceases for any reason other than for cause, disability or death, the optionholder may exercise any vested options for a period of three months following the cessation of service. If an optionholders service relationship with us is terminated for cause, then the option terminates immediately. If an optionholders service relationship with us or any of our affiliates ceases due to disability or death, or an optionholder dies within the period (if any) specified in the award agreement following cessation of service, the optionholder or a beneficiary may exercise any vested options for a period of at least 12 months in the event of disability or death. The option term may be extended in the event that exercise of the option following termination of service is prohibited by applicable securities laws. In no event, however, may an option be exercised beyond the expiration of its maximum term.
Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the Compensation Committee and may include (i) cash, check, bank draft or money order, (ii) a broker-assisted cashless exercise, (iii) the tender of common stock or common stock previously owned by the optionholder, (iv) cancellation of our indebtedness to the optionholder, (v) waiver of compensation due to the optionholder for services rendered and (vi) other legal consideration approved by our Compensation Committee.
Unless our Compensation Committee provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order. An optionholder may, however, designate a beneficiary who may exercise the option following the optionholders death.
Limitations on Incentive Stock Options . Incentive stock options may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to incentive stock options that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. No incentive stock option may be granted to any person who, at
131
the time of the grant, owns or is deemed to own stock comprising more than 10% of our total combined voting power or that of any of our affiliates unless (i) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and (ii) the term of the incentive stock option does not exceed five years from the date of grant.
Restricted Stock Awards . Restricted stock awards are granted pursuant to restricted stock award agreements. A restricted stock award is an offer by us to sell shares of our common stock subject to restrictions. The price, if any, of a restricted stock award will be determined by our Compensation Committee. Restricted stock awards may be granted in consideration for (i) cash, check, bank draft or money order, (ii) past or future services rendered to us or our affiliates or (iii) any other form of legal consideration determined by our Compensation Committee. Shares of common stock acquired under a restricted stock award may, but need not, be subject to a share repurchase option or forfeiture restriction in our favor in accordance with a vesting schedule to be determined by our Compensation Committee. Rights to acquire shares under a restricted stock award may be transferred only upon such terms and conditions as set by our Compensation Committee. Except as otherwise provided in the applicable award agreement, restricted stock awards that have not vested will be forfeited or subject to repurchase upon the participants cessation of continuous service for any reason.
Restricted Stock Unit Awards . RSU awards are granted pursuant to RSU award agreements. RSUs represent the right to receive shares of our common stock at a specified date in the future, subject to forfeiture of that right because of termination of the holders services to us or the holders failure to achieve certain performance conditions. If a RSU has not been forfeited, then on the date specified in the RSU agreement, we may deliver to the holder of the RSU whole shares of our common stock, which may be subject to additional restrictions, cash or a combination of our common stock and cash. Our Compensation Committee may also permit the holder of a RSU to defer payment to a date or dates after the RSU is earned, provided that the terms of the RSU and any deferral satisfy the requirements of Section 409A of the Code.
Stock Appreciation Rights . Stock appreciation rights are granted pursuant to stock appreciation rights agreements. Stock appreciation rights provide for a payment, or payments, in cash or shares of our common stock, to the holder based upon the increase in the fair market value of our common stock on the date of exercise from the stated exercise price (subject to any maximum number of shares as may be specified in the award agreement). The payment may occur upon the exercise of a stock appreciation right or deferred with such interest or dividend equivalent, if any, as our Compensation Committee determines, provided that the terms of the stock appreciation right and any deferral satisfy the requirements of Section 409A of the Code. Our Compensation Committee will determine the exercise price for a stock appreciation right, which generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Stock appreciation rights may vest based on time or achievement of performance conditions. Stock appreciation rights expire under the same rules that apply to stock options.
Performance Awards . The 2014 Plan permits the grant of performance stock awards and performance cash awards that may qualify as performance-based compensation that is not subject to the $1.0 million limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code (performance awards). To help ensure that the compensation attributable to performance awards will so qualify, our committee can structure such awards so that stock will be issued or paid pursuant to such award only upon the achievement of certain pre-established performance goals during a designated performance period. Awards may be made under the 2014 Plan that are based on performance criteria but are not performance awards under this paragraph. The maximum benefit that may be granted to a participant in any calendar year pursuant to a performance award described in this paragraph may not exceed $10.0 million.
Other Stock Awards . Our Compensation Committee may grant other stock awards based in whole or in part on our common stock. Our Compensation Committee will set the number of shares under the stock award and all other terms and conditions of such stock awards.
132
Changes to Capital Structure . In the event that there is a specified type of change in our capital structure, such as a stock split, appropriate adjustments will be made to (i) the maximum number of shares reserved under the 2014 Plan, (ii) the maximum number of shares subject to options, stock appreciation rights and performance stock awards that can be granted in a calendar year, (iii) the maximum number of shares that may be issued upon exercise of incentive stock options, (iv) the maximum number of shares that may be awarded to a member of our board of directors and (v) the number of shares and exercise price, if applicable, of all outstanding stock awards.
Corporate Transactions . The 2014 Plan provides that, in the event of a sale, lease or other disposition of all or substantially all of our assets or specified types of mergers or consolidations (corporate transaction), outstanding awards under our 2014 Plan may be assumed or replaced by any surviving or acquiring corporation; the surviving or acquiring corporation may substitute similar awards for those outstanding under the 2014 Plan; outstanding awards may be settled for the full value of such outstanding award (whether or not then vested or exercisable) in cash or securities of the successor entity with payment deferred until the date or dates the award would have become exercisable or vested; or outstanding awards may be terminated for no consideration. Our board of directors has the discretion to provide that a stock award under the 2014 Plan will immediately vest as to all or any portion of the shares subject to the stock award at the time of a corporate transaction or in the event a participants service with us or a successor entity is terminated actually or constructively within a designated period following the occurrence of the corporate transaction. Stock awards held by participants under the 2014 Plan will not vest automatically on such an accelerated basis unless specifically provided in the participants applicable award agreement. In the event of a corporate transaction, the vesting of all awards granted to non-employee directors shall accelerate and such awards shall become exercisable (as applicable) in full upon the consummation of the corporate transaction.
Plan Suspension or Termination . Our board of directors has the authority to suspend or terminate the 2014 Plan at any time provided that such action does not impair the existing rights of any participant.
2014 Employee Stock Purchase Plan
Our board of directors adopted the 2014 Employee Stock Purchase Plan (ESPP), which will become effective on the date of this prospectus. The purpose of the ESPP is to assist us in retaining the services of new employees and securing the services of new and existing employees while providing incentives for such individuals to exert maximum efforts toward our success. When effective, the ESPP will enable eligible employees to purchase shares of our common stock at a discount following this offering. Purchases will be accomplished through participation in discrete offering periods. The ESPP is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code.
Share Reserve . Following this offering, the ESPP authorizes the issuance of 3,000,000 shares of our common stock pursuant to purchase rights granted to our employees or to employees of our subsidiaries. The number of shares of our common stock reserved for issuance will automatically increase on January 1 of each year beginning January 1, 2015 through the termination of the plan by the lesser of 1% of the total outstanding shares of our common stock and common stock equivalents as of the immediately preceding December 31 or a number determined by our board of directors or Compensation Committee. As of the date hereof, no shares of our common stock have been purchased under the ESPP. The aggregate number of shares issued over the term of our ESPP will not exceed 56,000,000 shares of our common stock, and no other shares may be added to the ESPP without the approval of our stockholders.
Administration . The ESPP will be administered by our Compensation Committee. The ESPP is implemented through a series of offerings of purchase rights to eligible employees. Under the ESPP, we may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which not more than 2,500 shares of our common stock may be purchased by any employee participating in the offering. The first offering period will begin on the date of this prospectus and will end approximately six months following the date of this prospectus. Each purchase period will be for six months. An offering may be terminated under certain circumstances. Eligible participants will be
133
required to enroll in the ESPP in a timely manner. Once an employee is enrolled, participation will be automatic in subsequent offering periods. An employees participation automatically ends upon termination of employment for any reason.
Payroll Deductions . Our employees generally are eligible to participate in our ESPP if they are employed by us for at least 20 hours per week and more than five months in a calendar year. Employees who are 5% stockholders, or would become 5% stockholders as a result of their participation in our ESPP, are ineligible to participate in our ESPP. We may impose additional restrictions on eligibility. Under our ESPP, eligible employees will be able to acquire shares of our common stock by accumulating funds through payroll deductions. Our eligible employees will be able to select a rate of payroll deduction between 1% and 15% of their eligible cash compensation. Unless otherwise determined by our board of directors or Compensation Committee, common stock will be purchased for employees participating in the ESPP at a price per share equal to the lower of (i) 85% of the fair market value of a share of our common stock on the first date of an offering or (ii) 85% of the fair market value of a share of our common stock on the date of purchase.
Limitations . No holder will have the right to purchase our shares at a rate that, when aggregated with purchase rights under all our employee stock purchase plans that are also outstanding in the same calendar year(s), would have a fair market value of more than $25,000, determined in accordance with Section 423 of the Code, for each calendar year in which that right is outstanding. Finally, no employee will be eligible for the grant of any purchase rights under the ESPP, if immediately after such rights are granted, such employee has voting power over 5% or more of our outstanding capital stock measured by vote or value pursuant to Section 424(d) of the Code.
If we experience a change in control transaction, any offering period that commenced prior to the closing of the change in control transaction will be shortened and terminated on a new purchase date. The new purchase date will occur prior to the closing of the proposed change in control transaction and our ESPP will then terminate on the closing of the proposed change in control.
401(k) Plan
We maintain a retirement plan for the benefit of our employees. The plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Code, so that contributions to the 401(k) plan, and income earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan (except in the case of contributions under the 401(k) plan designated as Roth contributions). The 401(k) plan provides that each participant may contribute up to 100% of his or her pre-tax compensation, up to a statutory limit, which is $17,500 for 2014. Participants who are at least 50 years old can also make catch-up contributions of up to an additional $5,500 above the statutory limit. Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plans trustee as directed by participants. Our 401(k) plan provides for discretionary matching of employee contributions.
Limitations on Liability and Indemnification Matters
Our restated certificate of incorporation that we expect be in effect upon the completion of this offering contains provisions that will limit the liability of our directors for monetary damages to the fullest extent permitted by the Delaware General Corporation Law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:
| any breach of the directors duty of loyalty to us or our stockholders; |
| any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
| unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or |
| any transaction from which the director derived an improper personal benefit. |
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Our restated certificate of incorporation and restated bylaws that we expect to be in effect upon the completion of this offering will require us to indemnify our directors and officers to the maximum extent permitted by the Delaware General Corporation Law and allow us to indemnify other employees and agents as provided for in the Delaware General Corporation Law. Our restated bylaws will also require us to advance expenses incurred by our directors and officers for the defense of any action for which indemnification is required or permitted, subject to very limited exceptions.
We also intend to enter into new indemnification agreements with our directors and executive officers and certain key employees that may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements will require us, among other things, to indemnify our directors, executive officers and key employees against liabilities that may arise by reason of their status or service. These indemnification agreements will also require us to advance all expenses incurred by the directors, executive officers and key employees in investigating or defending any such action, suit or proceeding. We believe that these agreements are necessary to attract and retain qualified individuals to serve as directors, executive officers and key employees. Prior to the completion of this offering, we also intend to obtain directors and officers liability insurance.
The limitation of liability and indemnification provisions in our restated certificate of incorporation and restated bylaws that we expect to be in effect upon completion of this offering may discourage stockholders from bringing a lawsuit against our directors and officers for breaches of their fiduciary duties. Such provisions may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholders investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions.
At present, we are not aware of any pending litigation or proceeding involving any person who is or was one of our directors, officers, employees or other agents or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers or persons controlling us, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
135
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
In addition to the compensation arrangements, including employment, termination of employment and change in control arrangements, discussed in the sections titled Management and Executive Compensation and the registration rights described in the section titled Description of Capital StockRegistration Rights, the following is a description of each transaction since April 1, 2010 and each currently proposed transaction in which:
| we have been or are to be a participant; |
| the amount involved exceeded or exceeds $120,000; and |
| any of our directors, executive officers or holders of more than 5% of our outstanding capital stock, or any immediate family member of, or person sharing the household with, any of these individuals or entities, had or will have a direct or indirect material interest. |
Transactions on Our Marketplace
Our executive officers, directors and certain affiliates (including immediate family members) have opened investor accounts with us, made deposits to and withdrawals from their accounts and funded portions of loans. All of these transactions were conducted on terms and conditions that were not more favorable than those obtained by investors not related to us.
The following tables summarize deposits and withdrawals made by our directors and executive officers for the periods indicated. No other related party has made deposits or withdrawals exceeding $120,000.
Nine Months Ended
September 30, 2014 |
||||||||
Deposits | Withdrawals | |||||||
(unaudited) | ||||||||
Daniel Ciporin |
$ | 500,000 | $ | 62,855 | ||||
John J. Mack |
950,000 | 69,317 | ||||||
Larry Summers |
200,000 | | ||||||
|
|
|
|
|||||
Total |
$ | 1,650,000 | $ | 132,172 | ||||
|
|
|
|
Year Ended
December 31, 2013 |
||||||||
Deposits | Withdrawals | |||||||
Daniel Ciporin |
$ | 600,000 | $ | 128,288 | ||||
Jeffrey Crowe |
800,000 | 444,227 | ||||||
John J. Mack |
405,118 | 617,779 | ||||||
Larry Summers |
530,898 | | ||||||
|
|
|
|
|||||
Total |
$ | 2,336,016 | $ | 1,190,294 | ||||
|
|
|
|
Nine Months Ended
December 31, 2012 |
||||||||
Deposits | Withdrawals | |||||||
Daniel Ciporin |
$ | 500,000 | $ | 129,698 | ||||
Jeffrey Crowe |
150,000 | | ||||||
John J. Mack |
529,540 | 451,617 | ||||||
|
|
|
|
|||||
Total |
$ | 1,179,540 | $ | 581,315 | ||||
|
|
|
|
136
Year Ended
March 31, 2012 |
||||||||
Deposits | Withdrawals | |||||||
Daniel Ciporin |
$ | 209,500 | $ | 158,113 | ||||
John J. Mack |
1,700,000 | 199,265 | ||||||
|
|
|
|
|||||
Total |
$ | 1,909,500 | $ | 357,378 | ||||
|
|
|
|
Year Ended
March 31, 2011 |
||||||||
Deposits | Withdrawals | |||||||
Daniel Ciporin |
$ | 400,902 | $ | 118,331 | ||||
Jeffrey Crowe |
446,000 | 100,000 | ||||||
Scott Sanborn |
134,710 | 137,861 | ||||||
|
|
|
|
|||||
Total |
$ | 981,612 | $ | 356,192 | ||||
|
|
|
|
Financing Arrangements With Directors and Significant Stockholders
In April 2010, we issued 62,486,436 shares of Series C convertible preferred stock to investors for aggregate gross cash consideration of $24.5 million. In 2011 and 2012, we issued and sold 36,030,712 shares of Series D convertible preferred stock to investors for aggregate gross cash consideration of $32.0 million. In June 2012, we issued and sold 10,000,000 shares of Series E convertible preferred stock to investors for aggregate gross cash consideration of $17.5 million.
The participants in these convertible preferred stock financings included the following directors and holders of more than 5% of our voting securities or entities affiliated with them.
Participants |
Series C
Convertible Preferred Stock |
Aggregate
Consideration |
Series D
Convertible Preferred Stock |
Aggregate
Consideration |
Series E
Convertible Preferred Stock |
Aggregate
Consideration |
||||||||||||||||||
Norwest Venture Partners X, L.P. (1) |
12,451,360 | $ | 4,879,999 | 3,635,264 | $ | 3,233,022 | | $ | | |||||||||||||||
Canaan VII L.P. |
12,038,400 | 4,718,150 | 3,800,044 | 3,379,569 | | | ||||||||||||||||||
Morgenthaler Venture Partners IX, L.P. (2) |
7,654,524 | 2,999,999 | 1,686,624 | 1,499,999 | | | ||||||||||||||||||
Entities affiliated with Foundation Capital (3) |
26,663,264 | 10,450,000 | 3,004,792 | 2,672,312 | | | ||||||||||||||||||
John J. Mack |
| | | | 1,428,572 | 2,500,001 |
(1) | Jeffrey Crowe, a member of our board of directors, is an officer of NVP Associates, LLC, the managing member of the general partner of Norwest Venture Partners X, L.P. |
(2) | Rebecca Lynn, a member of our board of directors, is a managing member of the general partner of Morgenthaler Venture Partners IX, L.P. |
(3) | Represents 294,628 shares of Series C convertible preferred stock and 33,204 shares of Series D convertible preferred stock purchased by Foundation Capital VI Principals Fund, LLC and 26,368,636 shares of Series C convertible preferred stock and 2,971,588 shares of Series D convertible preferred stock purchased by Foundation Capital VI, L.P. |
Registration Rights
We have entered into an investor rights agreement with certain holders of our convertible preferred stock, including entities with which certain of our directors are affiliated. These stockholders are entitled to rights with respect to the registration of their shares following our initial public offering under the Securities Act. For a description of these registration rights, see Description of Capital StockRegistration Rights.
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Indemnification Agreements
We also intend to enter into new indemnification agreements with our directors and executive officers and certain key employees that may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements and our restated certificate of incorporation and restated bylaws that we expect to be in effect upon the completion of this offering will require us to indemnify our directors and officers to the maximum extent permitted by the Delaware General Corporation Law. Subject to certain very limited exceptions, our restated bylaws will also require us to advance expenses incurred by our directors and officers. For more information regarding these agreements, see Executive CompensationLimitations on Liability and Indemnification Matters.
Review, Approval or Ratification of Transactions with Related Parties
Our Nominating and Corporate Governance Committee Charter and our Audit Committee Charter require that any transaction with a related party that must be reported under applicable rules of the SEC, other than compensation-related matters, must be reviewed and approved or ratified by our Nominating and Corporate Governance Committee, unless the related party is, or is associated with, a member of that committee, in which event the transaction must be reviewed and approved by our Audit Committee.
In connection with this offering, we intend to adopt a formal written related-party transaction policy that provides that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of our common stock, and any of their immediate family members or affiliates, are not permitted to enter into a material related-party transaction with us without the review and approval of our Audit Committee, or a committee composed solely of independent directors in the event it is inappropriate for our Audit Committee to review such transaction due to a conflict of interest. The policy will provide that any request for us to enter into a transaction with an executive officer, director, director nominee, beneficial owner of more than 5% of our common stock or with any of their immediate family members or affiliates, in which the amount involved exceeds $120,000 will be presented to our Audit Committee for review, consideration and approval. In approving or rejecting any such proposal, we expect that our Audit Committee will consider the relevant facts and circumstances available and deemed relevant to our Audit Committee, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related persons interest in the transaction.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of our common stock as of September 30, 2014, by:
| each of our directors; |
| each of our named executive officers; |
| each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our common stock; |
| all of our directors and executive officers as a group; and |
| each of the selling stockholders. |
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares of common stock issuable upon the exercise of stock options and warrants that are exercisable within 60 days after October 31, 2014. Except as otherwise indicated in the footnotes to the table below, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
We calculated percentage ownership prior to this offering based on 311,035,557 shares of common stock outstanding as of October 31, 2014, assuming the conversion of all of our outstanding convertible preferred stock upon completion of this offering. We calculated percentage ownership after this offering based on 361,407,551 shares of common stock outstanding immediately following the completion of this offering, assuming no exercise of the underwriters option to purchase additional 8,655,000 shares of common stock from us.
In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of capital stock subject to options and warrants held by that person that are exercisable within 60 days of October 31, 2014. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to the table below, addresses of named beneficial owners are in care of LendingClub Corporation, 71 Stevenson Street, Suite 300, San Francisco, California 94105.
Shares Beneficially Owned
Prior to this Offering |
Number of
Shares Offered |
Shares Beneficially Owned
After this Offering |
||||||||||||||||||
Name of Beneficial Owner |
Number | Percentage | Number | Percentage | ||||||||||||||||
Named Executive Officers and Directors: |
||||||||||||||||||||
Renaud Laplanche (1) |
14,897,330 | 4.7 | % | | 14,897,330 | 4.1 | % | |||||||||||||
Carrie Dolan (2) |
2,330,266 | * | | 2,330,266 | * | |||||||||||||||
Scott Sanborn (3) |
|
2,509,016
|
|
* | | 2,509,016 | * | |||||||||||||
John MacIlwaine (4) |
411,986 | * | | 411,986 | * | |||||||||||||||
Chaomei Chen (5) |
1,478,292 | * | | 1,478,292 | * | |||||||||||||||
Daniel Ciporin (6) |
1,000,680 | * | | 1,000,680 | * | |||||||||||||||
Jeffrey Crowe (7) |
50,822,020 | 16.3 | | 50,822,020 | 14.0 | |||||||||||||||
Rebecca Lynn (8) |
28,491,504 | 9.2 | | 28,491,504 | 7.9 | |||||||||||||||
John J. Mack (9) |
2,419,528 | * | | 2,419,528 | * | |||||||||||||||
Mary Meeker (10) |
14,285,712 | 4.6 | | 11,985,712 | 3.3 | |||||||||||||||
John C. (Hans) Morris (11) |
288,748 | * | | 288,748 | * | |||||||||||||||
Lawrence Summers (12) |
999,316 | * | | 999,316 | * | |||||||||||||||
Simon Williams (13) |
427,952 | * | | 427,952 | * | |||||||||||||||
All executive officers and directors as a group (13 persons) (14) |
120,362,350 | 37.3 | | 118,062,350 | 31.7 |
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Shares Beneficially Owned
Prior to this Offering |
Number of
Shares Offered |
Shares Beneficially Owned
After this Offering |
||||||||||||||||||
Name of Beneficial Owner |
Number | Percentage | Number | Percentage | ||||||||||||||||
5% Stockholders: |
||||||||||||||||||||
Entities Affiliated with Norwest Venture Partners X, L.P. (7) |
50,822,020 | 16.3 | % | | 50,822,020 | 14.0 | % | |||||||||||||
Entities Affiliated with Canaan VII L.P. (15) |
49,050,512 | 15.7 | 3,400,000 | 45,650,512 | 12.6 | |||||||||||||||
Entities Affiliated with Foundation Capital VI, L.P. (16) |
39,367,152 | 12.7 | | 39,367,152 | 10.9 | |||||||||||||||
Entities Affiliated with Morgenthaler Venture Partners IX, L.P. (8) |
28,491,504 | 9.2 | | 28,491,504 | 7.9 | |||||||||||||||
Other Selling Stockholders: |
||||||||||||||||||||
KPCB Holdings, Inc., as nominee (10) |
14,285,712 | 4.6 | 2,300,000 | 11,985,712 | 3.3 | |||||||||||||||
Union Square Ventures Opportunity Fund, L.P. (17) |
13,783,532 | 4.4 | 2,000,000 | 11,783,532 | 3.3 |
* | Represents beneficial ownership of less than 1%. |
(1) | Represents (i) 4,617,330 shares held by Mr. Laplanche, (ii) 4,000,000 shares held by Laplanche Dmitrieva Family 2012 Irrevocable Trust U/A DTD December 17, 2012 and (iii) 6,280,000 shares underlying stock options exercisable within 60 days of October 31, 2014 held by Mr. Laplanche. |
(2) | Represents (i) 1,768,636 shares held by Dolan Family Trust U/A DTD 1/27/2003, (ii) 220,000 shares held by Dolan Family 2014 Irrevocable GST Exempt Trust and (iii) 341,630 shares underlying stock options exercisable within 60 days of October 31, 2014 held by Ms. Dolan. |
(3) | Represents (i) 665,956 shares and (ii) 1,843,060 shares underlying stock options exercisable within 60 days of October 31, 2014 held by Mr. Sanborn. |
(4) | Represents shares underlying stock options exercisable within 60 days of October 31, 2014 held by Mr. MacIlwaine. |
(5) | Represents (i) 559,624 shares held by Chaomei Chen and Yu Wu, as joint tenants with right of survivorship and (ii) 918,668 shares underlying stock options exercisable within 60 days of October 31, 2014 held by Ms. Chen. |
(6) | Represents (i) 952,408 shares held by Mr. Ciporin and (ii) 48,272 shares held by Daniel Ciporin 2014 Family Trust. |
(7) | Represents (i) 50,352,536 shares and (ii) 469,484 shares underlying warrants that are exercisable within 60 days of October 31, 2014 held by Norwest Venture Partners X, L.P. The general partner of Norwest Venture Partners X, L.P. is Genesis VC Partners X, LLC. The managing member of Genesis VC Partners X, LLC is NVP Associates, LLC. Promod Haque, Matthew Howard and Jeffrey Crowe, a member of our board of directors, are officers of NVP Associates, LLC. Each of these individuals has shared voting and investment power over the shares held by Norwest Venture Partners X, L.P. The address of Norwest Venture Partners X, L.P. is 525 University Avenue, Suite 800, Palo Alto, CA 94301-1922. |
(8) | Represents 28,491,504 shares held by Morgenthaler Venture Partners IX, L.P. The general partner of Morgenthaler Venture Partners IX, L.P. is Morgenthaler Management Partners IX, LLC. The managing members of Morgenthaler Management Partners IX, LLC are Robert Bellas, James Broderick, Ralph Christoffersen, Rebecca Lynn, a member of our board of directors, Gary Morgenthaler, Scott Watters, Gary Little, Robert Pavey and Henry Plain. Each of these individuals has shared voting and investment power over the shares held by Morgenthaler Venture Partners IX, L.P. The address of Morgenthaler Venture Partners IX, L.P. is 2710 Sand Hill Road, Suite 100, Menlo Park, CA 94025. |
(9) | Represents (i) 1,428,572 shares and (ii) 990,956 shares underlying stock options exercisable within 60 days of October 31, 2014 held by Mr. Mack. |
(10) | Represents 14,285,712 shares held by KPCB Holdings, Inc., as nominee. The shares are held in the name of KPCB Holdings, Inc., as nominee for the account of KPCB Digital Growth Fund, LLC and KPCB DGF Founders Fund, LLC (collectively, the Funds). John Doerr, Ted Schlein, Brook Byers, Bing Gordon and Mary Meeker, a member of our board of directors, are managing members of KPCB DGF Associates, LLC, the managing member of the Funds and, therefore, may be deemed to share voting and investment power over the shares held by the Funds. |
(11) | Represents shares underlying stock options exercisable within 60 days of October 31, 2014 held by Mr. Morris. |
(12) | Represents (i) 499,660 shares held by Mr. Summers, (ii) 180,000 shares held by Lawrence H. Summers 2012 Irrevocable Trust No. 1, (iii) 90,000 shares held by Lawrence H. Summers 2012 Irrevocable Trust No. 2 and (iv) 229,656 shares held by LHS 2014 Qualified Annuity Trust #3L. |
(13) | Represents 427,952 shares held by Mr. Williams. |
(14) | Represents (i) 108,389,866 shares, (ii) 11,075,048 shares underlying stock options exercisable within 60 days of October 31, 2014 and (iii) 469,484 shares underlying warrants exercisable within 60 days of September 30, 2014 held by our executive officers and directors as a group. |
(15) |
Represents (i) 48,581,028 shares and (ii) 469,484 shares underlying warrants exercisable within 60 days of October 31, 2014 held by Canaan VII L.P. The general partner of Canaan VII L.P. is Canaan Partners VII LLC. The managers of Canaan Partners VII LLC are Brenton Ahrens, John Balen, Stephen Bloch, Wende Hutton, Maha Ibrahim, Deepak Kamra, Gregory Kopchinsky, Guy Russo and Eric |
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Young. Investment and voting decisions with respect to the shares held by Canaan VII L.P. are made by the managers of Canaan Partners VII LLC, collectively. The address of Canaan VII, L.P. is 285 Riverside Avenue, Suite 250, Westport, CT 06880. |
(16) | Represents (i) 38,932,144 shares held by Foundation Capital VI, L.P. and (ii) 435,008 shares held by Foundation Capital VI Principals Fund, LLC. The general partner of Foundation Capital VI, L.P. and Foundation Capital VI Principals Fund, LLC is Foundation Capital Management Co. VI, LLC. The managing members of Foundation Capital Management Co. VI, LLC are William Elmore, Paul Koontz, Michael Schuh, Paul Holland, Richard Redelfs, Steve Vassallo, Charles Moldow and Warren Weiss. Each of these individuals has shared voting and investment power over the shares held by Foundation Capital VI, L.P. and Foundation Capital VI Principals Fund, LLC. The address of Foundation Capital Management Co. VI, LLC is 250 Middlefield Road, Menlo Park, CA 94025. |
(17) | Represents 13,783,532 shares held by Union Square Ventures Opportunity Fund, L.P. The general partner of Union Square Ventures Opportunity Fund, L.P. is Union Square Opportunity GP, L.L.C. The managers of Union Square Opportunity GP, L.L.C. are Brad Burnham, Fred Wilson, Albert Wenger, John Buttrick and Andy Weissman. Each of these managers has shared voting and investment power over the shares held by Union Square Ventures Opportunity Fund, L.P. The address of Union Square Ventures Opportunity Fund, L.P. is 915 Broadway, 19th Floor, New York, NY 10010. |
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A description of our capital stock and the material terms and provisions of our restated certificate of incorporation and restated bylaws that we expect to be in effect upon the completion of this offering is set forth below. This description is only a summary and does not contain all the information that may be important to you. For a complete description, you should refer to our restated certificate of incorporation and restated bylaws that we expect to be in effect upon the completion of this offering, which are included as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of Delaware law.
Upon the completion of this offering, our authorized capital stock will consist of 910,000,000 shares, with a par value of $0.01 per share, of which:
| 900,000,000 shares will be designated common stock; and |
| 10,000,000 shares will be designated preferred stock. |
As of September 30, 2014, and after giving effect to the conversion of all of our outstanding convertible preferred stock into 249,351,011 shares of common stock upon completion of this offering, there were outstanding:
| 310,272,201 shares of our common stock held by approximately 275 stockholders; |
| 54,587,814 shares issuable upon the exercise of outstanding stock options; and |
| 1,815,380 shares issuable upon the exercise of outstanding warrants (which does not give effect to warrant exercises subsequent to September 30, 2014 and in connection with this offering, as described below under Warrants). |
Common Stock
Dividend Rights
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends and then only at the times and in the amounts that our board of directors may determine. See Dividend Policy.
Voting Rights
Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. We have not provided for cumulative voting for the election of directors in our restated certificate of incorporation that we expect to be in effect upon the completion of this offering. Accordingly, holders of a majority of the shares of our common stock will be able to elect all of our directors. Our restated certificate of incorporation that we expect to be in effect upon the completion of this offering establishes a classified board of directors, to be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms.
No Preemptive or Similar Rights
Our common stock is not entitled to preemptive rights and is not subject to conversion, redemption or sinking fund provisions.
Right to Receive Liquidation Distributions
Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights and payment of liquidation preferences, if any, on any outstanding shares of preferred stock.
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Preferred Stock
Pursuant to the provisions of our restated certificate of incorporation that we expect to be in effect upon completion of this offering, all of our outstanding convertible preferred stock will convert into common stock, effective upon the completion of this offering. As a result, each currently outstanding share of convertible preferred stock will be converted into common stock. All series of convertible preferred stock will convert at a ratio of one share of common stock for each share of convertible preferred stock.
Following the completion of this offering, our board of directors will be authorized, subject to limitations prescribed by Delaware law, to issue convertible preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions, in each case without further vote or action by our stockholders. Our board of directors may increase or decrease the number of shares of any series of convertible preferred stock, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of convertible preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of our company and might adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. We have no current plan to issue any shares of convertible preferred stock.
Options
As of September 30, 2014, we had outstanding options to purchase 54,587,814 shares of our common stock, with a weighted-average exercise price of $2.63 per share.
Warrants
As of September 30, 2014, we had four warrants outstanding to purchase an aggregate of 1,189,392 shares of our Series A preferred stock with an exercise price of $0.266 per share. The warrants have a net exercise provision under which the holder, in lieu of paying the exercise price in cash, can surrender the warrant and receive a net number of shares of Series A preferred stock based on the fair market value of such stock at the time of exercise, after deducting the aggregate exercise price. Of such warrants:
| Warrants to purchase 938,968 shares of our Series A preferred stock would, unless earlier exercised, expire on January 24, 2015. If these warrants are not exercised prior to the completion of this offering, they will become exercisable for an equivalent number of shares of our common stock. |
| Warrants to purchase 250,424 shares of our Series A preferred stock would, unless earlier exercised, automatically expire immediately prior to the completion of this offering. All of these warrants were exercised after September 30, 2014. |
As of September 30, 2014, we had 18 warrants outstanding to purchase 625,988 shares of our common stock, with a weighted-average exercise price of $0.375 per share. The warrants have a net exercise provision under which the holder, in lieu of paying the exercise price in cash, can surrender the warrant and receive a net number of shares of common stock based on the fair market value of such stock at the time of exercise, after deducting the aggregate exercise price. Of such warrants:
| Warrants to purchase 52,772 shares of our common stock would, unless earlier exercised, expire on the tenth anniversary of their respective issue dates. Of these warrants, warrants to purchase 15,948 shares of our common stock were exercised after September 30, 2014. |
|
Warrants to purchase 573,216 shares of our common stock would, unless earlier exercised, automatically expire immediately prior to the completion of this offering. Of these warrants, warrants |
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to purchase 363,576 shares of common stock were exercised after September 30, 2014 and we expect warrants to purchase 209,640 shares of common stock to be exercised immediately prior to the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus. |
Registration Rights
Following the completion of this offering, holders of 264,205,934 shares of our common stock, based on the number of shares outstanding as of September 30, 2014, will be entitled to certain registration rights with respect to the sale of such shares under the Securities Act. We refer to these shares as registrable securities. The holders of these registrable securities possess registration rights pursuant to the terms of our investor rights agreement.
Demand Registration Rights
Under our investor rights agreement, upon the written request of the holders of registrable securities that we file a registration statement under the Securities Act with an anticipated aggregate price to the public of at least $10.0 million, we will be obligated to notify all holders of registrable securities of the written request and use our reasonable best efforts to effect, as expeditiously as reasonably possible, the registration of all registrable securities that holders request to be registered. We are not required to effect a registration statement until 180 days after our initial public offering (or such longer period, not to exceed 198 days after our initial public offering, as the underwriters may request) or April 16, 2017, whichever is earlier. We are required to effect no more than two registration statements that are declared or ordered effective, subject to certain exceptions. We may postpone the filing of a registration statement for up to 90 days once in a 12-month period if in the good-faith judgment of our board of directors such registration would be detrimental to us, and we are not required to effect the filing of a registration statement during the period beginning on the date of the filing of, and ending on a date 180 days following the effective date of, a registration related to an initial public offering initiated by us.
Piggyback Registration Rights
If we register any of our securities for public sale, we are required to afford each holder of registrable securities an opportunity to include in the registration statement all or part of the holders registrable securities. Each holder desiring to include all or any part of the registrable securities held by it in any such registration statement is required to notify us within 15 days of being notified by us of the registration. This right does not apply to registration statements relating to demand registrations, for Form S-3 registrations, employee benefit plans, a corporate reorganization or other transaction under Rule 145 of the Securities Act, stock issued upon conversion of debt securities or any registration statements related to the issuance of our notes. The underwriter of any underwritten offering will have the right to limit, due to marketing reasons, the number of shares registered by these holders to 30% of the total shares covered by the registration statement, unless the offering is our initial public offering and the registration statement does not include shares of any other selling stockholders, in which event any or all of the registrable securities of the holders may be excluded by the underwriter.
Form S-3 Registration Rights
The holders of registrable securities can request that we register all or a portion of their shares on Form S-3 if we are eligible to file a registration statement on Form S-3 and the aggregate price to the public of the shares offered is at least $1.0 million. We may postpone the filing of a registration statement for up to 90 days once in a 12-month period if in the good-faith judgment of our board of directors such registration would be detrimental to us or if we notify holders within 30 days of making the Form S-3 registration request that we intend to make a public offering within 90 days.
Registration Expenses
We will pay all expenses incurred in connection with each of the registrations described above, except for underwriting discounts and commissions. We will not, however, pay for any expenses of any demand or Form S-3 registration if the request is subsequently withdrawn by the participating holders of the registrable securities to be registered, subject to limited exceptions.
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Expiration of Registration Rights
The registration rights described above will survive our initial public offering and will terminate after our initial public offering on the earlier of:
| the three-year anniversary of our initial public offering; and |
| as to each holder of registrable securities, at the time the holder holds less than 1% of our then-outstanding common stock and all of such holders registrable securities may be sold pursuant to Rule 144 under the Securities Act during any 90-day period. |
Anti-Takeover Provisions
The provisions of Delaware law and our restated certificate of incorporation and restated bylaws that we expect to be in effect upon the completion of this offering could have the effect of delaying, deferring or discouraging another person from acquiring control of our company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents some Delaware corporations from engaging, under some circumstances, in a business combination, which includes a merger or sale of at least 10% of the corporations assets with any interested stockholder, meaning a stockholder who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of the corporations outstanding voting stock, unless:
| the transaction is approved by the board of directors prior to the time that the interested stockholder became an interested stockholder; |
| upon consummation of the transaction that resulted in the stockholders becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or |
| subsequent to such time that the stockholder became an interested stockholder, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. |
A Delaware corporation may opt out of these provisions with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders amendment approved by at least a majority of the outstanding voting shares. We have not opted out of these provisions. As a result, mergers or other takeover or change in control attempts may be discouraged or prevented. We also anticipate that Section 203 may discourage attempts that might result in a premium over the market price for the shares of outstanding common stock.
Restated Certificate of Incorporation and Restated Bylaws Provisions
Our restated certificate of incorporation and our restated bylaws that we expect to be in effect upon the completion of this offering include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management team, including the following:
|
Board of Directors Vacancies . Our restated certificate of incorporation and restated bylaws will authorize only our board of directors to fill vacant directorships, including newly created seats. In |
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addition, the number of directors constituting our board of directors will be permitted to be set only by a resolution adopted by a majority vote of our entire board of directors. These provisions would prevent a stockholder from increasing the size of our board of directors and then gaining control of our board of directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our board of directors but promotes continuity of management. |
| Classified Board . Our restated certificate of incorporation and restated bylaws will provide that our board of directors will be classified into three classes of directors, each with staggered three-year terms. A third party may be discouraged from making a tender offer or otherwise attempting to obtain control of us as it is more difficult and time consuming for stockholders to replace a majority of the directors on a classified board of directors. See ManagementClassified Board of Directors. |
| Stockholder Action; Special Meetings of Stockholders . Our restated certificate of incorporation will provide that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. As a result, a holder controlling a majority of our capital stock would be unable to amend our restated bylaws or remove directors without holding a meeting of our stockholders called in accordance with our restated bylaws. Further, our restated bylaws and restated certificate of incorporation will provide that special meetings of our stockholders may be called only by a majority of our board of directors, the chairman of our board of directors, our Chief Executive Officer or our President, thus prohibiting a stockholder from calling a special meeting. These provisions could delay the ability of our stockholders to force consideration of a proposal or for stockholders controlling a majority of our capital stock to take any action, including the removal of directors. |
| Advance Notice Requirements for Stockholder Proposals and Director Nominations . Our restated bylaws will provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders or to nominate candidates for election as directors at our annual meeting of stockholders. Our restated bylaws also will specify certain requirements regarding the form and content of a stockholders notice. These provisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from nominating directors at our annual meeting of stockholders if the proper procedures are not followed. We expect that these provisions might also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of our company. |
| No Cumulative Voting . The Delaware General Corporation Law provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporations certificate of incorporation provides otherwise. Neither our restated certificate of incorporation nor our restated bylaws will provide for cumulative voting. |
| Directors Removed Only for Cause . Our restated certificate of incorporation will provide that stockholders may remove directors only for cause and only by the affirmative vote of the holders of at least two-thirds of our outstanding common stock. |
| Amendment of Charter Provisions . Any amendment of the provisions in our restated certificate of incorporation described above would require approval by holders of at least two-thirds of our outstanding common stock. |
| Issuance of Undesignated Preferred Stock . Our board of directors has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by our board of directors. The existence of authorized but unissued shares of preferred stock would enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or other means. |
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Choice of Forum
Our restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our restated certificate of incorporation or our restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The enforceability of similar choice of forum provisions in other companies certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable.
Listing
Our common stock has been authorized for listing on the New York Stock Exchange under the symbol LC.
Transfer Agent and Registrar
Upon the completion of this offering, the transfer agent and registrar for our common stock will be American Stock Transfer & Trust Company, LLC. The transfer agents address is 6201 15th Avenue, Brooklyn, New York 11219.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been a public market for shares of our common stock. Future sales of substantial amounts of shares of our common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market after this offering, or the possibility of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future.
Upon the completion of this offering, we will have 361,111,491 shares of common stock outstanding, based on the number of shares of outstanding capital stock as of September 30, 2014, and including 629,948 shares issued upon the exercise of warrants after September 30, 2014 and 209,342 shares that we expect to issue upon the exercise of warrants that would otherwise expire upon the completion of this offering, of which 27,550 shares are expected to be issued upon the net exercise of a warrant, based upon the assumed initial public offering price of $11.00 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus. This also includes 57,700,000 shares of common stock that we and the selling stockholders are selling in this offering, which shares may be resold in the public market immediately after the completion of this offering, and assumes no additional exercise of outstanding options or warrants.
Of the remaining 303,411,491 shares of common stock that are not sold in this offering, 1,461,352 shares were issued upon the exercise of stock options registered on a Form S-8 and will be freely tradable, subject to the restrictions described below, and 301,950,139 shares will be restricted securities, as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 of the Securities Act, which is summarized below.
In addition, all of our security holders have entered into market standoff agreements with us restricting the sale of any shares of our common stock for 180 days after the date of this prospectus or have entered into lock-up agreements with the underwriters under which they agreed, subject to certain exceptions, not to sell any shares of our common stock until at least 180 days after the date of this prospectus, as further described below. As a result of these agreements, based on an assumed offering date of September 30, 2014, 361,111,491 shares will be available for sale in the public market as follows:
| beginning on the date of this prospectus, the 57,700,000 shares sold in this offering will be immediately available for sale in the public market; |
| beginning 180 days after the date of this prospectus, subject to extension as described in Underwriters, 303,411,491 additional shares will become eligible for sale in the public market pursuant to Rule 144 or as a registered security, of which 204,952,062 shares will be held by affiliates and subject to the volume and other restrictions of Rule 144, as described below. |
Rule 144
In general, under Rule 144, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then such person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell, upon the expiration of the lock-up agreements described below, within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:
| 1% of the number of shares of common stock then outstanding, which will equal approximately 3,611,114 shares immediately after the completion of this offering, or |
| the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
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Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Lock-Up Agreements and Market Stand-Off Provisions
Our officers and directors, the selling stockholders and the holders of substantially all of our outstanding equity securities have agreed with the underwriters not to dispose of any of our common stock or securities convertible into or exchangeable for shares of our common stock for 180 days following the date of this prospectus, except with the prior written consent of Morgan Stanley & Co. LLC. In addition, substantially all holders of our common stock, options and warrants have previously entered into market stand-off agreements with us that similarly restrict their ability to sell or otherwise transfer any of their common stock or securities convertible into or exchangeable for common stock.
Additionally, our employees, including our executive officers and directors, may enter into written trading plans that are intended to comply with Rule 10b5-1 under the Exchange Act. Sales under these trading plans would not be permitted until the expiration of the lock-up agreements relating to this offering described above.
See Underwriters for a more complete description of the lock-up agreements with the underwriters.
Registration Rights
Following the completion of this offering, holders of 264,205,934 shares of our common stock, based on the number of shares outstanding as of September 30, 2014, will be entitled to certain registration rights with respect to the sale of such shares under the Securities Act. Registration of the sale of these shares would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. See Description of Capital StockRegistration Rights for additional information.
Registration Statement
In July 2014, we filed a registration statement on Form S-8 under the Securities Act covering all of the shares of common stock subject to options outstanding, as well as shares reserved for future issuance under our 2007 Plan. We intend to file a registration statement on Form S-8 under the Securities Act covering all of the shares of common stock reserved for future issuance under our 2014 Plan and 2014 ESPP as soon as practicable after the completion of this offering. None of the shares registered on the Form S-8 will, however, be eligible for resale until the expiration of the lock-up agreements to which they are subject.
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MATERIAL U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK
This section summarizes the material U.S. federal income tax considerations relating to the acquisition, ownership and disposition of our common stock by non-U.S. holders (defined below) pursuant to this offering. This summary does not provide a complete analysis of all potential U.S. federal income tax considerations relating thereto. The information provided below is based upon provisions of the Code, Treasury regulations promulgated thereunder, administrative rulings, and judicial decisions currently in effect. These authorities may change at any time, possibly retroactively, or the Internal Revenue Service (IRS), might interpret the existing authorities differently. In either case, the tax considerations of owning or disposing of our common stock could differ from those described below.
For purposes of this summary, a non-U.S. holder is any holder of our common stock, other than an entity classified as a partnership for U.S. federal income tax purposes, that is not:
| an individual who is a citizen or resident of the United States; |
| a corporation, or other entity taxable as a corporation, created or organized under the laws of the United States, any state therein or the District of Columbia; |
| a trust if it (i) is subject to the primary supervision of a U.S. court and one of more U.S. persons have authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or |
| an estate whose income is subject to U.S. income tax regardless of source. |
If a partnership or other pass-through entity is a beneficial owner of our common stock, the tax treatment of a partner in the partnership or an owner of the entity will depend upon the status of the partner or other owner and the activities of the partnership or other entity. Accordingly, this summary does not address tax consequences applicable to partnerships that hold our common stock, and any partner in a partnership or owner of a pass-through entity holding shares of our common stock should consult its own tax advisor.
This discussion assumes that a non-U.S. holder will hold our common stock as a capital asset (generally, property held for investment). The summary generally does not address tax considerations that may be relevant to particular investors because of their specific circumstances, or because they are subject to special rules, including, without limitation, if the investor is a former citizen or long-term resident of the United States, controlled foreign corporation, passive foreign investment company, corporation that accumulates earnings to avoid U.S. federal income tax, real estate investment trust, regulated investment company, dealer in securities or currencies, financial institution, tax-exempt entity, insurance company, person holding our common stock as part of a hedging, integrated, conversion or constructive sale transaction or a straddle, trader in securities that elects to use a mark-to-market method of accounting, person liable for the alternative minimum tax, person who acquired our common stock as compensation for services, or partner in a partnership or beneficial owner of a pass-through entity that holds our common stock. Finally, the summary does not describe the Medicare tax imposed on certain investment income, the effects of any applicable foreign, state or local laws, or except to the limited extent set forth below, the effects of any applicable gift or estate tax laws.
INVESTORS CONSIDERING THE PURCHASE OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE OR LOCAL LAWS, AND TAX TREATIES.
Distributions
We do not expect to declare or make any distributions on our common stock in the foreseeable future. If we do make distributions on shares of our common stock, however, such distributions will constitute dividends for
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U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of our current and accumulated earnings and profits will constitute a return of capital that is applied against and reduces, but not below zero, a non-U.S. holders adjusted tax basis in shares of our common stock. Any remaining excess will be treated as gain realized on the sale or other disposition of our common stock. See Sale of Common Stock.
Any dividend paid to a non-U.S. holder on our common stock that is not effectively connected with a non-U.S. holders conduct of a U.S. trade or business will generally be subject to U.S. withholding tax at a 30% rate. The withholding tax might apply at a reduced rate under the terms of an applicable income tax treaty. You should consult your tax advisors regarding your entitlement to benefits under a relevant income tax treaty. Generally, in order for us or our paying agent to withhold tax at a lower treaty rate, a non-U.S. holder must certify its entitlement to treaty benefits. A non-U.S. holder generally can meet this certification requirement by providing a properly executed Form W-8BEN (or other appropriate version of IRS From W-8 or applicable successor form) to us or our paying agent certifying qualification for the reduced rate. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the holders behalf, the holder will be required to provide appropriate documentation to the agent. The holders agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS in a timely manner.
Dividends received by a non-U.S. holder that are effectively connected with a U.S. trade or business conducted by the non-U.S. holder (and, if an income tax treaty is applicable, are attributable to a permanent establishment maintained by the non-U.S. holder in the United States) are not subject to U.S. withholding tax. To obtain this exemption, a non-U.S. holder must provide us or our paying agent with an IRS Form W-8ECI properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. In addition to being taxed at the graduated tax rates described above, dividends received by corporate non-U.S. holders that are effectively connected with a U.S. trade or business of the corporate non-U.S. holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty.
Sale of Common Stock
Non-U.S. holders will generally not be subject to U.S. federal income tax on any gains realized on the sale or other taxable disposition of our common stock unless:
| the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the sale or other taxable disposition of our common stock, and certain other requirements are met (in which case the gain would be subject to a flat 30% tax, or such reduced rate as may be specified by an applicable income tax treaty, which may be offset by U.S. source capital losses, even though the individual is not considered a resident of the United States); |
| the rules of the Foreign Investment in Real Property Tax Act (FIRPTA) treat the gain as effectively connected with a U.S. trade or business; or |
| the gain (i) is effectively connected with the conduct by the non-U.S. holder of a U.S. trade or business and (ii) if required by an applicable income tax treaty between the United States and the non-U.S. holders country of residence, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States (in which case the special rules described below apply). |
The FIRPTA rules may apply to a sale, exchange or other disposition of our common stock if we are, or were within the shorter of the five-year period preceding the disposition and the non-U.S. holders holding period, as a U.S. real property holding corporation (USRPHC). In general, we would be a USRPHC if interests in U.S. real estate comprised at least half of the value of our business assets. We do not believe that we are a
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USRPHC and we do not anticipate becoming one in the future. Even if we become a USRPHC, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if beneficially owned by a non-U.S. holder that actually or constructively owned more than 5% of our outstanding common stock at any time within the five-year period preceding the disposition.
If any gain from the sale, exchange or other disposition of our common stock, (i) is effectively connected with a U.S. trade or business conducted by a non-U.S. holder and (ii) if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by such non-U.S. holder in the United States, then the gain generally will be subject to U.S. federal income tax at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. If the non-U.S. holder is a corporation, under certain circumstances, that portion of its earnings and profits that is effectively connected with its U.S. trade or business, subject to certain adjustments, generally would be subject also to a branch profits tax. The branch profits tax rate is generally 30%, although an applicable income tax treaty might provide for a lower rate.
U.S. Federal Estate Tax
The estate of a nonresident alien individual is generally subject to U.S. federal estate tax on property having a U.S. situs. Because we are a U.S. corporation, our common stock will be U.S. situs property and therefore will be included in the taxable estate of a nonresident alien decedent, unless an applicable estate tax treaty between the United States and the decedents country of residence provides otherwise.
Backup Withholding and Information Reporting
The amount of dividends paid to each non-U.S. holder, and the tax withheld with respect to such dividends generally will be reported annually to the IRS and to each such holder, regardless of whether no withholding was required because such dividends were effectively connected with the non-U.S. holders conduct of a U.S. trade or business or withholding was reduced or eliminated by an applicable tax treaty. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides or is established under the provisions of an applicable income tax treaty or agreement.
A non-U.S. holder generally will be subject to backup withholding for dividends paid to such holder unless such holder certifies under penalty of perjury (usually on an IRS Form W-8BEN or applicable successor form) that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that such holder is a U.S. person as defined under the Code), or such holder otherwise establishes an exemption. Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale of shares of our common stock within the United States or conducted through certain U.S.-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code), or such owner otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld from a payment to a holder of common stock under the backup withholding rules can be credited against any U.S. federal income tax liability of the holder and may entitle the holder to a refund, provided that the required information is furnished to the IRS in a timely manner.
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act will impose a U.S. federal withholding tax at a rate of 30% on payments to certain foreign entities of dividends on and the gross proceeds of dispositions of our common stock, unless such entity satisfies various U.S. information reporting and due diligence requirements (generally relating
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to ownership by U.S. persons of interests in or accounts with those entities). Final Treasury regulations provide for certain transition rules under which these withholding requirements will only apply for dividend payments made on or after July 1, 2014, and for payments of gross proceeds of dispositions of our common stock made on or after January 1, 2017. Non-U.S. holders should consult their tax advisors regarding the possible implications of this legislation on their investment in our common stock.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
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Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. LLC and Goldman, Sachs & Co. are acting as representatives, have severally agreed to purchase, and we and the selling stockholders have agreed to sell to them, severally, the number of shares indicated below:
Name |
Number of
|
|||
Morgan Stanley & Co. LLC |
||||
Goldman, Sachs & Co. |
||||
Credit Suisse Securities (USA) LLC |
||||
Citigroup Global Markets Inc. |
||||
Allen & Company LLC |
||||
Stifel, Nicolaus & Company, Incorporated |
||||
BMO Capital Markets Corp. |
||||
William Blair & Company, L.L.C. |
||||
Wells Fargo Securities, LLC |
||||
|
|
|||
Total |
57,700,000 | |||
|
|
The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The offering of the shares of common stock by the underwriters is subject to the receipt and acceptance and subject to the underwriters right to reject any order in whole or in part. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters option to purchase additional shares of common stock.
The underwriters initially propose to offer part of the shares of common stock directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 8,655,000 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriters name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.
The following table shows the per share and total public offering price, underwriting discounts and commissions and proceeds before expenses to us and the selling stockholders. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase up to an additional 8,655,000 shares of common stock from us.
Total | ||||||||||||
Per
Share |
No Exercise |
Full
Exercise |
||||||||||
Public offering price |
$ | $ | $ | |||||||||
Underwriting discounts and commissions payable by us |
$ | $ | $ | |||||||||
Underwriting discounts and commissions payable by the selling stockholders |
$ | $ | $ | |||||||||
Proceeds, before expenses, to us |
$ | $ | $ | |||||||||
Proceeds, before expenses, to the selling stockholders |
$ | $ | $ |
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The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $6.1 million. We have agreed to reimburse the underwriters for expenses relating to clearance of this offering with the Financial Industry Regulatory Authority, Inc. (FINRA), expenses incurred in connection with the directed share program and certain other expenses in connection with this offering up to $50,000.
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them.
Our common stock has been authorized for listing on the New York Stock Exchange under the trading symbol LC.
We, all of our directors and officers, the selling stockholders and the holders of substantially all of our outstanding equity securities have agreed that, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the underwriters, we and they will not, for 180 days after the date of this prospectus:
| offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock; |
| file any registration statement with the SEC relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or |
| enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; |
whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise, subject to certain exceptions. In addition, we and each such person have agreed that, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the underwriters, we or such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock.
The restricted period described in the preceding paragraph will be extended if:
| during the last 17 days of the restricted period, we issue an earnings release or material news event relating to us occurs, or |
| prior to the expiration of the restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the restricted period or provide notification to Morgan Stanley & Co. LLC of any earnings release or material news or material event that may give rise to an extension of the initial restricted period, |
in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
Morgan Stanley & Co. LLC, in its sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time.
In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under their option to purchase additional shares. The underwriters can close out a covered short sale by exercising the option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the
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open market price of shares compared to the price available under the option to purchase additional shares of common stock. The underwriters may also sell shares in excess of their option to purchase additional shares of common stock, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.
We, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representatives may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses. Morgan Stanley Senior Funding, Inc., CitiCorp North America Inc. and Credit Suisse AG, which are affiliates of Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC, respectively, as well as Credit Suisse Securities (USA) LLC, are joint lead arrangers, joint bookrunners, agents and lenders under our credit and guaranty agreement.
In addition, in the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities and instruments, including loans originated through our marketplace. The underwriters and their respective affiliates may also make investment recommendations or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions in such securities and instruments.
Pricing of the Offering
Prior to the completion of this offering, there will be no public market for our common stock. The initial public offering price will be determined by negotiations among us, the selling stockholders and the representatives. Among the factors we intend to consider in determining the initial public offering price are prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.
Directed Share Program
At our request, the underwriters have reserved up to 10% of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers, employees, investors that have
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invested through our marketplace as of September 30, 2014 and other individuals related to us. Shares purchased by our directors and officers will be subject to a 180-day lock-up restriction. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.
Conflict of Interest
Genesis VC Partners X, LLC (Genesis) is the general partner of Norwest Venture Partners X, L.P., a beneficial owner of more than 10% of our outstanding common stock. The managing member of Genesis is NVP Associates, LLC, which is a subsidiary of an affiliate of Wells Fargo Securities, LLC, an underwriter in this offering. Because of these relationships, Wells Fargo Securities, LLC may be deemed to beneficially own more than 10% of our outstanding common stock, resulting in a conflict of interest under FINRA Rule 5121(f)(5). FINRA Rule 5121 permits Wells Fargo Securities, LLC to participate in this offering notwithstanding this conflict of interest because the offering satisfies Rule 5121(a)(1)(A).
Selling Restrictions
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) an offer to the public of any shares of our common stock may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares of our common stock may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(i) | to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
(ii) | to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or |
(iii) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of our common stock shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive. |
For the purposes of this provision, the expression an offer to the public in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of our common stock to be offered so as to enable an investor to decide to purchase any shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
United Kingdom
Each underwriter has represented and agreed that:
(i) | it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (FSMA)) received by it in connection with the issue or sale of the shares of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us; and |
157
(ii) | it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares of our common stock in, from or otherwise involving the United Kingdom. |
Hong Kong
Shares of our common stock may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), (ii) to professional investors within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a prospectus within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to shares of our common stock may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares of our common stock which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of shares of our common stock may not be circulated or distributed, nor may the shares of our common stock be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (SFA), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where shares of our common stock are subscribed or purchased under Section 275 by a relevant person which is: (i) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (ii) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired shares of our common stock under Section 275 except: (i) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (ii) where no consideration is given for the transfer; or (iii) by operation of law.
Japan
Shares of our common stock have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any shares of our common stock, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
158
The validity of the shares of common stock offered hereby will be passed upon for us by Fenwick & West LLP, Mountain View, California. OMelveny & Myers LLP, San Francisco, California is acting as counsel to the underwriters. An investment fund affiliated with Fenwick & West LLP owns shares of our convertible preferred stock that will convert upon completion of this offering into shares of common stock representing less than 0.1% of our outstanding common stock as of September 30, 2014.
The consolidated financial statements as of and for the year ended December 31, 2013 included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such consolidated financial statements have been included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements as of and for the nine months ended December 31, 2012 and fiscal year ended March 31, 2012, have been included in this prospectus in reliance on the reports of Grant Thornton LLP, an independent registered public accounting firm, given on their authority as experts in auditing and accounting.
The financial statements of Springstone Financial, LLC as of and for the years ended December 31, 2012 and December 31, 2013, have been included in this prospectus in reliance on the reports of Auerr, Zajac & Associates, LLP, independent auditors, given on their authority as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed with the registration statements. For further information about us and the common stock offered hereby, reference is made to the registration statement and the exhibits filed with it. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and in each instance we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits filed with it may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from that office. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
We are subject to the information and periodic reporting requirements of the Exchange Act, and we file periodic reports and other information with the SEC. Such periodic reports and other information are available for inspection and copying at the Public Reference Room and website of the SEC referred to above. We maintain a website at www.lendingclub.com. You may access our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated into and are not a part of this prospectus.
159
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
Financial Statements of LendingClub Corporation |
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F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 | ||||
Financial Statements of Springstone Financial, LLC (as of and for the periods ended December 31, 2012 and 2013) |
||||
F-43 | ||||
F-44 | ||||
F-45 | ||||
F-46 | ||||
F-47 | ||||
F-48 | ||||
F-53 | ||||
F-54 | ||||
Financial Statements of Springstone Financial, LLC (as of and for the periods ended March 31, 2013 and 2014) |
||||
F-55 | ||||
F-56 | ||||
F-57 | ||||
F-58 | ||||
F-59 | ||||
F-60 | ||||
F-65 | ||||
F-66 | ||||
Unaudited Pro Forma Financial Statements |
||||
Unaudited Pro Forma Condensed Combined Statements of Operations |
F-67 | |||
Notes to the Unaudited Pro Forma Condensed Combined Statements of Operations |
F-70 |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
LendingClub Corporation
San Francisco, California
We have audited the accompanying consolidated balance sheet of LendingClub Corporation and subsidiaries (the Company) as of December 31, 2013, and the related consolidated statement of operations, statement of stockholders equity, and statement of cash flows for the year ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LendingClub Corporation and subsidiaries as of December 31, 2013 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Francisco, CA
March 31, 2014 (except for note 1 as it relates to stock splits and note 3, as to which the date is October 17, 2014)
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
LendingClub Corporation
We have audited the accompanying consolidated balance sheet of LendingClub Corporation (a Delaware corporation) and subsidiaries (the Company) as of December 31, 2012 and the related consolidated statements of operations, stockholders equity and cash flows for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management as well, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LendingClub Corporation and subsidiaries as of December 31, 2012 and the results of their operations and their cash flows for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
San Francisco, California
April 1, 2013 (except as to Note 1 as it relates to stock splits, which is as of October 17, 2014)
F-3
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, |
September 30,
2014 |
Pro Forma
Balance Sheet September 30, 2014 |
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2012 | 2013 | |||||||||||||||
(audited) | (unaudited) | |||||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 52,551 | $ | 49,299 | $ | 82,674 | $ | 82,674 | ||||||||
Restricted cash |
7,484 | 12,208 | 25,221 | 25,221 | ||||||||||||
Loans at fair value (includes $396,081, $1,158,302, and $1,580,656 from consolidated Trust, respectively) |
781,215 | 1,829,042 | 2,533,671 | 2,533,671 | ||||||||||||
Accrued interest receivable (includes $2,765, $10,061, and $13,849 from consolidated Trust, respectively) |
5,521 | 15,975 | 22,348 | 22,348 | ||||||||||||
Property, equipment and software, net |
1,578 | 12,595 | 23,686 | 23,686 | ||||||||||||
Intangible assets, net |
| | 37,690 | 37,690 | ||||||||||||
Goodwill |
| | 72,592 | 72,592 | ||||||||||||
Other assets |
2,366 | 23,921 | 16,521 | 16,521 | ||||||||||||
Due from related parties |
115 | 355 | 443 | 443 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 850,830 | $ | 1,943,395 | $ | 2,814,846 | $ | 2,814,846 | ||||||||
|
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|
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|
|
|
|
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Liabilities: |
||||||||||||||||
Accounts payable |
$ | 1,210 | $ | 4,524 | $ | 3,354 | $ | 3,354 | ||||||||
Accrued interest payable (includes $3,347, $11,176, and $15,939 from consolidated Trust, respectively) |
6,678 | 17,741 | 25,723 | 25,723 | ||||||||||||
Accrued expenses and other liabilities |
3,366 | 9,128 | 26,004 | 26,004 | ||||||||||||
Payable to investors |
2,050 | 3,918 | 17,366 | 17,366 | ||||||||||||
Notes and certificates, at fair value (includes $396,081, $1,158,302, and $1,580,656 from consolidated Trust, respectively) |
785,316 | 1,839,990 | 2,551,640 | 2,551,640 | ||||||||||||
Term loan |
| | 49,219 | 49,219 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total liabilities |
798,620 | 1,875,301 | 2,673,306 | 2,673,306 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Commitments and contingencies (see Note 16) |
||||||||||||||||
Stockholders Equity: |
||||||||||||||||
Preferred stock |
$ | 103,023 | $ | 103,244 | $ | 177,300 | $ | | ||||||||
Common stock, $0.01 par value; 360,000,000, 360,000,000 and 372,000,000 shares authorized at December 31, 2012, December 31, 2013 and September 30, 2014 (unaudited), respectively; 45,167,448, and 54,986,640 shares issued and outstanding at December 31, 2012 and December 31, 2013, respectively, and 60,921,190 and 310,300,049 shares issued and outstanding as of September 30, 2014 (unaudited), actual and pro forma (unaudited), respectively |
123 | 138 | 609 | 3,103 | ||||||||||||
Additional paid-in capital |
6,713 | 15,041 | 37,817 | 212,623 | ||||||||||||
Treasury stock (70,560 shares of common stock held at December 31, 2012) |
(12 | ) | | | | |||||||||||
Accumulated deficit |
(57,637 | ) | (50,329 | ) | (74,186 | ) | (74,186 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stockholders equity |
52,210 | 68,094 | 141,540 | 141,540 | ||||||||||||
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|
|
|
|||||||||
Total liabilities and stockholders equity |
$ | 850,830 | $ | 1,943,395 | $ | 2,814,846 | $ | 2,814,846 | ||||||||
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|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months
Ended September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(audited) | (unaudited) | |||||||||||||||||||
Operating Revenue: |
||||||||||||||||||||
Transaction fees |
$ | 13,701 | $ | 26,013 | $ | 85,830 | $ | 55,214 | $ | 133,835 | ||||||||||
Servicing fees |
1,222 | 1,474 | 3,951 | 2,485 | 6,301 | |||||||||||||||
Management fees |
206 | 720 | 3,083 | 2,083 | 4,163 | |||||||||||||||
Other revenue (expense) |
407 | 720 | 5,111 | 4,708 | (438 | ) | ||||||||||||||
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|
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|
|
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|
|
|
|||||||||||
Total operating revenue |
15,536 | 28,927 | 97,975 | 64,490 | 143,861 | |||||||||||||||
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|
|
|
|
|||||||||||
Net Interest Income (Expense): |
||||||||||||||||||||
Total interest income |
32,660 | 56,861 | 187,507 | 124,771 | 252,298 | |||||||||||||||
Total interest expense |
(32,030 | ) | (56,642 | ) | (187,447 | ) | (124,727 | ) | (253,054 | ) | ||||||||||
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|
|
|
|
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|
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Net interest (expense) income |
630 | 219 | 60 | 44 | (756 | ) | ||||||||||||||
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|
|
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Benefit/(provision) for losses on loans at amortized cost |
(368 | ) | 42 | | | | ||||||||||||||
Fair valuation adjustments, loans |
(6,732 | ) | (18,775 | ) | (57,629 | ) | (37,877 | ) | (84,963 | ) | ||||||||||
Fair valuation adjustments, notes and certificates |
6,731 | 18,180 | 57,596 | 37,848 | 84,865 | |||||||||||||||
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Net interest income (expense) after loss provision and fair value adjustments |
261 | (334 | ) | 27 | 15 | (854 | ) | |||||||||||||
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|
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Total net revenue |
15,797 | 28,593 | 98,002 | 64,505 | 143,007 | |||||||||||||||
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Operating Expenses: |
||||||||||||||||||||
Sales and marketing |
12,571 | 14,723 | 39,037 | 26,577 | 60,808 | |||||||||||||||
Origination and servicing |
5,099 | 6,134 | 17,217 | 11,044 | 26,135 | |||||||||||||||
General and administrative |
10,071 | 11,974 | 34,440 | 22,434 | 78,862 | |||||||||||||||
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|
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Total operating expenses |
27,741 | 32,831 | 90,694 | 60,055 | 165,805 | |||||||||||||||
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|
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Income (loss) before income taxes |
(11,944 | ) | (4,238 | ) | 7,308 | 4,450 | (22,798 | ) | ||||||||||||
Income tax expense |
| | | | 1,059 | |||||||||||||||
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|
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Net income (loss) |
$ | (11,944 | ) | $ | (4,238 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||
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Basic net income (loss) per share attributable to common stockholders |
$ | (0.34 | ) | $ | (0.10 | ) | $ | 0.00 | $ | 0.00 | $ | (0.41 | ) | |||||||
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Diluted net income (loss) per share attributable to common stockholders |
$ | (0.34 | ) | $ | (0.10 | ) | $ | 0.00 | $ | 0.00 | $ | (0.41 | ) | |||||||
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Weighted-average shares of common stock used in computing basic net income (loss) per common share |
35,125,628 | 41,359,676 | 51,557,136 | 50,457,948 | 57,958,838 | |||||||||||||||
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|
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Weighted-average shares of common stock used in computing diluted net income (loss) per common share |
|
35,125,628
|
|
41,359,676 | 81,426,976 | 79,153,912 | 57,958,838 | |||||||||||||
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Basic pro forma net income (loss) per share (unaudited) |
$ | 0.03 | $ | (0.08 | ) | |||||||||||||||
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|
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Weighted-average shares outstanding used to calculate basic pro forma net income (loss) per common share (unaudited) |
291,766,192 | 303,608,800 | ||||||||||||||||||
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|
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Diluted pro forma net income (loss) per share (unaudited) |
$ | 0.02 | $ | (0.08 | ) | |||||||||||||||
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|
|
|
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Weighted-average shares outstanding used to calculate diluted pro forma net income (loss) per common share (unaudited) |
323,331,550 | 303,608,800 | ||||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)
Convertible Preferred
Stock |
Common Stock |
Additional
Paid-in Capital |
Treasury Stock |
Accumulated
Deficit |
Total
Stockholders Equity |
|||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
Balances, March 31, 2012 |
225,661,228 | $ | 84,806 | 36,444,984 | $ | 91 | $ | 4,839 | | $ | | $ | (53,399 | ) | $ | 36,337 | ||||||||||||||||||||
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Exercise of warrants to purchase Series A convertible preferred stock |
2,272,292 | 606 | | | | | | | 606 | |||||||||||||||||||||||||||
Exercise of warrants to purchase Series B convertible preferred stock |
1,431,912 | 267 | | | (102 | ) | | | | 165 | ||||||||||||||||||||||||||
Exercise of warrants to purchase common stock |
| | 86,752 | 10 | 24 | | | | 34 | |||||||||||||||||||||||||||
Issuance of Series E convertible preferred stock for cash (net of issuance costs of $153) |
10,000,000 | 17,344 | | | | | | | 17,344 | |||||||||||||||||||||||||||
Stock-based compensation |
| | | | 1,110 | | | | 1,110 | |||||||||||||||||||||||||||
Issuance of common stock upon exercise of options |
| | 8,635,712 | 22 | 842 | | | | 864 | |||||||||||||||||||||||||||
Other |
| | | | | (70,560 | ) | (12 | ) | | (12 | ) | ||||||||||||||||||||||||
Net loss |
| | | | | | | (4,238 | ) | (4,238 | ) | |||||||||||||||||||||||||
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Balances, December 31, 2012 |
239,365,432 | $ | 103,023 | 45,167,448 | $ | 123 | $ | 6,713 | (70,560 | ) | $ | (12 | ) | $ | (57,637 | ) | $ | 52,210 | ||||||||||||||||||
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Exercise of warrants to purchase Series A convertible preferred stock |
829,356 | 221 | | | | | | | 221 | |||||||||||||||||||||||||||
Exercise of warrants to purchase common stock |
| | 957,876 | 2 | 148 | | | | 150 | |||||||||||||||||||||||||||
Stock-based compensation and warrant expense |
| | | | 6,490 | | | | 6,490 | |||||||||||||||||||||||||||
Issuance of common stock upon exercise of options |
| | 8,931,876 | 23 | 1,692 | | | | 1,715 | |||||||||||||||||||||||||||
Other |
| | (70,560 | ) | (10 | ) | (2 | ) | 70,560 | 12 | | | ||||||||||||||||||||||||
Net income |
| | | | | | | 7,308 | 7,308 | |||||||||||||||||||||||||||
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Balances, December 31, 2013 |
240,194,788 | $ | 103,244 | 54,986,640 | $ | 138 | $ | 15,041 | | $ | | $ | (50,329 | ) | $ | 68,094 | ||||||||||||||||||||
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Exercise of warrants to purchase common stock (unaudited) |
| | 295,720 | 3 | 99 | | | | 102 | |||||||||||||||||||||||||||
Exercise of warrants to purchase Series A convertible preferred stock |
321,737 | 86 | | | (86 | ) |
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Stock-based compensation and warrant expense (unaudited) |
| 6,405 | | | 20,684 | | | | 27,089 | |||||||||||||||||||||||||||
Issuance of Series F convertible preferred stock for cash (net of issuance costs of $197) (unaudited) |
6,390,556 | 64,803 | | | | | | | 64,803 | |||||||||||||||||||||||||||
Issuance of Series F preferred stock for the acquisition of Springstone (unaudited) |
2,443,930 | 2,762 | | | | | | | 2,762 | |||||||||||||||||||||||||||
Issuance of common stock upon exercise of options (unaudited) |
| | 5,638,830 | 56 | 2,941 | | | | 2,997 | |||||||||||||||||||||||||||
Reclassification of early exercise liability related to stock options (unaudited) |
| | | | (622 | ) | | | | (622 | ) | |||||||||||||||||||||||||
Vesting of early exercise stock options (unaudited) |
| | | | 172 | | | | 172 | |||||||||||||||||||||||||||
Par value adjustment for stock splits (unaudited) |
| 412 | (412 | ) | | | | | ||||||||||||||||||||||||||||
Net loss (unaudited) |
| | | | | | | (23,857 | ) | (23,857 | ) | |||||||||||||||||||||||||
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Balances, September 30, 2014 (unaudited) |
249,351,011 | $ | 177,300 | 60,921,190 | $ | 609 | $ | 37,817 | | $ | | $ | (74,186 | ) | $ | 141,540 | ||||||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
March 31, 2012 |
Nine Months
Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Cash Flows from Operating Activities: |
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Net income (loss) |
$ | (11,944 | ) | $ | (4,238 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Provision (benefit) for loan losses |
368 | (42 | ) | | | | ||||||||||||||
Fair value adjustments of loans, notes and certificates, net |
1 | 595 | 33 | 29 | 99 | |||||||||||||||
Change in loan servicing liability carried at fair value |
| | 936 | 731 | 2,776 | |||||||||||||||
Change in loan servicing asset carried at fair value |
| | (534 | ) | (153 | ) | (986 | ) | ||||||||||||
Stock-based compensation and warrant expense, net |
660 | 1,110 | 6,490 | 3,345 | 25,889 | |||||||||||||||
Depreciation and amortization |
150 | 236 | 1,663 | 907 | 6,620 | |||||||||||||||
Loss (gain) on sales of loans at fair value |
| (329 | ) | (3,862 | ) | (3,862 | ) | 2,110 | ||||||||||||
Other, net |
(43 | ) | (118 | ) | 30 | | 238 | |||||||||||||
Loss on disposal of property, equipment and software |
| | | | 212 | |||||||||||||||
Purchase of whole loans sold at fair value |
| (9,290 | ) | (442,362 | ) | (246,571 | ) | (1,096,592 | ) | |||||||||||
Proceeds from sales of whole loans at fair value |
| 9,619 | 446,224 | 250,433 | 1,094,482 | |||||||||||||||
Net change in operating assets and liabilities excluding the effects of the acquisition: |
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Accrued interest receivable |
(2,351 | ) | (3,170 | ) | (10,454 | ) | (7,280 | ) | (6,373 | ) | ||||||||||
Other assets |
(1,468 | ) | (649 | ) | (21,021 | ) | (153 | ) | 13,184 | |||||||||||
Due from related parties |
(40 | ) | (75 | ) | (240 | ) | (197 | ) | (88 | ) | ||||||||||
Accounts payable |
620 | 330 | 1,788 | 1,120 | (1,107 | ) | ||||||||||||||
Accrued interest payable |
2,604 | 4,070 | 11,063 | 7,871 | 7,982 | |||||||||||||||
Accrued expenses and other liabilities |
357 | 1,558 | 4,077 | 5,532 | 10,806 | |||||||||||||||
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Net cash provided by (used in) operating activities |
(11,086 | ) | (393 | ) | 1,139 | 16,202 | 35,395 | |||||||||||||
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Cash Flows from Investing Activities: |
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Purchase of loans at fair value |
(320,014 | ) | (598,622 | ) | (1,618,404 | ) | (1,115,774 | ) | (1,534,276 | ) | ||||||||||
Purchase of loans at amortized cost |
(1,064 | ) | | | | | ||||||||||||||
Principal payments of loans at fair value |
105,306 | 160,787 | 511,232 | 341,256 | 739,505 | |||||||||||||||
Principal payments of loans at amortized cost |
1,349 | 345 | | | | |||||||||||||||
Proceeds from recoveries and sales of charged-off loans at fair value |
| 247 | 1,716 | 1,180 | 5,178 | |||||||||||||||
Proceeds from recoveries and sales of charged-off loans at amortized cost |
| 22 | | | | |||||||||||||||
Payments for business acquisition, net of cash acquired |
| | | | (109,464 | ) | ||||||||||||||
Net change in restricted cash |
(4,000 | ) | (2,622 | ) | (4,724 | ) | (1,264 | ) | (11,432 | ) | ||||||||||
Purchase of property, equipment and software |
(383 | ) | (1,302 | ) | (10,435 | ) | (7,736 | ) | (14,989 | ) | ||||||||||
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Net cash used in investing activities |
(218,806 | ) | (441,145 | ) | (1,120,615 | ) | (782,338 | ) | (925,478 | ) | ||||||||||
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Cash Flows from Financing Activities: |
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Payable to investors |
533 | 1,517 | 1,868 | (1,593 | ) | 12,933 | ||||||||||||||
Proceeds from issuance of notes and certificates |
319,704 | 606,862 | 1,618,269 | 1,115,694 | 1,534,010 | |||||||||||||||
Payments on notes and certificates |
(101,950 | ) | (163,946 | ) | (504,330 | ) | (339,048 | ) | (732,342 | ) | ||||||||||
Payments on charged-off notes and certificates from recoveries/sales of related charged off loans at fair value |
| (219 | ) | (1,669 | ) | (1,139 | ) | (5,153 | ) | |||||||||||
Proceeds from term loan, net of discount |
| | | | 49,813 | |||||||||||||||
Payment for debt issuance cost |
| | | | (1,192 | ) | ||||||||||||||
Principal payments on term loan |
| | | | (625 | ) | ||||||||||||||
Payments on loans payable |
(2,601 | ) | (370 | ) | | | | |||||||||||||
Prepaid offering costs |
| | | | (1,887 | ) | ||||||||||||||
Proceeds from exercise of warrants to acquire Series A convertible preferred stock |
10 | 606 | 221 | | | |||||||||||||||
Proceeds from exercise of warrants to acquire Series B convertible preferred stock |
| 165 | | | | |||||||||||||||
Proceeds from exercise of warrants to acquire common stock |
| 34 | 150 | 326 | 101 | |||||||||||||||
Proceeds from issuance of Series D convertible preferred stock, net of issuance costs |
31,946 | | | | | |||||||||||||||
Proceeds from issuance of Series E convertible preferred stock, net of issuance costs |
| 17,344 | | | | |||||||||||||||
Proceeds from issuance of Series F convertible preferred stock, net of issuance costs |
| | | | 64,803 | |||||||||||||||
Repurchase of common stock |
| (12 | ) | | | | ||||||||||||||
Proceeds from stock options exercised |
158 | 864 | 1,715 | 1,531 | 2,997 | |||||||||||||||
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Net cash provided by financing activities |
247,800 | 462,845 | 1,116,224 | 775,771 | 923,458 | |||||||||||||||
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Net (decrease) increase in cash and cash equivalents |
17,908 | 21,307 | (3,252 | ) | 9,635 | 33,375 | ||||||||||||||
Cash and cash equivalents, beginning of period |
13,336 | 31,244 | 52,551 | 52,551 | 49,299 | |||||||||||||||
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Cash and cash equivalents, end of period |
$ | 31,244 | $ | 52,551 | $ | 49,299 | $ | 62,186 | $ | 82,674 | ||||||||||
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid for interest |
$ | 28,063 | $ | 52,511 | $ | 176,195 | $ | 116,746 | $ | 244,531 | ||||||||||
Non-cash exercise of common stock warrants |
$ | 2,345 | $ | | $ | 137 | $ | 137 | $ | 86 | ||||||||||
Non-cash exercise of preferred stock B warrants |
$ | | $ | 102 | $ | | $ | | $ | | ||||||||||
Reclassification of loans at amortized cost to loans held at fair value |
$ | | $ | 2,109 | $ | | $ | | $ | | ||||||||||
Non-cash investing activityaccrual of property, equipment and software, net |
$ | | $ | | $ | 2,275 | $ | | $ | 1,132 | ||||||||||
Non-cash financing activitiesaccruals for prepaid offering costs |
$ | | $ | | $ | | $ | | $ | 1,053 | ||||||||||
Non-cash investing and financing activityissuance of Series F convertible preferred stock for business acquisition |
$ | | $ | | $ | | $ | | $ | 2,762 |
The accompanying notes are an integral part of these financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Consolidation
Our consolidated financial statements include LendingClub Corporation and its wholly owned subsidiaries; Springstone Financial, LLC (Springstone) and LC Advisors, LLC, (LCA). Trust refers to LC Trust I, an independent Delaware business trust that acquires and holds loans for the sole benefit of certain investors that purchase trust certificates (Certificates) issued by the Trust and that are related to underlying loans. The accompanying consolidated financial statements, have been prepared by LendingClub Corporation (LendingClub, we, our, the Company and us) in conformity with U.S. generally accepted accounting principles (GAAP) for financial information.
We did not have any items of other comprehensive income (loss) during any of the periods presented in the consolidated financial statements and therefore, we are not required to report comprehensive income (loss).
Subsequent to the issuance of our December 31, 2012 consolidated financial statements, we corrected the classification of our preferred stock to present the preferred stock within permanent stockholders equity rather than temporary equity as previously presented. This revision is in accordance with ASC 480Distinguishing Liabilities from Equity (ASC 480) and resulted in a change to stockholders deficit from $50.8 million to stockholders equity of $52.2 million as of December 31, 2012. The revision had no effect on our consolidated statements of operations, reported assets and liabilities on the consolidated balance sheet, or the consolidated statements of cash flows.
During the year ended December 31, 2013, we changed the definitions used to classify operating expenses. Operating expenses were formerly classified as sales, marketing and customer service, engineering, and general and administrative. Our new categories of operating expenses are: sales and marketing; origination and servicing; and general and administrative. As a result of the new classification, loan origination and servicing costs which were previously included in sales, marketing and customer service are now included as a separate financial statement line and engineering costs which represent engineering and product development related expenses are categorized within general and administrative expenses. The changes had no impact to the total operating expenses or net income. Prior period amounts have been reclassified to conform to the current presentation. We previously referred to Transaction Fees as Origination Fees and General and AdministrativeEngineering and Product Development as General and AdministrativeTechnology.
On April 15, 2014, a 2-for-1 equity stock split approved by our board of directors became effective, in which each outstanding share of each series or class of equity capital stock was split into two outstanding shares of such series or class of equity capital stock. Additionally, another 2-for-1 equity stock split approved by our board of directors became effective on September 5, 2014, in which each outstanding share of each series or class of equity capital stock was split into two outstanding shares of such series or class of equity capital stock. All share and per share data has been adjusted to reflect these stock splits. The par value of each of the outstanding shares remains the same at $0.01.
On April 17, 2014, we acquired all the outstanding limited liability company interests of Springstone. Our interim consolidated financial statements include Springstones results of operations and financial position from this date. See Note 7Springstone Acquisition.
Unaudited interim consolidated financial information
The accompanying interim consolidated balance sheet as of September 30, 2014, the interim consolidated statements of operations, and cash flows for the nine months ended September 30, 2013 and 2014, the interim consolidated statement of stockholders equity for the nine months ended September 30, 2014, and the related footnote disclosures are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP on the same basis as the audited consolidated financial statements and, in the
F-8
opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, considered necessary to present fairly our financial position as of September 30, 2014 and our results of operations and cash flows for the nine months ended September 30, 2013 and 2014. The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
Unaudited pro forma balance sheet
Immediately prior to the closing of a qualifying initial public offering as defined in Note 12Stockholders Equity, all of the outstanding shares of convertible preferred stock will automatically convert into shares of common stock. In addition, the outstanding preferred stock warrants will automatically be converted into warrants to purchase common stock upon effectiveness of a qualified initial public offering, and certain of these warrants will automatically be net exercised for shares of common stock upon the completion of our initial public offering. The unaudited pro forma balance sheet information, as set forth in the accompanying consolidated balance sheets, gives effect to the automatic conversion of all outstanding shares of convertible preferred stock as of September 30, 2014. The shares of common stock issuable and the proceeds expected to be received in a qualified initial public offering are excluded from such pro forma information.
2. Summary of Significant Accounting Policies
Change in Fiscal Year
On December 19, 2012, our board of directors approved a change in our fiscal year-end from March 31 to December 31. The change was effective as of December 31, 2012.
Revenue Recognition
Revenue primarily results from fees earned. Fees include loan transaction fees paid by issuing banks and service providers, servicing fees paid by investors and management fees paid by certain certificate holders. We also have other smaller sources of revenue reported as other revenue.
Transaction Fees
Transaction fees are paid by the issuing banks to us for the work we perform through our platform in facilitating originations. The amount of these fees is based upon the terms of the loan, including grade, rate, term and other factors. As of March 31, 2012, December 31, 2012 and December 31, 2013, these fees ranged from 1.11% to 5.00% and, as of September 30, 2014, ranged from 1.00% to 6.00% of the initial principal amount of a loan. In addition, with our acquisition of Springstone, transaction fees include fees earned from issuing banks and service providers for education and patient finance loans. Where applicable, the transaction fees are included in the annual percentage rate calculation provided to the borrower and is subtracted from the gross loan proceeds prior to disbursement of the loan funds to the borrower. A loan is considered issued when we record the transfer of funds to the borrowers account on our platform and we initiate an ACH transaction to transfer funds from our platforms correspondent bank account to the borrowers bank account.
Servicing Fees
Investors typically pay us a servicing fee on each payment received from a borrower or on the investors month-end principal balance of loans serviced. The servicing fee compensates us for the costs we incur in servicing the related loan, including managing payments from borrowers, payments to investors and maintaining investors account portfolios. We record servicing fees paid by note holders and certain certificate holders as a component of operating revenue when received. Servicing fees can be, and have been, modified or waived at managements discretion.
F-9
Management Fees
Accredited investors and qualified purchasers can invest in limited partner interests in funds managed by LCA, a registered investment advisor and our wholly-owned subsidiary. LCA acts as the general partner for six private funds (Funds) in which it has made no capital contributions and does not receive any allocation of the Funds income, expenses, gains, losses or any carried interest. Each Fund invests in a certificate pursuant to a set investment strategy. LCA charges limited partners in the Funds a management fee payable monthly in arrears, based on a limited partners capital account balance at month end.
LCA also earns management fees on separately managed accounts (SMA), payable monthly in arrears, based on the month-end balances in the SMA accounts.
Management fees are a component of operating revenue in the consolidated statements of operations and are recorded as earned. Management fees can be, and have been, modified or waived at the discretion of LCA.
Other Revenue
Other revenue consists primarily of revenue from gains and losses on sales of whole loans.
Fair Valuation Adjustments of Loans at Fair Value and Notes and Certificates at Fair Value
We include in earnings the estimated unrealized fair value gains or losses during the period on loans, and the offsetting estimated unrealized fair value gains or losses on related notes and certificates. At each reporting period, we recognize fair valuation adjustments for the loans and the related notes and certificates. The fair valuation adjustment for a given principal amount of a loan will be approximately equal to the corresponding estimated fair valuation adjustment on the combined principal amounts of related notes and certificates because the same net cash flows of the loans and the related notes and/or certificates are used in the discounted cash flow valuation calculations.
Whole Loan Sales
From January 1, 2013 through June 30, 2013, transaction fees and direct loan origination and acquisition costs for loans that were subsequently sold to unrelated third-party purchasers and met the accounting requirements for a sale of loans were deferred and included in the overall net investment in the loans purchased. Accordingly, the transaction fees for such loans were not included in transaction fee revenue and the direct loan origination costs for such loans were not included in operating expenses. A gain or loss on the whole loan sales was recorded on the sale date.
Effective July 1, 2013, we elected the fair value option for whole loans acquired and subsequently sold to unrelated third-party purchasers. Under this election, all transaction fees and all direct costs incurred in the origination process are recognized in earnings as earned or incurred and are not deferred. Beginning July 1, 2013, transaction fees for whole loans sold to unrelated third-party purchasers are included in Transaction Fees and direct loan origination costs are included in Origination and Servicing operating expense on the consolidated statement of operations. Gains and losses from whole loan sales are recorded in Other Revenue in the consolidated statements of operations.
As part of the sale agreements, we retained the rights to service these sold whole loans. We calculate a gain or loss on the whole loan sale with servicing retained based on the net proceeds from the whole loan sale, minus the net investment in the loans being sold. The net investment in the loans sold has been reduced or increased by the recording of any applicable net servicing asset or liability respectively. Gains on whole loan sales were previously reported in Gain from Sales of Loan and have been reclassified to Other Revenue in the consolidated statement of operations.
Additionally, as needed, we will record a liability for significant estimated post-sale obligations or contingent obligations to the purchasers of the loans. No such liability was recorded at December 31, 2012, December 31, 2013 or September 30, 2014.
F-10
Servicing Assets and Liabilities at Fair Value
We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third-party or whole loan buyers or when the servicing contract commences. The gain or loss on a loan sale is recorded in Other Revenue while the component of the gain or loss that is based on the degree to which the contractual loan servicing fee is above or below an estimated market rate loan servicing fee is recorded as an offset in servicing assets or liabilities. Servicing assets and liabilities are recorded in Other Assets and Accrued Expenses and Other Liabilities, respectively, on the consolidated balance sheets. Over the life of the loan, changes in the estimated fair value of servicing assets and liabilities are reported in Servicing Fees on the consolidated statement of operations in the period in which the changes occur.
We use a discounted cash flow model to estimate the fair value of the loan servicing asset or liability which considers the contractual servicing fee revenue we earn on the loans, estimated market rate servicing fee to service such loans, the current principal balances of the loans and projected servicing revenues over the remaining terms of the loans.
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted deposits with financial institutions in checking, money market and short-term certificate of deposit accounts. We consider all highly liquid investments with stated maturity dates of three months or less from the date of purchase to be cash equivalents.
Restricted Cash
Restricted cash consists primarily of our funds in certain checking, money market and certificate of deposit accounts that are: (i) pledged to or held in escrow by our correspondent banks as security for transactions processed on or related to our platform; (ii) pledged through a credit support agreement with a certificate holder or (iii) received from investors but not yet applied to their accounts on the platform and transferred to segregated bank accounts that hold investors funds.
Loans at Fair Value and Notes and Certificates at Fair Value
We use fair value measurements to record loans, notes and certificates at fair value on a recurring basis and in our fair value disclosures. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Changes in the fair value of the loans and notes and certificates are recognized, on a gross basis, in earnings.
We determine the fair value of the loans, notes and certificates in accordance with the fair value hierarchy that requires an entity to maximize the use of observable inputs. The fair value hierarchy includes the following three levels based on the objectivity of the inputs, which were used for categorizing the assets or liabilities for which fair value is being measured and reported:
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 |
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Valuation generated from model-based techniques that use inputs that are significant and unobservable in the market. These unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted |
F-11
cash flow methodologies or similar techniques, which incorporate managements own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation. The fair value election for loans, notes and certificates allows for symmetrical accounting of the timing and amounts recognized for both expected unrealized losses and charge-offs on the loans and the related notes and certificates, consistent with the member payment dependent design of the notes and certificates. |
Our and the Trusts obligation to pay principal and interest on any note or certificate is equal to the pro-rata portion of the payments, if any, received on the related loan subject to applicable fees. The gross effective interest rate associated with notes or certificates is the same as the interest rate earned on the underlying loan. The discounted cash flow methodology used to estimate the notes and certificates fair values uses the same projected net cash flows as their related loan. The discount rates for the projected net cash flows of the notes and certificates are our estimates of the rates of return, including risk premiums (if significant) that investors in unsecured consumer credit obligations would require when investing in notes issued pursuant to a shelf registration statement and certificates issued by the Trust with cash flows dependent on specific credit grades of loans.
For additional discussion on this topic, including the adjustments to the estimated fair values of loans, notes and certificates, as discussed above, see Note 4Fair Value of Financial Instruments Measured at Fair Value.
Accrued Interest and Other Receivables
Interest income on loans is calculated based on the contractual interest rate of the loan and recorded as interest income as earned. Loans reaching 120 days delinquent are classified as non-accrual loans, and we stop accruing interest and reverse all accrued but unpaid interest as of such date.
Property, Equipment and Software, Net
Property, equipment and software consists of computer equipment and software, office furniture and equipment, construction in progress, leasehold improvements and internal use software and website development costs which are recorded at cost, less accumulated depreciation and amortization.
Computer equipment and software and furniture and fixtures are depreciated or amortized on a straight line basis over two to five years. Costs associated with construction projects are transferred to the leasehold improvement account upon project completion. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life.
Internal use software and website development costs are capitalized when preliminary development efforts are successfully completed and it is probable that the project will be completed and the software will be used as intended. Internal use software and website development costs are amortized on a straight line basis over the projects estimated useful life, generally three years. Capitalized internal use software development costs consist of salaries and payroll related costs for employees and fees paid to third-party consultants who are directly involved in development efforts. Costs related to preliminary project activities and post implementation activities including training and maintenance are expensed as incurred. Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are capitalized. We evaluate potential impairments of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances that could result in impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for our overall business and significant negative industry or economic trends. Determination of recoverability of long-lived assets is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the
F-12
asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value. For the year ended December 31, 2013, the nine months ended December 31, 2012 the year ended March 31, 2012 and for the nine months ended September 30, 2014, there was no impairment of long-lived assets.
Consolidation Policies
Our policy is to consolidate the financial statements of entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by evaluating whether the entity is a voting interest entity or variable interest entity (VIE) and if the accounting guidance requires consolidation.
Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that enable them to make significant decisions relating to the entities operations. For these types of entities, our determination of whether we have a controlling financial interest is based on ownership of a majority of the entities voting equity interest or through control of management of the entities.
VIEs are entities that, by design, either (i) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (ii) have equity investors that do not have the ability to make significant decisions relating to the entitys operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. We determine whether we have a controlling financial interest in a VIE by considering whether our involvement with the VIE is significant and whether we are the primary beneficiary of the VIE based on the following:
| we have the power to direct the activities of the VIE that most significantly impact the entitys economic performance; |
| the aggregate indirect and direct variable interests held by us have the obligation to absorb losses or the right to receive benefits from the entity that could be significant to the VIE; and |
| qualitative and quantitative factors regarding the nature, size, and form of our involvement with the VIE. |
We believe our beneficial ownership of a controlling financial interest in the Trust has qualified and continues to qualify as an equity investment in a VIE that should be consolidated for financial accounting and reporting purposes. We perform on-going reassessments on the status of the entities and whether facts or circumstances have changed in relation to our involvement in VIEs which could cause our conclusion to change.
All intercompany transactions and balances have been eliminated.
Business Combination (Unaudited)
We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. We continue to collect information and reevaluate these estimates and assumptions quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
F-13
Goodwill and Intangible Assets (Unaudited)
Goodwill represents the fair value of acquired businesses in excess of the aggregate fair value of the identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. Our annual impairment testing date is April 1. We can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit (defined as business for which financial information is available and reviewed regularly by management) exceeds its carrying value. A qualitative assessment may consider macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital or company-specific factors, such as market capitalization in excess of net assets, trends in revenue generating activities and merger or acquisition activity.
If we elect to bypass qualitatively assessing goodwill or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, we estimate the fair values of our reporting units and compare them to their carrying values. The estimated fair values of the reporting units are generally established using an income approach based on a discounted cash flow model or a market approach which compares each reporting unit to comparable companies in their respective industries.
Intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We do not have any indefinite-lived intangible assets.
Due from Related Parties
Due from related parties represents asset management fees due to LCA from investors in the Funds.
Payable to Investors
Payable to investors primarily represents payments-in-process received from investors and payments on notes, certificates and loan payments that, as of the last day of the period, have not been credited to investors accounts on the platform or transferred to the investors separate bank accounts.
Sales and Marketing Expense
Sales and marketing costs, including borrower and investor acquisition costs, are expensed as incurred and included in Sales and Marketing on the consolidated statement of operations.
Stock-Based Compensation
All stock-based awards made to employees are recognized in the consolidated financial statements based on their respective grant date fair values. Any benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash inflow and cash outflow from operating activities. The stock-based compensation related to awards that are expected to vest is amortized using the straight-line method over the awards vesting term, which is generally four years.
The fair value of share-option awards is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model considers, among other factors, the underlying fair value of common stock, the expected term of the option award, expected volatility of our common stock and expected future dividends, if any.
Forfeitures of awards are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from initial estimates or if future forfeitures are expected to differ from recent actual or
F-14
previously expected forfeitures. 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 option awards issued to non-employees are recorded at their fair value on the awards vesting date. We use the Black-Scholes option pricing model to estimate the fair value of share options granted to non-employees at each vesting date to determine the appropriate charge to stock-based compensation.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We account for uncertain tax positions using a two-step process whereby (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties accrued on any unrecognized tax benefits as a component of provision for income tax in the consolidated statement of operations.
Use of Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated 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 certain assets and liabilities. These judgments, assumptions and estimates include but are not limited to the following: (i) fair value determinations for loans, notes and certificates; (ii) stock-based compensation expense; (iii) provision for income taxes, net of valuation allowance for deferred tax assets; (iv) consolidation of variable interest entities; and (v) fair value determinations for servicing assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, loans financed directly by us and the related accrued interest receivable, and deposits with service providers. We hold our cash and cash equivalents and restricted cash in accounts at regulated domestic 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 exceeds the FDIC insured amounts.
F-15
Impact of New Accounting Standards (Unaudited)
In May, 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers which provides a single comprehensive revenue recognition model for all contracts with customers. The standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. This ASU is effective for annual reporting periods beginning after December 15, 2016 for public entities. Early adoption is not permitted. We are currently evaluating the impact of the new update on our consolidated financial statements.
In August, 2014, FASB issued ASU 2014-13 Consolidation (Topic 810)Measuring the Financial Assets and The Financial Liabilities of a Consolidated Collateralized Financing Entity to amend the existing standards. This ASU provides an alternative to current fair value measurement guidance to an entity that consolidates a collateralized financing entity (CFE) that has elected the fair value option for the financial assets and financial liabilities. If elected, the entity could measure both the financial assets and the financial liabilities of the CFE by using the fair value of the financial assets or financial liabilities, whichever is more observable. The election would effectively eliminate any measurement difference previously reflected in earnings and attributed to the reporting entity in the consolidated statements of operations. The guidance is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. We are currently evaluating the impact of the new update on our consolidated financial statements.
3. Net Income (Loss) Per Share and Net Income (Loss) Attributable to Common Stockholders
Basic net income (loss) per share (EPS) is the amount of net income (loss) available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of net income (loss) available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, convertible preferred stock and warrants. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive.
We calculate EPS using the two-class method. The two-class method allocates net income that otherwise would have been available to common shareholders to holders of participating securities. We consider all series of our convertible preferred stock to be participating securities due to their non-cumulative dividend rights. As such, net income allocated to these participating securities, which include participation rights in undistributed earnings (see Note 12Stockholders Equity), are subtracted from net income to determine total undistributed net income to be allocated to common stockholders. All participating securities are excluded from basic weighted-average common shares outstanding.
F-16
The following table details the computation of the basic and diluted net income (loss) per share (dollars in thousands, except shares and per share data):
Year Ended
March 31, 2012 |
Nine Months
Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months
Ended September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(unaudited) |
||||||||||||||||||||
Net income (loss) |
$ | (11,944 | ) | $ | (4,238 | ) | $ | 7,308 | $ | 4,450 | $ | (23,857 | ) | |||||||
Less: Net income allocated to participating securities (1) |
| | (7,117 | ) | (4,450 | ) | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) available to common shareholders after required adjustments for the calculation of basic and diluted net income per common share |
$ | (11,944 | ) | $ | (4,238 | ) | $ | 191 | $ | | $ | (23,857 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Basic weighted-average common shares outstanding |
35,125,628 | 41,359,676 | 51,557,136 | 50,457,948 | 57,958,838 | |||||||||||||||
Weighted-average effect of dilutive securities: |
||||||||||||||||||||
Stock Options |
| | 28,542,404 | 27,170,816 | | |||||||||||||||
Warrants |
| | 1,327,436 | 1,525,148 | | |||||||||||||||
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|
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|
|
|
|
|||||||||||
Diluted weighted-average common shares outstanding |
35,125,628 | 41,359,676 | 81,426,976 | 79,153,912 | 57,958,838 | |||||||||||||||
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|
|||||||||||
Net income (loss) per common share: |
||||||||||||||||||||
Basic |
$ | (0.34 | ) | $ | (0.10 | ) | $ | 0.00 | $ | | $ | (0.41 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Diluted |
$ | (0.34 | ) | $ | (0.10 | ) | $ | 0.00 | $ | | $ | (0.41 | ) | |||||||
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|
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|
|
|
|
(1) | In a period with net income, both earnings and dividends (if any) are allocated to participating securities. In a period with a net loss, only dividends (if any) are allocated to participating securities. |
Unaudited Pro Forma Net Income (Loss) per Share
Pro forma basic and diluted net income (loss) per share were computed to give effect to the automatic conversion of Series A convertible preferred stock, Series B convertible preferred stock, Series C convertible preferred stock, Series D convertible preferred stock, Series E convertible preferred stock and Series F convertible preferred stock using the if converted method as though the conversion had occurred as of the beginning of the period presented or the original date of issuance, if later, and the issuance of shares of common stock upon the automatic conversion and exercise of certain warrants to purchase shares of Series A convertible preferred stock and the automatic exercise of certain warrants to purchase common stock upon the completion of our initial public offering.
F-17
The unaudited basic and diluted pro forma per common share calculations are presented below (in thousands except share and per share amounts):
Year Ended
December 31, 2013 |
Nine Months
Ended September 30, 2014 |
|||||||
Net income (loss) available to common stockholders, as reported |
$ | 7,308 | $ | (23,857 | ) | |||
Weighted-average shares used to compute net income (loss) per share available to common stockholders, basic |
51,557,136 | 57,958,838 | ||||||
Pro forma adjustments to reflect conversion of convertible preferred stock |
239,822,864 | 245,622,114 | ||||||
Pro forma adjustments to reflect conversion of convertible preferred stock warrants and certain common stock warrants (1) |
386,192 | 27,848 | ||||||
|
|
|
|
|||||
Weighted-average shares to compute pro forma net income (loss) per share available to common stockholders, basic |
291,766,192 | 303,608,800 | ||||||
Dilutive effect of stock options |
28,542,404 | | ||||||
Dilutive effect of warrants |
3,022,954 | | ||||||
|
|
|
|
|||||
Weighted-average shares to compute pro forma net income (loss) per share available to common stockholders, diluted |
323,331,550 | 303,608,800 | ||||||
|
|
|
|
|||||
Proforma net income (loss) per common share: |
||||||||
Basic |
$ | 0.03 | $ | (0.08 | ) | |||
Diluted |
$ | 0.02 | $ | (0.08 | ) |
(1) | Assumes the automatic conversion and exercise of warrants to purchase a maximum of 331,616 shares of Series A convertible preferred stock and automatic exercise of warrants to purchase a maximum of 54,576 shares of common stock for the year ended December 31, 2013. Assumes the automatic exercise of warrants to purchase a maximum of 27,848 shares of common stock for the nine months ended September 30, 2014. Upon the completion of our initial public offering, these warrants will automatically be net exercised for common stock, resulting in the issuance of fewer shares. |
4. Fair Value of Financial Instruments Measured at Fair Value
Loans, Notes and Certificates
Our marketplace is where borrowers and investors engage in transactions relating to standard or custom program loans. Standard program loans are unsecured, fixed rate, three or five year personal loans in amounts ranging from $1,000 to $35,000 made to borrowers meeting strict credit criteria, including a FICO score of at least 660. Custom program loans are generally new offerings and loans that do not meet the requirements of the standard program and/or loans with longer maturities than we believe to be attractive to most note investors. Currently, custom program loans include small business, education and patient finance loans. Small business loans are unsecured and fixed rate loans in amounts ranging from $15,000 to $100,000, with various maturities between one and five years.
Education and patient finance loans are issued in amounts ranging from $499 to $40,000 with various maturities between 24 and 84 months for term loans as well as a revolving product with a promotional period ranging from six to 24 months that is interest free if the loan balance is paid in full during that period. Loans facilitated by Springstone are originated, owned and serviced by the issuing banks and are therefore not recorded on our consolidated balance sheet nor are the loans cash flows recorded on our consolidated statement of cash flows.
Investors can invest in loans that are offered through our marketplace. We issue notes and the Trust issues certificates.
We use fair value measurements to record fair value adjustments to loans and the related notes and certificates that are recorded at fair value on a recurring basis.
F-18
Loans and the related notes and certificates do not trade in an active market with readily observable prices. Accordingly, the fair value of loans and the related notes and certificates are determined using a discounted cash flow methodology utilizing assumptions market participants use for credit losses, discount rates, changes in the interest rate environment, and other factors. Fair value measurements of our loans and the related notes and certificates use significant unobservable inputs and, accordingly, we classify them as Level 3.
We have ongoing monitoring procedures in place for our Level 3 assets and liabilities that use such valuation models. These procedures are designed to provide reasonable assurance that models continue to perform as expected after approved. All valuation models are subject to ongoing review by business-unit-level management and the executive management team.
At December 31, 2012, December 31, 2013, and September 30, 2014, loans, notes and certificates measured at fair value on a recurring basis were (in thousands):
Loans at Fair Value | Notes and Certificates at Fair Value | |||||||||||||||||||||||
December 31, |
September 30,
2014 |
December 31, |
September 30,
2014 |
|||||||||||||||||||||
2012 | 2013 | 2012 | 2013 | |||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||
Aggregate principal balance outstanding |
$ | 791,774 | $ | 1,849,042 | $ | 2,566,477 | $ | 795,842 | $ | 1,859,982 | $ | 2,584,441 | ||||||||||||
Fair valuation adjustments |
(10,559 | ) | (20,000 | ) | (32,806 | ) | (10,526 | ) | (19,992 | ) | (32,801 | ) | ||||||||||||
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Fair value |
$ | 781,215 | $ | 1,829,042 | $ | 2,533,671 | $ | 785,316 | $ | 1,839,990 | $ | 2,551,640 | ||||||||||||
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At December 31, 2013, loans underlying notes and certificates had original terms of 36 months or 60 months, had monthly payments with fixed interest rates ranging from 5.42% to 26.06% and had various maturity dates through December 2018. At September 30, 2014, outstanding loans underlying notes and certificates had original maturities between 12 and 60 months, had monthly payments with fixed interest rates ranging from 5.42% to 29.90% and had various maturity dates through September 2019 (unaudited).
Loan Servicing Rights
We record servicing assets and liabilities at their estimated fair values when we sell whole loans to unrelated third-party whole loan buyers or when the servicing contract commences, and on a recurring basis thereafter.
At December 31, 2013, loans underlying loan servicing rights had a total principal balance of $0.41 billion, original terms between 36 months and 60 months and had monthly payments with fixed interest rates ranging from 6.00% to 26.06% and various maturity dates through December, 2018. At September 30, 2014, loans underlying loan servicing rights had a total principal balance of $1.37 billion, original terms between 12 and 60 months, had monthly payments with fixed interest rates ranging from 5.90% to 33.15% and had various maturity dates through September 2019 (unaudited).
F-19
We determined the fair values of loans, notes and certificates and servicing assets and liabilities using significant unobservable inputs and methods that are categorized in the fair value hierarchy on Level 3, as follows (in thousands):
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Fair Value | |||||||||||||
December 31, 2012 |
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Assets: |
||||||||||||||||
Loans at fair value |
$ | | $ | | $ | 781,215 | $ | 781,215 | ||||||||
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Total assets |
$ | | $ | | $ | 781,215 | $ | 781,215 | ||||||||
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Liabilities: |
||||||||||||||||
Notes and certificates |
$ | | $ | | $ | 785,316 | $ | 785,316 | ||||||||
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|
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|
|
|
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Total liabilities |
$ | | $ | | $ | 785,316 | $ | 785,316 | ||||||||
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December 31, 2013 |
||||||||||||||||
Assets: |
||||||||||||||||
Loans at fair value |
$ | | $ | | $ | 1,829,042 | $ | 1,829,042 | ||||||||
Servicing asset |
534 | 534 | ||||||||||||||
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|
|
|
|
|
|
|
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Total assets |
$ | | $ | | $ | 1,829,576 | $ | 1,829,576 | ||||||||
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Liabilities: |
||||||||||||||||
Notes and certificates |
$ | | $ | | $ | 1,839,990 | $ | 1,839,990 | ||||||||
Servicing liability |
936 | 936 | ||||||||||||||
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|
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|
|
|
|
|
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Total liabilities |
$ | | $ | | $ | 1,840,926 | $ | 1,840,926 | ||||||||
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September 30, 2014 (unaudited) |
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Assets: |
||||||||||||||||
Loans at fair value |
$ | | $ | | $ | 2,533,671 | $ | 2,533,671 | ||||||||
Servicing asset |
1,520 | 1,520 | ||||||||||||||
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|
|
|
|
|
|
|
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Total assets |
$ | | $ | | $ | 2,535,191 | $ | 2,535,191 | ||||||||
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Liabilities: |
||||||||||||||||
Notes and certificates |
$ | | $ | | $ | 2,551,640 | $ | 2,551,640 | ||||||||
Servicing liability |
3,712 | 3,712 | ||||||||||||||
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|
|
|
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Total liabilities |
$ | | $ | | $ | 2,555,352 | $ | 2,555,352 | ||||||||
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Instruments are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. Our fair value approach for Level 3 instruments primarily uses unobservable inputs, but may also include observable, actively quoted components derived from external sources. 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.
F-20
The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis at December 31, 2012, December 31, 2013 and September 30, 2014 (in thousands):
Loans |
Notes and
Certificates |
|||||||
Fair value at December 31, 2012 |
$ | 781,215 | $ | 785,316 | ||||
Purchases of loans |
2,064,628 | | ||||||
Issuances of notes and certificates |
| 1,618,269 | ||||||
Principal payments |
(511,232 | ) | (504,330 | ) | ||||
Whole loan sales |
(446,224 | ) | | |||||
Recoveries from sale and collection of charged-off loans |
(1,716 | ) | (1,669 | ) | ||||
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|
|
|
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Carrying value before fair value adjustments |
1,886,671 | 1,897,586 | ||||||
Fair valuation adjustments, included in earnings |
(57,629 | ) | (57,596 | ) | ||||
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|
|
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Fair value at December 31, 2013 |
$ | 1,829,042 | $ | 1,839,990 | ||||
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|
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Purchases of loans (unaudited) |
2,628,758 | | ||||||
Issuances of notes and certificates (unaudited) |
| 1,534,011 | ||||||
Whole loan sales (unaudited) |
(1,094,482 | ) | | |||||
Principal payments (unaudited) |
(739,506 | ) | (732,343 | ) | ||||
Recoveries from sale and collection of charged-off loans (unaudited) |
(5,178 | ) | (5,153 | ) | ||||
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|
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Carrying value before fair value adjustments (unaudited) |
2,618,634 | 2,636,505 | ||||||
Fair valuation adjustments, included in earnings (unaudited) |
(84,963 | ) | (84,865 | ) | ||||
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|
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Fair value at September 30, 2014 (unaudited) |
$ | 2,533,671 | $ | 2,551,640 | ||||
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|
The fair values of loans and the related notes and certificates are determined using a discounted cash flow model utilizing estimates for credit losses, changes in the interest rate environment, and other factors. For notes and certificates, we also consider risk factors such as our continued profitability, ability to operate on a cash-flow positive basis and liquidity position. The majority of fair valuation adjustments included in earnings is attributable to changes in estimated instrument-specific future credit losses. All fair valuation adjustments were related to Level 3 instruments for the year ended December 31, 2013 and for the nine months ended September 30, 2014 (unaudited). A specific loan that is projected to have higher future default losses than previously estimated has lower expected future cash flows over its remaining life, which reduces its estimated fair value. Conversely, a specific loan that is projected to have lower future default losses than previously estimated has increased expected future cash flows over its remaining life, which increases its fair value. Because the payments to holders of notes and certificates directly reflect the payments received on loans, a reduction or increase of the expected future payments on loans will decrease or increase the estimated fair values of the related notes and certificates. Expected losses and actual loan charge-offs on loans are offset to the extent that the loans are financed by notes and certificates that absorb the related loan losses.
The fair value adjustments for loans were largely offset by the fair value adjustments of the notes and certificates due to the member payment dependent design of the notes and certificates and because the principal balances of the loans were very close to the combined principal balances of the notes and certificates. Accordingly, the net fair value adjustment losses for loans, notes and certificates were $0.001 million, $0.6 million, $0.03 million and $0.1 million for the year ended March 31, 2012, the nine months ended December 31, 2012, the year ended December 31, 2013 and the nine months ended September 30, 2014 (unaudited), respectively.
At December 31, 2012, we had 576 loans that were 90 days or more past due (which includes non-accrual loans) or loans where the borrower has filed for bankruptcy or is deceased; these loans had a total outstanding principal balance of $6.4 million, aggregate adverse fair value adjustments totaling $5.7 million and an aggregate fair value of $0.7 million. At December 31, 2013, we had 989 loans that were 90 days or more past due (which
F-21
includes non-accrual loans) or loans where the borrower has filed for bankruptcy or is deceased; these loans had a total outstanding principal balance of $10.2 million, aggregate adverse fair value adjustments totaling $9.1 million and an aggregate fair value of $1.1 million. At September 30, 2014, we had 1,304 loans that were 90 days or more past due (which includes non-accrual loans) or loans where the borrower has filed for bankruptcy or is deceased; these loans had a total outstanding principal balance of $15.2 million, aggregate adverse fair value adjustments of $13.8 million and an aggregate fair value of $1.4 million. (Unaudited.)
We place loans on non-accrual status upon becoming 120 days past due. At December 31, 2013, we had 111 loans that were over 120 days past due and classified as non-accrual loans, which had a total outstanding principal balance of $1.1 million, aggregate adverse fair value adjustments totaling $0.9 million and an aggregate fair value of $0.2 million. At September 30, 2014, we had 51 loans that were over 120 days past due and classified as non-accrual loans, which had a total outstanding principal balance of $0.5 million, aggregate adverse fair value adjustments of $0.4 million and an aggregate fair value of $0.1 million. (Unaudited.)
Significant Unobservable Inputs
The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurements at December 31, 2013 and September 30, 2014:
December 31, 2013 | ||||||||||||||
Range of Inputs | ||||||||||||||
Unobservable Input |
Minimum | Maximum |
Weighted
Average |
|||||||||||
Loans, notes & certificates and servicing asset/liability |
Discount rate |
5.9 | % | 15.9 | % | 10.2 | % | |||||||
Loans, notes & certificates and servicing asset/liability |
Net cumulative expected loss |
2.1 | % | 23.7 | % | 10.1 | % | |||||||
Servicing asset/liability |
Market servicing rate (% per annum on loan balance) |
0.4 | % | 0.4 | % | 0.4 | % |
September 30, 2014 | ||||||||||||||
Range of Inputs | ||||||||||||||
Unobservable Input |
Minimum | Maximum |
Weighted
Average |
|||||||||||
Loans, notes & certificates and servicing asset/liability |
Discount rate |
5.2 | % | 23.6 | % | 10.6 | % | |||||||
Loans, notes & certificates and servicing asset/liability |
Net cumulative expected loss |
0.3 | % | 21.8 | % | 9.7 | % | |||||||
Servicing asset/liability |
Market servicing rate (% per annum on loan balance) |
0.5 | % | 0.7 | % | 0.5 | % |
The valuation technique used for our Level 3 assets and liabilities, as presented in the previous table, is described as follows:
Loans, Notes and Certificates
Discounted Cash Flow . Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
F-22
Significant unobservable inputs presented in the previous table are those we consider significant to the estimated fair values of the Level 3 assets and liabilities. We consider unobservable inputs to be significant, if by their exclusion, the estimated fair value of the Level 3 asset or liability would be impacted by a significant percentage change, or based on qualitative factors such as the nature of the instrument and significance of the unobservable inputs relative to other inputs used within the valuation. Following is a description of the significant unobservable inputs provided in the table.
Discount Rate. Discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, the fair value, of the loans, notes and certificates. The discount rates for the projected net cash flows of loans are our estimates of the rates of return that investors in unsecured consumer credit obligations would require when investing in the various credit grades of loans. The discount rates for the projected net cash flows of the notes and certificates are our estimates of the rates of return that investors in unsecured consumer credit obligations would require when investing in notes issued pursuant to a shelf registration statement and certificates issued by the Trust with cash flows dependent on specific grades of loans. Discount rates for existing loans, notes and certificates are adjusted to reflect the time value of money. A risk premium component is implicitly included in the discount rates to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments cash flows resulting from risks such as credit and liquidity.
Net Cumulative Expected Loss. Net cumulative expected loss is an estimate of the net cumulative principal payments that will not be repaid over the entire life of a new loans, note or certificate, expressed as a percentage of the original principal amount of the loans, note or certificate. The estimated net cumulative loss is the sum of the net losses estimated to occur each month of the life of a new loans, note or certificate. Therefore, the total net losses estimated to occur over the remaining maturity of existing loans, notes and certificates are less than the estimated net cumulative losses of comparable new loans, notes and certificates. A given months estimated net losses are a function of two variables:
(i) | estimated default rate, which is an estimate of the probability of not collecting the remaining contractual principal amounts owed and, |
(ii) | estimated net loss severity, which is the percentage of contractual principal cash flows lost in the event of a default, net of the average net recovery, expected to be received on a defaulted loans, note or certificate. |
Loan Servicing Rights
Discounted Cash F low . Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table above are those we consider significant to the estimated fair values of the Level 3 assets and liabilities. We consider unobservable inputs to be significant, if by their exclusion, the estimated fair value of the Level 3 asset or liability would be impacted by a significant percentage change, or based on qualitative factors such as the nature of the instrument and significance of the unobservable inputs relative to other inputs used within the valuation.
The following is a description of the significant unobservable inputs provided in the table.
Market Servicing R ate. We estimate an adequate servicing compensation assumption as a measure of what a market participant would earn to service the loans that we sell to third parties. We estimated this market servicing rate based on observable market rates for other loan types in the industry, adjusted for the unique loan attributes that are present in such loans we sell (i.e., unsecured fixed rate fully amortizing loans, ACH loan payments, intermediate terms, prime credit grades and sizes) and a market servicing benchmarking analysis performed by an independent valuation firm.
F-23
Discount R ate. Discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, the fair value, of the loan servicing rights. The discount rates for the projected net cash flows of loan servicing rights are our estimates of the rates of return that investors in servicing rights for unsecured consumer credit obligations would require for the various credit grades of the underlying loans. Discount rates for servicing rights on existing loans are adjusted to reflect the time value of money. A risk premium component is implicitly included in the discount rates to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments cash flows resulting from risks such as credit and liquidity.
Net Cumulative Expected L oss . Net cumulative expected loss is an estimate of the net cumulative principal payments that will not be repaid over the entire life of a loan expressed as a percentage of the original principal amount of the loan. The estimated net cumulative loss is the sum of the net losses estimated to occur each month of the life of a new loan. A given months estimated net losses are a function of two variables:
(i) | estimated default rate, which is an estimate of the probability of not collecting the remaining contractual principal amounts owed, and |
(ii) | estimated net loss severity, which is the percentage of contractual principal cash flows lost in the event of a default, net of the average net recovery, expected to be received on a defaulted loan. |
The following table presents additional information about Level 3 servicing assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2013 and for the nine months ended September 30, 2014 (unaudited) (in thousands):
Servicing
Assets |
Servicing
Liabilities |
|||||||
(unaudited) | ||||||||
Fair value at December 31, 2012 |
$ | | $ | | ||||
Additions |
587 | 1,273 | ||||||
Changes in fair value due to: |
||||||||
Realization of expected cash flows |
(53 | ) | (337 | ) | ||||
Changes in market inputs or assumptions used in the valuation model |
| | ||||||
|
|
|
|
|||||
Fair value at December 31, 2013 |
$ | 534 | $ | 936 | ||||
|
|
|
|
|||||
Additions (unaudited) |
1,885 | 3,464 | ||||||
Changes in fair value due to: |
||||||||
Realization of expected cash flows (unaudited) |
(555 | ) | (1,275 | ) | ||||
Changes in market inputs or assumptions used in the valuation model (unaudited) |
(344 | ) | 587 | |||||
|
|
|
|
|||||
Fair value at September 30, 2014 (unaudited) |
$ | 1,520 | $ | 3,712 | ||||
|
|
|
|
Our and the Trusts obligation to pay principal and interest on any note or certificate is equal to the pro-rata portion of the payments, if any, received on the related loan subject to applicable fees. The gross effective interest rate associated with notes or certificates is the same as the interest rate earned on the underlying loan. At December 31, 2013 and September 30, 2014, the discounted cash flow methodology used to estimate the notes and certificates fair values uses the same projected net cash flows as their related loan. The discount rates for the projected net cash flows of the notes and certificates are our estimates of the rates of return, including risk premiums (if significant) that investors in unsecured consumer credit obligations would require when investing in notes issued pursuant to a shelf registration statement and certificates issued by the Trust with cash flows dependent on specific credit grades of loans.
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
The discounted cash flow technique that we use to determine the fair value of our Level 3 loans, notes and certificates value requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, changes in these unobservable inputs may
F-24
have a significant impact on fair value. Certain of these unobservable inputs will (in isolation) have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. For example, increases in the discount rate and net cumulative expected loss rate each will reduce the estimated fair value of loans, notes and certificates. When multiple inputs are used within the valuation technique of a loan, note or certificate, a change in one input in a certain direction may be offset by an opposite change in another input.
The discounted cash flow valuation technique we use to determine the fair value of Level 3 loan servicing rights requires certain significant unobservable inputs including adequate servicing compensation, net cumulative loss rates, and discount rates. An increase in any of these unobservable inputs will reduce the fair value of the loan servicing rights and alternatively, a decrease in any one of these inputs would result in the loan servicing rights increasing in value.
5. Property, Equipment and Software, net
Property, equipment and software consist of the following (in thousands):
December 31, |
September 30,
2014 |
|||||||||||
2012 | 2013 | |||||||||||
(unaudited) | ||||||||||||
Internally developed software |
$ | 358 | $ | 4,188 | $ | 12,364 | ||||||
Computer equipment |
1,104 | 4,019 | 7,610 | |||||||||
Leasehold improvements |
33 | 2,700 | 4,488 | |||||||||
Construction in progress |
35 | 1,978 | 126 | |||||||||
Purchased software |
453 | 913 | 2,829 | |||||||||
Furniture and fixtures |
65 | 836 | 2,244 | |||||||||
Other |
21 | 26 | | |||||||||
|
|
|
|
|
|
|||||||
Total property and equipment |
2,069 | 14,660 | 29,661 | |||||||||
Accumulated depreciation and amortization |
(491 | ) | (2,065 | ) | (5,975 | ) | ||||||
|
|
|
|
|
|
|||||||
Property, equipment and software, net |
$ | 1,578 | $ | 12,595 | $ | 23,686 | ||||||
|
|
|
|
|
|
Depreciation and amortization expense on property, equipment and software for the year ended March 31, 2012, the nine months ended December 31, 2012 and year ended December 31, 2013 was $0.2 million, $0.2 million and $1.7 million, respectively. Depreciation and amortization expense on property, equipment and software for the nine months ended September 30, 2014 and September 30, 2013 was $4.1 million and $0.9 million, respectively (unaudited).
F-25
6. Other Assets
Other assets consist of the following (in thousands):
December 31, |
September 30,
2014 |
|||||||||||
2012 | 2013 | |||||||||||
(unaudited) | ||||||||||||
Receivable from investors |
$ | | $ | 18,116 | $ | 740 | ||||||
Prepaid expenses |
1,538 | 3,546 | 3,777 | |||||||||
Prepaid compensation |
| | 2,988 | |||||||||
Prepaid offering costs |
| | 2,940 | |||||||||
Loan servicing assets at fair value |
| 534 | 1,520 | |||||||||
Tenant improvement receivable |
| 504 | | |||||||||
Accounts receivable |
79 | 439 | 2,538 | |||||||||
Debt issuance costs, net |
| | 993 | |||||||||
Deposits |
696 | 193 | 354 | |||||||||
Other |
53 | 589 | 671 | |||||||||
|
|
|
|
|
|
|||||||
Total other assets |
$ | 2,366 | $ | 23,921 | $ | 16,521 | ||||||
|
|
|
|
|
|
7. Springstone Acquisition (unaudited)
On April 17, 2014, we acquired all of the outstanding limited liability company interests of Springstone Financial, LLC (Springstone). As a result of the closing of the acquisition, Springstone became our wholly owned subsidiary.
Springstone facilitates education and patient finance loans through a network of providers utilizing two issuing banks. Each of Springstones issuing banks originates, holds, and services the loans they issue. Springstone earns fee revenue from providers for facilitating loans to their customers. The acquisition of Springstone expands the services we offer. We have included the financial results of Springstone in the consolidated financial statements from the date of acquisition.
Under the terms of the purchase agreement, the sellers received at the closing an aggregate of $113 million in cash and $25 million worth of shares of our Series F convertible preferred stock. In connection with the acquisition, we also paid $2.4 million for transaction costs incurred by Springstone. For accounting purposes, the purchase price was $111.8 million, which was comprised of $109.0 million in cash and shares of Series F convertible preferred stock with an aggregate value of $2.8 million. To secure the retention of certain key employees, a total of $25.6 million comprised of $22.1 million of shares of Series F convertible preferred stock (Escrow Shares) and $3.5 million of cash were placed in a third-party escrow and are subject to certain vesting and forfeiture conditions applicable to these employees continuing employment over a three-year period from the closing. These amounts will be accounted for as a compensation arrangement and expensed over the three-year vesting period. Additionally, $19.0 million of the cash consideration and certain Escrow Shares were placed in a third-party escrow for 15 months from the closing date to secure, in part, the indemnification obligations of the sellers under the purchase agreement.
The cash portion of the consideration was funded by a combination of cash from us and proceeds from a debt financing and Series F convertible preferred stock financing (see Note 10Term Loan and Note 12Stockholders Equity).
F-26
We have completed the allocation of the purchase price to acquired assets and liabilities with the exception of finalizing the determination of certain contingent liabilities and the finalization of any deferred tax asset or liability as of the acquisition date. The preliminary purchase price allocation as of the acquisition date is as follows (in thousands):
Fair Value | ||||
Assets: |
||||
Cash |
$ | 2,256 | ||
Restricted cash |
1,581 | |||
Property, equipment and software |
366 | |||
Other assets |
599 | |||
Identified intangible assets |
40,200 | |||
Goodwill |
72,592 | |||
Liabilities: |
||||
Accounts payable |
239 | |||
Accrued expenses and other liabilities |
5,536 | |||
|
|
|||
Total purchase consideration |
$ | 111,819 | ||
|
|
The goodwill balance is primarily attributed to the expected operational synergies, the combined workforce and the future development initiative of the combined workforce. Goodwill is expected to be deductible for U.S. income tax purposes.
The amounts of net revenue and earnings (losses) of Springstone included in our consolidated statement of operations from the acquisition date of April 17, 2014 to September 30, 2014 were $10.4 million and $(4.4) million, respectively. We have recognized acquisition-related costs of $2.3 million for the nine months ended September 30, 2014 and have reported this in general and administrative expense. We did not recognize acquisition-related costs for the nine months ended September 30, 2013.
The following pro forma financial information summarizes the combined results of operations for us and Springstone, as though the companies were combined as of January 1, 2013. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have resulted had the acquisition occurred as of January 1, 2013, nor is it indicative of future operating results. The pro forma results presented include interest expense on the debt financing, amortization of acquired intangible assets, compensation expense related to the post-acquisition compensation arrangements entered into with the continuing employees and tax expenses (in thousands):
Nine Months Ended
September 30, |
||||||||
2014 | 2013 | |||||||
(unaudited) | ||||||||
Total net revenue |
$ | 148,317 | $ | 75,891 | ||||
Net loss (1) |
$ | (21,403 | ) | $ | (15,623 | ) | ||
Basic net loss per share attributable to common stockholders |
$ | (0.37 | ) | $ | (0.31 | ) | ||
Diluted net loss per share attributable to common stockholders |
$ | (0.37 | ) | $ | (0.31 | ) |
(1) | Net loss for the nine months ended September 30, 2013 includes $8.6 million of one-time acquisition-related costs and compensation expenses. |
F-27
8. Goodwill and Other Intangible Assets (Unaudited)
Goodwill
Goodwill consisted of the following (in thousands):
Balance at December 31, 2013. |
$ | | ||
Acquisition of Springstone |
72,592 | |||
|
|
|||
Balance at September 30, 2014 |
$ | 72,592 | ||
|
|
There was no impairment of goodwill during the nine months ended September 30, 2014. During the third quarter of 2014, we recorded an immaterial amount of adjustment to goodwill for the finalization of the net working capital balance and a revenue refund liability as of the acquisition date.
Intangible Assets
Intangible assets acquired are as follows as of September 30, 2014 (unaudited) (dollars in thousands):
Gross
Carrying Value |
Accumulated
Amortization |
Net
Carrying Value |
Remaining
Useful Life |
|||||||||||||
Customer relationships |
$ | 39,500 | $ | (2,382 | ) | $ | 37,118 | 13.5 | ||||||||
Technology |
400 | (60 | ) | 340 | 2.5 | |||||||||||
Brand name |
300 | (68 | ) | 232 | 1.5 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total intangible assets subject to amortization |
$ | 40,200 | $ | (2,510 | ) | $ | 37,690 | 13.3 | ||||||||
|
|
|
|
|
|
The customer relationship intangible assets are being amortized on an accelerated basis over a 14 year period. The technology and brand name intangible assets are being amortized straight line over three and two years, respectively. Amortization expense associated with other intangible assets for the nine months ended September 30, 2014 was $2.5 million.
The expected future amortization expense for intangible assets as of September 30, 2014 is as follows (unaudited) (in thousands):
Remainder of 2014 |
$ | 1,388 | ||
2015 |
5,287 | |||
2016 |
4,801 | |||
2017 |
4,287 | |||
2018 |
3,872 | |||
Thereafter |
18,055 | |||
|
|
|||
Total |
$ | 37,690 | ||
|
|
F-28
9. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
December 31, | September 30, | |||||||||||
2012 | 2013 | 2014 | ||||||||||
(unaudited) | ||||||||||||
Accrued compensation |
$ | 2,414 | $ | 5,243 | $ | 8,902 | ||||||
Accrued service fees |
952 | 2,057 | 7,128 | |||||||||
Loan servicing liability at fair value |
| 936 | 3,712 | |||||||||
Contingent liabilities |
| | 1,875 | |||||||||
Deferred rent |
| 653 | 1,045 | |||||||||
Deferred tax liability |
| | 1,004 | |||||||||
Transaction fee refund reserve |
| | 682 | |||||||||
Deferred revenue |
| | 472 | |||||||||
Early stock option exercise liability |
| | 450 | |||||||||
Other accrued expenses |
| 239 | 734 | |||||||||
|
|
|
|
|
|
|||||||
Total accrued expenses and other liabilities |
$ | 3,366 | $ | 9,128 | $ | 26,004 | ||||||
|
|
|
|
|
|
10. Term Loan (Unaudited)
In connection with the acquisition of Springstone, we entered into a Credit and Guaranty Agreement with several lenders on April 16, 2014, under which the lenders made a $50.0 million term loan to us. In connection with our entry into the credit agreement, we entered into a Pledge and Security Agreement with Morgan Stanley Senior Funding, Inc. as Collateral Agent.
The term loan matures on April 16, 2017 and requires principal payments of $312,500 per quarter plus interest, with the remaining then-unpaid principal amount payable at maturity. The term loan can be prepaid at any time without premium or penalty, subject to a minimum prepayment of $1.0 million. The term loan is required to be prepaid in certain circumstances, including upon sales of assets other than loans and upon the issuance of debt or redeemable capital stock.
Borrowings under the credit agreement bear interest, which at our option may be either (i) a floating base rate tied to an underlying index plus an additional 1.25% per annum or (ii) a Eurocurrency rate (for an interest period of one, two, three or six months) plus an additional 2.25% per annum. If a Eurocurrency rate loan is selected, customary breakage costs are payable in the case of any prepayment on a date other than the last day of an interest period. The weighted-average interest rate on the term loan was 2.65% for the nine months ended September 30, 2014.
The term loan is also guaranteed by Springstone and LCA and is secured by a first priority lien and security interest in substantially all of our and our subsidiaries assets, not otherwise pledged or restricted, subject to certain exceptions.
The credit agreement and pledge and security agreement contain certain affirmative and negative covenants applicable to us and our subsidiaries. These include restrictions on our ability to make certain restricted payments, including restrictions on our ability to pay dividends, incur additional indebtedness, place liens on assets, merge or consolidate, make investments and enter into certain transactions with our affiliates. The credit agreement also requires us to maintain a maximum total leverage ratio (as defined in the credit agreement) of less than 5.50:1 initially, and decreasing to 3.50:1 after September 30, 2015 (on a consolidated basis). The total leverage ratio as of September 30, 2014 was 2.25:1.
As of September 30, 2014, the carrying value of the term loan was $49.2 million. At September 30, 2014, the current portion of the term loan was $1.2 million and the noncurrent portion outstanding was $48.0 million. We did not have a term loan outstanding balance at December 31, 2013.
F-29
In connection with the term loan, we capitalized $1.2 million of debt issuance costs. As of September 30, 2014, the net balance of debt issuance costs was $1.0 million. Interest expense on the term loan, including amortization of debt issuance cost, was $0.2 million during the nine months ended September 30, 2014. We did not have interest on the term loan for the nine months ended September 30, 2013.
Future principal payments on the term loan are payable as follows (unaudited, in thousands):
Remainder of 2014 |
$ | 312 | ||
2015 |
1,250 | |||
2016 |
1,250 | |||
2017 |
46,563 | |||
|
|
|||
Total principal payments |
$ | 49,375 | ||
|
|
|||
Unamortized discounts, net |
(156 | ) | ||
|
|
|||
Total |
$ | 49,219 | ||
|
|
11. Related-Party Transactions
Several of our executive officers and directors (including immediate family members) have opened investor accounts with us, made deposits and withdrawals to their accounts and purchased notes and certificates. All note and certificate purchases made by related parties were transacted on terms and conditions that were not more favorable than those obtained by other investors.
The following table summarizes deposits and withdrawals made by related parties whose transactions totaled $120,000 or more for the year ended March 31, 2012, the nine months ended December 31, 2012, the year ended December 31, 2013 and for the nine months ended September 30, 2014.
Role |
Year Ended
March 31, 2012 |
|||||||||||
Related Party |
Deposits | Withdrawals | ||||||||||
Daniel Ciporin |
Director | $ | 209,500 | $ | 158,113 | |||||||
John J. Mack |
Director | 1,700,000 | 199,265 | |||||||||
|
|
|
|
|||||||||
Total |
$ | 1,909,500 | $ | 357,378 | ||||||||
|
|
|
|
Role |
Nine Months Ended
December 31, 2012 |
|||||||||||
Related Party |
Deposits | Withdrawals | ||||||||||
Daniel Ciporin |
Director | $ | 500,000 | $ | 129,698 | |||||||
Jeffrey Crowe |
Director | 150,000 | | |||||||||
John J. Mack |
Director | 529,540 | 451,617 | |||||||||
|
|
|
|
|||||||||
Total |
$ | 1,179,540 | $ | 581,315 | ||||||||
|
|
|
|
Role |
Year Ended
December 31, 2013 |
|||||||||||
Related Party |
Deposits | Withdrawals | ||||||||||
Daniel Ciporin |
Director | $ | 600,000 | $ | 128,288 | |||||||
Jeffrey Crowe |
Director | 800,000 | 444,227 | |||||||||
John J. Mack |
Director | 405,118 | 617,779 | |||||||||
Larry Summers |
Director | 530,898 | | |||||||||
|
|
|
|
|||||||||
Total |
$ | 2,336,016 | $ | 1,190,294 | ||||||||
|
|
|
|
F-30
Role |
Nine Months Ended
September 30, 2014 |
|||||||||||
Related Party |
Deposits | Withdrawals | ||||||||||
(unaudited) |
||||||||||||
Daniel Ciporin |
Director | $ | 500,000 | $ | 62,855 | |||||||
John J. Mack |
Director | 950,000 | 69,317 | |||||||||
Larry Summers |
Director | 200,000 | | |||||||||
|
|
|
|
|||||||||
Total |
$ | 1,650,000 | $ | 132,172 | ||||||||
|
|
|
|
12. Stockholders Equity
Convertible Preferred Stock (in thousands, except share and per share amounts) (September 30, 2014 amounts unaudited)
We have shares of preferred stock authorized and outstanding as follows:
December 31, |
September 30,
2014 |
|||||||||||
2012 | 2013 | |||||||||||
(unaudited) | ||||||||||||
Preferred stock, $0.01 par value; 246,470,064 total shares authorized at December 31, 2012, December 31, 2013 and 250,614,174 total shares authorized at September 30, 2014: |
||||||||||||
Series A convertible preferred stock, 68,025,100 shares designated at December 31, 2012, December 31, 2013 and 67,651,596 shares designated at September 30, 2014; 65,270,988, 66,100,340 and 66,422,077 shares issued and outstanding at December 31, 2012, December 31, 2013 and September 30, 2014; aggregate liquidation preference of $17,371, $17,599 and $17,685 at December 31, 2012, December 31, 2013 and September 30, 2014 |
$ | 17,181 | $ | 17,402 | $ | 17,487 | ||||||
Series B convertible preferred stock, 65,642,104 shares designated at December 31, 2012, December 31, 2013 and 65,577,300 shares designated at September 30, 2014; 65,577,300 shares issued and outstanding at December 31, 2012, December 31, 2013 and September 30, 2014; aggregate liquidation preference of $12,268 at December 31, 2012, December 31, 2013 and September 30, 2014 |
12,164 | 12,164 | 12,164 | |||||||||
Series C convertible preferred stock, 62,486,436 shares designated at December 31, 2012, December 31, 2013 and September 30, 2104; 62,486,436 shares issued and outstanding at December 31, 2012, December 31, 2013 and September 30, 2014; aggregate liquidation preference of $24,490 at December 31, 2012, December 31, 2013 and September 30, 2014 |
24,388 | 24,388 | 24,388 | |||||||||
Series D convertible preferred stock, 36,030,712 shares designated at December 31, 2012, December 31, 2013 and September 30, 2014; 36,030,712 shares issued and outstanding at December 31, 2012, December 31, 2013 and September 30, 2014; aggregate liquidation preference of $32,044 at December 31, 2012, December 31, 2013 and September 30, 2014 |
31,943 | 31,943 | 31,943 | |||||||||
Series E convertible preferred stock, 14,285,712 shares designated at December 31, 2012, December 31, 2013 and 10,000,000 shares designated at September 30, 2014; 10,000,000 shares issued and outstanding at December 31, 2012, December 31, 2013 and September 30, 2014; aggregate liquidation preference of $17,500 at December 31, 2012, December 31, 2013 and September 30, 2014 |
17,347 | 17,347 | 17,347 | |||||||||
Series F convertible preferred stock, 0, 0 and 8,868,130 shares designated at December 31, 2012, December 31, 2013 and September 30, 2014; 0, 0 and 8,834,486 shares issued and outstanding at December 31, 2012, December 31, 2013 and September 30, 2014; aggregate liquidation preference of $0, $0 and $89,858 at December 31, 2012, December 31, 2013 and September 30, 2014 |
| | 89,661 | |||||||||
|
|
|
|
|
|
|||||||
Subtotal |
$ | 103,023 | $ | 103,244 | $ | 192,990 | ||||||
|
|
|
|
|
|
|||||||
Unamortized compensation associated with Series F convertible preferred stock |
| | (15,690 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total preferred stock |
$ | 103,023 | $ | 103,244 | $ | 177,300 | ||||||
|
|
|
|
|
|
F-31
At December 31, 2013 and September 30, 2014, we had 1,635,760 and 1,189,392 shares of Series A convertible preferred stock subject to outstanding warrants and reserved for future issuance, respectively. Warrants to purchase Series A convertible preferred stock are fully exercisable with an exercise price of $0.2663 per share. The warrants expire in 2015 and 2018.
In June 2012, we issued 10.0 million shares of Series E convertible at $1.75 per share for aggregate gross cash consideration of $17.5 million. The shares are convertible into shares of our common stock, par value $0.01 per share, initially on a one-for-one basis, as adjusted from time to time pursuant to the anti-dilution provisions of the our certificate of incorporation. The two investors in the Series E convertible preferred stock were KPCB Holdings, Inc., as nominee (KPCB), and John J. Mack, a member of the our board of directors. In conjunction with the Series E financing, our board of directors appointed Mary Meeker, General Partner of KPCB, as a director. In connection with our private placement of Series E convertible preferred stock, we incurred transaction expenses of $0.2 million that were recorded as a reduction to gross proceeds.
In connection with the sale of Series E convertible preferred stock in June 2012, we filed an Amended and Restated Certificate of Incorporation with the State of Delaware, which reduced the total number of shares that we were authorized to issue from 632,184,352 shares to 606,470,064 shares, 360,000,000 shares of which were designated as common stock, and 246,470,064 shares of which were designated as preferred stock. Of the total shares of preferred stock, 68,025,100 shares were designated as Series A Preferred Stock, 65,642,104 shares were designated as Series B Preferred Stock, 62,486,436 shares were designated as Series C Preferred Stock, 36,030,712 shares were designated as Series D Preferred Stock and 14,285,712 shares were designated as Series E Preferred Stock. The number of authorized shares of common stock may be increased or decreased (but not below the number of shares of common stock then outstanding) by the affirmative vote of the holders of a majority of our preferred stock and common stock (voting together as a single class on an as-converted to common stock basis).
In connection with the Springstone acquisition, we sold an aggregate of 6,390,556 shares of our Series F convertible preferred stock, par value $0.01 per share (Financing Shares) for aggregate gross proceeds of approximately $65.0 million, pursuant to a Series F Preferred Stock Purchase Agreement. We sold the Financing Shares pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended; all investors in the financing were accredited investors (as defined under Rule 501 of Regulation D) and we made no general solicitation for the sale of the Financing Shares. The Financing Shares are convertible into shares of common stock, par value $0.01 per share, on a one-for-one basis, as adjusted from time to time pursuant to the anti-dilution provisions of our Restated Certificate of Incorporation. (Unaudited.)
In connection with the sale of Series F convertible preferred stock in April 2014, we filed a Restated Certificate of Incorporation with the State of Delaware, which increased the total number of shares that we were authorized to issue from 606,470,064 shares to 622,614,174, 372,000,000 shares of which were designated as common stock and 250,614,174 shares of which were designated as preferred stock. Of the total shares of preferred stock, 67,651,596 shares were designated as Series A Preferred Stock, 65,577,300 shares were designated as Series B Preferred Stock, 62,486,436 shares were designated as Series C Preferred Stock, 36,030,712 shares were designated as Series D Preferred Stock, 10,000,000 shares were designated as Series E Preferred Stock and 8,868,130 were designated as Series F Preferred Stock. (Unaudited.)
As part of the Springstone acquisition, the sellers received shares of our Series F convertible preferred stock having an aggregate value of $25 million (Share Consideration). $22.1 million of the Share Consideration is subject to certain vesting and forfeiture conditions over a three-year period for key continuing employees. This is accounted for as a compensation arrangement and expensed over the three-year vesting period. For the nine months ended September 30, 2014, we recognized $6.4 million of compensation expense, which is reported in general and administrative expenses related to this arrangement. (Unaudited.)
The outstanding shares of convertible preferred stock are not mandatorily or otherwise redeemable. The sale of all, or substantially all, of our assets, a consolidation or merger with another company, or a transfer of voting
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control in excess of 50% our voting power are all events that are deemed to be a liquidation and would trigger the payment of liquidation preferences under the preferred stock agreements. All such events require approval of our board of directors. However, in such events all holders of equal or more subordinate equity instruments would also be entitled to also receive the same form of consideration after any liquidation preferences. Therefore, based on the guidance of ASC 480-10-S99, the non-redeemable convertible preferred stock has been classified within stockholders equity on the consolidated balance sheet. See further discussion of the revision to the classification of our preferred stock from temporary equity to permanent stockholders equity in Note 2Summary of Significant Accounting PoliciesReclassifications. The significant terms of outstanding Series A, Series B, Series C, Series D, Series E and Series F convertible preferred stock are as follows:
Conversion Each share of convertible preferred stock is convertible, at the option of the holder, initially, into one share of common stock (subject to adjustments for events of dilution). Each share of convertible preferred stock will automatically be converted upon the earlier of: (i) the closing of an underwritten public offering of our common stock with aggregate gross proceeds that are at least $30.0 million; or (ii) the consent of the holders of a 55% majority of outstanding shares of convertible preferred stock, voting together as a single class, on an as-converted to common stock basis. Our preferred stock agreements contain certain anti-dilution provisions, whereby if we issue additional shares of capital stock for an effective price lower than the conversion price for a series of preferred stock immediately prior to such issue, then the existing conversion price of such series of preferred stock will be reduced. We determined that while our convertible preferred stock contains certain anti-dilution features, the conversion feature embedded within its convertible preferred stock does not require bifurcation under the guidance of ASC 815, Derivatives and Hedging Activities .
Liquidation preference Upon any liquidation, winding up or dissolution of us, whether voluntary or involuntary (Liquidation Event), before any distribution or payment shall be made to the holders of any common stock, the holders of convertible preferred stock shall, on a pari passu basis, be entitled to receive by reason of their ownership of such stock, an amount per share of Series A convertible preferred stock equal to $0.2663 (as adjusted for stock splits, recapitalizations and the like) plus all declared and unpaid dividends (Series A Preferred Liquidation Preference), an amount per share of Series B convertible preferred stock equal to $0.1871 (as adjusted for stock splits, recapitalizations and the like) plus all declared and unpaid dividends (Series B Preferred Liquidation Preference), an amount per share of Series C convertible preferred stock equal to $0.3919 (as adjusted for stock splits, recapitalizations and the like), an amount per share of Series D convertible preferred stock equal to $0.8894, an amount per share of Series E convertible preferred stock equal to $1.75 and an amount per share of Series F convertible preferred stock equal to $10.17 (unaudited) (as adjusted for stock splits, recapitalizations and the like). However, if upon any such Liquidation Event, our assets shall be insufficient to make payment in full to all holders of convertible preferred stock of their respective liquidation preferences, then the entire assets of ours legally available for distribution shall be distributed with equal priority between the preferred holders based upon the amounts such series was to receive. Any excess assets, after payment in full of the liquidation preferences to the convertible preferred stockholders, are then allocated to the holders of common and preferred stockholders, pro-rata, on an as-if-converted to common stock basis.
Dividends If and when declared by the Board, the holders of Series A, Series B, Series C, Series D and Series E convertible preferred stock, on a pari passu basis, will be entitled to receive non-cumulative dividends at a rate of 6% per annum in preference to any dividends on common stock (subject to adjustment for certain events). The holders of Series A, Series B, Series C, Series D, Series E and Series F convertible preferred stock are also entitled to receive with common stockholders, on an as-if-converted basis, any additional dividends issued by us. As of December 31, 2013 and September 30, 2014, we have not declared any dividends.
Voting rights Generally, preferred stockholders had one vote for each share of common stock that would have been issuable upon conversion of preferred stock. Voting as a separate class, and on an as-converted to common stock basis, the Series A convertible preferred stockholders were entitled to elect two members of our board of directors and the holders of Series B convertible preferred stockholders were entitled to elect one member of our board of directors. The Series C and Series D convertible preferred stockholders were not entitled to elect any members of our board of directors. The Series E convertible preferred stockholders were entitled to
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nominate members to our board of directors, and any nominee was subject to the vote of all convertible preferred stockholders. The holders of common stock, voting as a separate class, were entitled to elect one member of our board directors. The remaining directors were elected by the convertible preferred stockholders and common stockholders voting together as a single class on an as-converted to common stock basis.
In connection with the filing our Restated Certificate of Incorporation in April 2014, the Series A convertible preferred stockholders, voting together as a separate class on an as-converted to common stock basis, are entitled to elect two members of our board of directors and the holders of Series B convertible preferred stockholders, voting together as a separate class on an as-converted to common stock basis, are entitled to elect one member of our board of directors. The Series C, Series D, Series E and Series F convertible preferred stockholders are not entitled to elect any members of our board of directors. The holders of preferred stock, voting together as a separate class on an as-converted to common stock basis, are entitled to elect one member of our board of directors. The holders of common stock, voting together as a separate class, are entitled to elect one member of our board of directors. The remaining directors are elected by the convertible preferred stockholders and common stockholders voting together as a single class on an as-converted to common stock basis. (Unaudited.)
Common Stock
We have shares of common stock authorized and reserved for future issuance as follows as of:
December 31, 2013 | September 30, 2014 | |||||||
(unaudited) | ||||||||
Options to purchase common stock |
43,314,728 | 54,587,814 | ||||||
Options available for future issuance |
7,756,492 | 3,359,320 | ||||||
Common stock warrants |
780,940 | 625,988 | ||||||
|
|
|
|
|||||
Total common stock authorized and reserved for future issuance |
51,852,160 | 58,573,122 | ||||||
|
|
|
|
During the year ended December 31, 2013, we issued 8,931,876 shares of common stock in exchange for proceeds of $1.7 million upon the exercise of employee stock options. During the nine months ended September 30, 2014, we issued 5,638,830 shares of common stock in exchange for proceeds of $3.0 million upon the exercise of employee stock options (unaudited). During the year ended December 31, 2013, we issued 957,876 shares of common stock for proceeds of $0.2 million upon the exercise of warrants to purchase common stock. During the nine months ended September 30, 2014, we issued 295,720 common shares for proceeds of $0.1 million upon the exercise of common stock warrants (unaudited). Common stock warrants are fully exercisable with exercise prices of $0.01 to $0.3919 per share and expire in 2021.
13. Stock-Based Compensation and Other Employee Benefit Plans
Stock Incentive Plan
Under our 2007 Stock Incentive Plan (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 on the date of grant for incentive stock options and not less than 85% of the fair market value on the date of grant for non-statutory options. As of September 30, 2014 (unaudited), we had reserved 83,954,536 shares of our common stock for issuance under our 2007 Plan, of which 3,359,320 were issued and remained available for future grant. The options granted through September 30, 2014 are stock options that generally expire ten years from the date of grant and generally vest 25% 12 months from the date of grant, and quarterly thereafter, provided the grantee remains continuously employed by us through each vesting date (service-based options); however, our board of directors retains the authority to grant options with different terms. As discussed further below, certain stock options with ten year terms vest immediately upon achievement of specified performance
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goals provided the grantee remains continuously employed by us through each performance measurement date (performance-based options). As of December 31, 2013 and September 30, 2014 (unaudited), there were no performance-based options outstanding.
For the year ended March 31, 2012, we granted stock options to purchase a total of 14,333,676 shares of common stock with a weighted-average exercise price of $0.18 per share, a weighted-average grant date fair value of $0.11 per share and a total estimated fair value of approximately $1.5 million. Of the total stock option granted, 12,006,348 were service-based stock options and 2,327,328 were performance-based stock options.
For the nine months ended December 31, 2012, we granted stock options to purchase a total of 15,244,944 shares of common stock with a weighted-average exercise price of $0.60 per share, a weighted-average grant date fair value of $0.35 per share and a total estimated fair value of approximately $10.6 million. All of these stock options were service-based stock options.
For the year ended December 31, 2013, we granted stock options to purchase a total of 12,707,000 shares of common stock with a weighted-average exercise price of $2.44 per share, a weighted-average grant date fair value of $2.71 per share and a total estimated fair value of approximately $34.4 million. All of these stock options were service-based stock options.
For the nine months ended September 30, 2014, we granted service-based stock options to purchase 18,511,572 shares of common stock with a weighted-average exercise price of $5.91 per share, a weighted-average grant date fair value of $4.37 per share and a total estimated fair value of approximately $81.0 million (unaudited).
The fair value of the shares of common stock underlying stock options has historically been established by the board of directors primarily based upon a valuation provided by an independent third-party valuation firm. Because there is no public market for our common stock, our board of directors has relied upon this independent valuation and other factors, including, but not limited to, the current status of the technical and commercial success of our operations, our financial condition, the stage of our product design and development, and competition to establish the fair value of our common stock at the time of grant of the option.
We used the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions:
Year Ended
March 31, 2012 |
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Assumed forfeiture rate (annual %) |
8.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||||||||
Expected dividend yield |
| | | | | |||||||||||||||
Weighted-average assumed stock price volatility |
63.5 | % | 63.5 | % | 59.1 | % | 63.5 | % | 54.0 | % | ||||||||||
Weighted-average risk-free rate |
1.15 | % | 1.01 | % | 1.46 | % | 1.10 | % | 1.90 | % | ||||||||||
Weighted-average expected life (years) |
6.26 | 6.28 | 6.30 | 6.25 | 6.38 |
The assumed forfeiture rate is the annual percentage of unvested stock options that are assumed to be forfeited or cancelled due to grantees discontinuing employment with us. Because service-based stock options normally vest over a four year period, the forfeiture assumption is used to estimate the number of stock options that are expected to vest in future periods, which affects the estimate of the forfeiture-adjusted aggregate stock-based compensation expense related to the stock options. The forfeiture assumption was developed considering our actual annual forfeiture rates for unvested stock options over the past four years and analyzing the distribution of unvested stock options held by executive officers, senior managers and other employees as of
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December 31, 2013 and September 30, 2014 (unaudited). Holding other assumptions constant, a higher forfeiture rate reduces the number of options expected to vest in future periods, which lowers the estimated forfeiture-adjusted aggregate stock-based compensation expense related to any affected stock options.
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 0.0% in our option-pricing model.
The stock price volatility assumption is derived using a set of peer group public companies. For the year ended March 31, 2012 and the nine months ended December 31, 2012, the peer group companies were small- or micro-capitalization companies that conduct business in the consumer finance or investment management sectors. For the year ended December 31, 2013, we updated the set of peer group public companies used to derive the stock price volatility assumption. The new peer group included small-, mid- and large-capitalization companies that conduct business in the consumer finance, investment management and technology sectors. The weighted-average historical stock price volatility of the set of peer companies used in the fiscal year ended December 31, 2013 was substantially the same as the weighted-average historical stock price volatility, measured over the same time periods, as the peer companies used in the nine months ended December 31, 2012 and the year ended December 31, 2012. The change in this option valuation assumption did not have a material impact on the valuation of the stock options granted during the year ended December 31, 2013.
The expected life represents the period of time that stock options are estimated to be outstanding, giving consideration to the contractual terms of the awards, vesting schedules and expectations of future exercise patterns and post-vesting employee termination behavior. Given our limited operating history, the simplified method was applied to calculate the expected term. The risk-free interest rate is based on the U.S. treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.
Options activity under the Option Plan is summarized as follows:
Stock Options Issued
and Outstanding |
Weighted-
Average Exercise Price |
|||||||
Balances, December 31, 2012 |
41,020,888 | $ | 0.30 | |||||
Shares subject to options: |
||||||||
Granted |
12,707,000 | $ | 2.44 | |||||
Exercised |
(8,931,876 | ) | $ | 0.19 | ||||
Forfeited or expired |
(1,481,284 | ) | $ | 0.48 | ||||
|
|
|||||||
Balances, December 31, 2013 |
43,314,728 | $ | 0.94 | |||||
|
|
|||||||
Shares subject to options: |
||||||||
Granted (unaudited) |
18,511,572 | $ | 5.91 | |||||
Exercised (unaudited) |
(5,638,830 | ) | $ | 0.53 | ||||
Forfeited or expired (unaudited) |
(1,599,656 | ) | $ | 2.41 | ||||
|
|
|||||||
Outstanding at September 30, 2014 (unaudited) |
54,587,814 | $ | 2.63 | |||||
|
|
Options to purchase 8,931,876 shares with a total intrinsic value (fair value less exercise price) of $26.2 million were exercised during the year ended December 31, 2013. Options to purchase 5,638,830 shares (unaudited) of common stock with a total instrinsic value of $40.4 million (unaudited) were exercised during the nine months ended September 30, 2014. We capitalized $1.2 million (unaudited) of stock-based compensation expense associated with the cost of developing software for internal use during the nine months ended September 30, 2014. The total fair value of stock options vested during the nine months ended September 30, 2014 was $14.7 million (unaudited).
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A summary of outstanding options, vested options and options vested and expected to vest at December 31, 2013, is as follows:
Shares Subject to
Stock Options Issued and Outstanding |
Weighted-
Average Remaining Contractual Life (Years) |
Weighted-
Average Exercise Price |
||||||||||
Shares subject to: |
||||||||||||
Options outstanding |
43,314,728 | 8.07 | $ | 0.94 | ||||||||
Vested options |
15,502,936 | 6.93 | $ | 0.24 | ||||||||
Options vested and expected to vest |
41,451,548 | 8.03 | $ | 0.91 |
A summary of outstanding options, vested options and options vested and expected to vest at September 30, 2014, is as follows:
Shares Subject to
Stock Options Issued and Outstanding |
Weighted-
Average Remaining Contractual Life (Years) |
Weighted-
Average Exercise Price |
||||||||||
(unaudited) | ||||||||||||
Shares subject to: |
||||||||||||
Options outstanding |
54,587,814 | 8.16 | $ | 2.63 | ||||||||
Vested options |
20,138,530 | 6.84 | $0.58 | |||||||||
Options vested and expected to vest |
51,863,779 |
|
8.11
|
|
$ | 2.53 |
Stock-Based Compensation Expense
Total stock-based compensation expense recorded for stock options, warrants and Escrow Shares related to the Acquisition is summarized as follows:
Year Ended
March 31, 2012 |
Nine Months
Ended December 31, 2012 |
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, |
|||||||||||||||||
2013 | 2014 | |||||||||||||||||||
(in thousands) (unaudited) |
||||||||||||||||||||
Stock-Based Compensation Expense: |
||||||||||||||||||||
Sales and marketing |
$ | 152 | $ | 216 | $ | 1,313 | $ | 767 | $ | 5,029 | ||||||||||
Origination and servicing |
31 | 60 | 424 | 170 | 1,427 | |||||||||||||||
General and administrative: |
||||||||||||||||||||
Engineering and product development |
95 | 406 | 2,171 | 1,019 | 3,487 | |||||||||||||||
Other |
382 | 428 | 2,375 | 1,390 | 15,946 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stock-based compensation expense |
$ | 660 | $ | 1,110 | $ | 6,283 | $ | 3,346 | $ | 25,889 | ||||||||||
|
|
|
|
|
|
|
|
|
|
In the nine months ended September 30, 2014, stock-based compensation included $3.0 million of expense for the accelerated vesting of stock options for a terminated employee that was accounted for as a stock option modification (unaudited).
As of December 31, 2013 and September 30, 2014, total unrecognized compensation cost was $35.1 million and $97.8 million (unaudited), and these costs are expected to be recognized over the next 3.4 years and 3.6 years, respectively.
No net income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.
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401(k) Plan
We maintain a 401(k) defined contribution plan that covers substantially all of our employees. Participants may elect to contribute their annual compensation up to the maximum limit allowed by federal tax law. In the second quarter of 2014, we approved an employer 401(k) match of up to 3% of an employees eligible compensation with a maximum annual match of $5,000 per employee. Total 401(k) match expense for the nine months ended September 30, 2014 was $0.6 million (unaudited). For the fiscal year 2014 401(k) match, the match will be retroactively applied to employees eligible contributions from January 1, 2014.
14. Income Taxes
For the year ended March 31, 2012 and the nine months ended December 31, 2012, we recorded no benefit for income taxes on the taxable losses due to the full valuation allowance. For the year ended December 31, 2013, we recorded income taxes related to pre-tax income due to the availability of deferred tax assets subject to a full valuation allowance to offset current year income.
Our effective tax rate differs from the statutory federal rate for the year ended March 31, 2012, the nine months ended December 31, 2012, and year ended December 31, 2013, as follows (in thousands):
Year Ended March 31,
2012 |
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
||||||||||||||||||||||
Pretax Income (Loss) |
$ | (11,944 | ) | $ | (4,238 | ) | $ | 7,308 | ||||||||||||||||
Tax at federal statutory rate |
$ | (4,061 | ) | 34.00 | % | $ | (1,441 | ) | 34.00 | % | $ | 2,485 | 34.00 | % | ||||||||||
State tax, net of federal tax benefit |
(855 | ) | 7.16 | % | (151 | ) | 3.56 | % | 563 | 7.70 | % | |||||||||||||
Share-based compensation expense |
181 | (1.52 | )% | (314 | ) | 7.41 | % | (593 | ) | (8.11 | )% | |||||||||||||
Tax credits |
(140 | ) | 1.17 | % | | 0.00 | % | (459 | ) | (6.28 | )% | |||||||||||||
Change in valuation allowance |
5,409 | (45.28 | )% | 1,934 | (45.63 | )% | (2,534 | ) | (34.67 | )% | ||||||||||||||
Change in unrecognized tax benefit |
| 0.00 | % | 150 | (3.54 | )% | 518 | 7.09 | % | |||||||||||||||
Other |
(534 | ) | 4.47 | % | (178 | ) | 4.20 | % | 20 | 0.27 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | | 0.00 | % | $ | | 0.00 | % | $ | | 0.00 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of our deferred tax assets and liabilities at December 31, 2012 and 2013 are as follows (in thousands):
December 31, | ||||||||
2012 | 2013 | |||||||
Deferred tax assets |
||||||||
Net operating loss carryforwards |
$ | 21,856 | $ | 18,818 | ||||
Reserves and accruals |
1,365 | 2,804 | ||||||
Organizational and start-up costs |
529 | 516 | ||||||
Credits & California incentives |
254 | 216 | ||||||
|
|
|
|
|||||
Gross deferred tax asset |
24,004 | 22,354 | ||||||
Valuation allowance |
(23,939 | ) | (22,338 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
$ | 65 | $ | 16 | ||||
|
|
|
|
|||||
Deferred tax liability |
||||||||
Depreciation and amortization |
$ | (65 | ) | $ | (16 | ) | ||
|
|
|
|
|||||
Net deferred tax liability |
$ | (65 | ) | $ | (16 | ) | ||
|
|
|
|
Our management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. On the basis of this evaluation, as of December 31, 2013, a full valuation allowance of $22.3 million has been recorded to recognize only deferred tax assets that are more likely than not to be realized.
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At December 31, 2013, we had federal and state net operating loss (NOL) carry-forwards of approximately $43.9 million and $40.7 million, respectively, to offset future taxable income. Our federal and state net operating loss carry-forwards will begin expiring in 2027 and 2016, respectively. Additionally, at December 31, 2013, we had federal and state research and development (R&D) tax credit carry-forwards of approximately $0.6 million and $0.5 million, respectively. The federal credit carry-forwards will begin expiring in 2016 and the state credits may be carried forward indefinitely.
In general, a corporations ability to utilize its NOL and R&D carry-forwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (Code), as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carry-forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the capital (as defined) of a company by certain stockholders or public groups.
The following is a reconciliation of our unrecognized tax benefits (in thousands):
Nine Months Ended
December 31, 2012 |
Year Ended
December 31, 2013 |
|||||||
Balance as of the beginning of the calendar/fiscal year |
$ | 240 | $ | 367 | ||||
Additions for tax positions related to the prior year |
| 523 | ||||||
Additions for tax positions related to the current year |
127 | 190 | ||||||
|
|
|
|
|||||
Balance as of the end of the calendar/fiscal year |
$ | 367 | $ | 1,080 | ||||
|
|
|
|
If the cumulative unrecognized tax benefit is recognized, there will be no effect on our effective tax rate due to the full valuation allowance.
Due to the nature of the unrecognized tax benefits and the existence of tax attributes, we have not accrued any interest or penalties associated with unrecognized tax benefits in the consolidated statement of operations nor have we recognized a liability in the consolidated balance sheet.
We do not believe the total amount of unrecognized benefit as of December 31, 2013 will increase or decrease significantly in the next 12 months.
We file income tax returns in the United States and various state jurisdictions. As of December 31, 2013, our federal tax returns for 2009 and earlier and our state tax returns for 2008 and earlier were no longer subject to examination by the taxing authorities. However, our tax attribute carry-forwards from closed tax years may be subject to examination to the extent utilized in an open tax year.
For the nine months ended September 30, 2014, we recorded $1.1 million for income tax expense. The $1.1 million of income tax expense relates to the amortization of tax deductible goodwill from the acquisition of Springstone, which gives rise to an indefinite-lived deferred tax liability. There was no income tax benefit recorded on the pre-tax loss due to an increase in deferred tax asset valuation allowance. We recorded no income taxes for the nine months ended September 30, 2013. (Unaudited.)
15. Fair Value of Financial Instruments Not Measured at Fair Value on a Recurring Basis in the Balance Sheet
Following are descriptions of the valuation methodologies used for estimating the fair values of financial instruments not recorded at fair value on a recurring basis in the balance sheet; these financial instruments are carried at historical cost or amortized cost in the balance sheets.
Short-term financial assets: Short-term financial assets include cash and cash equivalents, restricted cash, and accrued interest. These assets are carried at historical cost. The carrying amount approximates fair value due to the short term nature of the financial instruments.
F-39
Short-term financial liabilities: Short-term financial liabilities include accounts payable, accrued interest payable, and payables to investors. These liabilities are carried at historical cost. The carrying amount approximates fair value due to the short term nature of the financial instruments.
Term loan: Based on the frequent interest reset feature of the term loan, we consider the carrying value of the term loan to be approximately its fair value as of September 30, 2014. (Unaudited.)
16. Commitments and Contingencies
Commitments
Operating Leases
Corporate Headquarters. We have several lease agreements for space at 71 Stevenson Street in San Francisco, California, where our corporate headquarters is located. These leases commenced in April 2011, September 2012, June 2013, December 2013 and August 2014. These leases expire June 30, 2022 with a renewal option that would extend the lease for five years.
Other Real Estate. In December 2012, we renewed the lease for a New York City office for a one year term that expired on January 31, 2014. We also have an operating lease agreement for space in Westborough, Massachusetts where Springstone is headquartered. On September 15, 2014, we amended our lease agreement to lease additional office space. This lease expires in January 31, 2020 with a renewal option that would extend the lease for five years.
Total facilities rental expense for the nine months ended September 30, 2014 was $2.5 million. Total facilities rental expense for the nine months ended September 30, 2013 was $1.3 million. We did not have any sublease rental expense for the nine months ended September 30, 2014. Sublease rental expense for the nine months ended September 30, 2013 was $0.4 million. Minimum rental expense for the nine months ended September 30, 2014 and September 30, 2013 were $2.2 million and $1.1 million, respectively. (Unaudited.)
Total facilities rental expense for the year ended March 31, 2012, the nine months ended December 31, 2012, and the year ended December 31, 2013 was $0.5 million, $0.6 million, and $1.9 million, respectively. Sublease rental expense for the year ended March 31, 2012, the nine months ended December 31, 2012, and the year ended December 31, 2013 was $0.4 million, $0.5 million, and $0.6 million, respectively. Minimum rental expense for the year ended March 31, 2012, the nine months ended December 31, 2012, and the year ended December 31, 2013 was $0.1 million, $0.1 million, and $1.3 million, respectively. As part of these lease agreements, we currently have pledged $0.2 million of cash and arranged for $0.2 million letter of credit as security deposits.
At December 31, 2013, the future minimum lease payments payable under the contracts for leased premises is as follows (in thousands):
Year-Ended December 31, |
Future Minimum
Lease Payments |
|||
2014 |
$ | 2,748 | ||
2015 |
3,293 | |||
2016 |
3,379 | |||
2017 |
3,598 | |||
2018 |
3,808 | |||
Thereafter |
1,925 | |||
|
|
|||
Total |
$ | 18,751 | ||
|
|
F-40
Contingencies
Loan Funding Commitments
For loans listed on the platform as a result of direct marketing efforts, we have committed to invest in such loans if investors do not provide funding for all or a portion of such loans. At September 30, 2014, there were 722 such loans on the platform with an unfunded balance of $9.0 million. All of these loans were fully funded by investors by October 8, 2014 (unaudited).
In connection with transitional activities related to the acquisition of Springstone, in June 2014, we entered into a contingent loan purchase agreement with an issuing bank that originates loans facilitated by Springstone and a third-party investor that has agreed to purchase certain of those loans from such bank. The contingent loan purchase commitment provides that we will purchase such loans from the bank if the third-party investor defaults on its loan purchase obligations to the bank through December 31, 2014. The contingent loan purchase commitment limits the aggregate amount of such loan originations from inception of the contingent loan purchase commitment through December 31, 2014 to a maximum of $5.0 million. As of September 30, 2014, the amount remaining under the overall limit on the cumulative amount of such loan originations through December 31, 2014 was $2.2 million. We were not required to purchase any such loans pursuant to the contingent loan purchase commitment during the quarter ended September 30, 2014. We do not expect we will be required to purchase any such loans under the contingent loan purchase commitment through its expiration on December 31, 2014. (Unaudited.)
Credit Support Agreement
We are subject to a credit support agreement with a certificate investor. The credit support agreement requires us to pledge and restrict cash in support of its contingent obligation to reimburse the investor for credit losses on loans underlying the investors certificate that are in excess of a specified aggregate loss threshold. We are contingently obligated to pledge cash, not to exceed $5.0 million, to support this contingent obligation and which cash balance is premised upon the investors certificate purchase volume. As of December 31, 2012 and December 31, 2013, approximately $2.3 million and $3.4 million, respectively, was pledged and restricted to support this contingent obligation. As of September 30, 2014, approximately $3.4 million was pledged and restricted to support this contingent obligation (unaudited).
As of December 31, 2012 and December 31, 2013 and as of September 30, 2014 (unaudited), the credit losses pertaining to the investors certificate have not exceeded the specified threshold, nor are future credit losses expected to exceed the specified threshold, and thus no expense or liability has been recorded. We currently do not anticipate recording losses resulting from our contingent obligation under this credit support agreement. If losses related to the credit support agreement are later determined to be likely to occur and are estimable, our results of operations could be affected in the period in which such losses are recorded.
Legal (2014 amounts unaudited)
In the second quarter of 2014, we offered to settle a dispute with a consultant that previously performed work for us. The dispute arose over how much compensation for the work performed was to be provided in cash and in equity and as to equity what valuations were to be used. In the third quarter of 2014, we amended our offer to the claimant for 120,000 shares of our common stock and cash consideration of $215,000. Subsequent to September 30, 2014, this offer was further amended to 80,000 shares of our common stock, an option to purchase 40,000 shares of our common stock, and cash consideration of $215,000.
During the second quarter of 2014, we also received notice from the California Employment Development Department (EDD) that it had commenced an examination of our records concerning the employment relationship of certain individuals who performed services for us from 2011 through 2014. Based on the EDDs determination, certain of these individuals should have been classified as employees with appropriate tax
F-41
withholding and employer related taxes incurred and paid. The EDD has completed its examination and issued a Final Notice of Assessment, which serves as the EDDs official notice of its determination relating to this matter. We intend to pay the assessment during the fourth quarter of 2014 and have recorded a liability for this payment as of September 30, 2014.
Additionally, during the third quarter, we settled a claim, which arose in a prior quarter by a former employee who had asserted a claim of wrongful termination.
In connection with these matters, we recorded an additional net charge to operations of $0.2 million during the third quarter of 2014. As of September 30, 2014, the accrued liability for these matters was $1.9 million. This aggregate amount represents the probable estimate of tax and settlement liabilities. As settlements have been agreed upon, for the matters indicated above, during the quarter or subsequent to the quarter-end, we do not believe the ultimate liability for such matters will be significantly different from the accrued aggregate liability at September 30, 2014.
We received a Civil Investigative Demand from the Consumer Financial Protection Bureau (CFPB) dated June 5, 2014 related to the operations of Springstone. The purpose of the investigation is to determine whether Springstone is engaging in unlawful acts or practices in connection with the marketing, issuance, and servicing of loans for healthcare related financing. As of September 30, 2014, we had provided all of the documents requested by the CFPB. We are continuing to evaluate this matter. As of September 30, 2014, there are no probable or estimable losses related to this matter.
In addition to the foregoing, we may be subject to legal proceedings and regulatory actions in the ordinary course of business. We do not anticipate that the ultimate liability, if any, arising out of any such matter will have a material effect on our financial condition, results of operations or cash flows.
17. Segment Reporting
We report segment information using the management approach. Under this approach, operating segments are identified in substantially the same manner as they are reported internally and used by us for purposes of evaluating performance and allocating resources. Based on this approach, we have one reportable segment. Our management reporting process is based on our internal operating structure, which is subject to change and is not necessarily similar to that of other comparable companies.
18. Subsequent Events (Unaudited)
On October 17, 2014, we entered into a lease agreement to lease additional office space at our corporate headquarters. The lease agreement commences in the fourth quarter of 2014 with a lease term of 4.5 years and an option to extend the leases for five years. The annual lease payments for this additional lease are approximately $1.2 million.
F-42
To the Members
Springstone Financial, LLC
Westborough, MA 01581
We have audited the accompanying financial statements of Springstone Financial, LLC which comprise the balance sheets as of December 31, 2013 and 2012, and the related statements of operations, changes in members equity, and cash flows for the years then ended, and the related notes to the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Springstone Financial, LLC as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 2 to the financial statements, the 2012 financial statements have been restated to correct misstatements. Our opinion is not modified with respect to this matter.
/s/ Auerr, Zajac & Associates, LLP
Certified Public Accountants
March 28, 2014
F-43
BALANCE SHEETS
(See Notes to Financial Statements)
December 31,
2012 |
December 31,
2013 |
|||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and Cash Equivalents |
$ | 7,385,889 | $ | 7,804,060 | ||||
Loan Origination Fees Receivable |
590,843 | 414,121 | ||||||
Prepaid Expenses |
62,135 | 105,977 | ||||||
Due From Officers |
85,930 | 171,860 | ||||||
Other Receivables |
149,391 | 625 | ||||||
|
|
|
|
|||||
Total Current Assets |
8,274,188 | 8,496,643 | ||||||
|
|
|
|
|||||
Property and Equipment |
||||||||
Property and EquipmentCost |
597,910 | 953,225 | ||||||
Less Accumulated Depreciation |
445,950 | 550,473 | ||||||
|
|
|
|
|||||
Net Property and Equipment |
151,960 | 402,752 | ||||||
|
|
|
|
|||||
Other Assets |
||||||||
Intangible Assets |
6,731 | 6,731 | ||||||
Less Accumulated Amortization |
3,142 | 3,590 | ||||||
|
|
|
|
|||||
Net Intangibles |
3,589 | 3,141 | ||||||
|
|
|
|
|||||
Restricted CashSee Note 5 |
1,312,358 | 1,399,732 | ||||||
Security Deposits |
27,378 | 57,378 | ||||||
|
|
|
|
|||||
Total Other Assets |
1,343,325 | 1,460,251 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 9,769,473 | $ | 10,359,646 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts Payable |
$ | 149,072 | $ | 345,138 | ||||
Alliance Rebate Payable |
221,829 | 494,416 | ||||||
Accrued Expenses |
107,929 | 106,063 | ||||||
Accrued Salaries and Payroll Taxes |
415,021 | 551,098 | ||||||
Loan Funding Payables |
178,399 | 323,299 | ||||||
Current Portion of Deferred Rent |
| 4,725 | ||||||
|
|
|
|
|||||
Total Current Liabilities |
1,072,250 | 1,824,739 | ||||||
|
|
|
|
|||||
Long Term Liabilities |
||||||||
Loan Loss ContingencySee Note 6 |
1,189,681 | 1,189,681 | ||||||
Deferred Rent |
| 22,839 | ||||||
|
|
|
|
|||||
Total Long Term Liabilities |
1,189,681 | 1,212,520 | ||||||
|
|
|
|
|||||
Total Liabilities |
2,261,931 | 3,037,259 | ||||||
Members Equity |
7,507,542 | 7,322,387 | ||||||
|
|
|
|
|||||
Total Liabilities and Members Equity |
$ | 9,769,473 | $ | 10,359,646 | ||||
|
|
|
|
F-44
STATEMENTS OF OPERATIONS
(See Notes to Financial Statements)
For Years Ended December 31, | ||||||||
2012 | 2013 | |||||||
Fee Income |
$ | 14,840,780 | $ | 19,401,918 | ||||
Fee Refunds |
428,658 | 916,198 | ||||||
|
|
|
|
|||||
Net Fee Income |
14,412,122 | 18,485,720 | ||||||
Operating Expenses |
7,380,232 | 9,861,710 | ||||||
|
|
|
|
|||||
Income From Operations |
7,031,890 | 8,624,010 | ||||||
Other Income |
||||||||
Interest Income |
3,077 | 2,543 | ||||||
|
|
|
|
|||||
Net Income |
$ | 7,034,967 | $ | 8,626,553 | ||||
|
|
|
|
F-45
STATEMENTS OF CHANGES IN MEMBERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(See Notes to Financial Statements)
NBT Capital
Corp |
Premier Payment
Solutions |
Total | ||||||||||
Balance Beginning of the Period |
$ | 3,056,958 | $ | 302,509 | $ | 3,359,467 | ||||||
Net Income |
1,406,993 | 5,627,974 | 7,034,967 | |||||||||
Distributions To Members |
(577,378 | ) | (2,309,514 | ) | (2,886,892 | ) | ||||||
|
|
|
|
|
|
|||||||
Members Equity December 31, 2012 |
$ | 3,886,573 | $ | 3,620,969 | $ | 7,507,542 | ||||||
|
|
|
|
|
|
|||||||
Net Income |
1,725,311 | 6,901,242 | 8,626,553 | |||||||||
Distributions To Members |
(1,762,342 | ) | (7,049,366 | ) | (8,811,708 | ) | ||||||
|
|
|
|
|
|
|||||||
Members Equity December 31, 2013 |
$ | 3,849,542 | $ | 3,472,845 | $ | 7,322,387 | ||||||
|
|
|
|
|
|
F-46
STATEMENTS OF CASH FLOWS
(See Notes to Financial Statements)
Years Ended December 31, | ||||||||
2012 | 2013 | |||||||
Cash Provided By (Used In) |
||||||||
Operating Activities |
||||||||
Net Income |
$ | 7,034,967 | $ | 8,626,553 | ||||
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities |
||||||||
Depreciation and Amortization |
102,864 | 123,421 | ||||||
Assets Abandoned In Office Relocation |
| 26,246 | ||||||
Security Deposits |
| (30,000 | ) | |||||
(Increase) Decrease In |
||||||||
Loan Origination Fees Receivable |
(402,337 | ) | 176,722 | |||||
Prepaid Expenses |
17,662 | (43,842 | ) | |||||
Due From Officers |
(85,930 | ) | (85,930 | ) | ||||
Other Receivables |
(143,852 | ) | 148,766 | |||||
(Decrease) Increase In |
||||||||
Accounts Payable |
22,519 | 196,066 | ||||||
Alliance Rebate Payable |
221,829 | 272,587 | ||||||
Accrued Expenses |
12,498 | (1,866 | ) | |||||
Accrued Salaries and Payroll Taxes |
197,159 | 136,077 | ||||||
Loan Funding Payables |
58,111 | 144,900 | ||||||
Loan Loss Contingency |
(33,253 | ) | | |||||
Deferred Rent |
| 27,564 | ||||||
|
|
|
|
|||||
Total Adjustments |
(32,730 | ) | 1,090,711 | |||||
|
|
|
|
|||||
Net Cash Provided by Operating Activities |
7,002,237 | 9,717,264 | ||||||
|
|
|
|
|||||
Investing Activities |
||||||||
Restricted Cash |
(89,424 | ) | (87,374 | ) | ||||
Purchase of Equipment and Software |
(81,383 | ) | (400,011 | ) | ||||
|
|
|
|
|||||
Net Cash Used In Investing Activities |
(170,807 | ) | (487,385 | ) | ||||
|
|
|
|
|||||
Financing Activities |
||||||||
Distributions to Members |
(2,886,892 | ) | (8,811,708 | ) | ||||
|
|
|
|
|||||
Net Cash Used In Investing Activities |
(2,886,892 | ) | (8,811,708 | ) | ||||
|
|
|
|
|||||
Net Increase in Cash |
3,944,538 | 418,171 | ||||||
CashBeginning of the Period |
3,441,351 | 7,385,889 | ||||||
|
|
|
|
|||||
CashEnd of the Period |
$ | 7,385,889 | $ | 7,804,060 | ||||
|
|
|
|
See Note 7 for supplemental disclosures of noncash transactions.
F-47
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
Note 1Summary of Significant Accounting Policies
Nature of Operations
The Company provides services related to the origination and processing of personal loans. The loans are used to fund elective medical, fertility and dental procedures, as well as tuition at private educational institutions and tutoring at learning centers for pre-post secondary age students.
Revenues and Expenses
The Company earns revenue by originating and placing personal loans with funding institutions. Revenue consists of fees from service providers and loan origination fees from the funding institutions. Revenue is recognized when the loans are funded.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures. Accordingly, the actual results could differ from those estimates.
Property and Equipment
Property and equipment additions are recorded at cost. Maintenance, repairs, and renewals are expensed, and additions and improvements are capitalized. Depreciation is computed using both straight-line and accelerated methods over useful lives of 5 - 7 years.
Depreciation expense for the years ended December 31, 2013 and 2012 was $122,973 and $102,416, respectively.
The Components of Property and Equipment are as follows:
December 31,
2013 |
December 31,
2012 |
|||||||
Computers and office equipment |
$ | 148,696 | $ | 118,465 | ||||
Furniture and fixtures |
237,540 | 56,543 | ||||||
Leasehold improvements |
110,259 | 24,775 | ||||||
|
|
|
|
|||||
496,495 | 199,783 | |||||||
Less accumulated depreciation |
179,354 | 146,496 | ||||||
|
|
|
|
|||||
$ | 317,141 | $ | 53,287 | |||||
|
|
|
|
Software and Website Costs
Computer software and web site development costs include packaged software, customized software for website operations, and costs related to major website enhancements. These costs are amortized using the straight-line method over three year lives. Operating expenses related to web site hosting and routine maintenance are expensed as incurred.
F-48
The components of capitalized software and website costs are as follows:
December 31,
2013 |
December 31,
2012 |
|||||||
Software |
$ | 136,865 | $ | 131,095 | ||||
Website Costs |
319,865 | 267,032 | ||||||
|
|
|
|
|||||
456,730 | 398,127 | |||||||
Less Accumulated Depreciation |
371,119 | 299,454 | ||||||
|
|
|
|
|||||
$ | 85,611 | $ | 98,673 | |||||
|
|
|
|
Marketing and Advertising
The Company currently markets loans to the following demographic markets: (1) high quality medical and dental professional service providers for funding of elective medical, fertility and dental procedures, and (2) private educational institutions and learning centers for funding of private K-12 school tuition and tutoring.
The Company expenses advertising as incurred. Advertising expense for the years ended December 31, 2013 and 2012 was $190,112 and $109,141, respectively.
Concentrations of Credit Risk
The Company maintains demand deposits with several high quality financial institutions. Periodically, cash balances exceed the federally insured bank deposit limits. The Company had approximately $9,068,000 and $9,818,000 in uninsured cash, as of December 31, 2013 and 2012, respectively.
Credit Policies
The Company follows practices standard in the consumer lending/loan servicing industries. Loan applications are processed through various fraud shield databases and credit checks are run for all loan applicants. Loan proceeds are sent directly to the medical or dental service provider or educational institution, and not to the borrower.
Limited Liability Company/Income Taxes
As a limited liability company, each members liability is limited to amounts reflected in their respective member accounts.
The Company files its income tax returns as a partnership for federal and state income tax purposes. As such, the Company will not pay any federal or state income taxes, because any income or loss will be passed through to the federal and state tax returns of the members of the Company. Accordingly, no provision is made for federal or state income taxes in the financial statements.
Following are the differences between the financial statements and how the Company reports in its income tax returns: The financial statements include a provision for loss reserves based on managements estimate of its exposure to potential loan defaults whereas the tax reporting allows deductions only when losses are realized. Organizational expenses were expensed in full on the financial statements, whereas for income tax reporting organizational costs are amortized over five years. Meals and entertainment are expensed in full on the financial statements, whereas for income tax reporting these costs are only 50% deductible.
The Company files income tax returns in the U.S. federal jurisdiction and the states of Massachusetts, Pennsylvania, New Jersey and Ohio. Management believes that all positions taken in its tax returns would be sustained in the event of review. The Companys tax returns are no longer subject to review for years before 2010.
F-49
Note 2Correction of Error
The Company has restated the 2012 financial statements in order to reflect the following corrections:
In 2009, the Company entered into an agreement with World Financial Capital Bank (now known as Comenity Bank) under which it would refund excess margin earned from provider fees, as calculated in accordance with the terms of the agreement. In 2012, the margin specified in the agreement was exceeded which resulted in the accrual of a rebate in the amount of $221,829 and referred to in the financial statements as Alliance Rebate.
The Company has been providing supplemental life insurance and disability benefits to its officers. It was subsequently determined that the cost of the benefits should be reimbursed by the officers. As a result, the Company has accrued a receivable from the officers in the amount of $85,930.
Note 3Lease Commitments
Operating Lease
In 2013, the Company entered into a lease for new office space. The lease is for a period of 73 months beginning February, 2014, with an option to renew for an additional five years.
The Company occupied the new space on October 1, 2013, and paid rent of $1,848 for the months of October through December under the early occupancy provision in the lease. The difference between the rent paid for these months and the fair value of the rent as determined from the lease terms has been recorded as rent expense and a liability for deferred rent, which will be amortized over the term of the lease. Rent expense for office space for the years ended December 31, 2013 and 2012 was $172,532 and $134,085, respectively.
Future minimum annual payments under the lease are as follows:
2014 |
$ | 154,057 | ||
2015 |
213,463 | |||
2016 |
221,780 | |||
2017 |
230,097 | |||
2018 |
238,413 | |||
Thereafter |
266,598 | |||
|
|
|||
$ | 1,324,408 | |||
|
|
Note 4Related-Party Transactions
One of the Companys funding sources, NBT Bank, N.A. (an FDIC insured banking institution) is a subsidiary of a member of the Company, NBT Capital Corp. NBT Bank, N.A. (NBT) takes the risk of loss on default for a large majority of the loans that it funds.
In addition, the Company also has several bank accounts on deposit with NBT.
Three of the Companys senior managers are stockholders of Premier Payment Solutions, Inc., the other member of the Company.
Note 5Restricted Cash
Restricted cash represents reserves set aside by NBT to cover potential defaults on selected loan portfolios. No withdrawals may be made from these accounts without written approval from NBT.
F-50
Note 6Loan Loss Contingency
Loan loss contingency represents managements estimate of the potential contingent liability to cover losses on the following loan portfolios:
Pool B This portfolio consists of loans, funded by the primary banking partner, made to borrowers with credit scores lower than normally required by the bank, but high enough to satisfy the Companys credit worthiness requirements, based on senior managements previous experience in the consumer loan market.
The total amount of loans outstanding in this portfolio as of December 31, 2013 and 2012 was approximately $6,240,000 and $5,624,000, respectively. For the years ended December 31, 2013 and 2012, the total amount of loan defaults realized from this portfolio was $468,358 and $356,595, respectively.
Over $25K The 2 nd portfolio consists of loans over $25,000, made to individuals with higher than normal credit scores. The Company bears the burden of risk of loss on such loans that were made before September 1, 2012. The Companys potential liability is based on the ratio of the amount of the original loan balance over $35,000 to the total original loan amount. At December 31, 2013 and 2012, the Companys exposure on this portfolio was approximately $2,986,000 and $5,402,000, respectively. For the years ended December 31, 2013 and 2012, actual defaults realized from this portfolio were $44,008 and $31,602, respectively.
ClearChoice Reserve Program Loans in this portfolio commenced in July, 2012 and are used to pay for the cost of dental and orthodontic procedures. The Company bears the risk of loss at 1.54% of the outstanding loan balance. At December 31, 2013 and 2012, the Companys exposure on this portfolio was approximately $62,000 and $32,000, respectively. For the years ended December 31, 2013 and 2012, actual defaults realized from this portfolio were $29 and none, respectively.
Management believes that the loan loss contingency balance is sufficient to cover any future loan defaults on these portfolios.
Note 7Statement of Cash FlowsSummary of Non-Cash and Other Items
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
There were no income taxes paid for the years ended December 31, 2013 and December 31, 2012.
There were no payments of interest for the years ended December 31, 2013 and December 31, 2012.
In the year ended December 31, 2013 fully depreciated property and equipment in the amount $18,465 of was written off.
Note 8Retirement Plan
The Company has a 401(k) profit sharing plan which covers substantially all employees. Participating employees may contribute, on a tax-deferred basis, a portion of their compensation in accordance with section 401(k) of the Internal Revenue Code. The plan provides for a safe harbor matching contribution by the Company. For the years ended December 31, 2013 and 2012, the Companys matching contributions were $95,086 and $80,727, respectively.
Note 9Compensated Absences
Employees of the Company are entitled to paid time off (PTO) which accrues up to a maximum of 160 hours. Paid time off can be used as vacation time, sick time, or personal time. Employees cannot carry over more than 40 hours of PTO into the next calendar year. As of December 31, 2013 and 2012, there were no accrued compensated absences.
F-51
Note 10Significant Concentrations
The Company is fully dependent on third party funding sources such as banks or private placement financing organizations. As of December 31, 2013, there were two banks with which the Company has an arrangement to fund the loans it originates. Until those loan portfolios grow significantly, the Company is unlikely to pursue other major lending sources, and therefore has a concentration in terms of readily available lenders.
The loan origination industry is subject to certain economic factors such as interest rates, and the overall health of the economy.
Note 11Regulatory Matters
The Company is subject to various regulations common in the financing industry and continually monitors its responsibilities with regard to regulatory and licensing requirements. The Company is satisfied that it is fully compliant with all requirements
Additionally, each of the Companys banking partners has a contractual right to review its policies and procedures related to regulatory matters to insure that the Company is in compliance.
Note 12Subsequent Events
In late 2013 the Company entered into negotiations with LendingClub Corporation (LendingClub) to be acquired. The discussions have continued into 2014, with no definitive terms yet set. Management expects that the Company and LendingClub will agree to terms and that the acquisition will be completed early in the second quarter of 2014.
The Company has evaluated all subsequent events through March 28, 2014, the date the financial statements were available to be issued.
Note 13Subsequent Events
Certain amounts in the 2012 financial statements and schedules have been reclassified to conform to the 2013 statement presentation.
F-52
INDEPENDENT AUDITORS REPORT ON SUPPLEMENTARY INFORMATION
To the Members
Springstone Financial, LLC
Westborough, MA 01581
We have audited the financial statements of Springstone Financial, LLC as of and for the years ended December 31, 2013 and 2012, and our report thereon dated March 28, 2014, which expressed an unqualified opinion on those financial statements, appears on page three. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The schedule of operating expenses is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.
/s/ Auerr, Zajac & Associates, LLP
Certified Public Accountants
March 28, 2014
F-53
SCHEDULE OF OPERATING EXPENSES
(See auditors report on supplemental information and notes to financial statements)
Years Ended December 31, | ||||||||
2013 | 2012 | |||||||
Salaries and Payroll Taxes |
$ | 4,524,719 | $ | 3,602,641 | ||||
Advertising and Marketing Expense |
799,862 | 499,375 | ||||||
Consultants |
297,784 | 347,254 | ||||||
Printing and Reproduction |
115,204 | 223,984 | ||||||
Information Technology and Website Hosting |
272,064 | 202,584 | ||||||
Rent Expense |
172,532 | 134,085 | ||||||
Professional Fees |
441,534 | 150,484 | ||||||
Travel and Entertainment |
39,661 | 14,004 | ||||||
Depreciation and Amortization |
123,421 | 102,864 | ||||||
Postage and Delivery |
142,294 | 129,061 | ||||||
Insurance |
148,137 | 86,671 | ||||||
Office Supplies and Expense |
27,243 | 34,745 | ||||||
Telephone and Utilities |
96,001 | 80,924 | ||||||
Training and Education |
67,252 | 50,332 | ||||||
Charitable Contributions |
2,139 | 4,470 | ||||||
Employee Retirement Benefits |
95,086 | 80,727 | ||||||
Credit Reports |
270,047 | 194,735 | ||||||
Alliance Rebate |
272,587 | 221,829 | ||||||
Provider Rebates and Chargebacks |
1,187,734 | 716,660 | ||||||
Provision for Loss Contingency |
525,605 | 388,197 | ||||||
Fraud Losses |
121,243 | 93,109 | ||||||
Bank Service Charges |
18,727 | 11,947 | ||||||
Office Relocation Expense |
78,184 | | ||||||
Miscellaneous |
22,650 | 9,550 | ||||||
|
|
|
|
|||||
Total Operating Expenses |
$ | 9,861,710 | $ | 7,380,232 | ||||
|
|
|
|
F-54
INDEPENDENT ACCOUNTANTS REVIEW REPORT
To the Members
Springstone Financial, LLC
Westborough, MA 01581
We have reviewed the accompanying balance sheets of Springstone Financial, LLC as of March 31, 2014 and 2013, and the related statements of operations, changes in members equity, and cash flows for the three months then ended. A review includes primarily applying analytical procedures to managements financial data and making inquiries of Company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
Our responsibility is to conduct the reviews in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require us to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. We believe that the results of our procedures provide a reasonable basis for our report.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.
/s/ Auerr, Zajac & Associates, LLP |
Certified Public Accountants |
June 17, 2014 |
F-55
BALANCE SHEETS
(See Notes to Financial Statements)
March 31,
2014 |
March 31,
2013 |
|||||||
ASSETS |
|
|||||||
Current Assets |
||||||||
Cash and Cash Equivalents |
$ | 10,019,977 | $ | 3,720,276 | ||||
Loan Origination Fees Receivable |
661,051 | 340,175 | ||||||
Prepaid Expenses |
174,068 | 109,695 | ||||||
Due From Officers |
171,860 | 101,997 | ||||||
Other Receivables |
490 | 490 | ||||||
|
|
|
|
|||||
Total Current Assets |
11,027,446 | 4,272,633 | ||||||
|
|
|
|
|||||
Property and Equipment |
||||||||
Property and EquipmentCost |
1,002,101 | 632,470 | ||||||
Accumulated Depreciation |
(584,990 | ) | (467,217 | ) | ||||
|
|
|
|
|||||
Net Property and Equipment |
417,111 | 165,253 | ||||||
|
|
|
|
|||||
Other Assets |
||||||||
Intangible Assets |
6,731 | 6,731 | ||||||
Accumulated Amortization |
(3,702 | ) | (3,254 | ) | ||||
|
|
|
|
|||||
Net Intangibles |
3,029 | 3,477 | ||||||
|
|
|
|
|||||
Restricted CashSee Notes 4 and 11 |
1,535,538 | 1,393,790 | ||||||
Security Deposits |
49,901 | 27,378 | ||||||
|
|
|
|
|||||
Total Other Assets |
1,588,468 | 1,424,645 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 13,033,025 | $ | 5,862,531 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS EQUITY |
|
|||||||
Current Liabilities |
||||||||
Accounts Payable |
$ | 735,654 | $ | 945,164 | ||||
Alliance Rebate Payable |
60,559 | 286,856 | ||||||
Accrued Expenses |
53,374 | 101,771 | ||||||
Accrued Salaries and Payroll Taxes |
276,107 | 169,357 | ||||||
Distributions Payable To Members |
767,150 | | ||||||
Loan Funding Payables |
937,491 | 360,656 | ||||||
Current Portion of Deferred Rent |
6,410 | | ||||||
|
|
|
|
|||||
Total Current Liabilities |
2,836,745 | 1,863,804 | ||||||
|
|
|
|
|||||
Long Term Liabilities |
||||||||
Loan Loss ContingencySee Notes 5 and 11 |
1,189,681 | 1,189,681 | ||||||
Deferred Rent |
30,981 | | ||||||
|
|
|
|
|||||
Total Long Term Liabilities |
1,220,662 | 1,189,681 | ||||||
|
|
|
|
|||||
Total Liabilities |
4,057,407 | 3,053,485 | ||||||
Members Equity |
8,975,618 | 2,809,046 | ||||||
|
|
|
|
|||||
Total Liabilities and Members Equity |
$ | 13,033,025 | $ | 5,862,531 | ||||
|
|
|
|
F-56
STATEMENTS OF OPERATIONS
(See Notes to Financial Statements)
Three Months Ended
March 31, |
||||||||
2014 | 2013 | |||||||
Fee Income |
$ | 5,970,113 | $ | 4,418,804 | ||||
Fee Refunds |
271,578 | 179,606 | ||||||
|
|
|
|
|||||
Net Fee Income |
5,698,535 | 4,239,198 | ||||||
Operating Expenses |
2,879,268 | 2,428,442 | ||||||
|
|
|
|
|||||
Income From Operations |
2,819,267 | 1,810,756 | ||||||
Other Income |
||||||||
Interest Income |
1,114 | 1,006 | ||||||
|
|
|
|
|||||
Net Income |
$ | 2,820,381 | $ | 1,811,762 | ||||
|
|
|
|
F-57
STATEMENTS OF CHANGES IN MEMBERS EQUITY
(See Notes to Financial Statements)
Three Months Ended
March 31, |
||||||||
2014 | 2013 | |||||||
Balance Beginning of the Period |
$ | 7,322,387 | $ | 7,507,542 | ||||
Net Income |
2,820,381 | 1,811,762 | ||||||
Distributions To MembersSee Note 6 |
(1,167,150 | ) | (6,510,258 | ) | ||||
|
|
|
|
|||||
Balance End of the Period |
$ | 8,975,618 | $ | 2,809,046 | ||||
|
|
|
|
F-58
STATEMENTS OF CASH FLOWS
(See Notes to Financial Statements)
Three Months Ended
March 31, |
||||||||
2014 | 2013 | |||||||
Cash Provided By (Used In) |
||||||||
Operating Activities |
||||||||
Net Income |
$ | 2,820,381 | $ | 1,811,762 | ||||
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities |
||||||||
Depreciation and Amortization |
34,629 | 21,379 | ||||||
Security Deposits |
7,477 | | ||||||
(Increase) Decrease In |
||||||||
Loan Origination Fees Receivable |
(246,930 | ) | 250,668 | |||||
Prepaid Expenses |
(68,091 | ) | (47,560 | ) | ||||
Due From Officers |
| (16,067 | ) | |||||
Other Receivables |
135 | 148,901 | ||||||
(Decrease) Increase In |
||||||||
Accounts Payable |
390,516 | 796,092 | ||||||
Alliance Rebate Payable |
(433,857 | ) | 65,027 | |||||
Accrued Expenses |
(52,689 | ) | (6,158 | ) | ||||
Accrued Salaries and Payroll Taxes |
(274,991 | ) | (245,664 | ) | ||||
Loan Funding Payables |
614,192 | 182,257 | ||||||
Deferred Rent |
9,827 | | ||||||
|
|
|
|
|||||
Total Adjustments |
(19,782 | ) | 1,148,875 | |||||
|
|
|
|
|||||
Net Cash Provided by Operating Activities |
2,800,599 | 2,960,637 | ||||||
|
|
|
|
|||||
Investing Activities |
||||||||
Restricted Cash |
(135,806 | ) | (81,432 | ) | ||||
Purchase of Equipment and Software |
(48,876 | ) | (34,560 | ) | ||||
|
|
|
|
|||||
Net Cash Used In Investing Activities |
(184,682 | ) | (115,992 | ) | ||||
|
|
|
|
|||||
Financing Activities |
||||||||
Distributions to Members |
(400,000 | ) | (6,510,258 | ) | ||||
|
|
|
|
|||||
Net Cash Used In Investing Activities |
(400,000 | ) | (6,510,258 | ) | ||||
|
|
|
|
|||||
Net Increase in Cash |
2,215,917 | (3,665,613 | ) | |||||
CashBeginning of the Period |
7,804,060 | 7,385,889 | ||||||
|
|
|
|
|||||
CashEnd of the Period |
$ | 10,019,977 | $ | 3,720,276 | ||||
|
|
|
|
See Note 6 for supplemental disclosures of noncash transactions.
F-59
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company provides services related to the origination and processing of consumer loans. The loans are used to fund elective medical, fertility and dental procedures, as well as tuition at private educational institutions and tutoring at learning centers for pre-post secondary age students.
Revenues and Expenses
The Company earns revenue by originating and placing consumer loans with funding institutions. Revenue consists of fees from service providers and loan origination fees from the funding institutions. Revenue is recognized when the loans are funded.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures. Accordingly, the actual results could differ from those estimates.
Property and Equipment
Property and equipment additions are recorded at cost. Maintenance, repairs, and renewals are expensed, and additions and improvements are capitalized. Depreciation is computed using both straight-line and accelerated methods over useful lives of 5 - 7 years.
Depreciation expense for the three months ended March 31, 2014 and 2013 was $34,517 and $21,267, respectively.
The Components of Property and Equipment are as follows:
March 31,
2014 |
March 31,
2013 |
|||||||
Computers and Office Equipment |
$ | 167,793 | $ | 121,341 | ||||
Furniture and Fixtures |
238,935 | 62,852 | ||||||
Leasehold Improvements |
110,259 | 24,775 | ||||||
|
|
|
|
|||||
516,987 | 208,968 | |||||||
Accumulated Depreciation |
(199,354 | ) | (151,009 | ) | ||||
|
|
|
|
|||||
$ | 317,633 | $ | 57,959 | |||||
|
|
|
|
Software and Website Costs
Computer software and web site development costs include packaged software, customized software for website operations, and costs related to major website enhancements. These costs are amortized using the straight-line method over three year lives. Operating expenses related to web site hosting and routine maintenance are expensed as incurred.
F-60
The components of capitalized software and website costs are as follows:
March 31,
2014 |
March 31,
2013 |
|||||||
Software |
$ | 145,024 | $ | 136,345 | ||||
Website Costs |
340,090 | 287,157 | ||||||
|
|
|
|
|||||
485,114 | 423,502 | |||||||
Accumulated Depreciation |
(385,636 | ) | (316,208 | ) | ||||
|
|
|
|
|||||
$ | 99,478 | $ | 107,294 | |||||
|
|
|
|
Marketing and Advertising
The Company currently markets loans to the following demographic markets: (1) high quality medical and dental professional service providers for funding of elective medical, fertility and dental procedures, and (2) private educational institutions and learning centers for funding of private K-12 school tuition and tutoring.
The Company expenses advertising as incurred. Advertising expense for the three months ended March 31, 2014 and 2013 was $102,984 and $27,548, respectively.
Concentrations of Credit Risk
The Company maintains demand deposits with several high quality financial institutions. Periodically, cash balances exceed the federally insured bank deposit limits. The Company had approximately $11,687,000 and $4,897,000 in uninsured cash, as of March 31, 2014 and 2013, respectively.
Credit Policies
The Company follows practices standard in the consumer lending/loan servicing industries. Loan applications are processed through various fraud shield databases and credit checks are run for all loan applicants. Loan proceeds are sent directly to the medical or dental service provider or educational institution, and not to the borrower.
Limited Liability Company/Income Taxes
As a limited liability company, each members liability is limited to amounts reflected in their respective member accounts.
The Company files its income tax returns as a partnership for federal and state income tax purposes. As such, the Company will not pay any federal or state income taxes, because any income or loss will be passed through to the federal and state tax returns of the members of the Company. Accordingly, no provision is made for federal or state income taxes in the financial statements.
Following are the differences between the financial statements and how the Company reports in its income tax returns: The financial statements include a provision for loss reserves based on managements estimate of its exposure to potential loan defaults whereas the tax reporting allows deductions only when losses are realized. Organizational expenses were expensed in full on the financial statements, whereas for income tax reporting organizational costs are amortized over five years. Meals and entertainment are expensed in full on the financial statements, whereas for income tax reporting these costs are only 50% deductible.
The Company files income tax returns in the U.S. federal jurisdiction and the states of Massachusetts, Pennsylvania, New Jersey and Ohio. Management believes that all positions taken in its tax returns would be sustained in the event of review. The Companys tax returns are no longer subject to review for years before 2010.
F-61
NOTE 2LEASE COMMITMENTS
Operating Lease
In 2013, the Company entered into a lease for new office space. The lease is for a period of 73 months beginning January, 2014, with an option to renew for an additional five years.
The Company occupied the new space on October 1, 2013, and paid rent of $1,848 for the months of October through December under the early occupancy provision in the lease and paid no rent for the month of January, 2014. The difference between the rent paid for these four months and the fair value of the rent as determined from the lease terms has been recorded as rent expense in the applicable periods and a liability for deferred rent, which is being amortized over the term of the lease. Rent expense for office space for the three months ended March 31, 2014 and 2013 was $32,687 and $32,918, respectively.
Future minimum annual payments under the lease for the 12 month periods ending March 31, are as follows:
2015 |
$ | 184,563 | ||
2016 |
215,542 | |||
2017 |
223,859 | |||
2018 |
232,176 | |||
2019 |
239,800 | |||
Thereafter |
205,609 | |||
|
|
|||
$ | 1,301,549 | |||
|
|
NOTE 3RELATED PARTY TRANSACTIONS
One of the Companys funding sources, NBT Bank, N.A. (an FDIC insured banking institution) is a subsidiary of a member of the Company, NBT Capital Corp. NBT Bank, N.A. (NBT) takes the risk of loss on default for a large majority of the loans that it funds.
In addition, the Company also has several bank accounts on deposit with NBT.
Three of the Companys senior managers are stockholders of Premier Payment Solutions, Inc., the other member of the Company.
NOTE 4RESTRICTED CASH
Restricted cash represents reserves set aside by NBT to cover potential defaults on selected loan portfolios. No withdrawals may be made from these accounts without written approval from NBT. See Note 11.
NOTE 5LOAN LOSS CONTINGENCY
Loan loss contingency represents managements estimate of the potential contingent liability to cover losses on the following loan portfolios. See Note 11:
Pool B This portfolio consists of loans, funded by the primary banking partner, made to borrowers with credit scores lower than normally required by the bank, but high enough to satisfy the Companys credit worthiness requirements, based on senior managements previous experience in the consumer loan market.
The total amount of loans outstanding in this portfolio as of March 31, 2014 and 2013 was approximately $6,677,000 and $5,620,000, respectively. For the three months ended March 31, 2014 and 2013, the total amount of loan defaults realized from this portfolio was $117,558 and $140,366, respectively.
F-62
Over $25K The 2 nd portfolio consists of loans over $25,000, made to individuals with higher than normal credit scores. The Company bears the burden of risk of loss on such loans that were made before September 1, 2012. The Companys potential liability is based on the ratio of the amount of the original loan balance over $25,000 to the total original loan amount. At March 31, 2014 and 2013, the Companys exposure on this portfolio was approximately $2,604,000 and $4,532,000, respectively. For the three months ended March 31, 2014 and 2013, actual defaults realized from this portfolio were $20,209 and $15,574, respectively.
ClearChoice Reserve Program Loans in this portfolio commenced in July, 2012 and are used to pay for the cost of dental and orthodontic procedures. The Company bears the risk of loss at 1.54% of the outstanding loan balance. At March 31, 2014 and 2013, the Companys exposure on this portfolio was approximately $71,000 and $39,000, respectively. For the three months ended March 31, 2014 and 2013, actual defaults realized from this portfolio were none and $29, respectively.
Management believes that the loan loss contingency balance is sufficient to cover any future loan defaults on these portfolios.
NOTE 6STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES AND OTHER ITEMS
Cash used in investing activities for the three months ended March 31, 2014, does not include distributions payable to members at March 31, 2014, in the amount of $767,150 as it did not have an impact on cash flows for the period.
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
There were no income taxes paid for the three months ended March 31, 2014 and 2013.
There were no payments of interest for the three months ended March 31, 2014 and 2013.
NOTE 7RETIREMENT PLAN
The Company has a 401(k) profit sharing plan which covers substantially all employees. Participating employees may contribute, on a tax-deferred basis, a portion of their compensation in accordance with section 401(k) of the Internal Revenue Code. The plan provides for a safe harbor matching contribution by the Company. For the three months ended March 31, 2014 and 2013, the Companys matching contributions were $26,389 and $27,940, respectively.
NOTE 8COMPENSATED ABSENCES
Employees of the Company are entitled to paid time off (PTO) which accrues up to a maximum of 160 hours. Paid time off can be used as vacation time, sick time, or personal time. Employees cannot carry over more than 40 hours of PTO into the next calendar year. Accrued PTO in the amounts of $51,600 and $34,400 are included in accrued salaries and payroll taxes at March 31, 2014 and 2013, respectively.
NOTE 9SIGNIFICANT CONCENTRATIONS
The Company is fully dependent on third party funding sources such as banks or private placement financing organizations. As of March 31, 2014, there were two banks with which the Company has an arrangement to fund the loans it originates. Until those loan portfolios grow significantly, the Company is unlikely to pursue other major lending sources, and therefore has a concentration in terms of readily available lenders.
F-63
The loan origination industry is subject to certain economic factors such as interest rates, and the overall health of the economy.
NOTE 10REGULATORY MATTERS
The Company is subject to various regulations common in the financing industry and continually monitors its responsibilities with regard to regulatory and licensing requirements. The Company is satisfied that it is fully compliant with all requirements.
Additionally, each of the Companys banking partners has a contractual right to review its policies and procedures related to regulatory matters to insure that the Company is in compliance.
NOTE 11SUBSEQUENT EVENTS
On April 17, 2014, the Company was acquired by LendingClub Corporation for a total consideration of $140 million in cash and stock.
The Company has entered into an agreement with NBT which provides that it will return to NBT the balances as of April 17, 2014, in the restricted cash accounts which are meant to cover potential loan defaults in the Pool B and Over 25K loan portfolios. The agreement also provides that the Company will have no liability for any losses arising from loans in these portfolios in existence on April 17, 2014. The combined balances for restricted cash and for the loan loss contingency for these loan portfolios at April 17, 2014, were $1,523,598 and $1,189,681, respectively. The Company will incur a charge to expense equal to the excess of the combined restricted cash balance over the loan loss contingency balances in the amount of $333,917.
The Company has evaluated all subsequent events through June 17, 2014, the date the financial statements were available to be issued.
F-64
INDEPENDENT ACCOUNTANTS REVIEW REPORT
ON SUPPLEMENTARY INFORMATION
To the Members
Springstone Financial, LLC
Westborough, MA 01581
Our report on our review of the basic financial statements of Springstone Financial, LLC for the three months ended March 31, 2014 and 2013 appears on page 3. That review was made primarily for the purpose of expressing a conclusion that there are no material modifications that should be made to the financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America. The supplementary information included in the accompanying schedule of operating expenses is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, and we did not become aware of any material modifications that should be made to such information.
/s/ Auerr, Zajac & Associates, LLP |
Certified Public Accountants |
June 17, 2014 |
F-65
SCHEDULE OF OPERATING EXPENSES
(See auditors report on supplemental information and notes to financial statements)
Three Months Ended
March 31, |
||||||||
2014 | 2013 | |||||||
Salaries and Payroll Taxes |
$ | 1,305,663 | $ | 1,033,275 | ||||
Advertising and Marketing Expense |
323,023 | 153,847 | ||||||
Consultants |
86,425 | 97,570 | ||||||
Printing and Reproduction |
979 | 3,958 | ||||||
Information Technology and Website Hosting |
67,067 | 70,469 | ||||||
Rent Expense |
32,687 | 32,918 | ||||||
Professional Fees |
70,715 | 105,650 | ||||||
Travel and Entertainment |
15,673 | 7,536 | ||||||
Depreciation and Amortization |
34,629 | 21,379 | ||||||
Postage and Delivery |
75,353 | 37,558 | ||||||
Insurance |
1,794 | 667 | ||||||
Office Supplies and Expense |
9,426 | 8,084 | ||||||
Telephone and Utilities |
35,985 | 17,606 | ||||||
Training and Education |
14,711 | 14,259 | ||||||
Charitable Contributions |
454 | 350 | ||||||
Employee Fringe Benefits |
95,118 | 67,926 | ||||||
Employee Retirement Benefits |
26,389 | 27,940 | ||||||
Credit Reports |
62,030 | 77,484 | ||||||
Alliance Rebate |
89,240 | 65,027 | ||||||
Provider Rebates and Chargebacks |
386,799 | 360,183 | ||||||
Provision for Loss Contingency |
135,393 | 155,968 | ||||||
Fraud Losses |
| 45,683 | ||||||
Bank Service Charges |
6,537 | 4,070 | ||||||
Office Relocation Expense |
| 7,500 | ||||||
Miscellaneous |
3,178 | 11,535 | ||||||
|
|
|
|
|||||
Total Operating Expenses |
$ | 2,879,268 | $ | 2,428,442 | ||||
|
|
|
|
F-66
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
On April 17, 2014 (Closing Date), LendingClub Corporation (Lending Club or Company) entered into an Interest Purchase Agreement (Purchase Agreement) with Springstone Financial, LLC, a Delaware limited liability company (Springstone), Premier Payment Solutions, Inc., a Massachusetts corporation (PPS), NBT Capital Corp., a New York corporation (together with PPS, the Sellers), and James P. Donovan, as the Sellers representative thereunder, pursuant to which Lending Club acquired all of the outstanding limited liability company interests of Springstone from the Sellers in a simultaneous signing and closing.
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2013 and for the nine months ended September 30, 2014 give effect to the acquisition as if it had occurred on January 1, 2013. The unaudited pro forma condensed combined statements of operations are derived from the historical statements of operations of LendingClub and Springstone for the year ended December 31, 2013 and the nine months ended September 30, 2014.
The purchase was accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price, as described in Note 3 to the unaudited pro forma condensed statements of operations, is allocated to the tangible and intangible assets acquired and liabilities assumed in connection with the acquisition, based on their estimated fair values as of the acquisition date. The areas of the purchase price allocation that are not yet finalized relate to the determination of certain contingent liabilities, a revenue refund liability, a deferred tax asset or liability and the net working capital balance as of the acquisition date.
In addition, the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2013 and for the nine months ended September 30, 2014 reflect (i) the automatic conversion of all of our convertible preferred stock and (ii) the automatic conversion and exercise of certain warrants to purchase shares of our common stock, both upon the completion of our initial public offering as if these transactions had occurred as of the beginning of the period presented or the original date of issuance, if later.
The unaudited pro forma condensed combined statements of operations are not intended to represent or be indicative of the consolidated results of operations of LendingClub that would have been reported had the acquisition been completed as of the dates presented, and should not be construed as representative of the future consolidated results of operations of the combined entity.
F-67
LendingClub Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2013
(In thousands, except for share and per share data)
Historical | ||||||||||||||||||||
LendingClub
Corporation |
Springstone
Financial, LLC |
Pro Forma
Adjustments |
Notes |
Pro Forma
Combined |
||||||||||||||||
Operating Revenue: |
||||||||||||||||||||
Transaction fees |
$ | 85,830 | $ | 17,316 | $ | | $ | 103,146 | ||||||||||||
Servicing fees |
3,951 | | | 3,951 | ||||||||||||||||
Management fees |
3,083 | | | 3,083 | ||||||||||||||||
Other revenue |
5,111 | | | 5,111 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total Operating Revenue |
97,975 | 17,316 | | 115,291 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net Interest Income (Expense): |
||||||||||||||||||||
Total interest income |
187,507 | 3 | | 187,510 | ||||||||||||||||
Total interest expense |
(187,447 | ) | | (1,749 | ) | a) | (189,196 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net Interest Income (Expense) |
60 | 3 | (1,749 | ) | (1,686 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Fair valuation adjustments, loans |
(57,629 | ) | | | (57,629 | ) | ||||||||||||||
Fair valuation adjustments, notes and certificates |
57,596 | | | 57,596 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net Interest Income (Expense) after Fair Value Adjustments |
27 | 3 | (1,749 | ) | (1,719 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total Net Revenue |
98,002 | 17,319 | (1,749 | ) | 113,572 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating Expenses: |
||||||||||||||||||||
Sales and marketing |
39,037 | 3,484 | | 42,521 | ||||||||||||||||
Origination and servicing |
17,217 | 2,331 | | 19,548 | ||||||||||||||||
General and administrative |
34,440 | 2,877 | 15,335 | d) | 58,202 | |||||||||||||||
| | 5,550 | e) | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total Operating Expenses |
90,694 | 8,692 | 20,885 | 120,271 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Income (Loss) before Income Taxes |
7,308 | 8,627 | (22,634 | ) | (6,699 | ) | ||||||||||||||
Income tax expense |
| | 2,021 | f) | 2,021 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net Income (Loss) |
$ | 7,308 | $ | 8,627 | $ | (24,655 | ) | $ | (8,720 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net Income (Loss) per share: |
||||||||||||||||||||
Basic net loss per share attributable to common shareholders |
$ | 0.00 | $ | (0.03 | ) | |||||||||||||||
Diluted net loss per share attributable to common shareholders |
$ | 0.00 | $ | (0.03 | ) | |||||||||||||||
Weighted-average shares of common stock used in computing net loss per share: |
||||||||||||||||||||
Basic |
| 8,834,486 | g) |
|
|
|
||||||||||||||
51,557,136 | 240,209,056 | h | ) | 300,600,678 | ||||||||||||||||
|
|
|
|
|||||||||||||||||
Diluted |
81,426,976 | 219,173,702 | h) |
|
300,600,678
|
|
||||||||||||||
|
|
|
|
F-68
LendingClub Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Nine Months Ended September 30, 2014
(In thousands, except for share and per share data)
Historical | ||||||||||||||||||
LendingClub
Corporation (1) |
Springstone
Financial, LLC (2) |
Pro Forma
Adjustments |
Notes |
Pro Forma
Combined |
||||||||||||||
Operating Revenue: |
||||||||||||||||||
Transaction fees |
$ | 133,835 | $ | 5,894 | $ | | $ | 139,729 | ||||||||||
Servicing fees |
6,301 | | | 6,301 | ||||||||||||||
Management fees |
4,163 | | | 4,163 | ||||||||||||||
Other revenue |
(438 | ) | 1 | | (437 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Operating Revenue |
143,861 | 5,895 | | 149,756 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net Interest Income (Expense): |
||||||||||||||||||
Total interest income |
252,298 | | | 252,298 | ||||||||||||||
Total interest expense |
(253,054 | ) | | (454 | ) | a) | (253,508 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net Interest Income (Expense) |
(756 | ) | | (454 | ) | (1,210 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Fair valuation adjustments, loans |
(84,963 | ) | (131 | ) | | (85,094 | ) | |||||||||||
Fair valuation adjustments, notes and certificates |
84,865 | | | 84,865 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net Interest Income (Expense) after Fair Value Adjustments |
(854 | ) | (131 | ) | (454 | ) | (1,439 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Net Revenue |
143,007 | 5,764 | (454 | ) | 148,317 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating Expenses: |
||||||||||||||||||
Sales and marketing |
60,808 | 1,212 | (358 | ) | c) | 61,662 | ||||||||||||
Origination and servicing |
26,135 | 840 | (384 | ) | c) | 26,591 | ||||||||||||
General and administrative |
78,862 | 5,152 | (2,288 | ) | b) | 79,952 | ||||||||||||
| | (3,168 | ) | c) | ||||||||||||||
| | 24 | d) | |||||||||||||||
| | 1,370 | e) | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Operating Expenses |
165,805 | 7,204 | (4,804 | ) | 168,205 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Income (Loss) before Income Taxes |
(22,798 | ) | (1,440 | ) | 4,350 | (19,888 | ) | |||||||||||
Income tax expense |
1,059 | | 456 | f) | 1,515 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net Income (Loss) |
$ | (23,857 | ) | $ | (1,440 | ) | $ | 3,894 | $ | (21,403 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||||
Net Income (Loss) per share: |
||||||||||||||||||
Basic net loss per share attributable to common shareholders |
$ | (0.41 | ) | $ | (0.07 | ) | ||||||||||||
Diluted net loss per share attributable to common shareholders |
$ | (0.41 | ) | $ | (0.07 | ) | ||||||||||||
Weighted-average shares of common stock used in computing net loss per share: |
||||||||||||||||||
Basic |
| 8,834,486 | g) | |||||||||||||||
57,958,838 | 240,245,716 | h) | 307,039,040 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||
Diluted |
|
57,958,838
|
|
249,080,202 | h) |
|
307,039,040
|
|
||||||||||
|
|
|
|
|
|
(1) | Includes the results of operations of Springstone Financial, LLC for the period from April 18, 2014 to September 30, 2014. |
(2) | Includes the results of operations of Springstone Financial, LLC for the period from January 1, 2014 through April 17, 2014. |
F-69
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Note 1 Description of Transactions
Springstone Acquisition
On April 17, 2014 (Closing Date), LendingClub Corporation (Lending Club or Company) entered into an Interest Purchase Agreement (Purchase Agreement) with Springstone Financial, LLC, a Delaware limited liability company (Springstone), Premier Payment Solutions, Inc., a Massachusetts corporation (PPS), NBT Capital Corp., a New York corporation (together with PPS, Sellers), and James P. Donovan, as the Sellers representative thereunder, pursuant to which Lending Club acquired all of the outstanding limited liability company interests of Springstone from the Sellers in a simultaneous signing and closing. We refer to the purchase by Lending Club and the sale by the Sellers pursuant to the Purchase Agreement as the Acquisition. As a result of the closing of the Acquisition, Springstone became a wholly owned subsidiary of Lending Club.
Under the terms of the purchase agreement, the sellers received at the closing an aggregate of $113 million in cash and $25 million worth of shares of our Series F convertible preferred stock. In connection with the acquisition, we also paid $2.4 million for transaction costs incurred by Springstone. For accounting purposes, the purchase price was $111.8 million, which was comprised of $109.0 million in cash and shares of Series F convertible preferred stock with an aggregate value of $2.8 million. To secure the retention of certain key employees, a total of $25.6 million comprised of $22.1 million of shares of Series F convertible preferred stock (Escrow Shares) and $3.5 million of cash were placed in a third-party escrow and are subject to certain vesting and forfeiture conditions applicable to these employees continuing employment over a three-year period from the closing. These amounts will be accounted for as a compensation arrangement and expensed over the three-year vesting period. Additionally, $19.0 million of the cash consideration and certain Escrow Shares were placed in a third-party escrow for 15 months from the closing date to secure, in part, the indemnification obligations of the sellers under the purchase agreement. The cash portion of the consideration was funded by a combination of cash from Lending Club and proceeds of the Debt Financing and Preferred Stock Financing (each as described below). Both the Debt Financing and the Preferred Stock Financing closed just prior to the Acquisition.
The Purchase Agreement contains representations, warranties and covenants of the Company, Springstone and the Sellers. The Purchase Agreement also contains customary indemnification provisions whereby the Sellers will indemnify Lending Club and affiliated parties for certain losses arising out of any inaccuracy in the representations and warranties, or breaches of the covenants, of Springstone or the Sellers under the Purchase Agreement and certain other matters.
The Debt Financing
In connection with the Acquisition, on April 16, 2014, Lending Club entered into a Credit and Guaranty Agreement (Credit Agreement) with joint lead arrangers and joint bookrunners led by Morgan Stanley Senior Funding, Inc., along with Credit Suisse Securities (USA) LLC, Silicon Valley Bank, Citicorp North America Inc., and JPMorgan Chase Bank, N.A. (Lenders), under which the Lenders agreed to make a $50.0 million term loan to Lending Club (Term Loan).
Also in connection with the Credit Agreement, on April 16, 2014, Lending Club entered into a Pledge and Security Agreement with Morgan Stanley Senior Funding, Inc. as Collateral Agent (Pledge and Security Agreement).
The Term Loan is to be drawn in a single borrowing to finance the Acquisition and pay related fees and expenses, including fees and expenses related to the Credit Agreement. The Company may request that the Lenders establish new term loan facilities, provided that the aggregate principal amount of all new term loan facilities do not exceed $75.0 million. No additional amounts are available for borrowing. We refer to the borrowing by Lending Club and the lending by the Lenders pursuant to the Credit Agreement as the Debt Financing.
F-70
The Term Loan matures three years after the Closing Date, or April 16, 2017 and amortizes at the rate of $312,500 per quarter, with the remaining principal amount payable at maturity. The Term Loan can be prepaid at any time at the Companys option without premium or penalty, subject to a minimum prepayment of $1.0 million. If a Eurodollar Rate loan is selected (as defined below), customary breakage costs are payable in the case of any prepayment on a date other than the last day of an interest period. The Term Loan is required to be prepaid in certain circumstances, including upon sales of assets other than loans and upon the issuance of debt or redeemable capital stock.
Borrowings under the Credit Agreement bear interest, which at the option of the Company may be either (a) a floating base rate tied to an underlying index plus an additional 1.25% per annum (Base Rate Loan) or (b) a Eurodollar rate (for an interest period of one, two, three or six months) plus an additional 2.25% per annum (Eurodollar Rate Loan).
The Preferred Stock Financing
In connection with the Acquisition, on April 16, 2014, Lending Club sold an aggregate of 6,390,556 shares of its Series F Preferred Stock, par value $0.01 per share (Financing Shares) to certain new investors for an aggregate gross proceeds to Lending Club of approximately $65.0 million, pursuant to a Series F Preferred Stock Purchase Agreement dated April 16, 2014 (Preferred Stock Purchase Agreement). Lending Club sold the Financing Shares pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended; all investors in the Preferred Stock Financing were accredited investors (as defined under Rule 501 of Regulation D) and Lending Club made no general solicitation for the sale of the Financing Shares. The Financing Shares are convertible into shares of Lending Club common stock, par value $0.01 per share, on a one-for-one basis, as adjusted from time to time pursuant to the anti-dilution provisions of the Lending Club Restated Certificate of Incorporation. We refer to the sale by Lending Club and the purchase by the investors of the Financing Shares pursuant to the Preferred Stock Purchase Agreement as the Preferred Stock Financing.
Note 2 Basis of Pro Forma Presentation
The historical financial information has been adjusted to give pro forma effect to events that are (i) directly attributable to the transaction, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed combined statements of income, expected to have a continuing impact on the combined results. We have completed the allocation of the purchase price to acquired assets and liabilities with the exception of finalizing the determination of certain contingent liabilities and the finalization of a revenue refund liability, and deferred tax asset or liability and the net working capital balance as of the acquisition date. Accordingly, the pro forma adjustments are preliminary and have been prepared to illustrate the estimated effect of the transactions.
Note 3 Purchase Price Allocation
Under the acquisition method of accounting, the total purchase price is allocated to Springstones tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of April 17, 2014, the acquisition date.
F-71
We have completed the allocation of the purchase price to acquired assets and liabilities with the exception of finalizing the determination of certain contingent liabilities and the finalization of any deferred tax asset or liability as of the acquisition date. The preliminary purchase price allocation is as follows (in thousands):
Fair Value | ||||
Assets: |
||||
Cash |
$ | 2,256 | ||
Restricted cash |
1,581 | |||
Property, equipment and software |
366 | |||
Other assets |
599 | |||
Identified intangible assets |
40,200 | |||
Goodwill |
72,592 | |||
Liabilities: |
||||
Accounts payable |
239 | |||
Accrued expenses and other liabilities |
5,536 | |||
|
|
|||
Total purchase consideration |
$ | 111,819 | ||
|
|
Note 4 Acquired Intangible Assets
The identified intangible assets include customer relationship, technology and brand name intangible assets with estimated fair values of $39.5 million, $0.4 million and $0.3 million, respectively. The customer relationship intangible asset is being amortized on an accelerated basis over a 14 year period. The brand name and technology intangible assets are being amortized on a straight line basis over 2 and 3 year periods, respectively.
Note 5 Notes to Unaudited Pro Forma Condensed Combined Statements of Operations
The pro forma condensed combined statements of operations assume (i) the Acquisition occurred on January 1, 2013 and (ii) the automatic conversion of our convertible preferred stock as if the automatic conversion occurred on January 1, 2013 or the original date of issuance of the shares, if later, and the automatic conversion and exercise of our warrants. The specific pro forma adjustments included in the unaudited pro forma condensed combined statements of operations are as follows:
a) | Represents the estimated interest expense based on the annual interest rate of 2.57% on the $50 million ($49.8 million net of discount) Term Loan entered into in connection with the acquisition and quarterly principal payments of $0.3 million made on regular basis. Additionally, this amount includes the amortization of debt issuance costs related to the Term Loan. |
b) | Includes $2.3 million of acquisition of acquisition-related expenses which were incurred during the nine months ended September 30, 2014. As these are non-recurring charges directly related to the Acquisition, we excluded these charges for the nine months ended September 30, 2014. |
c) | Includes $3.9 million of compensation expenses which were incurred during the nine months of 2014. As these are non-recurring charges directly related to the Acquisition, we excluded these charges for the nine months ended September 30, 2014. |
d) | Includes the amortization of stock based compensation in the amount of $22.1 million and $3.5 million in a cash compensation arrangement for the year ended December 31, 2013 and nine months ended September 30, 2014. This compensation is subject to forfeiture and vesting conditions of key continuing employees over a three year service performance period on a graded vesting basis. |
e) |
Represents the amortization of intangible assets acquired. The estimated fair value of the customer relationship intangible assets of $39.5 million has a useful life of 14 years and will be amortized on an accelerated basis. The estimated fair value of the technology and brand name intangible assets totaling $0.7 million have a useful life of 2 to 3 years and will be amortized on straight-line basis. The annual |
F-72
amortization expense for the customer relationship intangible assets for the five years following the acquisition date will be approximately $5.3 million, $4.9 million, $4.5 million, $4.1 million and $3.8 million, respectively. |
f) | Represents the tax expense related to the amortization of the tax deductible goodwill from the Acquisition, which gives rise to an indefinite-lived deferred tax liability. There is no income tax benefit recorded on the pretax loss due to an increase in our deferred tax asset valuation allowance. |
g) | Represents shares of Series F preferred stock issued in connection with the Acquisition, which was automatically converted into our common stock. |
h) | Represents shares of common stock from the automatic conversion of our convertible preferred stock as if the conversion occurred on January 1, 2013 or the original date of issuance of the shares, if later, and the automatic conversion and exercise of our warrants. For details, see Note 6 Pro Forma Net Loss Per Common Share below. |
Note 6 Pro Forma Net Loss Per Common Share
The pro forma basic and diluted net loss per common share reflects the automatic conversion of all our outstanding preferred stock as if the conversion had occurred as of January 1, 2013 or the original date of issuance, if later, and the automatic conversion and exercise of certain warrants to purchase our common stocks upon the completion of our initial public offering. No shares of common stock were issued as consideration in the Acquisition.
F-73
The following table details the pro forma adjustments and the computation of the unaudited pro forma basic and diluted net income (loss) per share (dollars in thousands, except shares and per share data):
Year Ended
December 31, 2013 |
Nine Months Ended
September 30, 2014 |
|||||||
Pro forma net income (loss) |
$ | (8,720) | $ | (21,403) | ||||
Less: Net income allocated to participating securities (1) |
| | ||||||
|
|
|
|
|||||
Net income (loss) available to common shareholders |
$ | (8,720) | $ | (21,403) | ||||
|
|
|
|
|||||
Pro forma weighted-average shares used to compute net income (loss) per shares available to common stockholders, basic (2) : |
||||||||
Basic weighted-average shares common stock outstanding, as reported |
51,557,136 | 57,958,838 | ||||||
Pro forma adjustment to reflect the portion of the Series F preferred stock in connection with the Acquisition |
8,834,486 | 8,834,486 | ||||||
Pro forma adjustment to reflect conversion of our convertible preferred stock |
239,822,864 | 240,217,868 | ||||||
Pro forma adjustment to reflect conversion of certain convertible preferred stock warrants and certain common stock warrants (3) |
386,192 | 27,848 | ||||||
|
|
|
|
|||||
Total pro forma adjustments |
249,043,542 | 249,080,202 | ||||||
|
|
|
|
|||||
Pro forma weighted-average shares used to compute pro forma net loss per share available to common stockholders, basic |
300,600,678 | 307,039,040 | ||||||
|
|
|
|
|||||
Pro forma weighted-average shares used to compute net income (loss) per shares available to common stockholders, diluted (2) : |
||||||||
Pro forma weighted-average shares used to compute pro forma net loss per share available to common stockholders, basic |
300,600,678 | 307,039,040 | ||||||
Pro forma weighted average effect of dilutive securities: |
||||||||
Diluted effect of stock options |
| | ||||||
Diluted effect of warrants |
| | ||||||
|
|
|
|
|||||
Pro forma weighted-average shares used to compute pro forma net loss per share available to common stockholders, diluted |
300,600,678 | 307,039,040 | ||||||
|
|
|
|
|||||
Pro forma net income (loss) per common stock: |
||||||||
Basic |
$ | (0.03) | $ | (0.07) | ||||
Diluted |
$ | (0.03) | $ | (0.07) |
(1) | In a period with net loss, only dividends, if any, are allocated to participating securities. |
(2) | In April 2014, our board of directors approved a two-for-one stock split of our outstanding capital stock and in August 2014, our board of directors approved another two-for-one split of our outstanding capital stock, which became effective in September 2014. All share and per share data in this table has been adjusted to reflect these stock splits. |
(3) | Assumes the automatic conversion and exercise of warrants to purchase a maximum of 331,616 shares of Series A convertible preferred stock for the year ended December 31, 2013. In addition, the pro forma adjustments include the automatic exercise of common stock warrants to purchase a maximum of 54,576 shares and 27,848 shares of common stock for the year ended December 31, 2013 and the nine months ended September 30, 2014, respectively. Upon the completion of our initial public offering, these warrants will automatically be net exercised for common stock, resulting in the issuance of fewer shares. |
F-74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all expenses to be paid by the Registrant, other than underwriting discounts and commissions, upon completion of this offering. All amounts shown are estimates except for the SEC registration fee, the FINRA filing fee and the stock exchange listing fee.
SEC registration fee |
$ | 92,526 | ||
FINRA filing fee |
119,939 | |||
Stock exchange listing fee |
250,000 | |||
Blue Sky fees and expenses |
15,000 | |||
Printing and engraving expenses |
425,000 | |||
Legal fees and expenses |
3,000,000 | |||
Accounting fees and expenses |
2,000,000 | |||
Transfer agent and registrar fees |
6,000 | |||
Miscellaneous expenses |
175,000 | |||
|
|
|||
Total |
$ | 6,083,465 | ||
|
|
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporations board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the Delaware General Corporation Law are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended (Securities Act).
As permitted by the Delaware General Corporation Law, the Registrants restated certificate of incorporation to be effective upon the completion of this offering contains provisions that eliminate the personal liability of its directors for monetary damages for any breach of fiduciary duties as a director, except liability:
| for any breach of the directors duty of loyalty to the Registrant or its stockholders; |
| for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
| under Section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock repurchases or redemptions); or |
| for any transaction from which the director derived an improper personal benefit. |
As permitted by the Delaware General Corporation Law, the Registrants restated bylaws to be effective upon the completion of this offering provide that:
| the Registrant is required to indemnify its directors and executive officers to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions; |
| the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law; |
| the Registrant is required to advance expenses, as incurred, to its directors and executive officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions; and |
| the rights conferred in the restated bylaws are not exclusive. |
II-1
The Registrant intends to enter into amended and restated indemnification agreements with each of its current directors and executive officers to provide these directors and executive officers additional contractual assurances regarding indemnification. There is no pending litigation or proceeding involving a director or executive officer of the Registrant for which indemnification is sought. Reference is also made to the underwriting agreement to be filed as Exhibit 1.1 to this registration statement, which provides for the indemnification of the Registrant and controlling persons of the Registrant against certain liabilities.
Item 15. Recent Sales of Unregistered Securities
From October 31, 2011 through October 31, 2014, the Registrant issued the following unregistered securities:
In January 2012, the Registrant issued 6,795,880 shares of Series D convertible preferred stock for aggregate cash consideration of approximately $6.0 million to 14 accredited investors. These securities were sold in reliance on the exemption from the registration requirements set forth in Section 4(a)(2) of the Securities Act.
In June 2012, the Registrant issued 10,000,000 shares of Series E convertible preferred stock for aggregate cash consideration of approximately $17.5 million to two accredited investors. These securities were sold in reliance on the exemption from the registration requirements set forth in Section 4(a)(2) of the Securities Act.
In April 2014, the Registrant issued 6,390,556 shares of Series F convertible preferred stock for aggregate cash consideration of approximately $65.0 million to 32 accredited investors and 2,443,930 shares of Series F convertible preferred stock as consideration for the acquisition of Springstone Financial, LLC worth approximately $25.0 million to two accredited investors. These securities were issued in reliance on the exemption from the registration requirements set forth in Section 4(a)(2) of the Securities Act.
From October 31, 2011 to July 22, 2014, the Registrant issued an aggregate of 4,813,000 shares of common stock to employees and consultants upon the exercise of stock options for aggregate consideration of approximately $0.3 million. The shares of common stock issued upon the exercise of the options were issued in reliance on the exemption from the registration requirements set forth in Rule 701 promulgated under the Securities Act.
From October 31, 2011 to July 22, 2014, the Registrant issued an aggregate of 18,109,762 shares of common stock to employees and consultants upon the exercise of stock options for aggregate consideration of approximately $4.6 million. The shares of common stock issued upon the exercise of the options were issued in reliance on the exemption from the registration requirements set forth in Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act.
From October 31, 2011 to October 31, 2014, the Registrant issued an aggregate of 1,551,976 shares of common stock upon the exercise of warrants for aggregate consideration of approximately $0.5 million. The shares of common stock were issued in reliance on the exemption from the registration requirements set forth in Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act.
From October 31, 2011 to October 31, 2014, the Registrant issued an aggregate of 3,673,805 shares of Series A convertible preferred stock upon the exercise of warrants for aggregate consideration of approximately $1.2 million. The shares of Series A convertible preferred stock were issued in reliance on the exemption from the registration requirements set forth in Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act.
From October 31, 2011 to October 31, 2014, the Registrant issued an aggregate of 1,496,720 shares of Series B convertible preferred stock upon the exercise of warrants for aggregate consideration of approximately $0.3 million. The shares of Series B convertible preferred stock were issued in reliance on the exemption from the registration requirements set forth in Section 4(a)(2) of the Securities Act.
Share and per share amounts contained in this Item 15 reflect the two-for-one stock split of our common stock, which became effective on September 5, 2014.
II-2
Item 16. Exhibits
(a) Exhibits.
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
1.1 | Form of Underwriting Agreement | X | ||||||||||
2.1 | Interest Purchase Agreement, dated as of April 17, 2014, by and among LendingClub Corporation, Springstone Financial, LLC, Premier Payment Solutions, Inc., NBT Capital Corp. and James P. Donovan | 8-K | 000-54752 | 2.1 | April 17, 2014 | |||||||
3.1 | Restated Certificate of Incorporation of LendingClub Corporation | 8-K | 000-54752 | 3.1 | April 17, 2014 | |||||||
3.2 | Amendment to Restated Certificate of Incorporation | 8-K | 000-54752 | 3.1 | September 9, 2014 | |||||||
3.3 | Form of Restated Certificate of Incorporation of LendingClub Corporation, to be in effect upon the completion of this offering | X | ||||||||||
3.4 | Amended and Restated Bylaws of LendingClub Corporation | 10-K | 333-151827 | 3.2 | June 17, 2009 | |||||||
3.5 | Form of Restated Bylaws of LendingClub Corporation, to be in effect upon the completion of this offering | X | ||||||||||
4.1 |
Form of Three-Year Member Payment Dependent Note (included as Exhibit A to
Exhibit 4.6) |
S-1,
Amendment No. 1 |
333-198393 | 4.1 | October 20, 2014 | |||||||
4.2 |
Form of Five-Year Member Payment Dependent Note (included as Exhibit B to
Exhibit 4.6) |
S-1,
Amendment No. 1 |
333-198393 | 4.2 | October 20, 2014 | |||||||
4.3 | Form of Indenture by and between LendingClub Corporation and Wells Fargo Bank, National Association |
S-1,
Amendment No. 3 |
333-151827 | 4.2 | October 9, 2008 | |||||||
4.4 | First Supplemental Indenture, dated as of July 10, 2009, by and between LendingClub Corporation and Wells Fargo Bank, National Association |
S-1, Post-
Effective Amendment No. 3 |
333-151827 | 4.3 | July 23, 2009 |
II-3
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
4.5 | Second Supplemental Indenture, dated as of May 5, 2010, by and between LendingClub Corporation and Wells Fargo Bank, National Association |
S-1, Post-
Effective Amendment No. 5 |
333-151827 | 4.5 | May 6, 2010 | |||||||
4.6 |
Third Supplemental Indenture, dated as of October 3, 2014, by and between LendingClub Corporation and Wells Fargo Bank, National Association. |
S-1,
Amendment No. 1 |
333-198393 | 4.6 | October 20, 2014 | |||||||
4.7 | Amended and Restated Investor Rights Agreement, dated as of April 16, 2014, by and among LendingClub Corporation and the investors named therein | 8-K | 000-54752 | 4.1 | April 17, 2014 | |||||||
4.8 | Form of Common Stock Certificate of LendingClub Corporation |
S-1,
Amendment No. 2 |
333-198393 | 4.8 |
November 17,
2014 |
|||||||
4.9 | Forms of Warrants to Purchase Common Stock | X | ||||||||||
4.10 | Forms of Warrants to Purchase Series A Convertible Preferred Stock | X | ||||||||||
5.1 | Opinion of Fenwick & West LLP | X | ||||||||||
10.1 | Form of Indemnity Agreement | X | ||||||||||
10.2 | Form of Loan Agreement | S-1 | 333-177230 | 10.1 | October 7, 2011 | |||||||
10.3 | Form of Borrower Membership Agreement | S-1 | 333-177230 | 10.2 | October 7, 2011 | |||||||
10.4 | LendingClub Corporation 2007 Stock Incentive Plan, as amended, and form of award agreement thereunder | X | ||||||||||
10.5 |
[Reserved] |
|||||||||||
10.6 | 2014 Equity Incentive Plan, to become effective upon the completion of this offering, and forms of award agreements thereunder | X | ||||||||||
10.7 | 2014 Employee Stock Purchase Plan, to become effective upon the completion of this offering, and forms of enrollment agreements thereunder | X |
II-4
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
10.8+ | Second Amended and Restated Loan Sale Agreement, dated as of February 28, 2014, by and between LendingClub Corporation and WebBank | 10-K | 000-54752 | 10.6 | March 31, 2014 | |||||||
10.9+ | Second Amended and Restated Loan Account Program Agreement, dated as of February 28, 2014, by and between LendingClub Corporation and WebBank | 10-K | 000-54752 | 10.7 | March 31, 2014 | |||||||
10.10 | Hosting Services Agreement, dated as of October 6, 2008, by and between LendingClub Corporation and FOLIOfn Investments, Inc. | 10-K | 333-151827 | 10.15 | June 17, 2009 | |||||||
10.11 | Services Agreement, dated as of October 6, 2008, by and between LendingClub Corporation and FOLIOfn Investments, Inc. |
S-1,
Amendment No. 1 |
333-198393 | 10.11 | October 20, 2014 | |||||||
10.12 | License Agreement, dated as of October 6, 2008, by and between LendingClub Corporation and FOLIOfn Investments, Inc. | 10-K | 333-151827 | 10.17 | June 17, 2009 | |||||||
10.13 | Backup and Successor Servicing Agreement, dated as of September 15, 2011, by and between Portfolio Financial Servicing Company and LendingClub Corporation |
S-1,
Amendment No. 1 |
333-198393 | 10.13 | October 20, 2014 | |||||||
10.14 | Form of Partner Agreement | S-1/A | 333-177230 | 10.28 | March 19, 2012 | |||||||
10.15 | Form of Employment Agreement for Chief Executive Officer | X | ||||||||||
10.16 | Form of Employment Agreement for Executive Officers other than Chief Executive Officer | X | ||||||||||
10.17 |
[Reserved] |
|||||||||||
10.18 |
[Reserved] |
|||||||||||
10.19 | [Reserved] | |||||||||||
10.20 | Credit and Guaranty Agreement, dated as of April 16, 2014, among LendingClub Corporation, the guarantors party thereto, the lenders party thereto and Morgan Stanley Senior Funding, Inc. |
S-1, Post-
Effective Amendment No. 4 |
333-177230 | 10.23 | April 29, 2014 |
II-5
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
10.21 | Pledge and Security Agreement, dated April 16, 2014, by and among LendingClub Corporation, the guarantors referred to therein and Morgan Stanley Senior Funding, Inc. |
S-1, Post-
Effective Amendment No. 4 |
333-177230 | 10.24 | April 29, 2014 | |||||||
10.22 | Lease Agreement, dated as of May 17, 2013, by and between LendingClub Corporation and Forward One, LLC, as amended |
S-1,
Amendment No. 2 |
333-198393 | 10.22 |
November 17,
2014 |
|||||||
10.23 | Assignment and Assumption of Lease, dated as of October 17, 2014, by and between LendingClub Corporation and Teachscape, Inc. |
S-1,
Amendment No. 2 |
333-198393 | 10.23 |
November 17,
2014 |
|||||||
10.24 | Form of Fund Subscription Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.24 | October 20, 2014 | |||||||
10.25 |
Form of Investment Advisory Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.25 | October 20, 2014 | |||||||
10.26 | Form of Loan Purchase Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.26 | October 20, 2014 | |||||||
10.27 | Form of Loan Servicing Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.27 | October 20, 2014 | |||||||
10.28 | Form of Investor Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.28 | October 20, 2014 | |||||||
21.1 | List of Subsidiaries | S-1 | 333-198393 | 21.1 | August 27, 2014 | |||||||
23.1 | Consent of Deloitte & Touche LLP | X | ||||||||||
23.2 | Consent of Grant Thornton LLP | X | ||||||||||
23.3 | Consent of Auerr, Zajac & Associates, LLP | X | ||||||||||
23.4 | Consent of Fenwick & West LLP (included in Exhibit 5.1) | X | ||||||||||
24.1 | Power of Attorney | S-1 | 333-198393 | 24.1 | August 27, 2014 | |||||||
24.2 | Power of Attorney | X | ||||||||||
101.INS | XBRL Instance Document | X |
II-6
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | ||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | ||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | X | ||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X |
+ | Confidential treatment requested. |
(b) Financial Statement Schedules.
No financial statement schedules have been provided because the information called for is not required or is shown either in the financial statements or notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) | For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(2) | For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in San Francisco, California, on the 1st day of December 2014.
LENDINGCLUB CORPORATION | ||
By: | /s/ Renaud Laplanche | |
Renaud Laplanche | ||
Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
Title |
Date |
||
/s/ Renaud Laplanche Renaud Laplanche |
Chief Executive Officer and Director (Principal Executive Officer) |
December 1, 2014 | ||
/s/ Carrie Dolan Carrie Dolan |
Chief Financial Officer (Principal Financial and Accounting Officer) |
December 1, 2014 | ||
* Jeffrey Crowe |
Director | December 1, 2014 | ||
* Daniel Ciporin |
Director | December 1, 2014 | ||
* Rebecca Lynn |
Director | December 1, 2014 | ||
* John J. Mack |
Director | December 1, 2014 | ||
* Mary Meeker |
Director | December 1, 2014 | ||
* John C. (Hans) Morris |
Director | December 1, 2014 | ||
* Lawrence Summers |
Director | December 1, 2014 | ||
/s/ Simon Williams Simon Williams |
Director | December 1, 2014 |
* By: |
/s/ Carrie Dolan |
|||
Attorney-in-fact |
II-8
Exhibit Index
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
1.1 | Form of Underwriting Agreement | X | ||||||||||
2.1 | Interest Purchase Agreement, dated as of April 17, 2014, by and among LendingClub Corporation, Springstone Financial, LLC, Premier Payment Solutions, Inc., NBT Capital Corp. and James P. Donovan | 8-K | 000-54752 | 2.1 | April 17, 2014 | |||||||
3.1 | Restated Certificate of Incorporation of LendingClub Corporation | 8-K | 000-54752 | 3.1 | April 17, 2014 | |||||||
3.2 | Amendment to Restated Certificate of Incorporation | 8-K | 000-54752 | 3.1 | September 9, 2014 | |||||||
3.3 | Form of Restated Certificate of Incorporation of LendingClub Corporation, to be in effect upon the completion of this offering | X | ||||||||||
3.4 | Amended and Restated Bylaws of LendingClub Corporation | 10-K | 333-151827 | 3.2 | June 17, 2009 | |||||||
3.5 | Form of Restated Bylaws of LendingClub Corporation, to be in effect upon the completion of this offering | X | ||||||||||
4.1 | Form of Three-Year Member Payment Dependent Note (included as Exhibit A to Exhibit 4.6) |
S-1,
Amendment No. 1 |
333-198393 | 4.1 | October 20, 2014 | |||||||
4.2 | Form of Five-Year Member Payment Dependent Note (included as Exhibit B to Exhibit 4.6) |
S-1,
Amendment No. 1 |
333-198393 | 4.2 |
October 20, 2014
|
|||||||
4.3 | Form of Indenture by and between LendingClub Corporation and Wells Fargo Bank, National Association |
S-1,
Amendment No. 3 |
333-151827 | 4.2 | October 9, 2008 | |||||||
4.4 | First Supplemental Indenture, dated as of July 10, 2009, by and between LendingClub Corporation and Wells Fargo Bank, National Association |
S-1, Post-
Effective Amendment No. 3 |
333-151827 | 4.3 | July 23, 2009 | |||||||
4.5 | Second Supplemental Indenture, dated as of May 5, 2010, by and between LendingClub Corporation and Wells Fargo Bank, National Association |
S-1, Post-
Effective Amendment No. 5 |
333-151827 | 4.5 | May 6, 2010 |
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
4.6 |
Third Supplemental Indenture, dated as of October 3, 2014, by and between LendingClub Corporation and Wells Fargo Bank, National Association. |
S-1,
Amendment No. 1 |
333-198393 | 4.6 | October 20, 2014 | |||||||
4.7 | Amended and Restated Investor Rights Agreement, dated as of April 16, 2014, by and among LendingClub Corporation and the investors named therein | 8-K | 000-54752 | 4.1 | April 17, 2014 | |||||||
4.8 | Form of Common Stock Certificate of LendingClub Corporation |
S-1,
Amendment No. 2 |
333-198393 | 4.8 |
November 17,
2014 |
|||||||
4.9 | Forms of Warrants to Purchase Common Stock | X | ||||||||||
4.10 | Forms of Warrants to Purchase Series A Convertible Preferred Stock | X | ||||||||||
5.1 | Opinion of Fenwick & West LLP | X | ||||||||||
10.1 | Form of Indemnity Agreement | X | ||||||||||
10.2 | Form of Loan Agreement | S-1 | 333-177230 | 10.1 | October 7, 2011 | |||||||
10.3 | Form of Borrower Membership Agreement | S-1 | 333-177230 | 10.2 | October 7, 2011 | |||||||
10.4 | LendingClub Corporation 2007 Stock Incentive Plan, as amended, and form of award agreement thereunder | X | ||||||||||
10.5 | [Reserved] | |||||||||||
10.6 | 2014 Equity Incentive Plan, to become effective upon the completion of this offering, and forms of award agreements thereunder | X | ||||||||||
10.7 | 2014 Employee Stock Purchase Plan, to become effective upon the completion of this offering, and forms of enrollment agreements thereunder | X | ||||||||||
10.8+ | Second Amended and Restated Loan Sale Agreement, dated as of February 28, 2014, by and between LendingClub Corporation and WebBank | 10-K | 000-54752 | 10.6 | March 31, 2014 |
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
10.9+ | Second Amended and Restated Loan Account Program Agreement, dated as of February 28, 2014, by and between LendingClub Corporation and WebBank | 10-K | 000-54752 | 10.7 | March 31, 2014 | |||||||
10.10 | Hosting Services Agreement, dated as of October 6, 2008, by and between LendingClub Corporation and FOLIOfn Investments, Inc. | 10-K | 333-151827 | 10.15 | June 17, 2009 | |||||||
10.11 | Services Agreement, dated as of October 6, 2008, by and between LendingClub Corporation and FOLIOfn Investments, Inc. |
S-1,
Amendment No. 1 |
333-198393 | 10.11 | October 20, 2014 | |||||||
10.12 | License Agreement, dated as of October 6, 2008, by and between LendingClub Corporation and FOLIOfn Investments, Inc. | 10-K | 333-151827 | 10.17 | June 17, 2009 | |||||||
10.13 | Backup and Successor Servicing Agreement, dated as of September 15, 2011, by and between Portfolio Financial Servicing Company and LendingClub Corporation |
S-1,
Amendment No. 1 |
333-198393 | 10.13 | October 20, 2014 | |||||||
10.14 | Form of Partner Agreement | S-1/A | 333-177230 | 10.28 | March 19, 2012 | |||||||
10.15 |
Form of Employment Agreement for Chief Executive Officer |
X | ||||||||||
10.16 |
Form of Employment Agreement for Executive Officers other than Chief Executive Officer |
X | ||||||||||
10.17 |
[Reserved] |
|||||||||||
10.18 |
[Reserved] |
|||||||||||
10.19 |
[Reserved] |
|||||||||||
10.20 | Credit and Guaranty Agreement, dated as of April 16, 2014, among LendingClub Corporation, the guarantors party thereto, the lenders party thereto and Morgan Stanley Senior Funding, Inc. |
S-1, Post-
Effective Amendment No. 4 |
333-177230 | 10.23 | April 29, 2014 | |||||||
10.21 | Pledge and Security Agreement, dated April 16, 2014, by and among LendingClub Corporation, the guarantors referred to therein and Morgan Stanley Senior Funding, Inc. |
S-1, Post-
Effective Amendment No. 4 |
333-177230 | 10.24 | April 29, 2014 |
Exhibit
|
Incorporated by Reference |
Filed
Herewith |
||||||||||
Description |
Form | File No. | Exhibit | Filing Date | ||||||||
10.22 | Lease Agreement, dated as of May 17, 2013, by and between LendingClub Corporation and Forward One, LLC, as amended |
S-1,
Amendment No. 2 |
333-198393 | 10.22 |
November 17,
2014 |
|||||||
10.23 | Assignment and Assumption of Lease, dated as of October 17, 2014, by and between LendingClub Corporation and Teachscape, Inc. |
S-1,
Amendment No. 2 |
333-198393 | 10.23 |
November 17,
2014 |
|||||||
10.24 | Form of Fund Subscription Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.24 | October 20, 2014 | |||||||
10.25 |
Form of Investment Advisory Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.25 | October 20, 2014 | |||||||
10.26 | Form of Loan Purchase Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.26 | October 20, 2014 | |||||||
10.27 | Form of Loan Servicing Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.27 | October 20, 2014 | |||||||
10.28 | Form of Investor Agreement |
S-1,
Amendment No. 1 |
333-198393 | 10.28 | October 20, 2014 | |||||||
21.1 | List of Subsidiaries | S-1 | 333-198393 | 21.1 | August 27, 2014 | |||||||
23.1 | Consent of Deloitte & Touche LLP | X | ||||||||||
23.2 | Consent of Grant Thornton LLP | X | ||||||||||
23.3 | Consent of Auerr, Zajac & Associates, LLP | X | ||||||||||
23.4 | Consent of Fenwick & West LLP (included in Exhibit 5.1) | X | ||||||||||
24.1 | Power of Attorney | S-1 | 333-198393 | 24.1 | August 27, 2014 | |||||||
24.2 | Power of Attorney | X | ||||||||||
101.INS | XBRL Instance Document | X | ||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | ||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | ||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | X | ||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X |
+ | Confidential treatment requested. |
Exhibit 1.1
[ ] Shares
LENDINGCLUB CORPORATION
[ ] COMMON STOCK
$0.01 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
[ ], 2014
[ ], 2014
Morgan Stanley & Co. LLC
Goldman, Sachs & Co.
as Representatives of the several Underwriters
c/o Morgan Stanley & Co. LLC
1585 Broadway
New York, New York 10036
c/o Goldman, Sachs & Co.
200 West Street
New York, New York 10282
Ladies and Gentlemen:
LendingClub Corporation, a Delaware corporation (the Company ), proposes to issue and sell to the several Underwriters named in Schedule II hereto (the Underwriters ), for which Morgan Stanley & Co. LLC ( Morgan Stanley ) and Goldman, Sachs & Co. are acting as representatives (in such capacity, the Representatives ) and certain stockholders of the Company (the Selling Stockholders ) named in Schedule I hereto severally propose to sell to the several Underwriters, an aggregate of [ ] shares of the common stock, par value $0.01 per share of the Company (the Firm Shares ), of which [ ] shares are to be issued and sold by the Company and [ ] shares are to be sold by the Selling Stockholders, each Selling Stockholder selling the amount set forth opposite such Selling Stockholders name in Schedule I hereto.
The Company also proposes to issue and sell to the several Underwriters not more than an additional [ ] shares of its common stock, par value $0.01 per share (the Additional Shares ) if and to the extent that you, as Representatives of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the Shares . The shares of common stock, par value $0.01 per share of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the Common Stock . The Company and the Selling Stockholders are hereinafter sometimes collectively referred to as the Sellers .
The Company has filed with the Securities and Exchange Commission (the Commission ) a registration statement, including a prospectus, relating to the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the Securities Act ), is hereinafter referred to as the Registration Statement ; the prospectus in the form first used to confirm sales of Shares (or in the form first made available to the Underwriters by the Company to meet requests of purchasers pursuant to Rule 173 under the Securities Act) is hereinafter referred to as the Prospectus . If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the Rule 462 Registration Statement ), then any reference herein to the term Registration Statement shall be deemed to include such Rule 462 Registration Statement.
For purposes of this Agreement, free writing prospectus has the meaning set forth in Rule 405 under the Securities Act, Time of Sale Prospectus means the preliminary prospectus together with the documents, pricing information and free writing prospectuses, if any, set forth in Schedule III hereto, and broadly available road show means a bona fide electronic road show as defined in Rule 433(h)(5) under the Securities Act that has been made available without restriction to any person. As used herein, the terms Registration Statement, preliminary prospectus, Time of Sale Prospectus and Prospectus shall include the documents, if any, incorporated by reference therein as of the date hereof.
The Representatives agree that up to [ ] of the Shares to be purchased by the Underwriters under this Agreement shall be reserved for sale to certain of the Companys directors, officers, employees, investors that have invested through its marketplace as of September 30, 2014 and other individuals related to the Company (collectively, Participants ), as set forth in the Prospectus under the heading Underwriters (the Directed Share Program ). The Directed Share Program shall be administered by Fidelity Capital Markets, a division of National Financial Services LLC ( Fidelity ). The Shares to be sold by Fidelity and its affiliates pursuant to the Directed Share Program are referred to hereinafter as the Directed Shares . Any Directed Shares not confirmed for purchase by any Participant by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus.
1. Representations and Warranties of the Company . The Company represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the Companys knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain, as of the date of such amendment or supplement, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented after the effective time of this Agreement, if applicable, will as of the
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date of such amendment or supplement comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (iii) the Time of Sale Prospectus does not, and at the time of each sale of the Shares in connection with the offering when the Prospectus is not yet available to prospective purchasers and at the Closing Date (as defined in Section 5), the Time of Sale Prospectus, as then amended or supplemented by the Company, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (iv) each broadly available road show, if any, when considered together with the Time of Sale Prospectus, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (v) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain, as of its date and as of the Closing Date and any Option Closing Date any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement, the Time of Sale Prospectus or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein.
(c) The Company is not an ineligible issuer in connection with the offering pursuant to Rules 164, 405 and 433 under the Securities Act. Any free writing prospectus that the Company is required to file pursuant to Rule 433(d) under the Securities Act has been, or will be, filed with the Commission in accordance with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Each free writing prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act or that was prepared by or on behalf of or used or referred to by the Company complies or, if filed after the effective time of this Agreement, will comply as of the date of such filing in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Except for the free writing prospectuses, if any, identified in Schedule III hereto, and electronic road shows, if any, each furnished to you before first use, the Company has not prepared, used or referred to, and will not, without your prior consent, prepare, use or refer to, any free writing prospectus.
(d) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of Delaware, has the corporate power and authority to own its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and is in good standing (to the extent the concept of good standing is applicable in such jurisdiction) in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing (to the extent the concept of good standing or an equivalent concept is applicable under the laws of such jurisdiction) would not reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole. The terms subsidiary and subsidiaries as used throughout this Agreement shall be deemed to include LC Trust I (the Trust ) solely for the purposes of this Agreement.
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(e) Each subsidiary of the Company has been duly organized, is validly existing as a corporation, limited liability company, limited liability partnership, limited partnership or statutory trust, as the case may be, in good standing under the laws of the jurisdiction of its organization (to the extent the concept of good standing or an equivalent concept is applicable under the laws of such jurisdiction), has the corporate power and authority to own its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction (to the extent the concept of good standing or an equivalent concept is applicable under the laws of such jurisdiction) in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; all of the issued shares of capital stock of each such subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company or one of its wholly owned subsidiaries (except for directors qualifying or substantially similar shares), free and clear of all material liens, encumbrances, equities or claims, except as described in the Time of Sale Prospectus and Prospectus. The trustee of the Trust is duly authorized to act as trustee of the Trust pursuant to the trust agreement for the Trust.
(f) This Agreement has been duly authorized, executed and delivered by the Company.
(g) At the Closing Date, the authorized capital stock of the Company will conform as to legal matters in all material respects to the description thereof contained in each of the Time of Sale Prospectus and the Prospectus.
(h) The shares of Common Stock (including the Shares to be sold by the Selling Stockholders) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable, and except as described in the Time of Sale Prospectus and Prospectus, have been issued in compliance with all federal and state securities laws.
(i) The Shares to be sold by the Company have been duly authorized and, when issued, delivered and paid for in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights.
(j) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of (i) applicable law or (ii) the certificate of incorporation or by-laws of the Company or (iii) any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or (iv) any judgment, order or decree of any governmental body, agency or court having
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jurisdiction over the Company or any subsidiary, except in the case of clauses (i), (iii) and (iv) for such contraventions as would not reasonably be expected to, individually or in the aggregate, have a material adverse effect or adversely affect the ability of the Company to perform its obligations under this Agreement, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may have been previously obtained or may be required by the securities or Blue Sky laws of the various states or the rules and regulations of the Financial Industry Regulatory Authority, Inc. ( FINRA ) in connection with the offer and sale of the Shares.
(k) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus.
(l) There are no legal or governmental proceedings pending or, to the Companys knowledge threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject (i) other than proceedings accurately described in all material respects in the Time of Sale Prospectus and proceedings that would not reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole, or on the power or ability of the Company to perform its obligations under this Agreement or to consummate the transactions contemplated by the Time of Sale Prospectus or (ii) that are required to be described in the Registration Statement, the Time of Sale Prospectus or the Prospectus and are not so described in all material respects; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement, the Time of Sale Prospectus or the Prospectus or to be filed as exhibits to the Registration Statement that are not described in all material respects or filed as required.
(m) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder.
(n) The Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an investment company as such term is defined in the Investment Company Act of 1940, as amended.
(o) The Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ( Environmental Laws ), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and
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conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(p) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(q) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement except such as have been duly waived or complied with in connection with the issuance of the Shares contemplated hereby.
(r) Neither the Company nor any of its subsidiaries or controlled affiliates, nor any director, or officer, nor, to the Companys knowledge, any other employee, agent or representative of the Company or of any of its subsidiaries or controlled affiliates, has taken any action in furtherance of an offer, payment, promise to pay, or authorization or approval of the payment or giving of money, property, gifts or anything else of value, directly or indirectly, to any government official (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) to influence official action or secure an improper advantage; and the Company and its subsidiaries and controlled affiliates have conducted their businesses in compliance with applicable anti-corruption laws, including the Foreign Corrupt Practices Act of 1977 and the Bribery Act 2010 of the United Kingdom, and have instituted and maintain and will continue to maintain policies and procedures designed to promote and achieve compliance with such laws.
(s) The operations of the Company and its subsidiaries, and, to the actual knowledge of the Company, WebBank (solely with respect to its operations relating to the loan program with the Company), are and have been conducted at all times in material compliance with all applicable financial recordkeeping and reporting requirements, including those of the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money laundering statutes of jurisdictions where the Company and its subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency
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(collectively, the Anti-Money Laundering Laws ), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
(t) (i) Neither the Company nor any of its subsidiaries, nor any director or officer thereof, nor, to the Companys knowledge, any employee, agent, controlled affiliate or representative of the Company or any of its subsidiaries, is an individual or entity ( Person ) that is, or is owned or controlled by a Person that is:
(A) the subject of any sanctions administered or enforced by the U.S. Department of Treasurys Office of Foreign Assets Control ( OFAC ), the United Nations Security Council ( UNSC ), the European Union ( EU ), Her Majestys Treasury ( HMT ), or other relevant sanctions authority (collectively, Sanctions ), nor
(B) located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Cuba, Iran, North Korea, Sudan and Syria).
(ii) The Company will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person:
(A) to fund or facilitate any activities or business of or with any Person or in any country or territory that, at the time of such funding or facilitation, is the subject of Sanctions; or
(B) in any other manner that will result in a violation of Sanctions by any Person (including any Person participating in the offering, whether as underwriter, advisor, investor or otherwise).
(iii) For the past 5 years, the Company and its subsidiaries have not knowingly engaged in, are not now knowingly engaged in, and will not knowingly engage in, any dealings or transactions with any Person, or in any country or territory, that at the time of the dealing or transaction is or was the subject of Sanctions.
(u) Subsequent to the respective dates as of which information is given in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, (i) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction; (ii) the Company has not purchased any of its outstanding capital stock other than repurchases of outstanding equity awards granted pursuant to the terms of the equity compensation plans described in the Time of Sale Prospectus, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock (other than the exercise of equity awards or grants of equity awards or forfeiture of equity awards
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outstanding as of such respective dates as of which information is given in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, in each case granted pursuant to the equity compensation plans described in the Time of Sale Prospectus), short-term debt or long-term debt of the Company and its subsidiaries, except in each case as described in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, respectively.
(v) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, taken as a whole, in each case free and clear of all liens, encumbrances and defects except such as are described in the Time of Sale Prospectus and Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries in any material respect; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and, to the Companys knowledge, enforceable leases with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in the Time of Sale Prospectus.
(w) The Company and its subsidiaries own or possess, or can acquire on commercially reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by them in connection with the business now operated by them except where the failure to own, possess or acquire any of the foregoing would not reasonably be expected to result in a material adverse effect, and neither the Company nor any of its subsidiaries has received any written notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(x) No material labor dispute with the employees of the Company or any of its subsidiaries exists, except as described in the Time of Sale Prospectus, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal issuing banks, service providers, suppliers or contractors that could reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(y) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are, in the Companys reasonable judgment, prudent and customary in the businesses in which they are engaged; neither the Company nor any of its subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor any
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of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as described in the Time of Sale Prospectus.
(z) The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses as currently conducted, and neither the Company nor any of its subsidiaries has received any written notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as described in the Time of Sale Prospectus.
(aa) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with managements general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Time of Sale Prospectus, since the end of the Companys most recent audited fiscal year, there has been (i) no material weakness in the Companys internal control over financial reporting (whether or not remediated) and (ii) no adverse change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
(bb) Except as described in the Time of Sale Prospectus or in the Registration Statement, the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants.
(cc) The Registration Statement, the Prospectus, the Time of Sale Prospectus and any preliminary prospectus comply, and any amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus, the Time of Sale Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program.
(dd) No consent, approval, authorization or order of, or qualification with, any governmental body or agency, other than those obtained, is required in connection with the offering of the Directed Shares in any jurisdiction where the Directed Shares are being offered.
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(ee) The Company has not offered, or caused Fidelity or any Underwriter to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customers or suppliers level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products.
(ff) The Company and each of its subsidiaries have filed all federal, state, local and foreign tax returns required to be filed through the date of this Agreement or have requested extensions thereof (except where the failure to file would not, individually or in the aggregate, reasonably be expected to have a material adverse effect) and have paid all taxes required to be paid thereon (except for cases in which the failure to file or pay would not reasonably be expected to have a material adverse effect, or, except as currently being contested in good faith and for which reserves required by U.S. GAAP have been created in the financial statements of the Company), and no tax deficiency has been determined adversely to the Company or any of its subsidiaries which has had (nor does the Company nor any of its subsidiaries have any notice or knowledge of any tax deficiency which could reasonably be expected to be determined adversely to the Company or its subsidiaries and which could reasonably be expected to have) a material adverse effect.
(gg) The interactive data in eXtensible Business Reporting Language included in the Registration Statement fairly presents the information called for in all material respects and has been prepared in accordance with the Commissions rules and guidelines applicable thereto.
(hh) The statements in any free writing prospectus and Time of Sale Prospectus under the headings Material U.S. Federal Tax Consequences for Non-U.S. Holders of Our Common Stock, Description of Capital Stock, Certain Relationships and Related Party Transactions, BusinessRegulations and Licensing, Risk FactorsRisks Related to Our Business and Industry and Risk FactorsRisks Related to Compliance and Regulation, insofar as such statements summarize legal matters, agreements, documents or proceedings discussed therein, are accurate and fair summaries of such legal matters, agreements, documents or proceedings.
(ii) Except as described in the Time of Sale Prospectus and Prospectus, the Company and its subsidiaries and, to the actual knowledge of the Company, WebBank (solely with respect to its operations relating to the loan program with the Company), (A) are in compliance with any and all applicable laws, rules, regulations, and regulatory capital requirements or court decrees relating to the business of banking, money-lending, servicing, consumer finance, purchase finance, medical finance, consumer protection, the business of money transmission or other regulations applicable to the business of the Company as currently conducted or contemplated to be conducted, including, but not limited to, rules and regulations promulgated by the Consumer Financial Protection
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Bureau (the CFPB ) , the Utah Department of Financial Institutions, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Consumer Protection Act, the Servicemembers Civil Relief Act, the Electronic Signatures in Global and National Commerce Act, the Uniform Electronic Transactions Act, the Gramm-Leach-Bliley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Corporation (the FDIC ) and all other applicable fair lending and fair housing laws or other laws relating to discrimination (including, without limitation, anti-redlining, equal credit opportunity and fair credit reporting), truth-in-lending, real estate settlement procedures or consumer credit except to the extent that the failure to comply would not reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole, or WebBank (such laws, rules and regulations, the Regulatory Laws ), (B) have received all federal and state permits, licenses and other approvals required of them under applicable Regulatory Laws to conduct their respective businesses, except where the failure to receive such permits, licenses and other approvals would not reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole, or WebBank and (C) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Regulatory Laws (i) could not reasonably be expected to have a material adverse effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) could not reasonably be expected to have a material adverse effect, except as set forth in or contemplated in the Time of Sale Prospectus (exclusive of any supplement or amendment thereto); and except as described in the Time of Sale Prospectus, the Company is not aware of any material changes proposed or contemplated to be made to any of the Regulatory Laws that could reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(jj) Except as described in the Time of Sale Prospectus, none of the Company or its subsidiaries is subject to any order or action, and to the Companys knowledge none has been threatened with any action by any federal or state regulatory authority concerning its compliance with applicable Regulatory Laws (including, but not limited to, the failure to obtain any permit, license or approval, or to comply with the terms thereof), except for any such order, action or noncompliance that would not singly or in the aggregate (i) reasonably be expected to have a material adverse effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as set forth in or contemplated in the Prospectus (exclusive of any supplement or amendment thereto).
(kk) There are no legal or governmental proceedings, under the Regulatory Laws or otherwise, pending or, to the Companys knowledge, threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Time of Sale Prospectus and are not so described or of any Regulatory Laws that are required to be described in the Registration Statement or the Time of Sale Prospectus that are not described as required.
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(ll) None of the transactions contemplated hereby, including the offer and sale of the Shares, will (i) result in a breach or violation of any of the Regulatory Laws or (ii) require any consent, approval, authorization, order, registration or qualification of, or filing with, any governmental agency, regulatory body, including, but not limited to, the CFPB and the FDIC, or court overseeing the Regulatory Laws, except for (A) the approval by FINRA of the underwriting terms and arrangements, and such consents, approvals, authorizations, orders, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (B) such consents as have been obtained by the Company and are in full force and effect or (C) the failure of which to obtain would not reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under this Agreement. The Company and its subsidiaries are in material compliance with the Regulatory Laws.
(mm) Neither the Company nor any of its subsidiaries (A) is required to be registered, licensed or qualified as a broker or dealer in accordance with the Securities Exchange Act of 1934, as amended (the Exchange Act ) and the rules and regulations of the Commission under the Exchange Act or the laws of any state or (B) directly, or indirectly through one or more intermediaries, controls or has any other association (within the meaning of Article I of the By-Laws of FINRA) with any member firm of FINRA, except in the case of (B) as described in the Time of Sale Prospectus and Prospectus.
(nn) LC Advisors, LLC ( LC Advisors ) (A) has duly registered with the Commission as an investment adviser as such term is defined in the Investment Advisers Act of 1940, as amended (the Advisers Act ), (B) that registration is in effect and no order or other regulatory action has been threatened by the Commission that concerns the effectiveness of that registration or LC Advisors compliance with the Advisers Act or applicable regulations thereunder and (C) LC Advisor has taken all actions required to maintain the effectiveness of that registration.
(oo) Assuming the competency and capacity of a potential borrower, a loan agreement entered into through the Companys marketplace in the form of promissory notes, constitutes a valid and binding obligation of the borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors rights generally and to general equitable principles, (whether considered in a proceeding in equity or at law) except to the extent that the failure to comply would not reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole.
2. Representations and Warranties of the Selling Stockholders . Each Selling Stockholder severally and not jointly represents and warrants to and agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder.
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(b) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement, the Custody Agreement signed by such Selling Stockholder and American Stock Transfer & Trust Company, LLC, as Custodian, relating to the deposit of the Shares to be sold by such Selling Stockholder (the Custody Agreement ) and the Power of Attorney appointing certain individuals as such Selling Stockholders attorneys-in-fact to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement (the Power of Attorney ) will not contravene (i) any provision of applicable law, (ii) the certificate of incorporation or by-laws of such Selling Stockholder (if such Selling Stockholder is a corporation), or equivalent organizational or formation documents, as applicable, (iii) any agreement or other instrument binding upon such Selling Stockholder or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Stockholder, except in the case of clauses (i), (iii) and (iv) as would not, individually or in the aggregate, have a material adverse effect on the ability of the Selling Stockholder to consummate the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Stockholder of its obligations under this Agreement or the Custody Agreement or Power of Attorney of such Selling Stockholder, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares.
(c) Such Selling Stockholder has, and on the Closing Date will have, valid title to, or a valid security entitlement within the meaning of Section 8-501 of the New York Uniform Commercial Code (the UCC ) in respect of, the Shares to be sold by such Selling Stockholder free and clear of all security interests, claims, liens, equities or other encumbrances and the legal right and power, and all authorization and approval required by law, to enter into this Agreement, the Custody Agreement and the Power of Attorney and to sell, transfer and deliver the Shares to be sold by such Selling Stockholder or a security entitlement in respect of such Shares.
(d) The Custody Agreement and the Power of Attorney have been duly authorized, executed and delivered by such Selling Stockholder and are valid and binding agreements of such Selling Stockholder, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors rights and to general equity principles.
(e) Upon payment for the Shares to be sold by such Selling Stockholder pursuant to this Agreement, delivery of such Shares, as directed by the Underwriters, to Cede & Co. ( Cede ) or such other nominee as may be designated by the Depository Trust Company ( DTC ), registration of such Shares in the name of Cede or such other nominee and the crediting of such Shares on the books of DTC to securities accounts of the Underwriters (assuming that neither DTC nor any such Underwriter has notice of any adverse claim (within the meaning of Section 8-105 of the UCC to such Shares), (A) DTC shall be a protected purchaser of such Shares within the meaning of Section 8-303 of the UCC, (B) under Section 8-501 of the UCC, the Underwriters will
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acquire a valid security entitlement in respect of such Shares and (C) no action based on any adverse claim, within the meaning of Section 8-102 of the UCC, to such Shares may be asserted against the Underwriters with respect to such security entitlement; for purposes of this representation, such Selling Stockholder may assume that when such payment, delivery and crediting occur, (x) such Shares will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Companys share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a clearing corporation within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC.
(f) Such Selling Stockholder is not prompted by any information concerning the Company or its subsidiaries which is not set forth in the Time of Sale Prospectus to sell its Shares pursuant to this Agreement.
(g) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Time of Sale Prospectus does not, and at the time of each sale of the Shares in connection with the offering when the Prospectus is not yet available to prospective purchasers and at the Closing Date (as defined in Section 5), the Time of Sale Prospectus, as then amended or supplemented by the Company, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (iii) each broadly available road show, if any, when considered together with the Time of Sale Prospectus, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 2(h) (A) do not apply to statements or omissions in the Registration Statement, the Time of Sale Prospectus or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein and (B) are limited in all respects to statements or omissions made in reliance upon and in conformity with information relating to such Selling Stockholder furnished to the Company in writing by such Selling Stockholder expressly for use in the Registration Statement, the Time of Sale Prospectus, the road show, the Prospectus or any amendments or supplements thereto, it being understood and agreed that the only information furnished by such Selling Stockholder consists of the name of such Selling Stockholder, the number of offered shares and the address and other information with respect to such Selling Stockholder (excluding percentages) which appear in the Time of Sale Prospectus in the table (and corresponding footnotes) under the caption Principal and Selling Stockholders (with respect to each Selling Stockholder, the Selling Stockholder Information ).
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3. Agreements to Sell and Purchase . Each Seller, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from such Seller at $[ ] a share (the Purchase Price ) the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the Underwriters the Additional Shares, and the Underwriters shall have the right to purchase, severally and not jointly, up to [ ] Additional Shares at the Purchase Price, provided , however , that the amount paid by the Underwriters for any Additional Shares shall be reduced by an amount per share equal to any dividends declared by the Company and payable on the Firm Shares but not payable on such Additional Shares. The Representatives may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice not later than 30 days after the date of this Agreement. Any exercise notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be purchased. Each purchase date must be at least one business day after the written notice is given and may not be earlier than the closing date for the Firm Shares nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. On each day, if any, that Additional Shares are to be purchased (an Option Closing Date ), each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased on such Option Closing Date as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus (the Restricted Period ), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock beneficially owned (as such term is used in Rule 13d-3 of the Securities Exchange Act or any other securities so owned convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (3) file any registration statement with the Commission relating to the offering of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock.
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The restrictions contained in the preceding paragraph shall not apply to (a) the Shares to be sold hereunder, (b) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing, (c) the issuance of shares of Common Stock by the Company in connection with the Companys acquisition of one or more businesses, products or technologies, joint ventures, commercial relationships or other strategic corporate transactions, provided, that the aggregate number of shares of Common Stock that the Company may issue or agree to issue pursuant to this clause (c) does not exceed 5% of the total number of shares of Common Stock issued and outstanding immediately following the completion of the transactions contemplated by this Agreement, and provided , further , that all such recipients of shares of Common Stock shall execute and deliver to you, on or prior to such issuance, a lock-up agreement, substantially in the form of Exhibit A hereto or (d) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of Common Stock, provided that (i) such plan does not provide for the transfer of Common Stock during the Restricted Period and (ii) no public announcement or filing under the Exchange Act, if any, is required or voluntarily made by or on behalf of the Company regarding the establishment of such plan.
Notwithstanding the foregoing, if (1) during the last 17 days of the Restricted Period the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the Restricted Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Restricted Period, the restrictions imposed by this agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. The Company shall provide Morgan Stanley and each individual subject to the Restricted Period pursuant to the lock-up letters described in Section 6(m) with prior notice of any such announcement that gives rise to an extension of the initial Restricted Period.
If Morgan Stanley, in its sole discretion, agrees to release or waive the restrictions set forth in a lock-up letter described in Section 6(m) hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by (i) a press release substantially in the form of Exhibit B hereto through a major news service or (ii) any other method that satisfies the obligations described in FINRA Rule 5131(d)(2) and approved by Morgan Stanley at least two business days before the effective date of the release or waiver.
4. Terms of Public Offering . The Sellers are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Sellers are further advised by you that the Shares are to be offered to the public initially at $[ ] a share (the Public Offering Price ) and to certain dealers selected by you at a price that represents a concession not in excess of $[ ] a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $[ ] a share, to any Underwriter or to certain other dealers.
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5. Payment and Delivery . Payment for the Firm Shares to be sold by each Seller shall be made to such Seller in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at approximately 10:00 a.m., New York City time, on [ ], 2014, or at such other time on the same or such other date, not later than [ ], 2014, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the Closing Date .
Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the corresponding notice described in Section 3 or at such other time on the same or on such other date, in any event not later than [ ], 2014, as shall be designated in writing by you.
The Firm Shares and Additional Shares shall be registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the applicable Option Closing Date, as the case may be. The Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the applicable Option Closing Date, as the case may be, for the respective accounts of the several Underwriters. The Purchase Price payable by the Underwriters shall be reduced by (i) any transfer taxes paid by, or on behalf of, the Underwriters in connection with the transfer of the Shares to the Underwriters duly paid and (ii) subject to any withholding required by law.
6. Conditions to the Underwriters Obligations . The obligations of the Sellers to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on each of the Closing Date or the applicable Option Closing Date, as the case may be, are subject to the condition that the Registration Statement shall have become effective not later than [ ] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date or the applicable Option Closing Date, as the case may be:
(i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the securities of the Company or any of its subsidiaries by any nationally recognized statistical rating organization, as such term is defined in Section 3(a)(62) of the Exchange Act; and
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(ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus.
(b) The Underwriters shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, a certificate, dated the Closing Date or the applicable Option Closing Date, as the case may be, and signed on behalf of the Company by an executive officer of the Company, to the effect set forth in Section 6(a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date or the applicable Option Closing Date, as the case may be, and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date or the applicable Option Closing Date, as the case may be.
The officer signing and delivering such certificate may rely upon his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, an opinion of Fenwick & West LLP, outside counsel for the Company, dated the Closing Date or the applicable Option Closing Date, as the case may be, in the form and substance satisfactory to the Representatives.
(d) The Underwriters shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, opinions of each of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP and Goodwin Procter LLP, counsel for the Selling Stockholders, each dated the Closing Date or the applicable Option Closing Date, as the case may be, in the form and substance satisfactory to the Representatives.
(e) The Underwriters shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, an opinion of OMelveny & Myers LLP, counsel for the Underwriters, dated the Closing Date or the applicable Option Closing Date, as the case may be, covering such matters as the Underwriters may reasonably request.
With respect to certain provisions included in the opinions to be delivered pursuant to Section 6(c) above, Fenwick & West LLP, with respect to certain provisions included in the opinions to be delivered pursuant to Section 6(e) above, OMelveny &
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Myers LLP and with respect to certain provisions included in the opinions to be delivered pursuant to Section 6(d) above, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP and Goodwin Procter LLP, may state that their opinions and beliefs are based upon their participation in the preparation of the Registration Statement, the Time of Sale Prospectus and the Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. With respect to Section 6(d) above, any counsel for the Selling Stockholders may rely upon an opinion or opinions of counsel for any Selling Stockholders and, with respect to factual matters and to the extent such counsel deems appropriate, upon the representations of each Selling Stockholder contained herein and in the Custody Agreement and Power of Attorney of such Selling Stockholder and in other documents and instruments; provided that (A) each such counsel for the Selling Stockholders is satisfactory to your counsel, (B) a copy of each opinion so relied upon is delivered to you and is in form and substance satisfactory to your counsel, (C) copies of such Custody Agreements and Powers of Attorney and of any such other documents and instruments shall be delivered to you and shall be in form and substance satisfactory to your counsel and (D) such counsel for such Selling Stockholder shall state in their opinion that they are justified in relying on each such other opinion.
The opinions of Fenwick & West LLP and the counsel for the Selling Stockholders described in Sections 6(c) and 6(d) above (and any opinions of counsel for any Selling Stockholder referred to in the immediately preceding paragraph) shall be rendered to the Underwriters at the request of the Company or one or more of the Selling Stockholders, as the case may be, and shall so state therein.
(f) The Underwriters shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, an opinion of Arnold & Porter LLP, regulatory counsel for the Company, dated the Closing Date or the applicable Option Closing Date, as the case may be, in the form and substance satisfactory to the Representatives.
(g) The Underwriters shall have received on the Closing Date or the applicable Option Closing Date, as the case may be, an opinion of K&L Gates LLP, special counsel for the Company, dated the Closing Date or the applicable Option Closing Date, as the case may be, in the form and substance satisfactory to the Representatives.
(h) The Underwriters shall have received, on each of the date hereof and the Closing Date, and as of the applicable Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance satisfactory to the Representatives, from Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus; provided that the letter delivered on the Closing Date or the applicable Option Closing Date, as the case may be, shall use a cut-off date not earlier than the date hereof.
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(i) The Underwriters shall have received, on each of the date hereof and the Closing Date, and as of the applicable Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance satisfactory to the Representatives, from Grant Thornton LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(j) The Underwriters shall have received, on each of the date hereof and the Closing Date, and as of the applicable Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance satisfactory to the Representatives, from Armanino LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(k) The Underwriters shall have received, on each of the date hereof and the Closing Date, and as of the applicable Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the applicable Option Closing Date, as the case may be, in form and substance satisfactory to the Representatives, from Auerr, Zajac & Associates, LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus.
(l) The Underwriters shall have received on the date hereof a certificate of the Chief Financial Officer of the Company, in the form and substance satisfactory to the Representatives, with respect to certain information contained in the Time of Sale Prospectus and the Prospectus.
(m) The lock-up agreements, each substantially in the form of Exhibit A hereto, between you and certain stockholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date.
7. Covenants of the Company . The Company covenants with each Underwriter as follows:
(a) To furnish to you, without charge, [ ] signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(e) or 7(f) below, as many copies of the Time of Sale Prospectus, the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.
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(b) Before amending or supplementing the Registration Statement, the Time of Sale Prospectus or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.
(c) To furnish to you a copy of each proposed free writing prospectus to be prepared by or on behalf of, used by, or referred to by the Company and not to use or refer to any proposed free writing prospectus to which you reasonably object.
(d) Not to take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would not have been required to file thereunder.
(e) If the Time of Sale Prospectus is being used to solicit offers to buy the Shares at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances, not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement then on file, or if, in the reasonable opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of the circumstances when the Time of Sale Prospectus is delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.
(f) If, during such period after the first date of the public offering of the Shares as in the reasonable opinion of counsel for the Underwriters the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is delivered to a purchaser, not misleading, or if, in the reasonable opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers
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(whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with applicable law.
(g) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request, provided , however , that nothing contained herein shall require the Company to qualify to do business in any jurisdiction, execute a general consent to service of process in any jurisdiction or to subject itself to taxation in any jurisdiction in which it is not otherwise subject.
(h) To make generally available to the Companys security holders and to you as soon as practicable an earnings statement covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the date of this Agreement which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder.
(i) To comply with all applicable securities and other laws, rules and regulations in each jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program.
(j) If any Seller is not a U.S. person for U.S. federal income tax purposes, the Company will deliver to each Underwriter (or its agent), on or before the Closing Date, (i) a certificate with respect to the Companys status as a United States real property holding corporation, dated not more than thirty (30) days prior to the Closing Date, as described in Treasury Regulations Sections 1.897-2(h) and 1.1445-2(c)(3), and (ii) proof of delivery to the IRS of the required notice, as described in Treasury Regulations 1.897-2(h)(2).
8. Covenants of the Sellers . Each Seller, severally and not jointly, covenants with each Underwriter as follows:
(a) Each Seller, severally and not jointly, covenants with each Underwriter to deliver to each Underwriter (or its agent), prior to or at the Closing Date, a properly completed and executed Internal Revenue Service ( IRS ) Form W-9 or an IRS Form W-8, as appropriate, together with all required attachments to such form.
9. Expenses . Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Sellers agree to pay or cause to be paid all expenses incident to the performance of their obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Companys counsel, the Companys accountants and one counsel for the Selling Stockholders in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration
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Statement, any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, any free writing prospectus prepared by or on behalf of, used by, or referred to by the Company and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(g) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, if any, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the Financial Industry Regulatory Authority, Inc., (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the NYSE and other national securities exchanges and foreign stock exchanges, (vi) the cost of printing certificates, if any, representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any road show undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the preparation or dissemination of any electronic road show, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and one-half of the cost of any aircraft chartered in connection with the road show (the remaining half of the cost to be paid by the Underwriters), (ix) the document production charges and expenses associated with printing this Agreement, (x) all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program ( provided that the aggregate amount payable by the Company pursuant to subsections (iii), (iv) and (x) shall not exceed $50,000) and (xi) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 11 entitled Indemnity and Contribution, Section 12 entitled Directed Share Program Indemnification and the last paragraph of Section 14 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect any agreement that the Sellers may otherwise have for the allocation of such expenses among themselves.
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10. Covenants of the Underwriters . Each Underwriter severally covenants with the Company not to take any action that would result in the Company being required to file with the Commission under Rule 433(d) a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not be required to be filed by the Company thereunder, but for the action of the Underwriter.
11. Indemnity and Contribution . (a) The Company agrees to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, any road show as defined in Rule 433(h) under the Securities Act (a road show), or the Prospectus or any amendment or supplement thereto or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. The Company agrees and confirms that references to affiliates of Morgan Stanley that appear in this Agreement shall be understood to include Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Stockholders, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, any road show or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus, road show, or the Prospectus or any amendment or supplement thereto.
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(c) Each Selling Stockholder agrees, severally and not jointly to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, any road show as defined in Rule 433(h) under the Securities Act (a road show), or the Prospectus or any amendment or supplement thereto or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that the losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon Selling Stockholder Information and provided , further , that the liability of the Selling Stockholder pursuant to this subsection (b) shall be limited to the aggregate Public Offering Price, less underwriting discounts and commissions, of Shares sold by such Selling Stockholder hereunder. The Selling Stockholders agrees and confirms that references to affiliates of Morgan Stanley that appear in this Agreement shall be understood to include Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
(d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Sections 11(a), 11(b) or 11(c), such person (the indemnified party ) shall promptly notify the person against whom such indemnity may be sought (the indemnifying party ) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonably incurred fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed in writing to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential conflict of interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all
25
Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act or who are affiliates of any Underwriter within the meaning of Rule 405 under the Securities Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Selling Stockholders and all persons, if any, who control any Selling Stockholder within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons and affiliates of any Underwriters, such firm shall be designated in writing by the Representatives. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Stockholders and such control persons of any Selling Stockholders, such firm shall be designated in writing by the persons named as attorneys-in-fact for the Selling Stockholders under the Powers of Attorney. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement (i) includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
(e) To the extent the indemnification provided for in Section 11(a), 11(b) or 11(c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 11(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in
26
clause 11(e)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Seller and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by the Underwriters and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters respective obligations to contribute pursuant to this Section 11 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint.
(f) The Sellers and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 11 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 11(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 11(e) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 11, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (ii) no Selling Stockholder shall be required to contribute an amount in excess of the amount by which the aggregate Public Offering Price, less underwriting discounts and commissions, of Shares sold by such Selling Stockholder exceeds the amount of any damages that such Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 11 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this Section 11 and the representations, warranties and other statements of the Company and the Selling Stockholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by
27
or on behalf of any Underwriter, any person controlling any Underwriter or any affiliate of any Underwriter, any Selling Stockholder or any person controlling any Selling Stockholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares.
12. Directed Share Program Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each affiliate of an Underwriter within the meaning of Rule 405 of the Securities Act ( Underwriter Entities ) from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of Directed Shares that the Participant agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of Underwriter Entities.
(b) In case any proceeding (including any governmental investigation) shall be instituted involving any Underwriter Entity in respect of which indemnity may be sought pursuant to Section 12(a), the Underwriter Entity seeking indemnity, shall promptly notify the Company in writing and the Company, upon request of the Underwriter Entity, shall retain counsel reasonably satisfactory to the Underwriter Entity to represent the Underwriter Entity and any others the Company may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any Underwriter Entity shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Underwriter Entity unless (i) the Company shall have agreed in writing to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Company and the Underwriter Entity and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Company shall not, in respect of the legal expenses of the Underwriter Entities in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriter Entities. Any such separate firm for the Underwriter Entities shall be designated in writing by the Representatives. The Company shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Company agrees to indemnify the Underwriter Entities from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Underwriter Entity shall have requested the Company to reimburse it for fees and expenses of counsel as contemplated
28
by the second and third sentences of this paragraph, the Company agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by the Company of the aforesaid request and (ii) the Company shall not have reimbursed the Underwriter Entity in accordance with such request prior to the date of such settlement. The Company shall not, without the prior written consent of the Representatives, effect any settlement of any pending or threatened proceeding in respect of which any Underwriter Entity is or could have been a party and indemnity could have been sought hereunder by such Underwriter Entity, unless such settlement (i) includes an unconditional release of the Underwriter Entities from all liability on claims that are the subject matter of such proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the Company.
(c) To the extent the indemnification provided for in Section 12(a) is unavailable to an Underwriter Entity or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then the Company in lieu of indemnifying the Underwriter Entity thereunder, shall contribute to the amount paid or payable by the Underwriter Entity as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriter Entities on the other hand from the offering of the Directed Shares or (ii) if the allocation provided by clause 12(c)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 12(c)(i) above but also the relative fault of the Company on the one hand and of the Underwriter Entities on the other hand in connection with any statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter Entities on the other hand in connection with the offering of the Directed Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Directed Shares (before deducting expenses) and the total underwriting discounts and commissions received by the Underwriter Entities for the Directed Shares, bear to the aggregate Public Offering Price of the Directed Shares. If the loss, claim, damage or liability is caused by an untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact, the relative fault of the Company on the one hand and the Underwriter Entities on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement or the omission or alleged omission relates to information supplied by the Company or by the Underwriter Entities and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(d) The Company and the Underwriter Entities agree that it would not be just or equitable if contribution pursuant to this Section 12 were determined by pro rata allocation (even if the Underwriter Entities were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 12(c). The amount paid or payable by the Underwriter Entities as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the
29
limitations set forth above, any legal or other expenses reasonably incurred by the Underwriter Entities in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 12, no Underwriter Entity shall be required to contribute any amount in excess of the amount by which the total price at which the Directed Shares distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter Entity has otherwise been required to pay. The remedies provided for in this Section 12 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
(e) The indemnity and contribution provisions contained in this Section 12 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter Entity or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Directed Shares.
13. Termination . The Underwriters may terminate this Agreement by notice given by you to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, any of the New York Stock Exchange, the NYSE MKT, the NASDAQ Global Market, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade or other relevant exchanges, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by Federal or New York State authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in your judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus or the Prospectus.
14. Effectiveness; Defaulting Underwriters . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares
30
that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 14 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased on such date, and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders. In any such case either you or the relevant Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the Time of Sale Prospectus, in the Prospectus or in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Additional Shares to be sold on such Option Closing Date or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller shall be unable to perform its obligations under this Agreement (other than for failure or non-performance by a Seller resulting from circumstances not specifically related to the Sellers due to the events described in sub-clauses (i), (iii), (iv) or (v) of Section 13), any such Seller will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder.
15. Entire Agreement . (a) This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not superseded by this Agreement) that relate to the offering of the Shares, represents the entire agreement between the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other, with respect to the preparation of any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, the conduct of the offering, and the purchase and sale of the Shares.
(b) The Company acknowledges that in connection with the offering of the Shares: (i) the Underwriters have acted at arms-length, are not agents of, and owe no fiduciary duties to, the Company or any other person, (ii) the Underwriters owe the Company only those duties and obligations set forth in this Agreement and prior written
31
agreements (to the extent not superseded by this Agreement), if any, and (iii) the Underwriters may have interests that differ from those of the Company. The Company waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the offering of the Shares.
16. Counterparts . This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
17. Applicable Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York.
18. Headings . The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.
19. Notices. All communications hereunder shall be in writing and effective only upon receipt and if to the Underwriters shall be delivered, mailed or sent to you in care of Morgan Stanley & Co. LLC, 1585 Broadway, New York, New York 10036, Attention: Equity Syndicate Desk, with a copy to the Legal Department and Goldman, Sachs & Co., 200 West Street, New York, New York 10282, Attention: Registration Department with a copy to OMelveny & Myers LLP, 2 Embarcadero Center, 28 th Floor, San Francisco, California 94111, Attention: Kurt J. Berney, Esq. and Eric Sibbitt, Esq.; if to the Company shall be delivered, mailed or sent to LendingClub Corporation, 71 Stevenson St., Suite 300, San Francisco, California 94105, Attention: Renaud Laplanche with a copy to Fenwick & West LLP, Silicon Valley Center, 801 California Street, Mountain View, California 94041, Attention: Jeffrey R. Vetter, Esq.; and if to the Selling Stockholders shall be delivered, mailed or sent to Goodwin Procter LLP, The New York Times Building, 620 Eighth Avenue, New York, NY 10018, Attention: Thomas Beaudoin, Esq. and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, 1200 Seaport Boulevard, Redwood City, CA 94063, Attention: Richard C. Blake, Esq.
[ Signature Pages Follow ]
32
Very truly yours, | ||
LENDINGCLUB CORPORATION | ||
By: |
|
|
Name: | ||
Title: |
[Signature Page to Underwriting Agreement]
[Signature Page to Underwriting Agreement]
[Signature Page to Underwriting Agreement]
SCHEDULE I
Selling Stockholder |
Number of Firm Shares
To Be Sold |
|||
Canaan VII L.P. |
||||
KPCB Holdings, Inc., as nominee |
||||
Union Square Ventures Opportunity Fund, L.P. |
||||
|
|
|||
Total: |
||||
|
|
I-1
SCHEDULE II
Underwriter |
Number of Firm Shares
To Be Purchased |
|
Morgan Stanley & Co. LLC |
||
Goldman, Sachs & Co. |
||
Credit Suisse Securities (USA) LLC |
||
Citigroup Global Markets Inc. |
||
Allen & Company LLC |
||
Stifel, Nicolaus & Company, Incorporated |
||
BMO Capital Markets Corp. |
||
William Blair & Company, L.L.C. |
||
Wells Fargo Securities, LLC |
||
|
||
Total: |
||
|
II-1
SCHEDULE III
Time of Sale Prospectus
1. | Preliminary Prospectus issued [ ], 2014 |
2. | [identify all free writing prospectuses filed by the Company under Rule 433(d) of the Securities Act] |
3. | [free writing prospectus containing a description of terms that does not reflect final terms, if the Time of Sale Prospectus does not include a final term sheet] |
4. | [orally communicated pricing information such as price per share and size of offering if a Rule 134 pricing term sheet is used at the time of sale instead of a pricing term sheet filed by the Company under Rule 433(d) as a free writing prospectus] |
III-1
EXHIBIT A
FORM OF LOCK-UP LETTER
[Attached.]
A-1
LOCK-UP LETTER
, 2014
Morgan Stanley & Co. LLC
Goldman, Sachs & Co.
as Representatives of the several Underwriters
c/o Morgan Stanley & Co. LLC
1585 Broadway
New York, New York 10036
c/o Goldman, Sachs & Co.
200 West Street
New York, New York 10282
Ladies and Gentlemen:
The undersigned understands that Morgan Stanley & Co. LLC ( Morgan Stanley ) and Goldman, Sachs & Co. (together with Morgan Stanley, the Representatives ) propose to enter into an Underwriting Agreement (the Underwriting Agreement ) with LendingClub Corporation, a Delaware corporation (the Company ), providing for the public offering (the Public Offering ) by the several Underwriters, including the Representatives (the Underwriters ), of shares (the Shares ) of the common stock, par value $0.01 per share of the Company (the Common Stock ).
To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus (the Restricted Period ) relating to the Public Offering (the Prospectus ), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock beneficially owned (as such term is used in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the Exchange Act )), by the undersigned or any other securities so owned convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to:
(a) transactions relating to shares of Common Stock or other securities acquired in the Public Offering (other than issuer-directed Shares acquired by a director or officer of the Company in or in connection with the Public Offering) or acquired in open market transactions after the completion of the Public Offering, provided that no filing under Section 16(a) of the Exchange Act shall be required or shall be voluntarily made in connection with subsequent sales of Common Stock or other securities acquired in such open market transactions;
(b) transfers of shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock (i) as a bona fide gift or gifts, (ii) by will or intestacy, (iii) to the spouse, domestic partner, parent, child or grandchild (each, an immediate family member) of the undersigned or to a trust formed for the benefit of one or more immediate family members, or (iv) if the undersigned is a trust, to a trustee or beneficiary of the trust, provided that in the case of any transfer pursuant to this clause, each transferee, donee, distributee shall execute and deliver to Morgan Stanley a lock-up letter substantially in the form of this Letter Agreement, and provided, further, that no filing under Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of shares of Common Stock shall be required or shall be voluntarily made during the Restricted Period other than any required Form 5 Annual Statement of Changes in Beneficial Ownership of Securities;
(c) transfers or distributions of shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock by a (i) stockholder that is a corporation, partnership or other business entity, either (A) to another corporation, partnership or other business entity that controls, is controlled by or managed by or is under common control with such stockholder or (B) as part of a distribution to an equity holder of such stockholder or to the estate of any such equity holder, or (ii) stockholder that is a trust to a trustor or beneficiary of the trust or to the estate of a beneficiary of such trust; provided that in each case (i) each donee or distributee shall sign and deliver a lock-up letter substantially in the form of this Letter Agreement and (ii) no filing under Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of shares of Common Stock shall be required or shall be voluntarily made during the Restricted Period;
(d) the exercise of options granted under a stock incentive plan described in the Prospectus, provided that the underlying shares of Common Stock continue to be subject to the restrictions set forth in this Letter Agreement;
(e) the exercise of warrants outstanding and which are described in the Prospectus related to the Public Offering, provided that the shares of Common Stock delivered upon such exercise are subject to the restrictions set forth in this Letter Agreement and that no filing under Section 16(a) of the Exchange Act shall be required or shall be voluntarily made during the Restricted Period;
(f) transfers of shares of Common Stock to the Company or any other securities convertible into Common Stock to the Company upon a vesting event of the Companys securities or upon the exercise of options or warrants to purchase the Companys securities that would otherwise expire during the Restricted Period, in each case on a cashless or net exercise basis or to cover tax withholding obligations of the
undersigned in connection with such vesting or exercise, provided that the underlying shares of Common Stock continue to be subject to the restrictions set forth in this Letter Agreement and that any filing under Section 16(a) of the Exchange Act shall clearly indicate in the footnotes thereto that the filing relates to the circumstances described in this clause (f);
(g) the exercise or surrender of options to purchase Common Stock granted under a stock incentive plan described in the Prospectus in connection with a rescission offer conducted by the Company or the sale, surrender or other transfer of Common Stock issued or issuable upon exercise of options granted under a stock incentive plan described in the Prospectus to the Company in connection with a rescission offer by the Company;
(h) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of Common Stock, provided that (i) such plan does not provide for the transfer of Common Stock during the Restricted Period, and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by or on behalf of the undersigned or the Company regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of Common Stock may be made under such plan during the Restricted Period;
(i) the conversion of the outstanding preferred stock of the Company into shares of Common Stock, provided that such shares of Common Stock remain subject to the terms of this Letter Agreement;
(j) the transfer of shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock to the Company, pursuant to agreements under which the Company has the option to repurchase such shares or a right of first refusal with respect to transfers of such shares, provided that any filing under Section 16(a) of the Exchange Act shall clearly indicate in the footnotes thereto that the filing relates to the circumstances described in this clause (j);
(k) the transfer of shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock that occurs by operation of law, pursuant to a qualified domestic order or in connection with a divorce settlement; provided that (i) with respect to any such transfer, each transferee shall execute and deliver to the Representatives a lock-up letter substantially in the form of this Letter Agreement and (ii) to the extent a public announcement or filing under the Exchange Act regarding the transfer is required of or is voluntarily made by or on behalf of the undersigned or the Company, such announcement or filing shall include a statement to the effect that the transfer was made by operation of law and, if applicable, pursuant to a qualified domestic order or in connection with a divorce settlement, as applicable; or
(l) the transfer of shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock pursuant to a bona fide third party tender offer, merger, consolidation or other similar transaction made to all holders of the Common Stock involving a change of control of the Company after the completion of the
Public Offering and that has been approved by the board of directors of the Company, provided that if the tender offer, merger, consolidation or other such transaction is not completed, the Common Stock owned by the undersigned shall remain subject to the restrictions contained in this Letter Agreement.
For the purposes of clause (l), a change of control means the transfer (whether by tender offer, merger, consolidation or other similar transaction), in one transaction or a series of related transactions, to a person or group of affiliated persons (other than the Underwriters pursuant to the Public Offering), of shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock if, after such transfer, the stockholders of the Company immediately prior to such transfer do not own more than 50% of the outstanding voting securities of the Company (or the surviving entity).
In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the Restricted Period, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. The undersigned also agrees and consents to the entry of stop transfer instructions with the Companys transfer agent and registrar against the transfer of the undersigneds shares of Common Stock except in compliance with the foregoing restrictions.
If the undersigned is an officer or director of the Company, the undersigned further agrees that the foregoing provisions shall be equally applicable to any issuer-directed Shares the undersigned may purchase in or in connection with the Public Offering.
If the undersigned is an officer or director of the Company, (i) Morgan Stanley agrees that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, Morgan Stanley will notify the Company of the impending release or waiver, and (ii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by Morgan Stanley hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this Letter Agreement to the extent and for the duration that such terms remain in effect at the time of the transfer.
If:
(1) during the last 17 days of the Restricted Period the Company issues an earnings release or material news or a material event relating to the Company occurs; or
(2) prior to the expiration of the Restricted Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Restricted Period;
the restrictions imposed by this Letter Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. The undersigned hereby acknowledges that the Company has agreed in the Underwriting Agreement to provide written notice of any event that would result in an extension of the initial Restricted Period and agrees that any such notice properly delivered will be deemed to have been given to, and received by, the undersigned.
The undersigned shall not engage in any transaction that may be restricted by this Letter Agreement during the 34-day period beginning on the last day of the initial Restricted Period unless the undersigned requests and receives prior written confirmation from the Company or Morgan Stanley that the restrictions imposed by this Letter Agreement have expired.
The undersigned understands that the Company and the Underwriters are relying upon this Letter Agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this Letter Agreement is irrevocable and shall be binding upon the undersigneds heirs, legal representatives, successors and assigns.
Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters.
This Letter Agreement shall automatically terminate upon the earliest to occur, if any, of (a) the date that the Company advises Morgan Stanley, in writing, prior to the execution of the Underwriting Agreement, that it has determined not to proceed with the Public Offering, (b) the date the Underwriting Agreement is terminated (without regard to any provisions thereof that survive termination) if prior to the closing of the Public Offering or (c) January 31, 2015 if the Public Offering of the Shares has not been completed by such date. This Letter Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
[ Signature Page Follows ]
Very truly yours, |
(Name) |
|
(Address) |
[Signature Page to Lock-up Agreement]
EXHIBIT B
FORM OF WAIVER OF LOCK-UP
, 20
[Name and Address of
Officer or Director
Requesting Waiver]
Dear Mr./Ms. [Name]:
This letter is being delivered to you in connection with the offering by LendingClub Corporation (the Company ) of [ ] shares of common stock, $0.01 par value (the Common Stock ), of the Company and the lock-up letter dated [ ], 2014 (the Lock-up Letter ), executed by you in connection with such offering, and your request for a [waiver] [release] dated [ ], 2014, with respect to [ ] shares of Common Stock (the Shares ).
Morgan Stanley & Co. LLC hereby agrees to [waive] [release] the transfer restrictions set forth in the Lock-up Letter, but only with respect to the Shares, effective [ ] 2014; provided , however , that such [waiver] [release] is conditioned on the Company announcing the impending [waiver] [release] by press release through a major news service at least two business days before effectiveness of such [waiver] [release]. This letter will serve as notice to the Company of the impending [waiver] [release].
Except as expressly [waived] [released] hereby, the Lock-up Letter shall remain in full force and effect.
B-1
Very truly yours, | ||
Morgan Stanley & Co. LLC | ||
Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto | ||
By: | Morgan Stanley & Co. LLC | |
By: |
|
|
Name: | ||
Title: |
cc: Company
B-2
FORM OF PRESS RELEASE
LendingClub Corporation
[Date]
LendingClub Corporation (the Company ) announced today that Morgan Stanley & Co. LLC, a lead book-running manager in the Companys recent public sale of [ ] shares of common stock is [waiving][releasing] a lock-up restriction with respect to [ ] shares of the Companys common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver][release] will take effect on , 20 , and the shares may be sold on or after such date.
This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.
B-3
Exhibit 3.3
LENDINGCLUB CORPORATION
RESTATED CERTIFICATE OF INCORPORATION
LendingClub Corporation, a Delaware corporation, hereby certifies as follows.
1. The name of the corporation is LendingClub Corporation. The date of filing its original Certificate of Incorporation with the Secretary of State was October 2, 2006 under the name SocBank Corporation.
2. The Restated Certificate of Incorporation of the corporation attached hereto as Exhibit A , which is incorporated herein by this reference, and which restates, integrates and further amends the provisions of the Certificate of Incorporation of this corporation as previously amended or supplemented, has been duly adopted by the Board of Directors and by the stockholders in accordance with Sections 242 and 245 of the Delaware General Corporation Law, with the approval of the corporations stockholders having been given by written consent without a meeting in accordance with Section 228 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, this corporation has caused this Restated Certificate of Incorporation to be signed by its duly authorized officer and the foregoing facts stated herein are true and correct.
Dated: |
|
LENDINGCLUB CORPORATION | ||||||
By: |
|
|||||||
Name: | Renaud Laplanche | |||||||
Title: | Chief Executive Officer |
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EXHIBIT A
LENDINGCLUB CORPORATION
RESTATED CERTIFICATE OF INCORPORATION
ARTICLE I: NAME
The name of the corporation is LendingClub Corporation (the Corporation ).
ARTICLE II: AGENT FOR SERVICE OF PROCESS
The address of the Corporations registered office in the State of Delaware is 2711 Centerville Road, Suite 400, City of Wilmington, County of New Castle, Delaware 19808. The name of the registered agent of the Corporation at that address is Corporation Service Company.
ARTICLE III: PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV: AUTHORIZED STOCK
1. Total Authorized . The total number of shares of all classes of stock that the Corporation has authority to issue is Nine Hundred Ten Million (910,000,000) shares, consisting of two classes: Nine Hundred Million (900,000,000) shares of Common Stock, $0.01 par value per share ( Common Stock ), and Ten Million (10,000,000) shares of Preferred Stock, $0.01 par value per share ( Preferred Stock ).
2. Designation of Additional Series.
2.1. The Board of Directors of the Corporation (the Board ) is authorized, subject to any limitations prescribed by the law of the State of Delaware, to provide for the issuance of the shares of Preferred Stock in one or more series, and, by filing a Certificate of Designation pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, to fix the designation, vesting, powers, preferences and relative, participating, optional or other rights, if any, of the shares of each such series and any qualifications, limitations or restrictions thereof, and to increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series. The number of authorized shares of Preferred Stock may also be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of two-thirds of the voting power of all the then-outstanding shares of capital stock of the Corporation entitled to vote thereon, without a vote of the holders of the Preferred Stock, unless a vote of any such holders is required pursuant to the terms of any certificate or certificates establishing a series of Preferred Stock.
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2.2 Except as otherwise expressly provided in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article IV, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, including, without limitation, voting rights, dividend rights, liquidation rights, redemption rights and conversion rights, senior to, junior to or pari passu with the rights of the Common Stock, the Preferred Stock or any future class or series of Preferred Stock or Common Stock.
2.3 Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Corporation for their vote; provided , however , that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any Certificate of Designation relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any Certificate of Designation relating to any series of Preferred Stock).
ARTICLE V: AMENDMENT OF BYLAWS
The Board shall have the power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the Bylaws of the Corporation by the Board shall require the approval of a majority of the Whole Board. For purposes of this Certificate of Incorporation, the term Whole Board shall mean the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation; provided , however , that in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation (including any Preferred Stock issued pursuant to a Certificate of Designation), the affirmative vote of the holders of at least two-thirds of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the Corporation.
ARTICLE VI: MATTERS RELATING TO THE BOARD OF DIRECTORS
1. Director Powers . The conduct of the affairs of the Corporation shall be managed by or under the direction of the Board. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.
2. Number of Directors . Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors shall be fixed from time to time exclusively by resolution adopted by a majority of the Whole Board.
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3. Classified Board . Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided, with respect to the time for which they severally hold office, into three classes designated as Class I, Class II and Class III, respectively (the Classified Board ). The Board may assign members of the Board already in office to the Classified Board, which assignments shall become effective at the same time the Classified Board becomes effective. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board, with the number of directors in each class to be divided as nearly equal as reasonably possible. The initial term of office of the Class I directors shall expire at the Corporations first annual meeting of stockholders following the closing of the Corporations initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, relating to the offer and sale of Common Stock to the public (the Initial Public Offering ), the initial term of office of the Class II directors shall expire at the Corporations second annual meeting of stockholders following the closing of the Initial Public Offering and the initial term of office of the Class III directors shall expire at the Corporations third annual meeting of stockholders following the closing of the Initial Public Offering. At each annual meeting of stockholders following the closing of the Initial Public Offering, directors elected to succeed those directors of the class whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election.
4. Term and Removal . Each director shall hold office until such directors successor is elected and qualified, or until such directors earlier death, resignation or removal. Any director may resign at any time upon notice to the Corporation given in writing or by any electronic transmission permitted in the Corporations Bylaws. Subject to the rights of the holders of any series of Preferred Stock, no director may be removed except for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of the then-outstanding shares of capital stock of the Corporation then entitled to vote at an election of directors voting together as a single class. No decrease in the authorized number of directors constituting the Board shall shorten the term of any incumbent director.
5. Board Vacancies . Subject to the rights of the holders of any series of Preferred Stock, any vacancy occurring in the Board for any cause, and any newly created directorship resulting from any increase in the authorized number of directors, shall, unless (a) the Board determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders or (b) as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which the director has been assigned expires or until such directors successor shall have been duly elected and qualified, or until such directors earlier death, resignation or removal.
6. Vote by Ballot . Election of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.
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ARTICLE VII: DIRECTOR LIABILITY
1. Limitation of Liability . To the fullest extent permitted by law, no director of the Corporation shall be personally liable for monetary damages for breach of fiduciary duty as a director. Without limiting the effect of the preceding sentence, if the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.
2. Change in Rights . Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VII, shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision.
ARTICLE VIII: MATTERS RELATING TO STOCKHOLDERS
1. No Action by Written Consent of Stockholders . Subject to the rights of any series of Preferred Stock, no action shall be taken by the stockholders of the Corporation except at a duly called annual or special meeting of stockholders and no action shall be taken by the stockholders by written consent.
2. Special Meeting of Stockholders . Special meetings of the stockholders of the Corporation may be called only by the Chairperson of the Board, the Chief Executive Officer, the President or the Board acting pursuant to a resolution adopted by a majority of the Whole Board.
3. Advance Notice of Stockholder Nominations and Business Transacted at Special Meetings . Advance notice of stockholder nominations for the election of directors of the Corporation and of business to be brought by stockholders before any meeting of stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. Business transacted at special meetings of stockholders shall be confined to the purpose or purposes stated in the notice of meeting.
ARTICLE IX: CHOICE OF FORUM
Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation; (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporations stockholders; (c) any action asserting a claim against the Corporation arising pursuant to any provision of the Delaware General Corporation Law, this Certificate of Incorporation or the Bylaws; (d) any action to interpret, apply, enforce or determine the validity of this Certificate of Incorporation or the Bylaws; or (e) any action asserting a claim against the Corporation governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article IX.
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ARTICLE X: AMENDMENT OF CERTIFICATE OF INCORPORATION
If any provision of this Certificate of Incorporation becomes or is declared on any ground by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Certificate of Incorporation, and the court will replace such illegal, void or unenforceable provision of this Certificate of Incorporation with a valid and enforceable provision that most accurately reflects the Corporations intent, in order to achieve, to the maximum extent possible, the same economic, business and other purposes of the illegal, void or unenforceable provision. The balance of this Certificate of Incorporation shall be enforceable in accordance with its terms.
The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided , however , that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law that might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least two-thirds of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal this Article X or Article V, Article VI, Article VII or Article VIII.
* * * * * * * * * * *
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Exhibit 3.5
LENDINGCLUB CORPORATION,
a Delaware Corporation
AMENDED AND RESTATED BYLAWS
As Adopted , 2014
LENDINGCLUB CORPORATION,
a Delaware Corporation
AMENDED AND RESTATED BYLAWS
TABLE OF CONTENTS
Article I - STOCKHOLDERS | ||||||||
Section 1.1: |
Annual Meetings | 1 | ||||||
Section 1.2: |
Special Meetings | 1 | ||||||
Section 1.3: |
Notice of Meetings | 1 | ||||||
Section 1.4: |
Adjournments | 1 | ||||||
Section 1.5: |
Quorum | 2 | ||||||
Section 1.6: |
Organization | 2 | ||||||
Section 1.7: |
Voting; Proxies | 2 | ||||||
Section 1.8: |
Fixing Date for Determination of Stockholders of Record | 2 | ||||||
Section 1.9: |
List of Stockholders Entitled to Vote | 3 | ||||||
Section 1.10: |
Inspectors of Elections | 3 | ||||||
Section 1.11: |
Notice of Stockholder Business; Nominations | 4 | ||||||
Article II - BOARD OF DIRECTORS | ||||||||
Section 2.1: |
Number; Qualifications | 7 | ||||||
Section 2.2: |
Election; Resignation; Removal; Vacancies | 7 | ||||||
Section 2.3: |
Regular Meetings | 7 | ||||||
Section 2.4: |
Special Meetings | 8 | ||||||
Section 2.5: |
Remote Meetings Permitted | 8 | ||||||
Section 2.6: |
Quorum; Vote Required for Action | 8 | ||||||
Section 2.7: |
Organization | 8 | ||||||
Section 2.8: |
Written Action by Directors | 8 | ||||||
Section 2.9: |
Powers | 8 | ||||||
Section 2.10: |
Compensation of Directors | 8 | ||||||
Article III - COMMITTEES | ||||||||
Section 3.1: |
Committees | 9 | ||||||
Section 3.2: |
Committee Rules | 9 | ||||||
Article IV - OFFICERS | ||||||||
Section 4.1: |
Generally | 9 | ||||||
Section 4.2: |
Chief Executive Officer | 9 | ||||||
Section 4.3: |
Chairperson of the Board | 10 | ||||||
Section 4.4: |
President | 10 | ||||||
Section 4.5: |
Vice President | 10 |
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Section 4.6: |
Chief Financial Officer | 11 | ||||||
Section 4.7: |
Treasurer | 11 | ||||||
Section 4.8: |
Secretary | 11 | ||||||
Section 4.9: |
Delegation of Authority | 11 | ||||||
Section 4.10: |
Removal | 11 | ||||||
Article V - STOCK | ||||||||
Section 5.l: |
Certificates | 11 | ||||||
Section 5.2: |
Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates or Uncertificated Shares | 12 | ||||||
Section 5.3: |
Other Regulations | 12 | ||||||
Article VI - INDEMNIFICATION | ||||||||
Section 6.1: |
Indemnification of Officers and Directors | 12 | ||||||
Section 6.2: |
Advancement of Expenses | 13 | ||||||
Section 6.3: |
Non-Exclusivity of Rights | 13 | ||||||
Section 6.4: |
Indemnification Contracts | 13 | ||||||
Section 6.5: |
Right of Indemnitee to Bring Suit | 13 | ||||||
Section 6.6: |
Nature of Rights | 14 | ||||||
Section 6.7: |
Insurance | 14 | ||||||
Article VII - NOTICES | ||||||||
Section 7.l: |
Notice | 15 | ||||||
Section 7.2: |
Waiver of Notice | 15 | ||||||
Article VIII - INTERESTED DIRECTORS | ||||||||
Section 8.1: |
Interested Directors | 16 | ||||||
Section 8.2: |
Quorum | 16 | ||||||
Article IX - MISCELLANEOUS | ||||||||
Section 9.1: |
Fiscal Year | 16 | ||||||
Section 9.2: |
Seal | 16 | ||||||
Section 9.3: |
Form of Records | 16 | ||||||
Section 9.4: |
Reliance Upon Books and Records | 16 | ||||||
Section 9.5: |
Certificate of Incorporation Governs | 17 | ||||||
Section 9.6: |
Severability | 17 | ||||||
Article X - AMENDMENT |
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LENDINGCLUB CORPORATION,
a Delaware Corporation
AMENDED AND RESTATED BYLAWS
As Adopted , 2014
ARTICLE I: STOCKHOLDERS
Section 1.1 : Annual Meetings . An annual meeting of stockholders shall be held for the election of directors at such date and time as the Board of Directors of the Corporation (the Board ) shall each year fix. The meeting may be held either at a place, within or without the State of Delaware as permitted by the Delaware General Corporation Law (the DGCL ), or by means of remote communication as the Board in its sole discretion may determine. Any proper business may be transacted at the annual meeting.
Section 1.2 : Special Meetings . Special meetings of stockholders for any purpose or purposes may be called at any time by the Chairperson of the Board, the Chief Executive Officer, the President or the Board acting pursuant to a resolution adopted by a majority of the Whole Board , which shall mean the total number of authorized directors, whether or not there exist any vacancies in previously authorized directorships. Special meetings may not be called by any other person or persons. The special meeting may be held either at a place, within or without the State of Delaware, or by means of remote communication as the Board in its sole discretion may determine.
Section 1.3 : Notice of Meetings . Notice of all meetings of stockholders shall be given in writing or by electronic transmission in the manner provided by law (including, without limitation, as set forth in Section 7.1.1 of these Bylaws) stating the date, time and place, if any, of the meeting, the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation of the Corporation (the Certificate of Incorporation ), such notice shall be given not less than ten (10), nor more than sixty (60), days before the date of the meeting to each stockholder of record entitled to vote at such meeting.
Section 1.4 : Adjournments . The chairperson of the meeting shall have the power to adjourn the meeting to another time, date and place (if any). Any meeting of stockholders may adjourn from time to time, and notice need not be given of any such adjourned meeting if the time, date and place (if any) thereof and the means of remote communications (if any) by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken; provided , however , that if the adjournment is for more than thirty (30) days, or if a new record date is fixed for the adjourned meeting, then a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. To the fullest extent permitted by law, the Board may postpone or reschedule any previously scheduled special or annual meeting of stockholders before it is to be held, in which case notice shall be provided to the stockholders of the new date, time and place, if any, of the meeting as provided in Section 1.3 above.
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Section 1.5 : Quorum . At each meeting of stockholders the holders of a majority of the voting power of the shares of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, unless otherwise required by applicable law. Where a separate vote by a class or classes or series is required, a majority of the voting power of the shares of such class or classes or series present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairperson of the meeting or the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting may adjourn the meeting. Shares of the Corporations stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation), shall neither be entitled to vote nor be counted for quorum purposes; provided , however , that the foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporations stock held by it in a fiduciary capacity and to count such shares for purposes of determining a quorum.
Section 1.6 : Organization . Meetings of stockholders shall be presided over by such person as the Board may designate, or, in the absence of such a person, the Chairperson of the Board, or, in the absence of such person, the President of the Corporation, or, in the absence of such person, such person as may be chosen by the holders of a majority of the voting power of the shares entitled to vote who are present, in person or by proxy, at the meeting. Such person shall be chairperson of the meeting and, subject to Section 1.10 hereof, shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her to be in order. The Secretary of the Corporation shall act as secretary of the meeting, but in such persons absence the chairperson of the meeting may appoint any person to act as secretary of the meeting.
Section 1.7 : Voting; Proxies . Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law. Except as may be required in the Certificate of Incorporation, directors shall be elected by a plurality of the votes cast. Unless otherwise provided by applicable law, the rules of any stock exchange upon which the Corporations securities are listed, the Certificate of Incorporation or these Bylaws, every matter other than the election of directors shall be decided by a majority of the votes cast for or against the matter.
Section 1.8 : Fixing Date for Determination of Stockholders of Record . In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, unless otherwise required by law, the Board may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board and which shall not be more than sixty (60), nor less than ten (10), days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed by the Board, then the record date shall be as
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provided by applicable law. To the fullest extent permitted by law, a determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided , however , that the Board may fix a new record date for the adjourned meeting.
Section 1.9 : List of Stockholders Entitled to Vote . A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either on a reasonably accessible electronic network as permitted by law (provided that the information required to gain access to the list is provided with the notice of the meeting) or during ordinary business hours at the principal place of business of the Corporation. If the meeting is held at a location where stockholders may attend in person, the list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present at the meeting. If the meeting is held solely by means of remote communication, then the list shall be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access the list shall be provided with the notice of the meeting.
Section 1.10 : Inspectors of Elections .
1.10.1 Applicability . Unless otherwise required by the Certificate of Incorporation or by the DGCL, the following provisions of this Section 1.10 shall apply only if and when the Corporation has a class of voting stock that is: (a) listed on a national securities exchange; (b) authorized for quotation on an interdealer quotation system of a registered national securities association; or (c) held of record by more than two thousand (2,000) stockholders. In all other cases, observance of the provisions of this Section 1.10 shall be optional, and at the discretion of the Board.
1.10.2 Appointment . The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting.
1.10.3 Inspectors Oath . Each inspector of election, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspectors ability.
1.10.4 Duties of Inspectors . At a meeting of stockholders, the inspectors of election shall (a) ascertain the number of shares outstanding and the voting power of each share, (b) determine the shares represented at a meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors, and (e) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.
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1.10.5 Opening and Closing of Polls . The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise.
1.10.6 Determinations . In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies in accordance with any information provided pursuant to Section 211(a)(2)(b)(i) or (iii) of the DGCL, or Sections 211(e) or 212(c)(2) of the DGCL, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.10 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors belief that such information is accurate and reliable.
Section 1.11: Notice of Stockholder Business; Nominations .
1.11.1 Annual Meeting of Stockholders .
(a) Nominations of persons for election to the Board and the proposal of business to be considered by the stockholders shall be made at an annual meeting of stockholders (i) pursuant to the Corporations notice of such meeting, (ii) by or at the direction of the Board or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 1.11, who is entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 1.11. For the avoidance of doubt, the foregoing clause (iii) shall be the exclusive means for a stockholder to make nominations or propose business (other than business included in the Corporations proxy materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (such act, and the rules and regulations promulgated thereunder, the Exchange Act )), at an annual meeting of stockholders.
(b) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to Section 1.11.1(a):
(i) the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation;
(ii) such other business must otherwise be a proper matter for stockholder action;
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(iii) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the Corporation with a Solicitation Notice, as that term is defined in this Section, such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the Corporations voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the Corporations voting shares reasonably believed by such stockholder or beneficial holder to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice; and
(iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this Section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section.
To be timely, a stockholders notice must be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the seventy-fifth (75th) day nor earlier than the close of business on the one hundred and fifth (105th) day prior to the first anniversary of the preceding years annual meeting (except in the case of the Corporations first annual meeting following its initial public offering, for which such notice shall be timely if delivered in the same time period as if such meeting were a special meeting governed by Section 1.11.2); provided , however , that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered (A) no earlier than the close of business on the one hundred and fifth (105th) day prior to currently proposed annual meeting and (B) no later than the close of business on the later of the seventy-fifth (75th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which Public Announcement of the date of such meeting is first made by the Corporation. Such stockholders notice shall set forth:
(x) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that would be required to be disclosed in solicitations of proxies for election of directors, or would be otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, including such persons written consent to being named in the proxy statement as a nominee and to serving as a director if elected;
(y) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and
(z) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (aa) the name and address of such stockholder, as they appear on the Corporations books, and of such beneficial owner, (bb) the class and number of shares of the Corporation that are owned beneficially
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and held of record by such stockholder and such beneficial owner, (cc) a description of any agreement, arrangement or understanding with respect to the nomination or proposal between or among such stockholder and such beneficial owner, any of their respective affiliates or associates, and any others acting in concert with any of the foregoing, (dd) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, warrants, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the stockholders notice by, or on behalf of, such stockholder and such beneficial owners, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder or such beneficial owner, with respect to shares of stock of the Corporation, (ee) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination and (ff) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of a proposal, at least the percentage of the Corporations voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the Corporations voting shares to elect such nominee or nominees (an affirmative statement of such intent being a Solicitation Notice ). If requested by the Corporation, the information required under clauses (bb), (cc) and (dd) of this subparagraph (z) shall be supplemented by such stockholder and beneficial owner, if any, not later than 10 days after the record date for the meeting to disclose such information as of the record date.
(c) Notwithstanding anything in the second sentence of Section 1.11.1(b) to the contrary, in the event that the number of directors to be elected to the Board is increased and there is no Public Announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board at least seventy five (75) days prior to the first anniversary of the preceding years annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy five (75) days prior to such annual meeting), a stockholders notice required by this Section 1.11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation no later than the close of business on the tenth (10th) day following the day on which such Public Announcement is first made by the Corporation.
1.11.2 Special Meetings of Stockholders . Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporations notice of such meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporations notice of such meeting (a) by or at the direction of the Board or (b) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporations notice of meeting, if the stockholders notice required by Section 1.11.1(b)
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shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation (i) no earlier than the one hundred fifth (105th) day prior to such special meeting and (ii) no later than the close of business on the later of the seventy fifth (75th) day prior to such special meeting or the tenth (10th) day following the day on which Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting.
1.11.3 General .
(a) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.11 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.11. Except as otherwise provided by law or these Bylaws, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.11 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded.
(b) For purposes of this Section 1.11, the term Public Announcement shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(c) Notwithstanding the foregoing provisions of this Section 1.11, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.11 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporations proxy statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE II: BOARD OF DIRECTORS
Section 2.1 : Number; Qualifications . The Board shall consist of one or more members. The initial number of directors shall be fixed from time to time as set forth in the Certificate of Incorporation. No decrease in the authorized number of directors constituting the Board shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation.
Section 2.2 : Election; Resignation; Removal; Vacancies . The directors shall be divided, with respect to the time for which they severally hold office, into classes as provided in the Certificate of Incorporation, and vacancies occurring in the Board and any newly created directorships resulting from any increase in the authorized number of directors shall be filled, as provided in the Certificate of Incorporation.
Section 2.3 : Regular Meetings . Regular meetings of the Board may be held at such places, within or without the State of Delaware, and at such times as the Board may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board.
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Section 2.4 : Special Meetings . Special meetings of the Board may be called by the Chairperson of the Board, the President or a majority of the members of the Board then in office and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally, in writing or by electronic transmission (including electronic mail), by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, mailgram, facsimile, electronic mail or other means of electronic transmission. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting.
Section 2.5 : Remote Meetings Permitted . Members of the Board, or any committee of the Board, may participate in a meeting of the Board or such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to conference telephone or other communications equipment shall constitute presence in person at such meeting.
Section 2.6 : Quorum; Vote Required for Action . Subject to the Certificate of Incorporation regarding the ability of members of the Board to fill a vacancy occurring in the Board, a majority of the Whole Board shall constitute a quorum for the transaction of business. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date or time without further notice thereof. Except as otherwise provided herein or in the Certificate of Incorporation, or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board.
Section 2.7 : Organization . Meetings of the Board shall be presided over by the Chairperson of the Board, or in such persons absence by the President, or in such persons absence by a chairperson chosen at the meeting. The Secretary shall act as secretary of the meeting, but in such persons absence the chairperson of the meeting may appoint any person to act as secretary of the meeting.
Section 2.8 : Written Action by Directors . Any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee, respectively, in the minute books of the Corporation. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
Section 2.9: Powers . The Board may, except as otherwise required by law or the Certificate of Incorporation, exercise all such powers and manage and direct all such acts and things as may be exercised or done by the Corporation.
Section 2.10 : Compensation of Directors . Members of the Board, as such, may receive, pursuant to a resolution of the Board, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board.
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ARTICLE III: COMMITTEES
Section 3.1 : Committees . The Board may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting of such committee who are not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to the following matters: (a) approving, adopting, or recommending to the stockholders any action or matter (other than the election or removal of members of the Board) expressly required by the DGCL to be submitted to stockholders for approval or (b) adopting, amending or repealing any bylaw of the Corporation.
Section 3.2 : Committee Rules . Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV: OFFICERS
Section 4.1 : Generally . The officers of the Corporation shall consist of a Chief Executive Officer (who may be the Chairperson of the Board or the President), a Secretary and a Treasurer and may consist of such other officers, including a Chief Financial Officer and one or more Vice Presidents, as may from time to time be appointed by the Board. All officers shall be elected by the Board; provided , however , that the Board may empower the Chief Executive Officer of the Corporation to appoint any officer other than the Chairperson of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. Each officer shall hold office until such persons successor is appointed or until such persons earlier resignation, death or removal. Any number of offices may be held by the same person. Any officer may resign at any time upon written notice to the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board.
Section 4.2 : Chief Executive Officer . Subject to the control of the Board and such supervisory powers, if any, as may be given by the Board, the powers and duties of the Chief Executive Officer of the Corporation are:
(a) To act as the general manager and, subject to the control of the Board, to have general supervision, direction and control of the business and affairs of the Corporation;
(b) Subject to Article I, Section 1.6, to preside at all meetings of the stockholders;
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(c) Subject to Article I, Section 1.2, to call special meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper;
(d) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation; and
(e) To vote and otherwise act on, or to authorize any officer to vote or otherwise act on, on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise, or authorize any officer otherwise to exercise, any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation.
The President shall be the Chief Executive Officer of the Corporation unless the Board shall designate another officer to be the Chief Executive Officer. If there is no President, and the Board has not designated any other officer to be the Chief Executive Officer, then the Chairperson of the Board shall be the Chief Executive Officer.
Section 4.3 : Chairperson of the Board . The Chairperson of the Board shall have the power to preside at all meetings of the Board and shall have such other powers and duties as provided in these Bylaws and as the Board may from time to time prescribe.
Section 4.4 : President . The Chief Executive Officer shall be the President of the Corporation unless the Board shall have designated one individual as the President and a different individual as the Chief Executive Officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board to the Chairperson of the Board, and/or to any other officer, the President shall have the responsibility for the general management and control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are commonly incident to the office of President or that are delegated to the President by the Board.
Section 4.5 : Vice President . Each Vice President shall have all such powers and duties as are commonly incident to the office of Vice President, or that are delegated to him or her by the Board or the Chief Executive Officer. A Vice President may be designated by the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officers absence or disability.
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Section 4.6 : Chief Financial Officer . The Chief Financial Officer shall be the Treasurer of the Corporation unless the Board shall have designated another officer as the Treasurer of the Corporation. Subject to the direction of the Board and the Chief Executive Officer, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of Chief Financial Officer.
Section 4.7 : Treasurer . The Treasurer shall have custody of all moneys and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of Treasurer, or as the Board or the Chief Executive Officer may from time to time prescribe.
Section 4.8 : Secretary . The Secretary shall issue or cause to be issued all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders and the Board. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of Secretary, or as the Board or the Chief Executive Officer may from time to time prescribe.
Section 4.9 : Delegation of Authority . The Board may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.
Section 4.10 : Removal . Any officer of the Corporation shall serve at the pleasure of the Board and may be removed at any time, with or without cause, by the Board; provided that if the Board has empowered the Chief Executive Officer to appoint any Vice Presidents of the Corporation, then such Vice Presidents may be removed by the Chief Executive Officer. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation.
ARTICLE V: STOCK
Section 5.1 : Certificates . The shares of capital stock of the Corporation shall be represented by certificates; provided, however, that the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock may be uncertificated shares. Notwithstanding the adoption of such resolution by the Board, each holder of stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairperson or Vice-Chairperson of the Board, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.
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Section 5.2 : Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates or Uncertificated Shares . The Corporation may issue a new certificate of stock, or uncertificated shares, in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owners legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.
Section 5.3 : Other Regulations . The issue, transfer, conversion and registration of stock certificates and uncertificated securities shall be governed by such other regulations as the Board may establish.
ARTICLE VI: INDEMNIFICATION
Section 6.1 : Indemnification of Officers and Directors . Each person who was or is made a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a Proceeding ), by reason of the fact that such person (or a person of whom such person is the legal representative), is or was a member of the Board or officer of the Corporation or a Reincorporated Predecessor (as defined below) or is or was serving at the request of the Corporation or a Reincorporated Predecessor as a member of the board of directors, officer or trustee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (for purposes of this Article VI, an Indemnitee ), shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the DGCL as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expenses, liability and loss (including attorneys fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith, provided such Indemnitee acted in good faith and in a manner that the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe the Indemnitees conduct was unlawful. Such indemnification shall continue as to an Indemnitee who has ceased to be a director or officer and shall inure to the benefit of such Indemnitees heirs, executors and administrators. Notwithstanding the foregoing, the Corporation shall indemnify any such Indemnitee seeking indemnity in connection with a Proceeding (or part thereof) initiated by such Indemnitee only if such Proceeding (or part thereof) was authorized by the Board or such indemnification is authorized by an agreement approved by the Board. As used herein, the term the Reincorporated Predecessor means a corporation that is merged with and into the Corporation in a statutory merger where (a) the Corporation is the surviving corporation of such merger; (b) the primary purpose of such merger is to change the corporate domicile of the Reincorporated Predecessor to Delaware. To the extent that a present or former director or officer of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described in this Section 6.1 or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith.
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Section 6.2 : Advancement of Expenses . Except as otherwise provided in a written indemnification agreement between the Corporation and an Indemnitee, the Corporation shall pay all expenses (including attorneys fees) incurred by such an Indemnitee in defending any such Proceeding as they are incurred in advance of its final disposition; provided , however , that if the DGCL then so requires, the payment of such expenses incurred by such Indemnitee in advance of the final disposition of such Proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it should be determined ultimately by final judicial decision from which there is no appeal that such Indemnitee is not entitled to be indemnified under this Article VI or otherwise. Expenses (including attorneys fees) actually and reasonably incurred by an officer or director of the corporation in defending any Proceeding shall be paid by the corporation in advance of the final disposition of such Proceeding upon receipt of a written request therefor (together with documentation reasonably evidencing such expenses) and an undertaking by or on behalf of the person to repay such amounts if it shall ultimately be determined that the person is not entitled to be indemnified under this Article VI or the DGCL. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents of the corporation or by persons serving at the request of the corporation as directors, officers, employees or agents of another corporation, partnership, joint venture, trust or other enterprise may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. The right to advancement of expenses shall not apply to any claim for which indemnity is excluded pursuant to these bylaws, but shall apply to any Proceeding referenced in Section 6.1 prior to a determination that the person is not entitled to be indemnified by the corporation.
Section 6.3: Non-Exclusivity of Rights . The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI.
Section 6.4 : Indemnification Contracts . The Board is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, that provide indemnification or advancement rights to such person. Such rights may be greater than those provided in this Article VI.
Section 6.5: Right of Indemnitee to Bring Suit . The following shall apply to the extent not in conflict with any indemnification contract provided for in Section 6.4 above.
6.5.1 Right to Bring Suit . If a claim under Section 6.1 or 6.2 of this Article VI is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a
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suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (a) any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (b) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the Indemnitee has not met any applicable standard for indemnification set forth in applicable law.
6.5.2 Effect of Determination . Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in applicable law, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel or its stockholders) that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit.
6.5.3 Burden of Proof . In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article VI, or otherwise, shall be on the Corporation.
Section 6.6 : Nature of Rights . The rights conferred upon Indemnitees in this Article VI shall be contract rights and such rights shall continue as to an Indemnitee who has ceased to be a director, officer or trustee and shall inure to the benefit of the Indemnitees heirs, executors and administrators. Any amendment, repeal or modification of any provision of this Article VI that adversely affects any right of an Indemnitee or an Indemnitees successors shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification.
Section 6.7: Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such persons status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of the DGCL.
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ARTICLE VII: NOTICES
Section 7.1 : Notice .
7.1.1 Form and Delivery . Except as otherwise specifically required in these Bylaws (including, without limitation, Section 7.1.2 below) or by law, all notices required to be given pursuant to these Bylaws shall be in writing and may, (a) in every instance in connection with any delivery to a member of the Board, be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid telegram, cablegram, overnight express courier, facsimile, electronic mail or other form of electronic transmission and (b) be effectively delivered to a stockholder when given by hand delivery, by depositing such notice in the mail, postage prepaid or, if specifically consented to by the stockholder as described in Section 7.1.2 of this Article VII by sending such notice by telegram, cablegram, facsimile, electronic mail or other form of electronic transmission. Any such notice shall be addressed to the person to whom notice is to be given at such persons address as it appears on the records of the Corporation. The notice shall be deemed given (a) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person, (b) in the case of delivery by mail, upon deposit in the mail, (c) in the case of delivery by overnight express courier, when dispatched, and (d) in the case of delivery via telegram, cablegram, facsimile, electronic mail or other form of electronic transmission, when dispatched.
7.1.2 Electronic Transmission . Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the DGCL, the Certificate of Incorporation, or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given in accordance with Section 232 of the DGCL. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (a) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (b) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided , however , the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this Section 7.1.2 shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of such posting and the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder.
7.1.3 Affidavit of Giving Notice . An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given in writing or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
Section 7.2 : Waiver of Notice . Whenever notice is required to be given under any provision of the DGCL, the Certificate of Incorporation or these Bylaws, a written waiver of notice, signed by the person entitled to notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the
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meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any waiver of notice.
ARTICLE VIII: INTERESTED DIRECTORS
Section 8.1 : Interested Directors . No contract or transaction between the Corporation and one or more of its members of the Board or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are members of the board of directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof that authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (a) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (b) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board, a committee thereof, or the stockholders.
Section 8.2 : Quorum . Interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction.
ARTICLE IX: MISCELLANEOUS
Section 9.1 : Fiscal Year . The fiscal year of the Corporation shall be determined by resolution of the Board.
Section 9.2 : Seal . The Board may provide for a corporate seal, which may have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board.
Section 9.3 : Form of Records . Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on or by means of, or be in the form of, diskettes, CDs, or any other information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to any provision of the DGCL.
Section 9.4 : Reliance upon Books and Records . A member of the Board, or a member of any committee designated by the Board shall, in the performance of such persons duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporations officers or employees, or committees of the Board, or by any other person as to matters the member reasonably believes are within such other persons professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.
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Section 9.5 : Certificate of Incorporation Governs . In the event of any conflict between the provisions of the Certificate of Incorporation and Bylaws, the provisions of the Certificate of Incorporation shall govern.
Section 9.6 : Severability . If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation, that are not themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation) shall remain in full force and effect.
ARTICLE X: AMENDMENT
Notwithstanding any other provision of these Bylaws, any amendment or repeal of these Bylaws, or adoption of Bylaws, shall require the approval of the Board or the stockholders of the Corporation as provided in the Certificate of Incorporation.
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Exhibit 4.9
THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE SOLD OR OTHERWISE TRANSFERRED OR PLEDGED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS, OR IF THE PROPOSED TRANSFER MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OR REGISTRATION OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS.
LENDINGCLUB CORPORATION
STOCK SUBSCRIPTION
WARRANT
, 20
THIS CERTIFIES that, for value received, , or assigns (the Holder), shall be entitled to subscribe for and purchase from LENDINGCLUB CORPORATION, a Delaware corporation (the Corporation), shares (the Warrant Shares) of Common Stock, $0.01 par value per share of the Corporation (the Common Stock), at the Exercise Price (as defined in Section 2 hereof), during the Exercise Period (as defined in Section 1 hereof), pursuant to the terms and subject to the conditions hereof.
Section 1. Exercise Period .
This Warrant may be exercised by the Holder at any time or from time to time after the date hereof and on or prior to , 20 (such period being herein referred to as the Exercise Period).
Section 2. Exercise Price .
The exercise price (the Exercise Price) at any time for each Warrant Share shall be $1.5677, subject to adjustment pursuant to Section 5 hereof.
Section 3. Exercise of Warrant: Warrant Shares .
(a) The rights represented by this Warrant may be exercised, in whole or in any part (but not as to a fractional share of Common Stock), by (i) the surrender of this Warrant (properly endorsed) at the office of the Corporation (or at such other agency or office of the Corporation in the United States of America as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Corporation), (ii) delivery to the Corporation of a notice of election to exercise in the form of Exhibit A attached hereto, and (iii) payment to the Corporation of the aggregate Exercise Price by (A) cash, wire transfer finds
or check or (B) shares of Common Stock or Warrants to purchase Common Stock (net of the exercise Price for such shares) valued for such purposes at the Market Price per share on the date of exercise. As used herein, Market Price at any date of one share of Common Stock shall be the value given such share as determined by the Corporations Board of Directors.
(b) Each date on which this Warrant is surrendered and on which payment of the Exercise Price is made is referred to herein as an Exercise Date. Simultaneously with each exercise, the Corporation shall issue and deliver a certificate or certificates for the Warrant Shares being purchased pursuant to such exercise, registered in the name of the Holder or, subject to compliance with applicable securities laws, the holders designee, to such Holder or designee, as the case may be. If such exercise shall not have been for the full number of the Warrant Shares, then the Corporation shall issue and deliver to the holder a new Warrant, registered in the name of the Holder, of like tenor to this Warrant, for the balance of the Warrant Shares that remain available for purchase upon exercise after exercise of the Warrant.
(c) The person in whose name any certificate for shares of Common Stock is issued upon any exercise shall for all purposes be deemed to have become the holder of record of such shares as of the Exercise Date, except that if the Exercise Date is a date on which the stock transfer books of the Corporation are closed, such person or entity shall be deemed to have become the holder of record of such shares at the close of business on the next succeeding date on which the stock transfer books are open. The Corporation shall pay all documentary, stamp or other transactional taxes attributable to the issuance or delivery of shares of Common Stock upon exercise of all or any part of this Warrant; provided, however , that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the Holder to the extent such taxes would exceed the taxes otherwise payable if such certificate had been issued to the Holder.
Section 4. Representations and Warranties of the Holder .
By acceptance of this Note, the Holder represents and warrants to the Corporation that the Holder is an accredited investor, as such term is defined in Rule 501 (the provisions of which are known to such Holder) promulgated under the Securities Act of 1933, as amended from time to time.
Section 5. Adjustment of Exercise Price .
5.1 If, at any time after the date hereof, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Exercise Price in effect at such time shall be decreased and the aggregate number of Warrant Shares issuable upon exercise of this Warrant as of such record date shall be increased in proportion to such increase in outstanding shares.
5.2 If, at any time after the date hereof, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date for such combination, the Exercise Price in effect at such time shall be increased and the aggregate number of Warrant Shares issuable upon exercise of this Warrant as of such record date shall be decreased in proportion to such decrease in outstanding shares.
5.3 If, at any time after the date hereof, any capital reorganization, or any reclassification of the capital stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares) shall be consummated, then this Warrant shall be exercisable after such reorganization or reclassification into the kind and number of shares of stock or other securities or property of the Corporation to which the holder of the number of shares of Common Stock (immediately prior to the time of such reorganization or reclassification) issuable upon exercise of this Warrant would have been entitled upon such reorganization or reclassification. The provisions of this subdivision 5 shall similarly apply to successive reorganizations or reclassifications.
5.4 Upon any adjustment to the Exercise Price hereunder, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be adjusted to the number obtained by dividing (i) an amount equal to the product of (x) the number of Warrant Shares purchasable hereunder immediately prior to such adjustment multiplied by (y) the Exercise Price immediately prior to such adjustment, by (ii) the Exercise Price immediately after such adjustment.
5.5 All calculations under this Section 5 shall be made to the nearest one-thousandth of a cent ($.001) or to the nearest one-thousandth of a share, as the case may be.
Section 6. No Shareholder Rights .
This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Corporation.
Section 7. Restrictions on Transfer .
7.1 Subject to applicable securities laws, this Warrant, the Warrant Shares and all rights hereunder are transferable, in whole or in part, at the agency or office of the Corporation referred to in Section 3 hereof, by the Holder in person or by duly authorized attorney, upon (i) surrender of this Warrant properly endorsed, and (ii) delivery of a notice of transfer in the form of Exhibit B hereto. Each transferee and holder of this Warrant, by accepting or holding the same, consents that this Warrant, when endorsed, in blank, shall be deemed negotiable, and, when so endorsed, the holder hereof shall be treated by the Corporation and all other persons dealing with this Warrant as the absolute owner hereof for any purposes and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Corporation, any notice to the contrary notwithstanding; provided, however, that until each such transfer is recorded on such books, the Corporation may treat the registered holder hereof as the owner hereof for all purposes.
7.2 If the Holder proposes to transfer any of the Warrant Shares, then the Holder shall promptly give written notice (the Notice) to the Corporation at least thirty (30) days prior to the closing of such transfer. The Notice shall describe in reasonable detail the proposed transfer including, without limitation, the number of Warrant Shares to be transferred, the nature of such transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. For a period of thirty (30) days following receipt of any notice, the Corporation (or its designee(s)) shall have the right to purchase all or a portion of the Warrant Shares subject to such Notice on the same terms and conditions as set forth therein. The Corporations purchase right shall be exercised by written notice signed by an officer of the Corporation (the Corporation Notice) and delivered to the Holder within such thirty (30) day period. The Corporation shall effect the purchase of the Warrant Shares, including payment of the purchase price, not more than ten (10) business days after delivery of the Corporations Notice, and at such time the Holder shall deliver to the Corporation the certificate(s) representing the Warrant Shares to be purchased by the Corporation (or its designee(s)), each certificate to be properly endorsed for transfer. The Warrant Shares so purchased shall thereupon be cancelled and cease to be issued and outstanding shares of the Corporations Common Stock. To the extent that the Corporation does not elect to purchase all of the Warrant Shares subject to the Notice, such Holder may, not later than sixty (60) days following delivery to the Corporation of the Notice, enter into an agreement providing for the closing of the transfer of such Warrant Shares covered by the Notice within thirty (30) days of such agreement on terms and conditions not materially more favorable to the transferor than those described in the Notice.
7.3 The Holder hereby agrees that he will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the initial public offering of the Corporations securities and ending on the date specified by the Corporation and the managing underwriter (such period not to exceed one hundred eighty (180) days (or such longer period, not to exceed 18 days after the expiration of the 180-day period , as the underwriters or the Corporation shall request in order to facilitate compliance with NASD Rule 2711)) (a) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Common Stock or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (a) or (b) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, and the undersigned hereby agrees to enter into a form of agreement acceptable to the underwriters reflecting the above restrictions if requested by the Corporation or the underwriters. The foregoing provisions of this section shall not apply (i) to the sale of any shares to an underwriter pursuant to an underwriting agreement (ii) to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or (iii) to a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future. The underwriters in connection with a public offering of the Corporations equity securities are intended third party beneficiaries of this section and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. To enforce the foregoing covenant, the Corporation may impose stop-transfer instructions with respect to the Common Stock held by the undersigned until the end of such period.
Section 8. Lost, Stolen, Mutilated or Destroyed Warrant .
If this Warrant is lost, stolen, mutilated or destroyed, the Corporation shall, on such terms as to indemnity or otherwise as it may in its reasonable discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new warrant shall constitute an original contractual obligation of the Corporation, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone.
Section 9. Notices .
All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered mail, postage prepaid, return receipt requested, or via facsimile, addressed as follows:
If to the Corporation, to: |
LendingClub Corporation |
71 Stevenson Street, Suite 300 |
San Francisco, CA 94105 |
Attention: Renaud Laplanche, President |
If to the Holder, |
To: |
Address: |
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or to such other address as the party to whom notice is to be given may have finished to the other party in writing in accordance herewith. If mailed, as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted.
Section 10. Governing Law .
This Warrant shall be governed by, and construed in accordance with, the laws of the State of Delaware without giving effect to principles of conflicts of laws.
Section 11. Headings .
The headings of the various sections contained in this Warrant have been inserted for convenience of reference only and should not be deemed to be a part of this Warrant.
Section 12. Execution in Counterpart .
This Warrant may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument and not separate Warrants.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by a duly authorized officer as of the date first written above.
LENDINGCLUB CORPORATION | ||
By: |
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Renaud Laplanche | ||
President/CEO |
EXHIBIT A
FORM OF NOTICE OF
ELECTION TO EXERCISE
[To be executed only upon exercise
Of the Warrant to which this form is attached]
To LendingClub Corporation:
The undersigned, the holder of the Warrant to which this form is attached, hereby irrevocably elects to exercise the right represented by such Warrant to purchase shares of Common Stock of LENDINGCLUB CORPORTATION, and herewith tenders the aggregate payment of $ in the form of (a) cash, wire transfer funds or check and/or (b) shares of Common Stock or Warrants to purchase Common Stock (net of the Exercise Price for such Shares) valued for such purposes at the Market Price (as defined in Section 3) per share on the date of exercise, in full payment of the purchase price for such shares. The undersigned request that a certificate for such shares be issues in the name of , whose address is , and that such certificate be delivered to, , whose address is .
If such number of shares is less than all of the shares purchasable under the current Warrant, the undersigned requests that a new Warrant, of like tenor as the Warrant to which this form is attached, representing the remaining balance of the shares purchasable under such current Warrant be registered in the name of , whose address is , and that such a new Warrant be delivered to , whose address is .
Signature: |
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(Signature must conform in all respects to the name of the holder of the Warrant as specified on the face of the Warrant) | ||
Date: |
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representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future.
(d) The undersigned further understands that the Securities must be held indefinitely unless subsequently registered under the Act or unless an exemption from registration is otherwise available. Moreover, the undersigned understands that the Company is under no obligation to register the Securities. In addition, the undersigned understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company.
(e) The undersigned is familiar with the provisions of Rule 144, promulgated under the Act, which, in substance, permits limited public resale of restricted securities acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. The Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, if applicable.
(f) The undersigned further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the Act, compliance with a registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk.
3. Please issue a certificate or certificates representing such shares of Warrant Stock in the name specified below.
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(Name) |
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(Address) | ||
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(City, State, Zip Code) | ||
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(Federal Tax Identification Number) | ||
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(Date) |
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT), OR UNDER THE SECURITIES LAWS OF APPLICABLE STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE PREFERRED STOCK
OF
LENDINGCLUB CORPORATION
Issued on , 20
Void on , 20
This certifies that in consideration of the sum of One Dollar ($1) paid to LendingClub Corporation, a Delaware corporation (the Company ), with principal offices at 370 Convention Way, Redwood City, California 94063, receipt of which is hereby acknowledged, is entitled, subject to the terms and conditions of this Warrant, to purchase from the Company, at any time or from time to time, on any business day on or after the date hereof and prior to 5:00 p.m., Pacific time, on , 20 (the Expiration Date ) or an earlier expiration of this Warrant as provided in Section 4 hereof, up to that number of shares of Warrant Stock (as defined below) as may be purchased for the amount of $2,500 (the Maximum Purchase Amount ), at a price per share equal to $1.5677 (the Warrant Price ), upon surrender of this Warrant at the principal offices of the Company, together with a duly executed subscription form in the form attached hereto as Exhibit 1 and simultaneous payment of the full Warrant Price for the shares of Warrant Stock so purchased in lawful money of the United States. The Warrant Price and the number and character of shares of Warrant Stock purchasable under this Warrant are subject to adjustment as provided herein.
1. DEFINITIONS . The following definitions shall apply for purposes of this Warrant:
1.1. Change of Control means (a) a merger or consolidation in which the Company is a constituent party, or a subsidiary of the Company is a constituent party, and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted or exchanged for shares of capital stock which represent, immediately following such merger or consolidation at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting
corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation ( provided that , for the purpose of this Section 1.1, all shares of the Companys Common Stock issuable upon exercise of options outstanding immediately prior to such merger or consolidation or upon conversion of convertible securities outstanding immediately prior to such merger or consolidation shall be deemed to be outstanding immediately prior to such merger or consolidation and, if applicable, converted or exchanged in such merger or consolidation on the same terms as the actual outstanding shares of Common Stock are converted or exchanged); or (b) the sale, lease, transfer or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, except where such sale, lease, transfer or other disposition is to a wholly owned subsidiary of the Company.
1.2. Company means the Company as defined above and includes any corporation which shall succeed to or assume the obligations of the Company under this Warrant.
1.3. Holder means any person who shall at the time be the registered holder of this Warrant.
1.4. Purchase Amount means, at a given time, an amount equal to the Maximum Purchase Amount less the aggregate amount previously paid to the Company for the purchase of Warrant Stock upon exercise of this Warrant.
1.5. Warrant means this Warrant and any warrant(s) delivered in substitution or exchange therefor, as provided herein.
1.6. Warrant Stock means Common Stock of the Company. The number and character of shares of Warrant Stock are subject to adjustment as provided herein and the term Warrant Stock shall include stock and other securities and property at any time receivable or issuable upon exercise of this Warrant in accordance with its terms.
2. EXERCISE .
2.1. Method of Exercise . Subject to the terms and conditions of this Warrant, the Holder may exercise this Warrant in whole or in part, at any time or from time to time, before the Expiration Date, for up to that number of shares of Warrant Stock that is obtained by dividing (a) the Maximum Purchase Amount by (b) the then effective Warrant Price, by surrendering this Warrant at the principal offices of the Company, with the subscription form attached hereto duly executed by the Holder, and payment of an amount equal to the product obtained by multiplying (i) the number of shares of Warrant Stock to be purchased by the Holder by (ii) the Warrant Price or adjusted Warrant Price therefor, if applicable, as determined in accordance with the terms hereof.
2.2. Form of Payment . Payment may be made by (i) a check payable to the Companys order, (ii) wire transfer of funds to the Company, (iii) cancellation of indebtedness of the Company to the Holder, or (iv) any combination of the foregoing.
2
2.3. Partial Exercise . Upon a partial exercise of this Warrant: (i) the Purchase Amount immediately prior to such exercise shall be reduced by the aggregate amount paid to the Company upon such exercise of this Warrant, and (ii) this Warrant shall be surrendered by the Holder and replaced with a new Warrant of like tenor in which the Maximum Purchase Amount is the Purchase Amount as so reduced. In no event may the cumulative aggregate purchase price paid to the Company upon all exercises of the Warrant exceed the Maximum Purchase Amount.
2.4. No Fractional Shares . No fractional shares may be issued upon any exercise of this Warrant, and any fractions shall be rounded down to the nearest whole number of shares. If upon any exercise of this Warrant a fraction of a share results, the Company will pay the cash value of any such fractional share, calculated on the basis of the Warrant Price.
2.5. Restrictions on Exercise . This Warrant may not be exercised if the issuance of the Warrant Stock upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of this Warrant, the Holder shall execute the subscription form attached hereto as Exhibit 1 , confirming and acknowledging that the representations and warranties of the Holder set forth in Section 8 of the Note are true and correct as of the date of exercise.
2.6. Net Exercise Election . The Holder may elect to convert all or a portion of this Warrant, without the payment by the Holder of any additional consideration, by the surrender of this Warrant or such portion to the Company, with the net exercise election selected in the subscription form attached hereto duly executed by the Holder, into up to the number of shares of Warrant Stock that is obtained under the following formula:
X = Y (A-B)
A
Where X = | the number of shares of Warrant Stock to be issued to the Holder pursuant to this Section 2.6. | |
Y = | the Maximum Purchase Amount divided by the Warrant Price (at the date of such calculation). | |
A = | the fair market value of one share of Warrant Stock, as determined in good faith by the Companys Board of Directors, as at the time the net exercise election is made pursuant to this Section 2.6. | |
B = | the Warrant Price (at the date of such calculation). |
The Company will promptly respond in writing to an inquiry by the Holder as to the then current fair market value of one share of Warrant Stock.
For purposes of the above calculation, fair market value of one share of Warrant Stock shall be determined by the Companys Board of Directors in good faith; provided, however, that where there exists a public market for the Companys Common Stock at the time of such exercise, the fair market value per share shall be the product of (i) the average of the closing bid and asked prices of the Common Stock quoted in the Over-The-Counter Market Summary or the
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last reported sale price of the Common Stock or the closing price quoted on the Nasdaq National Market or on any exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the five (5) trading days prior to the date of determination of fair market value and (ii) the number of shares of Common Stock into which each share of Warrant Stock is convertible, if applicable, at the time of such exercise. Notwithstanding the foregoing, in the event the Warrant is exercised in connection with the Companys initial public offering of Common Stock, the fair market value per share shall be the product of (i) the per share offering price to the public of the Companys initial public offering, and (ii) the number of shares of Common Stock into which each share of Warrant Stock is convertible, if applicable, at the time of such exercise.
3. ISSUANCE OF STOCK . Except as set forth in Section 4 below, this Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Warrant Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As soon as practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of whole shares of Warrant Stock issuable upon such exercise.
4. EARLY EXPIRATION . This Warrant shall automatically expire and be of no further force and effect without any action by the Holder immediately prior to the earliest of the following: (i) the effective date of a Change of Control, (ii) the effective date of the Initial Public Offering, or (iii) the Maturity Date. If the Company proposes at any time to effect a Change of Control or the Initial Public Offering, the Company shall, at least twenty (20) days prior to the Change of Control or the effective date of the Initial Public Offering, mail to the Holder a notice specifying the date on which the Change of Control or the Initial Public Offering is anticipated to become effective.
5. ADJUSTMENT PROVISIONS . The number and character of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities or property at the time receivable or issuable upon exercise of this Warrant) and the Warrant Price therefor, are subject to adjustment upon the occurrence of the following events between the date this Warrant first becomes exercisable and the date it is exercised.
5.1. Adjustment for Stock Splits and Stock Dividends . The Warrant Price of this Warrant and the number of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall each be proportionally adjusted to reflect any stock dividend, stock split or reverse stock split, or other similar event affecting the number of outstanding shares of Warrant Stock.
5.2. Adjustment for Other Dividends and Distributions . In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution payable respect to the Warrant Stock that is payable in (a) securities of the Company (other than issuances with respect to which adjustment is made under Sections 5.1 or 5.3 hereof) or (b) assets (other than cash dividends paid or payable solely out of retained earnings), then, and in each such case, the Holder, upon exercise of this
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Warrant at any time after the consummation, effective date or record date of such event, shall receive, in addition to the shares of Warrant Stock issuable upon such exercise prior to such date, the securities or such other assets of the Company to which the Holder would have been entitled upon such date if the Holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant).
5.3. Adjustment for Reorganization, Consolidation, Merger . Except as provided in Section 4 above, in case of any recapitalization or reorganization of the Company after the date of this Warrant, or in case, after such date, the Company shall consolidate with or merge into another corporation, then, and in each such case, the Holder, upon the exercise of this Warrant (as provided in Section 2 hereof), at any time after the consummation of such recapitalization, reorganization, consolidation or merger, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of this Warrant prior to such consummation, the stock or other securities or property to which the Holder would have been entitled upon the consummation of such recapitalization, reorganization, consolidation or merger if the Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in this Warrant, and the successor or purchasing corporation in such reorganization, consolidation or merger (if other than the Company) shall duly execute and deliver to the Holder a supplement hereto acknowledging such corporations obligations under this Warrant; and in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after the consummation of such reorganization, consolidation or merger.
5.4. Conversion of Stock . In case all the authorized Warrant Stock of the Company is converted, pursuant to the Companys Certificate of Incorporation, into Common Stock or other securities or property, or the Warrant Stock otherwise ceases to exist, then, in such case, the Holder, upon exercise of this Warrant at any time after the date on which the Warrant Stock is so converted or ceases to exist (the Termination Date ), shall receive, in lieu of the number of shares of Warrant Stock that would have been issuable upon such exercise immediately prior to the Termination Date (the Former Number of Shares of Warrant Stock ), the stock and other securities and property which the Holder would have been entitled to receive upon the Termination Date if the Holder had exercised this Warrant with respect to the Former Number of Shares of Warrant Stock immediately prior to the Termination Date (all subject to further adjustment as provided in this Warrant).
5.5. Notice of Adjustments . The Company shall promptly give written notice of each adjustment or readjustment of the Warrant Price or the number of shares of Warrant Stock or other securities issuable upon exercise of this Warrant. The notice shall describe the adjustment or readjustment and show in reasonable detail the facts on which the adjustment or readjustment is based.
5.6. No Change Necessary . The form of this Warrant need not be changed because of any adjustment in the Warrant Price or in the number of shares of Warrant Stock issuable upon its exercise.
5.7. Reservation of Stock . If at any time the number of shares of Warrant Stock or other securities issuable upon exercise of this Warrant shall not be sufficient to effect
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the exercise of this Warrant, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Warrant Stock or other securities issuable upon exercise of this Warrant as shall be sufficient for such purpose.
6. MARKET STAND-OFF AGREEMENT .
(a) Holder hereby agrees that it shall not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the first underwritten public offering of the Companys Common Stock to the general public that is effected pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission (the SEC ) under the Securities Act (the IPO ), and ending on the date specified by the Company and the managing underwriter (the Lock-Up Period ) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any capital stock or other securities of the Company held immediately prior to the effectiveness of the registration statement for such offering, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise. The Lock-Up Period shall not exceed one hundred eighty (180) days, provided , however , that for the purpose of allowing the underwriters in the IPO to comply with NASD Rule 2711(f)(4), if (a) during the last seventeen (17) days of the Lock-Up Period the Company releases earnings results or material news or a material event relating to the Company occurs, or (b) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the sixteen (16)-day period beginning on the last day of the Lock-Up Period, then in each such case, the Lock-Up Period may be extended past one hundred eighty (180) days until the expiration of the eighteen (18)-day period beginning on the date of release of the earnings results or the occurrence of the material news or material event, as applicable. The foregoing provisions of this Section 6 shall apply only to the IPO, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall only be applicable to the Holders if all officers, directors and greater than one percent (1%) stockholders of the Company enter into similar agreements. The underwriters in connection with the IPO are intended third-party beneficiaries of this Section 6 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. For purposes of this Section 6, the term Company shall include any wholly-owned subsidiary of the Company into which the Company merges or consolidates.
7. NO RIGHTS OR LIABILITIES AS STOCKHOLDER . This Warrant does not by itself entitle the Holder to any voting rights or other rights as a stockholder of the Company. In the absence of affirmative action by the Holder to purchase Warrant Stock by exercise of this Warrant, no provisions of this Warrant, and no enumeration herein of the rights or privileges of the Holder, shall cause the Holder to be a stockholder of the Company for any purpose.
8. ATTORNEYS FEES . In the event any party is required to engage the services of any attorneys for the purpose of enforcing this Warrant, or any provision thereof, the prevailing party shall be entitled to recover its reasonable expenses and costs in enforcing this Warrant, including attorneys fees.
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9. TRANSFER . Neither this Warrant nor any rights hereunder may be assigned, conveyed or transferred, in whole or in part, without the Companys prior written consent, which the Company may withhold in its sole discretion; provided, however, that this Warrant may be assigned, conveyed or transferred without the prior written consent of the Company to any person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Holder. The rights and obligations of the Company and the Holder under this Warrant and the Purchase Agreement shall be binding upon and benefit their respective permitted successors, assigns, heirs, administrators and transferees.
10. GOVERNING LAW . This Warrant shall be governed by and construed under the internal laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California, without reference to principles of conflict of laws or choice of laws.
11. HEADINGS . The headings and captions used in this Warrant are used only for convenience and are not to be considered in construing or interpreting this Warrant. All references in this Warrant to sections and exhibits shall, unless otherwise provided, refer to sections hereof and exhibits attached hereto, all of which exhibits are incorporated herein by this reference.
12. NOTICES . Unless otherwise provided, any notice required or permitted under this Warrant shall be given in writing and shall be deemed effectively given (i) at the time of personal delivery, if delivery is in person; (ii) one (1) business day after deposit with an express overnight courier for United States deliveries, or two (2) business days after such deposit for deliveries outside of the United States, with proof of delivery from the courier requested; or (iii) three (3) business days after deposit in the United States mail by certified mail (return receipt requested) for United States deliveries when addressed to the party to be notified at the address indicated for such party on the signature page hereto or, in the case of the Company, at 370 Convention Way, Redwood City California 94063, or at such other address as any party or the Company may designate by giving ten (10) days advance written notice to all other parties.
13. AMENDMENT; WAIVER . This Warrant may be amended and provisions may be waived by the Company and the Holder only by a written agreement executed by the Company and the Holder.
14. SEVERABILITY . If one or more provisions of this Warrant are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Warrant and the balance of the Warrant shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms.
15. TERMS BINDING . By acceptance of this Warrant, the Holder accepts and agrees to be bound by all the terms and conditions of this Warrant.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF , the parties hereto have executed this Warrant as of the date first above written.
THE COMPANY :
LENDINGCLUB CORPORATION
By:
Name: Renaud Laplanche
Title: Chief Executive Officer
EXHIBIT 1
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: LendingClub Corporation (the Company )
(1) The undersigned Holder hereby elects to:
¨ | purchase shares of Stock of the Company (the Warrant Stock ), pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full; or |
¨ | convert the Warrant into shares of Warrant Stock by net exercise election pursuant to Section 2.6 of the Warrant. This conversion is exercised with respect to shares of Stock of the Company (the Warrant Stock ) covered by the Warrant. |
(2) Please issue a certificate or certificates representing such shares of Warrant Stock in the name specified below:
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(Address) | ||
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(City, State, Zip Code) | ||
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(Federal Tax Identification Number) | ||
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(Date) |
Exhibit 4.10
THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS WARRANT AND THE UNDERLYING SECURITIES ARE SUBJECT TO A SUBORDINATION AGREEMENT, DATED AS OF THE DATE HEREOF, BETWEEN THE HOLDER AND SILICON VALLEY BANK.
LENDINGCLUB CORPORATION
WARRANT TO PURCHASE SERIES A PREFERRED STOCK
No. PAW - | , 20 |
VOID AFTER , 20
THIS CERTIFIES THAT , for value received, , with its principal office at , or assigns (the Holder ), is entitled to subscribe for and purchase from LENDINGCLUB CORPORATION , a Delaware corporation, with its principal office at 440 North Wolfe Road, Sunnyvale, CA 94085 (the Company ) Exercise Shares at the Exercise Price (each subject to adjustment as provided herein). This Warrant is being issued as one of a series of warrants (the Warrants ) pursuant to the terms of the Note and Warrant Purchase Agreement, dated , 20 by and among the Company and the Purchasers set forth on the Schedule of Purchasers thereto (the Purchase Agreement ).
1. DEFINITIONS . Capitalized terms used but not defined herein shall have the meanings set forth in the Purchase Agreement. As used herein, the following terms shall have the following respective meanings:
(a) Exercise Period shall mean the period commencing , 20 and ending seven (7) years later, unless sooner terminated as provided below.
(b) Exercise Price shall mean $1.065 per Exercise Share subject to adjustment pursuant to Section 5 below.
(c) Exercise Shares shall mean shares of the Companys Series A Preferred Stock issuable upon exercise of this Warrant.
2. EXERCISE OF WARRANT . The rights represented by this Warrant may be exercised in whole or in part at any time during the Exercise Period, by delivery of the following to the Company at its address set forth above (or at such other address as it may designate by notice in writing to the Holder):
(a) An executed Notice of Exercise in the form attached hereto;
(b) Payment of the Exercise Price either (i) in cash or by check, or (ii) by cancellation of indebtedness; and
(c) This Warrant.
Upon the exercise of the rights represented by this Warrant, a certificate or certificates for the Exercise Shares so purchased, registered in the name of the Holder or persons affiliated with the Holder, if the Holder so designates, shall be issued and delivered to the Holder within a reasonable time after the rights represented by this Warrant shall have been so exercised. In the event that this Warrant is being exercised for less than all of the then-current number of Exercise Shares purchasable hereunder, the Company shall, concurrently with the issuance by the Company of the number of Exercise Shares for which this Warrant is then being exercised, issue a new Warrant exercisable for the remaining number of Exercise Shares purchasable hereunder.
The person in whose name any certificate or certificates for Exercise Shares are to be issued upon exercise of this Warrant shall be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open.
2.2 Net Exercise . Notwithstanding any provisions herein to the contrary, if the fair market value of one Exercise Share is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant by payment of cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise in which event the Company shall issue to the Holder a number of Exercise Shares computed using the following formula:.
For purposes of the above calculation, the fair market value of one Exercise Share shall be determined by the Companys Board of Directors in good faith; provided, however, that in the event that this Warrant is exercised pursuant to this Section 2.1 in connection with the
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Companys initial public offering of its Common Stock, the fair market value per share shall be the product of (i) the per share offering price to the public of the Companys initial public offering, and (ii) the number of shares of Common Stock into which each Exercise Share is convertible at the time of such exercise.
3. COVENANTS OF THE COMPANY.
3.1 Covenants as to Exercise Shares . The Company covenants and agrees that the Company will at all times during the Exercise Period, have authorized and reserved a sufficient number of shares of the series of equity securities comprising the Exercise Shares to provide for the exercise of the rights represented by this Warrant. If at any time during the Exercise Period the number of authorized but unissued shares of such series of the Companys equity securities shall not be sufficient to permit exercise of this Warrant, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of such series of the Companys equity securities to such number of shares as shall be sufficient for such purposes.
3.2 Notices of Record Date . In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, the Company shall mail to the Holder, at least ten (10) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution.
4. REPRESENTATIONS OF HOLDER .
4.1 Acquisition of Warrant for Personal Account . The Holder represents and warrants that it is acquiring the Warrant and the Exercise Shares solely for its account for investment and not with a view to or for sale or distribution of said Warrant or Exercise Shares or any part thereof. The Holder also represents that the entire legal and beneficial interests of the Warrant and Exercise Shares the Holder is acquiring is being acquired for, and will be held for, its account only.
4.2 Securities Are Not Registered .
(a) The Holder understands that the Warrant and the Exercise Shares have not been registered under the Securities Act of 1933, as amended (the Act ) on the basis that no distribution or public offering of the stock of the Company is to be effected. The Holder realizes that the basis for the exemption may not be present if notwithstanding its representations, the Holder has a present intention of acquiring the securities for a fixed or determinable period in the future, selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the securities. The Holder has no such present intention.
(b) The Holder recognizes that the Warrant and the Exercise Shares must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. The Holder recognizes that the Company has no obligation to register the Warrant or the Exercise Shares of the Company, or to comply with any exemption from such registration.
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(c) The Holder is aware that neither the Warrant nor the Exercise Shares may be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale following the required holding period under Rule 144 and the number of shares being sold during any three month period not exceeding specified limitations. Holder is aware that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company presently has no plans to satisfy these conditions in the foreseeable future.
4.3 Disposition of Warrant and Exercise Shares .
(a) The Holder further agrees not to make any disposition of all or any part of the Warrant or Exercise Shares in any event unless and until:
(i) The Company shall have received a letter secured by the Holder from the Securities and Exchange Commission stating that no action will be recommended to the Commission with respect to the proposed disposition;
(ii) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with said registration statement; or
(iii) The Holder hall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Company, the Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, for the Holder to the effect that such disposition will not require registration of such Warrant or Exercise Shares under the Act or any applicable state securities laws. The Company agrees that it will not require an opinion of counsel with respect to transactions under Rule 144 of the Securities Act of 1933, as amended, except in unusual circumstances.
(b) The Holder understands and agrees that all certificates evidencing the shares to be issued to the Holder may bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT ). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
4.4 Accredited Investor Status . The Holder is an accredited investor as defined in Regulation D promulgated under the Act.
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5. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF EXERCISE SHARES .
5.1 Changes in Securities . In the event of changes in the series of equity securities of the Company comprising the Exercise Shares by reason of stock dividends, splits, recapitalizations, reclassifications, combinations or exchanges of shares, separations, reorganizations, liquidations, or the like, the number and class of Exercise Shares available under the Warrant in the aggregate and the Exercise Price shall be correspondingly adjusted to give the Holder of the Warrant, on exercise for the same aggregate Exercise Price, the total number, class, and kind of shares as the Holder would have owned had the Warrant been exercised prior to the event and had the Holder continued to hold such shares until after the event requiring adjustment. For purposes of this Section 5, the aggregate Exercise Price shall mean the aggregate Exercise Price payable in connection with the exercise in full of this Warrant. The form of this Warrant need not be changed because of any adjustment in the number of Exercise Shares subject to this Warrant.
5.2 Automatic Conversion . Upon the automatic conversion of all outstanding shares of the series of equity securities comprising the Exercise Shares, this Warrant shall become exercisable for that number of shares of Common Stock of the Company into which the Exercise Shares would then be convertible, so long as such shares, if this Warrant had been exercised prior to such offering, would have been converted into shares of the Companys Common Stock pursuant to the Companys certificate of incorporation. In such case, all references to Exercise Shares shall mean shares of the Companys Common Stock issuable upon exercise of this Warrant, as appropriate.
6. FRACTIONAL SHARES . No fractional shares shall be issued upon the exercise of this Warrant as a consequence of any adjustment pursuant hereto. All Exercise Shares (including fractions) to be issued upon exercise of this Warrant shall be aggregated for purposes of determining whether the exercise would result in the issuance of any fractional share. If, after aggregation, the exercise would result in the issuance of a fractional share, the Company shall, in lieu of issuance of any fractional share, pay the Holder otherwise entitled to such fraction a sum in cash equal to the product resulting from multiplying the then current fair market value of one Exercise Share by such fraction.
7. NO STOCKHOLDER RIGHTS . This Warrant in and of itself shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company.
8. TRANSFER OF WARRANT . Subject to applicable laws and the restriction on transfer set forth on the first page of this Warrant, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.
9. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT . If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms as to indemnity or otherwise as it may reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the
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Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone.
10. AMENDMENT . Any term of this Warrant may be amended or waived with the written consent of the Company and Holders of Warrants exercisable for at least fifty-five percent (55%) of the Exercise Shares issuable upon full exercise of all Warrants. Upon the effectuation of such amendment or waiver in conformance with this Section 10, the Company shall promptly give written notice thereof to the record holders of the Warrants who have not previously consented thereto in writing.
11. NOTICES, ETC. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail, telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company and to the Holder at the address as set forth on the signature page hereof, or at such other address or electronic mail address as the Company or Holder may designate by ten (10) days advance written notice to the other parties hereto.
12. GOVERNING LAW . This Warrant and all rights, obligations and liabilities hereunder shall be governed by and construed under the laws of the State of Delaware as applied to agreements among Delaware residents, made and to be performed entirely within the State of Delaware without giving effect to conflicts of laws principles. The parties agree that any action brought by either party under or in relation to this Agreement, including without limitation to interpret or enforce any provision of this Agreement, shall be brought in, and each party agrees to and does hereby submit to the jurisdiction and venue of, any state or federal court located in the County of Santa Clara, California.
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IN WITNESS WHEREOF , the undersigned have caused this Warrant to be executed by their respective duly authorized officers as of , 20 .
COMPANY: | ||
LENDINGCLUB CORPORATION | ||
Signature: |
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Renaud Laplanche | ||
President & CEO | ||
Address: | 440 North Wolfe Road | |
Sunnyvale, CA 94085 | ||
Acknowledged and Agreed: | ||
HOLDER: | ||
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By: |
Signature: |
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[ SIGNATURE PAGE TO WARRANT ]
NOTICE OF EXERCISE
TO: LENDINGCLUB CORPORATION
(1) ¨ The undersigned hereby elects to purchase shares of (the Exercise Shares ) of LendingClub Corporation, a Delaware corporation (the Company ) pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
¨ The undersigned hereby elects to purchase shares of (the Exercise Shares ) of LendingClub Corporation, a Delaware corporation (the Company ) pursuant to the terms of the net exercise provisions set forth in Section 2.1 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said Exercise Shares in the name of the undersigned or in such other name as is specified below:
(Name)
(Address)
(3) The undersigned represents that (i) the aforesaid Exercise Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares; (ii) the undersigned is aware of the Companys business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigneds own interests; (iv) the undersigned understands that Exercise Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the Securities Act ), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Exercise Shares may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to
make any disposition of all or any part of the aforesaid shares of Exercise Shares unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with said registration statement, or, if reasonably requested by the Company, the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.
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ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form
and supply required information. Do not use this
form to purchase shares.)
FOR VALUE RECEIVED , the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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Dated: , 20 | ||
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NOTE : The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
EXHIBIT 5.1
December 1, 2014
LendingClub Corporation
71 Stevenson St. Suite 300
San Francisco, CA 94104
Gentlemen and Ladies:
At your request, we have examined the Registration Statement on Form S-1 (File Number 333-198393) filed by LendingClub Corporation, a Delaware corporation (the Company ), with the Securities and Exchange Commission (the Commission ) on August 27, 2014, as amended (the Registration Statement ) in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of 66,355,000 shares of the Companys Common Stock (the Stock ), 7,700,000 of which are issuable upon the conversion of presently issued and outstanding shares of the Companys convertible preferred stock immediately prior to the completion of the Companys initial public offering, and will be sold by certain selling stockholders (the Selling Stockholders ).
In rendering this opinion, we have examined such matters of fact as we have deemed necessary in order to render the opinion set forth herein, which included examination of the following.
(1) | The Companys Restated Certificate of Incorporation, as amended, certified by the Delaware Secretary of State on September 5, 2014 (the Restated Certificate ) and the Amended and Restated Certificate of Incorporation that the Company intends to file and that will be effective upon the consummation of the sale of the Stock (the Post-Effective Restated Certificate ). |
(2) | The Companys Amended and Restated Bylaws, certified by the Companys Secretary on June 17, 2009 (the Restated Bylaws ) and the Amended and Restated Bylaws that the Company has adopted in connection with, and that will be effective upon the consummation of the sale of the Stock (the Post-Effective Bylaws ) . |
(3) | The Registration Statement, together with the Exhibits filed as a part thereof or incorporated therein by reference. |
(4) | The prospectus prepared in connection with the Registration Statement (the Prospectus ). |
(5) | Minutes of meetings and actions by written consent of the Companys Board of Directors (the Board ) and stockholders (the Stockholders ) at which, or pursuant to which, the Restated Certificate, the Post-Effective Restated Certificate, the Restated Bylaws, and the Post-Effective Bylaws were approved. |
December 1, 2014
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(6) | Minutes of meetings and actions by written consent of the Board and Stockholders at which, or pursuant to which, the sale and issuance of the Stock were approved. |
(7) | The stock records for the Company that the Company has provided to us (consisting of a list of stockholders issued by the Companys transfer agent and dated of even date herewith and a list of option and warrant holders respecting the Companys capital and of any rights to purchase capital stock that was prepared by the Company and dated October 31, 2014 verifying the number of such issued and outstanding securities). |
(8) | A Certificate of Good Standing issued by the Secretary of State of the State of Delaware dated November 26, 2014, stating that the Company is qualified to do business in good standing under the laws of the State of Delaware (the Certificate of Good Standing ). |
(9) | A Management Certificate addressed to us and dated of even date herewith executed by the Company containing certain factual representations (the Management Certificate ). |
(10) | The agreements under which the Selling Stockholders acquired the Stock to be sold by them as described in the Registration Statement. |
(11) | The Custody Agreements and Powers of Attorney signed by the Selling Stockholders in connection with the sale of Stock described in the Registration Statement. |
In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the authenticity and completeness of all documents submitted to us as originals, the conformity to originals and completeness of all documents submitted to us as copies, the legal capacity of all persons or entities executing the same, the lack of any undisclosed termination, modification, waiver or amendment to any document reviewed by us and the due authorization, execution and delivery of all such documents by the selling stockholders where due authorization, execution and delivery are prerequisites to the effectiveness thereof.
We render this opinion only with respect to, and express no opinion herein concerning the application or effect of the laws of any jurisdiction other than, the existing laws of the United States of America, of the State of California and of the Delaware General Corporation Law and reported judicial decisions relating thereto.
With respect to our opinion expressed in paragraph (1) below as to the valid existence and good standing of the Company under the laws of the State of Delaware, we have also relied upon the Certificate of Good Standing and representations made to us by the Company.
In connection with our opinion expressed in paragraphs (2) and (3) below, we have assumed that, at or prior to the time of the delivery of any shares of Stock, the Registration Statement will have been declared effective under the Securities Act of 1933, as amended, that
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the registration will apply to such shares of Stock and will not have been modified or rescinded and that there will not have occurred any change in law affecting the validity of the issuance of such shares of Stock.
This opinion is based upon the customary practice of lawyers who regularly give, and lawyers who regularly advise opinion recipients regarding, opinions of the kind set forth in this opinion letter, including customary practice as described in bar association reports.
Based upon the foregoing, we are of the following opinion:
(1) the Company is a corporation validly existing, in good standing, under the laws of the State of Delaware;
(2) the up to 7,700,000 shares of Stock to be sold by the Selling Stockholders pursuant to the Registration Statement, upon the conversion of the Companys outstanding convertible preferred stock immediately prior to the completion of the Companys initial public offering, will be validly issued, fully paid and nonassessable; and
(3) the up to 58,655,000 shares of Stock to be issued and sold by the Company, when issued, sold and delivered in the manner and for the consideration stated in the Registration Statement and the Prospectus and in accordance with the resolutions adopted by the Companys Board of Directors and to be adopted by the Pricing Committee of the Companys Board of Directors, will be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto.
This opinion is intended solely for use in connection with the sale of shares subject to the Registration Statement and is not to be relied upon for any other purpose. This opinion is rendered as of the date first written above and based solely on our understanding of facts in existence as of such date after the aforementioned examination. We assume no obligation to advise you of any fact, circumstance, event or change in the law subsequent to the date of effectiveness of the Registration Statement or the facts that may thereafter be brought to our attention whether or not such occurrence would affect or modify the opinions expressed herein.
Very truly yours,
/s/ FENWICK & WEST LLP
Exhibit 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of , 2014 is made by and between LendingClub Corporation, a Delaware corporation (the Company ), and , a director, officer or key employee of the Company or one of the Companys subsidiaries or other service provider who satisfies the definition of Indemnifiable Person set forth below ( Indemnitee ).
RECITALS
A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as representatives of corporations unless they are protected by comprehensive liability insurance and indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no relationship to the compensation of such representatives;
B. The members of the Board of Directors of the Company (the Board ) have concluded that to retain and attract talented and experienced individuals to serve as representatives of the Company and its Subsidiaries and Affiliates and to encourage such individuals to take the business risks necessary for the success of the Company and its Subsidiaries and Affiliates, it is necessary for the Company to contractually indemnify certain of its representatives and the representatives of its Subsidiaries and Affiliates, and to assume for itself maximum liability for Expenses and Other Liabilities in connection with claims against such representatives in connection with their service to the Company and its Subsidiaries and Affiliates;
C. Section 145 of the Delaware General Corporation Law ( Section 145 ), empowers the Company to indemnify by agreement its officers, directors, employees and agents, and persons who serve, at the request of the Company, as directors, officers, employees or agents of other corporations, partnerships, joint ventures, trusts or other enterprises, and expressly provides that the indemnification provided thereby is not exclusive; and
D. The Company desires and has requested Indemnitee to serve or continue to serve as a representative of the Company and/or the Subsidiaries or Affiliates of the Company free from undue concern about inappropriate claims for damages arising out of or related to such services to the Company and/or the Subsidiaries or Affiliates of the Company.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions .
(a) Affiliate . For purposes of this Agreement, Affiliate of the Company means any corporation, partnership, limited liability company, joint venture, trust or other enterprise in respect of which Indemnitee is or was or will be serving as a director, officer, trustee,
manager, member, partner, employee, agent, attorney, consultant, member of the entitys governing body (whether constituted as a board of directors, board of managers, general partner or otherwise), fiduciary, or in any other similar capacity at the request, election or direction of the Company, and including, but not limited to, any employee benefit plan of the Company or a Subsidiary or Affiliate of the Company.
(b) Change in Control . For purposes of this Agreement, Change in Control means (i) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a Subsidiary or a trustee or other fiduciary holding securities under an employee benefit plan of the Company or Subsidiary, is or becomes the Beneficial Owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Companys then outstanding capital stock or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Companys stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the outstanding capital stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into capital stock of the surviving entity) at least 80% of the total voting power represented by the capital stock of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Companys assets.
(c) Expenses . For purposes of this Agreement, Expenses means all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys fees and related disbursements, and other out-of-pocket costs), paid or incurred by Indemnitee in connection with either the investigation, defense or appeal of, or being a witness in, a Proceeding, or establishing or enforcing a right to indemnification under this Agreement, Section 145 or otherwise; provided, however, that Expenses shall not include any judgments, fines, ERISA excise taxes or penalties or amounts paid in settlement of a Proceeding.
(d) Indemnifiable Event . For purposes of this Agreement, Indemnifiable Event means any event or occurrence related to Indemnitees service for the Company or any Subsidiary or Affiliate as an Indemnifiable Person (as defined below), or by reason of anything done or not done, or any act or omission, by Indemnitee in any such capacity.
(e) Indemnifiable Person . For the purposes of this Agreement, Indemnifiable Person means any person who is or was a director, officer, trustee, manager, member, partner, employee, attorney, consultant, member of an entitys governing body (whether constituted as a board of directors, board of managers, general partner or otherwise) or other agent or fiduciary of the Company or a Subsidiary or Affiliate of the Company.
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(f) Independent Counsel . For purposes of this Agreement, Independent Counsel means legal counsel that has not performed services for the Company or Indemnitee in the five years preceding the time in question and that would not, under applicable standards of professional conduct, have a conflict of interest in representing either the Company or Indemnitee.
(g) Independent Director . For purposes of this Agreement, Independent Director means a member of the Board who is not a party to the Proceeding for which a claim is made under this Agreement.
(h) Other Liabilities . For purposes of this Agreement, Other Liabilities means any and all liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, ERISA (or other benefit plan related) excise taxes or penalties, and amounts paid in settlement and all interest, taxes, assessments and other charges paid or payable in connection with or in respect of any such judgments, fines, ERISA (or other benefit plan related) excise taxes or penalties, or amounts paid in settlement).
(i) Proceeding . For the purposes of this Agreement, Proceeding means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative, legislative or any other type whatsoever, preliminary, informal or formal, including any arbitration or other alternative dispute resolution and including any appeal of any of the foregoing.
(j) Subsidiary . For purposes of this Agreement, Subsidiary means any entity of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company.
2. Agreement to Serve . The Indemnitee agrees to serve and/or continue to serve as an Indemnifiable Person in the capacity or capacities in which Indemnitee currently serves the Company as an Indemnifiable Person, and any additional capacity in which Indemnitee may agree to serve, until such time as Indemnitees service in a particular capacity shall end according to the terms of an agreement, the Companys Certificate of Incorporation or Bylaws, governing law, or otherwise. Nothing contained in this Agreement is intended to create any right to continued employment or other form of service for the Company or a Subsidiary or Affiliate of the Company by Indemnitee.
3. Mandatory Indemnification .
(a) Agreement to Indemnify . In the event Indemnitee is a person who was or is a party to or witness in or is threatened to be made a party to or witness in any Proceeding by reason of an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses and Other Liabilities incurred by Indemnitee in connection with (including in preparation for) such Proceeding to the fullest extent not prohibited by the Delaware General Corporation Law ( DGCL ), as the same may be amended from time to time (but only to the extent that such amendment permits the Company to provide broader indemnification rights than the DGCL permitted prior to the adoption of such amendment).
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(b) Exception for Amounts Covered by Insurance and Other Sources . Notwithstanding the foregoing, the Company shall not be obligated to indemnify Indemnitee for Expenses or Other Liabilities of any type whatsoever (including, but not limited to judgments, fines, penalties, ERISA excise taxes or penalties and amounts paid in settlement) to the extent such have been paid directly to Indemnitee (or paid directly to a third party on Indemnitees behalf) by any directors and officers, or other type, of insurance maintained by the Company.
(c) Company Obligations Primary . The Company hereby acknowledges that Indemnitee may have rights to indemnification for Expenses and Other Liabilities provided by [name of VC or other sponsoring organization ( Other Indemnitor )]. The Company agrees with Indemnitee that the Company is the indemnitor of first resort of Indemnitee with respect to matters for which indemnification is provided under this Agreement and that the Company will be obligated to make all payments due to or for the benefit of Indemnitee under this Agreement without regard to any rights that Indemnitee may have against the Other Indemnitor. The Company hereby waives any equitable rights to contribution or indemnification from the Other Indemnitor in respect of any amounts paid to Indemnitee hereunder. The Company further agrees that no reimbursement of Other Liabilities or payment of Expenses by the Other Indemnitor to or for the benefit of Indemnitee shall affect the obligations of the Company hereunder, and that the Company shall be obligated to repay the Other Indemnitor for all amounts so paid or reimbursed to the extent that the Company has an obligation to indemnify Indemnitee for such Expenses or Other Liabilities hereunder.
4. Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses or Other Liabilities but not entitled, however, to indemnification for the total amount of such Expenses or Other Liabilities, the Company shall nevertheless indemnify Indemnitee for such total amount except as to the portion thereof for which indemnification is prohibited by the provisions of the DGCL. In any review or Proceeding to determine the extent of indemnification, the Company shall bear the burden to establish, by clear and convincing evidence, the lack of a successful resolution of a particular claim, issue or matter and which amounts sought in indemnity are allocable to claims, issues or matters which were not successfully resolved.
5. Liability Insurance . So long as Indemnitee shall continue to serve the Company or a Subsidiary or Affiliate of the Company as an Indemnifiable Person and thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed Proceeding as a result of an Indemnifiable Event, the Company shall use reasonable efforts to maintain in full force and effect for the benefit of Indemnitee as an insured (i) liability insurance issued by one or more reputable insurers and having the policy amount and deductible deemed appropriate by the Board and providing in all respects coverage at least comparable to and in the same amount as that provided to the Chairman of the Board or the Chief Executive Officer of the Company and (ii) any replacement or substitute policies issued by one or more reputable insurers providing in all respects coverage at least comparable to and in the same amount as that being provided to the Chairman of the Board or the Chief Executive Officer of the Company. The purchase, establishment and maintenance of any such insurance or other arrangements shall not in any way limit or affect the rights and obligations of the Company or of Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Company and Indemnitee shall not in any way limit or affect the rights and obligations of the
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Company or the other party or parties thereto under any such insurance or other arrangement. In the event of a Change in Control subsequent to the date of this Agreement, or the Companys becoming insolvent, including being placed into receivership or entering the federal bankruptcy process, the Company shall maintain in force any directors and officers liability insurance policies then maintained by the Company in providing insurance in respect of Indemnitee, for a period of six years thereafter.
6. Mandatory Advancement of Expenses . If requested by Indemnitee, the Company shall advance prior to the final disposition of the Proceeding all Expenses reasonably incurred by Indemnitee in connection with (including in preparation for) a Proceeding related to an Indemnifiable Event. Indemnitee hereby undertakes to repay such amounts advanced if, and only if and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company under the provisions of this Agreement, the DGCL, and no additional form of undertaking with respect to such obligation to repay shall be required. The advances to be made hereunder shall be paid by the Company to Indemnitee or directly to a third party designated by Indemnitee within thirty (30) days following delivery of a written request therefor by Indemnitee to the Company. Indemnitees undertaking to repay any Expenses advanced to Indemnitee hereunder shall be unsecured and shall not be subject to the accrual or payment of any interest thereon. In the event that Indemnitees request for the advancement of expenses shall be accompanied by an affidavit of counsel to Indemnitee to the effect that such counsel has reviewed such Expenses and that such Expenses are reasonable in such counsels view, then such expenses shall be deemed reasonable in the absence of clear and convincing evidence to the contrary.
7. Notice and Other Indemnification Procedures .
(a) Notification . Promptly after receipt by Indemnitee of notice of the commencement of or the threat of commencement of any Proceeding, Indemnitee shall, if Indemnitee believes that indemnification or advancement of Expenses with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. However, a failure so to notify the Company promptly following Indemnitees receipt of such notice shall not relieve the Company from any liability that it may have to Indemnitee except to the extent that the Company is materially prejudiced in its defense of such Proceeding as a result of such failure.
(b) Insurance and Other Matters . If, at the time of the receipt of a notice of the commencement of a Proceeding pursuant to Section 7(a) above, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such Proceeding to the issuers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all reasonable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such insurance policies.
(c) Assumption of Defense . In the event the Company shall be obligated to advance the Expenses for any Proceeding against Indemnitee, the Company, if deemed appropriate by the Company, shall be entitled to assume the defense of such Proceeding as provided herein. Such defense by the Company may include the representation of two or more
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parties by one attorney or law firm as permitted under the ethical rules and legal requirements related to joint representations. Following delivery of written notice to Indemnitee of the Companys election to assume the defense of such Proceeding, the approval by Indemnitee (which approval shall not be unreasonably withheld) of counsel designated by the Company and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees and expenses of counsel subsequently incurred by Indemnitee with respect to the same Proceeding. If (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have notified the Board in writing that Indemnitee has reasonably concluded that there is likely to be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company fails to employ counsel to assume the defense of such Proceeding, the fees and expenses of Indemnitees counsel shall be subject to indemnification and/or advancement pursuant to the terms of this Agreement. Nothing herein shall prevent Indemnitee from employing counsel for any such Proceeding at Indemnitees expense.
(d) Settlement . The Company shall not be liable to indemnify Indemnitee under this Agreement or otherwise for any amounts paid in settlement of any Proceeding effected without the Companys written consent; provided, however, that if a Change in Control has occurred subsequent to the date of this Agreement, the Company shall be liable for indemnification of Indemnitee for amounts paid in settlement if the Independent Counsel has approved the settlement. Neither the Company nor any Subsidiary or Affiliate shall enter into a settlement of any Proceeding that might result in the imposition of any Expense, Other Liability, penalty, limitation or detriment on Indemnitee, whether indemnifiable under this Agreement or otherwise, without Indemnitees written consent. Neither the Company nor Indemnitee shall unreasonably withhold consent from any settlement of any Proceeding. The Company shall promptly notify Indemnitee upon the Companys receipt of an offer to settle, or if the Company makes an offer to settle, any Proceeding, and provide Indemnitee with a reasonable amount of time to consider such settlement, in the case of any such settlement for which the consent of Indemnitee would be required hereunder. The Company shall not, on its own behalf, settle any part of any Proceeding to which Indemnitee is a party with respect to other parties (including the Company) without the written consent of Indemnitee if any portion of the settlement is to be funded from insurance proceeds unless approved by a majority of the Independent Directors, provided that this sentence shall cease to be of any force and effect if it has been determined in accordance with this Agreement that Indemnitee is not entitled to indemnification hereunder with respect to such Proceeding or if the Companys obligations hereunder to Indemnitee with respect to such Proceeding have been fully discharged.
8. Determination of Right to Indemnification .
(a) Success on the Merits or Otherwise . To the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding referred to in Section 3(a) above or in the defense of any claim, issue or matter described therein, the Company shall indemnify Indemnitee against Expenses actually and reasonably incurred in connection therewith.
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(b) Indemnification in Other Situations . In the event that Section 8(a) is inapplicable, the Company shall also indemnify Indemnitee if Indemnitee has not failed to meet the applicable standard of conduct for indemnification.
(c) Forum . Indemnitee shall be entitled to select the forum in which determination of whether or not Indemnitee has met the applicable standard of conduct shall be decided, and such election will be made from among the following:
a. Those members of the Board who are Independent Directors even though less than a quorum;
b. A committee of Independent Directors designated by a majority vote of Independent Directors, even though less than a quorum; or
c. Independent Counsel selected by Indemnitee and approved by the Board, which approval may not be unreasonably withheld, which counsel shall make such determination in a written opinion.
If Indemnitee is an officer or a director of the Company at the time that Indemnitee is selecting the forum, then Indemnitee shall not select Independent Counsel as such forum unless there are no Independent Directors or unless the Independent Directors agree to the selection of Independent Counsel as the forum.
The selected forum shall be referred to herein as the Reviewing Party. Notwithstanding the foregoing, following any Change in Control subsequent to the date of this Agreement, the Reviewing Party shall be Independent Counsel selected in the manner provided in c. above.
(d) Notice . As soon as practicable, and in no event later than thirty (30) days after receipt by the Company of written notice of Indemnitees choice of forum pursuant to Section 8(c) above, the Company and Indemnitee shall each submit to the Reviewing Party such information as they believe is appropriate for the Reviewing Party to consider. The Reviewing Party shall arrive at its decision within a reasonable period of time following the receipt of all such information from the Company and Indemnitee, but in no event later than thirty (30) days following the receipt of all such information, provided that the time by which the Reviewing Party must reach a decision may be extended by mutual agreement of the Company and Indemnitee. All Expenses associated with the process set forth in this Section 8(d), including but not limited to the Expenses of the Reviewing Party, shall be paid by the Company.
(e) Delaware Court of Chancery . Notwithstanding a final determination by any Reviewing Party that Indemnitee is not entitled to indemnification with respect to a specific Proceeding, Indemnitee shall have the right to apply to the Court of Chancery, for the purpose of enforcing Indemnitees right to indemnification pursuant to this Agreement.
(f) Expenses . The Company shall indemnify Indemnitee against all Expenses incurred by Indemnitee in connection with any hearing or Proceeding under this Section 8 involving Indemnitee and against all Expenses and Other Liabilities incurred by Indemnitee in connection with any other Proceeding between the Company and Indemnitee involving the interpretation or enforcement of the rights of Indemnitee under this Agreement unless a court of competent jurisdiction finds that each of the material claims of Indemnitee in any such Proceeding was frivolous or made in bad faith.
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(g) Determination of Good Faith . For purposes of any determination of whether Indemnitee acted in good faith Indemnitee shall be deemed to have acted in good faith if in taking or failing to take the action in question Indemnitee relied on the records or books of account of the Company or a Subsidiary or Affiliate, including financial statements, or on information, opinions, reports or statements provided to Indemnitee by the officers or other employees of the Company or a Subsidiary or Affiliate in the course of their duties, or on the advice of legal counsel for the Company or a Subsidiary or Affiliate, or on information or records given or reports made to the Company or a Subsidiary or Affiliate by an independent certified public accountant or by an appraiser or other expert selected by the Company or a Subsidiary or Affiliate, or by any other person (including legal counsel, accountants and financial advisors) as to matters Indemnitee reasonably believes are within such other persons professional or expert competence and who has been selected with reasonable care by or on behalf of the Company or a Subsidiary or Affiliate. In connection with any determination as to whether Indemnitee is entitled to be indemnified hereunder, or to advancement of expenses, the Reviewing Party or court shall presume that Indemnitee has satisfied the applicable standard of conduct and is entitled to indemnification or advancement of Expenses, as the case may be, and the burden of proof shall be on the Company to establish, by clear and convincing evidence, that Indemnitee is not so entitled. The provisions of this Section 8(g) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. In addition, the knowledge and/or actions, or failures to act, of any other person serving the Company or a Subsidiary or Affiliate as an Indemnifiable Person shall not be imputed to Indemnitee for purposes of determining the right to indemnification hereunder.
9. Exceptions . Any other provision herein to the contrary notwithstanding,
(a) Claims Initiated by Indemnitee . The Company shall not be obligated pursuant to the terms of this Agreement to indemnify or advance Expenses to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (1) with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement, any other statute or law, as permitted under Section 145, or otherwise, (2) where the Board has consented to the initiation of such Proceeding, or (3) with respect to Proceedings brought to discharge Indemnitees fiduciary responsibilities, whether under ERISA or otherwise, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board finds it to be appropriate; or
(b) Actions Based on Federal Statutes Regarding Profit Recovery and Return of Bonus Payments . The Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee on account of (i) any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of l934 and amendments thereto or similar provisions of any federal, state or local statutory law, or (ii) any reimbursement of the Company by the Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by the Indemnitee from
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the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act); or
(c) Unlawful Indemnification . The Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee for Other Liabilities if such indemnification is prohibited by law as determined by a court of competent jurisdiction in a final adjudication not subject to further appeal.
10. Non-exclusivity . The provisions for indemnification and advancement of Expenses set forth in this Agreement shall not be deemed exclusive of any other rights which Indemnitee may have under any provision of law, the Companys Certificate of Incorporation or Bylaws, the vote of the Companys stockholders or disinterested directors, other agreements, or otherwise, both as to acts or omissions in his or her official capacity and to acts or omissions in another capacity while serving the Company or a Subsidiary or Affiliate as an Indemnifiable Person and Indemnitees rights hereunder shall continue after Indemnitee has ceased serving the Company or a Subsidiary or Affiliate as an Indemnifiable Person and shall inure to the benefit of the heirs, executors and administrators of Indemnitee.
11. Severability . If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
12. Supersession, Modification and Waiver . This Agreement supersedes any prior indemnification agreement between the Indemnitee and the Company, its Subsidiaries or its Affiliates. If the Company and Indemnitee have previously entered into an indemnification agreement providing for the indemnification of Indemnitee by the Company, parties entry into this Agreement shall be deemed to amend and restate such prior agreement to read in its entirety as, and be superseded by, this Agreement. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) and except as expressly provided herein, no such waiver shall constitute a continuing waiver.
13. Successors and Assigns . The terms of this Agreement shall bind, and shall inure to the benefit of, the successors and assigns of the parties hereto.
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14. Notice . All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and a receipt is provided by the party to whom such communication is delivered, (ii) if mailed by certified or registered mail with postage prepaid, return receipt requested, on the signing by the recipient of an acknowledgement of receipt form accompanying delivery through the U.S. mail, (iii) personal service by a process server, or (iv) delivery to the recipients address by overnight delivery (e.g., FedEx, UPS or DHL) or other commercial delivery service. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice complying with the provisions of this Section 14. Delivery of communications to the Company with respect to this Agreement shall be sent to the attention of the Companys General Counsel.
15. No Presumptions . For purposes of this Agreement, the termination of any Proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law or otherwise. In addition, neither the failure of the Company or a Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Company or a Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of Proceedings by Indemnitee to secure a judicial determination by exercising Indemnitees rights under Section 8(e) of this Agreement shall be a defense to Indemnitees claim or create a presumption that Indemnitee has failed to meet any particular standard of conduct or did not have any particular belief or is not entitled to indemnification under applicable law or otherwise.
16. Survival of Rights . The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to serve the Company or a Subsidiary or Affiliate of the Company as an Indemnifiable Person and shall inure to the benefit of Indemnitees heirs, executors and administrators.
17. Subrogation and Contribution . (a) In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.
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To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by or on behalf of Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).
18. Specific Performance, Etc. The parties recognize that if any provision of this Agreement is violated by the Company, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, Indemnitee shall be entitled, if Indemnitee so elects, to institute Proceedings, either in law or at equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect to pursue.
19. Counterparts . This Agreement may be executed in counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
20. Headings . The headings of the sections and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction or interpretation thereof.
21. Governing Law . This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely with Delaware.
22. Consent to Jurisdiction . The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any Proceeding which arises out of or relates to this Agreement.
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The parties hereto have entered into this Indemnity Agreement effective as of the date first above written.
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Exhibit 10.4
LENDINGCLUB CORPORATION
2007 Stock Incentive Plan
ARTICLE 1
Background and Purpose of the Plan
Section 1.1 Background . This 2007 Stock Incentive Plan (the Plan ) permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock and other stock-based awards.
Section 1.2 Purpose . The purposes of the Plan are (a) to attract and retain the best available personnel for positions of substantial responsibility, (b) to provide additional incentive to Employees, Directors and Consultants, and (c) to promote the success of the business of the Company.
Section 1.3 Eligibility . All of the Companys Service Providers are eligible to be granted Awards under the Plan. Incentive Stock Options may be granted only to Employees.
Section 1.4 Definitions . Capitalized terms used in the Plan and not otherwise defined herein shall have the meanings assigned to such terms in the attached Appendix.
ARTICLE 2
Shares Subject To The Plan
Section 2.1 Shares Subject to the Plan . Subject to adjustment under Section 2.3, the number of shares of Common Stock initially reserved for issuance pursuant to Awards made under the Plan shall not exceed Shares. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares.
Section 2.2 Lapsed Awards . If an Award expires or is terminated, surrendered or cancelled without having been exercised in full, or is surrendered pursuant to an Exchange Program, or is otherwise forfeited in full or in part, including as a result of Restricted Stock or Optioned Stock or other Shares constituting or subject to an Award being repurchased by the Company pursuant to the contractual repurchase right as specified in the Award Agreement, then the unissued Shares which were subject to such Award and/or such surrendered, cancelled or forfeited Shares (as the case may be) shall become available for future grant or sale under the Plan (unless the Plan has terminated), subject however, in the case of Incentive Stock Options to any limitations under the Code. If an Award is exercised, in whole or in part, by delivery or attestation of Shares under Section 4.3(b), the number of Shares deemed to have been issued under the Plan shall be the number of Shares which were subject to the Award or portion thereof so exercised and not the net number of Shares actually issued upon such exercise.
Section 2.3 Adjustments . In the event that there is any stock dividend on the Shares payable in Shares, or any stock split, reverse stock split, combination or reclassification of
Shares, or any other increase in the number of outstanding Shares without receipt of consideration by the Company, then the maximum aggregate number and class of securities available for Awards under Section 2.1 of the Plan, the maximum number and class of securities issuable to a Service Provider under Section 4.1(c) of the Plan, and any other limitation under this Plan on the maximum number and class of securities issuable to an individual or in the aggregate, and the price of securities covered by each outstanding Option shall be proportionately adjusted by the Administrator as it deems equitable in its absolute discretion to prevent dilution or enlargement of the rights of the Participants; provided that any fractional Shares resulting from such adjustments shall be eliminated. The Administrators determination with respect to any such adjustments shall be conclusive.
ARTICLE 3
Administration of the Plan
Section 3.1 Board and Committees . The Plan shall be administered by (i) the Board or (ii) a Committee which shall comply with Applicable Laws. Different Committees with respect to different groups of Service Providers may administer the Plan.
Section 3.2 Powers of the Administrator . Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (a) to determine the Fair Market Value; (b) to select the Service Providers to whom Awards may be granted hereunder; (c) to determine the number of shares of Common Stock to be covered by each Award granted hereunder; provided, however that in no event shall Awards with more than the number of Shares reserved under the Plan pursuant to Section 2.1 be granted to any Service Provider in any fiscal year; (d) to approve forms of agreement for use under the Plan; (e) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder, such terms and conditions including, without limitation, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting, acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (f) to institute an Exchange Program; (g) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (h) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws; (i) to modify or amend each Award (subject to Section 10.4 of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (j) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Award that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld (the Fair Market Value of the Shares to be withheld shall be determined as of the date that the amount of tax to be withheld is to be determined and all elections by a Participant to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable); (k) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator; (1) allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an Award, and (m) to make all other determinations deemed necessary or advisable for administering the Plan.
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Section 3.3 Effect of Administrators Decision . The Administrators decisions, determinations and interpretations shall be final and binding on all Participants and any other holders of Awards.
Section 3.4 Delegation to Executive Officers . To the extent permitted by Applicable Law, the Board may delegate to one or more executive officers of the Company the power to grant Awards to Employees and to exercise such other powers under the Plan as the Board may determine, provided that the Administrator shall fix the terms of the Awards to be granted by such executive officers (including the exercise price of such Awards, which may include a formula by which the exercise price will be determined) and the maximum number of shares subject to Awards that the executive officers may grant; provided, however, that no executive officer shall be authorized to grant Awards to any executive officer of the Company (as defined by Rule 3b~7 under the Exchange Act) or to any officer of the Company (as defined by Rule 16a-l under the Exchange Act).
ARTICLE 4
Stock Options
Section 4.1 Limitations .
(a) No Option shall have a term in excess of 10 years measured from the date of grant; provided, however, that in the case of any Incentive Stock Option granted to a 10% Stockholder, the term of such Incentive Stock Option shall not exceed five years measured from the date of grant.
(b) Subject to Section 4.6, the exercise price per share of an Option shall not be less than 100% of the Fair Market Value per Share on the date of grant; provided, however, that in the case of any Incentive Stock Option granted to a 10% Stockholder, the exercise price per share of such Incentive Stock Option shall not be less than 110% of the Fair Market Value per share of Common Stock on the date of grant of the Option.
(c) Each Option shall be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary of the Company) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 4.1(c), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the date that the Option with respect to such Shares is granted.
(d) The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option.
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Section 4.2 Terms of Option . Subject to Section 4.1, the term, exercise price, vesting schedule and other conditions and limitations applicable to each Option shall be as determined by the Administrator and shall be stated in the Award Agreement.
Section 4.3 Form of Consideration . The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. To the extent approved by the Administrator, the consideration for exercise of an Option may be paid as follows:
(a) by cash, check or other cash equivalent approved by the Administrator;
(b) subject to the last paragraph of this Section 4.3, by the tendering of other Shares to the Company or the attestation to the ownership of the Shares that otherwise would be tendered to the Company in exchange for the Companys reducing the number of Shares necessary for payment in full of the Option price for the Shares so purchased;
(c) any combination of the forms of consideration set forth in subsections (a) and (b) above.
Shares tendered or attested to in exchange for Shares issued under the Plan may not be shares of Restricted Stock at the time they are tendered or attested to. The Administrator shall determine acceptable methods for tendering or attesting to Shares to exercise an Option under the Plan and may impose such limitations and prohibitions on the use of Shares to exercise Options as it deems appropriate. For purposes of determining the amount of the Option price satisfied by tendering or attesting to Shares, such Shares shall be valued at their Fair Market Value on the date of tender or attestation, as applicable. The date of exercise shall be deemed to be the date that the notice of exercise and payment of the Option price are received by the Administrator.
Section 4.4 Exercise of Option .
(a) Procedure for Exercise: Rights as a Stockholder . Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Award Agreement) from the person entitled to exercise the Option and (ii) full payment for the Shares with respect to which the Option is exercised. Shares issued upon exercise of an Option shall be issued in the name of the Participant. The Shares shall be deemed issued, and the Participant shall be deemed the record holder of the Optioned Stock, on the date when the Option has been deemed exercised in accordance with this Section 4.4(a). Until such date, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a
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dividend or other right for which the record date is prior to the date the Shares are issued. Notwithstanding anything in this Section 4.4(a) to the contrary, in the event that the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and number of shares subject to an Option are adjusted as of the date of distribution of the dividend (rather than as of the record date for such dividend), then a Participant who exercises such Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the Optioned Stock, notwithstanding the fact that such Optioned Stock was not outstanding as of the close of business on the record date for such stock dividend.
(b) Termination of Relationship as a Service Provider . If a Participant ceases to be a Service Provider, other than upon the Participants death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option shall remain exercisable for three months following the Participants termination.
(c) Disability of Participant . If a Participant ceases to be a Service Provider as a result of the Participants Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option shall remain exercisable for 12 months following the Participants termination.
(d) Death of Participant . If a Participant dies while a Service Provider, the Option may be exercised following the Participants death within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participants designated beneficiary, provided such beneficiary has been designated prior to Participants death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participants estate or by the person(s) to whom the Option is transferred pursuant to the Participants will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option shall remain exercisable for 12 months following Participants death.
Section 4.5 Repurchase Rights .
(a) If the Participant ceases to be a Service Provider for any reason (with or without cause), including, without limitation, as the result of the Participants death or Disability, the Company shall have the right to repurchase any or all of such Shares within such period of time and for such purchase price and upon such other terms and conditions as specified in the Award Agreement.
(b) The Administrator shall have the discretion to grant Options which are exercisable for unvested Shares. If the Participant ceases to be a Service Provider while holding
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such unvested Shares, the Company shall have the right to repurchase any or all of those unvested Shares within such period of time and for such purchase price and upon such other terms and conditions as specified in the Award Agreement.
(c) The terms upon which the repurchase rights set forth in Sections 4.5(a) and (b) above shall be exercisable by the Administrator (including the period and procedure for exercise and the appropriate vesting schedule for the purchased Shares) shall be established by the Administrator and set forth in the Award Agreement.
Section 4.6 Substitute Awards . In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Administrator may grant Awards in substitution for any options or other stock or stock-based awards granted by such entity or an affiliate thereof. Such substitute Awards may be granted on such terms as the Administrator deems appropriate in the circumstances, notwithstanding any limitations on Awards contained in the Plan.
ARTICLE 5
Restricted Stock
Section 5.1 Grant of Restricted Stock . Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, shall determine.
Section 5.2 Restricted Stock Agreement . Each Award of Restricted Stock shall be evidenced by an Award Agreement that shall specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, shall determine. Unless the Administrator determines otherwise, Shares of Restricted Stock shall be held by the Company as escrow agent until the restrictions on such Shares have lapsed.
Section 5.3 Transferability . Except as provided in this Article 5, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.
Section 5.4 Other Restrictions . The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.
Section 5.5 Removal of Restrictions . Except as otherwise provided in this Article 5, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall be released from escrow as soon as practicable after the last day of the Period of Restriction. The Administrator, in its discretion, may accelerate the time at which any restrictions shall lapse or be removed. Subject to Section 8.4, after the restrictions have lapsed, the Service Provider shall be entitled to have any legend or legends relating to restrictions provided pursuant to this Article 5 removed from his or her Share certificate, and the Shares shall be freely transferable by the Service Provider.
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Section 5.6 Voting Rights . During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless otherwise provided in the Award Agreement.
Section 5.7 Dividends and Other Distributions . During the Period of Restriction, Service Providers holding Shares of Restricted Stock shall be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.
Section 5.8 Right of Repurchase of Restricted Stock .
(a) The Company shall have the right to repurchase any or all of such Shares of Restricted Stock within such period of time and for such purchase price and upon such terms and conditions as are specified in the Award Agreement.
(b) The Company shall have the right to repurchase any or all of such shares that are no longer Restricted Stock within such period of time and for such purchase price and upon such terms and conditions as are specified in the Award Agreement.
Section 5.9 Performance Criteria .
(a) The Administrator may provide for the lapse or removal of restrictions on Restricted Stock using one or more of the performance objectives set forth on Schedule A and/or such other performance objectives as the Administrator may determine in its sole discretion. Any such performance objective shall be sufficiently specific that a third party having knowledge of the relevant facts could determine whether the objective is met.
(b) If the Administrator provides for the lapse or removal of restrictions on Restricted Stock based on performance objectives, the Administrator shall, at the time it establishes the performance objectives, specify the period over which the performance objectives relate. The establishment of the actual performance objectives and, if an Award of Restricted Stock is based on more than one performance objective, the relative weighting of such criteria, shall be at the sole discretion of the Administrator.
ARTICLE 6
Other Stock-Based Awards
Section 6.1 Other Stock-Based Awards . The Administrator shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Administrator may determine, including without limitation the grant of Shares based upon certain conditions, the grant of securities convertible into Shares, the grant of performance units or performance shares and the grant of stock appreciation rights.
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ARTICLE 7
Option Grants to Outside Directors
Section 7.1 Grants . Options may be granted to Outside Directors in accordance with the policies established from time to time by the Board specifying the number of Shares (if any) to be subject to each such Award and the time(s) at which such Awards shall be granted.
Section 7.2 Type of Options . All Options granted pursuant to this Article 7 shall be Nonstatutory Stock Options and, except as otherwise provided herein, shall be subject to the other terms and conditions of the Plan.
ARTICLE 8
Additional Terms of Awards
Section 8.1 Transferability of Awards . Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, such Award shall contain such additional terms and conditions as the Administrator deems appropriate. Notwithstanding the foregoing, subject to the approval of the Administrator in its sole discretion, Awards other than Incentive Stock Options may be transferable to members of the immediate family of the Participant and to one or more trusts for the benefit of such family members, partnerships in which such family members are the only partners, or corporations in which such family members are the only stockholders. Members of the immediate family means the Participants spouse, children, stepchildren, grandchildren, parents, grandparents, siblings (including half brothers and sisters), and individuals who are family members by adoption.
Section 8.2 No Effect on Employment or Service . Neither the Plan nor any Award shall confer upon a Participant any right with respect to continuing the Participants relationship as a Service Provider with the Company, nor shall they interfere in any way with the Participants right or the Companys right to terminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.
Section 8.3 Date of Grant . The date of grant of an Award shall be, for all purposes, the date on which the Administrator grants such Award, or such later date as is specified by the Administrator as the date of grant. Notice of any grant shall be provided to each Participant within a reasonable time after the date of such grant.
Section 8.4 Conditions Upon Issuance of Shares . The Company will not be obligated to deliver any Shares pursuant to the Plan or to remove restrictions from Shares previously delivered under the Plan until (a) all conditions of the Award have been met or removed to the satisfaction of the Administrator, (b) subject to approval of the Companys counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any Applicable Laws and (c) the Participant has executed and delivered to the Company such representations or agreements as the Administrator may consider appropriate to satisfy the requirements of Applicable Laws.
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Section 8.5 Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Companys counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.
Section 8.6 Withholding .
(a) Withholding Requirements . Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the Participants FICA obligation) required to be withheld with respect to such Award (or exercise thereof).
(b) Withholding Arrangements . The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in part by (a) electing to have the Company withhold otherwise deliverable Shares or (b) delivering to the Company already-owned Shares having a Fair Market Value equal to the amount required to be withheld. The amount of the withholding requirement shall be deemed to include any amount which the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered shall be determined as of the date that the taxes are required to be withheld.
ARTICLE 9
Dissolution or Liquidation or Other Events
Section 9.1 Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Administrator shall provide written notice to each Participant at least 20 days prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action. The Administrator may specify the effect of a liquidation or dissolution on any Award of Restricted Stock or other Award at the time of grant of such Award.
Section 9.2 Reorganization .
(a) Upon the occurrence of a Reorganization Event, subject to subsection (b) below, each outstanding Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation.
(b) In the event that the successor corporation does not assume the Option or an equivalent Option is not substituted, then the Administrator shall, upon written or electronic
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notice to each Participant, provide that one of the following will occur: (i) all Options must be exercised (either to the extent then exercisable or, at the discretion of the Administrator upon a change of control of the Company, all Options being made fully exercisable for purposes of this clause (i)) as of a specified time prior to the Reorganization Event and will thereafter terminate immediately prior to the consummation of such Reorganization Event except to the extent exercised by the Participants prior to the consummation of the Reorganization Event; or (ii) all outstanding Options will terminate upon consummation of such Reorganization Event and each Participant will receive, in exchange therefore, a cash payment equal to the amount (if any) by which (x) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (which may, in the Administrators discretion, be limited to Options then exercisable or include Options then not exercisable), exceeds (y) the aggregate exercise price of such Options.
(c) For the purposes of this Section 9.2, the Option shall be considered assumed if, following consummation of the Reorganization Event, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the Reorganization Event, the consideration (whether stock, cash, or other securities or property) received in the Reorganization Event by holders of Common Stock for each Share held immediately prior to the consummation of the Reorganization Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). If such consideration received in the Reorganization Event is not solely common stock of the successor corporation or a Parent or Subsidiary thereof, then the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option for each Share of Optioned Stock subject to the Option to be solely common stock of the successor corporation or a Parent or Subsidiary thereof equal in fair market value to the per share consideration received by holders of Common Stock in the Reorganization Event, and in such case such Options shall be considered assumed for the purposes of this Section 9.2.
ARTICLE 10
Term, Amendment and Termination of Plan
Section 10.1 Term of Plan . The Plan shall become effective on the date of its adoption by the Board; provided, however, that no Option shall be exercisable by a Participant unless and until the Plan shall have been approved by the stockholders of the Company in accordance with the provisions of its Certificate of Incorporation and By-laws, which approval shall be obtained by a majority vote of stockholders, voting either in person or by proxy, at a duly held stockholders meeting, or by written consent, within 12 months before or after the adoption of the Plan by the Board.
Section 10.2 Termination of the Plan . The Plan shall terminate upon the earliest to occur of (i) the tenth anniversary of the date on which the Plan is approved by the stockholders of the Company, (ii) the date on which all Shares available for issuance under the Plan have been issued as fully vested Shares, and (iii) the termination of all outstanding Options in connection with a Reorganization Event.
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Section 10.3 Amendment of the Plan . The Board may at any time amend, alter, suspend or terminate the Plan. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary to comply with Applicable Laws.
Section 10.4 Effect of Amendment or Termination . No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan shall not affect the Administrators ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.
ARTICLE 11
Miscellaneous
Section 11.1 Authorization of Sub-Plans . The Board may from time to time establish one or more sub-plans under the Plan for purposes of satisfying applicable blue sky, securities or tax laws of various jurisdictions. The Board shall establish such sub-plans by adopting supplements to this Plan containing (i) such limitations on the Boards discretion under the Plan as the Board deems necessary or desirable and (ii) such additional terms and conditions not otherwise inconsistent with the Plan as the Board shall deem necessary or desirable. All supplements adopted by the Board shall be deemed to be part of the Plan, but each supplement shall apply only to Participants within the affected jurisdiction and the Company shall not be required to provide copies of any supplement to Participants in any jurisdiction which is not the subject of such supplement.
Section 11.2 Governing Law . The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof.
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APPENDIX
As used in the Plan, the following terms shall have the following meanings:
(a) Acquisition Price means, in a Reorganization Event in which the consideration received by holders of Common Stock consists solely of cash, the amount of cash to which a holder of one share of Common Stock is entitled pursuant to such Reorganization Event.
(b) Administrator means the Board or any of its Committees as shall be administering the Plan, in accordance with Article 3 of the Plan.
(c) Applicable Laws means the requirements relating to the administration of stock incentive plans under applicable state corporation laws, United States federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.
(d) Award means, individually or collectively, a grant under the Plan of Options, Restricted Stock or other stock-based awards.
(e) Award Agreement means the written agreement setting forth the terms and provisions applicable to each Award granted under the Plan, The Award Agreement is subject to the terms and conditions of the Plan.
(f) Board means the board of directors of the Company.
(g) Code means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein shall be a reference to any regulations promulgated under such section, and shall further reference any successor or amended section of such section of the Code that is so referred to and any regulations thereunder.
(h) Committee means a committee of the Board appointed by the Board in accordance with Article 3 of the Plan.
(i) Common Stock means the Companys common stock.
(j) Company means LendingClub Corporation, a Delaware corporation, or any successor thereto.
(k) Consultant means any natural person, including an advisor, engaged by the Company or a Parent or Subsidiary of the Company to render services to such entity.
(l) Director means a member of the Board.
(m) Disability means total and permanent disability as defined in Section 22(e)(3) of the Code.
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(n) Employee means any person who is an employee, as defined in Section 3401(c) of the Code, of the Company or any Parent or Subsidiary of the Company or any other entity the employees of which are permitted to receive Incentive Stock Options under the Code. Neither service as a Director nor payment of a directors fee by the Company shall be sufficient to constitute employment by the Company.
(o) Exchange Act means the Securities Exchange Act of 1934, as amended.
(p) Exchange Program means a program under which, with the consent of the affected Participants, (i) outstanding Awards are surrendered or cancelled in exchange for Awards of the same type (which may have lower exercise prices and different terms), Awards of a different type, and/or cash, and/or (ii) the exercise price of an outstanding Award is reduced or increased. The terms and conditions of any Exchange Program shall be determined by the Administrator in its sole discretion.
(q) Fair Market Value means, as of any date, the value of Common Stock as determined in good faith by the Administrator.
(r) Fiscal Year means the fiscal year of the Company.
(s) Incentive Stock Option means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.
(t) Inside Director means a Director who is an Employee.
(u) Nonstatutory Stock Option means an Option not intended to qualify as an Incentive Stock Option.
(v) Option means a stock option granted pursuant to the Plan.
(w) Optioned Stock means the Common Stock subject to an Award.
(x) Outside Director means a Director who is not an Employee.
(y) Parent means a parent corporation, whether now or hereafter existing, as defined in Section 424(e) of the Code.
(z) Participant means the holder of an outstanding Award granted under the Plan.
(aa) Period of Restriction means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Administrator, in its discretion.
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(bb) Reorganization Event means:
(i) any merger or consolidation of the Company with or into another entity as a result of which all of the Common Stock is converted into or exchanged for the right to receive cash, securities or other property; or
(ii) any exchange of all of the Common Stock for cash, securities or other property pursuant to a share exchange transaction.
(cc) Restricted Stock means shares of Common Stock issued pursuant to Article 5 of the Plan.
(dd) Service Provider means an Employee, Director or Consultant.
(ee) Shares means shares of Common Stock.
(ff) Subsidiary means a subsidiary corporation, whether now or hereafter existing, as defined in Section 424(f) of the Code.
(gg) 10% Stockholder means the owner of stock (as determined under Code Section 424(d) possessing more than 10% of the total combined voting power of all classes of stock of the Company (or any Parent or Subsidiary).
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SCHEDULE A
I. | General Financial Criteria |
To be provided.
II. | Operational Criteria |
To be provided.
AMENDMENT NO. 1
TO THE 2007 STOCK INCENTIVE PLAN
OF LENDINGCLUB CORPORATION
In accordance with resolutions adopted by the Board of Directors of LendingClub Corporation (the Company) on March 1 2007, and by the Companys stockholders, on March 1, 2007, the first sentence of Section 2.1 of the Companys 2007 Stock Incentive Plan (the Plan) is hereby amended to read in its entirety as follows:
Subject to adjustment under Section 2.3, the number of shares of Common Stock available for sale upon exercise of options granted under the Plan shall not exceed 114 Shares.
AMENDMENT NO. 2
TO THE 2007 STOCK INCENTIVE PLAN
OF LENDINGCLUB CORPORATION
In accordance with resolutions adopted by the Board of Directors of LendingClub Corporation (the Company) on August 16, 2007, and by the Companys stockholders, on August 16, 2007, the first sentence of Section 2.1 of the Companys 2007 Stock Incentive Plan (the Plan) is hereby amended to read in its entirety as follows:
Subject to adjustment under Section 2.3, the number of shares of Common Stock available for sale upon exercise of options granted under the Plan shall not exceed 3,692,000 Shares.
AMENDMENT TO THE 2007 STOCK INCENTIVE PLAN
OF LENDINGCLUB CORPORATION
ADOPTED BY THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF THE CORPORATION
EFFECTIVE MARCH 13, 2009
Resolutions of the Board of Directors of the Corporation
Amendment to 2007 Stock Incentive Plan Increase in the Number of Shares
NOW THEREFORE BE IT RESOLVED, that an increase in the number of shares of Common Stock that are reserved and available for issuance under the Plan from 3,692,000 to 6,548,000 shares of Common Stock is hereby approved;
RESOLVED FURTHER, that the officers of the Company, and each of them with the full authority to act without the others, are hereby authorized to submit the amendment to the Plan to the stockholders of the Company for their approval.
Resolutions of the Stockholders of the Corporation
Increase in the Number of Shares Reserved Under the 2007 Stock Incentive Plan
NOW, THEREFORE, BE IT RESOLVED, that effective upon the Closing of the Series B Financing pursuant to the Series B Stock Purchase Agreement by and between the Company and Certain Investors, an increase in the number of shares of Common Stock that are reserved for issuance under the Plan from 3,692,000 to 6,548,000 shares is hereby approved.
EXHIBIT A
LENDINGCLUB CORPORATION
Stock Option Agreement
Under 2007 Stock Incentive Plan
Section 1. Grant of Option .
(a) This Stock Option Agreement (the Agreement ) evidences the grant by LendingClub Corporation, a Delaware corporation (the Company ), on the Grant Date, to the Optionee, of an option (the Option ) to purchase, in whole or in part, on the terms provided herein and in the Companys 2007 Stock Incentive Plan (the Plan ), a total number of shares of the Companys common stock equal to the Number of Option Shares set forth in the Notice of Grant to which this Agreement is attached as Exhibit A , at a price per share equal to the Exercise Price. Unless earlier terminated in accordance with Section 3(c) , ( d ) or ( e ) or Section 7 of this Agreement, the Option shall expire at 5:00 p.m., Eastern time, on the Termination Date. Capitalized terms used in this Section 1(a) and not otherwise defined herein shall refer to the information set forth next to such terms on the Notice of Grant. Capitalized terms used in this Agreement and not otherwise defined in this Agreement or in the Notice of Grant shall have the meanings assigned to such terms in the Plan, which is attached to the Notice of Grant as Exhibit B .
(b) If designated in the Notice of Grant as an Incentive Stock Option, the Option is intended to qualify as an incentive stock option under Section 422 of the Code.
(c) Except as otherwise indicated by the context, the term Optionee, as used in this Agreement, shall be deemed to include any person who acquires the right to exercise the Option validly under its terms.
Section 2. Vesting Schedule .
(a) The Option will become exercisable as described under the heading Vesting in the Notice of Grant.
(b) The right of exercise shall be cumulative so that, to the extent the Option is not exercised in any period to the maximum extent permissible, it shall continue to be exercisable, in whole or in part, with respect to all vested Option Shares until the earliest to occur of (i) the Termination Date, (ii) the termination of the Option under Section 3 or Section 7 hereof, or (iii) any other termination of the Option under the Plan.
Section 3. Exercise of Option .
(a) Form of Exercise . To exercise the Option with respect to all or any part of the Option Shares, the Optionee (or any other person or persons exercising the Option in accordance with Section 3(d) ) must execute and deliver to the Company an election notice in the form of Schedule 1 to this Agreement, either in writing or electronically, accompanied by payment in full in a manner provided in Section 4 . The Optionee may purchase any number of vested Option Shares subject to the Option, in any exercise of the Option, provided that no partial exercise of the Option may be for any fractional share.
(b) Continuous Relationship with the Company Required . Except as otherwise provided in this Section 3 , the Option may not be exercised unless the Optionee, at the time he or she exercises the Option, is, and has been at all times since the Grant Date, a Service Provider.
(c) Termination of Relationship with the Company . If the Optionee ceases to be a Service Provider for any reason while the Option is outstanding, then, except as provided in Sections 3(d) and ( e ), the right to exercise the Option shall terminate three months after such cessation (but in no event after the Termination Date), provided that the Option shall be exercisable only to the extent and with respect to the number of Option Shares that the Optionee was entitled to exercise on the date of such cessation.
(d) Exercise Period Upon Death or Disability . If the Optionee dies or suffers a Disability. while the Option is outstanding (including within the three-month period following termination of Service of the Optionee), and the Company has not terminated the Optionees Service for Cause as specified in Section 3(e) , the Option shall be exercisable, within the period of one year following the date of termination of Service of the Optionee, (i) in the case of a termination of Service due to the Disability of the Optionee, by the Optionee, and (ii) in the case of a termination of Service due to the death of the Optionee, by (A) a beneficiary designated in writing by the Optionee to the Company prior to the Optionees death, or (B) if no such beneficiary has been designated, by the personal representative of the Optionees estate or by the person(s) to whom the Option is transferred pursuant to the Optionees will or in accordance with the laws of descent and distribution; provided , that, in any case, the Option shall be exercisable only to the extent and with respect to the number of Option Shares that the Optionee was entitled to exercise on the date of his or her death or Disability; and further provided , that the Option shall not be exercisable after the Termination Date.
(e) Discharge for Cause . If the Optionees Service with the Company is terminated for Cause while the Option is outstanding, the right to exercise the Option shall terminate immediately upon the effective date of such discharge. Cause shall mean willful misconduct by the Optionee or willful failure by the Optionee to perform his or her responsibilities to the Company (including, without limitation, breach by the Optionee of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Optionee and the Company), as determined by the Company, which determination shall be conclusive, provided , however , that if any definition of Cause for termination (or a similar term) is contained in an effective employment agreement or similar agreement between the Company and the Optionee at the time of termination, such definition shall supersede the definition in this Section 3(e) and shall be incorporated in this Section 3(e) as the definition of Cause.
(f) Limited Exercisability . During any period of post-Service exercisability, the Option may not be exercised in the aggregate for more than the number of Option Shares in which the Optionee is, at the time of the Optionees cessation of Service, vested in accordance with the Vesting Schedule specified in the Notice of Grant. Upon the expiration of such exercise period or (if earlier) upon the Termination Date, the Option shall terminate and cease to be outstanding for any vested Option Shares for which the Option has not been exercised. To the extent that the Optionee is not vested in the Option Shares at the time of the Optionees cessation of Service, the Option shall immediately terminate and cease to be outstanding with respect to the Option Shares.
Section 4. Method of Payment .
(a) Common Stock purchased upon exercise of the Option may be paid in any one or more of the following forms:
(i) cash or check made payable to the Company;
(ii) subject to Section 4(b) , by the tendering to the Company of other shares of Common Stock of the Company (Tendered Option Shares) or the attestation to the ownership of shares of Common Stock that otherwise would be Tendered Option Shares (Attested Option Shares) in exchange for the Companys reducing the number of shares necessary for payment in full of the Exercise Price for the Option Shares so purchased; or
(iii) any combination of the forms of consideration set forth in subsections (i) and (ii) above.
(b) For purposes of determining the amount of the Exercise Price satisfied by the Tendered Option Shares or the Attested Option Shares, such shares shall be valued at their Fair Market Value on the date of tender or attestation, as applicable. The date of exercise shall be deemed to be the date that the notice of exercise and payment of the Exercise Price are received by the Administrator.
(c) Prior to the delivery of any Tendered Option Shares, Attested Option Shares or cash pursuant to the Option (or exercise thereof), the Company shall have the power and the right to deduct or withhold, or require the Optionee to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the Optionees FICA obligation) required to be withheld with respect to the Option (or exercise thereof). To the extent that the Company is required by Applicable Law to withhold funds for taxes in respect of any exercise of the Option, then the aggregate Exercise Price shall not be deemed paid and the Option shall not be deemed exercised and the Option Shares issuable upon exercise shall not be deemed issued, until the Optionee has paid to the Company, in a manner provided in this Section 4, the aggregate amount of such tax withholding.
Section 5. Disqualifying Disposition . If the Optionee disposes of Option Shares acquired upon exercise of the Option within two years from the Grant Date or one year after such Option Shares were acquired pursuant to exercise of the Option, the Optionee shall notify the Company in writing of such disposition.
Section 6. Nontransferability of Option . The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner by the Optionee, either voluntarily or by operation of law, other than by will or the laws of descent and distribution, and, during the lifetime of the Optionee, the Option shall be exercisable only by the Optionee.
Section 7. Adjustments . In the event that there is any stock dividend that is paid on Common Stock in shares of Common Stock, or any stock split, reverse stock split, combination or reclassification of Common Stock, or any other increase in the number of outstanding shares of Common Stock without receipt of consideration by the Company, then the total number and/or class of securities subject to the Option and the Exercise Price of the Option shall be appropriately adjusted, in such manner as the Administrator in its sole discretion deems equitable, in order to prevent dilution or enlargement of the rights of the Optionee under the Option.
Section 8. Stockholder Rights . The holder of the Option shall not have any rights as a stockholder with respect to the Option Shares until such person shall have exercised the Option, paid the Exercise Price and become the record holder of the purchased Option Shares in accordance with the terms of this Agreement and the Plan.
Section 9. Covenants of the Optionee and the Company .
(a) Repurchase Rights . [Reserved]
(b) Permitted Transfers .
(i) Neither the Optionee nor any permitted transferee of the Optionee shall Transfer (as defined below) all or any of the Option Shares to any Person (as defined below) except in accordance with this Section 9(b) . Notwithstanding anything to the contrary contained herein, the Optionee (and any permitted transferee of the Optionee) may Transfer all or any portion of his, her or its Option Shares: (A) if the stockholder is a limited partnership or a trust, to any member of the Group (as defined below) of which the Optionee (or such permitted transferee) is a member; (B) if the stockholder is a corporation or a limited liability company, to any member of its Group; (C) if the stockholder is an individual, to any member of the Family of such stockholder; provided, that the interests in any Family trusts shall be non-transferable; and (D) if the transferor is a permitted transferee of the Optionee by will or the laws of descent and distribution, provided that in each case of clauses (A) through (D), such transferee shall agree in writing with the Company, prior to and as a condition precedent to such Transfer, to be bound by all of the provisions of this Section 9 .
(ii) If requested in writing by the managing underwriters, if any, of any Initial Public Offering, the Optionee agrees not to offer, sell, contract to sell or otherwise dispose of any Option Shares except as part of such Initial Public Offering within thirty (30) days before or one hundred and eighty (180) days after the effective date of the registration statement filed with respect to said offering; provided, however, that this restriction will not apply to transfers permitted under Section 9(b)(i) provided such transferee agrees to be bound by the restriction contained in this Section 9(b)(ii) .
(c) Right of First Offer on Dispositions .
(i) If Optionee desires to Transfer all or any part of his Option Shares pursuant to this Section 9(c) at any time prior to completion of the Companys Initial Public Offering (other than pursuant to Section 9(a), 9(b)(i) or 9(d) hereof), Optionee shall submit a written offer (the Offer ) to sell such Option Shares (the Offered Option Shares ) to the Company, which Offer shall specify the number of Offered Option Shares proposed to be sold, the total number of Option Shares owned by Optionee, and the terms and conditions, including price, at which the Option Shares are being offered.
(ii) The Company shall have the right to purchase any or all of the Offered Option Shares on the same terms and conditions specified in the Offer.
(iii) If the Company desires to purchase any or all of the Offered Option Shares on the same terms and conditions specified in the Offer, the Company shall deliver its acceptance (an Acceptance ) to Optionee, which Acceptance shall confirm that the Company desires to purchase any or all of the Offered Option Shares and the number of Option Shares the Company desires to purchase and shall be delivered in person or mailed to Optionee at the address set forth in the Offer within twenty (20) days of the date the Offer was made by Optionee pursuant to Section 9(c)(i) .
(iv) If the Company elects to purchase any or all of the Offered Option Shares, sale of the Offered Option Shares pursuant to this Section 9(c) shall be made at the offices of the Company on the 30th day following the expiration of the 20-day period described above (or if such 30th day is not a business day, then on the next succeeding business day). Such sale shall be effected by Optionees delivery to the Company of a certificate or certificates evidencing the
Offered Option Shares to be purchased by it, duly endorsed for transfer to the Company, which Offered Option Shares shall be delivered free and clear of all liens, charges, claims and encumbrances of any nature whatsoever, against payment to Optionee of the purchase price therefor by the Company. Payment for the Offered Option Shares shall be made as provided in the Offer or by wire transfer or certified check.
(v) If the Company does not elect to purchase all of the Offered Option Shares, then the Offered Option Shares (less the amount to be purchased by the Company) may be sold by Optionee at any time within one hundred twenty (120) days after the date the Company responded to the Offer was made by Optionee pursuant to Section 9(c)(i) . Any such sale shall be upon terms and conditions, including price, no more favorable to the proposed transferee than those specified in the Offer. Any Offered Option Shares not sold within such 120-day period shall continue to be subject to the requirements of a prior offer pursuant to this Section 9(c) .
(d) Drag Along . Notwithstanding anything in this Agreement to the contrary, in the event that (i) the Board of Directors of the Company by unanimous vote or unanimous written consent and/or the holders of more than fifty percent (50%) of the then outstanding Common Stock by vote or written consent approves a transaction pursuant to which any Person or Persons not affiliated with any of the holders of any Common Stock will acquire fifty percent (50%) or more of the Common Stock of the Company (by stock purchase, merger or otherwise) or all or substantially all of the assets of the Company, upon the written request of the holders of more than fifty percent (50%) of the Common Stock, the Optionee agrees to offer to sell all of his Option Shares, and to sell all of his Option Shares (or, if such proposed transaction involves the sale of less than one hundred percent (100%) of the outstanding Common Stock, a proportionate amount of his Option Shares), to such Person or Persons or to vote all of his Option Shares in favor of the sale of assets, as the case may be, in either case upon the terms and conditions of the transaction approved by the Board of Directors of the Company and/or the holders of more than fifty percent (50%) of the Common Stock; provided, however, that the Optionees obligation to sell his Option Shares pursuant to this Section 9(d) shall only apply if all of the Option Shares are to be sold on the same terms and conditions as the shares of such other Person or Persons. For purposes of this Section 9(d), each Preferred Share shall be deemed to be equal to the number of shares of Common Stock into which such Preferred Share is then convertible.
(e) For purposes of this Section 9 , the following terms shall have the following meanings: (i) Equity Stock shall have the meaning set forth in Rule 3a11-1 under the Securities Exchange Act of 1934, as amended, and any successor statute and the rules and regulations thereunder, as shall be in effect from time to time; (ii) Family shall mean any spouse, lineal ancestor or descendant, or sibling or any trust for the exclusive benefit of any of the foregoing and/or the Optionee; (iii) Group shall mean as to (a) a partnership, any or all of its general or limited partners or any affiliate thereof (as defined by Rule 405 promulgated under the Securities Act), (b) a trust, any of the beneficiaries, settlers or grantors now existing or hereafter arising or any Person under common control with, such trust, (c) a corporation, any of its stockholders, any subsidiary of such corporation or any corporation which is under common control with such corporation, or any directors, officers or employees of such corporation, and (d) a limited liability company, any of its members; (iv) Initial Public Offering shall mean the Companys initial distribution of New Securities in an underwritten Public Offering to the general public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act at a price per New Security of not less than the product of three (3) and the original purchase price per share for the Companys initial round of Series A Preferred Stock (as adjusted for stock splits, stock dividends or similar recapitalizations) and resulting in net proceeds to the Company of
not less than $40 million; (v) New Securities shall mean any Equity Stock, including, but not limited to, shares of Common Stock, any security which is convertible into or exercisable or exchangeable for Common Stock, or any right, option or warrant to acquire any Common Stock; (vi) Person shall mean and include a natural person, a corporation, a partnership, a limited liability company, a trust, an unincorporated organization, an educational institution, a government or any department, agency or political subdivision thereof, or any other entity; (vii) Securities Act shall mean the Securities Act of 1933, as amended, and any successor statute and the rules and regulations of the Commission thereunder, as shall be in effect at the applicable time; and (viii) Transfer shall include any direct or indirect sale, assignment, transfer, pledge (but not including a pledge in favor of the Company), hypothecation or other disposition of any Option Shares or of any legal or beneficial interest therein.
Section 10. Reorganization Event .
(a) Upon the occurrence of a Reorganization Event, subject to subsection (b) below, each outstanding Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation.
(b) In the event that the successor corporation does not assume (within the meaning of Section 9.2 of the Plan) the Option or an equivalent option is not substituted, then the Administrator shall, upon written or electronic notice to the Optionee, provide that either: (i) the Option will become exercisable in full as of a specified time prior to the Reorganization Event and will terminate immediately prior to the consummation of such Reorganization Event, except to the extent exercised by the Optionee prior to the consummation of the Reorganization Event; or (ii) the Option will terminate upon consummation of such Reorganization Event and the Optionee will receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of Option Shares subject to the Option, whether or not such Option Shares are then vested in full, exceeds (B) the aggregate Exercise Price of the Option.
(c) If the Option is assumed in connection with a Reorganization Event, then the Option shall be appropriately adjusted, immediately after such Reorganization Event, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Reorganization Event had the Option been exercised in full immediately prior to such Reorganization Event, and appropriate adjustments shall also be made to the Exercise Price, provided that the aggregate Exercise Price shall remain the same.
(d) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or to otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
Section 11. Notices . Any notices required or permitted by the terms of this Agreement or the Plan shall be given by recognized courier service, facsimile, registered or certified mail, return receipt requested, or electronic transmission, addressed as follows:
If to the Company: | LendingClub Corporation | |
71 Stevenson Street, Suite 300 | ||
San Francisco, CA 94105 | ||
Attn: President | ||
If to the Optionee: | At the address set forth in the Notice of Grant |
or to such other address or addresses of which notice in the same manner has previously been given. Any such notice shall be deemed to have been given upon the earlier of receipt, one business day following delivery to a recognized courier service or three business days following mailing by registered or certified mail.
Section 12. Governing Law . This Agreement shall be construed and enforced in accordance with the law of the State of Delaware, without giving effect to the conflict of law principles thereof.
Section 13. Successors and Assigns . Subject to the provisions of the Plan and the other provisions hereof, this Agreement shall be for the benefit of and shall be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto.
Section 14. Construction . This Agreement and the Option evidenced hereby and by the Notice of Grant are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in the Option.
[Remainder of page intentionally left blank.]
LENDINGCLUB CORPORATION
Notice of Stock Option Grant
Under 2007 Stock Incentive Plan
Notice is hereby given of the following option grant (the Option) to purchase shares of Common Stock of LendingClub Corporation (the Company):
Optionee : | ||
Grant Date : | ||
Vesting Commencement Date : | ||
Exercise Price : | ||
Number of Option Shares : | shares of Common Stock | |
Termination Date : | ||
Type of Option : | Incentive Stock Option | |
Non-Statutory Stock Option | ||
Vesting Schedule : |
The Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the LendingClub Corporation 2007 Stock Incentive Plan (the Plan). The Optionee further agrees to be bound by the terms of the Option as set forth in this Notice of Grant and in the Stock Option Agreement attached hereto as Exhibit A . as well as the terms of the Plan, which is attached hereto as Exhibit B .
No Employment or Service Contract . Nothing in this Notice or in the attached Stock Option Agreement or Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining the Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate the Optionees Service at any time for any reason, with or without cause.
DATED: , 20 | ||||||||||
LENDINGCLUB CORPORATION | ||||||||||
By: |
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Name: | ||||||||||
Title: | ||||||||||
OPTIONEE | ||||||||||
By: |
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Address: |
ATTACHMENTS
Exhibit A - Stock Option Agreement
Exhibit B - 2007 Stock Incentive Plan
NOTICE OF EXERCISE
TO: | LendingClub Corporation (the Company) |
Reference is made to the Notice of Grant, dated , 20 , evidencing an Option (the Option) to purchase an aggregate of shares of Common Stock of the Company at an exercise price of $ per share. Capitalized terms used but not defined in this Notice of Exercise have the meanings given to them in the Notice of Grant and the accompanying Option Agreement and Plan.
I understand the nature of the investment I am making and the financial risks thereof. I am aware that it is my responsibility to have consulted with competent tax and legal advisors about the relevant national, state and local income tax and securities laws affecting the exercise of the Option and the purchase and subsequent sale of the Option Shares.
I am paying the Exercise Price for the exercised Option Shares, in accordance with Section 4 of the Option Agreement, as follows:
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Please issue the stock certificate for the Option Shares (check one): | ||||
¨ | to me; or | |||
¨ | to me and , as joint tenants with right of survivorship. | |||
and mail the certificate to me at the following address: | ||||
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My mailing address for stockholder communications, if different from the address listed above, is:
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Exhibit 10.6
LENDINGCLUB CORPORATION
2014 EQUITY INCENTIVE PLAN
1. PURPOSE . The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, and any Parents and Subsidiaries that exist now or in the future, by offering them an opportunity to participate in the Companys future performance through the grant of Awards. Capitalized terms not defined elsewhere in the text are defined in Section 28.
2. SHARES SUBJECT TO THE PLAN .
2.1. Number of Shares Available . Subject to Sections 2.6 and 21 and any other applicable provisions hereof, the total number of Shares reserved and available for grant and issuance pursuant to this Plan as of the date of adoption of the Plan by the Board, is thirty-five million (35,000,000) Shares, plus (i) any reserved shares not issued or subject to outstanding grants under the Companys 2007 Stock Incentive Plan (the Prior Plan ) on the Effective Date (as defined below), (ii) shares that are subject to stock options or other awards granted under the Prior Plan that cease to be subject to such stock options or other awards by forfeiture or otherwise after the Effective Date, (iii) shares issued under the Prior Plan before or after the Effective Date pursuant to the exercise of stock options that are, after the Effective Date, forfeited, (iv) shares issued under the Prior Plan that are repurchased by the Company at the original issue price and (v) shares that are subject to stock options or other awards under the Prior Plan that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any award.
2.2. Lapsed, Returned Awards . Shares subject to Awards, and Shares issued under the Plan under any Award, will again be available for grant and issuance in connection with subsequent Awards under this Plan to the extent such Shares: (a) are subject to issuance upon exercise of an Option or SAR granted under this Plan but which cease to be subject to the Option or SAR for any reason other than exercise of the Option or SAR; (b) are subject to Awards granted under this Plan that are forfeited or are repurchased by the Company at the original issue price; (c) are subject to Awards granted under this Plan that otherwise terminate without such Shares being issued; or (d) are surrendered pursuant to an Exchange Program. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Shares used to pay the exercise price of an Award or withheld to satisfy the tax withholding obligations related to an Award will become available for future grant or sale under the Plan. For the avoidance of doubt, Shares that otherwise become available for grant and issuance because of the provisions of this Section 2.2 shall not include Shares subject to Awards that initially became available because of the substitution clause in Section 21.2 hereof.
2.3. Minimum Share Reserve . At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Awards granted under this Plan.
2.4. Automatic Share Reserve Increase . The number of Shares available for grant and issuance under the Plan shall be automatically increased January 1 of each of the calendar years 2015 through 2024, by the lesser of (i) five percent (5%) of the number of shares of Common Stock and Common Stock equivalents (including options, RSUs, warrants and the pool of available Shares under the Plan) issued and outstanding on each December 31 immediately prior to the date of increase or (ii) such number of Shares determined by the Board.
2.5. Limitations . No more than three hundred fifty million (350,000,000) Shares shall be issued pursuant to the exercise of ISOs.
2.6. Adjustment of Shares . If the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company, without consideration, then (a) the number of Shares reserved for issuance and future grant under the Plan set forth in Section 2.1, (b) the Exercise Prices of and number of Shares subject to outstanding Options and SARs, (c) the number of Shares subject to other outstanding Awards, (d) the maximum number of shares that may be issued as ISOs set forth in Section 2.5, and (e) the maximum number of Shares that may be issued to an individual or to a new Employee in any one calendar year set forth in Section 3 or to a Non-Employee Director in Section 12 shall be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and in compliance with applicable securities laws; provided that fractions of a Share will not be issued.
3. ELIGIBILITY . ISOs may be granted only to eligible Employees. All other Awards may be granted to Employees, Consultants, Directors and Non-Employee Directors; provided such Consultants, Directors and Non-Employee Directors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No Participant will be eligible to be granted more than Four Million (4,000,000) Shares in any calendar year under this Plan pursuant to the grant of Awards except that new Employees (including new Employees who are also officers and directors of the Company or any Parent, Subsidiary or Affiliate) are eligible to be granted up to a maximum of Six Million (6,000,000) Shares in the calendar year in which they commence their employment.
4. ADMINISTRATION .
4.1. Committee Composition; Authority . This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan, except, however, the Board shall establish the terms for the grant of an Award to Non-Employee Directors. The Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may vest and be exercised (which may be based on performance criteria) or settled, any vesting acceleration or waiver of forfeiture restrictions, the method to satisfy tax withholding obligations or any other tax liability legally due, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Committee will determine;
(e) determine the number of Shares or other consideration subject to Awards;
(f) determine the Fair Market Value and interpret the applicable provisions of this Plan and the definition of Fair Market Value in connection with circumstances that impact the Fair Market Value, if necessary;
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(g) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company;
(h) grant waivers of Plan or Award conditions;
(i) determine the vesting, exercisability and payment of Awards;
(j) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;
(k) determine whether an Award has been earned;
(l) determine the terms and conditions of any, and to institute any Exchange Program;
(m) reduce or waive any criteria with respect to Performance Factors;
(n) adjust Performance Factors to take into account changes in law and accounting or tax rules as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships provided that such adjustments are consistent with the regulations promulgated under Section 162(m) of the Code with respect to persons whose compensation is subject to Section 162(m) of the Code;
(o) adopt terms and conditions, rules and/or procedures (including the adoption of any subplan under this Plan) relating to the operation and administration of the Plan to accommodate requirements of local law and procedures outside of the United States;
(p) make all other determinations necessary or advisable for the administration of this Plan; and
(q) delegate any of the foregoing to a subcommittee consisting of one or more executive officers pursuant to a specific delegation as permitted by applicable law, including Section 157(c) of the Delaware General Corporation Law.
4.2. Committee Interpretation and Discretion . Any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under the Plan. Any dispute regarding the interpretation of the Plan or any Award Agreement shall be submitted by the Participant or Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and the Participant. The Committee may delegate to one or more executive officers the authority to review and resolve disputes with respect to Awards held by Participants who are not Insiders, and such resolution shall be final and binding on the Company and the Participant.
4.3. Section 162(m) of the Code and Section 16 of the Exchange Act . When necessary or desirable for an Award to qualify as performance-based compensation under Section 162(m) of the Code the Committee shall include at least two persons who are outside directors (as defined under Section 162(m) of the Code) and at least two (or a majority if more than two then serve on the Committee) such outside directors shall approve the grant of such Award and timely determine (as applicable) the Performance Period and any Performance Factors upon which vesting or settlement of any portion of such Award is to be subject. When required by Section 162(m) of the Code, prior to settlement of any such Award at least two (or a majority if more than two then serve on the Committee) such outside directors then serving on the Committee shall determine and certify in writing the extent to
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which such Performance Factors have been timely achieved and the extent to which the Shares subject to such Award have thereby been earned. Awards granted to Participants who are subject to Section 16 of the Exchange Act must be approved by two or more non-employee directors (as defined in the regulations promulgated under Section 16 of the Exchange Act). With respect to Participants whose compensation is subject to Section 162(m) of the Code, and provided that such adjustments are consistent with the regulations promulgated under Section 162(m) of the Code, the Committee may adjust the performance goals to account for changes in law and accounting and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships, including without limitation (i) restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring charges, (ii) an event either not directly related to the operations of the Company or not within the reasonable control of the Companys management, or (iii) a change in accounting standards required by generally accepted accounting principles.
4.4. Documentation . The Award Agreement for a given Award, the Plan and any other documents may be delivered to, and accepted by, a Participant or any other person in any manner (including electronic distribution or posting) that meets applicable legal requirements.
4.5. Foreign Award Recipients . Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws and practices in other countries in which the Company and its Subsidiaries and Affiliates operate or have employees or other individuals eligible for Awards, the Committee, in its sole discretion, shall have the power and authority to: (i) determine which Subsidiaries and Affiliates shall be covered by the Plan; (ii) determine which individuals outside the United States are eligible to participate in the Plan which may include individuals who provide services to the Company, Subsidiary or Affiliate under an agreement with a foreign nation or agency; (iii) modify the terms and conditions of any Award granted to individuals outside the United States or foreign nationals to comply with applicable foreign laws, policies, customs and practices; (iv) establish subplans and modify exercise procedures and other terms and procedures, to the extent the Committee determines such actions to be necessary or advisable (and such subplans and/or modifications shall be attached to this Plan as appendices); provided, however, that no such subplans and/or modifications shall increase the share limitations contained in Section 2.1 hereof; and (v) take any action, before or after an Award is made, that the Committee determines to be necessary or advisable to obtain approval or comply with any local governmental regulatory exemptions or approvals. Notwithstanding the foregoing, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act or any other applicable United States securities law, or any other applicable law.
5. OPTIONS . An Option is the right but not the obligation to purchase a Share, subject to certain conditions, if applicable. The Committee may grant Options to eligible Employees, Consultants and Directors and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ( ISOs ) or Nonqualified Stock Options ( NSOs ), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may vest and be exercised, and all other terms and conditions of the Option, subject to the following:
5.1. Option Grant . Each Option granted under this Plan will identify the Option as an ISO or an NSO. An Option may be, but need not be, awarded upon satisfaction of such Performance Factors during any Performance Period as are set out in advance in the Participants individual Award Agreement. If the Option is being earned upon the satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for each Option; and (y) select from among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participants may participate simultaneously with respect to Options that are subject to different performance goals and other criteria.
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5.2. Date of Grant . The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, or a specified future date. The Award Agreement will be delivered to the Participant within a reasonable time after the granting of the Option.
5.3. Exercise Period . Options may be vested and exercisable within the times or upon the conditions as set forth in the Award Agreement governing such Option; provided , however , that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who, at the time the ISO is granted, directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ( Ten Percent Stockholder ) will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines.
5.4. Exercise Price . The Exercise Price of an Option will be determined by the Committee when the Option is granted; provided that: (i) the Exercise Price of an Option will be not less than one hundred percent (100%) of the Fair Market Value of the Shares on the date of grant and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than one hundred ten percent (110%) of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 11 and the Award Agreement and in accordance with any procedures established by the Company.
5.5. Method of Exercise . Any Option granted hereunder will be vested and exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Committee and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share. An Option will be deemed exercised when the Company receives: (i) notice of exercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Committee and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 2.6 of the Plan. Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.
(a) Termination of Service . If the Participants Service terminates for any reason except for Cause or the Participants death or Disability, then the Participant may exercise such Participants Options only to the extent that such Options would have been exercisable by the Participant on the date Participants Service terminates no later than ninety (90) days after the date Participants Service terminates (or such shorter or longer time period as may be determined by the Committee, with any exercise beyond three (3) months after the date Participants Service terminates deemed to be the exercise of an NSO), but in any event no later than the expiration date of the Options.
(b) Death . If the Participants Service terminates because of the Participants death (or the Participant dies within ninety (90) days after Participants Service terminates other than for Cause or because of the Participants Disability), then the Participants Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the date Participants Service terminates and must be exercised by the Participants legal representative, or authorized assignee, no later
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than twelve (12) months after the date Participants Service terminates (or such shorter or longer time period as may be determined by the Committee), but in any event no later than the expiration date of the Options.
(c) Disability . If the Participants Service terminates because of the Participants Disability, then the Participants Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the date Participants Service terminates and must be exercised by the Participant (or the Participants legal representative or authorized assignee) no later than twelve (12) months after the date Participants Service terminates (with any exercise beyond (a) three (3) months after the date Participants employment terminates when the termination of Service is for a Disability that is not a permanent and total disability as defined in Section 22(e)(3) of the Code, or (b) twelve (12) months after the date Participants employment terminates when the termination of Service is for a Disability that is a permanent and total disability as defined in Section 22(e)(3) of the Code, deemed to be exercise of an NSO), but in any event no later than the expiration date of the Options.
(d) Cause . If the Participant is terminated for Cause, then Participants Options shall expire on such Participants date of termination of Service, or at such later time and on such conditions as are determined by the Committee, but in any event no later than the expiration date of the Options. Unless otherwise provided in the Award Agreement, Cause shall have the meaning set forth in the Plan.
5.6. Limitations on Exercise . The Committee may specify a minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent any Participant from exercising the Option for the full number of Shares for which it is then exercisable.
5.7. Limitations on ISOs . With respect to Awards granted as ISOs, to the extent that the aggregate Fair Market Value of the Shares with respect to which such ISOs are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), such Options will be treated as NSOs. For purposes of this Section 5.7, ISOs will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.
5.8. Modification, Extension or Renewal . The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participants rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. Subject to Section 18 of this Plan, by written notice to affected Participants, the Committee may reduce the Exercise Price of outstanding Options without the consent of such Participants; provided , however , that the Exercise Price may not be reduced below the Fair Market Value on the date the action is taken to reduce the Exercise Price.
5.9. No Disqualification . Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.
6. RESTRICTED STOCK AWARDS . A Restricted Stock Award is an offer by the Company to sell to an eligible Employee, Consultant, or Director Shares that are subject to restrictions ( Restricted Stock ). The Committee will determine to whom an offer will be made, the number of Shares the Participant may purchase, the Purchase Price, the restrictions under which the Shares will be subject and all other terms and conditions of the Restricted Stock Award, subject to the Plan.
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6.1. Restricted Stock Purchase Agreement . All purchases under a Restricted Stock Award will be evidenced by an Award Agreement. Except as may otherwise be provided in an Award Agreement, a Participant accepts a Restricted Stock Award by signing and delivering to the Company an Award Agreement with full payment of the Purchase Price, within thirty (30) days from the date the Award Agreement was delivered to the Participant. If the Participant does not accept such Award within thirty (30) days, then the offer of such Restricted Stock Award will terminate, unless the Committee determines otherwise.
6.2. Purchase Price . The Purchase Price for a Restricted Stock Award will be determined by the Committee and may be less than Fair Market Value on the date the Restricted Stock Award is granted. Payment of the Purchase Price must be made in accordance with Section 11 of the Plan, and the Award Agreement and in accordance with any procedures established by the Company.
6.3. Terms of Restricted Stock Awards . Restricted Stock Awards will be subject to such restrictions as the Committee may impose or are required by law. These restrictions may be based on completion of a specified number of years of service with the Company or upon completion of Performance Factors, if any, during any Performance Period as set out in advance in the Participants Award Agreement. Prior to the grant of a Restricted Stock Award, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Restricted Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant. Performance Periods may overlap and a Participant may participate simultaneously with respect to Restricted Stock Awards that are subject to different Performance Periods and having different performance goals and other criteria.
6.4. Termination of Service . Except as may be set forth in the Participants Award Agreement, vesting ceases on such date Participants Service terminates (unless determined otherwise by the Committee).
7. STOCK BONUS AWARDS . A Stock Bonus Award is an award to an eligible Employee, Consultant, or Director of Shares for Services to be rendered or for past Services already rendered to the Company or any Parent or Subsidiary. All Stock Bonus Awards shall be made pursuant to an Award Agreement. No payment from the Participant will be required for Shares awarded pursuant to a Stock Bonus Award.
7.1. Terms of Stock Bonus Awards . The Committee will determine the number of Shares to be awarded to the Participant under a Stock Bonus Award and any restrictions thereon. These restrictions may be based upon completion of a specified number of years of service with the Company or upon satisfaction of performance goals based on Performance Factors during any Performance Period as set out in advance in the Participants Stock Bonus Agreement. Prior to the grant of any Stock Bonus Award the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Stock Bonus Award; (b) select from among the Performance Factors to be used to measure performance goals; and (c) determine the number of Shares that may be awarded to the Participant. Performance Periods may overlap and a Participant may participate simultaneously with respect to Stock Bonus Awards that are subject to different Performance Periods and different performance goals and other criteria.
7.2. Form of Payment to Participant . Payment may be made in the form of cash, whole Shares, or a combination thereof, based on the Fair Market Value of the Shares earned under a Stock Bonus Award on the date of payment, as determined in the sole discretion of the Committee.
7.3. Termination of Service . Except as may be set forth in the Participants Award Agreement, vesting ceases on such date Participants Service terminates (unless determined otherwise by the Committee).
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8. STOCK APPRECIATION RIGHTS . A Stock Appreciation Right ( SAR ) is an award to an eligible Employee, Consultant, or Director that may be settled in cash, or Shares (which may consist of Restricted Stock), having a value equal to (a) the difference between the Fair Market Value on the date of exercise over the Exercise Price multiplied by (b) the number of Shares with respect to which the SAR is being settled (subject to any maximum number of Shares that may be issuable as specified in an Award Agreement). All SARs shall be made pursuant to an Award Agreement.
8.1. Terms of SARs . The Committee will determine the terms of each SAR including, without limitation: (a) the number of Shares subject to the SAR; (b) the Exercise Price and the time or times during which the SAR may be settled; (c) the consideration to be distributed on settlement of the SAR; and (d) the effect of the Participants termination of Service on each SAR. The Exercise Price of the SAR will be determined by the Committee when the SAR is granted, and may not be less than Fair Market Value. A SAR may be awarded upon satisfaction of Performance Factors, if any, during any Performance Period as are set out in advance in the Participants individual Award Agreement. If the SAR is being earned upon the satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for each SAR; and (y) select from among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participants may participate simultaneously with respect to SARs that are subject to different Performance Factors and other criteria.
8.2. Exercise Period and Expiration Date . A SAR will be exercisable within the times or upon the occurrence of events determined by the Committee and set forth in the Award Agreement governing such SAR. The SAR Agreement shall set forth the expiration date; provided that no SAR will be exercisable after the expiration of ten (10) years from the date the SAR is granted. The Committee may also provide for SARs to become exercisable at one time or from time to time, periodically or otherwise (including, without limitation, upon the attainment during a Performance Period of performance goals based on Performance Factors), in such number of Shares or percentage of the Shares subject to the SAR as the Committee determines. Except as may be set forth in the Participants Award Agreement, vesting ceases on the date Participants Service terminates (unless determined otherwise by the Committee). Notwithstanding the foregoing, the rules of Section 5.6 also will apply to SARs.
8.3. Form of Settlement . Upon exercise of a SAR, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying (i) the difference between the Fair Market Value of a Share on the date of exercise over the Exercise Price; times (ii) the number of Shares with respect to which the SAR is exercised. At the discretion of the Committee, the payment from the Company for the SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. The portion of a SAR being settled may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee determines, provided that the terms of the SAR and any deferral satisfy the requirements of Section 409A of the Code.
8.4. Termination of Service . Except as may be set forth in the Participants Award Agreement, vesting ceases on such date Participants Service terminates (unless determined otherwise by the Committee).
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9. RESTRICTED STOCK UNITS . A Restricted Stock Unit ( RSU ) is an award to an eligible Employee, Consultant, or Director covering a number of Shares that may be settled in cash, or by issuance of those Shares (which may consist of Restricted Stock). All RSUs shall be made pursuant to an Award Agreement.
9.1. Terms of RSUs . The Committee will determine the terms of an RSU including, without limitation: (a) the number of Shares subject to the RSU; (b) the time or times during which the RSU may be settled; (c) the consideration to be distributed on settlement; and (d) the effect of the Participants termination of Service on each RSU. An RSU may be awarded upon satisfaction of such performance goals based on Performance Factors during any Performance Period as are set out in advance in the Participants Award Agreement. If the RSU is being earned upon satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for the RSU; (y) select from among the Performance Factors to be used to measure the performance, if any; and (z) determine the number of Shares deemed subject to the RSU. Performance Periods may overlap and participants may participate simultaneously with respect to RSUs that are subject to different Performance Periods and different performance goals and other criteria.
9.2. Form and Timing of Settlement . Payment of earned RSUs shall be made as soon as practicable after the date(s) determined by the Committee and set forth in the Award Agreement. The Committee, in its sole discretion, may settle earned RSUs in cash, Shares, or a combination of both. The Committee may also permit a Participant to defer payment under a RSU to a date or dates after the RSU is earned provided that the terms of the RSU and any deferral satisfy the requirements of Section 409A of the Code.
9.3. Termination of Service . Except as may be set forth in the Participants Award Agreement, vesting ceases on such date Participants Service terminates (unless determined otherwise by the Committee).
10. PERFORMANCE AWARDS . A Performance Award is an award to an eligible Employee, Consultant, or Director of a cash bonus or an award of Performance Shares denominated in Shares that may be settled in cash, or by issuance of those Shares (which may consist of Restricted Stock). Grants of Performance Awards shall be made pursuant to an Award Agreement solely pursuant to this Section 10.
10.1. Terms of Performance Shares . The Committee will determine, and each Award Agreement shall set forth, the terms of each Performance Award including, without limitation: (a) the amount of any cash bonus, (b) the number of Shares deemed subject to an award of Performance Shares; (c) the Performance Factors and Performance Period that shall determine the time and extent to which each award of Performance Shares shall be settled; (d) the consideration to be distributed on settlement, and (e) the effect of the Participants termination of Service on each Performance Award. In establishing Performance Factors and the Performance Period the Committee will: (x) determine the nature, length and starting date of any Performance Period; (y) select from among the Performance Factors to be used; and (z) determine the number of Shares deemed subject to the award of Performance Shares. Prior to settlement the Committee shall determine the extent to which Performance Awards have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Performance Awards that are subject to different Performance Periods and different performance goals and other criteria. No Participant will be eligible to receive more than $10,000,000 in Performance Awards in any calendar year under Section 10 of this Plan.
10.2. Value, Earning and Timing of Performance Shares . Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant. After the applicable Performance Period has ended, the holder of Performance Shares will be entitled to receive a payout of the number of Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding Performance Factors or other vesting provisions have been achieved. The Committee, in its sole discretion, may pay earned Performance Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Shares at the close of the applicable Performance Period) or in a combination thereof.
10.3. Termination of Service . Except as may be set forth in the Participants Award Agreement, vesting ceases on the date Participants Service terminates (unless determined otherwise by the Committee).
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11. PAYMENT FOR SHARE PURCHASES . Payment from a Participant for Shares purchased pursuant to this Plan may be made in cash or by check or, where approved for the Participant by the Committee and where permitted by law (and to the extent not otherwise set forth in the applicable Award Agreement):
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares of the Company held by the Participant that have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Award will be exercised or settled;
(c) by waiver of compensation due or accrued to the Participant for services rendered or to be rendered to the Company or a Parent or Subsidiary of the Company;
(d) by consideration received by the Company pursuant to a broker-assisted or other form of cashless exercise program implemented by the Company in connection with the Plan;
(e) by any combination of the foregoing; or
(f) by any other method of payment as is permitted by applicable law.
12. GRANTS TO NON-EMPLOYEE DIRECTORS . Non-Employee Directors are eligible to receive any type of Award offered under this Plan except ISOs. Awards pursuant to this Section 12 may be automatically made pursuant to policy adopted by the Board, or made from time to time as determined in the discretion of the Board. The aggregate number of Shares subject to Awards granted to a Non-Employee Director pursuant to this Section 12 in any calendar year shall not exceed 1,500,000.
12.1. Eligibility . Awards pursuant to this Section 12 shall be granted only to Non-Employee Directors. A Non-Employee Director who is elected or re-elected as a member of the Board will be eligible to receive an Award under this Section 12.
12.2. Vesting, Exercisability and Settlement . Except as set forth in Section 21, Awards shall vest, become exercisable and be settled as determined by the Board. With respect to Options and SARs, the exercise price granted to Non-Employee Directors shall not be less than the Fair Market Value of the Shares at the time that such Option or SAR is granted.
12.3. Election to receive Awards in Lieu of Cash . A Non-Employee Director may elect to receive his or her annual retainer payments and/or meeting fees from the Company in the form of cash or Awards or a combination thereof, as determined by the Committee. Such Awards shall be issued under the Plan. An election under this Section 12.3 shall be filed with the Company on the form prescribed by the Company.
13. WITHHOLDING TAXES .
13.1. Withholding Generally . Whenever Shares are to be issued in satisfaction of Awards granted under this Plan or the applicable tax event occurs, the Company may require the Participant to remit to the Company, or to the Parent, Subsidiary or Affiliate employing the Participant, an amount sufficient to satisfy applicable U.S. federal, state, local and international withholding tax requirements or any other tax or social insurance liability legally due from the Participant prior to the delivery of Shares pursuant to exercise or settlement of any Award. Whenever payments in satisfaction of Awards granted
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under this Plan are to be made in cash, such payment will be net of an amount sufficient to satisfy applicable U.S. federal, state, local and international withholding tax and social insurance requirements or any other tax liability legally due from the Participant.
13.2. Stock Withholding . The Committee, or its delegate(s), as permitted by applicable law, in its sole discretion and pursuant to such procedures as it may specify from time to time and to limitations of local law, may require or permit a Participant to satisfy such tax withholding obligation or any other tax liability legally due from the Participant, in whole or in part by (without limitation) (i) paying cash, (ii) electing to have the Company withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld, (iii) delivering to the Company already-owned Shares having a Fair Market Value equal to the minimum amount required to be withheld or (iv) withholding from the proceeds of the sale of otherwise deliverable Shares acquired pursuant to an Award either through a voluntary sale or through a mandatory sale arranged by the Company. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.
14. TRANSFERABILITY .
14.1. Transfer Generally . Unless determined otherwise by the Committee or pursuant to Section 14.2, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution. If the Committee makes an Award transferable, including, without limitation, by instrument to an inter vivos or testamentary trust in which the Awards are to be passed to beneficiaries upon the death of the trustor (settlor) or by gift or by domestic relations order to a Permitted Transferee, such Award will contain such additional terms and conditions as the Committee deems appropriate. All Awards shall be exercisable: (i) during the Participants lifetime only by (A) the Participant, or (B) the Participants guardian or legal representative; (ii) after the Participants death, by the legal representative of the Participants heirs or legatees; and (iii) in the case of all awards except ISOs, by a Permitted Transferee.
14.2. Award Transfer Program . Notwithstanding any contrary provision of the Plan, the Committee shall have all discretion and authority to determine and implement the terms and conditions of any Award Transfer Program instituted pursuant to this Section 14.2 and shall have the authority to amend the terms of any Award participating, or otherwise eligible to participate in, the Award Transfer Program, including (but not limited to) the authority to (i) amend (including to extend) the expiration date, post-termination exercise period and/or forfeiture conditions of any such Award, (ii) amend or remove any provisions of the Award relating to the Award holders continued service to the Company or its Parent or any Subsidiary, (iii) amend the permissible payment methods with respect to the exercise or purchase of any such Award, (iv) amend the adjustments to be implemented in the event of changes in the capitalization and other similar events with respect to such Award, and (v) make such other changes to the terms of such Award as the Committee deems necessary or appropriate in its sole discretion.
15. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES .
15.1. Voting and Dividends . No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant, except for any dividend equivalent rights permitted by an applicable Award Agreement. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided , that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided , further , that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participants Purchase Price or Exercise Price, as the case may be, pursuant to Section 15.2.
15.2. Restrictions on Shares . At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) a right to repurchase (a Right of Repurchase ) a portion of any or all Unvested Shares held by a Participant following such Participants termination of Service at any time within ninety (90) days (or such longer or shorter time determined by the Committee) after the later of the date Participants Service terminates and the date the Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participants Purchase Price or Exercise Price, as the case may be.
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16. CERTIFICATES . All Shares or other securities whether or not certificated, delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable U.S. federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted and any non-U.S. exchange controls or securities law restrictions to which the Shares are subject.
17. ESCROW; PLEDGE OF SHARES . To enforce any restrictions on a Participants Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of the Participants obligation to the Company under the promissory note; provided , however , that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participants Shares or other collateral. In connection with any pledge of the Shares, the Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid.
18. REPRICING; EXCHANGE AND BUYOUT OF AWARDS . Without prior stockholder approval, the Committee may (i) reprice Options or SARs (and where such repricing is a reduction in the Exercise Price of outstanding Options or SARs, the consent of the affected Participants is not required provided written notice is provided to them, notwithstanding any adverse tax consequences to them arising from the repricing), and (ii) with the consent of the respective Participants (unless not required pursuant to Section 5.8 of the Plan), pay cash or issue new Awards in exchange for the surrender and cancellation of any, or all, outstanding Awards.
19. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE . An Award will not be effective unless such Award is in compliance with all applicable U.S. and foreign federal and state securities and exchange control laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal or foreign law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration,
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qualification or listing requirements of any foreign or state securities laws, exchange control laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.
20. NO OBLIGATION TO EMPLOY . Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent, Subsidiary or Affiliate or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate to terminate Participants employment or other relationship at any time.
21. CORPORATE TRANSACTIONS .
21.1. Assumption or Replacement of Awards by Successor . In the event that the Company is subject to a Corporate Transaction, outstanding Awards acquired under the Plan shall be subject to the documentation evidencing the Corporate Transaction, which need not treat all outstanding Awards in an identical manner. Such agreement, without the Participants consent, shall provide for one or more of the following with respect to all outstanding Awards as of the effective date of such Corporate Transaction.
(a) The continuation of an outstanding Award by the Company (if the Company is the successor entity).
(b) The assumption of an outstanding Award by the successor or acquiring entity (if any) of such Corporate Transaction (or by its parents, if any), which assumption, will be binding on all selected Participants; provided that the exercise price and the number and nature of shares issuable upon exercise of any such option or stock appreciation right, or any award that is subject to Section 409A of the Code, will be adjusted appropriately pursuant to Section 424(a) of the Code.
(c) The substitution by the successor or acquiring entity in such Corporate Transaction (or by its parents, if any) of equivalent awards with substantially the same terms for such outstanding Awards (except that the exercise price and the number and nature of shares issuable upon exercise of any such option or stock appreciation right, or any award that is subject to Section 409A of the Code, will be adjusted appropriately pursuant to Section 424(a) of the Code).
(d) The full acceleration of exercisability or vesting and accelerated expiration of an outstanding Award and lapse of the Companys right to repurchase or re-acquire shares acquired under an Award or lapse of forfeiture rights with respect to shares acquired under an Award.
(e) The settlement of the full value of such outstanding Award (whether or not then vested or exercisable) in cash, cash equivalents, or securities of the successor entity (or its parent, if any) with a Fair Market Value equal to the required amount, followed by the cancellation of such Awards; provided however, that such Award may be cancelled if such Award has no value, as determined by the Committee, in its discretion. Subject to Section 409A of the Code, such payment may be made in installments and may be deferred until the date or dates the Award would have become exercisable or vested. Such payment may be subject to vesting based on the Participants continued service, provided that the vesting schedule shall not be less favorable to the Participant than the schedule under which the Award would have become vested or exercisable. For purposes of this Section 21.1(e), the Fair Market Value of any security shall be determined without regard to any vesting conditions that may apply to such security.
The Board shall have full power and authority to assign the Companys right to repurchase or re-acquire or forfeiture rights to such successor or acquiring corporation. In addition, in the event such successor or acquiring corporation refuses to assume, convert, replace or substitute Awards, as provided above, pursuant to a Corporate Transaction, the Committee will notify the Participant in writing or
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electronically that such Award will be exercisable to the extent exercisable or vested at that time, after giving effect to any acceleration approved by the Board or Committee or pursuant to an agreement governing the Award, for a period of time determined by the Committee in its sole discretion, and such Award will terminate upon the expiration of such period. Awards need not be treated similarly in a Corporate Transaction.
21.2. Assumption of Awards by the Company . The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other companys award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged ( except that the Purchase Price or the Exercise Price, as the case may be, and the number and nature of Shares issuable upon exercise or settlement of any such Award will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option in substitution rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. Substitute Awards shall not reduce the number of Shares authorized for grant under the Plan or authorized for grant to a Participant in a calendar year.
21.3. Non-Employee Directors Awards . Notwithstanding any provision to the contrary herein, in the event of a Corporate Transaction, the vesting of all Awards granted to Non-Employee Directors shall accelerate and such Awards shall become exercisable (as applicable) in full prior to the consummation of such event at such times and on such conditions as the Committee determines.
22. ADOPTION AND STOCKHOLDER APPROVAL . This Plan shall be submitted for the approval of the Companys stockholders, consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board.
23. TERM OF PLAN/GOVERNING LAW . Unless earlier terminated as provided herein, this Plan will become effective on the Effective Date and will terminate ten (10) years from the date this Plan is adopted by the Board. This Plan and all Awards granted hereunder shall be governed by and construed in accordance with the laws of the State of Delaware (excluding its conflict of laws rules).
24. AMENDMENT OR TERMINATION OF PLAN . The Board may at any time terminate or amend this Plan in any respect, including, without limitation, amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided , however , that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval; provided further , that a Participants Award shall be governed by the version of this Plan then in effect at the time such Award was granted.
25. NONEXCLUSIVITY OF THE PLAN . Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock awards and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
26. INSIDER TRADING POLICY . Each Participant who receives an Award shall comply with any policy adopted by the Company from time to time covering transactions in the Companys securities by Employees, officers and/or directors of the Company.
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27. ALL AWARDS SUBJECT TO COMPANY CLAWBACK OR RECOUPMENT POLICY . All Awards, subject to applicable law, shall be subject to clawback or recoupment pursuant to any compensation clawback or recoupment policy adopted by the Board or required by law during the term of Participants employment or other service with the Company that is applicable to executive officers, employees, directors or other service providers of the Company, and in addition to any other remedies available under such policy and applicable law, may require the cancellation of outstanding Awards and the recoupment of any gains realized with respect to Awards.
28. DEFINITIONS . As used in this Plan, and except as elsewhere defined herein, the following terms will have the following meanings:
28.1. Affiliate means (i) any entity that, directly or indirectly, is controlled by, controls or is under common control with, the Company and (ii) any entity in which the Company has a significant equity interest, in either case as determined by the Committee, whether now or hereafter existing.
28.2. Award means any award under the Plan, including any Option, Restricted Stock, Stock Bonus, Stock Appreciation Right, Restricted Stock Unit or award of Performance Shares.
28.3. Award Agreement means, with respect to each Award, the written or electronic agreement between the Company and the Participant setting forth the terms and conditions of the Award and country-specific appendix thereto for grants to non-U.S. Participants, which shall be in substantially a form (which need not be the same for each Participant) that the Committee (or in the case of Award agreements that are not used for Insiders, the Committees delegate(s)) has from time to time approved, and will comply with and be subject to the terms and conditions of this Plan.
28.4. Award Transfer Program means any program instituted by the Committee which would permit Participants the opportunity to transfer any outstanding Awards to a financial institution or other person or entity approved by the Committee.
28.5. Board means the Board of Directors of the Company.
28.6. Cause means (i) Participants willful failure substantially to perform his or her duties and responsibilities to the Company or deliberate violation of a Company policy; (ii) Participants commission of any act of fraud, embezzlement, dishonesty or any other willful misconduct that has caused or is reasonably expected to result in material injury to the Company; (iii) unauthorized use or disclosure by Participant of any proprietary information or trade secrets of the Company or any other party to whom the Participant owes an obligation of nondisclosure as a result of his or her relationship with the Company; or (iv) Participants willful breach of any of his or her obligations under any written agreement or covenant with the Company. The determination as to whether a Participant is being terminated for Cause shall be made in good faith by the Company and shall be final and binding on the Participant. The foregoing definition does not in any way limit the Companys ability to terminate a Participants employment or consulting relationship at any time as provided in Section 20 above, and the term Company will be interpreted to include any Subsidiary or Parent, as appropriate. Notwithstanding the foregoing, the foregoing definition of Cause may, in part or in whole, be modified or replaced in each individual employment agreement or Award Agreement with any Participant, provided that such document supersedes the definition provided in this Section 28.6.
28.7. Code means the United States Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.
28.8. Committee means the Compensation Committee of the Board or those persons to whom administration of the Plan, or part of the Plan, has been delegated as permitted by law.
28.9. Common Stock means the common stock of the Company.
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28.10. Company means LendingClub Corporation, or any successor corporation.
28.11. Consultant means any person, including an advisor or independent contractor, engaged by the Company or a Parent, Subsidiary or Affiliate to render services to such entity.
28.12. Corporate Transaction means the occurrence of any of the following events: (i) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Companys then-outstanding voting securities; provided, however, that for purposes of this subclause (i) the acquisition of additional securities by any one Person who is considered to own more than fifty percent (50%) of the total voting power of the securities of the Company will not be considered a Corporate Transaction; (ii) the consummation of the sale, transfer or disposition by the Company of all or substantially all of the Companys assets; (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation; (iv) any other transaction which qualifies as a corporate transaction under Section 424(a) of the Code wherein the stockholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company) or (v) a change in the effective control of the Company that occurs on the date that a majority of members of the Board is replaced during any twelve (12) month period by members of the Board whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For purpose of this subclause (v), if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Corporate Transaction. For purposes of this definition, Persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company. Notwithstanding the foregoing, to the extent that any amount constituting deferred compensation (as defined in Section 409A of the Code) would become payable under this Plan by reason of a Corporate Transaction, such amount shall become payable only if the event constituting a Corporate Transaction would also qualify as a change in ownership or effective control of the Company or a change in the ownership of a substantial portion of the assets of the Company, each as defined within the meaning of Code Section 409A, as it has been and may be amended from time to time, and any proposed or final Treasury Regulations and IRS guidance that has been promulgated or may be promulgated thereunder from time to time.
28.13. Director means a member of the Board.
28.14. Disability means in the case of incentive stock options, total and permanent disability as defined in Section 22(e)(3) of the Code and in the case of other Awards, that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.
28.15. Effective Date means the day immediately prior to the date of the underwritten initial public offering of the Companys Common Stock pursuant to a registration statement that is declared effective by the SEC.
28.16. Employee means any person, including officers and Directors, providing services as an employee to the Company or any Parent, Subsidiary or Affiliate. Neither service as a Director nor payment of a directors fee by the Company will be sufficient to constitute employment by the Company.
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28.17. Exchange Act means the United States Securities Exchange Act of 1934, as amended.
28.18. Exchange Program means a program pursuant to which (i) outstanding Awards are surrendered, cancelled or exchanged for cash, the same type of Award or a different Award (or combination thereof) or (ii) the exercise price of an outstanding Award is increased or reduced.
28.19. Exercise Price means, with respect to an Option, the price at which a holder may purchase the Shares issuable upon exercise of an Option and with respect to a SAR, the price at which the SAR is granted to the holder thereof.
28.20. Fair Market Value means, as of any date, the value of a share of the Companys Common Stock determined as follows:
(a) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal or such other source as the Committee deems reliable;
(b) if such Common Stock is publicly traded but is neither listed nor admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal or such other source as the Committee deems reliable;
(c) in the case of an Option or SAR grant made on the Effective Date, the price per share at which shares of the Companys Common Stock are initially offered for sale to the public by the Companys underwriters in the initial public offering of the Companys Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or
(d) if none of the foregoing is applicable, by the Board or the Committee in good faith.
28.21. Insider means an officer or director of the Company or any other person whose transactions in the Companys Common Stock are subject to Section 16 of the Exchange Act.
28.22. IRS means the United States Internal Revenue Service.
28.23. Non-Employee Director means a Director who is not an Employee of the Company or any Parent or Subsidiary.
28.24. Option means an award of an option to purchase Shares pursuant to Section 5.
28.25. Parent means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
28.26. Participant means a person who holds an Award under this Plan.
28.27. Performance Award means cash or stock granted pursuant to Section 10 or Section 12 of the Plan.
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28.28. Performance Factors means any of the factors selected by the Committee and specified in an Award Agreement, from among the following objective measures, either individually, alternatively or in any combination, applied to the Company as a whole or any business unit or Subsidiary, either individually, alternatively, or in any combination, on a GAAP or non-GAAP basis, and measured, to the extent applicable on an absolute basis or relative to a pre-established target, to determine whether the performance goals established by the Committee with respect to applicable Awards have been satisfied:
(a) Profit Before Tax;
(b) Billings;
(c) Revenue;
(d) Net revenue;
(e) Earnings (which may include earnings before interest and taxes, earnings before taxes, and net earnings, or as otherwise adjusted);
(f) Operating income;
(g) Operating margin;
(h) Operating profit;
(i) Controllable operating profit, or net operating profit;
(j) Net Profit;
(k) Gross margin;
(l) Operating expenses or operating expenses as a percentage of revenue;
(m) Net income;
(n) Earnings per share;
(o) Total stockholder return;
(p) Market share;
(q) Return on assets or net assets;
(r) The Companys stock price;
(s) Growth in stockholder value relative to a pre-determined index;
(t) Return on equity;
(u) Return on invested capital;
(v) Cash Flow (including free cash flow or operating cash flows)
(w) Cash conversion cycle;
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(x) Economic value added;
(y) Individual confidential business objectives;
(z) Contract awards or backlog;
(aa) Overhead or other expense reduction;
(bb) Credit rating;
(cc) Strategic plan development and implementation;
(dd) Succession plan development and implementation;
(ee) Improvement in workforce diversity;
(ff) Customer indicators;
(gg) New product invention or innovation;
(hh) Attainment of research and development milestones;
(ii) Improvements in productivity;
(jj) Bookings;
(kk) Attainment of objective operating goals and employee metrics; and
(ll) Any other metric that is capable of measurement as determined by the Committee.
The Committee may, in recognition of unusual or non-recurring items such as acquisition-related activities or changes in applicable accounting rules, provide for one or more equitable adjustments (based on objective standards) to the Performance Factors to preserve the Committees original intent regarding the Performance Factors at the time of the initial award grant. It is within the sole discretion of the Committee to make or not make any such equitable adjustments.
28.29. Performance Period means the period of service determined by the Committee, not to exceed five (5) years, during which years of service or performance is to be measured for the Award.
28.30. Performance Share means an Award granted pursuant to Section 10 or Section 12 of the Plan.
28.31. Permitted Transferee means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law (including adoptive relationships) of the Employee, any person sharing the Employees household (other than a tenant or employee), a trust in which these persons (or the Employee) have more than 50% of the beneficial interest, a foundation in which these persons (or the Employee) control the management of assets, and any other entity in which these persons (or the Employee) own more than 50% of the voting interests.
28.32. Person shall have the meaning as such term is used in Sections 13(d) and 14(d) of the Exchange Act.
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28.33. Plan means this LendingClub Corporation 2014 Equity Incentive Plan.
28.34. Purchase Price means the price to be paid for Shares acquired under the Plan, other than Shares acquired upon exercise of an Option or SAR.
28.35. Restricted Stock Award means an award of Shares pursuant to Section 6 or Section 12 of the Plan, or issued pursuant to the early exercise of an Option.
28.36. Restricted Stock Unit means an Award granted pursuant to Section 9 or Section 12 of the Plan.
28.37. SEC means the United States Securities and Exchange Commission.
28.38. Securities Act means the United States Securities Act of 1933, as amended.
28.39. Service shall mean service as an Employee, Consultant, Director or Non-Employee Director, to the Company or a Parent, Subsidiary or Affiliate of the Company, subject to such further limitations as may be set forth in the Plan or the applicable Award Agreement. An Employee will not be deemed to have ceased to provide Service in the case of (i) medical leave, (ii) military leave, or (iii) any other leave of absence approved by the Company. In the case of any Employee on an approved leave of absence or a reduction in hours worked (for illustrative purposes only, a change in schedule from that of full-time to part-time), the Company may make such provisions respecting suspension of or modification of vesting of the Award while on leave from the employ of the Company or a Parent, Subsidiary or Affiliate or during such change in working hours as it may deem appropriate, pursuant to formal policy adopted from time to time by the Company, except that in no event may an Award be exercised after the expiration of the term set forth in the applicable Award Agreement. In the event of military leave, if required by applicable laws, vesting shall continue for the longest period that vesting continues under any other statutory or Company approved leave of absence and, upon a Participants returning from military leave (under conditions that would entitle him or her to protection upon such return under the Uniform Services Employment and Reemployment Rights Act), he or she shall be given vesting credit with respect to Awards to the same extent as would have applied had the Participant continued to provide services to the Company throughout the leave on the same terms as he or she was providing services immediately prior to such leave. Except as set forth in this Section 28.39, an employee shall have terminated employment as of the date he or she ceases to provide services (regardless of whether the termination is in breach of local employment laws or is later found to be invalid) and employment shall not be extended by any notice period or garden leave mandated by local law, provided however , that a change in status from an employee to a consultant or advisor shall not terminate the service providers Service, unless determined by the Committee, in its discretion. The Committee will have sole discretion to determine whether a Participant has ceased to provide Services and the effective date on which the Participant ceased to provide Services.
28.40. Shares means shares of the Common Stock and the common stock of any successor security.
28.41. Stock Appreciation Right means an Award granted pursuant to Section 8 or Section 12 of the Plan.
28.42. Stock Bonus means an Award granted pursuant to Section 7 or Section 12 of the Plan.
28.43. Subsidiary means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
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28.44. Treasury Regulations means regulations promulgated by the United States Treasury Department.
28.45. Unvested Shares means Shares that have not yet vested or are subject to a right of repurchase in favor of the Company (or any successor thereto).
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N OTICE OF S TOCK O PTION G RANT
LENDINGCLUB CORPORATION 2014 EQUITY INCENTIVE PLAN
Unless otherwise defined herein, the terms defined in the LendingClub Corporation (the Company ) 2014 Equity Incentive Plan (the Plan ) shall have the same meanings in this Notice of Stock Option Grant (the Notice of Grant ) and the attached Stock Option Agreement (the Option Agreement ). You, the Optionee, have been granted an Option to purchase shares of Common Stock of the Company under the Plan subject to the terms and conditions of the Plan, this Notice of Grant and the attached Option Agreement.
By accepting this Option, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan, the Notice of Grant and the Option Agreement. By accepting this Option, you consent to electronic delivery as set forth in the Option Agreement.
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S TOCK O PTION A GREEMENT
LENDINGCLUB CORPORATION 2014
EQUITY INCENTIVE PLAN
You have been granted an Option by LendingClub Corporation (the Company ) under the 2014 Equity Incentive Plan (the Plan ) to purchase Shares (the Option ), subject to the terms, restrictions and conditions of the Plan, the Notice of Stock Option Grant (the Notice of Grant ) and this Stock Option Agreement (the Agreement ).
1. Grant of Option . You have been granted an Option for the number of Shares set forth in the Notice of Grant at the exercise price per Share set forth in the Notice of Grant (the exercise price ). In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ( ISO ), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an ISO, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonqualified Stock Option ( NSO ).
2. Termination Period .
(a) General Rule . If your Service terminates for any reason except death or Disability, and other than for Cause, then this Option will expire at the close of business at Company headquarters on the date three months after your termination of Service (subject to the expiration detailed in Section 6). If your Service is terminated for Cause, this Option will expire upon the date of such termination. The Company determines when your Service terminates for all purposes under this Agreement.
(b) Death; Disability . If you die before your Service terminates (or you die within three months of your termination of Service other than for Cause), then this Option will expire at the close of business at Company headquarters on the date 12 months after the date of death (subject to the expiration detailed in Section 6). If your Service terminates because of your Disability, then this Option will expire at the close of business at Company headquarters on the date 12 months after your termination date (subject to the expiration detailed in Section 6).
(c) No Notice . You are responsible for keeping track of these exercise periods following your termination of Service for any reason. The Company will not provide further notice of such periods. In no event shall this Option be exercised later than the Expiration Date set forth in the Notice of Grant.
3. Exercise of Option .
(a) Right to Exercise . This Option is exercisable during its term in accordance with the Vesting Schedule set forth in the Notice of Grant and the applicable provisions of the Plan and this Agreement. In the event of your death, Disability, or other cessation of Service, the exercisability of the Option is governed by the applicable provisions of the Plan, the Notice of Grant and this Agreement. This Option may not be exercised for a fraction of a Share.
(b) Method of Exercise . This Option is exercisable by delivery of an exercise notice in a form specified by the Company (the Exercise Notice ), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the
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Exercised Shares ), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be delivered in person, by mail, via electronic mail or facsimile or by other authorized method to the Secretary of the Company or other person designated by the Company. The Exercise Notice shall be accompanied by payment of the aggregate exercise price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of a fully executed Exercise Notice accompanied by the aggregate exercise price and any applicable tax withholding due upon exercise of the Option.
(c) Exercise by Another . If another person wants to exercise this Option after it has been transferred to him or her in compliance with this Agreement, that person must prove to the Companys satisfaction that he or she is entitled to exercise this Option. That person must also complete the proper Exercise Notice form (as described above) and pay the exercise price (as described below) and any applicable tax withholding due upon exercise of the Option (as described below).
4. Method of Payment . Payment of the aggregate exercise price shall be by any of the following, or a combination thereof, at your election:
(a) your personal check, wire transfer, or a cashiers check;
(b) certificates for shares of Company stock that you own, along with any forms needed to effect a transfer of those shares to the Company; the value of the shares, determined as of the effective date of the Option exercise, will be applied to the Option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the Option shares issued to you. However, you may not surrender, or attest to the ownership of, shares of Company stock in payment of the exercise price of your Option if your action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to this Option for financial reporting purposes;
(c) cashless exercise through irrevocable directions to a securities broker approved by the Company to sell all or part of the Shares covered by this Option and to deliver to the Company from the sale proceeds an amount sufficient to pay the Option exercise price and any withholding taxes. The balance of the sale proceeds, if any, will be delivered to you. The directions must be given by signing a special notice of exercise form provided by the Company; or
(d) other method authorized by the Company.
5. Non-Transferability of Option . In general, except as provided below, only you may exercise this Option prior to your death. You may not transfer or assign this Option, except as provided below. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option in your will or in a beneficiary designation. However, if this Option is designated as a NSO in the Notice of Grant, then the Committee (as defined in the Plan) may, in its sole discretion, allow you to transfer this Option as a gift to one or more family members. For purposes of this Agreement, family member means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in- law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law (including adoptive relationships), any individual sharing your household (other than a tenant or employee), a trust in which one or more of these individuals have more than 50% of the beneficial interest, a foundation in which you or one or more of these persons control the management of assets, and any entity in which you or one or more
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of these persons own more than 50% of the voting interest. In addition, if this Option is designated as a NSO in the Notice of Grant, then the Committee may, in its sole discretion, allow you to transfer this Option to your spouse or former spouse pursuant to a domestic relations order in settlement of marital property rights. The Committee will allow you to transfer this Option only if both you and the transferee(s) execute the forms prescribed by the Committee, which include the consent of the transferee(s) to be bound by this Agreement. This Option may not be transferred in any manner other than by will or by the laws of descent or distribution or court order and may be exercised during the lifetime of you only by you, your guardian, or legal representative, as permitted in the Plan. The terms of the Plan and this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of you.
6. Term of Option . This Option shall in any event expire on the expiration date set forth in the Notice of Grant, which date is 10 years after the grant date (five years after the grant date if this Option is designated as an ISO in the Notice of Grant and Section 5.3 of the Plan applies).
7. Tax Consequences . You should consult a tax adviser for tax consequences relating to this Option in the jurisdiction in which you are subject to tax. YOU SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option . You will not be allowed to exercise this Option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the Option exercise.
(b) Notice of Disqualifying Disposition of ISO Shares . If you sell or otherwise dispose of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, you shall immediately notify the Company in writing of such disposition. You agree that you may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current compensation paid to you.
8. Withholding Taxes and Stock Withholding . Regardless of any action the Company or your actual employer (the Employer ) takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding ( Tax-Related Items ), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is and remains your responsibility and that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option grant, including the grant, vesting or exercise of the Option, the subsequent sale of Shares acquired pursuant to such exercise and the receipt of any dividends; and (2) do not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate your liability for Tax-Related Items. You acknowledge that if you are subject to Tax-Related Items in more than one jurisdiction, the Company and/or the Employer may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
Prior to exercise of the Option, you shall pay or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all withholding and payment on account obligations of the Company and/or the Employer. In this regard, you authorize the Company and/or the Employer to withhold all applicable Tax-Related Items legally payable by you from your wages or other cash compensation paid to you by the Company and/or the Employer. With the Companys consent, these arrangements may also include, if permissible under local law, (a) withholding Shares that otherwise would be issued to you when you exercise this Option, provided that the Company only withholds the amount of Shares necessary to satisfy the minimum statutory withholding amount, (b) having the
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Company withhold taxes from the proceeds of the sale of the Shares, either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf and you hereby authorize such sales by this authorization), (c) your payment of a cash amount, or (d) any other arrangement approved by the Company; all under such rules as may be established by the Committee and in compliance with the Companys Insider Trading Policy and 10b5-1 Trading Plan Policy, if applicable; provided however, that if you are a Section 16 officer of the Company under the Exchange Act, then the Committee (as constituted in accordance with Rule 16b-3 under the Exchange Act) shall establish the method of withholding from alternatives (a)-(d) above, and the Committee shall establish the method prior to the Tax-Related Items withholding event. The Fair Market Value of these Shares, determined as of the effective date of the Option exercise, will be applied as a credit against the withholding taxes. You shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of your participation in the Plan or your purchase of Shares that cannot be satisfied by the means previously described. Finally, you acknowledge that the Company has no obligation to deliver Shares to you until you have satisfied the obligations in connection with the Tax-Related Items as described in this Section.
9. Acknowledgement . The Company and you agree that the Option is granted under and governed by the Notice of Grant, this Agreement and the provisions of the Plan (incorporated herein by reference). You: (i) acknowledge receipt of a copy of the Plan and the Plan prospectus, (ii) represent that you have carefully read and are familiar with their provisions, and (iii) hereby accept the Option subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice of Grant. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice of Grant and the Agreement.
10. Consent to Electronic Delivery of All Plan Documents and Disclosures . By your acceptance of this Option, you consent to the electronic delivery of the Notice of Grant, this Agreement, the Plan, account statements, Plan prospectuses required by the Securities and Exchange Commission, U.S. financial reports of the Company, and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements) or other communications or information related to the Option. Electronic delivery may include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or such other delivery determined at the Companys discretion. You acknowledge that you may receive from the Company a paper copy of any documents delivered electronically at no cost if you contact the Company by telephone, through a postal service or electronic mail at . You further acknowledge that you will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, you understand that you must provide on request to the Company or any designated third party a paper copy of any documents delivered electronically if electronic delivery fails. Also, you understand that your consent may be revoked or changed, including any change in the electronic mail address to which documents are delivered (if you have provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at . Finally, you understand that you are not required to consent to electronic delivery.
11. Compliance with Laws and Regulations . The exercise of this Option will be subject to and conditioned upon compliance by the Company and you with all applicable state, federal and foreign laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Companys Common Stock may be listed or quoted at the time of such issuance or transfer. The Shares issued pursuant to this Agreement shall be endorsed with appropriate legends, if any, determined by the Company.
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12. Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of this Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. For purposes of litigating any dispute that may arise directly or indirectly from the Plan, the Notice of Grant and this Agreement, the parties hereby submit and consent to litigation in the exclusive jurisdiction of the State of California and agree that any such litigation shall be conducted only in the courts of California in Santa Clara County or the federal courts of the United States for the Northern District of California and no other courts.
13. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent, Subsidiary or Affiliate of the Company, to terminate your Service, for any reason, with or without Cause.
14. Adjustment . In the event of a stock split, a stock dividend or a similar change in Company stock, the number of Shares covered by this Option and the exercise price per Share may be adjusted pursuant to the Plan.
15. Lock-Up Agreement . In connection with the initial public offering of the Companys securities and upon request of the Company or the underwriters managing any underwritten offering of the Companys securities, you hereby agree not to sell, make any short sale of, loan, grant any Option for the purchase of, or otherwise dispose of any securities of the Company however and whenever acquired (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the public offering; provided however that, if during the last seventeen (17) days of the restricted period the Company issues an earnings release or material news or a material event relating to the Company occurs, or prior to the expiration of the restricted period the Company announces that it will release earnings results during the sixteen (16)-day period beginning on the last day of the restricted period, then, upon the request of the managing underwriter, to the extent required by any FINRA rules, the restrictions imposed by this Section shall continue to apply until the end of the third trading day following the expiration of the fifteen (15)-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. In no event will the restricted period extend beyond two hundred sixteen (216) days after the effective date of the registration statement.
16. Award Subject to Company Clawback or Recoupment . To the extent permitted by applicable law, the Option shall be subject to clawback or recoupment pursuant to any compensation clawback or recoupment policy adopted by the Board or required by law during the term of your employment or other Service that is applicable to you. In addition to any other remedies available under such policy, applicable law may require the cancellation of your Option (whether vested or unvested) and the recoupment of any gains realized with respect to your Option.
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17. Entire Agreement; Enforcement of Rights. This Agreement, the Plan and the Notice of Grant constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning this Option are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.
BY ACCEPTING THIS OPTION, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.
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N OTICE OF R ESTRICTED S TOCK U NIT A WARD
LENDINGCLUB CORPORATION
2014 EQUITY INCENTIVE PLAN
Unless otherwise defined herein, the terms defined in the LendingClub Corporation (the Company ) 2014 Equity Incentive Plan (the Plan ) shall have the same meanings in this Notice of Restricted Stock Unit Award (the Notice ) and the attached Restricted Stock Unit Agreement (the RSU Agreement ). You have been granted an award of Restricted Stock Units ( RSUs ) under the Plan subject to the terms and conditions of the Plan, this Notice and the attached RSU Agreement.
You acknowledge that the vesting of the RSUs pursuant to this Notice is earned only by continuing Service. By accepting this award, you and the Company agree that this award is granted under and governed by the terms and conditions of the Plan, the Notice and the RSU Agreement. By accepting this RSU, you consent to electronic delivery as set forth in the RSU Agreement.
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RESTRICTED STOCK UNIT AGREEMENT
LENDINGCLUB CORPORATION
2014 EQUITY INCENTIVE PLAN
You have been granted Restricted Stock Units ( RSUs ) by LendingClub Corporation (the Company ) subject to the terms, restrictions and conditions of the Plan, the Notice of Restricted Stock Unit Award (the Notice ) and this Restricted Stock Unit Agreement (this RSU Agreement ).
1. Settlement . Settlement of RSUs shall be made in the same calendar year as the applicable date of vesting under the vesting schedule set forth in the Notice; provided, however, that if the vesting date under the vesting schedule set forth in the Notice is in December, then settlement of any RSUs that vest in December shall be within 30 days of vesting. Settlement of RSUs shall be in Shares. Settlement means the delivery of the Shares vested under an RSU. No fractional RSUs or rights for fractional Shares shall be created pursuant to this RSU Agreement.
2. No Stockholder Rights . Unless and until such time as Shares are issued in settlement of vested RSUs, you shall have no ownership of the Shares allocated to the RSUs and shall have no right to dividends or to vote such Shares.
3. Dividend Equivalents . Dividends, if any (whether in cash or Shares), shall not be credited to you.
4. No Transfer . RSUs may not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of in any manner other than by will or by the laws of descent or distribution or court order or unless otherwise permitted by the Committee on a case-by-case basis.
5. Termination . If your Service terminates for any reason, all unvested RSUs shall be forfeited to the Company forthwith, and all rights you have to such RSUs shall immediately terminate. In case of any dispute as to whether your termination of Service has occurred, the Committee shall have sole discretion to determine whether such termination has occurred and the effective date of such termination.
6. Tax Consequences . You acknowledge that you will recognize tax consequences in connection with the RSUs. You should consult a tax adviser regarding your tax obligations in the jurisdiction where you are subject to tax
7. Withholding Taxes and Stock Withholding . Regardless of any action the Company or your actual employer (the Employer ) takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding ( Tax-Related Items ), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is and remains your responsibility and that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the award, including the grant, vesting or settlement of the RSUs, the subsequent sale of Shares acquired pursuant to such settlement and the receipt of any dividends; and (ii) do not commit to structure the terms of the award or any aspect of the RSUs to reduce or eliminate your liability for Tax-Related Items. You acknowledge that if you are subject to Tax-Related Items in more than one jurisdiction, the Company and/or the Employer may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
Prior to the settlement of your RSUs, you shall pay or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all withholding and payment on account obligations of the Company and/or the Employer. In this regard, you authorize the Company and/or the Employer to withhold all applicable Tax-Related Items legally payable by you from your wages or other cash
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compensation paid to you by the Company and/or the Employer. With the Companys consent, these arrangements may also include, if permissible under local law, (a) withholding Shares that otherwise would be issued to you when your RSUs are settled, provided that the Company only withholds the amount of Shares necessary to satisfy the minimum statutory withholding amount, (b) having the Company withhold taxes from the proceeds of the sale of the Shares, either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf and you hereby authorize such sales by this authorization), (c) your payment of a cash amount, or (d) any other arrangement approved by the Company; all under such rules as may be established by the Committee and in compliance with the Companys Insider Trading Policy and 10b5-1 Trading Plan Policy, if applicable; provided however, that if you are a Section 16 officer of the Company under the Exchange Act, then the Committee (as constituted in accordance with Rule 16b-3 under the Exchange Act) shall establish the method of withholding from alternatives (a)-(d) above, and the Committee shall establish the method prior to the Tax-Related Items withholding event. The Fair Market Value of these Shares, determined as of the effective date when taxes otherwise would have been withheld in cash, will be applied as a credit against the withholding taxes. You shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of your participation in the Plan or your purchase of Shares that cannot be satisfied by the means previously described. Finally, you acknowledge that the Company has no obligation to deliver Shares to you until you have satisfied the obligations in connection with the Tax-Related Items as described in this Section.
8. Acknowledgement . The Company and you agree that the RSUs are granted under and governed by the Notice, this RSU Agreement and the provisions of the Plan (incorporated herein by reference). You: (i) acknowledge receipt of a copy of the Plan and the Plan prospectus, (ii) represent that you have carefully read and are familiar with their provisions, and (iii) hereby accept the RSUs subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice and this RSU Agreement.
9. Entire Agreement; Enforcement of Rights . This RSU Agreement, the Plan and the Notice constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this RSU Agreement, nor any waiver of any rights under this RSU Agreement, shall be effective unless in writing and signed by the parties to this RSU Agreement. The failure by either party to enforce any rights under this RSU Agreement shall not be construed as a waiver of any rights of such party.
10. Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and you with all applicable state, federal and foreign laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Companys Common Stock may be listed or quoted at the time of such issuance or transfer. The Shares issued pursuant to this RSU Agreement shall be endorsed with appropriate legends, if any, determined by the Company.
11. Governing Law; Severability . If one or more provisions of this RSU Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this RSU Agreement, (ii) the balance of this RSU Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this RSU Agreement shall be enforceable in accordance with its terms. This RSU Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. For purposes of litigating any dispute that may arise directly or indirectly from the Plan, the Notice and this RSU Agreement, the parties hereby submit and consent to litigation in
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the exclusive jurisdiction of the State of California and agree that any such litigation shall be conducted only in the courts of California in Santa Clara County or the federal courts of the United States for the Northern District of California and no other courts.
11. No Rights as Employee, Director or Consultant . Nothing in this RSU Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent, Subsidiary or Affiliate of the Company, to terminate your Service, for any reason, with or without Cause.
12. Consent to Electronic Delivery of All Plan Documents and Disclosures . By your acceptance of this RSU, you consent to the electronic delivery of the Notice, this RSU Agreement, the Plan, account statements, Plan prospectuses required by the Securities and Exchange Commission, U.S. financial reports of the Company, and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements) or other communications or information related to the RSU. Electronic delivery may include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or such other delivery determined at the Companys discretion. You acknowledge that you may receive from the Company a paper copy of any documents delivered electronically at no cost if you contact the Company by telephone, through a postal service or electronic mail at . You further acknowledge that you will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, you understand that you must provide on request to the Company or any designated third party a paper copy of any documents delivered electronically if electronic delivery fails. Also, you understand that your consent may be revoked or changed, including any change in the electronic mail address to which documents are delivered (if you have provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at . Finally, you understand that you are not required to consent to electronic delivery.
13. Code Section 409A . For purposes of this RSU Agreement, a termination of employment will be determined consistent with the rules relating to a separation from service as defined in Section 409A of the Internal Revenue Code and the regulations thereunder ( Section 409A ). Notwithstanding anything else provided herein, to the extent any payments provided under this RSU Agreement in connection with your termination of employment constitute deferred compensation subject to Section 409A, and you are deemed at the time of such termination of employment to be a specified employee under Section 409A, then such payment shall not be made or commence until the earlier of (i) the expiration of the six-month period measured from your separation from service or (ii) the date of your death following such a separation from service; provided, however, that such deferral shall only be effected to the extent required to avoid adverse tax treatment to you including, without limitation, the additional tax for which you would otherwise be liable under Section 409A(a)(1)(B) in the absence of such a deferral. To the extent any payment under this RSU Agreement may be classified as a short-term deferral within the meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from Section 409A under another provision of Section 409A. Payments pursuant to this section are intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.
14. Award Subject to Company Clawback or Recoupment . To the extent permitted by applicable law, the RSUs shall be subject to clawback or recoupment pursuant to any compensation clawback or recoupment policy adopted by the Board or required by law during the term of your employment or other Service that is applicable to you. In addition to any other remedies available under such policy, applicable law may require the cancellation of your RSUs (whether vested or unvested) and the recoupment of any gains realized with respect to your RSUs.
BY ACCEPTING THIS RSU, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.
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N OTICE OF S TOCK A PPRECIATION R IGHT A WARD
LENDINGCLUB CORPORATION
2014 EQUITY INCENTIVE PLAN
Unless otherwise defined herein, the terms defined in the LendingClub Corporation (the Company ) 2014 Equity Incentive Plan (the Plan ) shall have the same meanings in this Notice of Stock Appreciation Right Award (the Notice of Grant ) and the attached Stock Appreciation Right Agreement (the SAR Agreement ). You have been granted an award of Stock Appreciation Rights (the SAR ) of the Company under the Plan subject to the terms, restrictions and conditions of the Plan, this Notice of Grant and the SAR Agreement.
You acknowledge that the vesting of the SAR pursuant to this Notice of Grant is earned only by continuing Service. By accepting the SAR, you and the Company agree that the SAR is granted under and governed by the terms and conditions of the Plan, the Notice of Grant and the SAR Agreement. By accepting the SAR, you consent to electronic delivery as set forth in the SAR Agreement.
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S TOCK A PPRECIATION R IGHT A WARD A GREEMENT
LENDINGCLUB CORPORATION
2014 EQUITY INCENTIVE PLAN
You have been granted an award of Stock Appreciation Rights (the SAR ) by LendingClub Corporation (the Company ) under the 2014 Equity Incentive Plan (the Plan ), subject to the terms and conditions of the Plan, the Notice of Stock Appreciation Right Award (the Notice of Grant ) and this Stock Appreciation Right Agreement (the Agreement ).
1. Grant of SAR . You have been granted a SAR for the number of Shares set forth in the Notice of Grant at the fair market value set forth in the Notice of Grant. In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail.
2. Termination Period .
(a) General Rule . If your Service terminates for any reason except death or Disability, and other than for Cause, then this SAR will expire at the close of business at Company headquarters on the date three months after your termination of Service (subject to the expiration detailed in Section 6). In no event shall this SAR be exercised later than the Expiration Date set forth in the Notice of Grant. If your Service is terminated for Cause, this SAR will expire upon the date of such termination. The Company determines when your Service terminates for all purposes under this Agreement.
(b) Death; Disability . If you die before your Service terminates (or you die within three months of your termination of Service other than for Cause), then this SAR will expire at the close of business at Company headquarters on the date 12 months after the date of death (subject to the expiration detailed in Section 6). If your Service terminates because of your Disability, then this SAR will expire at the close of business at Company headquarters on the date 12 months after your termination date (subject to the expiration detailed in Section 6).
(c) No Notice . You are responsible for keeping track of these exercise periods following your termination of Service for any reason. The Company will not provide further notice of such periods. In no event shall this SAR be exercised later than the Expiration Date set forth in the Notice of Grant.
3. Vesting Rights . Subject to the applicable provisions of the Plan and this Agreement, this SAR may be exercised, in whole or in part, in accordance with the schedule set forth in the Notice of Grant.
4. Exercise of SAR .
(a) Right to Exercise . This SAR is exercisable during its term in accordance with the Vesting Schedule set forth in the Notice of Grant and the applicable provisions of the Plan and this Agreement. In the event of your death, Disability, or other cessation of Service, the exercisability of the SAR is governed by the applicable provisions of the Plan, the Notice of Grant and this Agreement. This SAR may not be exercised for a fraction of a Share.
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(b) Method of Exercise . This SAR is exercisable by delivery of an exercise notice in a form specified by the Company (the Exercise Notice ), which shall state the election to exercise the SAR, the number of Shares in respect of which the SAR is being exercised, and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be delivered in person, by mail, via electronic mail or facsimile or by other authorized method to the Secretary of the Company or other person designated by the Company. This SAR shall be deemed to be exercised upon receipt by the Company of a fully executed Exercise Notice and any applicable tax withholding due upon exercise of the SAR.
(c) No Shares shall be issued pursuant to the exercise of this SAR unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to you on the date the SAR is exercised with respect to such Exercised Shares.
5. Non-Transferability of SAR . This SAR may not be transferred in any manner other than by will or by the laws of descent or distribution or court order and may be exercised during your lifetime only by you unless otherwise permitted by the Committee on a case-by-case basis. The terms of the Plan and this Agreement shall be binding upon your executors, administrators, heirs, successors and assign.
6. Term of SAR . This SAR shall in any event expire on the expiration date set forth in the Notice of Grant, which date is not more than 10 years after the Date of Grant.
7. Tax Consequences . You should consult a tax adviser for tax consequences relating to this SAR in the jurisdiction in which you are subject to tax. YOU SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS SAR OR DISPOSING OF THE SHARES. If you are an Employee or a former Employee, the Company may be required to withhold from your compensation an amount equal to the minimum amount the Company is required to withhold for income and employment taxes or collect from you and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise.
8. Withholding Taxes and Stock Withholding . Regardless of any action the Company or your actual employer (the Employer ) takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding ( Tax-Related Items ), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is and remains your responsibility and that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the SAR, including the grant, vesting or exercise of the SAR, the subsequent sale of Shares acquired pursuant to such exercise and the receipt of any dividends; and (2) do not commit to structure the terms of the grant or any aspect of the SAR to reduce or eliminate your liability for Tax-Related Items. You acknowledge that if you are subject to Tax-Related Items in more than one jurisdiction, the Company and/or the Employer may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
Prior to exercise of the SAR, you shall pay or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all withholding and payment on account obligations of
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the Company and/or the Employer. In this regard, you authorize the Company and/or the Employer to withhold all applicable Tax-Related Items legally payable by you from your wages or other cash compensation paid to you by the Company and/or the Employer. With the Companys consent, these arrangements may also include, if permissible under local law, (a) withholding Shares that otherwise would be issued to you when you exercise this SAR, provided that the Company only withholds the amount of Shares necessary to satisfy the minimum statutory withholding amount, (b) having the Company withhold taxes from the proceeds of the sale of the Shares, either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf and you hereby authorize such sales by this authorization), (c) your payment of a cash amount, or (d) any other arrangement approved by the Company; all under such rules as may be established by the Committee and in compliance with the Companys Insider Trading Policy and 10b5-1 Trading Plan Policy, if applicable; provided however, that if you are a Section 16 officer of the Company under the Exchange Act, then the Committee (as constituted in accordance with Rule 16b-3 under the Exchange Act) shall establish the method of withholding from alternatives (a)-(d) above, and the Committee shall establish the method prior to the Tax-Related Items withholding event. The Fair Market Value of these Shares, determined as of the effective date of the SAR exercise, will be applied as a credit against the withholding taxes. You shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of your participation in the Plan or your purchase of Shares that cannot be satisfied by the means previously described. Finally, you acknowledge that the Company has no obligation to honor the exercise or deliver Shares to you until you have satisfied the obligations in connection with the Tax-Related Items as described in this Section.
9. Acknowledgement . The Company and you agree that the SAR is granted under and governed by the Notice of Grant, this Agreement and the provisions of the Plan (incorporated herein by reference). You: (i) acknowledge receipt of a copy of the Plan and the Plan prospectus, (ii) represent that you have carefully read and are familiar with their provisions, and (iii) hereby accept the SAR subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice of Grant. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice of Grant and the SAR Agreement.
10. Entire Agreement; Enforcement of Rights . This Agreement, the Plan and the Notice of Grant constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.
11. Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and you with all applicable state, federal and foreign laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Companys Common Stock may be listed or quoted at the time of such issuance or transfer. The Shares issued pursuant to this Agreement shall be endorsed with appropriate legends, if any, determined by the Company.
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12. Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of this Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. For purposes of litigating any dispute that may arise directly or indirectly from the Plan, the Notice of Grant and this Agreement, the parties hereby submit and consent to litigation in the exclusive jurisdiction of the State of California and agree that any such litigation shall be conducted only in the courts of California in Santa Clara County or the federal courts of the United States for the Northern District of California and no other courts.
13. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent, Subsidiary or Affiliate of the Company, to terminate your Service, for any reason, with or without Cause.
14. Consent to Electronic Delivery of All Plan Documents and Disclosures . By your acceptance of this SAR, you consent to the electronic delivery of the Notice of Grant, this Agreement, the Plan, account statements, Plan prospectuses required by the Securities and Exchange Commission, U.S. financial reports of the Company, and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements) or other communications or information related to the SAR. Electronic delivery may include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or such other delivery determined at the Companys discretion. You acknowledge that you may receive from the Company a paper copy of any documents delivered electronically at no cost if you contact the Company by telephone, through a postal service or electronic mail at . You further acknowledge that you will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, you understand that you must provide on request to the Company or any designated third party a paper copy of any documents delivered electronically if electronic delivery fails. Also, you understand that your consent may be revoked or changed, including any change in the electronic mail address to which documents are delivered (if you have provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at . Finally, you understand that you are not required to consent to electronic delivery.
15. Award Subject to Company Clawback or Recoupment . To the extent permitted by applicable law, the SAR shall be subject to clawback or recoupment pursuant to any compensation clawback or recoupment policy adopted by the Board or required by law during the term of your employment or other Service that is applicable to you. In addition to any other remedies available under such policy, applicable law may require the cancellation of your SAR (whether vested or unvested) and the recoupment of any gains realized with respect to your SAR.
BY ACCEPTING THIS SAR, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.
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NOTICE OF STOCK BONUS AWARD
LENDINGCLUB CORPORATION
2014 EQUITY INCENTIVE PLAN
Unless otherwise defined herein, the terms defined in the LendingClub Corporation (the Company ) 2014 Equity Incentive Plan (the Plan ) shall have the same meanings in this Notice of Stock Bonus Award (the Notice ) and the attached Stock Bonus Award Agreement (the Stock Bonus Agreement ). You have been granted an award of Shares under the Plan (the Stock Bonus Award ) subject to the terms and conditions of the Plan, this Notice and the attached Stock Bonus Agreement.
You acknowledge that the vesting of the Shares pursuant to this Notice is earned only by continuing Service. By accepting this Stock Bonus Award, you and the Company agree that this Stock Bonus Award is granted under and governed by the terms and conditions of the Plan, the Notice and the Stock Bonus Agreement. By accepting this Stock Bonus Award, you consent to electronic delivery as set forth in the Stock Bonus Agreement.
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STOCK BONUS AWARD AGREEMENT
LENDINGCLUB CORPORATION
2014 EQUITY INCENTIVE PLAN
You have been granted a Stock Bonus Award ( Stock Bonus Award ) by LendingClub Corporation (the Company ), subject to the terms, restrictions and conditions of the Plan, the Notice of Stock Bonus Award (the Notice ) and this Stock Bonus Award Agreement (this Agreement ).
1. Issuance . Your Stock Bonus Award shall be issued in Shares, and the Companys transfer agent shall record ownership of such Shares in your name as soon as reasonably practicable.
2. No Stockholder Rights . Unless and until you are recorded as the holder of such Shares on the stock records of the Company and its transfer agent, you shall have no right to dividends or to vote Shares.
3. No-Transfer . Unvested Shares subject to your Stock Bonus Award shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of by you or any person whose interest derives from your interest. Unvested Shares are Shares that have not yet vested pursuant to the terms of the vesting schedule set forth in the Notice.
4. Termination . If your Service terminates for any reason, all Unvested Shares shall immediately be forfeited to the Company, and all rights you have to such Unvested Shares shall immediately terminate. In case of any dispute as to whether a termination of Service has occurred, the Committee shall have sole discretion to determine whether such termination has occurred and the effective date of such termination.
5. Tax Consequences . YOU SHOULD CONSULT A TAX ADVISER BEFORE ACQUIRING THE SHARES IN THE JURISDICTION IN WHICH YOU ARE SUBJECT TO TAX. Shares shall not be issued under this Agreement unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the acquisition or vesting of Shares.
6. Withholding Taxes and Stock Withholding . Regardless of any action the Company or your actual employer (the Employer ) takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding ( Tax-Related Items ), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is and remains your responsibility and that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the award, including the award or vesting of such Shares, the subsequent sale of Shares under this award and the receipt of any dividends; and (2) do not commit to structure the terms of the award to reduce or eliminate your liability for Tax-Related Items. You acknowledge that if you are subject to Tax-Related Items in more than one jurisdiction, the Company and/or the Employer may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
The Company will only recognize you as a record holder of Shares if you have paid or made adequate arrangements satisfactory to the Company and/or the Employer to satisfy all
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withholding and payment on account obligations of the Company and/or the Employer. In this regard, you authorize the Company and/or the Employer to withhold all applicable Tax-Related Items legally payable by you from your wages or other cash compensation paid to you by the Company and/or the Employer. With the Companys consent, these arrangements may also include, if permissible under local law, (a) withholding Shares that otherwise would be released when they vest, provided that the Company only withholds the amount of Shares necessary to satisfy the minimum statutory withholding amount, (b) having the Company withhold taxes from the proceeds of the sale of the Shares, either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf and you hereby authorize such sales by this authorization), (c) your payment of a cash amount, or (d) any other arrangement approved by the Company; all under such rules as may be established by the Committee and in compliance with the Companys Insider Trading Policy and 10b5-1 Trading Plan Policy, if applicable; provided however, that if you are a Section 16 officer of the Company under the Exchange Act, then the Committee (as constituted in accordance with Rule 16b-3 under the Exchange Act) shall establish the method of withholding from alternatives (a)-(d) above, and the Committee shall establish the method prior to the Tax-Related Items withholding event. The Fair Market Value of these Shares, determined as of the effective date when taxes otherwise would have been withheld in cash, will be applied as a credit against the withholding taxes. You shall pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of your participation in the Plan or your purchase of Shares that cannot be satisfied by the means previously described. Finally, you acknowledge that the Company has no obligation to deliver Shares to you until you have satisfied the obligations in connection with the Tax-Related Items as described in this Section.
7. Acknowledgement . The Company and you agree that the Stock Bonus Award is granted under and governed by the Notice, this Agreement and the provisions of the Plan (incorporated herein by reference). You: (i) acknowledge receipt of a copy of the Plan and the Plan prospectus, (ii) represent that you have carefully read and are familiar with their provisions, and (iii) hereby accept the Stock Bonus Award subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice and the Stock Bonus Award.
8. Entire Agreement; Enforcement of Rights . This Agreement, the Plan and the Notice constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.
9. Compliance with Laws and Regulations . The issuance of Shares will be subject to and conditioned upon compliance by the Company and you with all applicable state, federal and foreign laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Companys Common Stock may be listed or quoted at the time of such issuance or transfer. The Shares issued pursuant to this Agreement shall be endorsed with appropriate legends, if any, determined by the Company.
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10. Governing Law; Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of this Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this Agreement shall be enforceable in accordance with its terms. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. For purposes of litigating any dispute that may arise directly or indirectly from the Plan, the Notice and this Agreement, the parties hereby submit and consent to litigation in the exclusive jurisdiction of the State of California and agree that any such litigation shall be conducted only in the courts of California in Santa Clara County or the federal courts of the United States for the Northern District of California and no other courts.
10. No Rights as Employee, Director or Consultant . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent, Subsidiary or Affiliate of the Company, to terminate your Service, for any reason, with or without Cause.
11. Consent to Electronic Delivery of All Plan Documents and Disclosures . By acceptance of this Stock Bonus Award, you consent to the electronic delivery of the Notice, this Agreement, the Plan, account statements, Plan prospectuses required by the Securities and Exchange Commission, U.S. financial reports of the Company, and all other documents that the Company is required to deliver to its security holders (including, without limitation, annual reports and proxy statements) or other communications or information related to the Stock Bonus Award. Electronic delivery may include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or such other delivery determined at the Companys discretion. You acknowledge that you may receive from the Company a paper copy of any documents delivered electronically at no cost if you contact the Company by telephone, through a postal service or electronic mail at . You further acknowledge that you will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, you understand that you must provide on request to the Company or any designated third party a paper copy of any documents delivered electronically if electronic delivery fails. Also, you understand that your consent may be revoked or changed, including any change in the electronic mail address to which documents are delivered (if you have provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at . Finally, you understand that you are not required to consent to electronic delivery.
12. Award Subject to Company Clawback or Recoupment . To the extent permitted by applicable law, the Stock Bonus Award shall be subject to clawback or recoupment pursuant to any compensation clawback or recoupment policy adopted by the Board or required by law during the term of your employment or other Service with the Company that is applicable to you. In addition to any other remedies available under such policy, applicable law may require the cancellation of your Stock Bonus Award (whether vested or unvested) and the recoupment of any gains realized with respect to your Stock Bonus Award.
BY ACCEPTING THE STOCK BONUS AWARD, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.
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Exhibit 10.7
LENDINGCLUB CORPORATION
2014 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE. LendingClub Corporation adopted the Plan effective as of the date of the IPO. The purpose of this Plan is to provide eligible employees of the Company and the Participating Corporations with a means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees sense of participation in the affairs of the Company. Capitalized terms not defined elsewhere in the text are defined in Section 28.
2. ESTABLISHMENT OF PLAN. The Company proposes to grant rights to purchase shares of Common Stock to eligible employees of the Company and its Participating Corporations pursuant to this Plan. The Company intends this Plan to qualify as an employee stock purchase plan under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. In addition, with regard to offers of options to purchase shares of the Common Stock under the Plan to employees working for a Subsidiary or an Affiliate outside the United States, this Plan authorizes the grant of options that are not intended to meet Section 423 requirements, provided, if necessary under Section 423 of the Code, the other terms and conditions of the Plan are met.
Subject to Section 14, a total of 3,000,000 Shares are reserved for issuance under this Plan. In addition, on each January 1 of each of the calendar years 2015 through 2024, the aggregate number of shares of Common Stock reserved for issuance under the Plan shall be increased automatically by the number of shares equal to one percent (1%) of the total number of outstanding shares of Common Stock and Common Stock equivalents outstanding on the immediately preceding December 31 (rounded down to the nearest whole share); provided, that the Board or the Committee may in its sole discretion reduce the amount of the increase in any particular year. Subject to Section 14, no more than Fifty-Six million (56,000,000) shares of Common Stock may be issued over the term of this Plan. The number of shares initially reserved for issuance under this Plan and the maximum number of shares that may be issued under this Plan shall be subject to adjustments effected in accordance with Section 14.
3. ADMINISTRATION. The Plan will be administered by the Committee. Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee and its decisions shall be final and binding upon all Participants. The Committee will have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility, to designate the Participating Corporations, to determine when to grant options that are not intended to meet the Code Section 423 requirements and to decide upon any and all claims filed under the Plan. Every finding, decision and determination made by the Committee will, to the full extent permitted by law, be final and binding upon all parties. Notwithstanding any provision to the contrary in this Plan, the Committee may adopt rules, sub-plans, and/or procedures relating to the operation and administration of the Plan designed to comply with local laws, regulations or customs or to achieve tax, securities law or other objectives for eligible employees outside of the United States. The Committee will have the authority to determine the Fair Market Value of the Common Stock (which determination shall be final, binding and conclusive for all purposes) in accordance with Section 8 below and to interpret Section 8 of the Plan in connection with circumstances that impact the Fair Market Value. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company. For purposes of this Plan, the Committee may designate separate offerings under the Plan (the terms of which need not be identical) in which eligible employees of one or more Participating Corporations will participate, even if the dates of the applicable Offering Periods of each such offering are identical.
4. ELIGIBILITY.
(a) Any employee of the Company or the Participating Corporations is eligible to participate in an Offering Period under this Plan, except that one or more of the following categories of employees may be excluded from coverage under the Plan by the Committee (other than where prohibited by applicable law):
(i) employees who are customarily employed for twenty (20) hours or less per week;
(ii) employees who are customarily employed for five (5) months or less in a calendar year; and
(iii) employees who do not meet any other eligibility requirements that the Committee may choose to impose (within the limits permitted by the Code).
The foregoing notwithstanding, an individual shall not be eligible if his or her participation in the Plan is prohibited by the law of any country that has jurisdiction over him or her, if complying with the laws of the applicable country would cause the Plan to violate Section 423 of the Code, or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan.
(b) No employee who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, owns stock or holds options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or its Parent or Subsidiary or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or its Parent or Subsidiary shall be granted an option to purchase Common Stock under the Plan.
5. OFFERING DATES.
(a) Each Offering Period of this Plan may be of up to twenty-seven (27) months duration and shall commence and end at the times designated by the Committee. Each Offering Period may consist of one or more Purchase Periods during which payroll deductions of Participants are accumulated under this Plan.
(b) The initial Offering Period shall commence on the Effective Date and shall end with the Purchase Date that occurs on May 10, 2015 or another date selected by the Committee which is six (6) months or more after the commencement of the initial Offering Period, but no more than twenty-seven (27) months after the commencement of the initial Offering period. The initial Offering Period shall consist of one Purchase Period. Thereafter, a six (6) month Offering Period shall commence on each May 11 and November 11, with each such Offering Period also consisting of one six-month Purchase Period, except as otherwise provided by an applicable subplan, or on such other date determined by the Committee. The Committee may at any time establish a different duration for an Offering Period or Purchase Period to be effective after the next scheduled Purchase Date.
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6. PARTICIPATION IN THIS PLAN.
(a) Any employee who is an eligible employee determined in accordance with Section 4 immediately prior to an Offering Period will be eligible to participate in this Plan, subject to the requirement of Section 6(b) hereof and the other terms and provisions of this Plan.
(b) With respect to each Offering Period, a Participant may elect to participate in this Plan by submitting an enrollment agreement prior to the commencement of the Offering Period (or such earlier date as the Committee may determine) to which such agreement relates.
(c) Once an employee becomes a Participant in an Offering Period, then such Participant will automatically participate in each subsequent Offering Period commencing immediately following the last day of the prior Offering Period unless the Participant withdraws or is deemed to withdraw from this Plan or terminates further participation in an Offering Period as set forth in Section 11 below. A Participant who is continuing participation pursuant to the preceding sentence is not required to file any additional enrollment agreement in order to continue participation in this Plan; a Participant who is not continuing participation pursuant to the preceding sentence is required to file an enrollment agreement prior to the commencement of the Offering Period (or such earlier date as the Committee may determine) to which such agreement relates.
7. GRANT OF OPTION ON ENROLLMENT. Becoming a Participant with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such Participant of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by a fraction, the numerator of which is the amount accumulated in such Participants payroll deduction account during such Purchase Period and the denominator of which is the lower of (i) eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the Offering Date (but in no event less than the par value of a share of the Common Stock), or (ii) eighty-five percent (85%) of the Fair Market Value of a share of the Common Stock on the Purchase Date, provided, however , that the number of shares of Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 10(b) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 10(a) below with respect to the applicable Purchase Date.
8. PURCHASE PRICE. The Purchase Price per share at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:
(a) The Fair Market Value on the Offering Date; or
(b) The Fair Market Value on the Purchase Date.
9. PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTION CHANGES; SHARE ISSUANCES.
(a) The Purchase Price shall be accumulated by regular payroll deductions made during each Offering Period, unless the Committee determines with respect to categories of Participants outside the United States that contributions may be made in another form due to local legal requirements. The deductions are made as a percentage of the Participants compensation in one percent (1%) increments not less than one percent (1%), nor greater than fifteen percent (15%) or such lower limit set by the Committee. Compensation shall mean base salary (or in foreign jurisdictions, equivalent cash compensation); however, the Committee may at any time prior to the beginning of an Offering Period determine that for that and future Offering Periods, Compensation shall mean solely base salary or all W-2 cash compensation, including without limitation base salary or regular hourly wages, bonuses, incentive compensation, commissions, overtime, shift premiums, plus draws against commissions (or in foreign
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jurisdictions, equivalent cash compensation). For purposes of determining a Participants Compensation, any election by such Participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code (or in foreign jurisdictions, equivalent salary deductions) shall be treated as if the Participant did not make such election. Payroll deductions shall commence on the first payday following the last Purchase Date (with respect to the initial Offering Period, as soon as practicable following the effective date of filing with the U.S. Securities and Exchange Commission a securities registration statement for the Plan) and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan. Notwithstanding the foregoing, the terms of any sub-plan may permit matching shares without the payment of any purchase price.
(b) A Participant may decrease the rate of payroll deductions during an Offering Period by filing with the Company a new authorization for payroll deductions, with the new rate to become effective no later than the second payroll period commencing after the Companys receipt of the authorization and continuing for the remainder of the Offering Period unless changed as described below. A decrease in the rate of payroll deductions may be made once during a Purchase Period or more frequently under rules determined by the Committee. A Participant may increase or decrease the rate of payroll deductions for any subsequent Purchase Period by filing with the Company a new authorization for payroll deductions prior to the beginning of such Purchase Period, or such other time period as specified by the Committee.
(c) A Participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Company a request for cessation of payroll deductions. Such reduction shall be effective beginning no later than the second payroll period after the Companys receipt of the request and no further payroll deductions will be made for the duration of the Offering Period. Payroll deductions credited to the Participants account prior to the effective date of the request shall be used to purchase shares of Common Stock in accordance with Subsection (e) below. A reduction of the payroll deduction percentage to zero shall be treated as such Participants withdrawal from such Offering Period and the Plan, effective as of the day after the next Purchase Date following the filing date of such request with the Company.
(d) All payroll deductions made for a Participant are credited to his or her account under this Plan and are deposited with the general funds of the Company, except to the extent local legal restrictions outside the United States require segregation of such payroll deductions. No interest accrues on the payroll deductions, except to the extent required due to local legal requirements. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions, except to the extent necessary to comply with local legal requirements outside the United States.
(e) On each Purchase Date, so long as this Plan remains in effect and provided that the Participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the Participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the Participant as of that date returned to the Participant, the Company shall apply the funds then in the Participants account to the purchase of whole shares of Common Stock reserved under the option granted to such Participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The Purchase Price per share shall be as specified in Section 8 of this Plan. Any fractional share, as calculated under this Subsection (e), shall be rounded down to the next lower whole share, unless the Committee determines with respect to all Participants that any fractional share shall be credited as a fractional share. Any amount remaining in a Participants account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock shall be returned to the Participant, without interest (except to the extent necessary to comply with local legal requirements outside the United States). In the event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the Participant, without interest (except to the extent required due to local legal
4
requirements outside the United States). No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date, except to the extent required due to local legal requirements outside the United States.
(f) As promptly as practicable after the Purchase Date, the Company shall issue shares for the Participants benefit representing the shares purchased upon exercise of his or her option.
(g) During a Participants lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The Participant will have no interest or voting right in shares covered by his or her option until such option has been exercised.
(h) To the extent required by applicable federal, state, local or foreign law, a Participant shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company or any Subsidiary or Affiliate, as applicable, may withhold, by any method permissible under the applicable law, the amount necessary for the Company or Subsidiary or Affiliate, as applicable, to meet applicable withholding obligations, including any withholding required to make available to the Company or Subsidiary or Affiliate, as applicable, any tax deductions or benefits attributable to the sale or early disposition of shares of Common Stock by a Participant. The Company shall not be required to issue any shares of Common Stock under the Plan until such obligations are satisfied.
10. LIMITATIONS ON SHARES TO BE PURCHASED.
(a) Any other provision of the Plan notwithstanding, no Participant shall purchase Common Stock with a Fair Market Value in excess of the following limit:
(i) In the case of Common Stock purchased during an Offering Period that commenced in the current calendar year, the limit shall be equal to (A) $25,000 minus (B) the Fair Market Value of the Common Stock that the Participant previously purchased in the current calendar year (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company).
(ii) In the case of Common Stock purchased during an Offering Period that commenced in the immediately preceding calendar year, the limit shall be equal to (A) $50,000 minus (B) the Fair Market Value of the Common Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the immediately preceding calendar year.
(iii) In the case of Common Stock purchased during an Offering Period that commenced two calendar years prior, the limit shall be equal to (A) $75,000 minus (B) the Fair Market Value of the Common Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the two immediately preceding calendar years.
For purposes of this Subsection (a), the Fair Market Value of Common Stock shall be determined in each case as of the beginning of the Offering Period in which such Common Stock is purchased. Employee stock purchase plans not described in Section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (a) from purchasing additional Common Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall automatically resume at the beginning of the earliest Purchase Period that will end in the next calendar year (if he or she then is an eligible employee), provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.
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(b) In no event shall a Participant be permitted to purchase more than 2,500 shares on any one Purchase Date or such lesser number as the Committee shall determine. If a lower limit is set under this Subsection (b), then all Participants will be notified of such limit prior to the commencement of the next Offering Period for which it is to be effective.
(c) If the number of shares to be purchased on a Purchase Date by all Participants exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable. In such event, the Company will give notice of such reduction of the number of shares to be purchased under a Participants option to each Participant affected.
(d) Any payroll deductions accumulated in a Participants account which are not used to purchase stock due to the limitations in this Section 10, and not covered by Section 9(e), shall be returned to the Participant as soon as practicable after the end of the applicable Purchase Period, without interest (except to the extent required due to local legal requirements outside the United States).
11. WITHDRAWAL.
(a) Each Participant may withdraw from an Offering Period under this Plan pursuant to a method specified for such purpose by the Company. Such withdrawal may be elected at any time prior to the end of an Offering Period, or such other time period as specified by the Committee.
(b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn Participant, without interest (except to the extent required due to local legal requirements outside the United States), and his or her interest in this Plan shall terminate. In the event a Participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 6 above for initial participation in this Plan.
12. TERMINATION OF EMPLOYMENT. Termination of a Participants employment for any reason, including retirement, death, disability, or the failure of a Participant to remain an eligible employee of the Company or of a Participating Corporation, immediately terminates his or her participation in this Plan. In such event, accumulated payroll deductions credited to the Participants account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest (except to the extent required due to local legal requirements outside the United States). For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Corporation in the case of sick leave, military leave, or any other leave of absence approved by the Company; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute. The Company will have sole discretion to determine whether a Participant has terminated employment and the effective date on which the Participant terminated employment, regardless of any notice period or garden leave required under local law.
13. RETURN OF PAYROLL DEDUCTIONS. In the event a Participants interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to the Participant all accumulated payroll deductions credited to such Participants account. No interest shall accrue on the payroll deductions of a Participant in this Plan (except to the extent required due to local legal requirements outside the United States).
14. CAPITAL CHANGES. If the number of outstanding shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or
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similar change in the capital structure of the Company, without consideration, then the Committee shall adjust the number and class of Common Stock that may be delivered under the Plan, the Purchase Price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised, and the numerical limits of Sections 2 and 10 shall be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and in compliance with the applicable securities laws; provided that fractions of a share will not be issued.
15. NONASSIGNABILITY. Neither payroll deductions credited to a Participants account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 below) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.
16. USE OF PARTICIPANT FUNDS AND REPORTS. The Company may use all payroll deductions received or held by it under the Plan for any corporate purpose, and the Company will not be required to segregate Participant payroll deductions (except to the extent required due to local legal requirements outside the United States). Until shares are issued, a Participant will only have the rights of an unsecured creditor unless otherwise required under local law. Each Participant shall receive promptly after the end of each Purchase Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be.
17. NOTICE OF DISPOSITION. Each U.S. taxpayer Participant shall notify the Company in writing if the Participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within the Notice Period. The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Companys transfer agent to notify the Company of any transfer of the shares. The obligation of the Participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.
18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Corporation, or restrict the right of the Company or any Participating Corporation to terminate such employees employment.
19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees granted an option under this Plan that is intended to meet the Code Section 423 requirements shall have equal rights and privileges with respect to this Plan or within any separate offering under the Plan so that this Plan qualifies as an employee stock purchase plan within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code, without further act or amendment by the Company, the Committee or the Board, shall be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in this Plan.
20. NOTICES. All notices or other communications by a Participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.
21. TERM; STOCKHOLDER APPROVAL. This Plan will become effective on the Effective Date. This Plan shall be approved by the stockholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. No purchase of shares that are subject to such stockholder approval before
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becoming available under this Plan shall occur prior to stockholder approval of such shares and the Board or Committee may delay any Purchase Date and postpone the commencement of any Offering Period subsequent to such Purchase Date as deemed necessary or desirable to obtain such approval (provided that if a Purchase Date would occur more than twenty-four (24) months after commencement of the Offering Period to which it relates, then such Purchase Date shall not occur and instead such Offering Period shall terminate without the purchase of such shares and Participants in such Offering Period shall be refunded their contributions without interest). This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time pursuant to Section 25 below), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) the tenth anniversary of the Effective Date under the Plan.
22. DESIGNATION OF BENEFICIARY.
(a) Unless otherwise determined by the Committee, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participants account under this Plan in the event of such Participants death prior to a Purchase Date. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participants death.
(b) Such designation of beneficiary may be changed by the Participant at any time by written notice filed with the Company at the prescribed location before the Participants death. In the event of the death of a Participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such Participants death, the Company shall deliver such cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such cash to the spouse or, if no spouse is known to the Company, then to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, exchange control restrictions and/or securities law restrictions outside the United States, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Shares may be held in trust or subject to further restrictions as permitted by any subplan.
24. APPLICABLE LAW. The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of Delaware.
25. AMENDMENT OR TERMINATION. The Committee, in its sole discretion, may amend, suspend, or terminate the Plan, or any part thereof, at any time and for any reason. If the Plan is terminated, the Committee, in its discretion, may elect to terminate all outstanding Offering Periods either immediately or upon completion of the purchase of shares of Common Stock on the next Purchase Date (which may be sooner than originally scheduled, if determined by the Committee in its discretion), or may elect to permit Offering Periods to expire in accordance with their terms (and subject to any adjustment pursuant to Section 14). If an Offering Period is terminated prior to its previously-scheduled expiration, all amounts then credited to Participants accounts for such Offering Period, which have not been used to purchase shares of Common Stock, shall be returned to those Participants (without interest thereon, except as otherwise required under local laws) as soon as administratively practicable. Further, the Committee will be entitled to change the Purchase Periods and Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio
8
applicable to amounts withheld or contributed in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the administration of the Plan, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participants base salary and other eligible compensation, and establish such other limitations or procedures as the Committee determines in its sole discretion advisable which are consistent with the Plan. Such actions will not require stockholder approval or the consent of any Participants. However, no amendment shall be made without approval of the stockholders of the Company (obtained in accordance with Section 21 above) within twelve (12) months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would: (a) increase the number of shares that may be issued under this Plan; or (b) change the designation of the employees (or class of employees) eligible for participation in this Plan. In addition, in the event the Board or Committee determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board or Committee may, in its discretion and, to the extent necessary or desirable, modify, amend or terminate the Plan to reduce or eliminate such accounting consequences including, but not limited to: (i) amending the definition of compensation, including with respect to an Offering Period underway at the time; (ii) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (iii) shortening any Offering Period by setting a Purchase Date, including an Offering Period underway at the time of the Committees action; (iv) reducing the maximum percentage of compensation a participant may elect to set aside as payroll deductions; and (v) reducing the maximum number of shares a Participant may purchase during any Offering Period. Such modifications or amendments will not require approval of the stockholders of the Company or the consent of any Participants.
26. CORPORATE TRANSACTIONS. In the event of a Corporate Transaction, the Offering Period for each outstanding right to purchase Common Stock will be shortened by setting a new Purchase Date and will end on the new Purchase Date. The new Purchase Date shall occur on or prior to the consummation of the Corporate Transaction, as determined by the Board or Committee, and the Plan shall terminate on the consummation of the Corporate Transaction.
27. CODE SECTION 409A; TAX QUALIFICATION.
(a) Options granted under the Plan generally are exempt from the application of Section 409A of the Code. However, options granted to U.S. taxpayers which are not intended to meet the Code Section 423 requirements are intended to be exempt from the application of Section 409A of the Code under the short-term deferral exception and any ambiguities shall be construed and interpreted in accordance with such intent. Subject to Subsection (b), options granted to U.S. taxpayers outside of the Code Section 423 requirements shall be subject to such terms and conditions that will permit such options to satisfy the requirements of the short-term deferral exception available under Section 409A of the Code, including the requirement that the shares of Common Stock subject to an option be delivered within the short-term deferral period. Subject to Subsection (b), in the case of a Participant who would otherwise be subject to Section 409A of the Code, to the extent the Committee determines that an option or the exercise, payment, settlement or deferral thereof is subject to Section 409A of the Code, the option shall be granted, exercised, paid, settled or deferred in a manner that will comply with Section 409A of the Code, including Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding the foregoing, the Company shall have no liability to a Participant or any other party if the option that is intended to be exempt from or compliant with Section 409A of the Code is not so exempt or compliant or for any action taken by the Committee with respect thereto.
(b) Although the Company may endeavor to (i) qualify an option for favorable tax treatment under the laws of the United States or jurisdictions outside of the United States or (ii) avoid adverse tax treatment ( e.g. , under Section 409A of the Code), the Company makes no representation to
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that effect and expressly disavows any covenant to maintain favorable or avoid unfavorable tax treatment, notwithstanding anything to the contrary in this Plan, including Subsection (a). The Company shall be unconstrained in its corporate activities without regard to the potential negative tax impact on Participants under the Plan.
28. DEFINITIONS.
(a) Affiliate means (i) any entity that, directly or indirectly, is controlled by, controls or is under common control with, the Company and (ii) any entity in which the Company has a significant equity interest, in either case as determined by the Committee, whether now or hereafter existing.
(b) Board shall mean the Board of Directors of the Company.
(c) Code shall mean the Internal Revenue Code of 1986, as amended.
(d) Committee shall mean the Compensation Committee of the Board that consists exclusively of one or more members of the Board appointed by the Board.
(e) Common Stock shall mean the common stock of the Company.
(f) Company shall mean LendingClub Corporation.
(g) Corporate Transaction means the occurrence of any of the following events: (i) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Companys then outstanding voting securities; or (ii) the consummation of the sale or disposition by the Company of all or substantially all of the Companys assets; or (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.
(h) Effective Date shall mean the date on which the Registration Statement related to the initial public offering of the shares of Common Stock is declared effective by the U.S. Securities and Exchange Commission.
(i) Fair Market Value shall mean, as of any date, the value of a share of Common Stock determined as follows:
(1) if such Common Stock is then quoted on the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market (collectively, the Nasdaq Market ), its closing price on the Nasdaq Market on the date of determination, or if there are no sales for such date, then the last preceding business day on which there were sales, as reported in The Wall Street Journal or such other source as the Board or the Committee deems reliable; or
(2) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal or such other source as the Board or the Committee deems reliable; or
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(3) if such Common Stock is publicly traded but is neither quoted on the Nasdaq Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal or such other source as the Board or the Committee deems reliable; or
(4) with respect to the initial Offering Period, Fair Market Value on the Offering Date shall be the price at which shares of Common Stock are offered to the public pursuant to the Registration Statement covering the initial public offering of shares of Common Stock; and
(5) if none of the foregoing is applicable, by the Board or the Committee in good faith.
(j) IPO shall mean the initial public offering of Common Stock.
(k) Notice Period shall mean within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased.
(l) Offering Date shall mean the first business day of each Offering Period. However, for the initial Offering Period the Offering Date shall be the Effective Date.
(m) Offering Period shall mean a period with respect to which the right to purchase Common Stock may be granted under the Plan, as determined by the Committee pursuant to Section 5(a).
(n) Parent shall have the same meaning as parent corporation in Sections 424(e) and 424(f) of the Code.
(o) Participant shall mean an eligible employee who meets the eligibility requirements set forth in Section 4 and who is either automatically enrolled in the initial Offering Period or who elects to participate in this Plan pursuant to Section 6(b).
(p) Participating Corporation shall mean any Parent, Subsidiary or Affiliate that the Committee designates from time to time as eligible to participate in this Plan, provided, however, that employees of Affiliates that are designated for participation may be granted only options that do not intend to comply with the Code Section 423 requirements.
(q) Plan shall mean this LendingClub Corporation 2014 Employee Stock Purchase Plan.
(r) Purchase Date shall mean the last business day of each Purchase Period.
(s) Purchase Period shall mean a period during which contributions may be made toward the purchase of Common Stock under the Plan, as determined by the Committee pursuant to Section 5(b).
(t) Purchase Price shall mean the price at which Participants may purchase shares of Common Stock under the Plan, as determined pursuant to Section 8.
(u) Subsidiary shall have the same meaning as subsidiary corporation in Sections 424(e) and 424(f) of the Code.
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L ENDING C LUB C ORPORATION
2014 E MPLOYEE S TOCK P URCHASE P LAN
B ENEFICIARY D ESIGNATION
Name: |
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If I die, any unused cash accumulated on my behalf under the LendingClub Corporation 2014 Employee Stock Purchase Plan (the Plan ) are to be transferred to those beneficiaries designated below who survive me, subject to the provisions of the Plan. The transfer is to be made as follows [ check one box only ]:
¨ | Entirely to the spouse to whom I am currently married. [ Please provide name and address below .] If my spouse does not survive me, payment is to be made to [ check one box only ]: |
¨ | All of my children who survive me in equal shares. [ Please provide names and addresses below .] |
¨ | All of the persons named below who survive me in equal shares. |
¨ | To all of my children who survive me in equal shares. [ Please provide names and addresses below .] |
¨ | To all of my siblings who survive me in equal shares. [ Please provide names and addresses below .] |
¨ | Entirely to the first person named below who survives me. |
¨ | To all of the persons named below who survive me in equal shares. |
¨ | Other [ please use a separate sheet if necessary ]: |
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|
|
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The term children means natural or legally adopted children but excludes stepchildren (if not adopted). The term siblings means brothers and sisters, whether natural or adoptive, but excludes stepbrothers and stepsisters.
The names and addresses of my beneficiaries are as follows [ please use a separate sheet if necessary ].
This beneficiary designation is to take effect on the date when it is received by the person responsible for administering the Plan at LendingClub Corporation, and it supersedes any prior designations that I may have made under the Plan.
, |
|
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(Date) |
(Signature) |
Please file this form with LendingClub Corporation
Received by:
Date of receipt: , 201
2
L ENDING C LUB C ORPORATION ( THE C OMPANY ) 2014 E MPLOYEE S TOCK P URCHASE P LAN (ESPP) |
U.S. F ORM - IPO E NROLLMENT F ORM |
S ECTION 1:
A CTIONS |
C HECK D ESIRED A CTION :
¨ Enroll in the ESPP |
AND C OMPLETE S ECTIONS :
2 + 3 + 4 + 6 |
||
S ECTION 2:
P ERSONAL D ATA |
Name:
Home Address:
Employee ID No.: ¨ ¨ ¨ ¨ ¨ ¨ ¨ ¨ ¨ |
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S ECTION 3:
E NROLL |
¨ I hereby elect to participate in the ESPP, effective at the beginning of the first Offering Period. I elect to purchase shares of the Common Stock of the Company pursuant to the ESPP. I understand that the stock certificate(s) for the shares purchased on my behalf will be issued in street name and deposited directly into my brokerage account. I hereby agree to take all steps, and sign all forms, required to establish an account with the Companys broker for this purpose.
My participation will continue as long as I remain eligible, unless I withdraw from the ESPP by filing a new Enrollment/Change Form with the Company. I understand that I must notify the Company of any disposition of shares purchased under the ESPP. |
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S ECTION 4:
E LECT C ONTRIBUTION P ERCENTAGE |
I hereby authorize the Company to withhold from each of my paychecks such amount as is necessary to equal at the end of the applicable Offering Period % of my base salary paid during such Offering Period as long as I continue to participate in the ESPP. That amount will be applied to the purchase of shares of the Common Stock pursuant to the ESPP. In addition, my contributions may not exceed $7,500. The percentage must be a whole number (from 1%, up to a maximum of 15%).
Note: You may decrease your contribution percentage to a percentage other than 0% only once within an Offering Period to be effective during that Offering Period. A change will become effective as soon as reasonably practicable after the form is received by the Company. You may not increase your contribution at any time within an Offering Period . An increase in your contribution percentage can only take effect with the next Offering Period . |
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S ECTION 5:
E LECTRONIC D ELIVERY AND A CCEPTANCE |
The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the ESPP by electronic means. I hereby consent to receive such documents by electronic delivery and agree to participate in the ESPP through an on-line or electronic system established and maintained by the Company or a third party designated by the Company. | |||
S ECTION 6:
A CKNOWLEDGMENT AND S IGNATURE |
I acknowledge that I have received a copy of the ESPP Prospectus (which summarizes the major features of the ESPP). I have read the Prospectus and my signature below (or my clicking on the Accept box if this is an electronic form) indicates that I hereby agree to be bound by the terms of the ESPP. | |||
Signature: Date: |
1
L ENDING C LUB C ORPORATION ( THE C OMPANY ) 2014 E MPLOYEE S TOCK P URCHASE P LAN (ESPP) |
U.S. F ORM E NROLLMENT /C HANGE F ORM |
S ECTION 1:
A CTIONS |
C HECK D ESIRED A CTION :
¨ Enroll in the ESPP
¨ Elect / Change Contribution Percentage
¨ Discontinue Contributions |
AND C OMPLETE S ECTIONS :
2 + 3 + 4 + 7
2 + 4 + 7
2 + 5 + 7 |
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S ECTION 2:
P ERSONAL D ATA |
Name:
Home Address:
Employee ID No.: ¨ ¨ ¨ ¨ ¨ ¨ ¨ ¨ ¨ |
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S ECTION 3:
E NROLL |
¨ I hereby elect to participate in the ESPP, effective at the beginning of the next Offering Period. I elect to purchase shares of the Common Stock of the Company pursuant to the ESPP. I understand that the stock certificate(s) for the shares purchased on my behalf will be issued in street name and deposited directly into my brokerage account. I hereby agree to take all steps, and sign all forms, required to establish an account with the Companys broker for this purpose.
My participation will continue as long as I remain eligible, unless I withdraw from the ESPP by filing a new Enrollment/Change Form with the Company. I understand that I must notify the Company of any disposition of shares purchased under the ESPP. |
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S ECTION 4:
E LECT /C HANGE C ONTRIBUTION P ERCENTAGE |
I hereby authorize the Company to withhold from each of my paychecks such amount as is necessary to equal at the end of the applicable Offering Period % of my base salary paid during such Offering Period as long as I continue to participate in the ESPP. That amount, plus any accumulated payroll deductions thus far during the current Offering Period if this is a change, will be applied to the purchase of shares of the Common Stock pursuant to the ESPP. In addition, my contributions may not exceed $7,500. The percentage must be a whole number (from 1%, up to a maximum of 15%).
If this is a change to my current enrollment, this represents an ¨ -increase ¨ -decrease to my contribution percentage.
Note: You may decrease your contribution percentage to a percentage other than 0% only once within an Offering Period to be effective during that Offering Period. A change will become effective as soon as reasonably practicable after the form is received by the Company. You may not increase your contribution at any time within an Offering Period . An increase in your contribution percentage can only take effect with the next Offering Period . |
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S ECTION 5:
D ISCONTINUE C ONTRIBUTIONS |
¨ I hereby elect to stop my contributions under the ESPP , effective as soon as reasonably practicable after this form is received by the Company. Please ¨ -refund all contributions to me in cash, without interest OR ¨ - use my contributions to purchase shares on the next Purchase Date. I understand that I cannot resume participation until the start of the next Offering Period and must timely file a new enrollment form to do so. |
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S ECTION 6:
E LECTRONIC D ELIVERY AND A CCEPTANCE |
The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the ESPP by electronic means. I hereby consent to receive such documents by electronic delivery and agree to participate in the ESPP through an on-line or electronic system established and maintained by the Company or a third party designated by the Company. |
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Exhibit 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the Agreement ) is entered into as of , 2014, by and between Lending Club Corporation (the Company ) and Renaud Laplanche (the Executive ).
WHEREAS, the Company and Executive desire to enter into this Agreement in order to set forth the terms of Executives employment with the Company during the period beginning on the date hereof and ending as provided herein.
NOW, THEREFORE, in consideration of the promises and mutual agreements set forth herein, and other consideration, the receipt of which is hereby acknowledged, Executive and the Company hereby agree as follows:
ARTICLE 1
EMPLOYMENT AND DUTIES
1.1 Employment. The Company agrees to employ Executive, and Executive hereby accepts employment with the Company, to serve as the Companys Chief Executive Officer, upon the terms and subject to the conditions set forth in this Agreement. The period during which Executive is employed by the Company is referred to herein as the Employment Period . The effective date on which the Executives Employment Period ends for any reason or no reason is referred to herein as the Termination Date .
1.2 At-Will Employment . The Company and the Executive understand and agree that the Executive is employed at-will, and either the Executive or the Company can terminate their employment relationship at any time, for any reason or no reason, with or without cause, and with or without notice.
1.3 Position and Duties .
1.3.1 During the Employment Period, Executive shall serve as the Companys Chief Executive Officer and shall have the duties, responsibilities, and authority customary for such a position in an organization of the size and nature of the Company, subject to the Companys Board of Directors or its designee (collectively, the Board ) ability to expand, change or limit such duties, responsibilities, and authority in their sole discretion.
1.3.2 Executive shall report directly to the Board, and Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and its subsidiaries, whether currently existing or hereafter acquired or formed and including any predecessor of any such entity (collectively, the LC Companies ). Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike, and efficient manner.
ARTICLE 2
COMPENSATION AND BENEFITS
2.1 Base Salary. During the Employment Period, Executives base salary shall be an amount set by the Board, or an appropriate committee of the Board (the Base Salary ), which Base Salary shall be payable in regular installments in accordance with the Companys general payroll practices.
2.2 Bonus . After each fiscal year during the Employment Period, Executive shall be eligible to receive a cash bonus for such fiscal year (a Bonus ), based on a target percent of Executives then-current Base Salary ( Target Bonus ). Whether a Bonus for any fiscal year is paid and, if so, the amount of the Bonus, shall be determined by the Board, in its sole discretion, based on criteria established by the Board in its sole discretion, including, if the Board so determines, the achievement of budgetary and other Company- or Executive-specific performance objectives set by the Board for such fiscal year. Except as otherwise expressly provided in Article 3 , to be entitled to receive payment of any Bonus, Executive must be employed by the Company on the date such Bonus is distributed to receive such Bonus.
2.3 Benefits . During the Employment Period, Executive shall continue to be entitled to participate in the Companys standard employee benefit programs for which executives of the Company are generally eligible, including, insurance and health benefits and the Companys 401(k) plan (collectively, Benefits ). Executive recognizes that the Company reserves the right to change its benefits from time to time and the Companys right to make such changes shall not be restricted by this Agreement.
2.4 Vacation . Executive will not accrue vacation during the Employment Period.
2.5 Reimbursement for Business Expenses. During the Employment Period, the Company shall reimburse Executive for all reasonable, necessary, and documented expenses incurred by Executive in performing Executives duties for the Company, on the same basis as similarly situated employees generally and in accordance with the Companys policies as in effect from time to time.
2.6 Withholding. The Company may withhold from any compensation, benefits, or amounts payable under this Agreement all federal, state, city, or other taxes as may be required or permitted pursuant to any law or governmental regulation or ruling.
ARTICLE 3
EARLY TERMINATION OF EMPLOYMENT PERIOD
3.1 General. The rights of Executive upon termination will be governed by this Article 3.
3.2 Definitions. For purposes of this Article 3, the words and phrases below have the following definitions:
3.2.1 Cause. For purposes of this Agreement, Cause shall mean: (i) Executives conviction, whether following trial or by plea of guilty or nolo contendere (or similar plea), in a criminal proceeding (a) on a charge of any crime involving fraud, embezzlement, bribery, forgery, counterfeiting, extortion, dishonesty, or moral turpitude; or (b) on any felony or misdemeanor charge; (ii) any act or omission by Executive involving dishonesty, disloyalty, or fraud with respect to any of the LC Companies; (iii) Executives breach of fiduciary duty to any of the LC Companies; (iv) Executives substantial, willful, or repeated disregard of the lawful and reasonable directives of the Board clearly communicated in writing to Executive, provided that if such disregard is capable of remedy Executive shall have thirty (30) days from receipt of written notification of such disregard by the Company in which to remedy such disregard; (v) a breach by Executive of any non-solicitation or other restrictive covenant set forth in any agreement between Executive and any of the LC Companies, including any covenant in Article 4 hereof, provided that if such breach is capable of remedy, Executive shall have thirty (30) days from receipt of written notification of such disregard by the Company in which to remedy such disregard; (vi) Executives gross negligence or willful misconduct with respect to any of the LC Companies or its customers, clients, contractors, and/or vendors; (vii) the coming into effect of an order, ruling, or determination by a government body, court, or self-regulatory organization that imposes a bar or disqualification on Executive from employment with the Company (either permanently or for a period exceeding 180 days); (viii) violation of the Companys policies against unlawful discrimination and harassment; (ix) Executives repeated alcohol or substance abuse while performing services for the Company; or (x) abandonment or gross dereliction of Executives work duties.
3.2.2 Change in Control. For purposes of this Agreement, Change in Control shall mean: (i) any merger or consolidation of the Company with or into another entity (other than any such merger or consolidation in which the shareholders of the Company immediately prior to such merger or consolidation continue to hold at least a majority of the voting power of the outstanding capital stock or other ownership interests in the surviving corporation); (ii) any sale, transfer, or other disposition, in a single transaction or series of related transactions, of all or substantially all of the assets of the Company, or; (iii) any other transaction or series of related transactions pursuant to which a single person or entity (or group of affiliated persons or entities) acquires from the Company or its shareholders a majority of the voting power of the outstanding capital stock or other ownership interest in the Company. With respect to Section 3.2.2 only, the term Company includes any parent entity having at least 50% ownership of the company employing Executive.
3.2.3 Good Reason. For purposes of this Agreement and subject to Section 3.3.4, Good Reason shall mean any of the following: (i) a material diminution in Executives base compensation unless the Base Salary of a majority of other employees at the same level as Executive is also proportionately reduced; (ii) a change in the geographic location to greater than fifty (50) miles at which Executive must perform the services; or (iii) any other action or inaction that constitutes a material breach by the Company of this Agreement, subject to the provisions of Section 3.3.4 .
3.2.4 Involuntary Termination. For purposes of this Agreement, Involuntary Termination shall mean either: a termination without Cause or a termination for Good Reason. In no event will it be deemed an independent and sufficient basis for an Involuntary Termination
if Executive is offered substantially equivalent employment and total compensation with the purchaser in a Change in Control, with another entity whose ownership has changed as a result of a Change in Control, or with any other entity created in connection with a Change in Control, in each case regardless of their beneficial ownership. In no event shall expiration of the Employment Period on account of nonrenewal by either party constitute an Involuntary Termination.
3.3 Involuntary Termination.
3.3.1 Involuntary Termination After Change in Control . If, prior to the expiration of the Employment Period and within twelve (12) months following a Change in Control, Executive is subject to an Involuntary Termination (as defined in Section 3.2.4) , then the Company will pay Change in Control Severance Benefits to Executive (which shall be the sole benefits Executive is entitled to under these circumstances). The Change in Control Severance Benefits will consist of (i) a payment (less applicable withholdings and deductions) equivalent to 18 months of Executives Base Salary (as in effect immediately prior to (a) the Change in Control, or (b) the date of the termination of Executives employment, whichever is greater), payable as a single lump sum within 74 days of Executives termination of employment; (ii) the greater of 150% of the Executives (i) Target Bonus or (ii) most recent actual bonus payout payable as a single lump sum within 74 days of the termination of Executives employment; (iii) taxable cash payments paid each calendar month for 18 months in an amount equal to the monthly COBRA premium at the time of Executives termination for the health dental and vision benefits that Executive and Executives eligible dependents had in effect under the Companys welfare plans immediately prior to Executives termination (the COBRA Payment); and (iv) Acceleration of vesting of one hundred percent (100%) of Executives unvested equity award compensation under any equity incentive plan maintained by Company, to the extent permitted by such plan and by applicable laws.
3.3.2 Involuntary Termination No Change in Control. If, prior to the expiration of the Employment Period, no Change in Control has occurred in the preceding twelve (12) months and Executive is subject to an Involuntary Termination (as defined in Section 3.2.4 ), then the Company will pay Severance Benefits to Executive (which shall be the sole benefits Executive is entitled to under these circumstances). The Severance Benefits will consist of: (i) a payment (less applicable withholdings and deductions) equivalent to 12 months of Executives Base Salary as in effect immediately prior to the date of Executives termination of employment, payable as a single lump sum within 74 days of the termination of Executives employment; (ii) the pro-rated amount of the bonus the Executive would have received had the Executive remained employed through the calendar year, to be determined at the Companys sole discretion based on the Executives performance and payable as a single lump sum within 74 days of Executives termination of employment; and (iii) taxable cash payments paid each calendar month for 12 months in an amount equal to the monthly COBRA premium at the time of Executives termination for the health dental and vision benefits that Executive and Executives eligible dependents had in effect under the Companys welfare plans immediately prior to Executives termination (also, the COBRA Payment).
3.3.3 Conditions for Retention/Receipt of Change in Control Severance Benefits or Severance Benefits (Including Execution of Release That Is Not Subsequently Revoked). The Change in Control Severance Benefits (as defined in Section 3.3.1 ) or the Severance Benefits (as defined in Section 3.3.2 ) shall be forfeited (and any and all Change in Control Severance Benefits or Severance Benefits already paid shall be promptly repaid by the Executive) unless Executive: (i) has returned all Company property in Executives possession, custody, or control within ten (10) business days of Executives termination; (ii) has executed and delivered to the Company, and not revoked, a general release (Release Agreement), in substantially the form attached hereto as Exhibit A , subject to modification as may be necessary to address changes in the applicable laws and other provisions as determined by the Company (but which shall include provisions for Confidentiality, Proprietary Rights, Non-Disclosure, Non-Disparagement, and Non-Solicitation), that has become irrevocably effective within fifty six (56) days of Executives termination (or within such shorter time period as may be specified by the Company), and (iv) is in compliance with the Confidentiality, Proprietary Rights, Non-Disclosure, Non-Disparagement, and Non-Solicitation provisions included in the Release Agreement.
3.3.4 Determination of Good Reason. In order for Executive to terminate for Good Reason, (i) Executive must notify the Board, in writing, within ninety (90) days of the event constituting Good Reason of Executives intent to terminate employment for Good Reason, that specifically identifies in reasonable detail the facts and events that the Executive believes constitute Good Reason; (ii) the event must remain uncured for thirty (30) days following the date that Executive notifies the Board in writing of Executives intent to terminate employment for Good Reason (the Notice Period ), and; (iii) the termination date must occur within sixty (60) days after the expiration of the Notice Period.
3.4 Voluntary Resignation; Termination For Cause . If Executives employment with the Company terminates (i) voluntarily by Executive (other than for Good Reason during the period following a Change in Control) or (ii) by the Company for Cause, then Company shall have no duty to make any payments or provide any benefits to Executive pursuant to this Agreement other than the amount of Executives Base Salary and vested Benefits, if any, accrued through the Termination Date. The use of the term Cause in this Section 3.4 in no way limits the right of the Company to terminate Executives employment pursuant to the provisions of this Article 3 . The Company must notify the Executive, in writing, that the Executive is being terminated for Cause, and such notice shall identify in reasonable detail the facts and events that the Company believes constitute Cause.
3.5 Accrued Wages; Expenses . Without regard to the reason for, or the timing of, Executives termination of employment: (i) the Company will pay Executive any unpaid Base Salary due for periods prior to the Termination Date, and; (ii) following submission of proper expense reports by Executive, the Company will reimburse Executive for all expenses reasonably and necessarily incurred by Executive in connection with the business of the Company prior to the Termination Date. These payments will be made promptly upon the Termination Date and within the period of time mandated by law, subject to provisions set forth herein.
ARTICLE 4
CONFIDENTIAL INFORMATION, PRIOR EMPLOYMENT AGREEMENTS, NON-SOLICITATION, PROPRIETARY RIGHTS, AND TRADE SECRETS
4.1 Confidential Information. Executive acknowledges that the information, observations, and data obtained by him while employed by the Company concerning the business or affairs of the LC Companies (collectively Confidential Information ) are the property of the Company. Therefore, Executive agrees that he shall not disclose to any unauthorized person or use for his own purpose any Confidential Information without the prior written consent of the Board other than in a good faith effort to promote the interests of the Company, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Executives acts or omissions. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Board or a committee thereof may request, all memoranda, notes, plans, records, reports, computer files, printouts, software, and other documents and data (and copies thereof) relating to the Confidential Information, Work Product (as defined below) and/or the business of the LC Companies which he may then possess or have under his control.
4.2 Proprietary Rights, Assignment. Executive acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, and all similar or related information (whether or not patentable) which relate to any LC Companys actual or anticipated business, research and development, or existing or future products or services, real estate strategies, or expansion plans, and which are conceived, developed, or made by Executive while employed by the Company ( Work Product ) belong to the Company. Any copyrightable work falling within the definition of Work Product shall be deemed a work made for hire as such term is defined in 17 U.S.C. § 101, and ownership of all right, title, and interest herein shall vest in the Company. To the extent that any Work Product is not deemed to be a work made for hire under applicable law or all right, title, and interest in and to such Work Product has not automatically vested in the Company, Executive hereby irrevocably assigns, transfers, and conveys, to the full extent permitted by the applicable law, all right, title, and interest in and to the Work Product on a worldwide basis to the Company and perform all actions requested by the Company (whether during or after employment) to establish and confirm such ownership (including assignments, consents, powers of attorney and other instruments).
4.3 Prior Employment Agreements. Executive represents and warrants to the Company that Executive is not subject to any agreement containing a noncompetition provision or other restriction with respect to (i) the nature of any services or business which he is entitled to perform or conduct for the Company (or any other LC Company) under this Agreement, or (ii) the disclosure or use of any information which directly or indirectly relates to the nature of the business of any LC Company or the services rendered by the Executive under this Agreement.
4.4 Non-Solicitation.
4.4.1 Executive acknowledges that in the course of his employment with the Company, he will become familiar with the Companys Trade Secrets (defined below) and/or Confidential Information concerning the Company and that his services shall be of special, unique, and extraordinary value to the Company. Trade Secrets includes commercially valuable information which is not generally known to the public or within the consumer lending field.
4.4.2 Executive shall not use any Trade Secrets and/or Confidential Information belonging to any other employer during employment with the Company. Executive shall also not bring any documents from any prior employer to the Company, including any memorialization of information that includes Trade Secrets and/or Confidential Information belonging to any prior employer. The word document means not only a physical piece of paper, but also includes electronic disks, hard drives, flash or thumb drives, emails or email attachments, or any other storage device or medium.
4.4.3 Executive agrees that for a period of six (6) months following the Termination Date, Executive will not directly or indirectly recruit or solicit any employee, or independent contractor of the Company or encourage any employee or independent contractor of the Company to leave the Companys employ or engagement, as the case may be. The parties agree that an advertisement of general solicitation to the general public does not violate this Section 4.4.3.
4.4.4 If, at the time of enforcement of this Article 4 , a court shall hold that the duration or scope restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration or scope reasonable under such circumstances shall be substituted for the stated duration or scope and that the court shall be allowed to revise the restrictions contained herein to cover the maximum duration and scope permitted by law.
ARTICLE 5
GENERAL PROVISIONS
5.1 Notices . All notices and other communications under this Agreement shall be in writing and shall be given by first-class mail, certified, or registered with return receipt requested, or by hand delivery, or by overnight delivery by a nationally recognized character, in each case to the applicable address set forth below, and any such notice is deemed effectively given with received by the recipient (or if receipt is refused by the recipient, when so refused).
If to the Company:
Lending Club Corporation
Attn:
If to Executive:
At the most recent address for Executive on file at the Company.
5.2 Governing Law; Jurisdiction . This Agreement and the legal relations thus created between the parties hereto (including, without limitation, any dispute arising out of or related to this Agreement) shall be governed by and construed under and in accordance with the internal laws of the State of California, without reference to its principles of conflict of laws.
5.3 Choice of Law. All issues and questions concerning the construction, validity, enforcement, and interpretation of this Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without giving effect to any choice of law or conflict of law rules or provisions that could cause the applications of the laws of any jurisdiction other than the State of California.
5.4 Section 280G. Anything in this Agreement to the contrary notwithstanding, in the event that any compensation, payment, or distribution by the Company or any of its affiliates to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the Covered Payments) constitute parachute payments (Parachute Payments) within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the Code) and would, but for this Section 5.4, be subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or any similar tax imposed by state or local law or any interest or penalties with respect to such taxes (collectively, the Excise Tax), then prior to making the Covered Payments, a calculation shall be made comparing (i) the Net Benefit (as defined below) to the Executive of the Covered Payments after payment of the Excise Tax to (ii) the Net Benefit to the Executive if the Covered Payments are limited to the extent necessary to avoid being subject to the Excise Tax. Only if the amount calculated under (i) above is less than the amount under (ii) above will the Covered Payments be reduced to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise Tax (that amount, the Reduced Amount). Net Benefit shall mean the present value of the Covered Payments net of all federal, state, local, foreign income, employment and excise taxes. In the event reduction is required, the Covered Payments shall be reduced by the Company in the following order: (i) cash severance payments hereunder to the extent not subject to Section 409A of the Code in the reverse order of payment; (ii) any other portion of the Covered Payments that are not subject to Section 409A of the Code in the reverse order of payment (other than any acceleration of vesting of equity awards); (iii) Covered Payments that are not subject to Section 409A of the Code that arise from the accelerated vesting of equity awards, and; (iv) Covered Payments that are subject to Section 409A of the Code in a manner consistent with Section 409A of the Code. All determinations pursuant to this Section 5.4 shall be made by tax accountants selected by the Company and reasonably acceptable to Executive (the Accountants), whose determinations shall be binding on the Company and the Executive absent manifest error. The Executive shall provide the Accountants with such information and documents as the Accountants may reasonably request in order for the Accountants to make their determinations.
5.5 Section 409A of the Internal Revenue Code. This Agreement is intended to comply with the requirements of Section 409A of the Code (including the exceptions thereto), to the extent applicable, and the Company shall administer and interpret this Agreement in accordance with such requirements. If any provision contained in the Agreement conflicts with the requirements of Section 409A of the Code (or the exemptions intended to apply under the Agreement), the Agreement shall be deemed to be reformed to comply with the requirements of Section 409A of the Code (or the applicable exemptions thereto). Severance benefits shall not be payable under Section 3.3 unless the conditions set forth in Section 3.3 are satisfied and Executives termination of employment constitutes a separation from service as defined in Section 409A of the Code. Reimbursement of any expenses provided for in this Agreement shall be made promptly upon presentation of documentation in accordance with the Companys
and the Companys policies (as applicable) with respect thereto as in effect from time to time (but in no event later than the end of calendar year following the year such expenses were incurred); provided , however , that in no event shall the amount of expenses eligible for reimbursement hereunder during a calendar year affect the expenses eligible for reimbursement in any other taxable year and the right to reimbursement shall not be subject to liquidation or exchange for another benefit. Notwithstanding anything to the contrary herein, if a payment or benefit under this Agreement is due to a separation from service for purposes of the rules under Treas. Reg. § 1.409A-3(i)(2) (payments to specified employees upon a separation from service) and the Executive is determined to be a specified employee (as determined under Treas. Reg. § 1.409A-1(i) and related Company procedures), such payment shall, to the extent necessary to comply with the requirements of Section 409A of the Code, be made on the later of (x) the date specified by the foregoing provisions of this Agreement or (y) the date that is six (6) months after the date of the Executives separation from service (or, if earlier, the date of the Executives death). Any payments that are delayed pursuant to this Section shall be accumulated and paid in a lump sum on the first day of the seventh month following Executives separation from service (or, if earlier, upon the Executives death) and the remaining payments shall begin on such date in accordance with their original schedule. The Change in Control Severance Benefits and the Severance Benefits are intended not to constitute deferred compensation subject to Section 409A of the Code pursuant to the (i) the short-term deferral exception set forth in Treas. Reg. § 1.409A-1(b)(4), (ii) the two times severance exception set forth in Treas. Reg. § 1.409A-1(b)(9)(iii), or (iii) the limited payments exception set forth in Treas. Reg. § 1.409A-1(b)(9)(v)(D). The short-term deferral exception, the two times severance exception and the limited payments exception shall be applied to the Change in Control Severance Benefits and the Severance Benefits, as applicable, in order of payment in such manner as results in the maximum exclusion of such Severance Payments from treatment as deferred compensation under Section 409A of the Code. Each installment of COBRA Payments shall be deemed to be a separate payment for purposes of Section 409A of the Code.
5.6 Complete Agreement . This Agreement, together with Exhibit A , which is incorporated herein by reference, embodies the complete agreement and understanding between the parties hereto and supersedes and preempts any prior understandings, agreements, or representations between the parties, written or oral, which may have related to the subject matter hereof in any way. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party that are not embodied herein.
5.7 Successor and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company and their respective successors, heirs, and assigns.
5.8 Amendment. Except as otherwise expressly provided herein, this Agreement may be amended, and any provision hereof may be waived, at any time only by written agreement between the Company (with approval of the Board) and Executive.
5.9 Counterparts; Facsimile Signature . This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Any party may execute this Agreement by facsimile or electronic signature and the other parties will be entitled to rely upon such facsimile signature as conclusive evidence that this Agreement has been duly executed by such party.
5.10 Headings; Interpretation; Construction. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. The term including, as used herein, shall mean including without limitation. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of authorship of any provision of this Agreement.
5.11 No Waiver. No failure or delay on the part of the Company or Executive in enforcing or exercising any right or remedy hereunder shall operate as a waiver thereof.
5.12 Severability. If any provision or clause of this Agreement, or portion thereof, shall be held by any court or other tribunal of competent jurisdiction to be illegal, invalid, or unenforceable in such jurisdiction, the remainder of such provision shall not be thereby affected and shall be given full effect, without regard to the invalid portion. It is the intention of the parties that, if any court construes any provision or clause of this Agreement, or any portion thereof, to be illegal, void, or unenforceable because of the duration of such provision or the area matter covered thereby, such court shall reduce the duration, area, or matter of such provision, and, in its reduced form, such provision shall then be enforceable and shall be enforced.
5.13 Arbitration. Executive and Company agree that they will resolve all matters in dispute between them, by binding arbitration, under the JAMS Employment Rules, then in effect, which are available at www.jamsadr.com or from Human Resources upon request. This agreement to arbitrate is a condition of Executives employment with Company. This means that both Executive and Company waive any right to have any disputes resolved in a court of law by a judge or jury, as arbitration is the exclusive forum for any claims against each other. Claims that must be arbitrated include, but are not limited to, those arising from Executives employment with, or termination from the Company, any claims for wages, compensation or benefits, for wrongful or constructive discharge, torts, or violations of federal, state or local laws. Moreover, Executive and the Company waive all rights to bring, be a party to, or be an actual or putative class member of, any class or collective action, in any forum (arbitration or otherwise), except that , Executive and Company agree that the parties may bring in arbitration only any representative action under any statute wherein their rights to bring such representative action are deemed unwaivable (such as the Private Attorneys General Act of 2004). This arbitration provision shall be self-amending; meaning if a provision is deemed unlawful, unenforceable, or not consistent with law, that provision and the agreement to arbitrate shall automatically, immediately and retroactively shall be amended, modified, and/or altered to be enforceable and otherwise comport with law. Similarly, if a right to a representative action that is alleged to be unwaivable is deemed waivable under law, the parties agree that it is their intent to enforce such a waiver and preclude any representative action in any forum.
5.14 Survival. The rights and obligations of Executive and Employer set forth in Section 1.2, Article 4 of this Agreement, (including Sections 4.1 , 4.2 , 4.3 , and 4.4 ), Section 5.13 , Section 5.14 , and in Exhibit A hereto, will survive the both Employment Period and the
expiration of this Agreement, and are intended to apply without regard to any specific duration. Executive and the Company agree that the provisions of Section 1.2 , and Article 4 of this Agreement, including Sections 4.1 , 4.2 , 4.3 , and 4.4 , Section 5.13 , Section 5.14 and Exhibit A hereto, may only be modified by a signed writing between Executive and the Board or a committee thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Employment Agreement as of the day and year first above written.
LENDING CLUB CORPORATION | ||
By: |
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Name: |
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Title: |
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EXECUTIVE | ||
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[Name of Executive] |
Exhibit 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the Agreement ) is entered into as of , 2014, by and between Lending Club Corporation (the Company ) and (the Executive ).
WHEREAS, the Company and Executive desire to enter into this Agreement in order to set forth the terms of Executives employment with the Company during the period beginning on the date hereof and ending as provided herein.
NOW, THEREFORE, in consideration of the promises and mutual agreements set forth herein, and other consideration, the receipt of which is hereby acknowledged, Executive and the Company hereby agree as follows:
ARTICLE 1
EMPLOYMENT AND DUTIES
1.1 Employment. The Company agrees to employ Executive, and Executive hereby accepts employment with the Company, to serve as the Companys , upon the terms and subject to the conditions set forth in this Agreement. The period during which Executive is employed by the Company is referred to herein as the Employment Period . The effective date on which the Executives Employment Period ends for any reason or no reason is referred to herein as the Termination Date .
1.2 At-Will Employment . The Company and the Executive understand and agree that the Executive is employed at-will, and either the Executive or the Company can terminate their employment relationship at any time, for any reason or no reason, with or without cause, and with or without notice.
1.3 Position and Duties .
1.3.1 During the Employment Period, Executive shall serve as the Companys and shall have the duties, responsibilities, and authority customary for such a position in an organization of the size and nature of the Company, subject to the Companys Board of Directors or its designee (collectively, the Board ) ability to expand, change or limit such duties, responsibilities, and authority in their sole discretion.
1.3.2 Executive shall report directly to the Companys , and Executive shall devote his/her best efforts and his/her full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and its subsidiaries, whether currently existing or hereafter acquired or formed and including any predecessor of any such entity (collectively, the LC Companies ). Executive shall perform his/her duties and responsibilities to the best of his/her abilities in a diligent, trustworthy, businesslike, and efficient manner.
ARTICLE 2
COMPENSATION AND BENEFITS
2.1 Base Salary. During the Employment Period, Executives base salary shall be an amount set by the Board, or an appropriate committee of the Board (the Base Salary ), which Base Salary shall be payable in regular installments in accordance with the Companys general payroll practices.
2.2 Bonus . After each fiscal year during the Employment Period, Executive shall be eligible to receive a cash bonus for such fiscal year (a Bonus ), based on a target percent of Executives then-current Base Salary ( Target Bonus ). Whether a Bonus for any fiscal year is paid and, if so, the amount of the Bonus, shall be determined by the Board, in its sole discretion, based on criteria established by the Board in its sole discretion, including, if the Board so determines, the achievement of budgetary and other Company- or Executive-specific performance objectives set by the Board for such fiscal year. Except as otherwise expressly provided in Article 3 , to be entitled to receive payment of any Bonus, Executive must be employed by the Company on the date such Bonus is distributed to receive such Bonus.
2.3 Benefits . During the Employment Period, Executive shall continue to be entitled to participate in the Companys standard employee benefit programs for which executives of the Company are generally eligible, including, insurance and health benefits and the Companys 401(k) plan (collectively, Benefits ). Executive recognizes that the Company reserves the right to change its benefits from time to time and the Companys right to make such changes shall not be restricted by this Agreement.
2.4 Vacation . Executive will not accrue vacation during the Employment Period.
2.5 Reimbursement for Business Expenses. During the Employment Period, the Company shall reimburse Executive for all reasonable, necessary, and documented expenses incurred by Executive in performing Executives duties for the Company, on the same basis as similarly situated employees generally and in accordance with the Companys policies as in effect from time to time.
2.6 Withholding. The Company may withhold from any compensation, benefits, or amounts payable under this Agreement all federal, state, city, or other taxes as may be required or permitted pursuant to any law or governmental regulation or ruling.
ARTICLE 3
EARLY TERMINATION OF EMPLOYMENT PERIOD
3.1 General. The rights of Executive upon termination will be governed by this Article 3.
3.2 Definitions. For purposes of this Article 3, the words and phrases below have the following definitions:
3.2.1 Cause. For purposes of this Agreement, Cause shall mean: (i) Executives conviction, whether following trial or by plea of guilty or nolo contendere (or similar plea), in a criminal proceeding (a) on a charge of any crime involving fraud, embezzlement, bribery, forgery, counterfeiting, extortion, dishonesty, or moral turpitude; or (b) on any felony or misdemeanor charge; (ii) any act or omission by Executive involving dishonesty, disloyalty, or fraud with respect to any of the LC Companies; (iii) Executives breach of fiduciary duty to any of the LC Companies; (iv) Executives substantial, willful, or repeated disregard of the lawful and reasonable directives of the Board or the Companys Chief Executive Officer clearly communicated in writing to Executive, provided that if such disregard is capable of remedy Executive shall have thirty (30) days from receipt of written notification of such disregard by the Company in which to remedy such disregard; (v) a breach by Executive of any non-solicitation or other restrictive covenant set forth in any agreement between Executive and any of the LC Companies, including any covenant in Article 4 hereof, provided that if such breach is capable of remedy, Executive shall have thirty (30) days from receipt of written notification of such disregard by the Company in which to remedy such disregard; (vi) Executives gross negligence or willful misconduct with respect to any of the LC Companies or its customers, clients, contractors, and/or vendors; (vii) the coming into effect of an order, ruling, or determination by a government body, court, or self-regulatory organization that imposes a bar or disqualification on Executive from employment with the Company (either permanently or for a period exceeding 180 days); (viii) violation of the Companys policies against unlawful discrimination and harassment; (ix) Executives repeated alcohol or substance abuse while performing services for the Company; or (x) abandonment or gross dereliction of Executives work duties.
3.2.2 Change in Control. For purposes of this Agreement, Change in Control shall mean: (i) any merger or consolidation of the Company with or into another entity (other than any such merger or consolidation in which the shareholders of the Company immediately prior to such merger or consolidation continue to hold at least a majority of the voting power of the outstanding capital stock or other ownership interests in the surviving corporation); (ii) any sale, transfer, or other disposition, in a single transaction or series of related transactions, of all or substantially all of the assets of the Company, or; (iii) any other transaction or series of related transactions pursuant to which a single person or entity (or group of affiliated persons or entities) acquires from the Company or its shareholders a majority of the voting power of the outstanding capital stock or other ownership interest in the Company. With respect to Section 3.2.2 only, the term Company includes any parent entity having at least 50% ownership of the company employing Executive.
3.2.3 Good Reason. For purposes of this Agreement and subject to Section 3.3.4, Good Reason shall mean any of the following: (i) a material diminution in Executives base compensation unless the Base Salary of a majority of other employees at the same level as Executive is also proportionately reduced; (ii) a change in the geographic location to greater than fifty (50) miles at which Executive must perform the services; or (iii) any other action or inaction that constitutes a material breach by the Company of this Agreement, subject to the provisions of Section 3.3.4 .
3.2.4 Involuntary Termination. For purposes of this Agreement, Involuntary Termination shall mean either: a termination without Cause or a termination for Good Reason. In no event will it be deemed an independent and sufficient basis for an Involuntary Termination if Executive is offered substantially equivalent employment and total compensation with the purchaser in a Change in Control, with another entity whose ownership has changed as a result of a Change in Control, or with any other entity created in connection with a Change in Control, in each case regardless of their beneficial ownership. In no event shall expiration of the Employment Period on account of nonrenewal by either party constitute an Involuntary Termination.
3.3 Involuntary Termination.
3.3.1 Involuntary Termination After Change in Control . If, prior to the expiration of the Employment Period and within twelve (12) months following a Change in Control, Executive is subject to an Involuntary Termination (as defined in Section 3.2.4) , then the Company will pay Change in Control Severance Benefits to Executive (which shall be the sole benefits Executive is entitled to under these circumstances). The Change in Control Severance Benefits will consist of (i) a payment (less applicable withholdings and deductions) equivalent to 12 months of Executives Base Salary (as in effect immediately prior to (a) the Change in Control, or (b) the date of the termination of Executives employment, whichever is greater), payable as a single lump sum within 74 days of Executives termination of employment; (ii) the greater of 100% of the Executives (i) Target Bonus or (ii) most recent actual bonus payout payable as a single lump sum within 74 days of the termination of Executives employment; and (iii) taxable cash payments paid each calendar month for 12 months in an amount equal to the monthly COBRA premium at the time of Executives termination for the health dental and vision benefits that Executive and Executives eligible dependents had in effect under the Companys welfare plans immediately prior to Executives termination (the COBRA Payment), and; (iv) Acceleration of vesting of one hundred percent (100%) of Executives unvested equity award compensation under any equity incentive plan maintained by Company, to the extent permitted by such plan and by applicable laws.
3.3.2 Involuntary Termination No Change in Control. If, prior to the expiration of the Employment Period, no Change in Control has occurred in the preceding twelve (12) months and Executive is subject to an Involuntary Termination (as defined in Section 3.2.4 ), then the Company will pay Severance Benefits to Executive (which shall be the sole benefits Executive is entitled to under these circumstances). The Severance Benefits will consist of: (i) a payment (less applicable withholdings and deductions) equivalent to 6 months of Executives Base Salary as in effect immediately prior to the date of Executives termination of employment, payable as a single lump sum within 74 days of the termination of Executives employment; (ii) the pro-rated amount of the bonus the Executive would have received had the Executive remained employed through the calendar year, to be determined at the Companys sole discretion based on the Executives performance and payable as a single lump sum within 74 days of Executives termination of employment; and (iii) taxable cash payments paid each calendar month for 6 months in an amount equal to the monthly COBRA premium at the time of Executives termination for the health dental and vision benefits that Executive and Executives eligible dependents had in effect under the Companys welfare plans immediately prior to Executives termination (also, the COBRA Payment).
3.3.3 Conditions for Retention/Receipt of Change in Control Severance Benefits or Severance Benefits (Including Execution of Release That Is Not Subsequently Revoked). The Change in Control Severance Benefits (as defined in Section 3.3.1 ) or the Severance Benefits (as defined in Section 3.3.2 ) shall be forfeited (and any and all Change in Control Severance Benefits or Severance Benefits already paid shall be promptly repaid by the Executive) unless Executive: (i) has returned all Company property in Executives possession, custody, or control within ten (10) business days of Executives termination; (ii) has executed and delivered to the Company, and not revoked, a general release (Release Agreement), in substantially the form attached hereto as Exhibit A , subject to modification as may be necessary to address changes in the applicable laws and other provisions as determined by the Company (but which shall include provisions for Confidentiality, Proprietary Rights, Non-Disclosure, Non-Disparagement, and Non-Solicitation), that has become irrevocably effective within fifty six (56) days of Executives termination (or within such shorter time period as may be specified by the Company), and (iv) is in compliance with the Confidentiality, Proprietary Rights, Non-Disclosure, Non-Disparagement, and Non-Solicitation provisions included in the Release Agreement.
3.3.4 Determination of Good Reason. In order for Executive to terminate for Good Reason, (i) Executive must notify the Board, in writing, within ninety (90) days of the event constituting Good Reason of Executives intent to terminate employment for Good Reason, that specifically identifies in reasonable detail the facts and events that the Executive believes constitute Good Reason; (ii) the event must remain uncured for thirty (30) days following the date that Executive notifies the Board in writing of Executives intent to terminate employment for Good Reason (the Notice Period ); and (iii) the termination date must occur within sixty (60) days after the expiration of the Notice Period.
3.4 Voluntary Resignation; Termination For Cause . If Executives employment with the Company terminates (i) voluntarily by Executive (other than for Good Reason during the
period following a Change in Control) or (ii) by the Company for Cause, then Company shall have no duty to make any payments or provide any benefits to Executive pursuant to this Agreement other than the amount of Executives Base Salary and vested Benefits, if any, accrued through the Termination Date. The use of the term Cause in this Section 3.4 in no way limits the right of the Company to terminate Executives employment pursuant to the provisions of this Article 3 . The Company must notify the Executive, in writing, that the Executive is being terminated for Cause, and such notice shall identify in reasonable detail the facts and events that the Company believes constitute Cause.
3.5 Accrued Wages; Expenses . Without regard to the reason for, or the timing of, Executives termination of employment: (i) the Company will pay Executive any unpaid Base Salary due for periods prior to the Termination Date, and; (ii) following submission of proper expense reports by Executive, the Company will reimburse Executive for all expenses reasonably and necessarily incurred by Executive in connection with the business of the Company prior to the Termination Date. These payments will be made promptly upon the Termination Date and within the period of time mandated by law, subject to the provisions set forth herein.
ARTICLE 4
CONFIDENTIAL INFORMATION, PRIOR EMPLOYMENT AGREEMENTS, NON-SOLICITATION, PROPRIETARY RIGHTS, AND TRADE SECRETS
4.1 Confidential Information. Executive acknowledges that the information, observations, and data obtained by him/her while employed by the Company concerning the business or affairs of the LC Companies (collectively Confidential Information ) are the property of the Company. Therefore, Executive agrees that he/she shall not disclose to any unauthorized person or use for his/her own purpose any Confidential Information without the prior written consent of the Board other than in a good faith effort to promote the interests of the Company, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Executives acts or omissions. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Board or a committee thereof or the Companys Chief Executive Officer may request, all memoranda, notes, plans, records, reports, computer files, printouts, software, and other documents and data (and copies thereof) relating to the Confidential Information, Work Product (as defined below) and/or the business of the LC Companies which he/she may then possess or have under his/her control.
4.2 Proprietary Rights, Assignment. Executive acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, and all similar or related information (whether or not patentable) which relate to any LC Companys actual or anticipated business, research and development, or existing or future products or services, real estate strategies, or expansion plans, and which are conceived, developed, or made by Executive while employed by the Company ( Work Product ) belong to the Company. Any copyrightable work falling within the definition of Work Product shall be deemed a work made for hire as such term is defined in 17 U.S.C. § 101, and ownership of all right, title, and interest herein shall vest in the Company. To the extent that any Work Product is not deemed to be a work made for hire under applicable law or all right, title, and interest in and to such Work
Product has not automatically vested in the Company, Executive hereby irrevocably assigns, transfers, and conveys, to the full extent permitted by the applicable law, all right, title, and interest in and to the Work Product on a worldwide basis to the Company and perform all actions requested by the Company (whether during or after employment) to establish and confirm such ownership (including assignments, consents, powers of attorney and other instruments).
4.3 Prior Employment Agreements. Executive represents and warrants to the Company that Executive is not subject to any agreement containing a noncompetition provision or other restriction with respect to (i) the nature of any services or business which he/she is entitled to perform or conduct for the Company (or any other LC Company) under this Agreement, or (ii) the disclosure or use of any information which directly or indirectly relates to the nature of the business of any LC Company or the services rendered by the Executive under this Agreement.
4.4 Non-Solicitation.
4.4.1 Executive acknowledges that in the course of his/her employment with the Company, he/she will become familiar with the Companys Trade Secrets (defined below) and/or Confidential Information concerning the Company and that his/her services shall be of special, unique, and extraordinary value to the Company. Trade Secrets includes commercially valuable information which is not generally known to the public or within the consumer lending field.
4.4.2 Executive shall not use any Trade Secrets and/or Confidential Information belonging to any other employer during employment with the Company. Executive shall also not bring any documents from any prior employer to the Company, including any memorialization of information that includes Trade Secrets and/or Confidential Information belonging to any prior employer. The word document means not only a physical piece of paper, but also includes electronic disks, hard drives, flash or thumb drives, emails or email attachments, or any other storage device or medium.
4.4.3 Executive agrees that for a period of six (6) months following the Termination Date, Executive will not directly or indirectly recruit or solicit any employee, or independent contractor of the Company or encourage any employee or independent contractor of the Company to leave the Companys employ or engagement, as the case may be. The parties agree that an advertisement of general solicitation to the general public does not violate this Section 4.4.3.
4.4.4 If, at the time of enforcement of this Article 4 , a court shall hold that the duration or scope restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration or scope reasonable under such circumstances shall be substituted for the stated duration or scope and that the court shall be allowed to revise the restrictions contained herein to cover the maximum duration and scope permitted by law.
ARTICLE 5
GENERAL PROVISIONS
5.1 Notices . All notices and other communications under this Agreement shall be in writing and shall be given by first-class mail, certified, or registered with return receipt requested, or by hand delivery, or by overnight delivery by a nationally recognized character, in each case to the applicable address set forth below, and any such notice is deemed effectively given with received by the recipient (or if receipt is refused by the recipient, when so refused).
If to the Company:
Lending Club Corporation
Attn:
If to Executive:
At the most recent address for Executive on file at the Company.
5.2 Governing Law; Jurisdiction . This Agreement and the legal relations thus created between the parties hereto (including, without limitation, any dispute arising out of or related to this Agreement) shall be governed by and construed under and in accordance with the internal laws of the State of California, without reference to its principles of conflict of laws.
5.3 Choice of Law. All issues and questions concerning the construction, validity, enforcement, and interpretation of this Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without giving effect to any choice of law or conflict of law rules or provisions that could cause the applications of the laws of any jurisdiction other than the State of California.
5.4 Section 280G. Anything in this Agreement to the contrary notwithstanding, in the event that any compensation, payment, or distribution by the Company or any of its affiliates to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the Covered Payments) constitute parachute payments (Parachute Payments) within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the Code) and would, but for this Section 5.4, be subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or any similar tax imposed by state or local law or any interest or penalties with respect to such taxes (collectively, the Excise Tax), then prior to making the Covered Payments, a calculation shall be made comparing (i) the Net Benefit (as defined below) to the Executive of the Covered Payments after payment of the Excise Tax to (ii) the Net Benefit to the Executive if the Covered Payments are limited to the extent necessary to avoid being subject to the Excise Tax. Only if the amount calculated under (i) above is less than the amount under (ii) above will the Covered Payments be reduced to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise Tax (that amount, the Reduced Amount). Net Benefit shall mean the present value of the Covered Payments net of all federal, state, local, foreign income, employment and excise taxes. In the event reduction is required, the Covered Payments shall
be reduced by the Company in the following order: (i) cash severance payments hereunder to the extent not subject to Section 409A of the Code in the reverse order of payment; (ii) any other portion of the Covered Payments that are not subject to Section 409A of the Code in the reverse order of payment (other than any acceleration of vesting of equity awards); (iii) Covered Payments that are not subject to Section 409A of the Code that arise from the accelerated vesting of equity awards, and; (iv) Covered Payments that are subject to Section 409A of the Code in a manner consistent with Section 409A of the Code. All determinations pursuant to this Section 5.4 shall be made by tax accountants selected by the Company and reasonably acceptable to Executive (the Accountants), whose determinations shall be binding on the Company and the Executive absent manifest error. The Executive shall provide the Accountants with such information and documents as the Accountants may reasonably request in order for the Accountants to make their determinations.
5.5 Section 409A of the Internal Revenue Code. This Agreement is intended to comply with the requirements of Section 409A of the Code (including the exceptions thereto), to the extent applicable, and the Company shall administer and interpret this Agreement in accordance with such requirements. If any provision contained in the Agreement conflicts with the requirements of Section 409A of the Code (or the exemptions intended to apply under the Agreement), the Agreement shall be deemed to be reformed to comply with the requirements of Section 409A of the Code (or the applicable exemptions thereto). Severance benefits shall not be payable under Section 3.3 unless the conditions set forth in Section 3.3 are satisfied and Executives termination of employment constitutes a separation from service as defined in Section 409A of the Code. Reimbursement of any expenses provided for in this Agreement shall be made promptly upon presentation of documentation in accordance with the Companys and the Companys policies (as applicable) with respect thereto as in effect from time to time (but in no event later than the end of calendar year following the year such expenses were incurred); provided , however , that in no event shall the amount of expenses eligible for reimbursement hereunder during a calendar year affect the expenses eligible for reimbursement in any other taxable year and the right to reimbursement shall not be subject to liquidation or exchange for another benefit. Notwithstanding anything to the contrary herein, if a payment or benefit under this Agreement is due to a separation from service for purposes of the rules under Treas. Reg. § 1.409A-3(i)(2) (payments to specified employees upon a separation from service) and the Executive is determined to be a specified employee (as determined under Treas. Reg. § 1.409A-1(i) and related Company procedures), such payment shall, to the extent necessary to comply with the requirements of Section 409A of the Code, be made on the later of (x) the date specified by the foregoing provisions of this Agreement or (y) the date that is six (6) months after the date of the Executives separation from service (or, if earlier, the date of the Executives death). Any payments that are delayed pursuant to this Section shall be accumulated and paid in a lump sum on the first day of the seventh month following Executives separation from service (or, if earlier, upon the Executives death) and the remaining payments shall begin on such date in accordance with their original schedule. The Change in Control Severance Benefits and the Severance Benefits are intended not to constitute deferred compensation subject to Section 409A of the Code pursuant to the (i) the short-term deferral exception set forth in Treas. Reg. § 1.409A-1(b)(4), (ii) the two times severance exception set forth in Treas. Reg. § 1.409A-1(b)(9)(iii), or (iii) the limited payments exception set forth in Treas. Reg. § 1.409A-1(b)(9)(v)(D). The short-term deferral exception, the two times severance exception and the limited payments exception shall be applied to the Change in Control Severance Benefits and the
Severance Benefits, as applicable, in order of payment in such manner as results in the maximum exclusion of such Severance Payments from treatment as deferred compensation under Section 409A of the Code. Each installment of COBRA Payments shall be deemed to be a separate payment for purposes of Section 409A of the Code.
5.6 Complete Agreement . This Agreement, together with Exhibit A , which is incorporated herein by reference, embodies the complete agreement and understanding between the parties hereto and supersedes and preempts any prior understandings, agreements, or representations between the parties, written or oral, which may have related to the subject matter hereof in any way. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party that are not embodied herein.
5.7 Successor and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company and their respective successors, heirs, and assigns.
5.8 Amendment. Except as otherwise expressly provided herein, this Agreement may be amended, and any provision hereof may be waived, at any time only by written agreement between the Company (with approval of the Board) and Executive.
5.9 Counterparts; Facsimile Signature . This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Any party may execute this Agreement by facsimile or electronic signature and the other parties will be entitled to rely upon such facsimile signature as conclusive evidence that this Agreement has been duly executed by such party.
5.10 Headings; Interpretation; Construction. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. The term including, as used herein, shall mean including without limitation. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of authorship of any provision of this Agreement.
5.11 No Waiver. No failure or delay on the part of the Company or Executive in enforcing or exercising any right or remedy hereunder shall operate as a waiver thereof.
5.12 Severability. If any provision or clause of this Agreement, or portion thereof, shall be held by any court or other tribunal of competent jurisdiction to be illegal, invalid, or unenforceable in such jurisdiction, the remainder of such provision shall not be thereby affected and shall be given full effect, without regard to the invalid portion. It is the intention of the parties that, if any court construes any provision or clause of this Agreement, or any portion thereof, to be illegal, void, or unenforceable because of the duration of such provision or the area matter covered thereby, such court shall reduce the duration, area, or matter of such provision, and, in its reduced form, such provision shall then be enforceable and shall be enforced.
5.13 Arbitration. Executive and Company agree that they will resolve all matters in dispute between them, by binding arbitration, under the JAMS Employment Rules, then in effect, which are available at www.jamsadr.com or from Human Resources upon request. This agreement to arbitrate is a condition of Executives employment with Company. This means that both Executive and Company waive any right to have any disputes resolved in a court of law by a judge or jury, as arbitration is the exclusive forum for any claims against each other. Claims that must be arbitrated include, but are not limited to, those arising from Executives employment with, or termination from the Company, any claims for wages, compensation or benefits, for wrongful or constructive discharge, torts, or violations of federal, state or local laws. Moreover, Executive and the Company waive all rights to bring, be a party to, or be an actual or putative class member of, any class or collective action, in any forum (arbitration or otherwise), except that , Executive and Company agree that the parties may bring in arbitration only any representative action under any statute wherein their rights to bring such representative action are deemed unwaivable (such as the Private Attorneys General Act of 2004). This arbitration provision shall be self-amending; meaning if a provision is deemed unlawful, unenforceable, or not consistent with law, that provision and the agreement to arbitrate shall automatically, immediately and retroactively shall be amended, modified, and/or altered to be enforceable and otherwise comport with law. Similarly, if a right to a representative action that is alleged to be unwaivable is deemed waivable under law, the parties agree that it is their intent to enforce such a waiver and preclude any representative action in any forum.
5.14 Survival. The rights and obligations of Executive and Employer set forth in Section 1.2, Article 4 of this Agreement, (including Sections 4.1 , 4.2 , 4.3 , and 4.4 ), Section 5.13 , Section 5.14 and in Exhibit A hereto, will survive the both Employment Period and the expiration of this Agreement, and are intended to apply without regard to any specific duration. Executive and the Company agree that the provisions of Section 1.2 , and Article 4 of this Agreement, including Sections 4.1 , 4.2 , 4.3 , and 4.4 , Section 5.13, Section 5.14 , and Exhibit A hereto, may only be modified by a signed writing between Executive and the Board or a committee thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Employment Agreement as of the day and year first above written.
LENDING CLUB CORPORATION | ||
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Name: |
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Title: |
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EXECUTIVE | ||
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[Name of Executive] |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Amendment No. 3 to Registration Statement (Registration Statement) No. 333-198393 on Form S-1 of our report dated March 31, 2014 (except for note 1 as it relates to stock splits and note 3, as to which the date is October 17, 2014), relating to the consolidated financial statements of LendingClub Corporation as of and for the year ended December 31, 2013, appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading Experts in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
November 29, 2014
San Francisco, CA
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated April 1, 2013 (except as to Note 1 as it relates to stock splits, which is as of October 17, 2014), with respect to the consolidated financial statements included in this Registration Statement and Prospectus for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012 of LendingClub Corporation. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption Experts.
/s/ GRANT THORNTON LLP
San Francisco, CA
November 29, 2014
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITOR
We have issued our reports dated March 28, 2014, as of and for the years ended December 31, 2013 and 2012 for Springstone Financial, LLC, with respect to the financial statements and supplementary information included in this Registration Statement on Form S-1. We consent to the use in this Registration Statement on Form S-1 of the aforementioned reports, and to the use of our name as it appears under the caption Experts.
/s/ Auerr, Zajac & Associates, LLP
Franklin, Massachusetts
November 29, 2014
Exhibit 24.2
POWER OF ATTORNEY
(Registration Statement on Form S-1)
The undersigned constitutes and appoints Renaud Laplanche and Carrie Dolan, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement on Form S-1 of LendingClub Corporation any and all amendments thereto (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, increasing the number of securities for which registration is sought) and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Simon Williams |
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Name: | Simon Williams | |
Date: | December 1, 2014 |