As submitted to the Securities and Exchange Commission on October 28, 2019.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT
ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933
For the fiscal year ended June 30, 2019
STREETSHARES, INC.
(Exact name of issuer as specified in its charter)
| Delaware | 6199 | 46-4390152 |
(State or other jurisdiction | (Primary Standard Industrial Classification Code Number) | (Employer Identification Number) |
StreetShares Notes
(Title of each class of securities issues pursuant to Regulation A)
1900 Campus Commons Drive, Suite 200 Reston, VA 20191
Telephone: (571) 325-2966
(Address, and telephone number principal executive offices)
Part II
Item 1.
BUSINESS
Narrative Description of Business
StreetShares, Inc. and its subsidiaries (hereafter also referred to as “Us”, “We”, “the Company”, “StreetShares”) is a venture-capital funded financial technology (FinTech) company on a mission to become the source for trusted digital finance for America’s heroes. The Company provides small business financing solutions to its community of members and its Lending-as-a-Service clients through its online application and platform. As of June 30, 2019, StreetShares’ products include term loans, Patriot Express® Line of Credit, and invoice receivables financing. StreetShares raises capital to fund these lending and contract financing products through retail debt securities offered under Regulation A and accredited investor opportunities. In September 2019, StreetShares publicly announced its Lending-as-as-Service product and services to assist StreetShares’ clients, such as financial institutions, in providing small business financing solutions.
As part of StreetShares’ mission, the Company is closing the small business credit gap, using technology and honesty to provide an alternative to costly cash-advance, “payday”-type small business lending products, ensuring that veteran and main street small businesses are able to obtain the funding they need in a fair, affordable manner. StreetShares is founded and run by military veterans and has a particular focus on providing military veteran owned small businesses with fair and transparently-priced small business financial products.
Under our business model, we generate revenue in multiple ways: through origination or success fees charged to borrowers, servicing and transaction fees charged to investors, fees from contract financing products, and interest generated from the portion of each loan that we fund through our direct lending account. Our loans are fully amortizing and are repaid weekly through electronic bank payments.
StreetShares has one office location, in Reston, Virginia. The Company is, as of June 30, 2019, comprised of 53 full-time employees.
Products, Services, and Investment Opportunities
The Company has facilitated over $180 million in financingsince we made our first loan in July 2014 throughJune 30, 2019, including term loans, lines of credit, and invoice financing.
(a) Lending Products:
The term loan and Patriot Express® Line of Credit products (“loans”) offered by StreetShares are fully amortizing and have flexible repayment options of 3 month, 6 month, 1 year, 18 month, 2 year, and 3 year terms. Business lending products are offered from $2,000 up to $250,000 (larger from time to time in the discretion of the StreetShares’ Credit Committee) with interest rates starting in the upper single digits for our most qualified borrowers. Product terms are subject to change.
StreetShares currently lends in 45 states and the District of Columbia as a non-bank commercial lender. One of StreetShares, Inc.’s subsidiaries, StreetShares Lending Company, LLC, is a California Finance Lender licensee (60DBO-44064). The states in which StreetShares’ offers its lending products are subject to change based upon market conditions and regulatory requirements.
A business may apply for a lending product through our website. StreetShares’ borrower members are required to provide us with relevant financial and business data about their business and the personal guarantor(s), if applicable. We use multiple methods to verify this information as well as the identity of the borrower member. Borrower members are required to provide us with bank account information and proof of ownership over their bank account before a loan is issued to the business.
StreetShares lends to qualified borrower members who meet the Company’s business and credit qualifications and are approved through the underwriting platform. In order to obtain financing from StreetShares, borrower members must display characteristics indicative of creditworthiness. These characteristics include factors such as business revenue, time in business, number of employees, cash flows, assets or inventory, and financial and credit variables. StreetShares uses technology, data analytics, and a proprietary credit scoring model to assess the creditworthiness of each small business borrower applicant. A borrower member’s loan is usually personally guaranteed by the business owner and may be secured through a UCC filing.
| 1 |
For our lending products, the interest rates charged to borrowers range from 6.25% - 32.50%, the weighted average APR is 24.10%, the average loan amount is approximately $25,375, and the weighted average term is approximately 1.72 years, during our last three fiscal years. Our interest rates charged to borrowers have decreased over these periods. For the fiscal year ended June 30, 2019, our interest rate range was 6.25%-31.00% with a weighted average APR of 21.40%. This is lower compared to fiscal year 2018, when our interest rate range was 8.0%-32.50% with a weighted average APR of 24.60% and fiscal year 2017, when our interest rate range was 10.0%-32.50% with a weighted average APR of 26.20%.
The average yield (net revenue/average balance of loans) for the Company’s lending products has been relatively flat. It was approximately 9% in fiscal year 2017 and fiscal year 2018, and approximately 11% in fiscal year 2019.
Interest income on lending assets is calculated based on the contractual interest rate of the loan and recorded as interest income as earned. The Company allows borrowers to “prepay” the principal balance of their loans without having to pay the future expected interest. The Company, however, requires collection of the interest accrued through the next expected payment date, if applicable. Servicing fees include fees charged to Reg. D and institutional investors based on a percentage of the payments received from borrowers. The service fees are recorded as income when payments are received. The origination fees, relating to the portion of the loans the Company owns, are deferred and recognized over the life of the loan using the effective interest method. Origination fees collected but not yet recognized as revenue are recorded as deferred revenue. The Company views the value of the auction as being delivered upon acceptance of the loans. As such, the origination fees relating to the portion owned by Reg. D and Institutional investors, called success fees, are recognized when received upon the funding of the loans. The Company charges fees for late payments, ACH return fees, and other fees charged by providers for failed payments. Generally, fees are used to cover costs incurred for collection.
The term loan products offered by StreetShares are charged a one-time origination fee of 4.95% of the principal balance and Patriot Express® Line of Credit draws are charged a one-time fee of 3.95% for each draw amount. StreetShares may advertise promotions from time to time to waive or reduce the origination or draw fees for such products. Fees are set per product type.
StreetShares currently funds the lending products with a variety of sources, including funds from institutional, accredited, and retail investors.
(b) Contract Financing Products:
StreetShares’ contract financing products are offered to government and commercial contractors based on the total size of the contracts assigned to the Company by the customer. Invoice receivables purchased by the Company have ranged from $600 to $7,000,000 since inception of our contract financing products in December 2016 through June 30, 2019.
StreetShares’ contract financing product is not a lending product. Rather, the Company purchases invoice receivables (also referred to as, factored receivables or factored invoices) from contractors performing work on government and commercial contracts. StreetShares’ contract financing product provides a reliable source of funding that helps contractors smooth out their cash flows and maintain predictable funding that keeps their operations running.
The Company generates revenue on invoice receivables through interest income, factor fees, draw fees, commitment fees, and enrollment fees. We charge factoring fees on the invoice receivables that we purchase and charge draw fees for lines of credit secured by unbilled invoices. In determining the interest and fees to be charged, we perform a risk assessment on the customer and the contract, considering factors such as credit score, the size of the contract, the type and terms of the contract, and prior performance. Interest income on invoice receivables is calculated using the simple interest method on the daily balances of principal outstanding. Interest income, factor fees, and commitment fees are accrued until funds are received for the purchased factored receivable. Enrollment fees are recognized at the time of purchase of factored receivables. Draw fees are recognized at the time of each draw on a line of credit secured by unbilled invoices.
StreetShares advances a percentage of the purchased invoice (usually up to 90% of the invoice amount), and when the government or commercial entity remits funds for the work performed under the contract, StreetShares then deducts its fees and pays the remaining balance to the contractor. Typically, we advance 90% on prime federal contracts and 80% on federal subcontracts or commercial contracts. The advance rate is subject to change, however, depending on factors such as size of contract, lien position, and prior performance related to both the contract being financed and as a StreetShares’ customer. In many instances, payment by the government or commercial entities can be 30 or 60 days (or longer). StreetShares removes the uncertainty with a transparent and affordable product that keeps contractors moving forward with their obligations.
| 2 |
StreetShares’ contract financing is available in all 50 states and the District of Columbia and applications may be made directly through StreetShares’ website. As with all StreetShares’ products, terms are subject to change based on market conditions and regulatory requirements.
As of June 30, 2019, StreetShares has serviced 40 customer accounts with this product, representing 65 contracts, with an average customer account having $2,812,006.83 in receivables purchased, and an aggregate of $112,480,273.34 in total receivables purchased. Since inception through June 30, 2019, the amount of each invoice purchased ranged from $606.00 to $6,986,100.00. The maximum invoice financed for each fiscal period has increased from $645,390.24 in fiscal year 2017 to $919,235.30 in fiscal year 2018 to $6,986,100.00 for fiscal year 2019.
The average yield (net revenue/average balance of advanced funds) for the Company’s contract financing products was approximately 19% in fiscal year 2017, approximately 24% in fiscal year 2018, and approximately 22% in fiscal year 2019. We see fluctuations in the average yield because the fee charged to the customer depends on the risk profile of the customer and the contract being financed.
(c) Lending-as-a-Service Products and Services:
Effective September 2019, the Company publicly launched a suite of Lending-as-a-Service (“LaaS”) products and services on the StreetShares’ Platform, which allows StreetShares’ clients, such as community banks, credit unions, and other financial and non-financial institutions, to make small business loans with a digital experience. StreetShares currently offers several LaaS packages, which include a mix of LaaS products and services, such as: online product presence for small business lending, web design collaboration, client-branded landing page, intelligent online loan application for small business borrowers, underwriting and servicing the small business loans, portal access to loan analytics, and small business loan marketing services. Prior to the public launch, StreetShares offered and sold certain LaaS products and services to select clients.
(d) Investment Opportunities:
StreetShares Notes
StreetShares Notes (“Notes”), the securities offered by the Company pursuant to Regulation A, are available to retail investors, who purchase notes via the StreetShares’ website at www.streetshares.com. Funds from the sale of Notes are invested into loans, lines of credit, and invoice financing, and may be used for general corporate purposes, or other products at the discretion of the Company. Investors in Notes do not directly invest in small business loans originated by StreetShares; rather the investments are aggregated with funds from the Company’s direct lending account, institutional capital providers, and accredited investors, which collectively fund the lending products. We retain final discretion over the use of the proceeds of the Notes.
Pursuant to a Regulation A Offering Circular qualified by the staff of the Securities Exchange Commission (“SEC”) on February 17, 2016 (the “Original Offering Circular”), the Company sold $34,381,660 worth of Notes, and redeemed or called an amount equal to $8,470,575 in previously issued Notes from the original offering through August 14, 2019. Thus, the Company has redeemed or called 24.6% of previously issued Notes at the request of the investor/holder from the original offering through August 14, 2019.
On August 14, 2019, the staff of the SEC qualified a Regulation A Offering Circular (the “2019 Offering Circular”) with a maximum offering amount of $25,692,700. The Company continues to offer and sell the Notes under the 2019 Offering Circular.
The offering of Notes is being conducted as a continuous offering pursuant to Rule 251(d)(3) of the Securities Act. Continuous offerings allow for a sale of securities to be made over time, with no specific offering periods or windows in which securities are available. Sales of securities may happen sporadically over the term of the continuous offering, and are not required to be made on any preset cadence. The active acceptance of investors, whether via the StreetShares website or otherwise, may at times be briefly paused, or the ability to subscribe may be periodically restricted to certain individuals to allow the Company time to effectively and accurately process and settle subscriptions that have been received. The Company may discontinue its offering of Notes at any time.
| 3 |
All outstanding Notes have a 3 year term and a fixed interest rate of 5% per annum. Thus, the remaining term on the outstanding Notes ranges from 1 month to 3 years.
StreetShares Pro Securities
StreetShares also offers debt securities to accredited investors only, under Rule 506(b) of Regulation D (“StreetShares Pro”). These Regulation D securities are made via Member Payment Dependent Notes (“MPDNs”). StreetShares does not advertise its StreetShares Pro products and relies upon word of mouth, its network of interested accredited investors, and its relationships in the alternative lending community. The MPDNs in which StreetShares Pro investors invest fund a portion of the loans, lines of credit, and contract financing originated to StreetShares members. These Regulation D securities are unregistered securities that are dependent upon the performance of a portion of the Company’s note from the borrower and are only available for purchase by accredited investors. If the note performs according to its terms, the investor receives the principal and interest portions of the note in proportion to their investment, less applicable servicing fees. If the note doesn’t perform, payments to the investor will be limited to the pro-rata portion of any payments received prior to charge-off, according to the respective principal balances funded by the investor, less applicable servicing fees.
All StreetShares products are distributed via the Company’s website (www.streetshares.com) and are subject to change as market or regulatory needs dictate.
Legal Proceedings
StreetShares is not subject to any bankruptcy, receivership, or similar proceedings. StreetShares further is not subject to legal proceedings others than those in the ordinary course of business (e.g., collections against defaulting borrowers).
Distinctive Characteristics and Risks
The Company operates in a highly regulated environment, and is subject to both federal and state regulatory regimes for its financing products and investments. Because of regulatory scrutiny overseeing financial services, StreetShares’ business offerings may be directly influenced by various statutes, laws, regulations, and rules. Changes in regulations, or in the way current or newly enacted federal or state regulations are applied to our business, or the increased costs due to compliance with these regulations, or inadvertent regulatory miscues, could all adversely affect our business. Ongoing compliance with Regulation A+, which is a relatively new regulatory scheme subject to the potential for more, and more frequent, amendments and differing interpretations, and the reporting thereof to the SEC could be more costly than anticipated.
The Company is an alternative lender, and the online alternative lending industry has yet to endure a major adverse phase in the credit cycle. Worsening economic conditions nationwide or across the lending industry may result in decreased demand for our loans, cause our customers’ default rates to increase, or harm our operating results.
Finally, the Company is a mid-stage, venture-capital and private equity funded company with a history of net operating losses, and we may not become profitable. We rely on outside capital to grow loan volume and our business, and our business may not be able to adequately scale its loan product distribution. Holders of StreetShares Notes are exposed to the credit risk of the Company.
Underwriting Process
In order to qualify, business borrower applicants must be approved through our proprietary underwriting process, which analyzes credit and financial data of both the business and the business owner. Our proprietary credit loss prediction model is based on several business demographic factors (including business revenue, age of business, cash flows, and other variables) combined with certain consumer bureau attributes (including income, revolving debt, personal credit score(s), delinquency history, age of credit file, and number of inquiries). If the applicant passes the initial underwriting criteria, the business is assigned a proprietary StreetShares’ score. The determination of what dollar amount to approve, how the product will be priced, and whether to file a UCC security interest is based on the above analysis, as well as additional factors (including length of loan, estimated default rates by type and grade, and general economic environment). At that point, the request is approved for placement on the StreetShares’ platform for funding.
| 4 |
Treatment of Investor Balances
Some portions of StreetShares’ loans are funded by investors. StreetShares investor funds are held in bank accounts under separate, but wholly owned subsidiaries of StreetShares, Inc. These bank accounts are currently held at EagleBank, headquartered in Bethesda, MD. StreetShares investors have no direct relationship with EagleBank. StreetShares may change the bank used to hold these funds from time to time. The bank account host and StreetShares’ EagleBank relationship may change at any time.
Loan Servicing
StreetShares has built a platform accessible by customers through online account servicing and manages investor servicing in-house. Loan servicing is managed by Portfolio Financial Servicing Company (“PFSC”), a 26-year-old servicer of contracts for both commercial and consumer portfolios. PFSC has over $30 billion in assets under management as primary servicer, successor servicer, and backup servicer. PFSC recently combined with First Associates as part of the Stone Point family of companies to form a single, financial solutions support community, called Vervent. We may change the outside servicer at any time.
Interest Rate
The StreetShares Notes bear interest at 5%. StreetShares may later issue StreetShares Notes that bear interest between 3% and 10%, as stated in the applicable StreetShares Note, to be determined by the Company in its sole discretion. StreetShares intends to include any changes to interest rates in a post-qualification amendment or a supplement to the 2019 Offering Circular. All terms, conditions, and details regarding the interest rate of StreetShares Notes and any promotional interest rates offered by the Company will be provided by the Company to the investor prior to purchase by the investor and made available on the StreetShares website at www.streetshares.com.
The interest rate of the StreetShares Notes may reflect promotional interest rates for specified periods of time or based on specified investment thresholds. For example, we may provide promotional interest rates for a specified period of time. We may also provide promotions for 1%-3% increases in interest rates if the investor meets certain minimum investment amounts. In certain instances, investors may also have the opportunity to earn promotional, additional interest on their StreetShares Notes if such investors hold the StreetShares Notes for specified periods of time without requesting to redeem or withdraw the funds invested in their StreetShares Notes.
Fees on StreetShares Notes
Unlike our institutional and accredited investors, StreetShares Note investors are not usually charged a servicing fee for their investments. Investors are usually charged a transaction fee if the investor requests early redemption and withdrawal of funds invested in the Note prior to the Note’s maturity date. Generally, the Company will accept an investor’s request to withdraw or redeem a Note at any time after thirty-one (31) days of such investor’s initial investment in a Note; but the Company may restrict the investor’s ability to withdraw or redeem funds invested in a Note. Generally, at each annual anniversary of an investor’s initial Note purchase, and for a two (2) week period thereafter, the investor may request to withdraw any or all funds without any transaction fees assessed to such investor. At all other times outside the anniversary date and corresponding two (2) week period, if an investor wishes to request to withdraw or redeem such investor’s Note, such investor will be charged with a 1% transaction fee on the principal amount that such investor wishes to withdraw, provided that, such 1% transaction fee amount shall not exceed the amount of interest earned to-date on such investor’s Note.
Tax and Legal Treatment
StreetShares Notes will receive interest income. At the end of the calendar year, investors with over $10 of realized interest will receive a form 1099-INT. The interest earned on the StreetShares Notes investment will need to be declared in accordance with the United States Tax Code. An investor’s tax situation will likely vary greatly and all tax and accounting questions should be directed towards a certified public accountant. StreetShares does not provide tax or legal advice to StreetShares Notes investors and encourages investors to seek out advice from their professional advisers to fully understand their particular tax situations.
StreetShares is a nonbank, commercial lender, and must comply with the various commercial lending regulations as required on a state-by-state basis. State legal and regulatory requirements may be subject to interpretation and/or are subject to change. StreetShares obtains all necessary licenses, certifications, and registrations where clearly required in each state in which StreetShares has chosen to lend. While each state has specific rules for how lending activities should be conducted, most states do not require licenses in order to engage in commercial lending activities. As such StreetShares has not obtained licenses across all of the jurisdictions in which it lends, preferring instead to pursue licenses when necessary. StreetShares currently holds a California Finance Lender License (CA License # 60DBO44064). As a lender, loans and lines of credit originated by the Company are generally subject to the lending laws of the Company’s home state of Virginia. The Company maintains a dialogue with regulators in states in which it operates to ensure that StreetShares’ business operates within the bounds of the law and the principles of fairness and goodwill.
| 5 |
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Form 1-K. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review theRisk Factors section beginning on page 8 of 2019 Offering Circular for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are an online platform for small business financing. We facilitated more than $99 million in lending and contract financing products in fiscal year 2019 and more than $56 million in lending and contract financing products in fiscal year 2018. We collected more than $80 million in payments from our customers in fiscal year 2019 and more than $49 million in customer payments in fiscal year 2018.
We generate revenue through success and origination fees, servicing fees we charge to institutional and accredited investors, fees from our contract financing products, and interest generated by the portion of each loan we fund through our direct lending account. As a mid-stage startup, rapid growth in both revenue and expenses is expected.
Operating Results
Revenues. For the fiscal year ended June 30, 2019, we had operating revenues of $4,420,422 compared to $3,178,766 in the fiscal year ended June 30, 2018. The increase is a result of the growth of our lending operations and the recognition of success fees, origination fees, servicing fees, factor fees, and interest revenues.
Operating Expenses. For the fiscal year ended June 30, 2019, we had operating expenses of $14,291,041 compared to $7,606,291 in the fiscal year ended June 30, 2018. The largest line items of operating expenses were payroll and payroll taxes, sales and marketing expenses, and general and administrative expenses. The year over year increase is due to Company growth over that time-period.
Refinanced Loans. For our lending products, certain of our originations were refinances of existing StreetShares’ loans (i.e., amounts rolled forward from existing loans into new loans). The percentage of our total loan originations that were refinances of existing loans was approximately 21.74% for the fiscal year ended June 30, 2018 and 11.37% for the fiscal year ended June 30, 2019.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our lending and contract financing activities and operations primarily through equity and convertible debt financings, bank lines of credit, revenues, and institutional and accredited investments in our loans. Through June 30, 2019, we have also raised $33,157,235 through the sale of StreetShares Notes ($7,467,125 of which have been redeemed or called) pursuant to the Original Offering Circular under Regulation A, which was qualified by the SEC on February 17, 2016.
Our lending and contract financing products are primarily funded by four sources: (1) our direct lending account; (2) institutional capital providers (primarily, Community Investment Management); (3) accredited investors under Rule 506(b) of Regulation D, which are also called “StreetShares Pro” investors; and (4) retail investors in the StreetShares Notes (pursuant to the qualified offering circulars under Regulation A).
| 6 |
The following table summarizes the percentage of lending and contract financing products funded by each of the four funding sources described above:
Product Type by Fiscal Period | % Funded by Direct Lending | % Funded by Institutional | % Funded by Pro-investor | % Funded by Retail investor | % Total | |||||||||||||||
| Contract Financing Products Fiscal Year 2018 | 3.24 | 13.13 | 33.41 | 50.22 | 100 | |||||||||||||||
| Lending Products Fiscal Year 2018 | 7.46 | 23.43 | 37.74 | 31.38 | 100 | |||||||||||||||
| FY 2018 Total | 4.66 | 16.59 | 34.86 | 43.89 | 100 | |||||||||||||||
| Contract Financing Products Fiscal Year 2019 | 1.64 | 0.04 | 0.04 | 98.28 | 100 | |||||||||||||||
| Lending Products Fiscal Year 2019 | 4.17 | 17.53 | 11.03 | 67.27 | 100 | |||||||||||||||
| FY 2019 Total | 2.58 | 6.56 | 4.14 | 86.72 | 100 | |||||||||||||||
Equity and Convertible Debt Financings
On January 18, 2018, the Company closed on a B round funding with $22,838,775 (after direct costs) of equity raised through several investors, led by Rotunda Capital Partners, LLC (“Rotunda”).
In August 2019, the Company issued $1,625,000 in convertible promissory notes, which are convertible into shares of the Company’s common stock, including a convertible promissory note in the amount of $1,000,000 issued to JNV II, Limited Partnership. Jeffrey Valcourt, who holds a board seat with the Company, has a financial interest in JNV II, Limited Partnership.
Lines of Credit
In September 2017, the Company closed on a line of credit from Federated Information Technologies, Inc. with a principal balance of $500,000. As of June 30, 2019, the line of credit was paid in full and closed. The founder and president of Federated Information Technologies, Inc. is a board observer.
In September 2017, the Company also closed on an additional line of credit from an entity owned by Jeffrey Valcourt. On October 5, 2017, the Company drew $500,000 on the line of credit. As of June 30, 2019, the balance on the line from Mr. Valcourt’s entity was paid in full and closed. Mr. Valcourt holds a board seat with the Company.
Notes Payable
In July 2017, the Company raised $325,000 in the form of promissory notes offered to the Company’s Reg. D investors. As of June 30, 2019, the principal balance was $325,000.
In September 2017, the Company closed on a note payable to Federated Information Technologies, Inc. with a principal balance of $500,000. As of June 30, 2019, the principal balance was paid in full and closed. The founder and president of Federated Information Technologies, Inc. is a board observer.
In September 2019, the Company raised $500,000 in the form of a promissory note payable to Federated Information Technologies, Inc. The founder and president of Federated Information Technologies, Inc. is a board observer.
Operating Capital and Expenditure Requirements
We may require additional capital beyond our currently anticipated amounts and additional capital may not be available on reasonable terms, or at all. The sale of equity may result in dilution to our stockholders and those securities may have rights senior to those of our common shares.
Trends and Key Factors Affecting Our Performance
Investment in Long-Term Growth. The core elements of our growth strategy include acquiring new customers, broadening our distribution capabilities through strategic partners, enhancing our data and analytics capabilities, expanding our product offerings, extending customer lifetime value, and expanding geographically. We plan to continue to invest significant resources to accomplish these goals, and we anticipate that our operating expenses will continue to increase for the foreseeable future, particularly our human resources, sales and marketing, and technology and analytics expenses. These investments are intended to contribute to our long-term growth, but they may affect our near-term profitability.
| 7 |
Revenues and Originations. Our revenues have grown since our inception primarily as a result of launching our first lending product in July 2014, launching our first contract financing product in December 2016, and subsequent growth in originations for these products. The trend towards growth in originations has been driven by the addition of new borrowers, increasing business (total loans and financing facilitated) from new, existing, and previous borrowers, and increasing the average transaction size for our lending and contract financing products. The percentage increase (decrease) in these drivers over fiscal years 2017, 2018, and 2019, is stated in the chart below:
Drivers of Growth In Originations | % Increase (Decrease) FY 2017 to FY 2018 | % Increase (Decrease) FY 2018 to FY 2019 | ||||||
| New Borrowers | (35.7 | ) | 134.7 | |||||
| Total Loans and Financing Facilitated | 238.0 | 64.7 | ||||||
| Average Transaction Size | 26.3 | 0.1 | ||||||
There has been a trend towards larger average transaction size, which began to flatten in fiscal year 2019. Larger average transaction size is fueled by our targeting of our most creditworthy borrowers with larger loans and is also a result of launching our contract financing products in December 2016, which have larger transaction sizes than our lending products, as well as the increase in each period in the maximum amount financed for our contract financing products. There is also a trend towards lower interest rates for our lending products as we target new and repeat borrowers with higher credit quality. There are no significant trends in average yields.
Growth in revenues also depends, in part, on our ability to continue to earn interest income and fees from our lending and contract financing products. We believe that there is a trend toward credit normalization with respect to our charged-off loans. Although we experienced a decrease in charge-offs in fiscal year 2019 (as shown in the “Summary of Critical Accounting Policies –Charged-Off Loans” section below), we began to see an increase in delinquent accounts in fiscal year 2019 and anticipate that future charge-offs will trend towards and settle in a similar range as the charge-off ratio in fiscal year 2018, subject to changes as a result of multiple factors including business conditions, macro-economic conditions, and emerging trends, etc. There have been no significant trends or changes in the Company’s allowance for loan losses ratio.
Future growth will continue to depend, in part, on attracting new customers on both the borrower and investor side of our platform. We also intend to continue to originate loans through outreach efforts, marketing efforts, as well as through strategic partnerships with banks and other lending institutions, including LaaS. We continue to expect to rely on the veterans’ affinity networks for borrower acquisition and investor growth. We plan to increase our sales and marketing spending related to our LaaS products and services, including on behalf of our LaaS clients, while we intend to decrease our direct marketing to potential borrowers outside of LaaS. In the past, as we have invested more funds in our marketing efforts, including direct marketing, digital marketing, and other promotions, our originations have increased. Although we have not yet seen a material increase in originations from our strategic partnerships with banks and other lending institutions, we expect to see a growth in originations from these strategic partnerships and LaaS to the extent that we increase our investment in them.
Sources of Funding. The trend in funding our lending and contract financing products has shifted away from funds from institutional capital providers and StreetShares Pro investors and towards funds from retail investors because of availability of funding sources and periodic adjustments in our funding mix to optimize yield returns. We are not able to predict if this trend will continue in the future because the Company is exploring multiple funding options. Capital market fluctuations and capital availability will determine the optimal mix of funding sources the Company uses at any given time. We seek to optimize funding by seeking multiple funding sources.
Summary of Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
| 8 |
Our significant accounting policies are fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Form 1-K (see pages F-7 - F-13), and we believe those accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.
Cash and Cash Equivalents. The term “cash”, as used in the accompanying consolidated financial statements, includes currency on hand in checking, savings, and money market accounts held with financial institutions. We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be a considered a cash equivalent. We maintain our cash in bank accounts, which at times may exceed Federal Deposit Insurance Corporation limits. As of June 30, 2019, interest-bearing and non-interest-bearing accounts held in an insured institution are aggregated and guaranteed by the Federal Deposit Insurance Corporation up to $250,000. We have not experienced any losses in such accounts and we believe these funds are not exposed to any significant risk.
Lending and Financing Assets. We originate funding products that can be categorized as short-term (maturity less than 1 year) and long-term (maturity greater than 1 year). We value the full value of these products at the outstanding value of principal reduced by a valuation allowance for loan losses estimated as of the balance sheet date. On June 30, 2019, the total principal balance of outstanding loans and factored receivables was$22,381,710. On June 30, 2019, the outstanding number of loans and factored receivables was approximately 1,123.
Allowance for Loan Losses. The allowance for loan losses (“ALL”), is established through periodic charges to the provision for loan losses. Loan losses are charged against the ALL when we believe that the future collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ALL.
We calculate the predicted losses on the current portfolio of loans and advanced invoices. The Predicted Loss Rate (PLR) for each asset is determined by the credit department. The PLR is multiplied by the remaining principal of the corresponding asset. The aggregate predicted losses are reviewed on a monthly basis by the credit and finance department to make adjustments. In determining the PLR for each asset and the aggregate predicted losses, we consider credit factors such as those described in the next paragraph. The resulting predicted loss numbers are then booked to the balance sheet (as contra assets to the loan/invoice assets).
We evaluate the creditworthiness of the portfolio on an aggregated basis. The allowance is subjective, as it requires material estimates, including such factors as historical trends, known and inherent risks in the portfolio, adverse situations that may affect borrower’s ability to repay, and current economic conditions. Other qualitative factors considered may include items such as: uncertainties in forecasting and modeling techniques, seasonality, business conditions, and emerging trends. Recovery of the carrying value of our financial products is dependent to a great extent on conditions that may be beyond our control. Any combination of the aforementioned factors may adversely affect our portfolio resulting in increased delinquencies and losses and could require additional provisions for credit losses, which could impact future periods.
The allocation of the allowance for the loan losses between the Company and the Reg. D and Institutional investors is determined on a pro-rata basis according to the relative principal balances outstanding funded by each party. Reg. D and Institutional investors invest in a specific asset (if available). If the loan performs according to its terms, the Reg. D and Institutional investors receive the principal and interest portions of the loan in proportion to their investment, less applicable servicing fees, except as provided in a separate agreement. If the loan doesn’t perform, payments to the Reg. D and Institutional investors will be limited to the pro-rata portion of any payments received prior to charge-off, according to the respective principal balances funded by the Reg. D or Institutional investor, less applicable servicing fees, except as provided in a separate agreement.
The ALL ratio consists of the ALL over the total loan balances outstanding. The following chart summarizes the ALL ratio for the last two fiscal years:
ALL Ratio
| Period | Lending Products | Contract Financing Products | Total | |||||||||
| Fiscal Year 2018 | 4.88 | 0.97 | 3.99 | |||||||||
| Fiscal Year 2019 | 4.96 | 0.98 | 4.54 | |||||||||
| 9 |
There are no significant trends or changes in the ALL ratio.
Charged Off Loans. Our loans and traditional lines of credits (“loans”) are paid back on a weekly basis. Loans are considered to be delinquent when either (i) the past-due balance is equal to or greater than three times the regular weekly payment or (ii) any amounts are 31 days or longer past due. The Company continues to accrue interest on delinquent loans. Loans are returned to current status when the Company receives all accrued principal and interest required with the original amortization schedule and any fees applied. No individual loan impairments are recorded. When a loan or line is 150 days since the last cleared payment, the Company charges off the outstanding principal balance of the individual loan, unless an assessment is made that an individual loan should not be charged off based on the payment status and information gathered through collection efforts. Charge-offs are allocated to the Company and the Reg. D and Institutional investors on a pro-rata basis according to the relative principal balances outstanding funded by each party, except to the extent provided in a separate agreement. Accrued interest associated to a charged-off account is reversed in the amount of interest accrued and not counted in the charged-off principal.
Our contract financing products are not loans. The Company purchases invoice receivables from small businesses with contracts with the federal government and highly rated commercial entities. When the Company purchases invoice receivables, it makes advance payments, which are interest earning and are recorded as reductions to the amounts due to the factoring clients for the purchase of the factored receivables. The expected payment dates on the factored receivables are based on the terms of the underlying invoice or contract with the federal government or highly rated commercial entity, which varies by contract. We monitor expected payment dates under each factored invoice; however, we do not assess or assign late or delinquency statuses to such factored invoices because they are being paid directly by the federal government or highly rated commercial entity and not the Company’s customer. As of June 30, 2019, we have not taken any charge-offs on contract financing products.
For loans, historical charge-offs for the last two fiscal years are summarized on the following table:
Historical Charged-Off Loans
| Period | Lending Products ($) | Contract Financing Products ($) | ||||||
| Fiscal Year 2018 | 623,539 | 0.00 | ||||||
| Fiscal Year 2019 | 157,910 | 0.00 | ||||||
The following table summarizes the charge-off ratio for each period presented. The charge-off ratio is the net charged-off over the average principal balances outstanding. Net charged-off is the charged-off principal balance less recoveries.
Charge-Off Ratio
| Period | Lending Products (%) | Contract Financing Products (%) | ||||||
| Fiscal Year 2018 | 6.86 | 0.00 | ||||||
| Fiscal Year 2019 | 1.10 | 0.00 | ||||||
The charge-offs for fiscal year 2018 were larger than the charge-offs in fiscal year 2019; however, we began to see an increase in delinquent accounts in fiscal year 2019 when compared to fiscal year 2018. We believe that the increase in delinquencies in fiscal year 2019 represents a trend toward credit normalization. In other words, we anticipate that future charge-offs will trend towards and settle in a similar range as the charge-off ratio in fiscal year 2018, subject to changes as a result of multiple factors including business conditions, macro-economic conditions, and emerging trends, etc.
Calculation of Credit Loss Exposure on Unfunded Lines of Credit. Effective January 1, 2019, the Company began calculating the credit loss exposure on the unfunded portion of the line of credit based on predicted funding volume by date brackets of 0-30 days, 31-60 days, and over 60 days based on historical data. This calculation had a material effect on the Company’s consolidated financial statements of reducing the accrual and expense for the credit loss exposure in comparison with prior periods.
| 10 |
Prior to January 1, 2019, and prior to any meaningful historical experience, in accordance with ASC 450, the Company calculated the credit loss exposure on the unfunded portion of a line of credit based the predicted funding volume over the full term of the line of credit. When enough time had lapsed to provide meaningful historical data, the Company determined that the predicted funding volume of the unfunded portion of a line of credit varied among the periods of time after the line of credit was approved (0-30 days, 31-60 days, and over 60 days). Specifically, the predicted funding volume was highest in the first 30 days after a line of credit was approved, lower in the 31-60 days after approval, and lowest after 60 days after loan approval. Based on this information, the Company refined its calculation methodology in accordance with ASC 450 to calculate the credit loss exposure on the unfunded portion of a line of credit by these date brackets instead of the full term of the line of credit in order to provide a more accurate calculation based on historical data. The result was a materially reduced accrual and expense for the credit loss exposure. As of June 30, 2019 and 2018, the total line of credit unfunded credit exposure was approximately $1,165,000 and $2,484,000, respectively, of which approximately $816,000 and $1,614,000, respectively, was related to the undrawn exposure predicted to be funded by the Company. As of June 30, 2019 and 2018, the total line of credit unfunded credit loss exposure was approximately $47,000 and $121,000, respectively, of which approximately $33,000 and $79,000, respectively, was related to the undrawn exposure predicted to be funded by the Company.
Property, Equipment, and Software. Property, equipment and software (“PE&S”), consists of computers and electronics, office equipment and furniture, patents, and capitalized internal-use software costs. PE&S are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are recognized over the estimated useful lives of the assets using the straight-line method. For electronics, the Company estimates a 2- year useful life. All other PE&S assets are estimated to have a two to five year useful life or the life of the lease, if shorter, for leasehold improvements.
Our internally developed software includes the costs incurred to develop the website, platform, and other affiliated costs are capitalized beginning when the preliminary project stage is completed, we have authorized funding, and it is probable that the project will be completed and used to perform its intended function. Capitalized software costs primarily include salary costs for employees directly involved in the development efforts, software licenses acquired, and fees paid to outside consultants and contractors.
Software development costs incurred prior to meeting the criteria for capitalization and costs incurred for training and maintenance are expensed as incurred. Certain upgrades and enhancements to existing software that result in additional functionality are capitalized. Capitalized software development costs are amortized using the straight-line method over their expected useful lives, generally 2 to 5 years.
Loans and Payable to Investors. The Company uses Member Payment Dependent Notes (“MPDNs”) to fund a portion of our financial products. MPDNs are unregistered securities that are dependent upon the performance of a portion of the Company’s note to the borrower. Reg. D and Institutional investors specify the amount of each asset in which to invest (if available). The term to maturity matches the term of the underlying note. If the loan performs according to its terms, the Reg. D and Institutional investors receive the principal and interest portions of the loan in proportion to their investment, less applicable servicing fees. If the loan doesn’t perform, payments to the Reg. D and Institutional investors will be limited to the pro-rata portion of any payments received prior to charge-off, according to the respective principal balances funded by the Reg. D or Institutional investor, less applicable servicing fees, except to the extent provided in a separate agreement. MPDNs are available to accredited and Institutional investors only. Some Institutional investors purchase actual loan participations and not MPDNs, in which case, the Institutional investor’s repayment terms are specified in their respective agreement with the Company
Revenue Recognition. The Company generates revenue primarily through interest, auction success fees, origination fees, and service fees on its lending products. Interest income on lending assets is calculated based on the contractual interest rate of the loan and recorded as interest income as earned. The Company allows borrowers to “prepay” the principal balance of their loans without having to pay the future expected interest. The Company, however, requires collection of the interest accrued through the next expected payment date, if applicable. Service fees are fees charged to Reg. D and Institutional investors based on a percentage of the payments received from borrowers. The service fees are recorded as income when payments are received. The origination fees, relating to the portion of the loans the Company owns, are deferred and recognized over the life of the loan using the effective interest method. Origination fees collected but not yet recognized as revenue are recorded as deferred revenue. The Company views the value of the auction as being delivered upon acceptance of the loans. As such, the auction success fees, relating to the portion owned by Reg. D and Institutional investors, are recognized when received upon the funding of the loans.
The Company generates revenue by charging fees for late payments, ACH return fees, and other fees charged by providers for failed payments. Generally, fees are used to cover costs incurred for collection.
The Company generates revenue on invoice receivables through interest income, factor fees, draw fees commitment fees, and enrollment fees. Interest income on invoice receivables is calculated using the simple interest method on the daily balances of principal outstanding. Interest income, factor fees, and commitment fees are accrued until funds are received for the purchased factored receivable. Enrollment fees are recognized at the time of purchase of factored receivables. Draw fees are recognized at the time of each draw on a line of credit secured by unbilled invoices.
| 11 |
The Company generates revenue through transaction fees charged to Reg. A+ investors in accordance with the terms of the investor membership agreement.
Interest Income and Expenses. Interest income from the Company’s lending products and contract financing products (factored receivables) is presented under Operating Revenue in the Company’s Consolidated Statements of Operations. Interest paid by the Company to sources of funding (e.g., Reg D and Institutional investors and Reg. A+ investors) for the Company’s lending products and financing products is presented under Cost of Revenue as an interest expense.
Interest earned within Other Income (Expense) in the Company’s Consolidated Statements of Operations refers to interest earned from sources other than from the Company’s operations, including interest earned from funds in the Company’s bank accounts. In January 2018, the Company raised $20,000,000 in equity financing from new investors through the issuance of 29,107,845 shares of B Round Series Convertible Preferred Stock. The increase in funds held by the Company resulted in an increase in interest earned as Other Income in the fiscal year 2019. The Company’s Other Income interest earned for the fiscal year ending June 30, 2019 was $79,422 compared to $64,210 for the fiscal year ending June 30, 2018.
Interest expense within Other Income (Expense) in the Company’s Consolidated Statements of Operations refers to interest expense on debt other than sources of funding for the Company’s lending products and financing products. On March 6, 2017, the Company issued a convertible note in the principal balance of $3,000,000 to a related party of a Company director and on June 15, 2017, the Company issued a convertible note in the principal balance of $100,000 to a Preferred Stock Holder. These notes accrued interest at 8 percent per annum until converted to Company stock on January 18, 2018. Because the Company was no longer paying interest on the convertible notes after January 18, 2018, the Company’s interest expense within Other Income (Expense)decreased in the fiscal year ending June 30, 2019 ($76,037) when compared to the fiscal year ending June 30, 2018 ($225,832).
Income Taxes. We recognize deferred tax asset and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Valuation allowances are recorded to reduce deferred tax assets to the amount we believe is more likely than not to be realized.
Uncertain tax positions are recognized only when we believe it is more likely than not that the tax position will be upheld on examination by the taxing authorities based on the merits of the position. We recognize interest and penalties, if any, related to uncertain tax positions in Income Tax Expense on the Consolidated Statement of Operations.
We file income tax returns in the United States for federal, state, and local jurisdictions, where necessary. We are potentially subject to a tax examination for a period of three years from the date a return is originally filed or filed as amended, which as of June 30, 2019 includes all returns filed since our 2016 tax year return. No income tax returns are currently under examination by taxing authorities.
Accounting for Stock-Based Compensation. Our stock-based compensation is measured based on the grant date fair value of the awards and recognized as compensation expense on a straight-line basis of the period during which the option holder is required to perform services in exchange for the award (vesting period). We use the Black-Scholes Option Pricing Model to estimate fair value of stock options. The use of the option valuation model requires subjective assumptions, including the fair value of our common stock, the expected term of the option and the expected stock price volatility based on peer companies. Additionally, the recognition of stock-based compensation expense requires an estimation of the number of options that will ultimately vest and the number of options that will ultimately be forfeited. For the period July 15, 2013 (inception) through June 30, 2019, the Company has incurred $211,176 of stock-based compensation expense.
Marketing Costs. All marketing costs are expensed as incurred. Marketing expense for the years ended June 30, 2019 and 2018 was approximately $2,614,000 and $798,000, respectively.
| 12 |
Item 3.
DIRECTORS AND OFFICERS
Our executive officers, directors, and significant employees, and ages are as follows:
| Name | Position | Age | Term of Office | |||
| Executive Officers: | ||||||
| Mark L. Rockefeller | Chief Executive Officer, Co-Founder, Director | 42 | Since December 2013 | |||
| Michael Konson | President, Co-Founder, Interim Principal Financial and Accounting Officer, Director | 46 | Since December 2013 | |||
| Mohan A. Rao | Chief Product & Technology Officer | 53 | Since March 2018 | |||
| Stephen Vickrey | Chief Business Officer | 53 | Since February 2019 | |||
| Brendon DiBella | Chief Commercial Officer | 48 | Since March 2015 | |||
| Lauren Friend McKelvey | General Counsel & Chief Compliance Officer | 38 | Since May 2019 | |||
| Non-Executive Directors: | ||||||
| Alexander Acree | Director | 39 | Since February 2016 | |||
| John Fruehwirth | Director | 52 | Since January 2018 | |||
| Jeffery Valcourt | Director | 66 | Since July 2017 | |||
| David Wasik | Director | 48 | Since March 2016 | |||
| Bob Wickham | Director | 46 | Since January 2018 | |||
| Significant Employee | ||||||
| James Mentor | Director of Digital Marketing | 31 | Since April 2019 |
Mark L. Rockefeller
Mr. Rockefeller co-founded StreetShares and has served as our Chief Executive Officer and a member of our Board of Directors since the company’s inception. Mr. Rockefeller began his career as a military officer and attorney. Following service in Iraq and separation from the military, he joined the global financial services law firm Milbank, Tweed, Hadley & McCloy LLP, where his practice focused on securities, bankruptcy, and financial services litigation. He holds a Bachelor’s degree in finance, MBA, JD, and LLM degrees. He is a graduate of Columbia Law School.
| 13 |
Michael (“Mickey”) Konson
Mr. Konson co-founded StreetShares, serves as our President, and has been a member of our Board of Directors since the company’s inception. He has served as Interim Principal Financial and Accounting Officer for the Company since December 2017. Prior to StreetShares, he spent nearly 12 years at Capital One Bank, where he was the lead executive for Capital One’s consumer retail bank business, and was the Senior Credit Officer for the retail bank. Mr. Konson also spent five years working in a variety of credit, marketing and operational leadership roles at Capital One’s small business unit. Previously, Mr. Konson was an analyst at McKinsey & Co. where he served clients from Africa and Europe. He holds business and law degrees from the University of Cape Town and an MBA from Harvard Business School.
Mohan A. Rao
Mr. Rao is StreetShares’ Chief Product & Technology Officer. His expertise is in product management, UX and agile product development and operations. Prior to joining StreetShares, from 2014 to 2018, he was Chief Technology Officer at Hobsons, an education technology company, where he led product development and operations for all product lines in multiple markets. Before that, he was President & Chief Operating Officer at Mobile Insight, Chief Technology Officer at Wireless Matrix and Chief Technology Officer at Career Rewards. Earlier in his career, he was at Deloitte & Touche Consulting Group and at NYNEX Science & Technology. Mr. Rao has an MBA from Pace University, New York, a master’s degree in computer science, and a bachelor’s degree in electronics and communications engineering.
Stephen Vickrey
Mr. Vickrey is StreetShares’ Chief Business Officer. Prior to StreetShares, Mr. Vickrey was a finance contractor assisting various businesses with real estate, banking, and business planning since 2015. Previously, from 2010-2015, Mr. Vickrey was Chief Financial Officer & Chief Operating Officer of HSP Direct, a direct-mail and digital marketing company where he ran all financial operations, human resources, information technology, legal, and various operational areas. In addition, Mr. Vickrey spent 8 years at Capital One Bank, where he was the Chief Financial Officer of multiple Credit Card business entities and the Healthcare Finance business, where he helped lead a financial turnaround and rebuilding of the financial infrastructure. Prior to Capital One, he was a Finance Manager in G.E. Capital’s Private-Label Credit Card and Asset Leasing businesses. He received his M.B.A. from Villanova University.
Brendon DiBella
Mr. DiBella is StreetShares’ Chief Commercial Officer. He earned his B.S. in Economics from the U.S. Naval Academy and his M.B.A. from Harvard Business School. His career includes serving as a Navy Surface Warfare Officer in the U.S. Navy and selling sophisticated products and services in high-technology fields for nearly 20 years. Mr. DiBella’s deep technical sales experience comes from working with firms such as the Society for the Worldwide Interbank Financial Telecommunication (SWIFT), Dell, and Boston Scientific. Directly before joining StreetShares, from 2011 - 2015 Mr. Dibella was a part of Boston Scientific Incorporated, where he was revenue-responsible for the company’s Northern Virginia cardiac device franchise including its field sales and clinical personnel.
Lauren Friend McKelvey
Ms. McKelvey is StreetShares’ General Counsel & Chief Compliance Officer. Prior to joining StreetShares, Ms. McKelvey practiced law at Odin Feldman & Pittleman, PC (2015-2019), where she was a shareholder, and at Wiley Rein, LLP (2009-2015). During her ten years in private practice, Ms. McKelvey advised banks, financial fiduciaries, technology companies, and other clients on legal and compliance issues in the areas of technology, cybersecurity, intellectual property, creditor’s rights, bankruptcy, financial restructuring, and privacy. She also litigated hundreds of matters in federal and state courts. Ms. McKelvey currently sits on the Board of Directors of the Freedom Bank of Virginia since September 2018 and the Board of Directors of the International Women’s Insolvency and Restructuring Confederation since October 2014. Ms. McKelvey holds a B.A. from Sweet Briar College, a M.A. from Georgetown University, and a J.D. from the George Mason University Antonin Scalia Law School.
Alexander Acree
Mr. Acree is a member of the StreetShares’ Board of Directors representing Fenway Summer Ventures, a StreetShares’ equity investor. Mr. Acree is a Venture Partner of Fenway Summer Ventures GP, LLC, the General Partner of Fenway Summer Ventures. He was previously an attorney at Gibson, Dunn & Crutcher LLP. He holds a B.A. from Boston College, a J.D. from Yale Law School and an MBA from Yale School of Management.
John Fruehwirth
Mr. Fruehwirth is the Managing Partner of Rotunda Capital Partners. Rotunda focuses on investments in distribution, logistics and financial services. Since founding Rotunda in 2008, the team has closed 12 platforms and numerous add-on investments. Mr. Fruehwirth currently serves on the boards of StreetShares, Amware Logistics, Microf Financial, and MacQueen Equipment. Mr. Fruehwirth formerly served on the boards of Primary Integration, Commercial Credit Group, Inc., Financial Pacific Company, Direct Capital Corporation, and Worldwide Express, Inc. Mr. Fruehwirth earned his MBA from Darden School of Business Administration at the University of Virginia. He earned his BBA from the University of Wisconsin-Madison.
| 14 |
Jeffery Valcourt
Mr. Valcourt is a member of the StreetShares’ Board of Directors representing Endeavor Equity Holdings, LLC (“EEH”), a StreetShares’ equity investor, and assumed the director’s role for EEH in July of 2017. Mr. Valcourt is the Chairman and CEO of Endeavor Capital Management, as well as EEH. In addition to this role, Mr. Valcourt serves as the Founder and CEO of Valcourt Building Services (“VBS”). VBS has been in business for over 33 years, has acquired or formed over 17 companies and does over $90M in annual business. Mr. Valcourt also brings considerable banking experience to the Board as he was elected Chairman of the Board of Directors for United Financial Banking Companies and a Director for the Business Bank in the 1990s.
David Wasik
Mr. Wasik is an independent member of the StreetShares’ Board of Directors. Mr. Wasik served as a senior executive at Capital One in a variety of roles for over 15 years. While at Capital One Mr. Wasik led the Small Business Credit Card line of business, as well as the company's Collections and Recoveries department during the Great Recession. He is currently a Senior Advisor at 2nd Order Solutions, a credit risk advisory firm based in Richmond, VA. He holds a B.S.E. in Mechanical Engineering from Duke University.
Bob Wickham
Mr. Wickham is a Partner of Rotunda Capital Partners. Prior to joining Rotunda, Mr. Wickham was a Principal in the Private Finance Group at Allied Capital. Prior to joining Allied Capital, Mr. Wickham worked in the investment banking groups of Merrill Lynch and Equitable Securities (now part of SunTrust Robinson Humphrey) and was a co-founder of Brentwood Capital Advisors, a boutique M&A and private placement advisor. Mr. Wickham received a B.A. in Economics, with honors, from the University of Virginia and a M.B.A., with honors, from The Wharton School at the University of Pennsylvania.
James Mentor
Mr. Mentor is StreetShares’ Director of Digital Marketing since April 2019. He earned his B.A. in International Business and Finance from the University of San Francisco, CA in 2010. Mr. Mentor has over 10 years of experience in marketing; specializing in building and implementing marketing automation tech through web development and UX/UI coding, driven by analytics, especially during his time at Zoc Doc in 2014. Over his career, he has launched new digital products in the healthcare, retail, e-commerce, and the non-profit sector, and through agency partnerships with Fortune 500 marketing teams during his time with GDS Group, as the Head of Digital Outreach from 2015 - 2016. At Surefire Local, he was a National Brand Manager and principal digital strategist for three major national brands, overseeing a combined marketing budget of over $3 million a year from 2017 - 2019. He has over 7 years of experience managing multi-million dollar digital campaigns and scaling both small business and national brands.
Family Relationships
None.
Conflicts of Interest
We do not believe that we are a party to any transactions that contain or give rise to a conflict of interest between any of our directors, officers and major stockholders on the one hand, and StreetShares on the other hand.
One transaction should be noted (further information provided in the consolidated financial statements) as follows: a small amount of start-up, general, and administrative expenses were incurred by the Company from the inception date which were funded by advances from the Company’s co-founders, of which two are among the Company’s primary stockholders. As of June 30, 2019, the Company owes such advances back to its stockholders, which are included in net advances owed to investors and stockholders in the accompanying consolidated balance sheets.
Also of note, our General Counsel, Ms. McKelvey serves on the Board of Directors of the Freedom Bank of Virginia, which is a LaaS client of the Company. The contract between the Company and the Freedom Bank of Virginia is not a material contract.
| 15 |
Involvement in Certain Legal Proceedings
Except for routine collections suits against borrowers from time to time, we are not a party to any litigation.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Compensation of our three most highly paid executive officers for the 2019 fiscal year was as follows:
| Name: | Cash compensation | Other compensation | Total compensation | |||||||||
| Executive Officers: | ||||||||||||
| Mark L. Rockefeller, CEO | $ | 266,703.12 | $ | 25,716 | $ | 292,419.12 | ||||||
| Michael Konson, President | $ | 251,254.03 | $ | 25,716 | $ | 276,970.03 | ||||||
| Mohan A. Rao, Chief Product & Technology Officer | $ | 249,500.89 | $ | 11,058 | $ | 260,558.89 | ||||||
The Company has seven (7) directors, but only three (3) directors are compensated, Messrs. Rockefeller, Konson, and Wasik. The Company’s directors were paid $573,097.15 in aggregate cash compensation and other compensation for the 2019 fiscal year. Executive compensation is set annually by our Board’s Compensation Committee based on several factors including: company and individual leadership, performance compensation of competitor peer group, and other factors. All StreetShares employees, including Messrs. Rockefeller, Konson, and Rao, are eligible for performance-based bonus when the company hits periodic loan volume targets. While Rotunda Capital Partners is paid a quarterly management fee of $75,000.00 by StreetShares, Mr. Fruehwirth and Mr. Wickham are not directly compensated by StreetShares for their services as directors of StreetShares.
Item 4.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
| Common Stock | ||||||||||||||||
| Name and address of beneficial owner (1) | Stock | Options (2) | Warrants (3) 9/30/19 | Percent of class | ||||||||||||
| Mark L. Rockefeller | 4,659,967 | 1,075,211 | 8,000 | 21.3 | % | |||||||||||
| Michael Konson | 3,659,967 | 1,075,211 | N/A | 17.5 | % | |||||||||||
| RCP-SSI, LLC | N/A | N/A | 6,889,275 | 25.5 | % | |||||||||||
| JNV Limited Partnership II, LLC | N/A | N/A | 1,300,491 | 4.8 | % | |||||||||||
| Endeavor Equity Fund, LP | 1,046,315 | N/A | N/A | 3.9 | % | |||||||||||
| Bethesda StreetShares Group, LLC | N/A | N/A | N/A | N/A | ||||||||||||
| Fenway Summer Ventures | N/A | N/A | N/A | N/A | ||||||||||||
| Peter Kight | N/A | N/A | N/A | N/A | ||||||||||||
| Accion Gateway Fund, L.L.C. | N/A | N/A | N/A | N/A | ||||||||||||
| All Executive Officers and Directors as a Group (4) | 8,708,956 | 3,360,462 | 8,000 | 44.8 | % | |||||||||||
| 16 |
| Preferred Stock (Seed) (5) | Preferred Stock (A Round) (5) | Preferred Stock (B Round) (5) | ||||||||||||||||||||||
| Name and address of beneficial owner (1) | Amount of beneficial ownership as of 9/30/19 | Percent of class | Amount of beneficial ownership as of 9/30/19 | Percent of class | Amount of beneficial ownership as of 9/30/19 | Percent of class | ||||||||||||||||||
| Mark L. Rockefeller | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||
| Michael Konson | 96,974 | 2.1 | % | N/A | N/A | N/A | N/A | |||||||||||||||||
| RCP-SSI, LLC | N/A | N/A | N/A | N/A | 29,107,845 | 83.7 | % | |||||||||||||||||
| JNV Limited Partnership II, LLC | N/A | N/A | N/A | N/A | 5,494,698 | 15.8 | % | |||||||||||||||||
| Endeavor Equity Fund, LP | N/A | N/A | 5,084,142 | 35.1 | % | N/A | N/A | |||||||||||||||||
| Bethesda StreetShares Group, LLC | 2,221,016 | 46.7 | % | N/A | N/A | N/A | N/A | |||||||||||||||||
| Fenway Summer Ventures | N/A | N/A | 1,897,094 | 13.1 | % | N/A | N/A | |||||||||||||||||
| Peter Kight | N/A | N/A | 1,694,714 | 11.7 | % | N/A | N/A | |||||||||||||||||
| Accion Gateway Fund, L.L.C. | 1,551,590 | 32.8 | % | 626,549 | 4.3 | % | N/A | N/A | ||||||||||||||||
| All Executive Officers and Directors as a Group (4) | 269,841 | 5.7 | % | 190,110 | 1.3 | % | N/A | N/A | ||||||||||||||||
| (1) | The address of Mark L. Rockefeller and Michael Konson is StreetShares, Inc., 1900 Campus Commons Drive, Suite 200, Reston, VA 20191. The address of RCP-SSI, LLC is 3 Bethesda Metro Center, Suite 830, Bethesda, MD 20814. The address of JNV Limited Partnership II, LLC is 8260 Greensboro Drive, Suite 425, McLean, VA 22102. The address of Endeavor Equity Fund, LP is 11037 Sunset Hills Rd, Suite A-3, Reston, VA 20190. The address of Bethesda StreetShares Group is c/o Shulman, Rogers, Gandal, Pordy & Ecker, 12505 Park Potomac Ave., 6th Floor, Potomac, MD 20854. The address of Fenway Summer Ventures is 7315 Wisconsin Avenue, Suite 960 West, Bethesda, MD 20814. The address of Peter Kight is 9674 E. Taos Drive Scottsdale, AZ 85262. The address of Accion Gateway Fund, L.L.C. is 10 Fawcett Street, Suite 204, Cambridge, MA 02138. |
| (2) | Options include vested and unvested options. | |
| (3) | In conjunction with the January 2018 Preferred Stock financing, the Company issued 8,233,115 warrants with conditional vesting and can terminate if certain milestones are achieved; one of such milestones may have been achieved on September 28, 2018, but the Company has not yet made a determination in this regard and reserves the right to make this determination at any time, including on or before the next milestone of June 30, 2020 or later. The warrants have an equity classification; therefore, no liability or expense has been recorded on the accompanying consolidated balance sheets and consolidated statement of operations. |
| (4) | All Executive Officers and Directors as a Group includes the shares owned by Mark L. Rockefeller and Michael Konson, which are also separately listed on the table. |
| (5) | There is no Preferred Stock (Seed), Preferred Stock (A Round), or Preferred Stock (B Round) acquirable as of September 30, 2019. |
Item 5.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
From March 2017 to June 2017, the Company issued approximately $3,100,000 in convertible promissory notes to investors, which converted into Series B preferred stock of the Company. Jeffery Valcourt, who sits on the Board of Directors of the Company, was one of the major investors in the note ($3,000,000), which converted into Series B preferred stock of the Company.
| 17 |
In September 2017, the Company closed on a note payable from Federated Information Technologies, Inc. with a principal balance of $500,000. As of June 30, 2019, the note was paid in full and closed. In September 2017, the Company closed on a line of credit from Federated Information Technologies, Inc. with a principal balance of $500,000. As of June 30, 2019, the line of credit was paid in full and closed. In September 2017, the Company also closed on an additional line of credit from an entity owned by Jeffrey Valcourt. On October 5, 2017, the Company drew $500,000 on the line of credit. As of June 30, 2019, the balance on the line from Mr. Valcourt’s entity was paid in full and closed. Mr. Valcourt holds a board seat with the company and the founder and president of Federated Information Technologies, Inc. is a board observer.
On March 30, 2018, the Company purchased a loan portfolio for $1,026,185 from an entity in which Jeffrey Valcourt has a financial interest. The book value of the portfolio was $1,056,213 at the time of purchase by the Company. Mr. Valcourt sits on the Board of Directors of the Company.
In August 2019, the Company issued $1,625,000 in convertible promissory notes, which are convertible into shares of the Company’s common stock, including a convertible promissory note in the amount of $1,000,000 issued to JNV II, Limited Partnership. Jeffrey Valcourt, who holds a board seat with the Company, has a financial interest in JNV II, Limited Partnership.
In September 2019, the Company raised $500,000 in the form of a promissory note payable to Federated Information Technologies, Inc. The founder and president of Federated Information Technologies, Inc. is a board observer.
Item 6.
OTHER INFORMATION
There is no additional information to report for this section.
| 18 |
STREETSHARES, INC.ANDSUBSIDIARIES
Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Contents
F-1
To the Board of Directors and Stockholders of
StreetShares, Inc. and Subsidiaries
We have audited the accompanying consolidated financial statements of StreetShares, Inc., (a Delaware corporation) and Subsidiaries, which comprise the consolidated balance sheets as of June 30, 2019 and 2018, and the related consolidated statements of operations, changes in redeemable stock and stockholders’ deficit, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated 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 consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated 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 entity’s 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of StreetShares, Inc. and Subsidiaries as of June 30, 2019 and 2018, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Tysons, Virginia
October 28, 2019
Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities.
| F-2 |
STREETSHARES, INC.ANDSUBSIDIARIES
As of June 30, 2019 and 2018
| 2019 | 2018 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 12,673,723 | $ | 16,407,136 | ||||
| Cash Reserve for Reg. A+ | 1,052,550 | 327,654 | ||||||
| Advances from Reg. D and Institutional investors | 947,599 | 2,491,855 | ||||||
| Factored receivables | 2,370,319 | 2,567,707 | ||||||
| Loans, net | 18,995,924 | 8,383,994 | ||||||
| Notes due from Reg. D and Institutional investors | 176,434 | 139,615 | ||||||
| Accrued interest receivable | 88,474 | 23,010 | ||||||
| Prepaid expenses | 461,259 | 181,040 | ||||||
| Property, equipment, and software, net | 357,300 | 111,716 | ||||||
| Other assets | 191,099 | 63,637 | ||||||
| Total Assets | $ | 37,314,681 | $ | 30,697,364 | ||||
| Liabilities, Redeemable Stock, and Stockholders' Deficit | ||||||||
| Liabilities | ||||||||
| Accounts payable | $ | 621,049 | $ | 149,511 | ||||
| Accrued expenses | 493,510 | 556,341 | ||||||
| Payable to Reg. D and Institutional investors | 6,585,697 | 7,444,277 | ||||||
| Payable to Reg. A+ investors | 25,690,110 | 6,861,275 | ||||||
| Accrued interest payable | 929,112 | 308,045 | ||||||
| Deferred revenue | 240,790 | 116,350 | ||||||
| Notes payable | 350,556 | 347,480 | ||||||
| Lines of credit | - | 500,000 | ||||||
| Net advances owed to stockholders | 26,887 | 26,887 | ||||||
| Other liabilities | 371,292 | 151,994 | ||||||
| Total Liabilities | 35,309,003 | 16,462,160 | ||||||
| Redeemable Stock | ||||||||
| B Round Series preferred stock: $0.0001 par value; 34,785,700 shares authorized; issued and outstanding as of June 30, 2019 and 2018 (liquidation preference value of $23,316,066 as of June 30, 2019 and 2018) | 22,838,775 | 22,838,775 | ||||||
| A Round Series preferred stock: $0.0001 par value; 14,488,075 shares authorized; issued and outstanding as of June 30, 2019 and 2018 (liquidation preference value of $8,095,394 as of June 30, 2019 and 2018) | 8,006,166 | 8,006,166 | ||||||
| Series seed preferred stock: $0.0001 par value; 4,735,924 shares authorized; issued and outstanding as of June 30, 2019 and 2018 (liquidation preference value of $1,200,000 as of June 30, 2019 and 2018) | 1,200,000 | 1,200,000 | ||||||
| Total redeemable stock | 32,044,941 | 32,044,941 | ||||||
| Stockholders' Deficit | ||||||||
| Common stock; $0.0001 par value; 82,000,000 shares authorized; 11,877,520 shares issued and outstanding as of June 30, 2019; 11,637,131 shares issued and outstanding as of June 30, 2018; | 1,188 | 1,164 | ||||||
| Additional paid-in capital | 475,497 | 400,903 | ||||||
| Accumulated deficit | (30,515,948 | ) | (18,211,804 | ) | ||||
| Total stockholders' deficit | (30,039,263 | ) | (17,809,737 | ) | ||||
| Total Liabilities, Redeemable Stock, and Stockholders' Deficit | $ | 37,314,681 | $ | 30,697,364 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
STREETSHARES, INC.ANDSUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30, 2019 and 2018
| 2019 | 2018 | |||||||
| Operating Revenue | ||||||||
| Interest income | $ | 3,084,495 | $ | 2,007,231 | ||||
| Auction success fees | 704,127 | 675,891 | ||||||
| Origination fees | 102,973 | 16,311 | ||||||
| Partner fees | 135,000 | 100,000 | ||||||
| Other loan revenue | 393,827 | 379,333 | ||||||
| Total operating revenue | 4,420,422 | 3,178,766 | ||||||
| Cost of Revenue | ||||||||
| Interest expense | (1,892,170 | ) | (1,748,971 | ) | ||||
| Provision for loan losses | (543,782 | ) | (221,584 | ) | ||||
| Total cost of revenue | (2,435,952 | ) | (1,970,555 | ) | ||||
| Net revenue | 1,984,470 | 1,208,211 | ||||||
| Operating Expenses | ||||||||
| Payroll and payroll taxes | 6,959,661 | 4,580,130 | ||||||
| Sales and marketing | 3,231,216 | 1,041,851 | ||||||
| General and administrative | 1,750,704 | 1,183,370 | ||||||
| Professional fees | 1,886,130 | 505,860 | ||||||
| Processing and servicing | 463,360 | 295,080 | ||||||
| Total operating expenses | 14,291,071 | 7,606,291 | ||||||
| Other Income (Expense) | ||||||||
| Interest earned | 79,422 | 64,210 | ||||||
| Interest expense | (76,037 | ) | (225,832 | ) | ||||
| Loss on disposal of fixed asset | (1,243 | ) | - | |||||
| Other income | 315 | - | ||||||
| Total other income (expense) | 2,457 | (161,622 | ) | |||||
| Net Loss | $ | (12,304,144 | ) | $ | (6,559,702 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
STREETSHARES, INC.ANDSUBSIDIARIES
Consolidated Statements of Changes in Redeemable Stock and Stockholders’ Deficit
For the Years Ended June 30, 2019 and 2018
| Redeemable Stock | Redeemable Stock | Redeemable Stock | Stockholders' Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||
| Series Seed | A Round Series | B Round Series | Additional | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-In | Treasury Stock | Accumulated | Stockholders' | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Deficit | ||||||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2018 | 4,735,924 | $ | 1,200,000 | 14,488,075 | $ | 8,006,166 | - | $ | - | 10,038,617 | $ | 1,004 | $ | 413,393 | - | $ | - | $ | (11,652,102 | ) | $ | (11,237,705 | ) | |||||||||||||||||||||||||||||
| Issuance of Common Stock | - | - | - | - | - | - | 470,199 | 47 | 25,376 | - | - | - | 25,423 | |||||||||||||||||||||||||||||||||||||||
| Stock Warrants | - | - | - | - | - | - | - | - | (122,509 | ) | - | - | - | (122,509 | ) | |||||||||||||||||||||||||||||||||||||
| Stock Compensation | - | - | - | - | - | - | - | - | 70,194 | - | - | - | 70,194 | |||||||||||||||||||||||||||||||||||||||
| Conversion of Convertible Promissory Notes | - | - | - | - | 5,677,855 | 3,316,066 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of Series B Preferred Stock | - | - | - | - | 29,107,845 | 20,000,000 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Direct Cost of Preferred Stock Issued | - | - | - | - | - | (477,291 | ) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Exercise of Warrants to Purchase Common Stock | - | - | - | - | - | - | 1,128,315 | 113 | 14,449 | - | - | - | 14,562 | |||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | - | - | - | - | - | (6,559,702 | ) | (6,559,702 | ) | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2018 | 4,735,924 | $ | 1,200,000 | 14,488,075 | $ | 8,006,166 | 34,785,700 | $ | 22,838,775 | 11,637,131 | $ | 1,164 | $ | 400,903 | - | $ | - | $ | (18,211,804 | ) | $ | (17,809,737 | ) | |||||||||||||||||||||||||||||
| Issuance of Common Stock | - | - | - | - | - | - | 240,389 | 24 | 7,956 | - | - | - | 7,980 | |||||||||||||||||||||||||||||||||||||||
| Stock Warrants | - | - | - | - | - | - | - | - | (2,260 | ) | - | - | - | (2,260 | ) | |||||||||||||||||||||||||||||||||||||
| Stock Compensation | - | - | - | - | - | - | - | - | 68,898 | - | - | - | 68,898 | |||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | - | - | - | - | - | (12,304,144 | ) | (12,304,144 | ) | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | 4,735,924 | $ | 1,200,000 | 14,488,075 | $ | 8,006,166 | 34,785,700 | $ | 22,838,775 | 11,877,520 | $ | 1,188 | $ | 475,497 | - | $ | - | $ | (30,515,948 | ) | $ | (30,039,263 | ) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
STREETSHARES, INC.ANDSUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2019 and 2018
| 2019 | 2018 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (12,304,144 | ) | $ | (6,559,702 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities | ||||||||
| Depreciation and amortization | 81,701 | 25,370 | ||||||
| Loss on disposal of fixed assets | 1,243 | - | ||||||
| Stock compensation expense | 68,898 | 70,194 | ||||||
| Warrant expense | (2,260 | ) | (122,509 | ) | ||||
| Provision for loan losses | 543,782 | 221,584 | ||||||
| Interest on convertible notes | - | 139,463 | ||||||
| Changes in assets and liabilities: | ||||||||
| Factored receivables | 199,118 | (2,440,567 | ) | |||||
| Cash Reserve for Reg. A+ | (724,896 | ) | (148,793 | ) | ||||
| Advances from Reg. D and Institutional investors | 1,544,256 | (1,459,164 | ) | |||||
| Notes due from Reg. D and Institutional investors | (36,819 | ) | 191,165 | |||||
| Prepaid expenses and other assets | (407,681 | ) | (95,657 | ) | ||||
| Loans | (11,201,203 | ) | 340,238 | |||||
| Accrued interest receivable | (65,464 | ) | 8,652 | |||||
| Deferred revenue | 124,440 | 61,569 | ||||||
| Accounts payable | 471,538 | (41,705 | ) | |||||
| Accrued expenses | (62,831 | ) | 347,189 | |||||
| Payable to Reg. D and Institutional investors | (814,819 | ) | (911,963 | ) | ||||
| Payable to Reg. A+ investors | 18,828,835 | 4,785,400 | ||||||
| Accrued interest payable | 621,067 | 236,890 | ||||||
| Other liabilities | 218,298 | 81,796 | ||||||
| Net cash used in operating activities | (2,916,941 | ) | (5,270,550 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of property, equipment, and software | (328,528 | ) | (41,119 | ) | ||||
| Net cash used in investing activities | (328,528 | ) | (41,119 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Draws and (payments) on lines of credit | (500,000 | ) | 500,000 | |||||
| Notes payable | 3,076 | 340,311 | ||||||
| Decrease in net advances owed to stockholders | - | (1,335 | ) | |||||
| Issuance of common stock | 7,980 | 39,985 | ||||||
| Issuance of series B preferred stock | - | 20,000,000 | ||||||
| Series B closing cost | - | (477,291 | ) | |||||
| Early exercise of stock options | 1,000 | 9,288 | ||||||
| Net cash provided by (used in) financing activities | (487,944 | ) | 20,410,958 | |||||
| Net Increase (Decrease) in Cash and Cash Equivalents | (3,733,413 | ) | 15,099,289 | |||||
| Cash and Cash Equivalents, beginning of year | 16,407,136 | 1,307,847 | ||||||
| Cash and Cash Equivalents, end of year | $ | 12,673,723 | $ | 16,407,136 | ||||
| Supplemental Information | ||||||||
| Cash paid for interest | $ | 1,347,140 | $ | 1,598,450 | ||||
| Non-cash Financing Transactions: | ||||||||
| Conversion of convertible debt to series seed preferred stock | $ | - | $ | (3,316,066 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 1 - Organization
StreetShares, Inc. was incorporated on December 3, 2013 under the laws of the state of Delaware. StreetShares, Inc. wholly owns and operates five subsidiaries: StreetShares Lending Company, LLC (“SSLC”), a Delaware limited liability company, which was formed on July 15, 2013; StreetShares Investor Interest Holding, LLC (“SSIIH”) which had a name change to StreetShares Funding, LLC (“SSF”) on December 10, 2015, a Delaware limited liability company, which was formed on October 28, 2014; StreetShares Investors Servicing, LLC (“SSIS”), a Delaware limited liability company, which was formed on December 8, 2015; STR Co-Investment, LLC (“STR”), a Delaware limited liability company, which was formed on December 8, 2015, StreetShares Public Investor Holdings, LLC (“SSPIH”), a Delaware limited liability company, which was formed on January 13, 2017, and shall each have an indefinite life pursuant to its operating agreements. The accompanying consolidated financial statements include the accounts of StreetShares, Inc., SSLC, SSF, SSIS, STR and SSPIH. Collectively, these entities are known as “the Company”.
The Company began operations on July 15, 2013, which primarily included start-up and organizational activities. The Company originated its first loan in July 2014.
The Company’s principal activity is providing business financing products to small businesses located throughout the United States. The Company offers loans from $2,000 to $250,000 for terms of three months, six months, one year, 18 months, two years, and three years. The Company purchases invoice receivables from small businesses with U.S. Federal and State Government contracts and highly rated companies, usually in the Fortune 500. The amount of each invoice receivable purchase is determined based on the total size of the assigned contract and invoices purchased have ranged from $600 to $7,000,000 since inception.
The Company makes an investment representing a portion of every approved loan or line and places the remaining portion for auction on their marketplace. Prior to July 1, 2018, the Company placed a portion of every factored invoice in the marketplace. The Company uses their technology and data analytics to aggregate data about the small business and its owner, assess the creditworthiness of both, approve or deny their loan request, and then price the loan accordingly. Potential regulation D (“Reg. D”) loan investors bid an amount of the loan at the interest rate specified by the Company. Institutional investors (lenders) also make investments in each loan or line in the amount and at the interest rate specified by their agreements with the Company.
The Company qualified for Regulation A+ (“Reg. A+”) from the Security and Exchange Commission (“SEC”) on February 17, 2016 to offer StreetShares Notes (marketed as “Veteran Business Bonds” and sometimes referred to as “VBB”) to investors.
As an early stage, venture-funded company that is not yet profitable, we rely heavily on capital investments to fund our operations. Based on our current financial situation, it is possible we will require additional capital within the next 12 months beyond our currently anticipated amounts to fund the operations of the Company. The Company is currently, and consistently, engaged in ongoing discussions with providers who have the financial wherewithal to provide such funding. Notwithstanding these discussions, additional capital may not be available on reasonable terms, or at all. In the event the Company is not able to acquire funding, there are several options that can be enacted that would allow the Company to achieve a break-even state or help prolong the duration of the Company until funding can be obtained. These options include, but are not limited to, scaling back of marketing efforts significantly, scaling back of human resources significantly, obtaining additional debt financing, asset and or business unit divestitures, and the potential sale of the Company at a discount.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation - The Company prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of StreetShares, Inc. as well as the accounts of their wholly-owned subsidiaries, SSLC, SSF, SSIS, STR, and SSPIH. All significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates the financial statements of all entities in which it has a controlling financial interest. The Company has concluded that it does not have investments in any variable interest entities (“VIE”).
| F-7 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 2 - Summary of Significant Accounting Policies- Continued
Use of Estimates - The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Significant estimates include, but are not limited to, allowance for loan losses, stock-based compensation expense, valuation of warrants, capitalized software development costs, the useful lives of fixed assets, and the valuation of deferred tax assets. The Company bases its estimates on historical experience, current events, third party valuations and opinions, and other factors they believe to be reasonable. These estimates and assumptions are inherently subjective in nature; actual results may differ from the estimates and assumptions and such differences may be material.
Cash and Cash Equivalents- The term cash, as used in the accompanying consolidated financial statements, includes currency on hand and checking, saving, and money market accounts held with financial institutions. The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be a cash equivalent. Interest bearing and non-interest bearing accounts held in an insured institution are aggregated and guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company maintains its cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk.
Cash Reserve for Reg. A+- The Company holds a cash reserve to cover losses on assets funded by Reg. A+ investors. The reserve is funded quarterly based upon the predicted twelve months future losses on the portion of the portfolio funded by the Reg. A+ proceeds.
Advances from Reg. D and Institutional Investors- The Company requires cash deposits from prospective Reg. D investors in anticipation of their participation in future loan auction activities. Institutional investors may also provide cash deposits if specified in their agreements with the Company. Reg. D and Institutional (“Reg. D and Institutional”) investor deposits, if not bid in an auction, are refundable and, accordingly, are included as a component of Payable to Reg. D and Institutional investors on the consolidated balance sheet.
Loans- The Company values their loans at the principal balance outstanding reduced by a valuation allowance for loan losses estimated as of the consolidated balance sheet date.
Allowance for Loan Losses- The allowance for loan losses (“ALL”) is established through periodic charges to the provision for loan losses. Loan losses are charged against the ALL when the Company believes that the future collection of principal is unlikely. Subsequent net recoveries, if any, are credited to the ALL.
We calculate the predicted losses on the current portfolio of loans and advanced invoices. The Predicted Loss Rate (PLR) for each asset is determined by the credit department. The PLR is multiplied by the remaining principal of the corresponding asset. The aggregate predicted losses are reviewed on a monthly basis by the credit and finance department to make adjustments. In determining the PLR for each asset and the aggregate predicted losses, we consider credit factors such as those described in the next paragraph. The resulting predicted loss numbers are then booked to the balance sheet (as contra assets to the loan assets).
The Company evaluates the creditworthiness of the portfolio on an aggregated basis. The allowance is subjective, as it requires material estimates, including such factors as historical trends, known and inherent risks in the portfolio, adverse situations that may affect borrower’s ability to repay, and current economic conditions. Other qualitative factors considered may include items such as: uncertainties in forecasting and modeling techniques, seasonality, business conditions, and emerging trends. Recovery of the carrying value of our financial products is dependent to a great extent on conditions that may be beyond our control. Any combination of the aforementioned factors may adversely affect our portfolio resulting in increased delinquencies and losses and could require additional provisions for credit losses, which could impact future periods. The allocation of the allowance for the loan losses between the Company and the Reg. D and Institutional investors is determined on a pro-rata basis according to the relative principal balances outstanding funded by each party. The Reg. D and Institutional investor portion of the allowance does not affect the operations of the Company, as it is a reduction in the amount payable to Reg. D and Institutional investors, except to the extent provided in a separate agreement.
| F-8 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 2 - Summary of Significant Accounting Policies- Continued
Charged-Off Loans - The Company’s loans and traditional lines of credits (“loans”) are paid back on a weekly basis. Loans are considered to be delinquent when either (i) the past-due balance is equal to or greater than three times the regular weekly payment or (ii) any amounts are 31 days or longer past due. The Company continues to accrue interest on delinquent loans. Loans are returned to current status when the Company receives all accrued principal and interest required with the original amortization schedule and any fees applied. No individual loan impairments are recorded.
When a loan or line is 150 days since the last cleared payment, the Company charges off the outstanding principal balance of the individual loan, unless an assessment is made that an individual loan should not be charged off based on the payment status and information gathered through collection efforts. Charge-offs are allocated to the Company and the Reg. D and Institutional investors on a pro-rata basis according to the relative principal balances outstanding funded by each party, except to the extent provided in a separate agreement.
Factored Receivables -In December 2016, the Company began offering advances to small businesses with direct or subcontracted US Federal and State Government contracts. In October 2017, the Company began purchasing invoice receivables from small businesses with contracts from highly rated companies, usually in the Fortune 500. Such advance payments, which are interest earning, are recorded as reductions to the amounts due to the factoring clients for the purchase of factored receivables. As of June 30, 2019 and 2018, the funds employed (factored receivables less amount due to factoring clients less ALL) were $2,370,319 and $2,567,707, respectively.
Notes due from Reg. D and Institutional Investors- The Company places bids on behalf of certain Reg. D and Institutional investors, as per agreements, on the Company’s marketplace. These bids are transferred to the Reg. D and Institutional investors platform account after a required holding period. The notes due are the amounts due to the Company from the Reg. D and Institutional investors for the bids placed on their behalf of loans in their portfolio.
Unfunded Loan Accrual and Off-Balance Sheet Exposure- The Company offers a line of credit. An accrual is recognized for the Company’s credit loss exposure on the unfunded portion of the line of credit and an expense is recorded in General and administrative expense on the consolidated statements of operations. The credit loss exposure is calculated similar to the allowance for loan losses. Effective January 1, 2019, the Company began calculating the credit loss exposure on the unfunded portion of the line of credit based on predicted funding volume by date brackets of 0-30 days, 31-60 days, and over 60 days based on historical data. Prior to January 1, 2019, and prior to any meaningful historical experience, the Company calculated the credit loss exposure on the unfunded portion of a line of credit based the predicted funding volume over the full term of the line of credit. As of June 30, 2019, approximately 44% of unfunded line of credits are predicted to fund in the first 30 days, 6% in days 31-60, and 1% over 60 days, based on the historical funding data. As of June 30, 2018, approximately 50 percent of unfunded lines of credit were predicted to be drawn over the full term of the line of credit based on historical data. As of June 30, 2019 and 2018, the Company predicts to fund approximately 70 percent and 65 percent, respectively, of the amount predicted to be drawn. Reg. D and Institutional investors have the opportunity to, but are not obligated to, fund the remaining amount predicted to be drawn.
As of June 30, 2019 and 2018, the total line of credit unfunded credit exposure was approximately $1,165,000 and$2,484,000, respectively, of which approximately $816,000 and $1,614,000, respectively, was related to the undrawn exposure predicted to be funded by the Company. As of June 30, 2019 and 2018, the total line of credit unfunded credit loss exposure was approximately $47,000 and $121,000, respectively, of which approximately $33,000 and $79,000, respectively, was related to the undrawn exposure predicted to be funded by the Company.
Property, Equipment, and Software- Property, equipment, and software (“PE&S”) consist of computers and electronics, office equipment and furniture, patents and capitalized internal-use software costs. PE&S are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are recognized over the estimated useful lives of the assets using the straight-line method. For electronics, the Company estimates a five-year useful life. All other PE&S assets are estimated to have a two to five-year useful life or the life of the lease, if shorter, for leasehold improvements.
The Company’s internally developed software includes the costs incurred to develop the website, platform, and other affiliated costs and are capitalized when the preliminary project stage is completed, the Company has authorized funding, and it is probable that the project will be completed and used to perform its intended function. Capitalized software costs primarily include salary costs for employees directly involved in the development efforts, software licenses acquired, and fees paid to outside consultants and contractors. Software development costs incurred prior to meeting the criteria for capitalization and costs incurred for training and maintenance are expensed as incurred. Certain upgrades and enhancements to existing software that result in additional functionality are capitalized. Capitalized software development costs are amortized using the straight-line method over their projected useful lives, generally two to five years.
| F-9 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 2 - Summary of Significant Accounting Policies- Continued
PE&S consisted of the following:
| Estimated Useful Life | 2019 | 2018 | ||||||||
| Computer and electronics | 2-5 years | $ | 146,427 | $ | 116,560 | |||||
| Office equipment, furniture, and fixtures | 2-5 years | 67,553 | 3,543 | |||||||
| Capitalized internal-use software | life of lease | 56,462 | 45,212 | |||||||
| Leasehold improvements | life of lease | 163,000 | 1,150 | |||||||
| Patent | indefinite | 78,584 | 27,929 | |||||||
| 512,026 | 194,394 | |||||||||
| Less: accumulated depreciation and amortization | (154,726 | ) | (82,678 | ) | ||||||
| Property, Equipment, and Software, net | $ | 357,300 | $ | 111,716 | ||||||
Depreciation and amortization expense for the years ended June 30, 2019 and 2018 wasapproximately $82,000 and $25,000, respectively.
The Company is required to assess potential impairment of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As of June 30, 2019 and 2018, there were no events or changes that resulted in an impairment of the Company’s long-lived assets.
Loans and Payable to Reg. D and Institutional Investors - The Company uses Member Payment Dependent Notes (“MPDNs”) to fund a portion of loans and lines of credit to borrowers. Prior to July 1, 2018, the Company used MPDNs to fund a portion of factored invoice receivables. MPDNs are unregistered securities that are dependent upon the performance of a portion of the Company’s note from the borrower. Reg. D and Institutional investors specify the amount of each asset in which to invest (if available). The term to maturity matches the term of the underlying note. If the loan performs according to its terms, the Reg. D and Institutional investors receive the principal and interest portions of the loan in proportion to their investment, less applicable servicing fees. If the loan doesn’t perform, payments to the Reg. D and Institutional investors will be limited to the pro-rata portion of any payments received prior to charge-off, according to the respective principal balances funded by the Reg. D or Institutional investor, less applicable servicing fees, except to the extent provided in a separate agreement. MPDNs are available to accredited and Institutional investors only. Some Institutional investors purchase actual loan participations and not MPDNs, in which case, the Institutional investor’s repayment terms are specified in their respective agreement with the Company.
Payable to Reg. A+ Investors - The Company offers StreetShares Notes to Reg. A+ investors at a fixed rate with a minimum investment of $25. The notes mature three years from the date of the purchase agreement. The Company uses the proceeds from Reg. A+ investors primarily to fund loans, lines of credit, and purchase factored invoice receivables. The proceeds from Reg. A+ investors are not payment dependent on any individual loans and therefore are not directly subject to the loan loss risk of any one asset.
| F-10 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 2 - Summary of Significant Accounting Policies- Continued
As of June 30, 2019 future annual maturities of notes due to Reg. A+ investors were as follows:
| Period Ending June 30 | Amount | |||
| 2020 | $ | 857,925 | ||
| 2021 | 2,713,150 | |||
| 2022 | 21,992,835 | |||
| 2023 | 126,200 | |||
| $ | 25,690,110 | |||
Revenue Recognition - The Company generates revenue primarily through interest, auction success fees, origination fees, and service fees on its lending products. Interest income on lending assets is calculated based on the contractual interest rate of the loan and recorded as interest income as earned. The Company allows borrowers to “prepay” the principal balance of their loans without having to pay the future expected interest. The Company, however, requires collection of the interest accrued through the next expected payment date, if applicable. Service fees are fees charged to Reg. D and Institutional investors based on a percentage of the payments received from borrowers. The service fees are recorded as income when payments are received. The origination fees, relating to the portion of the loans the Company owns, are deferred and recognized over the life of the loan using the effective interest method. Origination fees collected but not yet recognized as revenue are recorded as deferred revenue. The Company views the value of the auction as being delivered upon acceptance of the loans. As such, the auction success fees, relating to the portion owned by Reg. D and Institutional investors, are recognized when received upon the funding of the loans.
The Company generates revenue by charging fees for late payments, ACH return fees, and other fees charged by providers for failed payments. Generally, fees are used to cover costs incurred for collection.
The Company generates revenue on invoice receivables through interest income, factor fees, draw fees, commitment fees, and enrollment fees. Interest income on invoice receivables is calculated using the simple interest method on the daily balances of principal outstanding. Interest income, factor fees, and commitment fees are accrued until funds are received for the purchased factored receivable. Enrollment fees are recognized at the time of purchase of factored receivables. Draw fees are recognized at the time of each draw on a line of credit secured by unbilled invoices.
The Company generates revenue through transaction fees charged to Reg. A+ investors in accordance with the terms of the investor membership agreement.
Income Taxes - The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Valuation allowances are recorded to reduce deferred tax assets to the amount the Company believes is more likely than not to be realized.
Uncertain tax positions are recognized only when the Company believes it is more likely than not that the tax position will be upheld on examination by the taxing authorities based on the merits of the position. The Company recognizes interest and penalties, if any, related to uncertain tax positions in Income tax expense on the consolidated statements of operations.
The Company files income tax returns in the United States for federal, state, and local jurisdictions. The Company is potentially subject to a tax examination for a period of three years from the date a return is originally filed or filed as amended, which as of June 30, 2019, includes all returns filed since the Company’s 2016 tax year return. No income tax returns are currently under examination by taxing authorities.
| F-11 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 2 - Summary of Significant Accounting Policies- Continued
Accounting for Stock-Based Compensation - The Company’s stock-based compensation is measured based on fair value of the awards at the grant date and recognized as compensation expense on a straight-line basis over the period during which the option holder is required to perform services in exchange for the award (vesting period). The Company uses the Black-Scholes Option Pricing Model to estimate fair value of stock options. The use of the option valuation model requires subjective assumptions, including the fair value of the Company’s common stock, the expected term of the option, and the expected stock price volatility based on peer companies. Additionally, the recognition of stock-based compensation expense requires an estimation of the number of options that will ultimately vest and the number of options that will ultimately be forfeited.
Marketing Costs - All marketing costs are expensed as incurred. Marketing expense for the years ended June 30, 2019 and 2018 was approximately $2,614,000 and $798,000, respectively.
Recent Accounting Pronouncements - During May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU No. 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. During 2015 and 2016, the FASB also issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09; ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations in Topic 606; ASU No. 2016-10, “Identifying Performance Obligations and Licensing”, which clarifies the identification of performance obligations and the licensing implementation guidance; ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606”, which both affect narrow aspects of Topic 606. Topic 606 (as amended) is effective for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The company may elect to apply the guidance earlier, but no earlier than fiscal years beginning after December 15, 2016. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Management is currently evaluating this guidance and the impact it will have on the Company’s consolidated financial statements.
During February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. Management is currently evaluating this guidance and the impact it will have on the Company’s consolidated financial statements.
During March 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU No. 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements or the Notes thereto.
During June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 (as amended) is effective for annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. Management is currently evaluating this guidance and the impact it will have on the Company’s consolidated financial statements.
| F-12 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 2 - Summary of Significant Accounting Policies- Continued
During February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassifications of Certain Tax Effects from Accumulated Other Comprehensive Income”. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. The ASU is effective for years beginning after December 31, 2018, with early adoption permitted. The Company has not adopted the provisions of ASU 2018-02. Management does not believe the provisions of this guidance will have a significant effect on the Company’s consolidated financial statements.
Note 3 – Loans, Factored Receivables and Payable to Reg. D and Institutional Investors
The Company’s marketplace allows borrowers, Reg. D, and Institutional investors to engage in transactions relating to StreetShares’ lending products. SSLC originates loans and lines to borrowers, while SSF purchases factored receivables and issues notes to Reg. D and Institutional investors as a means to allow the investors to invest in the associated loans and, prior to July 1, 2018, in factored receivables. Prior to August 2017, SSI purchased factored receivables. Shortly after origination the borrower loans are sold in their entirety to SSF for holding, servicing, receipt, and disbursement of received payments. SSF operates as a remote entity from SSI, as a wholly owned subsidiary whose only purpose is to hold and manage the loans and factored receivables, borrower repayments, and disbursements to investors.
As of June 30, 2019, loans outstanding, on the accompanying consolidated balance sheet, consists of the following:
| The Company Loans Outstanding | Investor Loans Outstanding | Total Loans Outstanding | ||||||||||
| Loans | $ | 14,052,895 | $ | 5,934,969 | $ | 19,987,864 | ||||||
| Allowance for loans losses | (695,069 | ) | (296,871 | ) | (991,940 | ) | ||||||
| Total loans, net | $ | 13,357,826 | $ | 5,638,098 | $ | 18,995,924 | ||||||
As of June 30, 2018, loans outstanding, on the accompanying consolidated balance sheet, consists of the following:
| The Company Loans Outstanding | Investor Loans Outstanding | Total Loans Outstanding | ||||||||||
| Loans | $ | 3,836,752 | $ | 4,977,896 | $ | 8,814,648 | ||||||
| Allowance for loans losses | (179,680 | ) | (250,974 | ) | (430,654 | ) | ||||||
| Total loans, net | $ | 3,657,072 | $ | 4,726,922 | $ | 8,383,994 | ||||||
| F-13 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 3 - Loans, Factored Receivables and Payable to Reg. D and Institutional Investors- Continued
As of June 30, 2019, factored receivables outstanding, on the accompanying consolidated balance sheet, consists of the following:
| The Company Factored Receivables Outstanding | Investor Factored Receivables Outstanding | Total Factored Receivables Outstanding | ||||||||||
| Factored receivables | $ | 2,393,846 | $ | - | $ | 2,393,846 | ||||||
| Allowance for loans losses | (23,527 | ) | - | (23,527 | ) | |||||||
| Total factored receivables, net | $ | 2,370,319 | $ | - | $ | 2,370,319 | ||||||
As of June 30, 2018, factored receivables outstanding, on the accompanying consolidated balance sheet, consists of the following:
| The Company Factored Receivables Outstanding | Investor Factored Receivables Outstanding | Total Factored Receivables Outstanding | ||||||||||
| Factored receivables | $ | 2,365,328 | $ | 227,636 | $ | 2,592,964 | ||||||
| Allowance for loans losses | (23,121 | ) | (2,136 | ) | (25,257 | ) | ||||||
| Total factored receivables, net | $ | 2,342,207 | $ | 225,500 | $ | 2,567,707 | ||||||
As of June 30, 2019 and 2018, payable to Reg. D and Institutional investors, on the accompanying consolidated balance sheet, consists of the following:
| 2019 | 2018 | |||||||
| Loans owned by Reg. D and Institutional investors | $ | 5,934,969 | $ | 4,977,896 | ||||
| Factored receivables owned by Reg. D and Institutional investors | - | 227,636 | ||||||
| Allowance for loan losses for net loans | (296,871 | ) | (250,974 | ) | ||||
| Allowance for loan losses for factored receivables | - | (2,136 | ) | |||||
| Advances from Reg. D and Institutional investors | 947,599 | 2,491,855 | ||||||
| Total payable to Reg. D and Institutional investors | $ | 6,585,697 | $ | 7,444,277 | ||||
As of June 30, 2019 and 2018, loans had original terms of three months, six months, one year, 18 months, two years, three years and five years. As of June 30, 2019 and 2018, factored receivables had original terms of 1-60 days.
| F-14 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 3 - Loans, Factored Receivables and Payable to Reg. D and Institutional Investors - Continued
As of June 30, 2019, all loans outstanding had an average term of 19 months. Because the terms of these loans were established through marketplace auctions, the Company believes the carrying amount of these loans, and the corresponding payables to Reg. D and Institutional investors approximate their fair value.
As of June 30, 2019, all factored receivables outstanding had originated within the previous 59 days. Because these factored receivables were originated within the short term, the Company believes the carrying amount of these factored receivables approximate their fair value.
As of June 30, 2019, future annual maturities of notes due to Reg. D and Institutional investors were as follows:
| Period Ending June 30 | Amount | |||
| 2020 | $ | 4,928,624 | ||
| 2021 | 1,541,259 | |||
| 2022 | 92,882 | |||
| 2023 | 11,611 | |||
| 2024 | 11,321 | |||
| $ | 6,585,697 | |||
As of June 30, 2019 and 2018, allowance for loan losses, on the accompanying consolidated balance sheets, consists of the following:
| The Company | Investor | Total | ||||||||||
| Allowance for loans losses - Balance as of June 30, 2017 | $ | 88,068 | $ | 419,048 | $ | 507,116 | ||||||
| Provision for loan losses | 221,584 | 350,750 | 572,334 | |||||||||
| Charge-offs, net of recoveries | (106,851 | ) | (516,688 | ) | (623,539 | ) | ||||||
| Allowance for loans losses - Balance as of June 30, 2018 | 202,801 | 253,110 | 455,911 | |||||||||
| Provision for loan losses | 543,782 | 173,684 | 717,466 | |||||||||
| Charge-offs, net of recoveries | (27,987 | ) | (129,923 | ) | (157,910 | ) | ||||||
| Allowance for loans losses - Balance as of June 30, 2019 | $ | 718,596 | $ | 296,871 | $ | 1,015,467 | ||||||
During the years ended June 30, 2019 and 2018, there were $60,663 and $20,237, respectively, in net recoveries related to the allowance for loan losses.
Note 4 - Redeemable Stock and Stockholders’ Equity
In May 2014, the Company raised approximately $1,200,000 in equity financing from new investors through the issuance of 4,735,924 shares of Series Seed Convertible Preferred Stock (“Series Seed Preferred Stock”). Approximately 779,000 shares were issued to investors in which the Company converted promissory notes for approximately $180,000 in proceeds. The remaining shares were issued at a purchase price of $0.258 per share.
| F-15 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 4 - Redeemable Stock and Stockholders’ Equity - Continued
In conjunction with the May 2014 Preferred Stock financing, the Company amended its Certificate of Incorporation and authorized the issuance of up to 21,735,924 shares of stock, 17,000,000 of which have been designated as common stock and 4,735,924 of which have been designated as preferred stock. The par value of the common stock and preferred stock is $0.0001 per share. The holders of each series of preferred stock and the holders of common stock have certain rights and privileges as described below.
In February 2016 and June 2016, the Company raised approximately $4,560,000 and $965,000, respectively, in equity financing from new investors through the issuance of a total of 9,363,289 shares of A Round Series Convertible Preferred Stock. Approximately 788,000 shares were issued to investors in which the Company converted promissory notes for approximately $340,000 in proceeds.
The remaining shares were issued at a purchase price of $0.59007 per share. Approximately 5,125,000 shares were converted from convertible debt to A Round Series Convertible Preferred Stock.
In conjunction with the February 2016 Preferred Stock financing, the Company amended its Certificate of Incorporation and authorized the issuance of up to 62,971,062 shares of stock, 40,400,000 of which have been designated as common stock and 22,571,062 of which have been designated as preferred stock. The par value of the common stock and preferred stock is $0.0001 per share. The holders of each series of preferred stock and the holders of common stock have certain rights and privileges as described below.
In January 2018, the Company raised $20,000,000 in equity financing from new investors through the issuance of 29,107,845 shares of B Round Series Convertible Preferred Stock. The remaining shares were issued at a purchase price of $0.5840 per share. Approximately 5,678,000 shares were converted from convertible debt to B Round Series Convertible Preferred Stock. As part of the B Round Series issuance, the share class is entitled to participating liquidation rights subject to certain restrictions. As of June 30, 2019 and 2018, the Company incurred direct legal costs in the issuance of the B Round Series stock totaling $0 and $477,291, respectively, which was reflected as a reduction of the carrying amount of the B Round Series preferred stock on the accompanying consolidated balance sheets.
In conjunction with the January 2018 Preferred Stock financing, the Company amended its Certificate of Incorporation and authorized the issuance of up to 136,009,699 shares of stock, 82,000,000 of which have been designated as common stock and 54,009,699 of which have been designated as preferred stock. The par value of the common stock and preferred stock is $0.0001 per share. The holders of each series of preferred stock and the holders of common stock have certain rights and privileges as described below.
The Preferred Stock is redeemable at the option of the holder. The Company has evaluated the redemption features of the Preferred Stock to determine if the Preferred Stock should be considered liabilities or mandatorily redeemable securities requiring classification as liabilities under U.S. GAAP. The Company has concluded that the Preferred Stock does not require classification as a liability. Given the potential redemption of the Preferred Stock, the Company has concluded to present the carrying value of the Preferred Stock outside of stockholders’ deficit as temporary equity and in the “mezzanine” in the accompanying consolidated balance sheets.
Stock Warrants- Warrants have a per-share exercise price of fair market value at the time of warrants issuance, as determined by the Company’s Board of Directors. The warrants are fully exercisable upon issuance and are scheduled to expire from October 2019 to August 2025.
In conjunction with the January 2018 Preferred Stock financing, the Company issued 8,233,115 warrants with conditional vesting and can terminate if certain milestones are achieved; one of such milestones may have been achieved on September 28, 2018, but the Company has not yet made a determination in this regard and reserves the right to make this determination at any time, including on or before the next milestone of June 30, 2020 or later. The warrants have an equity classification; therefore, no liability or expense has been recorded on the accompanying consolidated balance sheets and consolidated statement of operations. As of June 30, 2019 and 2018, the fair value using the Black-Scholes methodology was approximately $1,755,000 and $999,000, respectively.
| F-16 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 4 - Redeemable Stock and Stockholders’ Equity - Continued
A summary of warrant activity of the Company is as follows:
| Number of | ||||
| Warrants | ||||
| Outstanding at June 30, 2017 | 1,430,763 | |||
| Granted | 8,305,115 | |||
| Exercised | (1,128,315 | ) | ||
| Canceled | - | |||
| Outstanding at June 30, 2018 | 8,607,563 | |||
| Granted | - | |||
| Exercised | - | |||
| Canceled | - | |||
| Outstanding as of June 30, 2019 | 8,607,563 | |||
Restricted Stock - On December 3, 2013, 10,000,000 shares of common stock were issued to the three co-founders for 0.0001 per share. The shares were owned by the founders at the time of issuance. In conjunction with the February 2016 Preferred Stock financing, the Company amended the restricted stock for the remaining two co-founders (see next paragraph for third co-founder details) to 50 percent of the shares of stock vested immediately, and the remaining shares of stock was subject to the repurchase option on a monthly basis until such that 100 percent of the shares of stock was released from the repurchase option in January 2019.
Effective June 15, 2015, one of the three co-founders resigned from his position as an employee and director of the Company. The individual also surrendered 1,237,500 shares of his common stock to the Company on July 1, 2015. On July 6, 2015, the Company purchased the 1,237,500 shares of common stock back from the co-founder for 0.0001 per share. In June 2018, the individual sold 1,334,000 of his remaining shares of common stock directly to the officers of the Company.
Note 5 - Stock-Based Compensation
In December 2013, the Company adopted, and the stockholders approved the 2014 Equity Incentive Plan (“2014 EIP”). The 2014 EIP provides for the grant of incentive stock options to the Company’s employees and for the grant of non-statutory stock options to the Company’s employees, directors, advisors, and consultants. The Company was initially authorized to issue up to 1,765,000 shares of common stock. Under the 2014 EIP, stock options granted to eligible participants have a ten-year contractual life and generally vest and become fully exercisable at the end of the vesting schedule set forth in the Stock Option Grant Notice. Options under the 2014 EIP are granted with exercise prices intended to be at least equal to the grant date fair market value of the Company’s common stock, as determined by the Company’s Board of Directors. The shares are subject to repurchase by the Company in the event of termination by the grantee at a price equal to the fair market value at the time of repurchase. The 2014 EIP also provides for the issuance of restricted stock awards, restricted stock unit awards, and stock appreciation rights.
Certain employee and non-employee option agreements granted under the 2014 EIP allow for the early exercise of an option before vesting (“Early Exercise Option”); however, shares issued thereon remain subject to the restriction through the remainder of the original vesting schedule for the stock option award. The Company may repurchase an unvested Early Exercise Option at a price equal to the lower of the fair market value at the date of repurchase or the exercise price of the Early Exercise Option.
| F-17 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 5 - Stock-Based Compensation - Continued
A summary of stock option activity under the 2014 EIP of the Company is as follows:
| Weighted- | ||||||||||||
| Weighted- | Average | |||||||||||
| Average | Remaining | |||||||||||
| Number of | Exercise Price | Contractual | ||||||||||
| Option Shares | per Share | Term | ||||||||||
| Outstanding as of June 30, 2017 | 3,865,650 | $ | 0.18 | 9.2 years | ||||||||
| Granted | 3,332,625 | $ | 0.14 | 10 years | ||||||||
| Exercised | (470,199 | ) | 0.05 | - | ||||||||
| Canceled | (956,501 | ) | 0.21 | - | ||||||||
| Outstanding at June 30, 2018 | 5,771,575 | 0.16 | 9 years | |||||||||
| Granted | 1,417,150 | 0.13 | 10 years | |||||||||
| Exercised | (240,389 | ) | 0.03 | - | ||||||||
| Canceled | (981,563 | ) | 0.17 | - | ||||||||
| Outstanding as of June 30, 2019 | 5,966,773 | $ | 0.16 | 8.5 years | ||||||||
A summary of vested options and unvested options expected to vest at June 30, 2019 is as follows:
| Weighted- | ||||||||||||
| Weighted- | Average | |||||||||||
| Average | Remaining | |||||||||||
| Number of | Exercise Price | Contractual | ||||||||||
| Option Shares | per Share | Term | ||||||||||
| Options at June 30, 2019 | ||||||||||||
| Vested and exercised | 2,201,589 | $ | 0.18 | 8 years | ||||||||
| Unvested and exercisable | 3,765,184 | 0.14 | 8.8 years | |||||||||
| Vested and Expected to Vest | 5,966,773 | $ | 0.16 | 8.5 years | ||||||||
| F-18 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 5 - Stock-Based Compensation - Continued
A summary of vested options and unvested options expected to vest at June 30, 2018 is as follows:
| Weighted- | ||||||||||||
| Weighted- | Average | |||||||||||
| Average | Remaining | |||||||||||
| Number of | Exercise Price | Contractual | ||||||||||
| Option Shares | per Share | Term | ||||||||||
| Options at June 30, 2018 | ||||||||||||
| Vested and exercised | 1,297,600 | $ | 0.19 | 8.2 years | ||||||||
| Unvested and exercisable | 4,473,975 | 0.15 | 9.2 years | |||||||||
| Vested and Expected to Vest | 5,771,575 | $ | 0.16 | 9.0 years | ||||||||
A summary of grant-date fair value stock option activity of the Company is as follows:
| Weighted- | ||||||||
| Average | ||||||||
| Number of | Grant-Date | |||||||
| Option Shares | Fair Value | |||||||
| Unvested at June 30, 2017 | 3,403,717 | $ | 0.09 | |||||
| Granted | 3,332,625 | $ | 0.07 | |||||
| Canceled | (956,501 | ) | 0.10 | |||||
| Vested | (1,305,866 | ) | 0.03 | |||||
| Unvested at June 30, 2018 | 4,473,975 | 0.08 | ||||||
| Granted | 1,417,150 | 0.07 | ||||||
| Canceled | (981,563 | ) | 0.09 | |||||
| Vested | (1,144,378 | ) | 0.02 | |||||
| Unvested at June 30,2019 | 3,765,183 | $ | 0.08 | |||||
All stock awards made under the 2014 EIP are restricted as to transferability and to sale, and the Company has the right of first refusal on any resale of any stock owned by employees and non-employees.
The Company calculates the estimated value of options granted to both employees and non-employees, including those whose original terms have been modified, using the Black-Scholes options pricing model. The Company records the related compensation expense over the vesting life of the award, on a straight-line basis. The options pricing model includes the input of highly subjective assumptions including the expected term, volatility, risk-free interest rate, and dividend yield. The estimated expected term of an award is determined by reference to the simplified method commonly used in the absence of significant and meaningful option history. The Company has estimated the expected volatility by reference to historical volatilities of similar publicly traded companies’ common stock over the most recent period commensurate with the estimated expected term of the awards. The risk-free interest rate is based on the U.S. Treasury bond rate in effect at the time of grant. The dividend yield is based on the average dividend yield over the expected term of the option.
| F-19 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 5 - Stock-Based Compensation - Continued
The fair value of each option was estimated on the date of grant using the following assumptions for grants:
| 2019 | 2018 | |||||||
| Stock price volatility | 51% | 45% - 51% | ||||||
| Expected term | 7 years | 7 years | ||||||
| Risk-free interest rate | 1.95% - 3.09% | 2.03% - 2.93% | ||||||
| Dividend yield | 0% | 0% | ||||||
The Company recognized compensation expense in the amount of $68,898 and $70,194 for the years ended June 30, 2019 and 2018, respectively. The total unamortized compensation expense related to awards of $630,655 and $534,811 as of June 30, 2019 and 2018, respectively, is expected to be recognized over a weighted average remaining period of three years. As of June 30, 2019 and 2018, the Company received $1,000 and $9,288, respectively, from employees on the early exercise of unvested stock options, which is included in liabilities on the accompanying consolidated balance sheets. As of June 30, 2019 and 2018, the aggregate intrinsic value between exercise price and common stock fair value of vested, exercisable stock options is approximately $180,000 and $235,000, respectively.
Note 6 – Commitments and Contingencies
Operating Leases - On May 2, 2018, the Company entered into a 50 month lease commencing on August 13, 2018 for their corporate offices located in Reston, Virginia. The lease terminates on October 31, 2022 and calls for monthly rent payments of approximately $26,470 with four percent increase on each anniversary of the sublease commencement date.
Future minimum lease payments under non-cancelable operating leases as of the report date are as follows:
| Period Ending June 30 | Amount | |||
| 2020 | $ | 328,861 | ||
| 2021 | 342,015 | |||
| 2022 | 355,696 | |||
| 2023 | 122,181 | |||
| $ | 1,148,753 | |||
Note 7 - Income Taxes
The Company records deferred income taxes to reflect the net tax effects of temporary differences, if any, between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. At , the Company’s net deferred tax asset consisted primarily of differences in the basis of property, equipment, and software and its taxable net operating losses available for carryforward. The Company has recorded a valuation allowance against the entire net deferred tax asset, as management believes it is more likely than not that the Company will not be able to benefit from the net deferred tax asset. As a result, the accompanying consolidated financial statements do not reflect a benefit for income taxes. As of June 30, 2019 and 2018, the Company has estimated it has a total domestic Net Operating Loss (“NOL”) for federal and state income tax purposes of approximately $8,317,000 and $4,923,000, respectively, which will begin to expire in 2034. Utilization of the Company’s domestic federal NOL may be subject to an annual limitation due to the “change of ownership” provisions of the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
| F-20 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 7 - Income Taxes- Continued
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, (2) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, and (3) bonus depreciation that will allow for full expensing of qualified property. Because the Company maintains a valuation allowance on its entire net deferred tax asset, the change in the applicable tax rate does not have any effect on the consolidated financial statements.
Note 8 - Lines of Credit
On September 28, 2017, the Company entered into an agreement with Federated Information Technologies, Inc. (“FIT”) where FIT shall provide a line of credit to the Company for up to $500,000. The Company shall pay FIT nine percent simple interest on the average daily balance of the drawn line of credit, as calculated and paid on a monthly basis. On October 5, 2017, the Company drew $500,000 on the line of credit. For the years ended June 30, 2019 and 2018, the Company recognized interest expense of $10,726 and $33,123, respectively, which is included in the Cost of Revenue on the consolidated statement of operations. As of June 30, 2019, this line has been paid in full and closed.
On September 29, 2017, the Company entered into an agreement with JNV Kids, LLC (“JNV”) where JNV shall provide a line of credit to the Company for up to the amount set forth in a schedule provided by the Company. The Company shall pay JNV nine percent simple interest on the average daily balance of the drawn line of credit, as calculated and paid on a monthly basis. On October 5, 2017, the Company drew $500,000 on the line of credit. For the years ended June 30, 2019 and 2018, the Company recognized interest expense of $0 and $14,425, respectively, which is included in the Cost of Revenue on the consolidated statement of operations As of June 30, 2018, this line was paid in full and closed.
Note 9 - Notes Payable
On July 31, 2017, the Company raised $225,000 in the form of a promissory notes offered to the Company’s Reg. D investors. In exchange for investment, Reg. D investors were offered warrants for the Company's common stock for a note at a simple interest rate of 12 percent calculated daily. The interest is payable with the full principal balance due on July 31, 2020. As of June 30, 2019, 72,000 warrants were issued. For the years ended June 30, 2019 and 2018, the Company recognized interest expense of $27,000 and $24,707, respectively, which is included in the Other Expenses on the consolidated statement of operations.
On July 31, 2017, the Company raised $100,000 in the form of a promissory notes offered to the Company’s Reg. D investors. In exchange for investment, Reg. D investors were offered priority access to a portion of loan assets on the Company’s marketplace for a note at a simple interest rate of 14 percent calculated daily. The interest is payable with the full principal balance due on July 31, 2021. For the years ended June 30, 2019 and 2018, the Company recognized interest expense of $14,000 and $12,811, respectively, which is included in the Other Expenses on the consolidated statement of operations.
On September 8, 2017, the Company entered into an agreement with FIT where FIT provided a note with a principal amount of $500,000 to the Company to be used exclusively for the factored receivables at a simple interest rate of nine percent calculated daily. The interest is payable with the full principal balance due on June 30, 2018. For the years ended June 30, 2019 and 2018, the Company recognized interest expense of $0 and $35,877, respectively, which is included in the Other Expenses on the consolidated statement of operations. As of June 30, 2018, the principal balance was paid in full.
| F-21 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 9 - Notes Payable- Continued
On January 1, 2018, the Company entered into an agreement with First Insurance Funding where First Insurance Funding provided a note with a principal amount of $67,212 to the Company with a security interest in the financed insurance policies at an annual percentage rate of 4.24 percent. The financed insurance policies consist of the Company’s professional liability package. Nine monthly payments of principal and interest is due in the amount of $7,601. For the years ended June 30, 2019 and 2018, the Company recognized interest expense of $322 and $871, respectively, which is included in the other expenses on the consolidated statement of operations. As of June 30, 2019, the principal balance was paid in full.
On December 21, 2018, the Company entered into an agreement with First Insurance Funding where First Insurance Funding provided a note with a principal amount of $75,766 to the Company with a security interest in the financed insurance policies at an annual percentage rate of 4.74 percent. The financed insurance policies consist of the Company’s professional liability package. Nine monthly payments of principal and interest is due in the amount of $8,586. For the year ended June 30, 2019, the Company recognized interest expense of $871.
Note 10 - Convertible Debt
On March 6, 2017, the Company issued a convertible note in the principal balance of $3,000,000 to a related party of a Company director and on June 15, 2017, the Company issued a convertible note in the principal balance of $100,000 to a Preferred Stock Holder. The principal balance of each note, together with accrued interest of 8 percent per annum, is due to be paid at the earliest of 1) a Qualified Financing (as defined in the note agreements) through automatic conversion, see third paragraph in Note 13 for subsequent events; 2) a change in control (as defined in the note agreements); or 3) September 6, 2018. The principal and accrued interest may not be prepaid by the Company without the prior consent of the majority holders of the notes.
As of June 30, 2019, and 2018, the Company incurred interest of approximately $0 and $216,000, respectively, all of which is included in the outstanding convertible note balance as reported on the accompanying consolidated balance sheet as of June 30, 2019 and 2018. The outstanding balance of the convertible notes of $3,100,000 has been converted into Preferred B Round Shares as of June 30, 2018.
The notes converted to Company stock on January 18, 2018 in conjunction with the B Round Series equity investment primary closing. At the time of conversion, the convertible debt had $216,066 of accrued and unpaid interest, resulting in $3,316,066 converting for the issuance of 5,677,855 shares of B Round Series Convertible Preferred Stock.
Note 11 - Related Parties
Approximately $59,000 of start-up, general, and administrative expenses were incurred by the Company from the inception date which were funded by advances from the Company’s three co-founders, of which two are the Company’s primary common stockholders. As of June 30, 2019 and 2018, the Company owes such advances back to its stockholders, which are included in net advances owed to stockholders in the accompanying consolidated balance sheets.
On March 6, 2017, the Company issued a convertible note in the principal balance of $3,000,000 to a related party of a Company director and on June 15, 2017, the Company issued a convertible note in the principal balance of $100,000 to a Preferred Stock Holder. See Note 10 for convertible debt details.
On July 31, 2017, the Company’s CEO purchased a note of $25,000 and was provided with 8,000 warrants of the Company’s common stock. See first paragraph in Note 9 for note details.
On September 8, 2017, the Company entered into an agreement with FIT, in which FIT provided a note with a principal amount of $500,000 to the Company. See third paragraph in Note 9 for note details. The founder and President of FIT is a Board observer of the Company.
| F-22 |
STREETSHARES, INC.ANDSUBSIDIARIES
Notes to the Consolidated Financial Statements
As of and for the Years Ended June 30, 2019 and 2018
Note 11 - Related Parties- Continued
On September 28, 2017, the Company entered into an agreement with FIT, in which FIT shall provide a line of credit to the Company. See first paragraph in Note 8 for line of credit details. The founder and President of FIT is a Board observer of the Company.
On September 29, 2017, the Company entered into an agreement with JNV, in which JNV shall provide a line of credit to the Company. See second paragraph in Note 8 for line of credit details. The managing member and President of JNV is a Director on the Board of the Company.
On March 30, 2018, the Company purchased a loan portfolio for $1,026,185 from Endeavor Capital Fund, LP (“Endeavor”). The book value of the portfolio was $1,056,213 at the time of purchase by the Company. A member of the Board of Directors of the Company has a financial interest in Endeavor.
Note 12 - Accrued Expenses
Accrued expenses as of June 30, 2019 and 2018 were comprised of the following:
| 2019 | 2018 | |||||||
| Accrued professional and legal fees | $ | 236,618 | $ | 181,708 | ||||
| Accrued payroll | 186,918 | 328,283 | ||||||
| Other | 69,974 | 46,350 | ||||||
| Total accrued expenses | $ | 493,510 | $ | 556,341 | ||||
Note 13 - Subsequent Events
The Company has evaluated its consolidated financial statements for subsequent events through October 28, 2019 the date the accompanying consolidated financial statements were available to be issued. Other than the matters noted below, as necessary, the Company is not aware of any subsequent events which would require recognition or disclosure in the accompanying consolidated financial statements.
Effective July 2019, the Company launched a small business credit card program.
Effective August 2019, the SEC qualified the continued offering of StreetShares Notes by the Company under Reg. A+.
Effective August 2019, the Company issued $1,625,000 in convertible promissory notes, which are convertible into shares of the Company’s common stock, including a convertible promissory note in the amount of $1,000,000 issued to JNV II, Limited Partnership. Jeffrey Valcourt, who holds a board seat with the Company, has a financial interest in JNV II, Limited Partnership.
Effective September 2019, the Company raised $500,000 in the form of a promissory note payable to Federated Information Technologies, Inc. The founder and president of Federated Information Technologies, Inc. is a board observer.
Effective September 2019, the Company publicly launched StreetShares Platform, a lending-as-a-service technology that allows community banks and credit unions to make small business loans with a digital experience.
| F-23 |
PART III — EXHIBITS
Index to Exhibits
| Exhibit | ||||||||||||
| Exhibit | Description | Filed | Incorporated by Reference | |||||||||
| Number | (hyperlink) | Herewith | Form | File No. | Exhibit | Filing Date | ||||||
| 2.1 | Third Amended and Restated Certificate of Incorporation | 1-K | 24R-00010 | 2.5 | October 30, 2018 | |||||||
| 2.2 | Amended and Restated Bylaws | 1/1-A | 024-10944 | 2.2 | February 7, 2019 | |||||||
| 3.1 | Stockholders’ Agreement | 1/1-A | 024-10498 | 3.2 | December 4, 2015 | |||||||
| 3.2 | Form of StreetShares Note | 1/1-A | 024-10944 | 3.2 | July 17, 2019 | |||||||
| 4.1 | Form of Subscription Agreement | 1/1-A | 024-10944 | 4.1 | July 17, 2019 | |||||||
| 10.1 | Power of Attorney (contained on signature page hereto) | X | ||||||||||
| 11.1 | Consent of Baker Tilly Virchow Krause, LLP (Independent Auditors) | X | ||||||||||
| 19 |
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer certifies has duly caused this report to be singed on its behalf by the undersigned, thereunto duly authorized, in the City of Reston, Commonwealth of Virginia, on the 28th day of October, 2019.
| STREETSHARES, INC. | ||
| By: | /s/ Mark L. Rockefeller | |
| Name: Mark L. Rockefeller | ||
| Title: Chief Executive Officer | ||
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Mark L. Rockefeller and Lauren Friend McKelvey as true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for them and in their name, place and stead, in any and all capacities, to sign any and all amendments to this Form 1-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, and generally to do all such things in their names and behalf in their capacities as officers and directors to enable the Company to comply with the provisions of the Securities Act of 1933 and all requirements of the SEC, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, ratifying and confirming all that said attorneys-in-fact and agents or his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.
| Name and Signature | Title | Date | ||
| /s/ Mark L. Rockefeller | Chief Executive Officer, Director | October 28, 2019 | ||
| Mark L. Rockefeller | (Principal Executive Officer) | |||
| /s/ Michael Konson | President, Director | October 28, 2019 | ||
| Michael Konson | (Principal Financial & Accounting Officer) | |||
| /s/ Alexander Acree | Director | October 28, 2019 | ||
| Alexander Acree | ||||
| /s/ John Fruehwirth | Director | October 28, 2019 | ||
| John Fruehwirth | ||||
| /s/ Jeffery Valcourt | Director | October 28, 2019 | ||
| Jeffery Valcourt | ||||
| /s/ David Wasik | Director | October 28, 2019 | ||
| David Wasik | ||||
| /s/ Robert Wickham | Director | October 28, 2019 | ||
| Robert Wickham |
| 20 |