StreetShares 1-SA Semiannual report

As submitted to the Securities and Exchange Commission on March 28, 2019.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-SA

SEMI-ANNUAL REPORT

SEMI-ANNUAL REPORT PURSUANT TO REGULATION A

OF THE SECURITIES ACT OF 1933

For the six-month period ended
December 31, 2018

STREETSHARES, INC.

(Exact name of issuer as specified in its charter)

Delaware	6199	46-4390152
(State or other jurisdiction of incorporation)	(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)

Mark L. Rockefeller
Chief Executive Officer
StreetShares, Inc.

1900 Campus Commons Drive, Suite 200 Reston, VA 20191

Telephone: (571) 325-2966

(Name, address, and telephone number, of agent for service)

Item 1.: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are an online platform for financing products. As of December 31, 2018, we have advanced more than $135 million in lending products and have collected more than $112 million in customer payments since we made our first loan in July 2014. We generate revenue through auction success, origination, and factor fees; servicing fees we charge to institutional and accredited investors; and interest and fees generated by the portion of each asset we fund through our direct lending account. As a mid-stage company, rapid growth in both revenues and expenses is expected.

Operating Results

Revenues

For the six-month period ended December 31, 2018, we had revenues of $1,888,660 compared to $1,583,143 in the six-month period ended December 31, 2017. The increase is a result of the anticipated growth of our lending operations, significant increase in factoring receivables, and the recognition of origination fees, servicing fees, and interest revenues.

Operating Expenses

For the six-month period ended December 31, 2018, we had operating expenses of $7,249,195 compared to $3,224,131 in the six-month period ended December 31, 2017. 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.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have funded our lending activities and operations primarily through equity and convertible debt financings, lines of credit, notes payable, revenues, Reg A+ security purchases, and institutional and accredited investments in our loans.

Equity and Convertible Debt Financings

In May 2014, we raised approximately $1.2 million from the combined issuance of equity in the form of preferred stock and convertible debt in the form of promissory notes that subsequently converted into preferred stock. In May 2015, we raised approximately $2.4 million from the sale of convertible promissory notes that converted to preferred stock pursuant to our February through June 2016 Series A Round equity raise of an additional nearly $5.5 million. In March 2017, we raised $3 million from the sale of convertible promissory notes to be converted to preferred stock upon qualified financing. In June 2017, we raised $100,000 from the sale of convertible promissory notes to be converted to preferred stock upon qualified financing. This capital is used for advertising and marketing, meeting our loan funding commitments, expanding operations, and for other general corporate purposes. In January 2018, we raised approximately $23.1 million via a Series B Round equity raise, which included a $3 million convertible note from March 2017.

Lines of Credit

In September 2017, the Company closed on two additional lines of credit from Federated Information Technologies, Inc. and JNV Kids, LLC. As of December 31, 2018, our balances on the lines from Federated Information Technologies, Inc. and JNV Kids, LLC was $500,000 and paid in full, respectively. The founder, President of Federated Information Technologies, Inc. is a board member observer. The managing member & President of JNV Kids, LLC holds a board seat.

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Notes Payable

In July 2017, the Company raised $325,000 in the form of promissory notes offed to the Company’s Reg. D investors. As of December 31, 2018, the principal balance was $325,000. In September 2017, the Company closed on a note payable from Federated Information Technologies, Inc. with a principal balance of $500,000. As of December 31, 2018, the principal balance was paid in full. In January 2018, the Company closed on a note payable from First Insurance Funding with a principal balance of $67,212. As of December 31, 2018, the principal balance was paid in full. In December 2018, the Company closed on a note payable from First Insurance Funding with a principal balance of $75,766. As of December 31, 2018, the principal balance was $75,766.

Operating Activities

Cash flows used in operating activities primarily include net losses arising from the afore-mentioned difference between revenue and expenses adjusted for (i) non-cash items included in net losses, including provision for loan losses, depreciation and amortization expense, amortization of debt issuance costs, stock-based compensation expense, and (ii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of various payments.

Operating and Capital Expenditure Requirements

Approximately $5.5 million in new funds was raised during our February through June 2016 Series A Round equity raise. Approximately $23.1 million was raised through a Series B Round equity raise which closed in January of 2018. Those funds, together with our existing cash reserves, borrowing capacity under our current debt lines, and access to institutional investor, accredited investor, and Reg A+ investor capital to fund loans, is sufficient to meet our anticipated cash operating expense and capital expenditure requirements for our Company’s near-term growth plan. If those funds are insufficient to satisfy our liquidity requirements, we will seek additional equity or debt financing. The sale of equity may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of additional debt, the agreements governing such debt could contain covenants that would restrict our operations and such debt would rank senior to shares of our common stock. We may require additional capital beyond our currently anticipated amounts and additional capital may not be available on reasonable terms, or at all.

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 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.

Originations

Our revenues have grown since our inception in 2013 primarily as a result of launching our first loan product in July 2014, offering our factored receivable product in December 2016, and subsequent growth in originations of both products. Growth in originations has been driven by the addition of new borrowers, increasing business from existing and previous borrowers, and increasing average loan size, as other factors such as effective interest yields and annual loan loss rates have remained relatively constant over this time.

Future growth will continue to depend, in part, on attracting new customers on both the borrower and investor side of our platform. We plan to increase our sales and marketing spending to attract these members as well as continue to increase our analytics spending to better identify potential members. We continue to expect to rely on the veterans affinity networks for borrower acquisition and investor growth. We also originate loans through our direct and strategic partner channels. As we have invested more funds in our marketing efforts, such as conference sponsorship and speaking events, and focused on growing strategic partnerships, the relative share of each channel to our originations to new customers and to all customers has increased. We expect this trend to continue to the extent that we increase our investment in our direct and strategic partner channels.

We believe the behavior of our repeat borrower members will be important to our future growth. The extent to which we generate repeat business from our borrowers will be an important factor in our continued revenue growth and our visibility into future revenue.

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Item 2.: OTHER INFORMATION

Jesse Cushman (“Mr. Cushman”), the Principal Financial and Accounting Officer of StreetShares, Inc. (the “Company”) resigned from the Company, effective as of January 1, 2019. Michael Konson, the President and Co-Founder of the Company is currently acting as Interim Principal Financial and Accounting Officer until Mr. Cushman’s permanent successor is named.

3

Item 3.: FINANCIAL STATEMENTS

Consolidated Financial Statements

As of and for the Six-Month Periods Ended
December 31, 2018 (unaudited) and for December 31, 2017
(unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Contents

	Page
Consolidated Balance Sheets	F-2
Consolidated Statements of Operations	F-3
Consolidated Statements of Changes in Redeemable Stock and Stockholders’ Deficit	F-4
Consolidated Statements of Cash Flows	F-5
Notes to the Consolidated Financial Statements	F-6 – F-23

F-1

StreetShares, Inc. and Subsidiaries

Consolidated Balance Sheets

As of December 31, 2018 and June 30, 2018

	Unaudited			Audited
	December 31, 2018			June 30, 2018
Assets
Cash and cash equivalents	$	12,410,180		$	16,407,136
Reserve for Reg. A+		845,653			327,654
Advances from Reg. D and Institutional investors		941,209			2,491,855
Accounts receivable factored invoices, net		5,031,776			2,567,707
Loans, net		13,783,841			8,383,994
Notes due from Reg. D and Institutional investors		47,510			139,615
Accrued interest receivable		45,738			23,010
Prepaid expenses		275,188			181,040
Property, equipment, and software, net		356,547			111,716
Other assets		58,516			63,637
Total Assets	$	33,796,158		$	30,697,364
Liabilities, Redeemable Stock, and Stockholders' Deficit
Liabilities
Accounts payable	$	524,309		$	149,511
Accrued expenses		569,764			556,341
Payable to Reg. D and Institutional investors		5,965,219			7,444,277
Payable to Reg. A+ investors		16,777,866			6,861,275
Accrued interest payable		570,872			308,045
Deferred revenue		292,077			116,350
Notes payable		400,766			347,480
Lines of credit		500,000			500,000
Net advances owed to stockholders		26,887			26,887
Other liabilities		261,857			151,994
Total Liabilities		25,889,617			16,462,160
Redeemable Stock
B Round Series preferred stock: $0.0001 par value; 34,785,700 shares authorized; issued and outstanding as of December 31, 2018 and June 30, 2018 (liquidation preference value of $23,316,066 as of December 31, 2018 and June 30, 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 December 31, 2018 and June 30, 2018 (liquidation preference value of $8,095,394 as of December 31, 2018 and June 30, 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 December 31, 2018 and June 30, 2018 (liquidation preference value of $1,200,000 as of December 31, 2018 and June 30, 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; 11,768,261 shares issued and outstanding as of December 31, 2018; 11,637,131 shares issued and outstanding as of June 30, 2018;		1,177			1,164
Additional paid-in capital		457,272			400,903
Accumulated deficit		(24,596,849	)		(18,211,804	)
Total stockholders' deficit		(24,138,400	)		(17,809,737	)
Total Liabilities, Redeemable Stock, and Stockholders' Deficit	$	33,796,158		$	30,697,364

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

F-2

StreetShares, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Six-Month Periods Ended December 31, 2018 (unaudited) and December 31, 2017 (unaudited)

	Unaudited			Unaudited
	December 31, 2018			December 31, 2017
Operating Revenue
Interest income	$	1,222,179		$	979,700
Auction success fees		370,087			378,082
Origination fees		36,770			330
Partner fees		135,000			50,000
Other loan revenue		124,624			175,031
Total operating revenue		1,888,660			1,583,143
Cost of Revenue
Interest expense		(779,806	)		(837,320	)
Provision for loan losses		(265,680	)		(30,992	)
Total cost of revenue		(1,045,486	)		(868,312	)
Net revenue		843,174			714,831
Operating Expenses
Payroll and payroll taxes		3,404,546			2,057,956
Sales and marketing		1,666,401			473,642
General and administrative		1,028,351			408,292
Professional fees		912,268			133,532
Processing and servicing		237,629			150,709
Total operating expenses		7,249,195			3,224,131
Other Income (Expense)
Interest earned		64,337			7
Interest expense		(43,676	)		(164,173	)
Other income		315			-
Total other income (expense)		20,976			(164,166	)
Net Loss	$	(6,385,045	)	$	(2,673,466	)

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

F-3

StreetShares, Inc. and Subsidiaries

Consolidated Statements of Changes in Redeemable Stock and Stockholders’ Deficit

For the Six-Month Period Ended December 31, 2018 (unaudited) and for the Year Ended June 30, 2018 (audited)

	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, June 30, 2017 (audited)		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 Seed Preferred Stock		-		-		-		-		29,107,845		20,000,000			-		-		-			-		-		-			-
Direct Cost of Proposed 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 (audited)		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		-		-		-		-		-		-			131,130		13		4,690			-		-		-			4,703
Stock Warrants		-		-		-		-		-		-			-		-		(1,154	)		-		-		-			(1,154	)
Stock Compensation		-		-		-		-		-		-			-		-		52,833			-		-		-			52,833
Net Loss		-		-		-		-		-		-			-		-		-			-		-		(6,385,045	)		(6,385,045	)
Balance, December 30, 2018 (unaudited)		4,735,924	$	1,200,000		14,488,075	$	8,006,166		34,785,700	$	22,838,775			11,768,261	$	1,177	$	457,272			-	$	-	$	(24,596,849	)	$	(24,138,400	)

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

F-4

StreetShares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six-Month Periods Ended December 31, 2018 (unaudited) and December 31, 2018 (unaudited)

	Unaudited			Unaudited
	December 31, 2018			December 31, 2017
Cash Flows from Operating Activities
Net loss	$	(6,385,045	)	$	(2,673,466	)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization		61,186			11,707
Stock compensation expense		52,833			35,691
Warrant expense		(1,154	)		6,910
Provision for loan losses		265,680			30,992
Interest on convertible notes		-			125,019
Changes in assets and liabilities:
Accounts receivable factored invoices		(2,476,671	)		(2,429,263	)
Reserve for Reg. A+		(517,999	)		(88,602	)
Advances from Reg. D and Institutional investors		1,550,646			(862,528	)
Notes due from Reg. D and Institutional investors		92,105			219,765
Prepaid expenses and other assets		(89,027	)		(21,630	)
Loans		(5,668,952	)		407,524
Accrued interest receivable		(22,728	)		(10,895	)
Deferred revenue		175,727			(9,999	)
Accounts payable		374,798			5,826
Accrued expenses		13,423			219,233
Payable to Reg. D and Institutional investors		(1,463,031	)		1,254,989
Payable to Reg. A+ investors		9,916,591			2,230,375
Accrued interest payable		262,827			147,253
Other liabilities		100,575			66,249
Net cash used in operating activities		(3,758,216	)		(1,334,850	)
Cash Flows from Investing Activities
Purchase of property, equipment, and software		(306,017	)		(6,592	)
Net cash used in investing activities		(306,017	)		(6,592	)
Cash Flows from Financing Activities
Lines of credit		-			1,000,000
Notes payable		53,286			817,831
Decrease in net advances owed to stockholders		-			(1,191	)
Issuance of common stock		4,703			9,072
Early exercise of stock options		9,288			-
Net cash provided by financing activities		67,277			1,825,712
Net Increase (Decrease) in Cash and Cash Equivalents		(3,996,956	)		484,270
Cash and Cash Equivalents, beginning of year		16,407,136			1,307,847
Cash and Cash Equivalents, end of year	$	12,410,180		$	1,792,117
Supplemental Information
Cash paid for interest	$	560,655		$	729,221

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

F-5

StreetShares, Inc.AndSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

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. Effective September 2018, 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. In December 2016, the Company began purchasing invoice receivables from small businesses with U.S. Federal and State Government contracts. In October 2017, the Company began purchasing invoice receivables from small business with contracts from highly rated Fortune 500 companies. These invoices can range from $2,000 to $1,000,000.

The Company makes an investment representing a portion of every approved loan, line, or factored invoice and places the remaining portion for auction on their 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 and Institutional”) loan investors bid an amount of the loan at the interest rate specified by the Company. Prior to August 15, 2016, the potential Reg. D and Institutional investor bid an amount of the loan and required interest rate, then at the end of the auction, the aggregate of the lowest bids required to fund the approved loan amount were consolidated into one term loan for the borrower at the weighted average rate. Each Reg. D and Institutional investor who won the auction received their required interest rate.

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-6

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

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 ofassets, and the valuation of deferred tax assets. The Company bases its estimates on historical experience, current events, third partyvaluations 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 expected 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 and Institutional investors (lenders) in anticipation of their participation in future loan auction activities. 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.

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.

The Company evaluates the creditworthiness of its portfolio on an aggregated basis. The allowance is subjective as it requires material estimates, including such factors as historical trends, known factors applicable to individual loans, such as delinquency status, known and inherent risks in the loan 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 loans is dependent to a great extent upon conditions that may be beyond the Company’s control. Any combination of the aforementioned factors may adversely affect the Company’s loans resulting in increased delinquencies and loan 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.

Impaired and Charged-Off Loans - The Company’s loans and traditional lines of credits (“loans”) are paid back on a weekly basis. The Company considers a loan to be late when it has been over 7 days since last payment. Loans with over 14 days since last payment are considered to be delinquent and impairments are applied. The Company continues to accrue interest on late and delinquent loans. Loans are returned to current status when the Company receives all accrued payments, interest, and fees required with the original amortization schedule and, in the Company’s judgment, will continue to make their payments as scheduled.

F-7

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 2 - Summary of Significant Accounting Policies - Continued 

Generally, after 150 days of delinquency, the Company will make an assessment of whether an individual loan should be charged off based on the payment status and information gathered through collection efforts. A loan is charged off when the Company determines it is probable that they will be unable to collect all of the remaining balance. 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.

Accounts Receivable Factored Invoices -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 Fortune 500 companies. 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 December 31, 2018 and June 30, 2018, the funds employed (factored receivables less amount due to factoring clients less ALL) were $2,567,707 and $152,397, 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 is the amount 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 began offering a line of credit product in April 2016. An accrual is recognized for the Company’s credit loss exposure on the unfunded exposure of the line of credit and an expense is recorded in general and administrative expense. The credit loss exposure is calculated using the same method as the allowance for loan losses. As of December 31, 2018 and June 30, 2018, 48 percent and 50 percent, respectively, were expected to be drawn based on historical data. As of December 31, 2018 and June 30, 2018, the Company expects to fundapproximately 70 percent and 65 percent, respectively, of theamount expected to be drawn. Reg. D and Institutional investors have the ability to, but are not obligated to, fund the remaining amount expected to be drawn.

As of December 31, 2018 and June 30, 2018, the total line of credit unfunded credit exposure were approximately $5,878,000 and$2,484,000, respectively, of which approximately $4,114,000 and $1,614,000, respectively, were related to the undrawn exposure expected to be funded by the Company. As of December 31, 2018 and June 30, 2018, the total line of credit unfunded credit loss exposure were approximately $272,000 and$121,000, respectively, of which approximately $190,000 and$79,000,respectively, were related to the undrawn exposure expected 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, 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 lease-term, 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 expected useful lives, generally two to five years.

F-8

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 2 - Summary of Significant Accounting Policies - Continued

PE&S consisted of the following:

	Estimated Useful Life	December 31, 2018			June 30, 2018
Computer and electronics	5 years	$	143,174		$	116,560
Office equipment, furniture, and fixtures	5 years		71,096			3,543
Capitalized internal-use software	3 years		45,212			45,212
Leasehold improvements	life of lease		163,000			1,150
Patent	indefinite		77,929			27,929
			500,411			194,394
Less: accumulated depreciation and amortization			(143,864	)		(82,678	)
Property, Equipment, and Software, net		$	356,547		$	111,716

Depreciation and amortization expense for the years ended December 31, 2018 and 2017 wasapproximately $61,200 and $11,700, respectively, of which $4,593 and $4,593, respectively, related to amortization of deferred financing costs. As of December 31, 2018 deferred financing costs were fully amortized.

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 December 31, 2018 and June 30, 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, lines of credit, and factored contracts to borrowers. 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, according to the respective principal balances funded by the Reg. D or Institutional investor, less applicable servicing fees. MPDNs are available to accredited and Institutional investors only. Some Institutional investors purchase actual loan participations and not MPDNs.

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 invoice receivable purchases made on the Company’s marketplace. As such, the proceeds from Reg. A+ investors are not directly invested on the Company’s marketplace and therefore are not directly subject to the loan loss risk of any one asset.

F-9

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 2 - Summary of Significant Accounting Policies - Continued

As of December 31, 2018, future annual maturities of notes due to Reg. A+ investors were as follows:

Period Ending June 30	Amount
2019	$	301,375
2020		2,871,525
2021		5,360,000
2022		8,244,966
	$	16,777,866

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 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. Any remaining portion of these fees is provided to the loan’s Reg. D and Institutional investors on a weighted basis by amount invested in the particular loan. As such, the Company receives fee revenue from their investment portion in each loan.

The Company generates revenue on invoice receivables through interest income, factor 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.

The Company generates revenue through service fees charged to Reg. A+ investors. Service fees are fees charged to Reg. A+ investors for payments made to the 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.

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 December 31, 2018, includes all returns filed since the Company’s 2015 tax year return. No income tax returns are currently under examination by taxing authorities.

F-10

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

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 December 31, 2018 and 2017 was approximately$1,425,000 and $369,000, 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 (as amended) 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 is effective for annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. 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-11

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

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 accounts receivable factored invoices (factored receivables) to the borrowers while SSF issues notes to Reg. D and Institutional investors as a means to allow the investors to invest in the associated loans and factored receivables. Shortly after origination the borrower loans and factored receivables 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 December 31, 2018, loans outstanding, on the accompanying consolidated balance sheet, consists of the following:

	The Company Loans Outstanding			Investor Loans Outstanding			Total Loans Outstanding
Loans	$	9,216,094		$	5,293,147		$	14,509,241
Allowance for loans losses		(456,263	)		(269,137	)		(725,400	)
Total loans, net	$	8,759,831		$	5,024,010		$	13,783,841

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-12

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 3 - Loans, Factored Receivables and Payable to Reg. D and Institutional Investors - Continued

As of December 31, 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
Accounts receivable factored invoices	$	5,069,635		$	-	$	5,069,635
Allowance for loans losses		(37,859	)		-		(37,859	)
Total factored invoices, net	$	5,031,776		$	-	$	5,031,776

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
Accounts receivable factored invoices	$	2,365,328		$	227,636		$	2,592,964
Allowance for loans losses		(23,121	)		(2,136	)		(25,257	)
Total factored invoices, net	$	2,342,207		$	225,500		$	2,567,707

F-13

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 3 - Loans, Factored Receivables and Payable to Reg. D and Institutional Investors - Continued

As of December 31, 2018 and June 30, 2018, payable to Reg. D and Institutional investors, on the accompanying consolidated balance sheet, consists of the following:  

	December 31, 2018			June 30, 2018
Loans owned by Reg. D and Institutional investors	$	5,293,147		$	4,977,896
Factored receivables owned by Reg. D and Institutional investors		-			227,636
Allowance for loan losses for net loans		(269,137	)		(250,974	)
Allowance for loan losses for factored receivables		-			(2,136	)
Advances from Reg. D and Institutional  investors		941,209			2,491,855
Total payable to Reg. D and Institutional  investors	$	5,965,219		$	7,444,277

As of December 31, 2018 and June 30, 2018, loans had original terms of three months, six months, one year, 18 months, two years, three years and five years. As of December 31, 2018 and June 30, 2018, factored receivables had original terms of 1-60 days.

As ofDecember 31, 2018, all loans outstanding had originated within the previous 50 months, through marketplace auctions. Because the terms of these loans were established through such 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 ofDecember 31, 2018, all factored receivables outstanding had originated within the previous 53 days, through marketplace auctions. Because the terms of these factored receivables were established through such auctions, the Company believes the carrying amount of these factored receivables, and the corresponding payables to Reg. D and Institutional investors approximate their fair value.

As of December 31, 2018 and June 30, 2018, $165,053 and$154,653, respectively, of loans were late in payment over 14 days and $101,483 and$71,692,respectively, of loans were more than 90 days past due and still accruing. As December 31, 2018 and June 30, 2018, no factored receivables were late in payment over 90 days.

As of December 31, 2018, future annual maturities of notes due to Reg. D and Institutional investors were as follows:

Period Ending June 30	Amount
2019	$	3,003,785
2020		2,347,106
2021		540,846
2022		54,456
2023		12,784
2024		6,242
	$	5,965,219

F-14

StreetShares, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 3 - Loans, Factored Receivables and Payable to Reg. D and Institutional Investors - Continued

As of December 31, 2018 and June 30, 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 December 31, 2017	$	90,473		$	380,065		$	470,538
Provision for loan losses		190,592			137,302			327,894
Loans charged off		(78,264	)		(264,257	)		(342,521	)
Allowance for loans losses - Balance as of June 30, 2018		202,801			253,110			455,911
Provision for loan losses		265,680			82,440			348,120
Loans charged off		25,641			(66,413	)		(40,772	)
Allowance for loans losses - Balance as of December 31, 2018	$	494,122		$	269,137		$	763,259

As of December 31, 2018 and June 30, 2018, there were $45,984 and $20,237,respectively,in net recoveries related to ALL.

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.

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 which was included in Notes due from shareholders as of June 30, 2016.

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. As of December 31, 2018 and June 30, 2018, the Company incurred direct legal costs in the issuance of the A Round Series stock totaling $0.

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 December 31, 2018 and June 30, 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.

F-15

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 4 - Redeemable Stock and Stockholders’ Equity - Continued

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 fromNovember 2019 to March 2022.

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. 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 December 31, 2018 and June 30, 2018, the fair value using the Black-Scholes methodology was approximately $995,000 and $999,000, respectively.

A summary of warrant activity of the Company is as follows:

	Number of
	Warrants
Outstanding at December 31, 2017		1,494,763
Granted		8,241,115
Exercised		(1,128,315	)
Canceled		-
Outstanding at June 30, 2018		8,607,563
Granted		-
Exercised		-
Canceled		-
Outstanding as of December 31, 2018		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 will be subject to the repurchase option on a monthly basis such that 100 percent of the shares of stock will be 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.

F-16

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited) 

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 required service period. 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.

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 December 31, 2017		3,247,834		$	0.18		8.7 years
Granted		3,021,750		$	0.14		10 years
Exercised		(233,003	)		0.05		-
Canceled		(265,006	)		0.21		-
Outstanding at June 30, 2018		5,771,575			0.16		9 years
Granted		257,750			0.13		10 years
Exercised		(131,130	)		0.04		-
Canceled		(168,547	)		0.14		-
Outstanding as of December 31, 2018		5,729,648		$	0.16		8.6 years

F-17

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 5 - Stock-Based Compensation - Continued

A summary of vested options and unvested options expected to vest at December 31, 2018 is as follows:

					Weighted-
			Weighted-		Average
			Average		Remaining
	Number of		Exercise Price		Contractual
	Option Shares		per Share		Term
Options at December, 2018
Vested and exercised		1,769,683	$	0.19		8.1 years
Unvested and exercisable		3,959,965		0.15		8.9 years
Vested and Expected to Vest		5,729,648	$	0.16		8.6 years

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		8.6 years

F-18

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 5 - Stock-Based Compensation - Continued

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 December 31, 2017		2,477,778		$	0.10
Granted		3,021,750		$	0.07
Canceled		(265,006	)		0.10
Vested		(760,547	)		0.03
Unvested at June 30, 2018		4,473,975			0.08
Granted		257,750			0.07
Canceled		(168,547	)		0.08
Vested		(603,213	)		0.02
Unvested at December 31, 2018		3,959,965		$	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 pursuant to stock option exercises.

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 requisite service period, normally 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.

The fair value of each option was estimated on the date of grant using the following assumptions for grants:

	December 31, 2018		June 30, 2018
Stock price volatility		45% - 51%		45% - 51%
Expected term		7 years		7 years
Risk-free interest rate		2.75% - 3.09%		2.03% - 2.93%
Dividend yield		0%		0%

The Company recognized compensation expense in the amount of $52,833 and$70,194for the years ended December 31, 2018 and year ended June 30, 2018, respectively. The total unamortized compensation expense related to awards of $553,226 and $534,811 as of December 31, 2018 and June 30, 2018, respectively, is expected to be recognized over a weighted average remaining period of three years. As of December 31, 2018 and June 30, 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 December 31, 2018 and June 30, 2018, the aggregate intrinsic value between exercise price and common stock fair value of vested, exercisable stock options is approximately $235,000.

F-19

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

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
2019	$	158,829
2020		328,861
2021		342,015
2022		355,696
2023		122,181
	$	1,307,582

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 December 31, 2018 and June 30, 2018, the Company has estimated it has a total domestic Net Operating Loss (“NOL”) for federal and state income tax purposes of approximately $6,670,000and $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.

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.

F-20

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

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. As of December 31, 2018, the Company drew$500,000on the line of credit. For the six-month period ended December 31, 2018, the Company recognized interest expense of $22,685, which is included in the other expenses on the consolidated statement of operations.

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$500,000on the line of credit. As of June 30, 2018, this line has been 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 December 31, 2018, 72,000 warrants were issued. For the six-month period ended December 31, 2018, the Company recognized interest expense of $13,611, 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 six-month period ended December 31, 2018, the Company recognized interest expense of $7,057, 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. As of June 30, 2018, this line has been paid in full and closed.

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 six-month period ended December 31, 2018, the Company recognized interest expense of $322, which is included in the other expenses on the consolidated statement of operations. As of December 31, 2018, 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 six-month period ended December 31, 2018, the Company recognized interest expense of $0.

F-21

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

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.

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 December 31, 2018 and June 30, 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 July 31, 2017, theCompany’s CEO purchased a note of $25,000 and was provided with 8,000 warrants of the Company’s common stock. Seefirst 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.

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.

Note 12 - Accrued Expenses

Accrued expenses as of December 31, 2018 and June 30, 2018 were comprised of the following:

	December 31, 2018		June 30, 2018
Accrued professional and legal fees	$	182,189	$	181,708
Accrued payroll		289,735		328,283
Other		97,840		46,350
	$	569,764	$	556,341

F-22

StreetShares, Inc.andSubsidiaries

Notes to the Consolidated Financial Statements

As of and for the Six-Month Periods Ended December 31, 2018 (unaudited) and for December 31, 2017 (unaudited) and as of and for the Year Ended June 30, 2018 (audited)

Note 13 - Subsequent Events

The Company has evaluated its consolidated financial statements for subsequent events throughMarch 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 January 1, 2019, the Company began calculating the credit loss exposure on the unfunded portion of the line of credit based on expected funding volume by date brackets of 0-30 days, 31-60 days, and over 60 days from historical data. This calculation hasa material effect on the Company’s consolidated financial statementsof reducing the accrual and expense for the credit loss exposure.

F-23

Item 4.: EXHIBITS

Exhibit Number	Description
2.1	Certificate of Incorporation of StreetShares, Inc., filed with the Delaware Secretary of State on December 3, 2013; Incorporated by Reference as Exhibit 2.1 to the Offering Statement filed December 04, 2015
2.2	Amended and Restated Certificate of Incorporation of StreetShares, Inc., filed with the Delaware Secretary of State on May 1, 2014; Incorporated by Reference as Exhibit 2.2 to Offering Statement filed December 04, 2015
2.3	Second Amended and Restated Certificate of Incorporation of StreetShares, Inc., filed with the Delaware Secretary of State on February 24, 2016; Incorporated by Reference as Exhibit 2.3 to Form 1-K, filed October 28, 2016
2.4	Bylaws of StreetShares, Inc., adopted by the Board of Directors on December 3, 2013; Incorporated by Reference as Exhibit 2.3 to Offering Statement, filed December 04, 2015
2.5	Third Amended and Restated Certificate of Incorporation of StreetShares, Inc., filed with the Delaware Secretary of State on January 18, 2018; Incorporated by Reference as Exhibit 2.5 to Form 1-K, filed October 30, 2018
3.1	Form of StreetShares Note; Incorporated by Reference as Exhibit 3.1 to Offering Statement filed December 04, 2015
3.2	StreetShares, Inc. Stockholders’ Agreement dated as of May 01, 2014; Incorporated by Reference as Exhibit 3.2 to Offering Statement filed December 04, 2015
4.1	StreetShares Subscription Agreement; Incorporated by Reference as Exhibit 4.1 to Offering Statement filed December 22, 2015

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 March, 2019.

STREETSHARES, INC.
By:	/s/ Mark L. Rockefeller
Name:	Mark L. Rockefeller
Title:	Chief Executive Officer

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	March 28, 2019
Mark L. Rockefeller	(Principal Executive Officer)
/s/ Michael Konson	President, Director	March 28, 2019
Michael Konson	(Principal Financial & Accounting Officer)