Attached files

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EX-10.1 - EX-10.1 - PROSPER MARKETPLACE, INCprosper-ex101_361.htm
EX-32.2 - EX-32.2 - PROSPER MARKETPLACE, INCprosper-ex322_12.htm
EX-32.1 - EX-32.1 - PROSPER MARKETPLACE, INCprosper-ex321_15.htm
EX-31.4 - EX-31.4 - PROSPER MARKETPLACE, INCprosper-ex314_8.htm
EX-31.3 - EX-31.3 - PROSPER MARKETPLACE, INCprosper-ex313_14.htm
EX-31.2 - EX-31.2 - PROSPER MARKETPLACE, INCprosper-ex312_7.htm
EX-31.1 - EX-31.1 - PROSPER MARKETPLACE, INCprosper-ex311_10.htm
EX-10.3 - EX-10.3 - PROSPER MARKETPLACE, INCprosper-ex103_424.htm
EX-10.2 - EX-10.2 - PROSPER MARKETPLACE, INCprosper-ex102_360.htm
EX-3.4 - EX-3.4 - PROSPER MARKETPLACE, INCprosper-ex34_362.htm
EX-3.2 - EX-3.2 - PROSPER MARKETPLACE, INCprosper-ex32_363.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended June 30, 2016

 

Commission

File Number

 

Exact Name of Registrant as Specified in its Charter

 

I.R.S. Employer

Identification Number

333-147019

333-179941-01

333-204880

 

PROSPER MARKETPLACE, INC.

a Delaware corporation

221 Main Street, 3rd Floor

San Francisco, CA 94105

Telephone: (415)593-5400

 

73-1733867

 

 

 

 

 

333-179941

333-204880-01

 

PROSPER FUNDING LLC

a Delaware limited liability company

221 Main Street, 3rd Floor

San Francisco, CA 94105

Telephone: (415)593-5479

 

45-4526070

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

 

Prosper Marketplace, Inc.

Yesx No ¨

Prosper Funding LLC

Yesx No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Prosper Marketplace, Inc.

Yesx No ¨

Prosper Funding LLC

Yesx No ¨

 

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

 

 

Large

Accelerated

Filer

 

Accelerated

Filer

 

Non-

Accelerated

Filer

 

Smaller

Reporting

Company

Prosper Marketplace, Inc.

o

 

o

 

x

 

o

Prosper Funding LLC

o

 

o

 

o

 

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Prosper Marketplace, Inc.

Yes¨ No x

Prosper Funding LLC

Yes¨ No x

Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

As of August 4, 2016, there were 69,744,201 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.

THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PROSPER MARKETPLACE, INC. AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.

 

 

 

 

 

 

1

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page No.

 

 

Forward-Looking Statements

 

2

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Condensed Consolidated Financial Statements

 

4

 

 

Prosper Marketplace Inc.

 

4

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

4

 

 

Condensed Consolidated Statements of Operations (Unaudited)

 

5

 

 

Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

7

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8

 

 

Prosper Funding LLC

 

29

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

29

 

 

Condensed Consolidated Statements of Operations (Unaudited)

 

30

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

31

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

32

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

41

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

53

Item 4.

 

Controls and Procedures

 

54

PART II.

 

OTHER INFORMATION

 

55

Item 1.

 

Legal Proceedings

 

55

Item 1A.

 

Risk Factors

 

55

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

55

Item 3.

 

Defaults upon Senior Securities

 

55

Item 4.

 

Mine Safety Disclosures

 

55

Item 5.

 

Other Information

 

55

Item 6.

 

Exhibits

 

55

Signatures

 

56

Exhibit Index

 

57

 

 

Except as the context requires otherwise, as used herein, “Registrants” refers to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “we,” “us,” “our,” “Prosper,” and the “Company” refer to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. (“BillGuard”), a Delaware corporation, Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, and Prosper Capital Management LLC, a Delaware limited liability company, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis. In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” Further, investors currently invest in Borrower Loans through two channels: (i) the “Note Channel”, which allows investors to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel”, which allows accredited and institutional investors to purchase Borrower Loans in their entirety directly from PFL. Finally, although historically we have referred to investors as “lender members,” we call them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace. All share and per share numbers presented in this Form 10-Q have been adjusted to reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and

2

 


expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.

The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

 

·

the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;

 

·

PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding Borrower Loans;

 

·

our ability to attract potential borrowers and investors to our marketplace;

 

·

the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;

 

·

our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;

 

·

credit risks posed by the credit worthiness of borrowers and the effectiveness of our credit rating systems;

 

·

our limited operational history and lack of significant historical performance data about borrower performance;

 

·

potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;

 

·

our compliance with applicable local, state and federal law, including the Securities Act, Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;

 

·

potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace;

 

·

the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;

 

·

the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;

 

·

the lack of a public trading market for the Notes and any inability to resell the Notes on the Note Trader platform;

 

·

the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and

 

·

our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our marketplace or adversely impact our ability to service Borrower Loans.

There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of our Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

WHERE YOU CAN FIND MORE INFORMATION

The following filings are available for download free of charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public at the SEC’s Internet site at http://www.sec.gov.

 

3

 


Item 1. Condensed Consolidated Financial Statements

Prosper Marketplace, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except for share and per share amounts)

 

 

 

June 30, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

28,824

 

 

$

66,295

 

Restricted Cash

 

 

133,216

 

 

 

151,223

 

Available for Sale Investments, at Fair Value

 

 

55,713

 

 

 

73,187

 

Accounts Receivable

 

 

870

 

 

 

2,434

 

Loans Held for Sale, at Fair Value

 

 

4,705

 

 

 

32

 

Borrower Loans, at Fair Value

 

 

310,034

 

 

 

297,273

 

Property and Equipment, Net

 

 

28,178

 

 

 

24,965

 

Prepaid and Other Assets

 

 

6,747

 

 

 

6,433

 

Servicing Assets

 

 

14,297

 

 

 

14,363

 

Goodwill

 

 

36,368

 

 

 

36,368

 

Intangibles Assets, Net

 

 

11,076

 

 

 

13,051

 

Total Assets

 

$

630,028

 

 

$

685,624

 

Liabilities, Convertible Preferred Stock and Stockholders' Deficit

 

 

 

 

 

 

 

 

Accounts Payable and Accrued Liabilities

 

$

13,104

 

 

$

22,409

 

Payable to Investors

 

 

114,876

 

 

 

136,507

 

Notes at Fair Value

 

 

309,530

 

 

 

297,405

 

Other Liabilities

 

 

24,416

 

 

 

20,735

 

Total Liabilities

 

 

461,926

 

 

 

477,056

 

Commitments and Contingencies (see Note 16)

 

 

 

 

 

 

 

 

Convertible Preferred Stock – $0.01 par value; 177,388,425 shares authorized, issued and outstanding as of June 30, 2016 and December 31, 2015. Aggregate liquidation preference of $325,952 as of June 30, 2016 and December 31, 2015.

 

 

275,938

 

 

 

275,938

 

Stockholders' Deficit

 

 

 

 

 

 

 

 

Common Stock ($0.01 par value; 298,222,103 shares authorized, 70,893,225 issued and

69,957,290 outstanding as of June 30, 2016; and 270,326,075 shares authorized, 70,367,425 shares issued and 69,431,490 outstanding as of December 31, 2015)

 

 

174

 

 

 

127

 

Additional Paid-In Capital

 

 

115,325

 

 

 

102,971

 

Less: Treasury Stock (5,177,235 common shares at cost, June 30, 2016 and December 31, 2015)

 

 

(23,417

)

 

 

(23,417

)

Accumulated Deficit

 

 

(199,996

)

 

 

(146,907

)

Accumulated Other Comprehensive Income/(Loss)

 

 

78

 

 

 

(144

)

Total Stockholders' Deficit

 

 

(107,836

)

 

 

(67,370

)

Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit

 

$

630,028

 

 

$

685,624

 

 

All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

 

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

 

 

4

 


Prosper Marketplace, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except for share and per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction Fees, Net

 

$

19,276

 

 

$

39,800

 

 

$

61,100

 

 

$

65,142

 

Servicing Fees, Net

 

 

7,676

 

 

 

3,575

 

 

 

14,819

 

 

 

6,144

 

Gain (Loss) on Sale of Borrower Loans

 

 

(687

)

 

 

3,696

 

 

 

3,104

 

 

 

5,618

 

Other Revenue

 

 

816

 

 

 

1,630

 

 

 

3,589

 

 

 

2,685

 

Total Operating Revenues

 

 

27,081

 

 

 

48,701

 

 

 

82,612

 

 

 

79,589

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income on Borrower Loans

 

 

11,192

 

 

 

10,165

 

 

 

21,975

 

 

 

20,634

 

Interest Expense on Notes

 

 

(10,098

)

 

 

(9,448

)

 

 

(19,819

)

 

 

(19,011

)

Net Interest Income

 

 

1,094

 

 

 

717

 

 

 

2,156

 

 

 

1,623

 

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net

 

 

(2

)

 

 

95

 

 

 

(79

)

 

 

21

 

Total Net Revenue

 

 

28,173

 

 

 

49,513

 

 

 

84,689

 

 

 

81,233

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Origination and Servicing

 

 

8,833

 

 

 

7,126

 

 

 

19,282

 

 

 

13,982

 

Sales and Marketing

 

 

12,303

 

 

 

26,580

 

 

 

45,023

 

 

 

45,150

 

General and Administrative

 

 

28,499

 

 

 

21,832

 

 

 

59,145

 

 

 

35,329

 

Restructuring Charges

 

 

14,061

 

 

 

-

 

 

 

14,061

 

 

 

-

 

Total Expenses

 

 

63,696

 

 

 

55,538

 

 

 

137,511

 

 

 

94,461

 

Net Loss Before Taxes

 

 

(35,523

)

 

 

(6,025

)

 

 

(52,822

)

 

 

(13,228

)

Income Tax Expense

 

 

105

 

 

 

176

 

 

 

270

 

 

 

249

 

Net Loss Applicable to Common Stockholders

 

$

(35,628

)

 

$

(6,201

)

 

$

(53,092

)

 

$

(13,477

)

Net Loss Per Share – Basic and Diluted

 

$

(0.56

)

 

$

(0.11

)

 

$

(0.86

)

 

$

(0.25

)

Weighted-Average Shares - Basic and Diluted

 

 

63,270,058

 

 

 

55,612,485

 

 

 

61,813,773

 

 

 

54,168,175

 

  

All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

 

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

 


5

 


 

Prosper Marketplace, Inc.

Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)

(in thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Loss

 

$

(35,628

)

 

$

(6,201

)

 

$

(53,092

)

 

$

(13,477

)

Other Comprehensive Income (Loss), Before Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value

 

 

25

 

 

 

-

 

 

 

215

 

 

 

-

 

   Realized Gain (Loss) on Sale of Available for Sale Investments, at Fair Value

 

 

6

 

 

 

-

 

 

 

6

 

 

 

-

 

Other Comprehensive Income (Loss), Before Tax

 

 

31

 

 

 

-

 

 

 

221

 

 

 

-

 

   Income tax effect

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other Comprehensive Income (Loss), Net of Tax

 

 

31

 

 

 

-

 

 

 

221

 

 

 

-

 

Comprehensive Income (Loss)

 

 

(35,597

)

 

 

(6,201

)

 

 

(52,871

)

 

 

(13,477

)

 

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


6

 


 

Prosper Marketplace, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Cash flows from Operating Activities:

 

 

 

 

 

 

 

 

Net Loss

 

$

(53,092

)

 

$

(13,477

)

Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities:

 

 

 

 

 

 

 

 

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes

 

 

79

 

 

 

(21

)

Depreciation and Amortization

 

 

6,430

 

 

 

3,455

 

Gain on Sales of Borrower Loans

 

 

(5,690

)

 

 

(5,857

)

Change in Fair Value of Servicing Rights

 

 

5,647

 

 

 

1,895

 

Stock-Based Compensation Expense

 

 

11,510

 

 

 

4,192

 

Restructuring Liability

 

 

8,492

 

 

 

-

 

Other, Net

 

 

227

 

 

 

45

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Purchase of Loans Held for Sale at Fair Value

 

 

(1,358,011

)

 

 

(1,402,499

)

Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value

 

 

1,353,338

 

 

 

1,409,426

 

Restricted Cash Except for those Related to Investing Activities

 

 

20,621

 

 

 

(63,254

)

Accounts Receivable

 

 

1,564

 

 

 

1,956

 

Prepaid and Other Assets

 

 

(84

)

 

 

(2,235

)

Accounts Payable and Accrued Liabilities

 

 

(4,995

)

 

 

2,754

 

Payable to Investors

 

 

(21,631

)

 

 

70,551

 

Other Liabilities

 

 

(7,690

)

 

 

(2,000

)

Net cash (Used in) provided by Operating Activities

 

 

(43,285

)

 

 

4,931

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of Borrower Loans Held at Fair Value

 

 

(109,215

)

 

 

(94,512

)

Principal Payments of Borrower Loans Held at Fair Value

 

 

83,514

 

 

 

73,457

 

Purchases of Property and Equipment

 

 

(8,600

)

 

 

(6,412

)

Maturities of Short Term Investments

 

 

1,278

 

 

 

1,274

 

Purchases of Short Term Investments

 

 

(1,277

)

 

 

(1,275

)

Purchases of Available for Sale Investments, at Fair Value

 

 

(11,725

)

 

 

-

 

Proceeds from Sale of Available for Sale Investments

 

 

9,193

 

 

 

-

 

Maturities of Available for Sale Investments

 

 

20,064

 

 

 

-

 

Acquisition of Businesses, Net of Cash Acquired

 

 

-

 

 

 

(19,000

)

Changes in Restricted Cash Related to Investing Activities

 

 

(2,614

)

 

 

(2,729

)

Net Cash Used in Investing Activities

 

 

(19,382

)

 

 

(49,197

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from Issuance of Notes Held at Fair Value

 

 

109,147

 

 

 

94,575

 

Payments of Notes Held at Fair Value

 

 

(84,200

)

 

 

(73,509

)

Proceeds from Issuance of Convertible Preferred Stock, Net

 

 

-

 

 

 

164,793

 

Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock

 

 

464

 

 

 

4,609

 

Repurchase of Common Stock and Restricted Stock

 

 

(46

)

 

 

(21,250

)

Taxes Paid for Awards Vested Under Equity Incentive Plans

 

 

(169

)

 

 

(2,206

)

Net Cash Provided by Financing Activities

 

 

25,196

 

 

 

167,012

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

 

(37,471

)

 

 

122,746

 

Cash and Cash Equivalents at Beginning of the Period

 

 

66,295

 

 

 

50,557

 

Cash and Cash Equivalents at End of the Period

 

$

28,824

 

 

$

173,303

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash Paid for Interest

 

$

19,787

 

 

$

19,147

 

Non-Cash Investing Activity- Accrual for Property and Equipment, Net

 

$

346

 

 

$

26

 

Non-Cash Investing Activity- Amount Payable for the Acquisition of Business

 

$

-

 

 

$

840

 

7

 


 

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

 

Prosper Marketplace, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Basis of Presentation

Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005.  Except as the context requires otherwise, as used in these notes to the condensed consolidated financial statements of Prosper Marketplace, Inc., “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015. The balance sheet at December 31, 2015 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

The preparation of Prosper’s condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in Prosper’s financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.

The accompanying interim condensed consolidated financial statements include the accounts of PMI and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.

On January 23, 2015, PMI acquired all of the outstanding limited liability company units of American HealthCare Lending, LLC (“American HealthCare Lending”), a company that operated a patient financing platform, and merged American HealthCare Lending with and into Prosper Healthcare Lending LLC (“PHL”), a newly established entity surviving the merger. Prosper’s condensed consolidated financial statements include PHL’s results of operations and financial position from the date of acquisition forward.

On October 9, 2015, PMI acquired all of the outstanding stock of BillGuard, Inc. (“BillGuard”), a company incorporated in Delaware in 2010 that developed applications that help consumers manage their identity, finances and credit. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. Prosper’s condensed consolidated financial statements include BillGuard’s results of operations and financial position from the date of acquisition forward.

Reclassifications

During the period ended June 30, 2016, Prosper changed the presentation of its revenue in the condensed consolidated statements of operations. A new line called “Gain on Sales of Borrower Loans” was created with the amounts included in this line previously classified as “Other Revenue”.  Prior period amounts have been reclassified to conform to the current presentation.   

Additionally, due to the early adoption of ASU 2016-09 on January 1, 2016, reclassifications were made to the financing section of the condensed consolidated statements of cash flows to reflect taxes paid for awards vested under equity incentive plans.  Prior period amounts have been reclassified to conform to the current presentation.   

 

 

 

8

 


2. Summary of Significant Accounting Policies

Prosper’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes to these accounting policies during the first six months of 2016.

Fair Value Measurements

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments at Fair Value, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.

Restructuring Charges

Restructuring charges consist of severance and contract termination related costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals.

 

Borrower Loans, Loans Held for Sale and Notes

Through the Note Channel, Prosper purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s condensed consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.

Recent Accounting Pronouncements

In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper may adopt the standard in either Prosper’s fiscal year ending December 31, 2017 or 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In March 2016, April 2016 and May 2016, the FASB further amended the guidance to clarify the implementation on principal versus agent considerations, the identification of performance obligation and the licensing implementation guidance, and to provide narrow-scope improvements and practical expedients.  Prosper has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.  

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity to eliminate the use of different methods in practice and thereby reduce existing diversity in the accounting for hybrid financial instruments issued in the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument. The existence or omission of any single

9

 


term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which became effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The new guidance simplifies the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.  

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures.  This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper will be required to recognize and measure leases at the beginning off the earliest period presented using a modified retrospective approach.  Prosper anticipates that this standard will have a material impact on our consolidated financial statements.  While Prosper is continuing to assess all potential impacts of the standard, Prosper currently believes the most significant impact relates to our accounting for office operating leases.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718).  This guidance makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This guidance will be effective for us in the first quarter of our fiscal year 2017, and early adoption is permitted. Prosper has decided to early adopt this guidance effective January 1, 2016, the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.  

 

 

3. Property and Equipment, Net

Property and equipment consist of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

 

2016

 

 

2015

 

Property and equipment:

 

 

 

 

 

 

 

 

Computer equipment

 

$

14,153

 

 

$

10,522

 

Internal-use software and website development costs

 

 

14,289

 

 

 

10,990

 

Office equipment and furniture

 

 

3,087

 

 

 

2,442

 

Leasehold improvements

 

 

7,220

 

 

 

5,719

 

Assets not yet placed in service

 

 

1,994

 

 

 

3,242

 

Property and equipment

 

 

40,743

 

 

 

32,915

 

Less accumulated depreciation and amortization

 

 

(12,565

)

 

 

(7,950

)

Total property and equipment, net

 

$

28,178

 

 

$

24,965

 

 

Depreciation and amortization expense for property and equipment for the three months ended June 30, 2016 and 2015 was $2.5 million and $1.4 million, respectively.  Depreciation and amortization expense for property and equipment for the six months ended June 30, 2016 and 2015 was $4.5 million and $3.1 million, respectively. Prosper capitalized internal-use software and website development costs in the amount of $1.8 million and $2.1 million for the three months ended June 30, 2016 and 2015, respectively.  Prosper capitalized internal-use software and website development costs in the amount of $3.6 million and $3.9 million for the six months ended June 30, 2016 and 2015, respectively. Prosper recorded internal-use software and website development impairment charges of $240 thousand and $0 for the six months ended June 30, 2016 and 2015, respectively, as a result of its decision to

10

 


discontinue several software and website development projects. These charges are included in general and administration expenses on the condensed consolidated statement of operations.

 

4. Borrower Loans, Loans Held for Sale, and Notes Held at Fair Value

 

The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale and Notes as of June 30, 2016 and December 31, 2015, are presented in the following table (in thousands):

 

 

 

Borrower Loans

 

 

Notes

 

 

Loans Held for Sale

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

June 30, 2016

 

 

December 31, 2015

 

 

June 30, 2016

 

 

December 31, 2015

 

Aggregate principal balance outstanding

 

$

312,725

 

 

$

296,945

 

 

$

(315,671

)

 

$

(294,331

)

 

$

4,715

 

 

$

42

 

Fair value adjustments

 

 

(2,691

)

 

 

328

 

 

 

6,141

 

 

 

(3,074

)

 

 

(10

)

 

 

(10

)

Fair value

 

$

310,034

 

 

$

297,273

 

 

$

(309,530

)

 

$

(297,405

)

 

$

4,705

 

 

$

32

 

 

At June 30, 2016, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through June 2021. At December 31, 2015, outstanding Borrower Loans had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2020.

 

Approximately $0.3 million and $2.0 million represents the gain and loss, respectively, that is attributable to changes in the instrument specific credit risks related to Borrower Loans that were recorded in the change in fair value during the three and six months ending June 30, 2016.

As of June 30, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.0 million and a fair value of $0.7 million. As of December 31, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.3 million and a fair value of $0.9 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of June 30, 2016 and December 31, 2015, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.1 million, respectively.

 

 

5. Loan Servicing Assets and Liabilities

Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees.  The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains and losses recognized on the sale of such Borrower Loans was $0.7 million of losses and $3.7 million of gains for the three months ended June 30, 2016 and 2015, respectively. The total gain recognized on the sale of such Borrower Loans was $3.1 million and $5.6 million for the six months ended June 30, 2016 and 2015, respectively.

As of June 30, 2016, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $4.1 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through June 2021. At December 31, 2015, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.8 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and various maturity dates through December 2020.  

$10.4 million and $4.6 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statement of operations in Servicing Fees, Net for the three months ended June 30, 2016 and 2015 respectively. $20.0 million and $7.8 million of contractually specified servicing fees and ancillary fees are included on our condensed statement of operations in Servicing Fees, Net for the six months ended June 30, 2016 and 2015 respectively.

Fair value

Valuation method – Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.

11

 


Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.

Market servicing rate – Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider.

Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets.

Default Rate – The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.

Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans.  Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.

 

6. Available for Sale Investments, at Fair Value

 

Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired (OTTI).

 

The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of June 30, 2016 and December 31, 2015, are as follows:

 

 

 

 

 

June 30, 2016

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Corporate debt securities

 

$

37,453

 

 

$

49

 

 

$

(9

)

 

$

37,493

 

   Commercial paper

 

 

3,899

 

 

 

-

 

 

 

-

 

 

 

3,899

 

   US Treasury securities

 

 

10,533

 

 

 

28

 

 

 

-

 

 

 

10,561

 

   Agency bonds

 

 

2,499

 

 

 

11

 

 

 

-

 

 

 

2,510

 

Total fixed maturity securities

 

 

54,384

 

 

 

88

 

 

 

(9

)

 

 

54,463

 

   Short term bond funds

 

 

1,250

 

 

 

-

 

 

 

-

 

 

 

1,250

 

Total Available for Sale Investments

 

$

55,634

 

 

$

88

 

 

$

(9

)

 

$

55,713

 

 

 

12

 


 

 

 

 

December 31, 2015

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Corporate debt securities

 

$

50,327

 

 

$

1

 

 

$

(94

)

 

$

50,234

 

   Commercial paper

 

 

9,493

 

 

 

-

 

 

 

-

 

 

 

9,493

 

   US Treasury securities

 

 

8,512

 

 

 

-

 

 

 

(41

)

 

 

8,471

 

   Agency bonds

 

 

2,499

 

 

 

-

 

 

 

(8

)

 

 

2,491

 

Total fixed maturity securities

 

 

70,831

 

 

 

1

 

 

 

(143

)

 

 

70,689

 

   Short term bond funds

 

 

2,500

 

 

 

-

 

 

 

(2

)

 

 

2,498

 

Total Available for Sale Investments

 

$

73,331

 

 

$

1

 

 

$

(145

)

 

$

73,187

 

 

A summary of available for sale investments with unrealized losses as of June 30, 2016, and December 31, 2015, aggregated by category and period of continuous unrealized loss, is as follows:

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

June 30, 2016

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Corporate debt securities

 

$

9,753

 

 

$

(9

)

 

$

-

 

 

$

-

 

 

$

9,753

 

 

$

(9

)

   U.S. treasury securities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

   Agency bonds

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total fixed maturity securities

 

 

9,753

 

 

 

(9

)

 

 

-

 

 

 

-

 

 

 

9,753

 

 

 

(9

)

   Short term bond funds

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Investments with Unrealized Losses

 

$

9,753

 

 

$

(9

)

 

$

-

 

 

$

-

 

 

$

9,753

 

 

$

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

December 31, 2015

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Corporate debt securities

 

$

45,375

 

 

$

(94

)

 

$

-

 

 

$

-

 

 

$

45,375

 

 

$

(94

)

   U.S. treasury securities

 

 

8,471

 

 

 

(41

)

 

 

-

 

 

 

-

 

 

 

8,471

 

 

 

(41

)

   Agency bonds

 

 

2,491

 

 

 

(8

)

 

 

-

 

 

 

-

 

 

 

2,491

 

 

 

(8

)

Total fixed maturity securities

 

 

56,337

 

 

 

(143

)