PROSPER MARKETPLACE, INC - FORM 10-Q - August 11, 2017

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EX-32.2 - EXHIBIT 32.2 - PROSPER MARKETPLACE, INCprosper10q63017ex322.htm
EX-32.1 - EXHIBIT 32.1 - PROSPER MARKETPLACE, INCprosper10q63017ex321.htm
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EX-10.10 - EXHIBIT 10.10 - PROSPER MARKETPLACE, INCprosper10q63017ex1010.htm
EX-10.9 - EXHIBIT 10.9 - PROSPER MARKETPLACE, INCprosper10q63017ex109.htm
EX-10.1 - EXHIBIT 10.1 - PROSPER MARKETPLACE, INCprosper10q63017ex101.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, 2017
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.
Yes x No ¨
Prosper Funding LLC
Yes x 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.
Yes x No ¨
Prosper Funding LLC
Yes x 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
 
Emerging Growth Company
Prosper Marketplace, Inc.
o
 
o
 
x
 
o
 
o
Prosper Funding LLC
o
 
o
 
x
 
o
 
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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, 2017, there were 69,744,201 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.

1


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.
 

2


TABLE OF CONTENTS
 
 
 
 
 
Page No.
 
 
 
PART I.
 
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
PART II.
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
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 subsidiaries, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, and Prosper Depositor LLC, 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.


3


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 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;
•
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, including the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes, and the effectiveness of our credit rating systems;
•
the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;
•
our compliance with applicable regulations and regulatory developments or court decisions affecting our business;
•
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 lack of a public trading market for the Notes and the lack of any trading platform on which investors can resell the Notes;
•
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” sections of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016 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.

4


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.

5


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, 2017
 
December 31, 2016
Assets
 

 
 

Cash and Cash Equivalents
$
34,667

 
$
22,337

Restricted Cash
179,331

 
163,907

Available for Sale Investments, at Fair Value
7,997

 
32,769

Accounts Receivable
732

 
757

Loans Held for Sale, at Fair Value
95

 
624

Borrower Loans, at Fair Value
312,272

 
315,627

Property and Equipment, Net
22,068

 
24,853

Prepaid and Other Assets
9,227

 
4,606

Servicing Assets
13,489

 
12,786

Goodwill
36,368

 
36,368

Intangible Assets, Net
1,862

 
9,212

Total Assets
$
618,108

 
$
623,846

Liabilities, Convertible Preferred Stock and Stockholders' Deficit
 

 
 

Accounts Payable and Accrued Liabilities
$
10,508

 
$
15,017

Payable to Investors
160,611

 
142,644

Notes at Fair Value
311,410

 
316,236

Other Liabilities
12,775

 
17,173

Convertible Preferred Stock Warrant Liability
70,114

 
21,711

Total Liabilities
565,418

 
512,781

Commitments and Contingencies (see Note 17)


 


Convertible Preferred Stock – $0.01 par value; 407,511,351 shares authorized; 177,388,428 issued and outstanding as of June 30, 2017; and 217,388,425 shares authorized, 177,388,425 issued and outstanding as of December 31, 2016. Aggregate liquidation preference of $325,952 as of June 30, 2017 and December 31, 2016.
275,938

 
275,938

Stockholders' Deficit
 

 
 

Common Stock ($0.01 par value; 550,000,000 shares authorized, 70,719,747 issued and 69,783,812 outstanding as of June 30, 2017; and 338,222,103 shares authorized, 70,843,044 shares issued and 69,907,109 outstanding as of December 31, 2016)
222

 
212

Additional Paid-In Capital
131,021

 
123,988

Less: Treasury Stock
(23,417
)
 
(23,417
)
Accumulated Deficit
(331,070
)
 
(265,648
)
Accumulated Other Comprehensive Loss
(4
)
 
(8
)
Total Stockholders' Deficit
(223,248
)
 
(164,873
)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit
$
618,108

 
$
623,846

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.

6



Prosper Marketplace, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except for share and per share amounts) 
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 

 
 

 
 
 
 
Operating Revenues
 

 
 

 
 
 
 
Transaction Fees, Net
$
35,423

 
$
19,276

 
$
62,291

 
$
61,100

Servicing Fees, Net
6,793

 
7,676

 
12,947

 
14,819

Gain (Loss) on Sale of Borrower Loans
3,803

 
(687
)
 
3,485

 
3,104

Fair Value of Warrants Vested on Sale of Borrower Loans
(16,887
)
 
—

 
(20,194
)
 
—

Other Revenue
1,415

 
816

 
2,135

 
3,589

Total Operating Revenues
30,547

 
27,081

 
60,664

 
82,612

Interest Income
 
 
 
 
 
 
 
Interest Income on Borrower Loans
12,007

 
11,192

 
23,507

 
21,975

Interest Expense on Notes
(11,177
)
 
(10,098
)
 
(21,855
)
 
(19,819
)
Net Interest Income
830

 
1,094

 
1,652

 
2,156

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
70

 
(2
)
 
(24
)
 
(79
)
Total Net Revenue
31,447

 
28,173

 
62,292

 
84,689

Expenses
 
 
 
 
 
 
 
Origination and Servicing
8,873

 
8,833

 
17,278

 
19,282

Sales and Marketing
20,131

 
12,303

 
39,687

 
45,023

General and Administrative
18,758

 
28,499

 
39,473

 
59,145

Restructuring Charges, Net
647

 
14,061

 
572

 
14,061

Change in Fair Value of Convertible Preferred Stock Warrants
22,416

 
—

 
22,817

 
—

Other Expenses, Net
1,930

 
—

 
7,629

 
—

Total Expenses
72,755

 
63,696

 
127,456

 
137,511

Net Loss Before Taxes
(41,308
)
 
(35,523
)
 
(65,164
)
 
(52,822
)
Income Tax Expense
97

 
105

 
262

 
270

Net Loss Applicable to Common Stockholders
$
(41,405
)
 
$
(35,628
)
 
$
(65,426
)
 
$
(53,092
)
Net Loss Per Share – Basic and Diluted
$
(0.59
)
 
$
(0.56
)
 
$
(0.94
)
 
$
(0.86
)
Weighted-Average Shares - Basic and Diluted
69,691,841

 
63,270,058

 
69,436,365

 
61,813,773

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.

7



Prosper Marketplace, Inc.
Condensed Consolidated Statements of Other Comprehensive Loss (Unaudited)
(in thousands)
 
Three Months Ended
June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
Net Loss
$
(41,405
)
 
$
(35,628
)
$
(65,426
)
 
$
(53,092
)
Other Comprehensive Income, Before Tax
 

 
 

 
 
 
Change in Net Unrealized Gain on Available for Sale Investments, at Fair Value
(1
)
 
25

16

 
215

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

 
6

(12
)
 
6

Other Comprehensive Income, Before Tax
(1
)
 
31

4

 
221

Income tax effect
—

 
—

—

 
—

Other Comprehensive Income, Net of Tax
(1
)
 
31

4

 
221

Comprehensive Loss
(41,406
)
 
(35,597
)
(65,422
)
 
(52,871
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

8



Prosper Marketplace, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from Operating Activities:
 

 
 

Net Loss
$
(65,426
)
 
$
(53,092
)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
 
 
 
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes
24

 
79

Depreciation and Amortization
6,270

 
6,430

Gain on Sales of Borrower Loans
(6,532
)
 
(5,690
)
Change in Fair Value of Servicing Rights
5,742

 
5,647

Stock-Based Compensation Expense
6,812

 
11,510

Restructuring Liability
412

 
8,492

Fair Value of Warrants Vested
21,677

 
—

Change in Fair Value of Warrants
22,817

 
—

Impairment Losses on Assets Held for Sale
6,319

 
—

Other, Net
199

 
227

Changes in Operating Assets and Liabilities:
 
 
 
Purchase of Loans Held for Sale at Fair Value
(1,245,826
)
 
(1,358,011
)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value
1,246,358

 
1,353,338

Restricted Cash Except for those Related to Investing Activities
(18,329
)
 
20,621

Accounts Receivable
25

 
1,564

Prepaid and Other Assets
(4,637
)
 
(84
)
Accounts Payable and Accrued Liabilities
(3,696
)
 
(4,995
)
Payable to Investors
17,967

 
(21,631
)
Other Liabilities
(1,774
)
 
(7,690
)
Net Cash Used in Operating Activities
(11,598
)
 
(43,285
)
Cash Flows from Investing Activities:
 
 
 
Purchase of Borrower Loans Held at Fair Value
(106,940
)
 
(109,215
)
Principal Payments of Borrower Loans Held at Fair Value
99,482

 
83,514

Purchases of Property and Equipment
(2,485
)
 
(8,600
)
Maturities of Short Term Investments
1,280

 
1,278

Purchases of Short Term Investments
(1,263
)
 
(1,277
)
Purchases of Available for Sale Investments, at Fair Value
—

 
(11,725
)
Proceeds from Sale of Available for Sale Investments
16,163

 
9,193

Maturities of Available for Sale Investments
8,600

 
20,064

Changes in Restricted Cash Related to Investing Activities
2,905

 
(2,614
)
Net Cash Provided by (Used in) Investing Activities
17,742

 
(19,382
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from Issuance of Notes Held at Fair Value
106,506

 
109,147

Payments of Notes Held at Fair Value
(100,274
)
 
(84,200
)
Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock
18

 
464

Repurchase of Common Stock and Restricted Stock
(64
)
 
(46
)
Taxes Paid for Awards Vested Under Equity Incentive Plans
—

 
(169
)
Net Cash Provided by Financing Activities
6,186

 
25,196

Net Increase (Decrease) in Cash and Cash Equivalents
12,330

 
(37,471
)
Cash and Cash Equivalents at Beginning of the Period
22,337

 
66,295

Cash and Cash Equivalents at End of the Period
$
34,667

 
$
28,824

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Paid for Interest
$
22,121

 
$
19,787

Non-Cash Investing Activity- Accrual for Property and Equipment, Net
$
169

 
$
346

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

9



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, 2016. The balance sheet at December 31, 2016 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.
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.
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, 2016. There have been no changes to these accounting policies during the first six months of 2017.
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, Convertible Preferred Stock Warrant Liability 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.
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.

10



Assets Held for Sale:
Prosper classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year. The net assets held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.
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. Prosper intends to adopt the guidance for Prosper's fiscal year ending December 31, 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Prosper expects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018. Our preliminary results indicate that transaction fees are included in the scope of the new guidance, while servicing fees and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing. While we anticipate some changes to revenue recognition for certain customer contracts, Prosper does not currently believe that this ASU will have a material effect on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. Prosper is currently evaluating the impact that this guidance will have on its 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 is currently evaluating the impact that this guidance will have on its consolidated financial statements, however we do expect that this guidance will have a material impact on Prosper's consolidated financial statements. As of June 30, 2017 Prosper has a total of $41.4 million in non-cancelable operating lease commitments.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper is currently evaluating the impacts the adoption of this accounting standard will have on Prosper's consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16)", which requires companies to recognize the income-tax consequences of an intra-entity transfer
of an asset other than inventory. This guidance will be effective for us in the first quarter of 2018, with the option to adopt it in
the first quarter of 2017. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements, however we do not believe the standard to have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18)", which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for us in the first quarter of 2018 and early adoption is permitted. Prosper is currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The standard eliminates Step 2 from the goodwill impairment test, which requires a hypothetical purchase price allocation. Prosper will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The standard is effective for interim and annual periods beginning after

11



December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The standard should be applied on a prospective basis. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
3. Property and Equipment, Net
Property and equipment consist of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Property and equipment:
 

 
 

Computer equipment
$
14,370

 
$
14,107

Internal-use software and website development costs
18,603

 
16,750

Office equipment and furniture
3,010

 
3,010

Leasehold improvements
7,038

 
7,038

Assets not yet placed in service
1,453

 
1,222

Property and equipment
44,474

 
42,127

Less accumulated depreciation and amortization
(22,406
)
 
(17,274
)
Total property and equipment, net
$
22,068

 
$
24,853

Depreciation and amortization expense for property and equipment for the three months ended June 30, 2017 and 2016 was $2.7 million and $2.5 million, respectively. Depreciation and amortization expense for property and equipment for the six months ended June 30, 2017 and 2016 was $5.2 million and $4.5 million respectively. Prosper capitalized internal-use software and website development costs in the amount of $1.0 million and $1.8 million for the three months ended June 30, 2017 and 2016, respectively. Prosper capitalized internal-use software and website development costs in the amount of $2.1 million and $3.6 million for the six months ended June 30, 2017 and 2016, respectively. 
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, 2017 and December 31, 2016, are presented in the following table (in thousands):
 
Borrower Loans
 
Notes
 
Loans Held for Sale
 
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
Aggregate principal balance outstanding
$
316,378

 
$
319,143

 
$
(319,072
)
 
$
(323,358
)
 
$
106

 
$
641

Fair value adjustments
(4,106
)
 
(3,516
)
 
7,662

 
7,122

 
(11
)
 
(17
)
Fair value
$
312,272

 
$
315,627

 
$
(311,410
)
 
$
(316,236
)
 
$
95

 
$
624

At June 30, 2017, 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 2022. At December 31, 2016, 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 2021. 
Approximately $1.2 million and $2.0 million represents the loss 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 six months ending June 30, 2017 and June 30, 2016, respectively.
As of June 30, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.6 million and a fair value of $0.9 million. As of December 31, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.2 million and a fair value of $1.0 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of June 30, 2017 and December 31, 2016, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.5 million, respectively.
5. Loan Servicing Assets and Liabilities

12



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 losses recognized on the sale of such Borrower Loans for the three months ended June 30, 2017were a gain of $3.8 million and a loss of $16.9 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium after the closing of the Consortium transaction. The total gains and losses recognized on the sale of such Borrower Loans for the six months ended June 30, 2017 were a gain of $3.5 million and a loss of $20.2 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium after the closing of the Consortium transaction. Total losses recognized on the sale of such Borrower Loans were $0.7 million during the three months ended June 30, 2016. Total gains recognized on the sale of such Borrower Loans were $3.1 million during the six months ended June 30, 2016.
As of June 30, 2017, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.6 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 2022. At December 31, 2016, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.5 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 December 2021.
$9.4 million and $10.4 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended June 30, 2017 and 2016, respectively. $18.2 million and $20.0 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the six months ended June 30, 2017 and 2016, 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.
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). 

13



The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of June 30, 2017 and December 31, 2016, are as follows (in thousands): 
June 30, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed maturity securities:
 

 
 

 
 

 
 

US Treasury securities
5,501

 
—

 
(3
)
 
5,498

Agency bonds
2,500

 
—

 
(1
)
 
2,499

Total Available for Sale Investments
$
8,001

 
$
—

 
$
(4
)
 
$
7,997

December 31, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed maturity securities:
 

 
 

 
 

 
 

Corporate debt securities
$
21,762

 
$
1

 
$
(10
)
 
$
21,753

US Treasury securities
8,516

 
3

 
(3
)
 
8,516

Agency bonds
2,499

 
1

 
—

 
2,500

Total Available for Sale Investments
$
32,777

 
$
5

 
$
(13
)
 
$
32,769

A summary of available for sale investments with unrealized losses as of June 30, 2017, and December 31, 2016, aggregated by category and period of continuous unrealized loss, is as follows (in thousands):
 
Less than 12 months
 
12 months or longer
 
Total
June 30, 2017
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

U.S. treasury securities
$
5,498

 
$
(3
)
 


 


 
$
5,498

 
$
(3
)
Agency bonds
—

 
—

 
2,499

 
(1
)
 
2,499

 
(1
)
Total Investments with Unrealized Losses
$
5,498

 
$
(3
)
 
$
2,499

 
$
(1
)
 
$
7,997

 
$
(4
)
 
 
Less than 12 months
 
12 months or longer
 
Total
December 31, 2016
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

Corporate debt securities
$
—

 
$
—

 
$
14,651

 
$
(10
)
 
$
14,651

 
$
(10
)
U.S. treasury securities
$
—

 
$
—

 
$
4,499

 
$
(3
)
 
$
4,499

 
$
(3
)
Total Investments with Unrealized Losses
$
—

 
$
—

 
$
19,150

 
$
(13
)
 
$
19,150

 
$
(13
)

There were no impairment charges recognized during the six months ended June 30, 2017. 
The maturities of available for sale investments at June 30, 2017 and December 31, 2016 are as follows (in thousands):
June 30, 2017
Within 1 year
 
After 1 year through 5 years
 
After 5 years to 10 years
 
After 10 years
 
Total
US Treasury securities
5,498

 


 


 


 
5,498

Agency bonds
2,499

 


 


 


 
2,499

Total Fair Value
$
7,997

 
$
—

 
$
—

 
$
—

 
$
7,997

Total Amortized Cost
$
8,001

 
$
—

 
$
—

 
$
—

 
$
8,001


14



December 31, 2016
Within 1 year
 
After 1 year through 5 years
 
After 5 years to 10 years
 
After 10 years
 
Total
Corporate debt securities
21,753

 
—

 
—

 
—

 
21,753

US Treasury securities
8,516

 
—

 
—

 
—

 
8,516

Agency bonds
2,500

 
—

 
—

 
—

 
2,500

Total Fair Value
$
32,769

 
$
—

 
$
—

 
$
—

 
$
32,769

Total Amortized Cost
$
32,777

 
$
—

 
$
—

 
$
—

 
$
32,777


During the six months ended June 30, 2017, Prosper sold $16.2 million of investments which resulted in a realized gain of $12 thousand.
7.  Fair Value of Assets and Liabilities 
Prosper measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors, Convertible Preferred Stock Warrant and Notes. Servicing Assets and Liabilities are also subject to fair value measurement within the financial statements of Prosper. 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. 
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
Investments held at fair value consist of available for sale investments.  The available for sale investments consist of corporate debt securities, commercial paper, U.S. treasury securities, agency bonds and short term bond funds.  When available, Prosper uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper's

15



primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts. 
The Convertible Preferred Stock Warrant Liability is valued using a Black Scholes-Option pricing model. Refer to Note 12 for further details.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
June 30, 2017
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$
—

 
$
—

 
$
312,272

 
$
312,272

Loans Held for Sale
—

 
—

 
95

 
95

Available for Sale Investments, at Fair Value
—

 
7,997

 
—

 
7,997

Servicing Assets
—

 
—

 
13,489

 
13,489

Total Assets
—

 
7,997

 
325,856

 
333,853

Liabilities:
 

 
 

 
 

 
 

Notes
$
—

 
$
—

 
$
311,410

 
$
311,410

Servicing Liabilities
—

 
—

 
111

 
111

Convertible Preferred Stock Warrant Liability
—

 
—

 
70,114

 
70,114

Loan Trailing Fee Liability
—

 
—

 
1,655

 
1,655

Total Liabilities
$
—

 
$
—

 
$
383,290

 
$
383,290

 
December 31, 2016
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$
—

 
$
—

 
$
315,627

 
$
315,627

Loans Held for Sale
—

 
—

 
624

 
624

Available for Sale Investments, at Fair Value
—

 
32,769

 
—

 
32,769

Servicing Assets
—

 
—

 
12,786

 
12,786

Total Assets
—

 
32,769

 
329,037

 
361,806

Liabilities:
 

 
 

 
 

 
 

Notes
$
—

 
$
—

 
$
316,236

 
$
316,236

Servicing Liabilities
—

 
—

 
198

 
198

Convertible Preferred Stock Warrant Liability
—

 
—

 
21,711

 
21,711

Loan Trailing Fee Liability
—

 
—

 
665

 
665

Total Liabilities
$
—

 
$
—

 
$
338,810

 
$
338,810

As Prosper’s Borrower Loans, Loans Held for Sale, Notes and loan servicing rights do not trade in an active market with readily observable prices, Prosper uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at June 30, 2017 and December 31, 2016:

16



Borrower Loans, Loans Held for Sale and Notes: 
 
 
Range
Unobservable Input
 
June 30, 2017
 
December 31, 2016
Discount rate
 
4.3% - 15.2%
 
4.0% - 15.9%
Default rate
 
1.9% - 15.2%
 
1.7% - 14.9%
 
Servicing Rights
 
 
Range
Unobservable Input
 
June 30, 2017
 
December 31, 2016
Discount rate
 
15% - 25%

 
15% - 25%

Default rate
 
1.6% - 15.7%

 
1.5% - 15.2%

Prepayment rate
 
14.4% - 26.7%

 
13.6% - 26.6%

Market servicing rate
 
0.625
%
 
0.625
%
At June 30, 2017, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
The following tables present additional information about level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis (in thousands):  
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at January 1, 2017
$
315,627

 
$
(316,236
)
 
$
624

 
$
15

Purchase of Borrower Loans/Issuance of Notes
106,940

 
(106,506
)
 
1,245,826

 
1,246,260

Principal repayments
(97,492
)
 
100,274

 
(42
)
 
2,740

Borrower Loans sold to third parties
(1,990
)
 
—

 
(1,246,316
)
 
(1,248,306
)
Other changes
9

 
266

 
(3
)
 
272

Change in fair value
(10,822
)
 
10,792

 
6

 
(24
)
Balance at June 30, 2017
$
312,272

 
$
(311,410
)
 
$
95

 
$
957

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at January 1, 2016
$
297,273

 
$
(297,405
)
 
$
32

 
$
(100
)
Purchase of Borrower Loans/Issuance of Notes
109,215

 
(109,147
)
 
1,358,011

 
1,358,079

Principal repayments
(82,376
)
 
83,119

 
(136
)
 
607

Borrower Loans sold to third parties
(1,138
)
 
1,081

 
(1,353,202
)
 
(1,353,259
)
Other changes
(6
)
 
(33
)
 
—

 
(39
)
Change in fair value
(12,934
)
 
12,855

 
—

 
(79
)
Balance at June 30, 2016
$
310,034

 
$
(309,530
)
 
$
4,705

 
$
5,209


17



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at April 1, 2017
$
317,536

 
$
(316,944
)
 
$
109

 
$
701

Purchase of Borrower Loans/Issuance of Notes
50,260

 
(49,692
)
 
721,829

 
722,397

Principal repayments
(48,048
)
 
48,695

 
(14
)
 
633

Borrower Loans sold to third parties
(869
)
 
—

 
(721,829
)
 
(722,698
)
Other changes
10

 
(156
)
 
—

 
(146
)
Change in fair value
(6,617
)
 
6,687

 
—

 
70

Balance at June 30, 2017
$
312,272

 
$
(311,410
)
 
$
95

 
$
957

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at April 1, 2016
$
303,243

 
$
(302,357
)
 
$
30

 
$
916

Purchase of Borrower Loans/Issuance of Notes
54,044

 
(53,873
)
 
426,591

 
426,762

Principal repayments
(41,390
)
 
41,057

 
(131
)
 
(464
)
Borrower Loans sold to third parties
(525
)
 
499

 
(421,784
)
 
(421,810
)
Other changes
(2
)
 
(191
)
 
—

 
(193
)
Change in fair value
(5,336
)
 
5,335

 
(1
)
 
(2
)
Balance at June 30, 2016
$
310,034

 
$
(309,530
)
 
$
4,705

 
$
5,209


The following tables present additional information about level 3 servicing assets and liabilities measured at fair value on a recurring basis (in thousands):
 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at January 1, 2017
12,786

 
198

Additions
6,532

 
—

Less: Changes in fair value
(5,829
)
 
(87
)
Fair Value at June 30, 2017
13,489

 
111

 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at January 1, 2016
14,363

 
484

Additions
5,750

 
9

Less: Changes in fair value
(5,816
)
 
(169
)
Fair Value at June 30, 2016
14,297

 
324

 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at April 1, 2017
12,436

 
147

Additions
3,768

 
—

Less: Changes in fair value
(2,715
)
 
(36
)
Fair Value at June 30, 2017
13,489

 
111


18



 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at April 1, 2016
15,548

 
398

Additions
1,729

 
—

Less: Changes in fair value
(2,980
)
 
(74
)
Fair Value at June 30, 2016
14,297

 
324


The following table presents additional information about level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
Balance at January 1, 2017
 
665

Issuances
 
1,216

Cash payment of Loan Trailing Fee
 
(351
)
Change in fair value
 
125

Balance at June 30, 2017
 
1,655


Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity 
Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at June 30, 2017 for Borrower Loans, Loans Held for Sale and Notes funded through the Note Channel are presented in the following table (in thousands, except percentages):
 
Borrower Loans and
Loans Held for Sale
 
Notes
 
Discount rate assumption:
7.55
%
*
7.55
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
309,203

 
$
308,250

 
200 basis point increase
306,119

 
305,170

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
315,614

 
$
314,653

 
200 basis point decrease
318,948

 
317,984

 
Default rate assumption:
12.96
%
*
12.96
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
308,608

 
$
307,645

 
200 basis point increase
304,984

 
304,015

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
316,150

 
$
315,200

 
200 basis point decrease
319,980

 
319,038

 
* Represents weighted average assumptions considering all credit grades.
The following table presents the estimated impact on Prosper’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of June 30, 2017 (in thousands, except percentages).

19



 
Servicing
Assets
 
Servicing
Liabilities
Market servicing rate assumptions
0.625
%
 
0.625
%
Resulting fair value from:
 

 
 

Market servicing rate increase to 0.65%
$
12,613

 
$
122

Market servicing rate decrease to 0.60%
$
14,365

 
$
100

Weighted average prepayment assumptions
20.09
%
 
20.09
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to prepayment rate
$
13,301

 
$
109

Applying a 0.9 multiplier to prepayment rate
$
13,678

 
$
113

Weighted average default assumptions
12.18
%
 
12.18
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to default rate
$
13,301

 
$
111

Applying a 0.9 multiplier to default rate
$
13,680

 
$
111

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
8. Goodwill and Other Intangible Assets
Goodwill 
Prosper’s goodwill balance of $36.4 million at June 30, 2017 did not change during the six months ended June 30, 2017. We did not record any goodwill impairment expense for the six months ended June 30, 2017. A portion of the goodwill balance is considered held for sale, refer to Note 9 for more detail.
Other Intangible Assets 
The following table presents the detail of other intangible assets for the period presented (dollars in thousands):
 
June 30, 2017
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net
Carrying Value
 
Remaining
Useful Life
(In Years)
User base and customer relationships
$
4,122

 
$
(3,775
)
 
$
347

 
7.8

Developed technology
4,793

 
(3,278
)
 
$
1,515

 
0.8

Brand name
60

 
(60
)
 
—

 
—

Total intangible assets subject to amortization
$
8,975

 
$
(7,113
)
 
$
1,862

 
 

Prosper’s intangible asset balance was $1.9 million and $9.2 million at June 30, 2017 and December 31, 2016, respectively. During the six months ended June 30, 2017, certain intangible assets were made available for sale and as a result they were written down to fair value. This resulted in a $6.3 million impairment loss. Refer to Note 9 for more detail.
The user base and customer relationship intangible assets are being amortized on an accelerated basis over a three to ten year period. The technology and brand name intangible assets are being amortized on a straight line basis over three to five years and one year, respectively.

20



Amortization expense for the three months ended June 30, 2017 and 2016 was $0.2 million and $1.0 million, respectively. Amortization expense for the six months ended June 30, 2017 and 2016 was $1.0 million and $2.0 million, respectively. Estimated amortization of purchased intangible assets for future periods (excluding those held for sale) is as follows (in thousands):
Year Ending December 31,
 
Remainder of 2017
$
355

2018
379

2019
279

2020
219

2021
500

Total
$
1,732

9. Assets Held for Sale

As of June 30, 2017, the Company was actively marketing certain assets related to the Prosper Daily application. Through this process, the Company identified the specific assets to be sold and allocated goodwill based on the relative fair values of the assets held for sale and the assets that will be retained by the Company. The fair value of the assets held for sale is based on management's best estimates of what it expects to receive. This resulted in an impairment loss of $2.0 million and $6.3 million during the three and six months ended June 30, 2017, which is recorded in Other Expenses on the Condensed Consolidated Statement of Operations.
Amounts classified as assets held for sale on June 30, 2017, are presented on the Company’s Condensed Consolidated Balance Sheet within their respective accounts, and include the following (in thousands):
Intangible Assets
 
$
130

Goodwill
 
12

Total Assets Held for Sale
 
$
142

10. Other Liabilities
Other Liabilities includes the following:
 
June 30, 2017
 
December 31, 2016
Class action settlement liability
$
—

 
$
2,996

Repurchase liability for unvested restricted stock awards
24

 
118

Loan trailing fee
1,655

 
665

Servicing liabilities
111

 
198

Deferred rent
4,133

 
4,469

Restructuring liability
3,414

 
6,052

Other
3,438

 
2,675

Total Other Liabilities
$
12,775

 
$
17,173

11. Net Loss Per Share
The weighted average shares used in calculating basic and diluted net loss per share excludes certain shares that are disclosed as outstanding shares in the condensed consolidated balance sheets because such shares are restricted as they were associated with options that were early exercised and continue to remain unvested.

21



Basic and diluted net loss per share was calculated as follows: 
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
Numerator:
 

 
 

 
 
 
Net loss available to common stockholders for basic
   and diluted EPS
$
(41,405
)
 
$
(35,628
)
$
(65,426
)
 
$
(53,092
)
Denominator:
 
 
 
 
 
 
Weighted average shares used in computing basic and diluted net loss per share
69,691,841

 
63,270,058

69,436,365

 
61,813,773

Basic and diluted net loss per share
$
(0.59
)
 
$
(0.56
)
$
(0.94
)
 
$
(0.86
)
The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:  
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
 
(shares)
 
(shares)
(shares)
 
(shares)
Excluded securities:
 

 
 

 
 
 
Convertible preferred stock issued and outstanding
177,388,428

 
177,388,425

177,388,428

 
177,388,425

Stock options issued and outstanding
60,938,265

 
43,719,604

53,040,604

 
41,694,271

Unvested stock options exercised
20,940

 
5,345,950

20,940

 
5,345,950

Restricted stock units
—

 
—

—

 
—

Warrants issued and outstanding
1,199,403

 
962,113

1,199,403

 
792,449

Series E convertible preferred stock warrants
35,544,141

 
—

35,544,141

 
—

Series F convertible preferred stock warrants
177,720,704

 
—

177,720,704

 
—

Total common stock equivalents excluded from diluted
   net loss per common share computation
452,811,881

 
227,416,092

444,914,220

 
225,221,095

The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
12. Convertible Preferred Stock, Warrant Liability and Stockholders’ Deficit
Convertible Preferred Stock and Warrants
On December 16, 2016, PMI issued a warrant to purchase 20,267,135 shares of Series E-1 convertible preferred stock of PMI ("Series E-1") at an exercise price of $0.01 per share (the “First Series E-1 Warrant”) to Pinecone Investments LLC (“Pinecone”), an affiliate of Colchis Capital Management, L.P. (“Colchis”).
On February 27, 2017, PMI issued to Pinecone a second warrant (the “Second Series E-1 Warrant,” and together with the First Series E-1 Warrant, the “Series E-1 Warrants”) to purchase 15,277,006 shares of Series E-1 at an exercise price of $0.01 per share. The Series E-1 Warrants are immediately exercisable, in whole or in part, by paying in cash the full purchase price payable in respect of the number of shares purchased. The Series E-1 Warrants were issued pursuant to the Warrant Agreement, dated December 16, 2016, between PMI and Colchis, as previously described in PMI’s Current Report on Form 8-K as filed with the Commission on December 22, 2016.
In connection with a loan purchase agreement (“Consortium Purchase Agreement”) with affiliates of the Consortium ("Warrant Holders'") a warrant agreement was signed (the "Warrant Agreement"). Pursuant to the Warrant Agreement, PMI issued to the Consortium, three warrants (together, the “Series F Warrant”) to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
The Warrant Holders' right to exercise the Series F Warrant is subject to monthly vesting during the term of the Consortium Purchase Agreement based upon the volume of loans the Consortium elects to purchase (if any) in each month, subject to certain cure rights such as offering additional loans for sale in subsequent periods (except that a certain portion of the Series F Warrant will be immediately exercisable as a result of loans purchased before the signing of the agreement). Under the

22



terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI, insolvency of PMI or PFL certain breaches of contract by PMI or PFL that are not cured within a defined cure period and upon the occurrence of certain events set forth in the Warrant Agreement.
The Series F Warrant will be exercisable with respect to vested Warrant Shares, in whole or in part, at any time prior to the tenth anniversary of its date of issuance. The number of shares underlying the Series F Warrant may be adjusted following certain events such as stock splits, dividends, reclassifications, and certain other issuances by PMI.
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of June 30, 2017 are disclosed in the table below (amounts in thousands except share and per share amounts): 
Convertible Preferred Stock
 
Par Value
 
Authorized
shares
 
Outstanding
and Issued
shares
 
Liquidation
Preference (outstanding shares)
Series A
 
$
0.01

 
68,558,220

 
68,558,220

 
$
19,774

Series A-1
 
0.01

 
24,760,915

 
24,760,915

 
49,522

Series B
 
0.01

 
35,775,880

 
35,775,880

 
21,581

Series C
 
0.01

 
24,404,770

 
24,404,770

 
70,075

Series D
 
0.01

 
23,888,640

 
23,888,640

 
165,000

Series E-1
 
0.01

 
35,544,141

 
—

 
—

Series E-2
 
0.01

 
16,858,078

 
—

 
—

Series F
 
0.01

 
177,720,707

 
3

 
—

 
 
 

 
407,511,351

 
177,388,428

 
$
325,952

The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Dividends
Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2 and Series F convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the Series A, Series B, Series C, Series D, Series E-1, Series E-2 and Series F convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series E-1, Series E-2 and Series F convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights.  To date, no dividends have been declared on any of the PMI’s preferred stock or common stock.
Conversion
Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an Initial Public Offering (“IPO”) that values Prosper at least at $2 billion and that results in aggregate proceeds to Prosper of at least $100 million or (ii) upon a written request from the holders of at least 60% of the voting power of the outstanding preferred stock (on an as-converted basis), provided that (i) the Series A-1 convertible preferred stock shall not be converted without at least 14% of the voting power of the outstanding Series A-1 convertible preferred stock; (ii) the Series D shall not be converted without at least 60% of the voting power of the outstanding Series D; (iii) the Series E-1 and Series E-2 shall not be converted without at least 60% of the voting power of the outstanding Series E-1 and Series E-2, voting together as a single class; and (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F. In addition, if a holder of the Series A convertible preferred stock has converted any of the Series A convertible preferred stock, then all of such holder’s shares of Series A-1 convertible preferred stock also will be converted upon a liquidation event. In lieu of any fractional shares of common stock to which a holder would otherwise be entitled, PMI shall pay such holder cash in an amount equal to the fair market value of such fractional shares, as determined by its Board of Directors. At present, the Series A, Series B, Series C, Series D, Series E-1, Series E-2 and the Series F convertible preferred stock converts into PMI common stock at a 1:1 ratio while the Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio

23



Liquidation Rights
PMI’s convertible preferred stock has been classified as temporary equity on the Consolidated Balance Sheets. The preferred stock is not redeemable; however, upon in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of Series E-1, Series E-2 and Series F convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A, Series B, Series C, Series D and Series A-1 preferred stock or common stock, an amount per share for (i) each share of Series E-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, (ii) each share of Series E-2 convertible preferred stock equal to the sum of two-thirds the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (iii) each share of Series F convertible preferred stock equal to the sum of two-thirds of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series E-1, Series E-2, and Series F convertible preferred stock, each holder of Series A, Series B, Series C and Series D, Series E-2 and Series F convertible preferred stock is entitled to receive, on a pari passu basis, prior to and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 preferred stock or common stock, (i) an amount per share for each share of Series E-2 and Series F convertible preferred stock equal to the sum of one-third of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (ii) an amount per share for each share of Series A, Series B, Series C and Series D convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2 and Series F convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F convertible preferred stock and Series A-1 preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of Series A preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the Series A preferred stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum aggregate amount per share of Series A convertible preferred stock which the holders of Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the Series A convertible preferred stock.
At present, the liquidation preferences are equal to $0.29 per share for the Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the Series B convertible preferred stock, $2.87 per share for the Series C convertible preferred stock, $6.91 for the Series D convertible preferred stock, $0.84 for the Series E-1 convertible preferred stock, $0.84 for the Series E-2 convertible preferred stock, and $0.84 for the Series F convertible preferred stock.
Voting
Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the bylaws of PMI. 
Convertible Preferred Stock Warrant Liability
Series E-1 Warrants
In connection with the Settlement and Release Agreement dated November 17, 2016 among PMI, PFL and Colchis, on December 16, 2016, PMI issued the First Series E-1 Warrant. The Second Series E-1 Warrant for an additional 15,277,006 shares of Series E-1 convertible preferred stock were granted on the signing of the Consortium Purchase Agreement on February 27, 2017. The warrants expire ten years from the date of issuance. For the six months ended June 30, 2017, Prosper

24



recognized $14.9 million of expense from the re-measurement of the fair value of the warrants. The expense is recorded through other expenses in the statement of operations.
To determine the fair value of the Series E-1 Convertible Preferred Stock Warrants, the Company first determined the value of a share of a Series E-1 convertible preferred stock. To determine the fair value of the convertible preferred stock, the Company first derived the business enterprise value (“BEV”) of the Company using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the option pricing method ("OPM") was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The concluded per share value for the Series E-1 convertible preferred stock was utilized as an input to the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding convertible Series E-1 preferred stock warrants utilizing the following assumptions as of the following dates:
 
June 30, 2017
 
December 31, 2016
Volatility
40
%
 
40%
Risk-free interest rate
2.28
%
 
2.45%
Remaining contractual term
9.55 years

 
9.96 years
Dividend yield
—
%
 
—%
The above assumptions were determined as follows:
Volatility: The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield in effect as of the period end date and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant.
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
Series F Warrants
In connection with the Consortium Purchase Agreement (as described in Note 16), PMI issued warrants to purchase up to 177,720,706 of PMI's Series F convertible preferred share at $0.01 per share. For the three months ended June 30, 2017, Prosper recognized $7.5 million of expense from the re-measurement of the fair value of the warrants. The expense is recorded through other expenses in the condensed consolidated statement of operations.
To determine the fair value of the Series F Convertible Preferred Stock Warrants, the Company first determined the value of a share of a Series F convertible preferred stock. To determine the fair value of the convertible preferred stock, the Company first derived the BEV of the Company using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the OPM was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The concluded per share value for the Series F convertible preferred stock warrants utilized the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding convertible Series F preferred stock warrants utilizing the following assumptions as of June 30, 2017:
 
June 30, 2017
Volatility
40
%
Risk-free interest rate
2.29
%
Remaining contractual term (in years)
9.66

Dividend yield
—
%

25



The above assumptions were determined as follows:
Volatility: The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield in effect as of the period end date and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant.
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
The combined activity of the Convertible Preferred Stock Warrant Liability for the six months ended June 30, 2017 is as follows (in thousands):
Balance at January 1, 2017
$
21,711

Warrants Vested
25,586

Change in Fair Value
22,817

Balance at June 30, 2017
$
70,114

Common Stock
PMI, through its amended and restated certificate of incorporation, as amended, is the sole issuer of common stock and related options, RSUs and warrants. On February 16, 2016, PMI amended and restated its certificate of incorporation to, among other things, effect a 5-for-1 forward stock split. On May 31, 2016, PMI further amended its amended and restated certificate of incorporation to increase the number of shares of common stock authorized for issuance.  The total number of shares of stock which PMI has the authority to issue is 957,511,351, consisting of 550,000,000 shares of common stock, $0.01 par value per share, and 407,511,351 shares of preferred stock, $0.01 par value per share. As of June 30, 2017, 70,719,747 shares of common stock were issued and 69,783,812 shares of common stock were outstanding. As of December 31, 2016, 70,843,044 shares of common stock were issued and 69,907,109 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held.
Common Stock Issued upon Exercise of Stock Options
During the six months ended June 30, 2017, PMI issued 134,633 shares of common stock upon the exercise of vested options for cash proceeds of $14 thousand. Certain options are eligible for exercise prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the same vesting schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the holder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At June 30, 2017 and December 31, 2016, there were 20,940 and 1,126,210 shares, respectively, of restricted stock outstanding that remain unvested and subject to Prosper’s right of repurchase.
For the six months ended June 30, 2017, PMI repurchased 266,130 shares of restricted stock for $64 thousand upon termination of employment of various employees
13. Share Based Incentive Plan and Compensation
In 2005, PMI’s stockholders approved the adoption of the 2005 Stock Plan. On December 1, 2010, PMI’s stockholders approved the adoption of the Amended and Restated 2005 Stock Plan (the “2005 Plan”). The 2005 Plan expired during the year ending December 31, 2015 and PMI’s stockholders approved the adoption of the 2015 Equity Incentive Plan. On February 15, 2016, PMI’s stockholders approved the adoption of an Amendment No. 1 to the 2015 Equity Incentive Plan, and on May 31, 2016, PMI’s stockholders approved the adoption of an Amendment No. 2 to the 2015 Equity Incentive Plan (as amended to date, the “2015 Plan”). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms. As of June 30, 2017 under the 2015 Plan, up to 60,241,343 shares of common stock are reserved and may be granted to employees, directors, and consultants by PMI’s board of directors and stockholders to promote the success of Prosper’s business. Options generally vest 25% one year from the vesting

26



commencement date and 1/48th per month thereafter or vest 50% one year from the vesting date and 1/48 per month thereafter or vest 50% two years from the vesting commencement date and 1/48th per month thereafter or vest 1/36th per month from the vesting commencement date.  In no event are options exercisable more than ten years after the date of grant.
At June 30, 2017, there were 9,817,115 shares available for grant under the 2015 Plan and zero shares available for grant under the 2005 Plan.
The number of options, restricted stock units and amounts per share reflects a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Stock Option Reprice
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “2016 Reprice”) authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock.  The repricing was effected on May 16, 2016 for eligible directors and employees located in the United States and on May 19, 2016 for eligible employees located in Israel.
On March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “2017 Reprice” and together with the 2016 Reprice, the "Repricings") authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock.  The repricing was effected on March 17, 2017 for eligible directors and employees.
Prosper believes that the Repricings of such stock options will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of the Repricings.
The financial statement impact of the above Repricings is $0.1 million in the three months ended June 30, 2017 and $0.9 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 1.9 years.
Early Exercised Stock Options
The balance of stock options that were early exercised under the 2005 Plan as of June 30, 2017 is not material.
Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized for the six months ended June 30, 2017 below: 
 
Options
Issued and
Outstanding
 
Weighted-
Average
Exercise
Price
Balance as of January 1, 2017
41,395,719

 
$
1.48

Options issued
30,388,611

 
0.22

Options exercised – vested
(134,633
)
 
0.11

Options forfeited
(12,089,870
)
 
1.17

Options expired
(2,500
)
 
0.22

Balance as of June 30, 2017
59,557,327

 
$
0.21

Options vested and expected to vest as of June 30, 2017
47,563,036

 
0.21

Options vested and exercisable at June 30, 2017
21,119,436

 
0.18

Due to the timing of the 2017 Reprice, the ending weighted average exercise price shown above reflects repriced options while the opening weighted average exercise price does not.
Other Information Regarding Stock Options

27



Additional information regarding common stock options outstanding as of June 30, 2017 is as follows: 
 
 
 
Options Outstanding
 
Options Vested and Exercisable
 
Range of
Exercise Prices
 
Number
Outstanding
 
Weighted – Avg.
Remaining Life
 
Weighted –Avg.
Exercise Price
 
Number
Vested
 
Weighted – Avg.
Exercise Price
$
0.02 - 0.20
 
8,275,145

 
6.56
 
$
0.11

 
8,275,145

 
$
0.11

 
0.20 - 0.50
 
51,260,062

 
9.09
 
0.22

 
12,822,171

 
0.22

 
0.50 - 1.13
 
22,120

 
7.35
 
1.13

 
22,120

 
1.13

$
0.02 - 1.13
 
59,557,327

 
8.74
 
$
0.20

 
21,119,436

 
$
0.18

The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires Prosper to make assumptions and judgments about the variables used in the calculation, including the fair value of PMI’s common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of PMI’s common stock, a risk-free interest rate, and expected dividends. Given the absence of a publicly traded market, Prosper considered numerous objective and subjective factors to determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) the prices for PMI’s preferred stock sold to outside investors; (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock; (iv) the lack of marketability of PMI’s common stock; (v) developments in the business; (vi) secondary transactions of PMI’s common and preferred shares and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not publicly traded volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of Prosper. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Prosper uses an expected dividend yield of zero as it does not anticipate paying any dividends in the foreseeable future.  
Prosper also estimates forfeitures of unvested stock options. Expected forfeitures are based on Prosper’s historical experience.  To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for options that do not vest.
The fair value of PMI’s stock option awards granted during the three months ended June 30, 2017 and 2016 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
 
Three Months Ended
June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
Volatility of common stock
N/A
 
50.88
%
50.28
%
 
50.88
%
Risk-free interest rate
N/A
 
1.29
%
2.12
%
 
1.29
%
Expected life
N/A
 
5.8 years

5.7 years

 
5.8 years

Dividend yield
N/A
 
0
%
0
%
 
0
%
Restricted Stock Unit Activity
During the six months ended June 30, 2017, PMI granted restricted stock units (“RSUs”) to certain employees that are subject to three-year vesting terms or four year vesting terms and the occurrence of a liquidity event.
The aggregate fair value of the RSUs granted was $3 thousand. The following table summarizes the activities for PMI’s RSUs during the six months ended June 30, 2017:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Unvested - December 31, 2016
1,995,159

 
$
2.16

Granted
12,000

 
0.22

Vested
—

 
—

Forfeited
(509,479
)
 
2.18

Unvested - June 30, 2017
1,497,680

 
$
2.14


28



The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations during the three months ended June 30, 2017 and 2016 (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
Origination and servicing
$
328

 
$
579

$
545

 
$
1,018

Sales and marketing
141

 
896

311

 
1,632

General and administrative
2,843

 
4,884

5,956

 
8,815

Restructuring
—

 
45

—

 
45

Total stock based compensation
$
3,312

 
$
6,404

$
6,812

 
$
11,510

During the three months ended June 30, 2017 and 2016, Prosper capitalized $75 thousand and $225 thousand respectively, of stock-based compensation as internal use software and website development costs. As of June 30, 2017, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to Prosper’s employees’ unvested stock-based awards was approximately $21.2 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.0 years.
14. Restructuring     
Summary of Restructuring Plan
On May 3, 2016, Prosper adopted a strategic restructuring of its business. This restructuring was intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location.  As a result of this restructuring, Prosper terminated 167 employees across all locations. In December 2016, Prosper shut down its Tel Aviv location, resulting in the termination of 31 employees.
In addition to the employment costs associated with the restructuring, Prosper is also marketing for sublease our existing office space that is no longer needed due to the reduction in headcount. Other than accretion and changes in sublease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.
The following table summarizes the activities related to Prosper's restructuring plan (in thousands):
 
Severance Related
 
Facilities Related
 
Total
Balance January 1, 2017
$
597

 
$
6,052

 
$
6,649

Adjustments to expense
(13
)
 
321

 
308

Sublease cash receipts
—

 
16

 
16

Less: Cash paid
(584
)
 
(3,193
)
 
(3,777
)
Balance June 30, 2017
$
—

 
$
3,196

 
$
3,196

 
15. Income Taxes
For the three months ended June 30, 2017 and 2016, Prosper recognized $97 thousand and $105 thousand of income tax expense, respectively. For the six months ended June 30, 2017 and 2016, Prosper recognized $262 thousand and $270 thousand of income tax expense, respectively. The income tax expense relates to state income tax expense and the amortization of tax deductible goodwill which gives rise to an indefinite-lived deferred tax liability.  No other income tax expense or benefit was recorded for the three or six month periods ended June 30, 2017 and 2016 due to a full valuation allowance recorded against our deferred tax assets.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, it is not more likely than not that our deferred tax assets will be realized and therefore a full valuation allowance has been recorded.
16. Consortium Purchase Agreement
On February 27, 2017, Prosper entered into series of agreements (the "Consortium Purchase Agreement") with a consortium of investors (the "Consortium"). Under the Consortium Purchase Agreement the Consortium has agreed to

29



purchase borrower loans in an aggregate principal amount of up to $5.0 billion (including certain loans purchased by one of the investors prior to the date of the Consortium Agreement). PFL will be obligated to offer for purchase minimum monthly volumes of eligible loans to the Consortium, for the Consortium to elect to purchase.
In connection with the above agreement to purchase PMI issued to the Consortium, three warrants (together, the “Series F Warrant”) to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
The Consortium’s right to exercise the Series F Warrant is subject to monthly vesting during the term of the Consortium Purchase Agreement based upon the volume of loans Purchaser elects to purchase (if any) in each month, subject to certain cure rights such as offering additional loans for sale in subsequent periods (except that a certain portion of the Series F Warrant will be immediately exercisable as a result of loans purchased before the signing of the agreement). Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI, insolvency of PMI or PFL, certain breaches of contract by PMI or PFL that are not cured within a defined cure period and upon the occurrence of certain other events set forth in the Warrant Agreement.
On vesting of the Series F warrants, Prosper records a liability as Convertible Preferred Stock Warrant Liability on the Condensed Consolidated Balance Sheet at fair value and a corresponding amount as "Fair Value of Warrants Vested on Sale of Borrower Loans" on the Condensed Consolidated Statement of Operations. Subsequent changes in the fair value of the vested warrants are recorded in "Other Expenses" on the Condensed Consolidated Statement of Operations. Additionally as part of signing of the Consortium Purchase Agreement certain rebates previously issued were settled by the issuance of vested Series F Convertible Preferred Stock Warrants. The difference in fair value of these warrants over the cash settlement price is recorded in "Other Expense" on the Condensed Consolidated Statement of Operations.
17. Commitments and Contingencies
Future Minimum Lease Payments
Prosper has entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2022 and 2027.
Future minimum rental payments under these leases as of June 30, 2017 are as follows (in thousands):
Remaining six months of 2017
2,762

2018
5,690

2019
6,026

2020
6,193

2021
6,170

2022
6,076

Thereafter
8,480

Total future operating lease obligations
$
41,397

The payments in the above table include amounts that have been accrued for as part of the restructuring liability in Note 14. Restructuring accrual balances related to operating facility leases were $3.4 million at June 30, 2017.
Rental expense under operating lease arrangements was $1.2 million and $1.9 million for the three months ended June 30, 2017 and 2016, respectively.  Rental expense under operating lease arrangements was $2.5 million and $3.7 million for the six months ended June 30, 2017 and 2016, respectively. 
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month.  To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency.  Accordingly, the minimum fee for the remaining nine months ended December 31, 2017 is $0.9 million. The minimum fee is $1.7 million and $0.9 million in each of the years 2018 and 2019, respectively.

30



Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At June 30, 2017, Prosper was in compliance with the covenant.
Loan Purchase Commitments
Prosper has entered into an agreement with WebBank to purchase $40.9 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended June 30, 2017 and the first business day of the quarter ending September 30, 2017. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending September 30, 2017.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at June 30, 2017 is $3,557 million. Prosper has accrued $1.1 million and $0.6 million as of June 30, 2017 and December 31, 2016, respectively, in regard to this obligation.
Securities Law Compliance
From inception through October 16, 2008, Prosper sold approximately $178.0 million of Borrower Loans to investors through its old platform structure, whereby Prosper assigned promissory notes directly to investors. Prosper did not register the offer and sale of the promissory notes corresponding to these Borrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws. Prosper believes that the question of whether or not the operation of the platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, Prosper would have failed to comply with the registration and qualification requirements of federal and state laws.
In 2008, plaintiffs filed a class action lawsuit against Prosper and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation agreed to enter into a settlement to resolve all claims related thereto (the “Settlement”). In connection with the Settlement, Prosper agreed to pay an aggregate amount of $10 million into a settlement fund, split into four annual installments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order and judgment entered by the Superior Court on April 16, 2014. Pursuant to the final order and judgment, the claims in the class action were dismissed, and the defendants were released by the plaintiffs from all claims that were or could have been asserted concerning the issues alleged in the class action lawsuit. All annual installments have been made prior to June 30, 2017.
18. Related Parties
Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers, and certain affiliates participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the six months ended June 30, 2017 and 2016, as well as the Notes and Borrower Loans outstanding as of June 30, 2017 and December 31, 2016 are summarized below (in thousands):

31



 
Aggregate Amount of
Notes and Borrower Loans Purchased
Six Months Ended June 30,
Interest Earned on Notes and Borrower Loans
Six Months Ended June 30,
Related Party
2017
2016
2017
2016
Executive officers and management
$
10

$
801

$
81

$
110

Directors (excluding executive officers and management)
174

350

20

15

Total
$
184

$
1,151

$
101

$
125


 
 
Aggregate Amount of
Notes and Borrower Loans Purchased
Three Months Ended June 30,
 
Interest Earned on Notes and Borrower Loans
Three Months Ended June 30,
Related Party
 
2017
 
2016
 
2017
 
2016
Executive officers and management
 
$
5

 
$
396

 
$
35

 
$
61

Directors (excluding executive officers and management)
 
85

 
114

 
10

 
9

Total
 
$
90

 
$
510

 
$
45

 
$
70

 
 
Notes and Borrower Loans Balance as of
Related Party
 
June 30, 2017
 
December 31, 2016
Executive officers and management
 
$
1,012

 
$
1,620

Directors (excluding executive officers and management)
 
560

 
537

 
 
$
1,572

 
$
2,157

19. Significant Concentrations
Prosper is dependent on third party funding sources such as banks and investment funds to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the six months ended June 30, 2017, 52%, 14% and 8% were purchased by three different parties. This compares to 25%, 25% and 12% for the period ended June 30, 2016. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which 92% and 92% of Borrower Loans were originated through the Whole Loan Channel in the six months ended June 30, 2017 and 2016, respectively.  
Prosper receives all of its transaction fee revenue from WebBank.  Prosper earns a transaction fee from WebBank for our services in facilitating originations of Borrower Loans issued by WebBank.  The rate of the transaction fee for each individual Borrower Loan is based on the term and credit grade of the Borrower Loan.  No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented.

32




Prosper Funding LLC
Condensed Consolidated Balance Sheets (Unaudited)
(amounts in thousands)
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and Cash Equivalents
$
12,384

 
$
6,929

Restricted Cash
165,628

 
147,983

Short Term Investments
1

 
1,280

Loans Held for Sale at Fair Value
95

 
624

Borrower Loans Receivable at Fair Value
312,272

 
315,627

Property and Equipment, Net
9,312

 
10,095

Servicing Assets
13,297

 
12,461

Other Assets
257

 
186

Total Assets
$
513,246

 
$
495,185

Liabilities and Member’s Equity
 
 
 
Accounts Payable and Accrued Liabilities
$
631

 
$
2,223

Payable to Related Party
4,701

 
1,899

Payable to Investors
159,999

 
141,625

Notes at Fair Value
311,410

 
316,236

Other Liabilities
3,188

 
1,877

Total Liabilities
479,929

 
463,860

Member's Equity
 
 
 
Member's Equity
30,704

 
30,704

Retained Earnings
2,613

 
621

Total Member's Equity
$
33,317

 
$
31,325

Total Liabilities and Member's Equity
$
513,246

 
$
495,185

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

33



Prosper Funding LLC
Condensed Consolidated Statements of Operations (Unaudited)
(amounts in thousands)
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
Revenues
 

 
 

 
 
 
Operating Revenues
 

 
 

 
 
 
Administration Fee Revenue - Related Party
$
27,309

 
$
6,930

$
42,463

 
$
22,348

Servicing Fees, Net
6,520

 
7,589

12,401

 
14,623

Gain (Loss) on Sale of Borrower Loans
(13,084
)
 
(687
)
(16,709
)
 
3,104

Other Revenues
34

 
26

64

 
417

Total Operating Revenues
20,779

 
13,858

38,219

 
40,492

Interest Income on Borrower Loans
12,007

 
10,988

23,507

 
21,496

Interest Expense on Notes
(11,177
)
 
(10,098
)
(21,855
)
 
(19,819
)
Net Interest Income
830

 
890

1,652

 
1,677

Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net
70

 
(2
)
(24
)
 
(79
)
Total Net Revenues
21,679

 
14,746

39,847

 
42,090

Expenses
 

 
 

 

 
 

Administration Fee - Related Party
18,466

 
15,652

34,282

 
36,258

Servicing
1,524

 
1,536

3,255

 
2,767

General and Administrative
145

 
380

318

 
737

Total Expenses
20,135

 
17,568

37,855

 
39,762

Total Net Income (Loss)
$
1,544

 
$
(2,822
)
$
1,992

 
$
2,328

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

34



Prosper Funding LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net Income
$
1,992

 
$
2,328

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 

 
 

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes
24

 
79

Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes
(272
)
 
39

Gain on Sale of Borrower Loans
(6,532
)
 
(5,690
)
Change in Fair Value of Servicing Rights
5,609

 
5,387

Depreciation and Amortization
2,637

 
1,864

Changes in Operating Assets and Liabilities:
 

 
 

Purchase of Loans Held for Sale at Fair Value
(1,245,826
)
 
(1,358,011
)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value
1,246,358

 
1,353,338

Restricted Cash Except for those Related to Investing Activities
(18,701
)
 
21,080

Other Assets
(71
)
 
11

Accounts Payable and Accrued Liabilities
(1,592
)
 
(755
)
Payable to Investors
18,374

 
(22,051
)
Net Related Party Receivable/Payable
3,807

 
2,077

Other Liabilities
1,398

 
184

Net Cash Provided by (Used in) Operating Activities
7,205

 
(120
)
Cash Flows From Investing Activities:
 

 
 

Purchase of Borrower Loans Held at Fair Value
(106,940
)
 
(109,215
)
Principal Payment of Borrower Loans Held at Fair Value
99,482

 
83,514

Maturities of Short Term Investments
1,280

 
1,277

Purchases of Short Term Investments
(1
)
 
(1,279
)
Purchases of Property and Equipment
(2,859
)
 
(4,163
)
Changes in Restricted Cash Related to Investing Activities
1,056

 
(3,076
)
Net Cash Used in Investing Activities
(7,982
)
 
(32,942
)
Cash Flows from Financing Activities:
 

 
 

Proceeds from Issuance of Notes Held at Fair Value
106,506

 
109,147

Payments of Notes Held at Fair Value
(100,274
)
 
(84,200
)
Net Cash Provided by Financing Activities
6,232

 
24,947

Net Increase (Decrease) in Cash and Cash Equivalents
5,455

 
(8,115
)
Cash and Cash Equivalents at Beginning of the Year
6,929

 
15,026

Cash and Cash Equivalents at End of the Period
$
12,384

 
$
6,911

Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Paid for Interest
$
22,121

 
$
19,787

Non-Cash Investing Activity - Accrual for Property and Equipment, Net
$
601

 
572

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

35



Prosper Funding LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Prosper Funding LLC (“PFL”) was formed in the state of Delaware on February 17, 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”, "Parent").  Except as the context otherwise requires, as used in these Notes to the condensed consolidated financial statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiaries, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, and Prosper Depositor LLC, a Delaware limited liability company, 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, 2016. The balance sheet at December 31, 2016 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.
Prosper Funding did not have any items of other comprehensive income (loss) during any of the periods presented in the condensed consolidated financial statements as of and for the six months ended June 30, 2017 and June 30, 2016.
The preparation of Prosper Funding'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 its condensed consolidated 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.
2. Significant Accounting Policies
Prosper Funding's significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no changes to these accounting policies during the first six months of 2017.
Fair Value Measurements
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Short Term Investments, 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.
Borrower Loans, Loans Held for Sale and Notes
Through the Note Channel, Prosper Funding purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes funded through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes funded through the Note Channel are carried on Prosper Funding’s 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 Funding 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 Funding maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes. 

36



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 Funding 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. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Prosper Funding expects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018. Our evaluation of this ASU is ongoing and not complete. The FASB has issued and may issue in the future, interpretative guidance, which may cause our evaluation to change. Our preliminary results indicate that administration fees are included in the scope of the new guidance, while servicing fees and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing. Prosper Funding does not currently believe that this ASU will have a material effect on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. Prosper Funding is currently evaluating the impact that this guidance will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper Funding in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper Funding is currently evaluating the impacts the adoption of this accounting standard will have on the Prosper Funding's cash flows.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU2016-18)", which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for us in the first quarter of 2018 and early adoption is permitted. Prosper Funding is currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Property and equipment:
 

 
 

Internal-use software and web site development costs
$
18,603

 
$
16,749

Less accumulated depreciation and amortization
(9,291
)
 
(6,654
)
Total property and equipment, net
$
9,312

 
$
10,095

Depreciation expense for the three months ended June 30, 2017 and 2016 was $1.4 million and $1.0 million, respectively. Depreciation expense for the six months ended June 30, 2017 and 2016 was $2.6 million and $1.9 million, respectively.
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, 2017 and December 31, 2016, are presented in the following table (in thousands):

37



 
Borrower Loans
 
Notes
 
Loans Held for Sale
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Aggregate principal balance outstanding
$
316,378

 
$
319,143

 
$
(319,072
)
 
$
(323,358
)
 
$
106

 
$
641

Fair value adjustments
(4,106
)
 
(3,516
)
 
7,662

 
7,122

 
(11
)
 
(17
)
Fair value
$
312,272

 
$
315,627

 
$
(311,410
)
 
$
(316,236
)
 
$
95

 
$
624

 
At June 30, 2017, 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 2022. At December 31, 2016, 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 2021.
Approximately $1.2 million represents the loss 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 six months ended June 30, 2017.
As of June 30, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.6 million and a fair value of $0.9 million. As of December 31, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.2 million and a fair value of $1.0 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of June 30, 2017 and December 31, 2016, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.5 million, respectively.
5. Loan Servicing Assets and Liabilities
Prosper Funding 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 Funding sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The total losses recognized on the sale of such Borrower Loans were $13.1 million and $0.7 million for the three months ended June 30, 2017 and June 30, 2016, respectively. The total gains and losses recognized on the sale of such Borrower Loans were a loss of $16.7 million and gain of $3.1 million for the six months ended June 30, 2017 and June 30, 2016, respectively.
At June 30, 2017, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.5 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 2022. At December 31, 2016, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.4 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 December 2021.
$9.2 million and $10.3 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended June 30, 2017 and 2016, respectively. $17.9 million and $19.7 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the six months ended June 30, 2017 and 2016, respectively.  
Fair value
Valuation method – Prosper Funding 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.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper Funding 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 Funding 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 Funding 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 Funding sells and services and information from a backup service provider.

38



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 Funding’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. Income Taxes
Prosper Funding incurred no income tax provision for the six months ended June 30, 2017 and 2016. Prosper Funding is a US disregarded entity and its income and loss is included in the return of its parent, PMI. Since PMI is in a loss position, is not currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.
7. Fair Value of Assets and Liabilities
Prosper Funding measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.
Financial instruments consist principally of cash and cash equivalents, restricted cash, Borrower Loans, accounts payable and accrued liabilities, and Notes. Servicing assets and liabilities are also subject to fair value measurement within the financial statements of Prosper Funding. The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their carrying values because of their short term nature. 
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower

39



Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands): 
June 30, 2017
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$
—

 
$
—

 
$
312,272

 
$
312,272

Servicing Assets
—

 
—

 
13,297

 
13,297

Loans Held for Sale
—

 
—

 
95

 
95

Total Assets
—

 
—

 
325,664

 
325,664

Liabilities:
 

 
 

 
 

 
 

Notes
$
—

 
$
—

 
$
311,410

 
$
311,410

Servicing Liabilities
—

 
—

 
111

 
111

Loan Trailing Fee Liability
 
 
 
 
1,655

 
1,655

Total Liabilities
$
—

 
$
—

 
$
313,176

 
$
313,176

December 31, 2016
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$
—

 
$
—

 
$
315,627

 
$
315,627

Servicing Assets
—

 
—

 
12,461

 
12,461

Loans Held for Sale
—

 
—

 
624

 
624

Total Assets
—

 
—

 
328,712

 
328,712

Liabilities:
 

 
 

 
 

 
 

Notes
$
—

 
$
—

 
$
316,236

 
$
316,236

Servicing Liabilities
—

 
—

 
198

 
198

Loan Trailing Fee Liability
—

 
—

 
665

 
665

Total Liabilities
$
—

 
$
—

 
$
317,099

 
$
317,099

As Prosper Funding’s Borrower Loans, Loans Held for Sale, Notes and loan servicing rights do not trade in an active market with readily observable prices, Prosper Funding uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper Funding’s level 3 fair value measurements at June 30, 2017 and December 31, 2016: 
Borrower Loans, Loans Held for Sale and Notes: 
 
 
Range
Unobservable Input
 
June 30, 2017
 
December 31, 2016
Discount rate
 
4.3% - 15.2%
 
4.0% - 15.9%
Default rate
 
1.9% - 15.2%
 
1.7% - 14.9%

40



Servicing Rights
 
 
Range
Unobservable Input
 
June 30, 2017
 
December 31, 2016
Discount rate
 
15% - 25%

 
15% - 25%

Default rate
 
1.6% - 15.7%

 
1.5% - 15.2%

Prepayment rate
 
14.4% - 26.7%

 
13.6% - 26.6%

Market servicing rate
 
0.625
%
 
0.625
%
The changes in the Borrower Loans, Loans Held for Sale and Notes, which are Level 3 assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower 
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at January 1, 2017
$
315,627

 
$
(316,236
)
 
$
624

 
$
15

Originations
106,940

 
(106,506
)
 
1,245,826

 
1,246,260

Principal repayments
(97,492
)
 
100,274

 
(42
)
 
2,740

Borrower Loans sold to third parties
(1,990
)
 
—

 
(1,246,316
)
 
(1,248,306
)
Other changes
9

 
266

 
(3
)
 
272

Change in fair value
(10,822
)
 
10,792

 
6

 
(24
)
Balance at June 30, 2017
$
312,272

 
$
(311,410
)
 
$
95

 
$
957

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower 
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at January 1, 2016
$
297,273

 
$
(297,405
)
 
$
32

 
$
(100
)
Originations
109,215

 
(109,147
)
 
1,358,011

 
1,358,079

Principal repayments
(82,376
)
 
83,119

 
(136
)
 
607

Borrower Loans sold to third parties
(1,138
)
 
1,081

 
(1,353,202
)
 
(1,353,259
)
Other changes
(6
)
 
(33
)
 
—

 
(39
)
Change in fair value
(12,934
)
 
12,855

 
—

 
(79
)
Balance at June 30, 2016
$
310,034

 
$
(309,530
)
 
$
4,705

 
$
5,209

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower 
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at April 1, 2017
$
317,536

 
$
(316,944
)
 
$
109

 
$
701

Originations
50,260

 
(49,692
)
 
721,829

 
722,397

Principal repayments
(48,048
)
 
48,695

 
(14
)
 
633

Borrower Loans sold to third parties
(869
)
 
—

 
(721,829
)
 
(722,698
)
Other changes
10

 
(156
)
 
—

 
(146
)
Change in fair value
(6,617
)
 
6,687

 
—

 
70

Balance at June 30, 2017
$
312,272

 
$
(311,410
)
 
$
95

 
$
957


41



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower 
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at April 1, 2016
$
303,243

 
$
(302,357
)
 
$
30

 
$
916

Originations
54,044

 
(53,873
)
 
426,591

 
426,762

Principal repayments
(41,390
)
 
41,057

 
(131
)
 
(464
)
Borrower Loans sold to third parties
(525
)
 
499

 
(421,784
)
 
(421,810
)
Other changes
(2
)
 
(191
)
 
—

 
(193
)
Change in fair value
(5,336
)
 
5,335

 
(1
)
 
(2
)
Balance at June 30, 2016
$
310,034

 
$
(309,530
)
 
$
4,705

 
$
5,209


The following table presents additional information about Level 3 servicing assets and liabilities recorded at fair value for the three months ended June 30, 2017 (in thousands).
 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at January 1, 2017
12,461

 
198

Additions
6,532

 
—

Less: Changes in fair value
(5,696
)
 
(87
)
Fair Value at June 30, 2017
13,297

 
111

 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at January 1, 2016
13,605

 
484

Additions
5,750

 
9

Less: Changes in fair value
(5,557
)
 
(169
)
Fair Value at June 30, 2016
13,798

 
324

 
 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at April 1, 2017
12,190

 
147

Additions
3,768

 
—

Less: Changes in fair value
(2,661
)
 
(36
)
Fair Value at June 30, 2017
13,297

 
111

 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at April 1, 2016
14,929

 
398

Additions
1,729

 
—

Less: Changes in fair value
(2,860
)
 
(74
)
Fair Value at June 30, 2016
13,798

 
324


The following table presents additional information about level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):

42



Balance at January 1, 2017
 
665

Issuances
 
1,216

Cash payment of Loan Trailing Fee
 
(351
)
Change in fair value
 
125

Balance at June 30, 2017
 
1,655

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at June 30, 2017 for Borrower Loans, Loans Held for Sale and Notes funded are presented in the following table (in thousands, except percentages):
 
Borrower
Loans and
Loans Held
for Sale
 
Notes
 
Discount rate assumption:
7.55
%
*
7.55
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
309,203

 
$
308,250

 
200 basis point increase
306,119

 
305,170

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
315,614

 
$
314,653

 
200 basis point decrease
318,948

 
317,984

 
Default rate assumption:
12.96
%
*
12.96
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
308,608

 
$
307,645

 
200 basis point increase
304,984

 
304,015

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
316,150

 
$
315,200

 
200 basis point decrease
319,980

 
319,038

 
 * Represents weighted average assumptions considering all credit grades.
Servicing Asset and Liability Fair Value Input Sensitivity:
The following table presents the estimated impact on Prosper Funding’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of June 30, 2017 (in thousands, except percentages).

43



 
Servicing
Assets
 
Servicing
Liabilities
Market servicing rate assumptions
0.625
%
 
0.625
%
Resulting fair value from:
 

 
 

Market servicing rate increase to 0.65%
12,434

 
122

Market servicing rate decrease to 0.60%
14,160

 
100

Weighted average prepayment assumptions
20.09
%
 
20.09
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to prepayment rate
13,112

 
109

Applying a 0.9 multiplier to prepayment rate
13,484

 
113

Weighted average default assumptions
12.18
%
 
12.18
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to default rate
13,112

 
111

Applying a 0.9 multiplier to default rate
13,486

 
111

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
8. Commitments and Contingencies
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month.  To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency.  Accordingly, the minimum fee for the remaining nine months of 2017 is $1.3 million.  The minimum fee is $1.7 million and $0.9 million for years 2018 and 2019, respectively.  
Loan Purchase Commitments
Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase $40.9 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended June 30, 2017 and first business day of the quarter ending September 30, 2017. Prosper Funding will purchase these Borrower Loans within the first three business days of the quarter ending September 30, 2017.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper Funding and investors that participate in the Whole Loan Channel, Prosper Funding may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience. Prosper Funding recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at June 30, 2017 is $3,506 million. Prosper Funding had accrued $1.0 million and $0.6 million as of June 30, 2017 and December 31, 2016, respectively, in regard to this obligation.
9. Related Parties

44



Since inception, Prosper Funding has engaged in various transactions with its directors, executive officers and sole member, and immediate family members and other affiliates of its directors, executive officers and sole member. Prosper Funding believes that all of the transactions described below were made on terms no less favorable to Prosper Funding than could have been obtained from unaffiliated third parties.
Prosper Funding’s executive officers and directors who are not executive officers participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be related parties of Prosper Funding as of June 30, 2017 and December 31, 2016 are summarized below (in thousands):
 
Aggregate Amount of
Notes and Borrower Loans Purchased
Six Months Ended June 30,
Interest Earned on Notes and Borrower Loans
Six Months Ended June 30,
Related Party
2017
2016
2017
2016
Executive officers and management
$
10

$
801

$
81

$
110

Directors (excluding executive officers and management)
—

—

—

—

Total
$
10

$
801

$
81

$
110

 
Aggregate Amount of
Notes and Borrower Loans Purchased
Interest Earned on Notes and Borrower Loans
 
Three Months Ended June 30,
Three Months Ended June 30,
Related Party
2017
2016
2017
2016
Executive officers and management
$
5

$
396

$
35

$
61

Directors (excluding executive officers and management)
—

—

—

—

Total
$
5

$
396

$
35

$
61

 
Note and Borrower Loan
Balance as of
Related Party
June 30, 2017
 
December 31, 2016
Executive officers and management
$
1,012

 
$
1,620

Directors  (excluding executive officers and management)
—

 
—

 
$
1,012

 
$
1,620


45



Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
PROSPER MARKETPLACE, INC.
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper’s historical condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q.  The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper’s Annual Report on Form 10-K for the year ended December 31, 2016.
Overview
Prosper is a pioneer of online marketplace lending that connects borrowers and investors. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return.
We believe our online marketplace model has key advantages relative to traditional bank lending, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology driven automation that increases efficiency and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure; instead, we use data and technology to drive automation and efficiency in our operation. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.
During the year ended December 31, 2016, our marketplace facilitated $2.2 billion in Borrower Loan originations, of which $2.0 billion were funded through our Whole Loan Channel, representing 90% of the total Borrower Loans originated through our marketplace during this period. From inception through June 30, 2017, our marketplace facilitated $9.7 billion in Borrower Loan originations, of which $8.4 billion were funded through our Whole Loan Channel, representing 86% of the total Borrower Loans originated through our marketplace during this period.  In the three months ended June 30, 2017, our marketplace facilitated $774.7 million in Borrower Loan originations, up 32% from the previous quarter and up 73% from the same period in 2016. In the three months ended June 30, 2017, $725.0 million of the borrower loan originations originated through our marketplace were funded through our Whole Loan Channel, representing 94% of the total Borrower Loans originated through our marketplace during this period. In the six months ended June 30, 2017, our marketplace facilitated $1.4 billion in Borrower Loans originations, of which $1.3 billion were funded through our Whole Loan Channel, representing 92% of the total Borrower Loans originated through our marketplace during this period.   
During the course of 2017 management has taken actions to reduce costs and as a result in the three months ended June 30, 2017, Prosper was able to generate positive cash flows from operations of $8.6 million and increased our cash and cash equivalents balance by $6.1 million.
As a credit marketplace, we believe our customers are more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate in our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
    
Results of Operations
Key Operating and Financial Metrics (in thousands)


46



 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Loan Originations
$
774,700

 
$
445,300

 
$
1,360,315

 
$
1,423,443

Transaction Fees, Net
35,423

 
19,276

 
62,291

 
61,100

Whole Loans Outstanding (1)

3,557,914

 
4,062,786

 
3,557,914

 
4,062,786

Servicing Fees, Net
6,793

 
7,676

 
12,947

 
14,819

Net Loss
(41,405
)
 
(35,628
)
 
(65,426
)
 
(53,092
)
Adjusted EBITDA (2)
6,716

 
(11,619
)
 
(2,336
)
 
(21,125
)
Net Cash Provided by (Used in) Operating Activities
8,579

 
(18,341
)
 
(11,598
)
 
(43,285
)
(1) Balance as of June 30.
(2) Adjusted EBITDA is a non-GAAP Financial measure. For more information regarding this measure and a reconciliation of this measure to the most comparable GAAP measure, see “Non-GAAP Financial Measures”
Overview
The following tables summarize Prosper’s net loss for the three and six months ended June 30, 2017 and 2016 (in thousands, except percentages):
 
Three Months Ended
June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Total Net Revenue
$
31,447

 
$
28,173

 
3,274

 
12
 %
Total Expenses
72,755

 
63,696

 
9,059

 
14
 %
Net Loss Before Taxes
(41,308
)
 
(35,523
)
 
(5,785
)
 
16
 %
Income Tax Expense
97

 
105

 
(8
)
 
(8
)%
Net Loss
$
(41,405
)
 
$
(35,628
)
 
(5,777
)
 
16
 %
 
 
Six Months Ended
June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Total Net Revenue
$
62,292

 
$
84,689

 
(22,397
)
 
(26
)%
Total Expenses
127,456

 
137,511

 
(10,055
)
 
(7
)%
Net Loss Before Taxes
(65,164
)
 
(52,822
)
 
(12,342
)
 
23
 %
Income Tax Expense
262

 
270

 
(8
)
 
(3
)%
Net Loss
$
(65,426
)
 
$
(53,092
)
 
(12,334
)
 
23
 %

Total net revenue for the three months ended June 30, 2017 increased $3.3 million, a 12% increase from the three months ended June 30, 2016, primarily due to increased Borrower Loan originations, which increased 74% on a dollar basis, this was offset by $16.9 million of rebates that were provided to members of the Consortium via the issuance of Convertible Preferred Stock Warrants that vested during the three months ended June 30, 2017. See below for an explanation of the increase in origination volume.  Total expenses for the three months ended June 30, 2017 increased $9.1 million, a 14% increase from the three months ended June 30, 2016, primarily due to an increase in the fair value of the preferred stock warrant liability of $22.4 million in the three months ended June 30, 2017. This increase was offset by a reduction in restructuring costs of $13.4 million as Prosper underwent a restructuring in the three months ended June 30, 2016. Net loss for the three months ended June 30, 2017 decreased $5.8 million, primarily due to increases in revenues explained above.   
Total net revenue for the six months ended June 30, 2017 decreased $22.4 million, a 26% decrease from the six months ended June 30, 2016, primarily due to decreased originations, which decreased 4% on a dollar basis and $20.2 million of rebates that were provided to members of the Consortium via the issuance of Convertible Preferred Stock Warrants that vested during the six months ended June 30, 2017. Total expenses for the six months ended June 30, 2017 decreased $10.1 million, a 7% decrease

47



from the six months ended June 30, 2016, primarily due to a reduction in general and administration costs of $19.7 million and restructuring charges of $13.5 million. This was offset by an increase in the fair value of the preferred stock warrant liability of $22.8 million in the six months ended June 30, 2017. Net loss for the six months ended June 30, 2017 increased $12.3 million, primarily due to the decrease in revenues explained above.
Origination Volume
From inception through June 30, 2017, a total of 769,403 Borrower Loans, totaling $9.7 billion, were originated through Prosper’s marketplace.
During the second quarter ended June 30, 2017, 61,355 Borrower Loans totaling $774.7 million were originated through Prosper’s marketplace, compared to 32,984 Borrower Loans totaling $445.3 million during the second quarter ended June 30, 2016. This represented an increase of 86% in terms of the number of loans and a 74% increase in the dollar amount of loans. During the six months ended June 30, 2017, 107,717 Borrower loans totaling $1.36 billion were originated through Prosper's marketplace, compared to 105,326 borrower loans totaling $1.42 billion during the six months ended June 30, 2016. This represented an increase of 2% in terms of number of loans and a 4% decrease in the dollar amount of loans.
The origination increase experienced during the quarter ended June 30, 2017 versus the quarter ended June 30, 2016 is due to the fact that, beginning in the second quarter of 2016, a number of our largest investors paused or significantly reduced their purchases of Borrower Loans.  As a result Prosper undertook a restructuring in May of 2016.
Prosper has taken a number of actions aimed at increasing the amount of capital committed to make purchases through its marketplace. On February 27, 2017, Prosper signed an agreement with a consortium of investors for the purchase of up to $5.0 billion of loans over two years (for more details please see note 16 to our condensed consolidated financial statements). As a result, the dollar amount of loans originated through Prosper's marketplace increased in the second quarter of 2017 by $189.1 million or 32% when compared to the first quarter of 2017.
Revenue
The following tables summarizes Prosper’s revenue for the three and six months ended June 30, 2017 and 2016 (in thousands, except percentages):
 
Three Months Ended June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Operating Revenues
 

 
 

 
 

 
 

Transaction Fees, Net
$
35,423

 
$
19,276

 
16,147

 
84
 %
Servicing Fees, Net
6,793

 
7,676

 
(883
)
 
(12
)%
Gain (Loss) on Sale of Borrower Loans
3,803

 
(687
)
 
4,490

 
(654
)%
Fair Value of Warrants Vested on the Sale of Borrower Loans
(16,887
)
 
—

 
(16,887
)
 
100
 %
Other Revenues
1,415

 
816

 
599

 
73
 %
Total Operating Revenues
30,547

 
27,081

 
3,466

 
13
 %
Interest Income
 

 
 

 
 

 
 

Interest Income on Borrower Loans
12,007

 
11,192

 
815

 
7
 %
Interest Expense on Notes
(11,177
)
 
(10,098
)
 
(1,079
)
 
11
 %
Net Interest Income
830

 
1,094

 
(264
)
 
(24
)%
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
70

 
(2
)
 
72

 
(3,600
)%
Total Revenues
31,447

 
28,173

 
3,274

 
12
 %

48



 
Six Months Ended June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Operating Revenues
 

 
 
 
 

 
 

Transaction Fees, Net
$
62,291

 
$
61,100

 
1,191

 
2
 %
Servicing Fees, Net
12,947

 
14,819

 
(1,872
)
 
(13
)%
Gain on Sale of Borrower Loans
3,485

 
3,104

 
381

 
12
 %
Fair Value of Warrants Vested on the Sale of Borrower Loans
(20,194
)
 
—

 
(20,194
)
 
100
 %
Other Revenues
2,135

 
3,589

 
(1,454
)
 
(41
)%
Total Operating Revenues
60,664

 
82,612

 
(21,948
)
 
(27
)%
Interest Income
 

 
 

 
 

 
 

Interest Income on Borrower Loans
23,507

 
21,975

 
1,532

 
7
 %
Interest Expense on Notes
(21,855
)
 
(19,819
)
 
(2,036
)
 
10
 %
Net Interest Income
1,652

 
2,156

 
(504
)
 
(23
)%
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
(24
)
 
(79
)
 
55

 
(70
)%
Total Revenues
62,292

 
84,689

 
(22,397
)
 
(26
)%
Transaction Fees, Net
Prosper earns a transaction fee upon the successful origination of all Borrower Loans facilitated through Prosper’s marketplace.  Prosper receives payments from WebBank as compensation for the activities Prosper performs on behalf of WebBank. Prosper’s fee is determined by the term and credit grade of the Borrower Loans that Prosper facilitates on its marketplace and WebBank originates.  We record the transaction fee revenue net of any fees paid by us to WebBank.
Transaction fees increased primarily due to higher origination volume through Prosper’s marketplace during the three months ended June 30, 2017. The average transaction fee was 4.57% and 4.33% of the principal amount of originated loans facilitated through Prosper’s marketplace for the three months ended June 30, 2017 and 2016, respectively. This increase was due to marketing fee increases implemented in the second quarter of 2016 for certain Prosper scores. The marketing fee increases were partially offset by the fair value of the loan trailing fee on loans originated on the platform during the period.
Transaction fees increased primarily due to a higher average transaction fee during the six months ended June 30, 2017. The average transaction fee was 4.58% and 4.29% of the principal amount of originated loans facilitated through Prosper’s marketplace for the six months ended June 30, 2017 and 2016, respectively. This increase was due to marketing fee increases implemented in the second quarter of 2016 for certain Prosper scores. The marketing fee increases were partially offset by the fair value of the loan trailing fee on loans originated on the platform during the period and a decrease in the dollar amount of loans originated on the platform.
Servicing Fees, Net
Prosper earns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates us for the costs we incur in servicing the Borrower Loan, including managing payments from borrowers and payments to investors and maintaining investors’ account portfolios. Historically, the servicing fee has been generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has been set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The decrease in servicing fees during the three months ended June 30, 2017 was due to the decrease in Borrower Loans being serviced as a result of the decrease in sales of Borrower Loans through the Whole Loan Channel in the past year.
The decrease in servicing fees during the six months ended June 30, 2017 was due to the decrease in Borrower Loans being serviced as a result of the decrease in sales of Borrower Loans through the Whole Loan Channel in the past year.
Gain (Loss) on Sale of Borrower Loans
Gain (Loss) on Sale of Borrower Loans consists of net gains and losses on Borrower Loans sold through the Whole Loan Channel. The increase was due to an increase in volume of such sales during the three months ending June 30, 2017 due to an increase in loans being originated through the platform as described above and $2.0 million less of rebates that were issued in the

49



three months ended June 30, 2016. The increase was also the result of a 7.5 basis point higher servicing fee on borrower loans sold, increasing the gain on each loan sold.    
Gain (Loss) on Sale of Borrower Loans consists of net gains and losses on Borrower Loans sold through the Whole Loan Channel. The increase during the six months ended June 30, 2017 was the result of a 7.5 basis point higher servicing fee on borrower loans sold, increasing the gain on each loan sold. The 7.5 basis point fee was introduced starting in August 2016.
Fair Value of Warrants Vested on the Sale of Borrower Loans
Fair Value of Warrants Vested on the Sale of Borrower Loans relates to warrants to purchase Series F Convertible Preferred Stock issued to the Consortium that vest when the Consortium purchases whole loans under the Consortium Purchase Agreement that was signed in February 2017. The charges of $16.9 million and $20.2 million recognized related to the fair value of warrants that vested during the three and six months ended June 30, 2017, respectively.  
Other Revenue
Other revenues consist primarily of securitization fees and credit referral fees. Credit referral fees are where partner companies pay us an agreed upon amount for referrals of customers from our website. Securitization fees represent fees Prosper earns to facilitate securitizations for purchasers of borrower loans. The increase in other revenue for the three months ended June 30, 2017 was primarily the result of an increase in securitization fees as Prosper facilitated one securitization during the three months ended June 30, 2017 compared to no securitizations during the three months ended June 30, 2016.   
The decrease in other revenue for the six months ended June 30, 2017 was primarily due to the fact that in the six months ended June 30, 2016, Prosper earned non-recurring revenues of $1.2 million that were earned in the period in relation to work performed for a BillGuard partner.
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper recognizes interest income on Borrower Loans funded through the Note Channel using the accrual method based on the stated interest rate to the extent we believe it to be collectible. We record interest expense on the corresponding Notes based on the contractual interest rates. The interest rate charged on the Borrower Loans is generally 1% higher than the corresponding interest rate on the Note to compensate us for servicing the Borrower Loans.
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net
The fair value of Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance, and discount rates. Loans held for sale are primarily comprised of Borrower Loans held for short durations and are valued using the same approach as the Borrower Loans held at fair value.
The following table summarizes the fair value adjustments for the three and six months ended June 30, 2017 and 2016, respectively (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
Borrower Loans
$
(6,617
)
 
$
(5,336
)
$
(10,822
)
 
$
(12,934
)
Loans held for sale
—

 
(1
)
6

 
—

Notes
6,687

 
5,335

10,792

 
12,855

Total
$
70

 
$
(2
)
$
(24
)
 
$
(79
)
Expenses
The following tables summarize Prosper’s expenses for the three months ended June 30, 2017 and 2016 (in thousands):

50



 
Three Months Ended
June 30,
 
 

 
 

 
2017
 
2016
 
$ Change
 
% Change
Expenses
 

 
 

 
 

 
 

Origination and Servicing
$
8,873

 
$
8,833

 
40

 
—
 %
Sales and Marketing
20,131

 
12,303

 
7,828

 
64
 %
General and Administrative -Research and Development
3,909

 
7,615

 
(3,706
)
 
(49
)%
General and Administrative - Other
14,849

 
20,884

 
(6,035
)
 
(29
)%
Change in Fair Value of Convertible Preferred Stock Warrants
22,416

 
—

 
22,416

 
100
 %
Restructuring Charges

647

 
14,061

 
(13,414
)
 
(95
)%
Other Expenses
1,930

 
—

 
1,930

 
100
 %
Total Expenses
$
72,755

 
$
63,696

 
$
9,059

 
14
 %
 
Six Months Ended June 30,
 
 

 
 

 
2017
 
2016
 
$ Change
 
% Change
Expenses
 

 
 

 
 

 
 

Origination and Servicing
$
17,278

 
$
19,282

 
(2,004
)
 
(10
)%
Sales and Marketing
39,687

 
45,023

 
(5,336
)
 
(12
)%
General and Administrative -Research and Development
8,083

 
15,286

 
(7,203
)
 
(47
)%
General and Administrative - Other
31,390

 
43,859

 
(12,469
)
 
(28
)%
Change in Fair Value of Convertible Preferred Stock Warrants
22,817

 
—

 
22,817

 
100
 %
Restructuring Charges

572

 
14,061

 
(13,489
)
 
(96
)%
Other Expenses
7,629

 
—

 
7,629

 
100
 %
Total Expenses
$
127,456

 
$
137,511

 
$
(10,055
)
 
(7
)%

As of June 30, 2017, Prosper had 363 full-time employees compared to 583 full-time employees as of June 30, 2016. The following table reflects full-time employees as of June 30, 2017 and 2016 by department: 
 
June 30, 2017
 
June 30, 2016
Origination and Servicing
162

 
191

Sales and Marketing
24

 
112

General and Administrative - Research and Development
74

 
138

General and Administrative - Other
103

 
142

Total Headcount
363

 
583

 
Origination and Servicing
Origination and servicing costs consist primarily of salaries, benefits and stock-based compensation expense related to Prosper’s credit, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans. The increase in the three months ending June 30, 2017 was primarily the result of an increased usage of outsourced services of $0.7 million and increased amortization costs for internal use software of $0.4 million. The increase was offset by a decrease in compensation costs of $0.9 million.
The decrease in the six months ended June 30, 2017 was the result of a decrease in compensation costs of $2.4 million. The decrease in compensation costs was the result of the reduction in personnel as part of our May 2016 restructuring. This was offset by an increase in amortization costs of internal use software of $0.8 million.
Sales and Marketing
Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations, and direct mail marketing, as well as the compensation expenses such as wages, benefits and

51



stock based compensation for the employees who support these activities. For the three months ended June 30, 2017, the increase was largely due to increased variable costs as Prosper increased its marketing efforts to increase demand from Borrowers and maintain marketplace equilibrium.  These increases included a $6.8 million or 103% increase in direct mailing costs as Prosper increased the volume of its direct mail campaigns, a $2.4 million or 180% increase in partnership costs as Prosper significantly increased partnership activities and a $1.6 million or 241% increase in online marketing costs. These increases were offset by a $2.3 million or 78% decrease in compensation costs as Prosper significantly reduced its sales and marketing headcount with its restructuring that occurred in May 2016, including the closing of its Utah office which contained mainly sales employees.
For the six months ended June 30, 2017, the decrease was largely due to a $5.8 million or 78% decrease in compensation costs as Prosper significantly reduced its sales and marketing headcount with its restructuring that occurred in May 2016. This was offset by an increase in variable marketing costs as Prosper increased its marketing efforts to increase demand from Borrowers and maintain marketplace equilibrium.  These increases included a $3.4 million or 14% increase in direct mailing costs as Prosper increased the volume of its direct mail campaigns, and a $0.9 million or 34% increase in online marketing costs. These were offset by decreases in certain variable marketing channels such as partnerships which decreased $1.1 million or 15%, trade shows which decreased $0.4 million or 96%, radio advertising which decreased $1.0 million or 100% as Prosper reallocated its market channel mix to gain greater efficiencies.
Research and Development
Research and development costs consist primarily of salaries, benefits and stock-based compensation expense related to engineering and product development employees and related vendor costs. The decrease for the three months ended June 30, 2017 was primarily due to a decrease in compensation costs of $2.8 million and a decrease of $0.5 million due to lower contractor usage. Compensation costs decreased as a result of the decrease in personnel since June 30, 2016. The total expenses incurred for the three months ended March 31, 2017 do not reflect the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are amortized in origination and servicing expense. Prosper capitalized internal-use software and website development costs in the amount of $1.0 million and $1.8 million for the three months ended June 30, 2017 and 2016, respectively. 
Research and development costs consist primarily of salaries, benefits and stock-based compensation expense related to engineering and product development employees and related vendor costs. The decrease for the six months ended June 30, 2017 was primarily due to a decrease in compensation costs of $5.6 million and a decrease of $1.1 million due to lower contractor and consultant usage. Compensation costs decreased as a result of the decrease in personnel since June 30, 2016. The total expenses incurred for the six months ended June 30, 2017 do not reflect the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are amortized in origination and servicing expense. Prosper capitalized internal-use software and website development costs in the amount of $2.1 million and $3.6 million for the six months ended June 30, 2017 and 2016, respectively. 
General and Administrative
General and administrative expenses consists primarily of salaries, benefits and stock-based compensation expense related to accounting and finance, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expense. The decrease for the three months ended June 30, 2017 was primarily the result of a decrease in compensation expense of $7.6 million and a decrease in rent and occupancy expenses of $0.7 million. The decrease in compensation expenses is the result of the reduction in headcount since June 30, 2016. Rent and occupancy related expenses have decreased as Prosper has ceased the use of or terminated a number of leases for office space since June 30, 2016.
General and administrative expenses consists primarily of salaries, benefits and stock-based compensation expense related to accounting and finance, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expense. The decrease for the six months ended June 30, 2017 was primarily the result of a decrease in compensation expense of $11.3 million and a decrease in rent and occupancy expenses of $1.3 million. The decrease in compensation expenses is the result of the reduction in headcount since June 30, 2016. Rent and occupancy related expenses have decreased as Prosper has ceased the use of or terminated a number of leases for office space since June 30, 2016.
Changes in the Fair Value of Convertible Preferred Stock Warrants
Changes in the Fair Value of Convertible Preferred Stock warrants increased $22.4 million and $22.8 million in the three and six months ended June 30, 2017 respectively over the comparable prior period. There were no such warrants outstanding in the three and six months ended June 30, 2016.
Restructuring Charges

52



Restructuring costs consist of personnel and facilities related costs related to the strategic restructuring of the business that Prosper announced on May 3, 2016.   For the three months and six months ended June 30, 2017, the expenses relate to adjustments to fair value of the existing liabilities and accretion expense on the remaining liability. For the three and six months ended June 30, 2016 the expense relates to the restructuring that Prosper undertook in May 2016.
Other Expenses
Other expenses includes primarily impairment charges on assets held for sale. During the three months ended June 30, 2017, Prosper management continued to actively market the assets related to the Prosper Daily application and as a result the related assets were marked down to fair value less costs to sell, resulting in an additional impairment charge of $2.0 million. For the six months ended June 30, 2017 Prosper recorded an impairment charge on the assets held for sale was $6.3 million. Additionally, during the six months ended June 30, 2017 Prosper settled certain rebates related to the purchase of whole loans by members of the Consortium prior to the closing of the Consortium transaction via the issuance of Convertible Preferred Stock Warrants at a loss of $1.5 million over the cash settlement amount.
Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure that we define as Net Loss adjusted for interest income on available for sale securities, cash and cash equivalents, income tax expense, depreciation and amortization, impairment of intangible assets, stock based compensation expense, fair value of warrants vested on the sale of borrower loans, restructuring charges, and fair value adjustments for warrant liabilities. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.
We consider Adjusted EBITDA to be a helpful indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Management uses Adjusted EBITDA to, among other things, understand and compare operating results across accounting periods, evaluate our operations and financial performance, and for internal planning and forecasting purposes. Inclusion of Adjusted EBITDA is intended to provide investors insight into the manner in which management views the performance of the Company, enhance investors’ evaluation of our operating results, and to facilitate meaningful comparisons of our results between periods. These non-GAAP financial measures should not be considered an alternative to, or more meaningful than, the GAAP financial information provided herein.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not consider the potentially dilutive impact of equity-based charges;
•
Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
•
other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

The major non-GAAP adjustments, and our basis for excluding them, are outlined below:

•
Fair value of warrants vested on the sale of borrower loans and change in the fair value of convertible preferred stock warrants liability. We exclude these charges primarily because they are non-cash charges and the fair value varies based on the fair value of the underlying stock, varying valuation methodologies and subjective assumptions. This makes the comparison of our current financial results to previous and future periods difficult to evaluate.
•
Stock-based compensation expense. This consists of expenses for equity awards under our equity incentive plans. Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to evaluate; therefore, we believe it is useful to exclude stock-based compensation. We also excludes these expenses because they are non-cash.

53



•
Amortization or impairment of acquired intangible assets and impairment of goodwill. We incur amortization or impairment of acquired intangible assets and goodwill in connection with acquisitions and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.
•
Restructuring charges - We have incurred restructuring charges that are included in our GAAP financial statements, related to workforce reductions and estimated costs of exiting facility lease commitments due to our May 2016 restructuring. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or historical operations of our business.
The following table presents a reconciliation of Net Loss to Adjusted EBITDA for each of the periods indicated (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net Loss
$
(41,405
)
 
$
(35,628
)
 
$
(65,426
)
 
$
(53,092
)
Fair Value of Warrants Vested on Sale of Borrower Loans

16,887

 
—

 
20,194

 
—

Depreciation expense:


 


 


 


    Servicing and Origination
1,357

 
981

 
2,637

 
1,864

    General & Administration - Other
1,293

 
1,461

 
2,603

 
2,573

Amortization of Intangibles
177

 
1,007

 
1,030

 
1,975

Impairment of Intangibles
1,999

 
240

 
6,320

 
240

Stock-based Compensation
3,312

 
6,359

 
6,812

 
11,465

Restructuring Charges
647

 
14,061

 
572

 
14,061

Change in the Fair Value of Warrants
22,416

 
—

 
22,817

 
—

Interest Income on Available for Sale Securities, Cash and Cash Equivalents
(64
)
 
(205
)
 
(157
)
 
(481
)
Income Tax Expense
97

 
105

 
262

 
270

Adjusted EBITDA
$
6,716

 
$
(11,619
)
 
$
(2,336
)
 
$
(21,125
)

Expenses include the following amount of stock based compensation for the periods presented:
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
Origination and servicing
$
328

 
$
579

$
545

 
$
1,018

Sales and marketing
141

 
896

311

 
1,632

General and administrative
2,843

 
4,884

5,956

 
8,815

Total stock based compensation
$
3,312

 
$
6,359

$
6,812

 
$
11,465


Liquidity and Capital Resources
The following table summarizes Prosper’s cash flow activities for the six months ended June 30, 2017 and 2016 (in thousands):

54



 
Six Months Ended
June 30,
 
2017
 
2016
Net Loss
$
(65,426
)
 
$
(53,092
)
Net cash used in operating activities
(11,598
)
 
(43,285
)
Net cash provided by (used in) investing activities
17,742

 
(19,382
)
Net cash provided by financing activities
6,186

 
25,196

Net increase (decrease) in cash and cash equivalents
12,330

 
(37,471
)
Cash and cash equivalents at the beginning of the period
22,337

 
66,295

Cash and cash equivalents at the end of the period
$
34,667

 
$
28,824

Net cash increased for the six months ended June 30, 2017 primarily due to the maturity and sales of $24.8 million in available for sale securities, offset by the $1.7 million loss, net of non-cash items, $3.7 million reduction in Accounts Payable and Accrued Liabilities, $4.6 million increase in prepaid expenses and a $3.0 million scheduled payment to reduce our settlement liability. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties, which is included in cash flow from operating activities along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans and the $24.8 million of available for sale securities that have been converted into cash. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes.  

The following table summarizes Prosper’s cash flow activities for the three months ended June 30, 2017 and 2016 (in thousands):
 
Three Months Ended June 30,
 
2017
 
2016
Net Loss
$
(41,405
)
 
$
(35,628
)
Net cash provided by (used in) operating activities
8,579

 
(18,341
)
Net cash used in investing activities
(3,458
)
 
(6,158
)
Net cash provided by financing activities
1,011

 
12,362

Net increase (decrease) in cash and cash equivalents
6,132

 
(12,137
)
Cash and cash equivalents at the beginning of the period
28,535

 
40,961

Cash and cash equivalents at the end of the period
$
34,667

 
$
28,824


Net cash increased for the three months ended June 30, 2017 primarily due to the $5.5 million net income, net of non-cash items. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties, which is included in cash flow from operating activities along with the corresponding proceeds from sale of Borrower Loans) and purchases of property and equipment. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes.  
Prosper also has available for sale securities that are available for its liquidity needs. The fair value of securities available for sale as of June 30, 2017 was $8.0 million. As a result the total cash, cash equivalents and available for sale investments available to Prosper at June 30, 2017 for its liquidity needs was $42.7 million. This represents an increase of $6.1 million from the total available at March 31, 2017. At June 30, 2017, the available for sale securities included US treasury securities and agency bonds. All securities were rated or carried implied ratings equal to investment grade (defined as a rating equivalent to a Moody’s rating of “Baa3” or higher, or a Standard & Poor’s rating of “BBB-” or higher) and there were no significant unrealized losses. These securities provided $0.1 million of interest income for the three months ending June 30, 2017. These securities continue to be available to meet liquidity needs.
Income Taxes
Prosper recognizes benefits from uncertain tax positions only if it believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

55



Given Prosper’s history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for its net operating loss carry-forwards. Based on the weight of available evidence, which includes historical operating performance and the reported cumulative net losses in prior years, Prosper has recorded a full valuation allowance against its net deferred tax assets.  The income tax expense relates to state income tax expense and the amortization of goodwill from the acquisition of PHL for tax purposes which gives rise to an indefinite-lived deferred tax liability.
Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, Prosper is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as Prosper is not the primary beneficiary.
Critical Accounting Policies
Certain of Prosper's accounting policies that involve a higher degree of judgment and complexity are discussed in Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Estimates in Prosper’s Annual Report on Form 10-K. There have been no significant changes to these critical accounting estimates during the first six months of 2017.  

56



PROSPER FUNDING LLC
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper Funding’s historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper Funding’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2016. 
Prosper Funding was formed in the state of Delaware on February 17, 2012 as a limited liability company with its sole equity member being PMI. Prosper Funding was formed by PMI to hold Borrower Loans originated through the Note Channel and issue related Notes. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI. 
PFL formed PAH on October 4, 2013 as a limited liability company with the sole equity member being PFL. PAH was formed to purchase certain Borrower Loans from PFL and, sell them to certain participants in the Whole Loan Channel. PFL formed Prosper Depositor LLC on March 29, 2017 as a limited liability company with the sole equity member being PFL.
As a credit marketplace, we believe our customers are more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
 
Results of Operations
Overview
The following table summarizes Prosper Funding’s net income for the three months ended June 30, 2017 and 2016 (in thousands, except percentages):
 
Three Months Ended
June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Total Net Revenue
$
21,679

 
$
14,746

 
$
6,933

 
47
 %
Total Expenses
20,135

 
17,568

 
2,567

 
15
 %
Net Income (Loss)
$
1,544

 
$
(2,822
)
 
$
4,366

 
(155
)%
 
Six Months Ended
June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Total Net Revenue
$
39,847

 
$
42,090

 
$
(2,243
)
 
(5
)%
Total Expenses
37,855

 
39,762

 
(1,907
)
 
(5
)%
Net Income
$
1,992

 
$
2,328

 
$
(336
)
 
(14
)%

Total net revenue for the three months ended June 30, 2017 increased $6.9 million, a 47% increase from the three months ended June 30, 2016, primarily due to the increased number of loan listings on the marketplace during the quarter, which resulted

57



in increased administration fee revenue for the listing driven portion of the administration fee. As well the administration fee increased due to increased administration fees in relation to rebates given purchasers of borrower loans. Total expenses for the three months ended June 30, 2017 increased $2.6 million, a 15% increase from the three months ended June 30, 2016, primarily due to higher corporate administration fees related to the listing driven portion during the current quarter.
Total net revenue for the six months ended June 30, 2017 decreased $2.2 million a 5% decrease from the six months ended June 30, 2016, primarily due to an decrease in servicing fees due to the decrease in Borrower Loans being serviced as a result of the decrease in sales of Borrower Loans through the Whole Loan Channel in the past year. Total expenses for the six months ended June 30, 2017 decreased $1.9 million, a 5% decrease from the six months ended June 30, 2016, primarily due to lower corporate administration fees related to the listing driven portion during the current period.
Revenue
The following tables summarize Prosper Funding’s revenue for the three and six months ended June 30, 2017 and 2016 (in thousands, except percentages):
 
Three Months Ended
June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Revenues
 

 
 

 
 

 
 

Operating Revenues
 

 
 

 
 

 
 

Administration Fee Revenue - Related Party
$
27,309

 
$
6,930

 
20,379

 
294
 %
Servicing Fees, Net
6,520

 
7,589

 
(1,069
)
 
(14
)%
Gain (Loss) on Sale of Borrower Loans
(13,084
)
 
(687
)
 
(12,397
)
 
1,805
 %
Other Revenues
34

 
26

 
8

 
31
 %
Total Operating Revenues
20,779

 
13,858

 
6,921

 
50
 %
Interest Income on Borrower Loans
12,007

 
10,988

 
1,019

 
9
 %
Interest Expense on Notes
(11,177
)
 
(10,098
)
 
(1,079
)
 
11
 %
Net Interest Income
830

 
890

 
(60
)
 
(7
)%
Change in Fair Value on Borrower Loans, Loans Held for
   Sale and Notes, net
70

 
(2
)
 
72

 
(3,600
)%
Total Revenue
$
21,679

 
$
14,746

 
6,933

 
47
 %
 
Six Months Ended
June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Revenues
 

 
 
 
 

 
 

Operating Revenues
 

 
 

 
 

 
 

Administration Fee Revenue - Related Party
$
42,463

 
$
22,348

 
20,115

 
90
 %
Servicing Fees, Net
12,401

 
14,623

 
(2,222
)
 
(15
)%
Gain (Loss) on Sale of Borrower Loans
(16,709
)
 
3,104

 
(19,813
)
 
(638
)%
Other Revenues
64

 
417

 
(353
)
 
(85
)%
Total Operating Revenues
38,219

 
40,492

 
(2,273
)
 
(6
)%
Interest Income on Borrower Loans
23,507

 
21,496

 
2,011

 
9
 %
Interest Expense on Notes
(21,855
)
 
(19,819
)
 
(2,036
)
 
10
 %
Net Interest Income
1,652

 
1,677

 
(25
)
 
(1
)%
Change in Fair Value on Borrower Loans, Loans Held for
   Sale and Notes, net
(24
)
 
(79
)
 
55

 
(70
)%
Total Revenue
$
39,847

 
$
42,090

 
(2,243
)
 
(5
)%

Administration Fee Revenue - Related Party

58



Prosper Funding primarily generates revenue through license fees it earns under its Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the marketplace for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement. Effective July 1, 2016 the Administration Agreement was amended. The amendments included amending the License Fee to include a fixed monthly fee alongside a reduced variable fee and the introduction of a Rebates Fee related to rebates given to investors. The increase for the three months ended June 30, 2017 was the result of an increase in the listing driven portion of administration fees as a result of higher listings in the three months ended June 30, 2017 and the above changes in the administration agreement, which was designed to compensate Prosper Funding for any rebates offered to whole loan investors. The increase for the six months ended June 30, 2017 was the result of the above changes in the administration agreement, which was designed to compensate Prosper Funding for any rebates offered to whole loan investors.
Servicing Fee Revenue, Net
Prosper Funding earns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates Prosper Funding for the costs it incurs in servicing these Borrower Loans, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Historically, the servicing fee has been generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has been set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The decrease in servicing fees was due to the decrease in Borrower Loans being serviced as a result of the decrease in loan originations in the past year.
Gain (Loss) on Sale of Borrower Loans
Gain (Loss) on Sale of Borrower Loans consists of net gains (losses) on Borrower Loans sold through the Whole Loan Channel. The increase in the loss for the three months ended June 30, 2017 was due to increase in rebates offered to certain whole loan investors to facilitate the sale of large volumes of Borrower Loans through the Whole Loan Channel. The increase in rebates of $14.8 million is primarily due to warrants issued by PMI in relation to the agreement with the Consortium that was reached in 2017 that results in warrants for convertible preferred stock vesting as loans are purchased by the Consortium.   
The increase in the loss for the six months ended June 30, 2017 was due to increase in rebates offered to certain whole loan investors to facilitate the sale of large volumes of Borrower Loans through the Whole Loan Channel. The increase in rebates of $19.3 million is primarily due to warrants issued by PMI in relation to the agreement with the Consortium that was reached in 2017 that results in warrants for convertible preferred stock vesting as loans are purchased by the Consortium.   
Other Revenue
Other revenue consists primarily of fees earned from assisting whole loan purchasers with securitizations of their holdings. The changes in other revenues were not considered to be material.  
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper Funding recognizes interest income on Borrower Loans funded through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes it to be collectable. Prosper Funding records interest expense on the corresponding Notes based on the contractual interest rates. The interest rate charged on a Borrower Loan is generally 1% higher than the interest rate on the corresponding Notes to compensate Prosper Funding for servicing the Borrower Loan. This is recorded in interest income.
Overall, the increase in net interest income for the periods above was primarily driven by the increase in volume of Borrower Loans funded through the Note Channel.
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net
The fair value of Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance, and discount rates. Loans Held for Sale are primarily comprised of Borrower Loans held for short durations and are recorded using the same approach as the Borrower Loans held at fair value.
The following table summarizes the fair value adjustments for the six months ended June 30, 2017 and 2016, respectively (in thousands): 

59



 
Three Months Ended
June 30,
Six Months Ended June 30,
 
2017
 
2016
2017
 
2016
Borrower Loans
$
(6,617
)
 
$
(5,336
)
$
(10,822
)
 
$
(12,934
)
Loans held for sale
—

 
(1
)
6

 
—

Notes
6,687

 
5,335

10,792

 
12,855

Total
$
70

 
$
(2
)
$
(24
)
 
$
(79
)
Expenses
The following tables summarize Prosper Funding’s expenses for the three months and six ended June 30, 2017 and 2016 (in thousands, except percentages):
 
Three Months Ended
June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Expenses
 

 
 

 
 

 
 

Administration Fee Expense – Related Party
$
18,466

 
$
15,652

 
2,814

 
18
 %
Servicing
1,524

 
1,536

 
(12
)
 
(1
)%
General and Administrative
145

 
380

 
(235
)
 
(62
)%
Total Expenses
$
20,135

 
$
17,568

 
2,567

 
15
 %
 
Six Months Ended
June 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Expenses
 

 
 

 
 

 
 

Administration Fee Expense – Related Party
$
34,282

 
$
36,258

 
(1,976
)
 
(5
)%
Servicing
3,255

 
2,767

 
488

 
18
 %
General and Administrative
318

 
737

 
(419
)
 
(57
)%
Total Expenses
$
37,855

 
$
39,762

 
(1,907
)
 
(5
)%

Administration Fee Expense - Related Party
Pursuant to an Administration Agreement between Prosper Funding and PMI, PMI manages the marketplace on behalf of Prosper Funding. Accordingly, each month, Prosper Funding is required to pay PMI a Corporate Administration Fee, a fee for each Borrower Loan originated through the marketplace, a proportion of all servicing fees collected by or on behalf of Prosper Funding, and all nonsufficient funds fees collected by or on behalf of Prosper Funding. Effective July 1, 2016 the Administration Agreement was amended. The amendments included amending the Corporate Administration Fee to a fixed amount of $500,000 per month, increasing the Loan Platform Servicing Fee to $150 per Borrower Loan originated through the marketplace and reducing the Loan and Note Servicing Fee to 62.5% of all servicing fee collected by or on behalf of Prosper Funding. The decrease in fees for the three months ended June 30, 2017 was due to lower fees paid on the origination of borrower loans due to the decrease in origination volume. The decrease in fees for the six months ended June 30, 2017 was due to lower fees paid on the origination of borrower loans due to the decrease in origination volume.
Servicing
Servicing costs consists primarily of vendor costs and depreciation of internal use software costs associated with servicing Borrower Loans.   The increase for the six months ended June 30, 2017 was primarily due to an increase in amortization of internal use software.
General and Administrative
General and administrative costs consist primarily of bank service charges and professional fees. The decreases for the three and six months ended June 30, 2017 was primarily due to an decrease in outsourced costs as Prosper made an effort to reduce its spending on outsourced services during the period.

60



Liquidity and Capital Resources
The following table summarizes Prosper Funding’s cash flow activities for the six months ended June 30, 2017 and 2016 (in thousands):
 
Six Months Ended
June 30,
 
2017
 
2016
Net Income
$
1,992

 
$
2,328

Net cash provided by (used in) operating activities
7,205

 
$
(120
)
Net cash used in investing activities
(7,982
)
 
(32,942
)
Net cash provided by financing activities
6,232

 
24,947

Net increase (decrease) in cash and cash equivalents
5,455

 
(8,115
)
Cash and cash equivalents at the beginning of the period
6,929

 
15,026

Cash and cash equivalents at the end of the period
$
12,384

 
$
6,911

 
The net increase in Cash for the six months ended June 30, 2017, is primarily due to net income of $2.0 million and an increase in net related party payables of $3.8 million. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties which is included in cash flow from operating activities along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes.
Income Taxes
Prosper Funding incurred no income tax expense for the three months ended June 30, 2017 and 2016. Prosper Funding is a US disregarded entity for income tax purposes and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses and inability to achieve profitable operations, it is difficult to accurately forecast how Prosper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.
Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, Prosper Funding is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special interest entities are consolidated as Prosper Funding is not the primary beneficiary. Otherwise as of June 30, 2017, Prosper Funding has not engaged in any off-balance sheet financing activities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Prosper Marketplace, Inc.
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in financial market prices and interest rates.
Because balances, interest rates and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.
The fair values of Borrower Loans, Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
Prosper had cash and cash equivalents of $34.7 million as of June 30, 2017, and $22.3 million as of December 31, 2016.  These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities consisting primarily of money market funds, commercial paper, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes.  Due to their short-term nature, Prosper believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of

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changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will moderately increase the interest income earned on these cash balances.  
Interest Rate Sensitivity
Prosper holds available for sale investments.  The fair value of Prosper’s available for sale investment portfolio was $8.0 million and $32.8 million as of June 30, 2017 and December 31, 2016, respectively.  These investments consisted of U.S. agency bonds and U.S. Treasury securities. To mitigate the risk of loss, Prosper’s investment policy and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns. To manage this risk, Prosper limits and monitors maturities, credit ratings, and concentrations within the investment portfolio. Changes in U.S. interest rates affect the interest earned on Prosper’s available for sale investments and the market value of those investments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $22 thousand in the fair value of Prosper’s available for sale investments as of June 30, 2017, and of approximately $147 thousand in the fair value of Prosper’s available for sale investments as of December 31, 2016. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $22 thousand in the fair value of Prosper’s available for sale investments as of June 30, 2017, and of approximately $134 thousand in the fair value of Prosper’s available for sale investments as of December 31, 2016. Any realized gains or losses resulting from such interest rate changes would only be recorded if Prosper sold the investments prior to maturity and the investments were not considered other-than-temporarily impaired.
Prosper Funding LLC 
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in financial market prices and interest rates.
Because balances, interest rates and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.
The fair values of Borrower Loans, Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
Prosper Funding had cash and cash equivalents of $12.4 million as of June 30, 2017, and $6.9 million as of December 31, 2016.  These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities consisting primarily of money market funds, commercial paper, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes.  Due to their short-term nature, Prosper Funding believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will moderately increase the interest income earned on these cash balances.  
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Registrants’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including to each of the Registrant’s Principal Executive Officer (PEO) and the Principal Financial Officer (PFO), to allow timely decisions regarding required disclosures. The management of each Registrant, with the participation of such Registrant’s PEO and PFO, has evaluated the effectiveness of such Registrant’s disclosure controls and procedures as of June 30, 2017. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of June 30, 2017.
Changes in Internal Control Over Financial Reporting
There were no changes in either Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three months ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
PFL is not currently subject to any material legal proceedings. PFL is not aware of any litigation matters which have had, or are expected to have, a material adverse effect on it.
PMI is not currently subject to any material legal proceedings. Except for the matters referenced in Note 17 (“Commitments and Contingencies”) of PMI’s Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, which information is incorporated into this Item by reference, PMI is not aware of any litigation matters that have had, or are expected to have, a material adverse effect on it.
This Item should be read in conjunction with the Legal Proceedings disclosures in our Annual Report on Form 10-K for the year ended December 31, 2016 (Part I, Item 3).

Item 1A. Risk Factors 
You should carefully consider the risks and uncertainties described below, together with all information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and related notes, and the risks described in "Part I - Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2016.
RISKS RELATED TO PFL AND PMI, OUR MARKETPLACE AND OUR ABILITY TO SERVICE THE NOTES
Our systems and marketplace utilize complex programs, algorithms and inputs, and if they contain errors, our business could be adversely affected.
Our marketplace utilizes complex programs, algorithms and inputs. We depend on these programs, algorithms and inputs to store, retrieve, process and manage data, as well as to provide marketplace features such as the Prosper Rating, estimated loss rates, estimated returns, and individual note, note portfolio and platform wide performance data. Errors or other design defects within these programs, algorithms and inputs may result in a negative experience for borrowers and investors, delay introductions of new features or enhancements, impact the information displayed on our website, or result in negative publicity and unfavorable media coverage, harm to our reputation, litigation, regulatory inquiries or proceedings, loss of or damage to our relationships with borrowers or investors or loss of revenue or liability for damages, any of which could adversely affect our business and financial results.  In April 2017, we became aware of an error in the manner in which we calculated the annualized net return and seasoned annualized net return numbers provided to note investors. The error did not affect any other part of note investors’ accounts, nor did it affect any other aspects of the platform, including the receipt and distribution of loan payments, deposits, monthly statements or tax documentation, or the note and loan level information provided to investors.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
None.
Information for this Item is not required for Prosper Funding because it meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q; Prosper Funding is therefore filing this Form with the reduced disclosure format.
Item 3. Defaults upon Senior Securities
Not applicable. 
Item 4. Mine Safety Disclosures
Not applicable. 
Item 5. Other Information
None.

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Item 6. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
PROSPER MARKETPLACE, INC.
 
PROSPER FUNDING LLC
 
 
Date: August 11, 2017
/s/ David Kimball
 
David Kimball
 
Chief Executive Officer of Prosper Marketplace, Inc.
 
Chief Executive Officer of Prosper Funding LLC
 
(Principal Executive Officer)
 
 
Date: August 11, 2017
/s/ Usama Ashraf
 
Usama Ashraf
 
Chief Financial Officer of Prosper Marketplace, Inc.
 
Treasurer of Prosper Funding LLC

 
(Principal Financial and Accounting Officer)

 
 


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EXHIBIT INDEX
Exhibit
Number
 
Exhibit Description
 
 
 
3.1
 
Fifth Amended and Restated Limited Liability Company Agreement of PFL, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of the Post-Effective Amendment No. 3 to the Registration Statement on Form S-1, filed October 23, 2013 by PFL and PMI)
 
 
 
3.2
 
Amended and Restated Certificate of Incorporation of PMI (incorporated by reference to Exhibit 3.2 of PMI's and PFL's Annual Report on Form 10-K, filed on March 17, 2017)
 
 
 
3.3
 
PFL Certificate of Formation (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1/A, filed April 23, 2012 by PFL and PMI)
 
 
 
3.4
 
Bylaws of PMI, as amended by an Amendment No. 1 dated February 15, 2016 (incorporated by reference to Exhibit 3.2 of PMI's and PFL's Form 10-Q, filed on August 15, 2016)
 
 
 
4.1
 
Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5)
 
 
 
4.2
 
Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4)
 
 
 
4.3
 
Supplemental Indenture, dated January 22, 2013, between PMI, PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
 
 
 
4.4
 
Indenture, dated June 15, 2009, between PMI and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed June 26, 2009)
 
 
 
4.5
 
Amended and Restated Indenture, dated January 22, 2013, between PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
 
 
 
10.1
 
Form of PFL Borrower Registration Agreement (2)
 
 
 
10.2
 
Form of PFL Investor Registration Agreement (incorporated by reference to Exhibit 10.2 of PMI's and PFL's Annual Report on Form 10-K, filed on March 17, 2017)
 
 
 
10.3
 
Amendment No. 2 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Form 10-Q, filed on August 15, 2016) (3)
 
 
 
10.4
 
Asset Sale Agreement, dated July 1, 2016, between PFL and WebBank (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1)
 
 
 
10.5
 
Marketing Agreement, dated July 1, 2016, between PMI and WebBank (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1)
 
 
 
10.6
 
Stand By Purchase Agreement, dated July 1, 2016, between PMI and WebBank (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Current Report on Form 8-K filed on July 8, 2016) (1)
 
 
 
10.7
 
Amendment No. 3 to Administration Agreement between PFL and PMI, dated as of November 8, 2016 and made effective as of July 1, 2016 (incorporated by reference to Exhibit 10.8 of PMI's and PFL's Annual Report on Form 10-K, filed on March 17, 2017)
 
 
 
10.8
 
Loan Purchase Agreement, dated as of February 27, 2017, among PFL, PF LoanCo Funding LLC, and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee of PF LoanCo Trust (incorporated by reference to Exhibit 10.8 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on May 15, 2017) (1)
 
 
 
10.9
 
Warrant Agreement, dated as of February 27, 2017, among PMI, PF WarrantCo Holdings, LP, and, for certain limited purposes, New Residential Investment Corp (incorporated by reference to Exhibit 10.9 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on May 15, 2017) (1)
 
 
 

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10.10
 
Back-Up Servicing Agreement (Note Channel), dated as of February 24, 2017, among PFL, PMI, and First Associates Loan Servicing, LLC (incorporated by reference to Exhibit 10.10 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on May 15, 2017) (1)
 
 
 
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. (2)
 
 
 
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. (2)
 
 
 
31.3
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. (2)
 
 
 
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. (2)
 
 
 
32.2
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. (2)
 
 
 
101.INS
 
XBRL Instance Documents
 
 
 
101.SCH
 
XBRL  Taxonomy Extension Schema Document
 
 
 
101.CAL
 
Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
Taxonomy Extension Definition Linkbase Document
(1)
 
Certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act.

 
 
 
(2)
 
Filed herewith.
 
 
 
(3)
 
Management contract or compensatory plan or arrangement.




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PROSPER MARKETPLACE, INC Reports